M/S E-LAND SYSTEMS PRIVATE LIMITED ,BANGALORE vs. INCOME TAX OFFICER WARD-2(1)(4), BANGALORE

The assessee has filed this appeal challenging the order dated 28.9.2018 passed by Ld. CIT(A)-2, Bengaluru and it relates to the assessment year 2015-16. The main grounds of appeal urged by the assessee is whether the Ld. CIT(A) was justified in holding that the assessee has not set up its business during the year under consideration and hence, the A.O. was justified in disallowing the claim of loss.

It is well settled proposition of law that the legal issue can be urged at any stage provided all the facts relating to the same are already available on record. We notice that the assessee is not sure as to whether the approval from PCIT has been obtained by AO or not. As per the Instruction No.5/2016 issued by CBDT, the AO can convert the limited scrutiny into complete scrutiny after obtaining administrative approval from PCIT/CIT/PDIT/DIT. In the instant case, it is the assessee which has raised the additional ground and hence, it is the bounden duty of the assessee to ascertain and ensure that all the facts relating to the additional ground are available on record. Since the assessee is not sure whether all the relevant details relating to the additional ground are already available facts, it can only be said that the assessee has raised this ground only on presumption that the AO might not have obtained required approval. Such kind of presumptions have no place in judicial proceedings and such practice of raising legal issues by way of additional grounds without ascertaining the relevant facts unnecessarily waste the time of Court also. Hence, we are unable to admit the additional ground urged by the assessee.

The facts relating to the main grounds are stated in brief. The assessee company was incorporated on 17.12.2014. Hence, the year under consideration is the first year for the assessee. The assessee is engaged in the business of providing information technology application management support and BPO services to M/s. E Land Group companies. During the year under consideration, the assessee incurred the expenditure to the tune of Rs.18,78,529/-. The assessee claimed that it has already set up the business during the year under consideration and accordingly claimed the above said loss under the head “Income from business” and also claimed that it should be carried forward to next year.

The A.O. noticed that the assessee did not commence business during the year under consideration. He noticed that the assessee has entered into a Service agreement with a group company named M/s. K. Swiss Inc. for providing service with effective from 1.4.2015. He noticed that the above said agreement was signed by the assessee on 26.11.2015 and by the above said group company on 23.11.2015. The first invoice was raised by the assessee company only on 19-10- 2015. The AO also noticed that the assessee did not generate any revenue during the year under consideration. The A.O., relying on the decision rendered by Hon’ble Supreme Court in the case of CWT Vs. Ramaraj Surgical Cotton Mills Ltd. (1967) 63 ITR 478 observed that “A Unit cannot be said to have been set up unless it is ready to discharge function for which it is being set up”. Accordingly, the A.O. held that the business of the assessee was not set up and hence the expenditure incurred prior to setting up of business is not deductible. Accordingly, he rejected the claim of business loss of Rs.18,78,529/- and determined the total income as nil.

We heard the parties and perused the record. The Ld A.R took us through the financial statements relating to the year under consideration. He submitted that the assessee has already set up its M/s. E Land Systems Pvt. Ltd., Bangalore

The Ld D.R, on the contrary, submitted that there is no dispute that the expenses incurred after setting up of business is allowable as deduction. He submitted that the very fact that the agreement was signed with its group company in November, 2015 would show that the assessee could not have set up its business before 31.3.2015. Further, the assessee has not employed the full technical team, without which it could not have commenced the business. He submitted that the assessee could be said have “set up” its business, only when it is fully ready to commence its operations. He submitted

We heard the parties and perused the record. There is no dispute with regard to the fact that there could be a time gap between “setting up of business” and actual “commencement of business”. It is also settled principle that the expenses incurred after setting up of business is allowable as deduction. We may gainfully take support from the following observations made by Hon’ble Bombay High Court in the case of Western India Vegetable Products Ltd vs. CIT (1954)(26 ITR 151)(Bom):- “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 a 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 deduction under sec. 10(2).”

Hence the answer to the question as to whether the assessee has set up its business or not would depend upon the facts prevailing in each of the case. We notice that, in the instant case, the Ld A.R has shown to us that the assessee has taken a premises on rent, employed few employees, purchased certain assets. In the case of Omniglobe Information Tech India P Ltd (supra), the Hon’ble Delhi High Court was considering the question of “setting up” of business in the context of a BPO Service industry. The Hon’ble Delhi High Court observed as under:- “Keeping in view the nature of business activity of the appellant-assessee, we do not think that it can be held that training, imparting skills to employees recruited, or, testing their performance can be treated as a pre-set up expenditure. The appellant-assessee had either employed or taken help of trainers/seniors for the said purpose. The moment employees were recruited and entrolled and infrastructure to use their

For determining the question as to whether the assessee has “set up” its business or not, in our considered view, what is required to be seen is whether the assessee is ready to commence its business. As rightly pointed out by Ld CIT(A) that the essential man power is the heart and soul of ITES service Industry. Since the assessee is in service industry providing IT application maintenance support services its requirement of man power and electronic equipment would depend upon the nature and type of work, i.e., type of IT application, it is getting. Hence, in the instant case, the assessee could plan its further recruitment of employees, depending upon the nature and type of work it is getting, which is essential to determine the skill set required for executing the said work.

We notice that the Ld CIT(A) has referred to the service agreement entered in the succeeding year by the assessee, wherein the management has visualized requirement of 25 technical employees. Since the assessee has not recruited that much number of employees, the Ld CIT(A) has taken the view that the assessee is still in the process of setting up of business. In our view, the directors have stated in the Directors’ report that the nature of work required to be performed under the agreement entered with its AE would require 25 employees. In the instant case, in our view, this kind of decision is taken after setting up of business but before actual commencement of operations. Accordingly, we are of the view that M/s. E Land Systems Pvt. Ltd., Bangalore Page 8 of 8 the Ld CIT(A) was not justified in observing that the assessee is in the process of setting up of business, since it has not yet completed recruitment of 25 employees.

Accordingly, in the facts and circumstance of the case, we are of the view that the assessee has set up its business during the year under consideration. Accordingly, the expenses incurred by the assessee are allowable as deduction and in the case of loss, it is entitled to carry it forward. Accordingly, we reverse the order passed by Ld CIT(A) and direct the AO allow the expenses and also carry forward of loss.

In the result, the appeal filed by the assessee is partly allowed.