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Facts
The assessee company, incorporated on 14/06/2006, obtained a certificate of commencement of business on 11/08/2006 and made a significant long-term investment in a subsidiary on 31/08/2006. For Assessment Year 2007-08, the Assessing Officer disallowed business expenses totaling Rs. 3,02,18,433/-, arguing there was no business activity, shares were investments, not stock-in-trade, and the objective was merely to hold subsidiary shares. The CIT(A) allowed the assessee's appeal, holding the business commenced on 11/08/2006 and expenses were allowable, leading the Department of Revenue to appeal to the Tribunal.
Held
The Tribunal upheld the CIT(A)'s decision, emphasizing the distinction between "setting up of business" and "commencement of business." It ruled that the assessee set up its business on 11/08/2006 when it was ready to make investments, a fact corroborated by its first investment on 31/08/2006. Consequently, all expenses incurred after the business was set up are allowable deductions under the Income Tax Act, irrespective of whether revenue-generating activities had actually commenced or how the entries were recorded in the books of accounts.
Key Issues
Whether business expenses incurred after the 'setting up' of a business but prior to its 'commencement' of revenue-generating activities are allowable deductions under the Income Tax Act.
Sections Cited
143(1), 143(2), 143(3), 4, 2(34), 3, 28(i), 10(2), 2(11)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI
Before: SHRI M. BALAGANESH & SH. YOGESH KUMAR U.S.
Assessee by Neeraj Jain, Adv, Sh. AnshulSachdev, Adv and Sh. TavishVerma, Adv Revenue by Sh. Sahil Kumar Bansal, Sr. DR Date of Hearing 29/04/2025 Date of Pronouncement 04/06/2025 ORDER
PER YOGESH KUMAR, U.S. JM:
This appeal is filed by the Department of Revenue against the order of the Commissioner of Income Tax (appeals)-1, (‘Ld. CIT(A)’ for short) Delhi dated 21/12/2015 for the Assessment Year 2007-08.
The Grounds of Appeal
are as under:-
1. On the fact and the circumstances of the case, the Ld.CIT(A) has erred in holding that the assessee company had commenced its business on 11.08.2006 on receipt of certificate of commencement of business ignoring the fact that:-
(i) There was no business activity of the assessee. ii) The shares purchased were classified in the balance sheet as investment & not stock in ( trade. (iii) The declared objective was to hold share of subsidiary companies.
2. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in directing the AO to allow deduction of expenditure as business expenditure.
3. The appellant crave leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.”
Brief facts of the case are that, the Assessee Company incorporated on 14/06/2006. As per the Memorandum of Association, the main object of promoting, establishing, formatting, acquiring or investing by way of capital or that and also dealing in shares, stocks government bounds etc.
The Assessee filed return decaling loss of Rs. 3,01,42,660/- for the year under consideration, which was processed u/s 143(1) of the Income Tax Act, 1961 (‘Act’ for short). The case of the Assessee was selected for scrutiny u/s 143 (2) of the Act and notice u/s 143(2) of the Act was issued to the Assessee. Assessment order came to be passed u/s 143(3) of the Act on 30/11/2009, wherein an amount of Rs. 3,02,18,433/- has been disallowed by the A.O. finding theabsence of any business activities of business expenses claimed by the Assessee during the year under consideration, accordingly, added back the said amount to the taxable income of the Assessee.
Aggrieved by the assessment order dated 30/11/2009, the Assessee preferred an Appeal before the Ld. CIT(A). The Ld. CIT(A) vide order dated 21/12/2015, allowed the Appeal of the Assessee by deleting the disallowance made by the A.O. Aggrieved by the order of the Ld. CIT(A) in deleting the disallowance, the Department of Revenue preferred the present Appeal on the Grounds mentioned above.
The Ld. Departmental Representative vehemently submitted that,in the year under consideration the Assessee had made only one transaction i.e. Long Term investment in its subsidiary Company namely Flextronics Software System Ltd. amounting to Rs. 2349.29 crores and no other business activity has been carried out by the Assessee Company. Further submitted that the long term investment in shares of Company as claimed by the Assessee in the balance sheet can earn income either from dividend which is exempt from the tax and Short Term or Long Term Capital Gain depending upon period of holding and those two sources of receipts do not qualify for income/receipt to be taxed under the head ‘income from business and profession’. The Ld. Departmental Representative further submitted that the Assessee Company has not commenced its business as the main object of the Company is dealing in shares and securities which not at all commenced for the purpose of the Act. The Long Term investment made in the subsidiary company does not yielded any income of the Assessee. Apart from the same, submitted that,the Assessee himself show the purchase of shares in its book of accounts as investment and not stock-in-trade hence, all expenditure claimed in the profit and loss account are related to investment and investments only which is not related to the business.
Thus, submitted that the Ld. CIT(A) has committed error in deleting the addition.
Per contra, the Ld. Assessee's Representative submitted that the Assessee company was incorporated on 14/06/2006 and got certificate of commencement of business on 11/08/2006 and opened the bank account in India thereafter for the purpose of making investments in other Companies, the Assessee raised funds through allotment of equity shares and preference shares and the said shares have been allotted/issued to the subscribers on 31/08/2006 and the Assessee has made investment in the shares of Flextronics Software on 31/08/2006 itself. Therefore, the Assessee has commenced the activity of investing in Companies engaged in developing marketing software as on 31/08/2006.
The ld. Assessee's Representative further submitted that the Assessee has set up the business on 14/06/2006 itself and commenced the business from 31/08/2006, when the appellant made investment in the shares of Flextronics Software. The Ld. Assessee's Representative submitted that for setting and commence of business, it is not necessary that the income should be earned. The expenses incurred by the Assessee after the business was set up on 14/06/2006 are allowable business expenditure. The ld. Assessee's Representative relying on the orders of the Ld. CIT(A), sought for dismissal of the Appeal filed by the Department of Revenue.
We have heard both the parties and perused the material available on record. The main ground of challenge by the Department is that the Ld. CIT(A) committed error holding that the ‘Assessee has commenced its business on 11/08/2006’ ignoring the fact that there was no business activities of the Assessee, the shares purchased were classified in the balance-sheet as investment and no stock-in-trade and the declared objective of the Assessee was to hold share of subsidy Companies.
The Assessee Company was incorporated on 14/06/2006 and got certificate of commencement of business on 11/08/2006. As per the Memorandum of Association of the Company, the main objects are promoting, establishing, forming, acquiring or investing in entities engaged in the business of designing, developing, marketing, distributing, selling etc. of any software, hardware and programmes of any and all kinds of description.
During the relevant previous year, the Assessee company claimed expenditure for set up of business amounting to Rs. 3,02,18,433/- which has been disallowed by the A.O. The Assessee Company started investment in shares of Flextronics Software System on 31/08/2006 which has been reflected as investment in the books of account of the Company and was ready with the activity of investing in Companies engaged in developing marketing software all over the world which can be corroborated from the financial statement evidencing shares issued and investment made by the Assessee at Page No. 8 of the Paper Book.Further notes of account reflects the nature of business of the Assessee and the investment made by it at Page No. 13 of the paper Book. The bank statement produced in the Paper Book Page No. 225 to 228 reflects the amount received on issuance of shares. Thus, from the above, it can be safely construed that the Assessee Company was incorporated in the Financial Year 2006-07 and the business activities of the Assessee Company also started in the same year. To substantiate the said fact, the Assessee produced relevant dates, events and the document’s Page No. in paper book in the tabular format which is reproduced as under:-
Particulars Date Page PB 1 Certificate of Incorporation of Kappa Investments 14.06.2006 66 Limited 2 Certificate of commencement of business of Kappa 11.08.2006 65 Investments Limited 3 Allotment of Redeemable optionally convertible 31.08.2006 13 non-cumulative 0.1% preference shares 4 Investment in Flextronics Software Systems Limited 31.08.2006 8 5 Amalgamation approved by HC between Assessee and 16.05.2007 185 Flextronics Software Systems Limited 6 Fresh certificate of incorporation consequent 28.05.2007 64 upon change of name to Aricent Technologies (Holdings) Limited 7 Certificate issued by ROC confirming amalgamation of 13.08.2007 62 companies
Further as per the notes to account to financial statement, the Assessee has mentioned the above said business of the Assessee, investment made by it and also mentioned the amalgamation approved by Hon'ble High Court.
The only reason assigned by the A.O. for disallowing the expenditure alleging that, no business of the Assessee undertaken during the Assessment Year. As per Section 4 of the Act, income-tax is chargeable in respect of the total income of the Assessee for any "previous year". The term "previous year" is defined in section 2(34) of the Act read with section 3 of the Act to mean financial year immediately preceding the assessment year. Proviso to the said section, which defines the term 'previous year' in relation to, inter alia, a newly set up business or profession, reads as under:
"Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said. financial year."
For the purpose of determining 'previous year' the material date is the 'date of setting up of the business'. Section 28 (i) of the Act provides that:
"The following income shall be chargeable to income-tax under the head 'Profits and gains of business or profession', (i) The profits and gains of any business or profession which was carried on by the assessee at any time during the previous year;"
On a bare perusal of the aforesaid provisions, it is clear that for a new business, the previous year is the period beginning with the date of setting up of business.
On a conjoint reading of sections 3, 4 and 28 of the Act, the expenses incurred after the 'date of setting up of the business' are eligible for deduction, subject to fulfillment of the other provisions of the Act. On the other hand, expenses incurred before the date of setting up
of the business are liable to be disallowed.
There is a clear distinction between "commencement of business"
and "setting up of a business". For income tax purposes, the ‘setting up of the business’ and not the ‘commencement of business’ is to be considered. When a business is established and is ready to commence business then it can be said that business that it is set up.There may, however, be an interval between 'setting up of the business' and 'commencement of the business' and all expenses incurred during that interval would be permissible deduction. A business can be said to have been set up when it is ready to discharge the function for which it was set up and the actual commencement of revenue generating activity does not have any bearing for determining the date of setting up of business. The date of setting up of business is relevant for computation of income under the head "Business and Profession" and allowance of revenue expenditure incurred after that date.
The Hon’ble Courts have, in the context of determination of the issue as to when the business can be said to have set up, accepted that there may be an interregnum between the setting up of business and actual commencement thereof. The Courts nave considered the issue as to when a business could be said to have been set up.
The Hon'ble High Court of Bombay in the case of Western India Vegetable Products Ltd. Vs. CIT: 26 ITR 151 held as under:-
“The important question that has got to be considered is from which date are the expenses of this business to be considered permissible deductions and for that purpose the section that we have got to look to is Section 2(11) and that section defines the "previous year" and for the purpose of a business the previous year begins from the date of the setting up of the business. Therefore it is only after the business is set up that the previous year of that business commences and in that previous year the expenses incurred in the business can be claimed as permissible deductions. Any expenses incurred prior to the setting up of a business would obviously not be permissible deductions because those expenses would be incurred at a point of time when the previous year of the business would not have commenced.
It seems to us, that the expression "setting up" means, as is defined in the Oxford English Dictionary, "to place on foot" or "to establish", and in contradistinction to "commence". The distinction is this that when a business is established and is ready to commence business then it can be said of that business that it is set up. But before it is ready to commence business it is not set up. But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deductions under Section 10(2).”
The above view of the Hon'ble High Court of Bombay in the case of Western India Vegetable Products (supra) subsequently approved by the Hon'ble Supreme Court.
The Hon'ble High Court of Delhi in the case of CIT of Dhoomketu Builders and Development (P) Ltd. [ITA No. 528/2012, vide Judgment dated 23/04/2013 held as under:-
“9. The Tribunal has observed that having regard to the business of the assessee, which is the development of real estates, the participation in the tender represents commencement of one activity which would enable the assessee to acquire the land for development. If the assessee is in a position to commence business, that means the business has been set-up. The acts of applying for participation in the tender, the borrowing of monies for interest from the holding company, the deposit of the borrowed monies on the same day with NGEF Ltd. as earnest money were all acts which clearly establish that the business had been set-up. The commencement of real estate business would normally start with the acquisition of land or immoveable property. When an assessee whose business it is to develop real estates, is in a position to perform certain acts towards the acquisition of land, that would clearly show that it is ready to commence business and, as a corollary, that it has already been set- up. The actual acquisition of land is the result of such efforts put in by the assessee; once the land is acquired the assessee may be said to have actually commenced its business which is that of development of real estate. The actual acquisition of the land may be a first step in the commencement of the business, but section 3 of the Act does not speak of commencement of the business, it speaks only of setting-up of the business. When the assessee in the present case was in a position to apply for the tender, borrowed money for interest albeit from its holding company and deposited the same with NGEF Ltd. on the same day, it shows that the assessee‟s business had been set-up and it was ready to commence business. The learned senior standing counsel for the revenue would, however, state that till the land is acquired, the business is not set- up. The difficulty in accepting the argument is that an assessee may not be successful in acquiring land for long period of time though he is ready to commence his business in real estate, and that would result in the expenses incurred by him throughout that period not being computed as a loss under the head "business" on the ground that he is yet to set-up his business. That would be an unacceptable position. The other argument of the learned standing counsel for the revenue that the tax auditors of the assessee have themselves pointed out that the assessee is yet to commence its business is also irrelevant because of the distinction between the commencement of the business and setting-up of the same.” following cases • CIT v. Hughes Escorts Communications Ltd. 311 ITR 253 (Del HC) • CIT vs. LG Electronics (India) Limited: 282 ITR 545 (Del Hon'ble High Court • CIT v. ESPN Software India (P) Ltd. 218 CTR 427 (Del HC)
In view of the above settled position of law having been laid down by the Courts, we are of the opinion that the Assessee which is an investment company would be regarded to have set up its business when it was ready to make investment i.e. when it received funds from making investment in its bank account and it is evident from the factum of first investment made by the Assessee as on 31/08/2006 in the shares of Flextronics Software System Ltd. (a software development company which later merged with the Assessee), by using funds received by the Assessee by way of issue of remedial optionallyconvertible non- cumulative preference shares in its bank accounts. Thus, we find no error in the order of the Ld. CIT(A) holding that the Assessee has set up its business on 11/08/2006 and the expenses incurred thereafter ought to be allowed as deduction subjection to the provision of law. Further, the mere entries in the books of accounts of the Assessee are not determinative of ambit of taxation under the provision of Act. If an item of income/expenditure is taxable/deductible, the same must be taken into account as per the provision of the Act not as per the mere books entry. The said view has been fortified in the Judgments of Kedarnath Jute Mfg. Co Ltd vs CIT: 82 ITR 363 (SC), Sutlej Cotton Mills Ltd. vs CIT:
116 ITR 1 (SC) and, Asian Hotels Ltd. V. CIT [2023] 155 taxmann.com 247 (Delhi HC)].
In view of the above discussions, we find no merits in the Grounds of appeal of the Revenue and find no reasons to interfere with the findings and the conclusion of the Ld. CIT(A). Accordingly, the Appeal of the Revenue is dismissed.
Order pronounced in the open court on 04th JUNE , 2025