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Facts
The assessee, Sahara India Tourism Development Corporation Ltd, acquired a cruise ship to run a floating hotel in Goa. Expenses were incurred for acquiring and renovating the ship, and for its operations before the business commenced. The Assessing Officer disallowed these expenses on the grounds that the business had not started.
Held
The Tribunal held that the business is considered 'set up' when the assessee acquires the necessary wherewithal and physical infrastructure, even if awaiting commencement. Expenses incurred after setting up but before commencement are deductible. The Tribunal directed the Assessing Officer to allow the benefit of expenses as claimed.
Key Issues
Whether expenses incurred prior to the commencement of business, but after acquiring the necessary infrastructure, are allowable as a deduction.
Sections Cited
37, 10(2), 256(1)
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Income Tax Appellate Tribunal, “B” BENCH, KOLKATA
Before: SHRI GEORGE MATHAN & SHRI SANJAY AWASTHI
(निर्धारण वर्ा / Assessment Year : 2014-2015) Sahara India Tourism Vs ACIT, Circle-8(2), Kolkata Development Corporation Ltd, Sahara India Sadan, 2A, Shakespeare Sarani, Kolkata PAN No. :AAICS 0060 P (अपीलधर्थी /Appellant) .. (प्रत्यर्थी / Respondent) निर्धाररती की ओर से /Assessee by : None रधजस्व की ओर से /Revenue by : Shri Abhijit Adhikary, Sr. DR सुनवाई की तारीख / Date of Hearing : 17/11/2025 घोषणा की तारीख/Date of Pronouncement : 17/11/2025 आदेश / O R D E R
Per George Mathan, JM :
This is an appeal filed by the assessee against the order of the ld. CIT(A)-3, Kolkata, dated 29.12.2017 for the assessment year 2014-2015.
None represented on behalf of the assessee. Shri Abhijit Adhikary, Sr. DR appeared on behalf of the revenue.
3. It was submitted by the ld. Sr. DR that the appeal has been filed by the assessee and as nobody appeared on behalf of the assessee, the order of the ld. CIT(A) is liable to be confirmed. It was the further submission that in para 4 of the assessment order, the ld. Assessing Officer has disallowed the expenses and the same have also been confirmed by the ld. CIT(A). In this case, it must be mentioned that this appeal is of 2018 and appeal had been heard on multiple occasions and had been released for various reasons. As of today, and for the last past few postings/hearings, none represented on behalf of the assessee. Therefore, keeping this fact pending does not serve the issue of justice. Consequently, this appeal is heard ex- parte the assessee.
Facts in the present case, as mentioned in the assessment order, shows that the stand of the revenue is that the assesse’s business has not started. A perusal of the assessment order clearly shows that the assessee is a company. The page 1 of the assessment order shows that the AR of the assessee had provided all the details before the Assessing Officer. On the earlier occasions the assessee has already filed written submission which reads as follows :- BEFORE THE LEARNED INCOME TAX APPELLATE TRIBUNAL "B" BENCH KOLKATA In the matter of: IT Appeal No.357/KOL of 2018 Sahara India Tourism Development Corporation Limited - Appellant Vs ACIT, Circle-8(2), Kolkata - Respondent BRIEF NOTE OF SUBMISSIONS ON BEHALF OF THE ASSESSEE BRIEF FACTS 1.1 The assessee, incorporated on July 4, 2003, is engaged in hospitality business. During the previous year relevant to the assessment year 2014-15, the assessee acquired a cruise ship for running a floating hotel in Goa. The ship was brought from Italy to Goa. The ship had restaurant, swimming pool, bed rooms, etc., and only minor renovation was required which was carried out to make it ready for use. The application for general trading licence was made to the Directorate General of Shipping on January 8, 2014 (page 315 of the Paper Book). Since the floating hotel business was set up but had not commenced, the assessee did not claim depreciation in respect of cost of Rs.80,96,78,357 incurred for acquiring the ship and for its renovation and the said amount was shown in the fixed assets schedule under the head "Capital Work in Progress" (page 56 of the Paper Book). After the business was set up and during the pendency of the application for licence, towards the end of the year, liquidity constraints cropped up due to freezing of the assessee's deposits and other assets by the authorities because of which the commercial launch of the business of the hotel could not take place during the relevant previous year. 1.2 The recurring operating expenses of the ready floating hotel, which were revenue in nature, aggregated to Rs.1,27,85,029 (including crew expenses of Rs.33,76,267) and were charged to the statement of profit and loss for the previous year ended March 31, 2014. The assessee also had staff at its Mumbai office which looked after the accounts, administration, human resources, legal and statutory compliances, etc. The expenses incurred in respect of the employees (including expenses of Rs.33,76,267 in respect of the crew of the cruise ship) aggregated to Rs.1,22,83,939 and were shown under the head "Employee Benefits Expense" in the statement of profit and loss (page 55 read with page 61 and page 316 of the Paper Book). The other expenses incurred during the previous year [including cruise ship operating expenses (other than for crew) of Rs.94,08,762] amounted to Rs.3,83,78,041 (page 55 read with page 63 of the Paper Book) and included filing fees of Rs.1,86,57,580 paid to the Registrar of Companies for increase of the authorized capital. In the computation of income, the assessee did not claim any deduction in respect of such filing fees. 1.3 Thus, the expenses incurred by the assessee during the previous year (excluding accounting depreciation and amortisation expenses of Rs.1,77,531 and filing fees paid to the Registrar of Companies of Rs.1,86,57,580) aggregated to Rs.3,20,04,400 of which Rs.1,27,85,029 was on account of recurring operating expenses of the cruise ship (including for its crew) and Rs.1,92,19,371 was on account of the assessee's Mumbai office establishment expenses. The assessee had no revenue from operations during the previous year and had other income of Rs.3,28,41,112 mainly comprising interest of Rs.3,27,62,636 on fixed deposits (page 55 read with page 61 of the Paper Book).
2. The AO took the view that the assessee had only earned interest on fixed deposits and had no visible business activities. He held that the expenses debited had no nexus or connection with the interest income from fixed deposits and cannot be allowed as deduction. After excluding the other expenses of Rs.26,027 shown by the assessee in the accounts of the preceding financial year ended March 31, 2013, the AO disallowed the entire expenditure of Rs.3,19,78,373 debited to the statement of profit and loss. In the computation portion of the assessment order, the AO wrongly mentioned the figure of disallowance as Rs. 1,96,94,434, though in the paragraph just preceding the computation, the figure of disallowance was mentioned as Rs. 3,19,78,373.
On appeal, the CIT(A) held that since the assessee had not obtained the licence, its business was not set up and that expenses incurred prior to commencement of business were not allowable. He Hon'ble Calcutta High Court in Ritz Continental Hotels Ltd. v. CIT, (1978) 114 ITR 554 (Cal), and upheld the disallowance of Rs.3,19,78,373.
4. The assessee is in appeal before the Hon'ble Tribunal in respect of the said disallowance of Rs.3,19,78,373. SUBMISSIONS IN BRIEF 5. It is submitted that the CIT(A) went wrong in holding that in the absence of licence, the cruise ship business was not set up. He further erred in law in holding that expenditure incurred prior to commencement of business is not allowable. The legal position is that the business is set up when an assessee acquires the necessary wherewithal and physical infrastructure for carrying on its business and is only waiting for the approval of its application for commencement. It is also the settled legal position that if there is an interregnum between the setting up of the business and its commencement, all expenses incurred after the setting up of the business and before its commencement are permissible deduction under section 37.
In Maruti Insurance Broking (P) Ltd. v DCIT, (2021) 435 ITR 34 (Del), the Hon'ble Delhi High considered the question as to whether the business of the assessee in that case was set up only on grant of licence by the authority concerned. In that case, up to the stage of the Tribunal, it was held that the business was not set up prior to the date of grant of licence and that the expenditure incurred prior to such date was not allowable and had to be capitalized as preoperative expenditure. The Hon'ble Delhi High Court was pleased to hold that the finding recorded by the Tribunal that the assessee set up its business only when the licence was granted was perverse and erroneous in law. The material portion of the said judgment reads as under :- "7. Given this position, we are of the view that the finding recorded by the Tribunal that the assessee set up its business only on 2-2- 2012 was perverse and erroneous in law. The assessee, having acquired the necessary wherewithal and physical infrastructure for carrying on its business it was only waiting for the approval of its application for commencement. The Tribunal failed to appreciate the difference between the assessee being ready to commence business and the date from which it conducts business or, as in this, allowed to conduct. It has to be understood that business does not conform to, metaphorically speaking. the "cold start" doctrine. There is, in most cases, hiatus between the time a person or entity is ready to do business and when business is conducted. During this period, expenses are incurred towards keeping the business primed up. These expenses cannot be capitalized as suggested by the authorities below." (emphasis added)
In deciding the matter, the Hon'ble Delhi High Court considered the judgment of the Hon'ble Bombay High Court in Western India Vegetable Products Ltd. v CIT, (1954) 26 ITR 151 (Bom) as also the judgment of the Hon'ble Supreme Court in CWT v Ramaraju Surgical Cotton Mills Ltd., (1967) 63 ITR 478 (SC) where the Hon'ble Supreme Court approved the view taken by the Hon'ble Bombay High Court in Western India Vegetable Products' case (supra).
7. In Hotel Alankar v CIT, (1982) 133 ITR 866 (Guj), the question before the Hon'ble Gujarat High Court was as to whether the hotel business was set up when it was inaugurated or when the assessee acquired the building and started putting it in shape. It was held that the business was set up when the building was acquired and the assessee started putting it in shape. Paragraph 11 of the said judgment reads as under :- "11. It is always a question of fact whether in a given case a business has been set up or not, and in order to decide whether in a given case the business has been set up or not, the Court has to consider what is the nature of the business, whether it comprises of integrated activities, whether the activities t are such that they can be undertaken at a sime and such other relevant factors for purpose of determining as to whether in a given case it can be said that the business has been set up or not. The very fact that in the present case a partnership business was set up with a view to undertake and carry on the business of boarding and lodging house and for that purpose the first thing was to acquire a proper and suitable building, then to make it more suitable and efficient for the purposes of the business, and thereafter to employ the competent staff and to start the business in the right earnest. If this was the nature of the business and we have no doubt in our mind that it is, it cannot be gain said that the moment the assessee acquired the building and started putting it in shape, it must be held that the business of boarding and lodging house was set up. We have not been able to appreciate for what purpose such a huge building could have been placed at the disposal of the firm without any compensation except for that of business of boarding and lodging house. It is no doubt true: that some repairs and structural changes have been made. But they are not of substantial or major type and were effected only with a view to make the building more suitable and efficient for the purpose of the business. In that view of the matter, therefore, we are of the opinion that the Tribunal has committed an error of law in holding that the assessee had not set up the business till 24-2-1968. In our opinion the assessee had set up the business when the building was placed at the disposal of that firm, that is 1-7- 1967." (emphasis added) 8. The relevant passage in Western India Vegetable Products' case (supra) reads as under :-
" 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). (emphasis added) 9. In CIT v Hughes Escorts Communications, (2007) 165 Taxman 318 (Del), the Hon'ble Delhi High Court held that expenses incurred prior to the commencement of the business but after setting up of business were deductible revenue expenses (please see paragraph 12 of the judgment).
The decisions relied upon by the CIT(A) do not advance the revenue's case. 10.1 The CIT(A) referred to the judgment of the Hon'ble Bombay High Court in Western India Vegetable Products' case (supra) which actually helps the assessee. 10.2 The CIT(A) referred to the judgment of the Hon'ble Supreme Court in Ramaraju Surgical Cotton Mills' case (supra) where the Hon'ble Supreme Court approved the view taken by the Hon'ble Bombay High Court in Western India Vegetable Products' case. That apart, Ramaraju Surgical Cotton Mills' case was also considered by the Hon'ble Delhi High Court in Maruti Insurance Broking's case. 10.3 The CIT(A) referred to the decision of the Hon'ble Bombay High Court in CIT v Peim Hotel Pvt. Ltd., (1994) 209 ITR 616 (Bom). In that case, the admitted position was that the construction of the hotel building was not complete at the time when the expenses claimed were incurred and as such it was held that the hotel business could not be treated as set up unless the hotel building was completed. Paragraph 10 of the said judgment reads as under :- "10. The fact remains that the hotel building was not even complete at the time when the above referred expenses were incurred. The hotel business could not be treated as set up unless the hotel building was complete. Merely because banquet hall in the incomplete hotel building was let out by the assessee on 24-11-1972, it does not follow that 'the hotel business' as such was set up by the assessee by this date." (emphasis added)
10.4 The CIT(A) also referred to the judgment of the Hon'ble Bombay High Court in CIT v Industrial Solvents & Chemicals Pvt. Ltd., (1979) 119 ITR 608 (Bom). That decision related to the case of a manufacturing concern. In that case also, the judgments of the Hon'ble Bombay High Court in Western India Vegetable Products' case and of the Hon'ble Supreme Court in Ramaraju Surgical Cotton Mills' case were considered. In that case, the argument on behalf of the revenue that the business was not set up since proper standard marketable end product had not been obtained was rejected. It was held that the business was set up even though the plant had produced sub-standard end product which was not marketable. The said decision helps the assessee rather than the revenue. 10.5 The last decision relied upon by the CIT(A) is of the Hon'ble Calcutta High Court in Ritz Continental Hotels' case (supra) which, according to the CIT(A) covered the controversy. It is submitted that the CIT(A) could not have been more wrong. In that case, the assessment years involved were 1968-69 and 1969-70 and it was the admitted position that the building was completed in 1971. The assessee in that case sought to claim deduction of expenditure even before the building was completed. It was held by the Hon'ble Calcutta High that expenses incurred after setting up and before commencement of the business were allowable. The assessee's claim was rejected since the business was not set up. Material portions from the said decision are set out hereunder :- The building was completed early in 1971 and was given on lease to the assessee-company some time in March, 1971. The interest at 3% which came to Rs. 88,910 for the assessment year 1968-69 and Rs. 1,08,648 for the assessment year 1969-70 were described by the assessee-company as rent in the profit and loss account and the amounts were claimed as such as deduction in the computation of business income." "Under section 256(1) of the Income-tax Act, 1961, the Tribunal has referred the following question to this court: "Whether, on the facts and in the circumstances of the case, and on a proper construction of the agreement dated 30th May, 1963, between the assessee-company and the Life Insurance Corporation of India, the Appellate Tribunal was justified in holding that the payment by the assessee-company in terms of clause 9 of the said agreement amounting to Rs. 88,910 for the assessment year 1968- 69 and Rs. 1,08,648 for the assessment year 1969-70 was correctly disallowed in the computation of the business income of the assessee-company?" On behalf of the assessee it was urged before us that the true nature of the expenses was not so much as advance rent but is interest on the amount borrowed for running of the business..
...In order to be allowable as expenses it should be in respect of business which was carried on by the assessee and the profits of which are computed and assessed and should be incurred after the business is set up... ".........In this case, in my opinion, deduction in order to be allowed as the amount of interest paid in respect of the capital borrowed for the purposes of the business or profession must be of an existing business. In this case, as the business was not set up, no question of allowance under clause (in) of sub-section (1) of section 36 arose." (emphasis added) In deciding the matter, the Hon'ble Calcutta High Court considered the judgment of the Hon'ble Bombay High Court in Western India Vegetable Products' case. It is submitted that the decision of the Hon'ble Calcutta High Court in Ritz Continental Hotels' case helps the assessee rather than the revenue.
11. For the reasons aforesaid, it is respectfully submitted that the disallowance of Rs.3,19,78,373 made by the Assessing Officer is required to be deleted. Further and in any event and without prejudice to the aforesaid, it is the alternative contention of the assessee that only the sum of Rs.1,27,85,029 12 was incurred in respect of the cruise ship and that the rest of the expenditure of Rs.1,92,19,371 was the normal business expenditure of the assessee. It is settled law that a corporate entity has to incur expenses for maintaining its status and discharging its legal obligations and also for making and maintaining investments which give rise to income and that such expenditure is allowable deduction. Reliance in this behalf is placed on the following decisions :- (i) CIT v Rampur Timber and Turnery Co. Ltd., (1981) 129 ITR 58 (All) (ii) CIT v New Savan Sugar and Gur Refining Co. Ltd., (1990) 185 ITR 564 (Cal) (iii) CIT v Ganga Properties Ltd., (1993) 199 ITR 94 (Cal).
In the written submission the claim of the assessee is that its business has started. The expenses were for the purpose of business and the same is liable to be allowed. A perusal of the assessment order at page 8 para 4 shows that the genuineness of the expenditure has not been disputed. The main dispute is as to whether the business of the assessee has started or not. The nature of expenses shows that in the previous year the expenses were zero and during the current year expenses have been incurred, which is in the nature of service charges, crew sign on/off charges and medical examination charges. A perusal of the profit and loss account of the assessee shows that there are also crew salaries. This shows in the Capital work in progress of the cruise ship representing in the purchase cost etc., the same is also extracted as under :-
6. The statement of the ld. Sr. Dr that the assessee has not received the license for the operation of the ship in India is a reason for the stand of non-business activity having been started. It is not the case that license has not been applied. In fact, the Suez Canal Transit charges is Rs.4,67,000/- has also been claimed, therefore, the ship has very much moved from its port in Italy to India. The fixed assets list of the assessee, which reads as follows :-
Also, shows various assets having been put to use. The auditor’s negative report is not there. At page 61, the employee benefits are also 8. For the fact that the ship has left its original port travelled through Suez Canal and has also entered in into the port in India is not dispute, insofar as even the port dues and pilot charges are claimed in the profit and loss account. The license for the movement of the ship and its entry into the country was available. The license for operating the same as cruise ship in the country admittedly has not yet been received. This does not mean that the business of the assessee has not started. Putting the asset ready to use is in fact a part of the business activity. This being so, we are of the view that the expenditure as claimed by the assessee in its profit and loss account is liable to be allowed and we direct the Assessing Officer to do so.
The alternate issue is that the assessee is a company. All expenditure required for maintenance of the status of the company is liable to be allowed. The existence of the company would be deemed to be the existence of the business. The Assessing Officer has, admittedly, not allowed even these expenses. Even though the Assessing Officer has treated the income in respect of the fixed deposit interest as income from other sources. The other expenses which is shown at page 63 of the paper book are part of the balance sheet and profit and loss account shows the filing fees of Rs.1,86,57,580/-, the breakup of the other expenses is as follows :-
10. The filing expenses itself is part of the expenses in relation to the maintenance of the status of the company. There are other expenses also. The Assessing Officer has not considered even this stand. It is noticed that the Assessing Officer only disallowed expenses with one line stand that the business of the assessee has not started. As we have already held that the business of the assessee has been started, the Assessing Officer is directed to allow the benefit of expenses as claimed.
In the result, appeal of the assessee is allowed. Order dictated and pronounced in the open court on 17/11/2025.