NISCHAY FAB PVT LTD. vs. INCOME TAX OFFICER,

Assessee   has   challenged   the   judgment   of   the Income   Tax   Appellate   Tribunal   dated   15.11.2017, raising following questions for our consideration: “(i) Whether   on   the   facts   and   in   the circumstances  of   the  case,   the   Tribunal  is right   in   law   in   not   allowing   total expenditure   of   Rs.19,26,441/­   done   by   the company by holding that the assessee had not carried on any business in Asst. Year 2011­ 12 (i.e. F.Y. 2010­11)? (ii) Whether   on   the   facts   and   in   the Electronics   Ltd.   ­   (2013)   356   ITR   354   and Carefour   WC   &   C   India   P.   Ltd.   vs.   DCIT   – (2014) 368 ITR 692 (Del), which it took note of in para 17 of its order?

Essentially,   issue   pertains   to   allowing   an expenditure of Rs.19.26 lakhs claimed by the assessee by   way   of   expenditure.   The   Revenue   authorities   and the   Tribunal   were   of   the   opinion   that   during   the period  relevant  to  the  assessment  year  2010­11,  the assessee   had   not   commenced   its   business   activities and therefore such prior period expenditure could not be allowed.

The assessee is a private limited company and is engaged in the activity of trading in iron and steel. For the assessment year 2011­12, the assessee company had   claimed   business   expenditure   of   Rs.19.26   lakhs claiming   that   the   business   of   the   assessee   had already   commenced.     Such   expenditure   principally involved   the   directors'   remuneration   and   salary   and bonus to the staff.  The Assessing Officer confronted the   assessee   with   the   question   that   there   was   no business   activity   carried   on   by   the   company   during the said period  to which  the assessee  contended  that the   company   had   commenced   the   business   activity   of trading   in   iron   and   steel   during   the   year   under consideration.   “By   making   market   survey,   by contacting   various   customers   (retailers)”   and   in support   of   which,   letters   written   to   the   customers were produced.  The assessee pointed out that letters were also written  to the re­rolling  mills  to inquire about the source for procurement of these items.  The assessee  contended  that  actual  sales  may  have  taken place  in  the  later  year,  nevertheless,  it  cannot  be stated that in the current year, the assessee had not carried   out   any   business   activity.     The   assessee placed   on   record   various   letters   written   to   the prospective  customers  and  actual  subsequent  sale  and purchase transactions effected during the later year.

The  Assessing  Officer  however,  was  unmoved.    He was   of   the   opinion   that   in   absence   of   any   trading activity  and  generation  of  any  income,  there  was  no question   of   engaging   staff   or   of   paying   salary   and bonus  or incurring  heavy  expenditure  of remuneration to  the  directors.    The  Assessing  Officer  also  noted substantial   time   gap   between   the   so   called correspondences   with   prospective   buyers   and   sellers and   the   actual   transaction   which   typically   ranged between  one  year  and  in some  cases  extended  to over two  years.    The  Assessing  Officer  distinguished  the judgments relied upon by the assessee.

Commissioner   of  Income   Tax  (Appeals)  concurred with   the   view   of   the   Assessing   Officer,   however, recorded   his   own   observations   and   reasons.     The Tribunal   likewise   while   rejecting   the   assessee's appeal,   recorded   further   reasons.     The   Tribunal though   granted   partial   relief   to   the   extent   of Rs.4.50  lakhs  of directors'  remuneration  and salary, inter alia,  on   the   ground   that   even   to   protect   the company's   corporate   structure,   such   establishment would   have   to   be   maintained.     The   assessee   is   now before us in this appeal.

Learned   counsel   for   the   assessee   vehemently contended that the Tribunal committed an error in not appreciating  the  nature  of  activities  carried  on  by the   assessee   in   proper   prospective.     To   establish commencement of business, it is not necessary to show actual  sale  or  purchase  of  commodity.    The  assessee had   carried   out   initial   activities   which   later   on fructified   into   actual   sales.     It   cannot   be   stated that  no  business  activities  were  carried  on.    Heavy reliance  was placed  on decisions  of Delhi  High Court in following cases: (I) Ltd. ­ reported in (2013) 356 ITR 354 (II) In   case   of  Carrefour WC & C India P. Ltd. vs. DCIT – reported in (2014) 368 ITR 692 (Del)

Question   of   commencement   of   business   is essentially one of facts, of course to be judged with application  of well  settled  legal  principles,  on the basis   of   materials   available   on   record.     The   two Revenue   authorities   and   Tribunal   concurrently   held that  the  business  activities  had  not  commenced.    In particular,   the   Assessing   Officer   in   his   elaborate order,   analyze   the   materials   on   record   which   the assessee   placed   for   his   consideration.     Primarily, the  assessee  had  carried  out  market  survey  and  made certain   general   inquiries   about   source   of   the commodity and prospective buyers.  As correctly noted by   the   Assessing   Officer,   even   between   the   letters written  by the  assessee  to the  buyer  and  seller  and annual   culmination   of   any   transaction   of   sale   or purchase,  there  was substantial  time gap of over one year in almost  every case and in some cases over two years.     The   Assessing   Officer   therefore   refused   to link   said   letters   written   by   the   assessee   to   the actual   transaction   of   sale   or   purchase.     He   also noted   that   in   absence   of   any   income   generation,   it was   difficult   to   understand   how   the   staff   was   paid bonus   as   claimed   by   the   assessee.     The   Tribunal further recorded that there was no evidence on record to suggest that the assessee has registered itself as a trading  concern  or had procured  statutory  licenses from the State or the local authorities.

We   are   broadly   in   the   agreement   with   the   view expressed by the Revenue authorities and confirmed by the   Tribunal.     As   noted,   the   assessee   claims   the correspondence  with  the prospective  buyer  and  seller as   an   important   evidence   to   demonstrate   that   the business  activity  had  commenced.    Such  evidence  was analyzed   by   the   authorities.   Primarily,   the correspondence   was   in   the   nature   of   market   survey. There   is   nothing   on   record   to   suggest   that   the assessee   had   actively   solicited   business   and   the negotiations  in the parlance  buyers  and sellers  were at advance stage or were at any concrete form.  There was significant  time  gap in such  correspondences  and actual sale and purchase transaction.

The decisions  of Delhi  High  Court  were  based  on facts  presented  before  it essentially  showing  active groundwork   of   the   business   of   manufacturing   or   in trading and were distinguishable.

In the result, Tax Appeal is dismissed. (AKIL KURESHI, J.) (B.N. KARIA, J.) ANKIT