ORIENT GREEN POWER CO. LTD.,CHENNAI vs. ACIT, CHENNAI

The learned AR, drawing our attention to the documents placed in the paper book, submitted that assessee had duly set-up its business during the year and all the work to set up the plant was already done by the assessee. Reliance has been placed on the decision of Hon’ble Delhi High Court in the case of Pr. CIT V/s Miele India Private Ltd. (127 Taxmann.com 684) wherein it was held that when the assessee was ready to carry on business in previous year it could safely be concluded that business had been set-up and therefore expenditure incurred prior to launch a physical trading outlet would be allowable expenditure. Reliance has also been placed on the decision of Hon’ble Madras High Court in the case of Diamler India Commercial Vehicles (P) Ltd. V/s DCIT (107 Taxmann.com 243) wherein it was held that where the & 1216/Chny/2017 - 3 - assessee had already commenced various activities, merely because manufacturing and sale of vehicle did not take place during the year due to non-completion of construction of plant, it could not be concluded that the business had not been set-up so as to reject assessee’s claim of deduction. Reliance has also been placed on the decision of Hon’ble Karnataka High Court in Pr. CIT V/s Bank Note Paper Mill India Pvt. Ltd. (412 ITR 415), the decision of Mumbai Tribunal in Globex Energia Pvt. Ltd. V/s ACIT (77 Taxmann.203) and Samsara Hospitality Pvt. Ltd. V/s ITO (59 ITR (Trib) 155). The copies of the same have been placed on record. On the basis of these submissions, Ld. AR submitted that business expenditure would be allowable to the assessee.

The Ld. DR, on the other hand, submitted that setting up of business would mean group of activities which would make assessee completely ready to carry out business operations. Till the time the assessee is not ready to commence the business, the expenditure could not be allowed and the same would remain merely pre-operative expenditure. The Ld. Sr. DR also referred to the observations of lower authorities in their respective orders to support the assessment.

Having heard rival submissions and after going through the orders of lower authorities including the documents placed in the paper book and after going through the judicial pronouncements as cited during the course of hearing before us, our adjudication would be as given in succeeding paragraphs. & 1216/Chny/2017 - 4 - Assessment Proceedings 5.1 The assessee being resident corporate assessee has been incorporated under The Companies Act, 1956 during the year 2006 and is stated to be engaged in the business of investing, owning and operating renewable energy sources like biomass power, wind power, biogas etc. 5.2 The return of income was filed at loss of Rs.303.58 Lacs. Upon perusal of financial statements, it transpired that the assessee admitted only ‘income from other sources’ and no ‘business income’ was offered to tax. It was concluded by Ld. AO that though the assessee had not commenced its business operations, however, certain expenses like employee costs, other costs, depreciation and interest charges to the extent of Rs.337.82 Lacs were claimed in the Profit & Loss Account. Accordingly, it was held that the assessee would be entitled to claim depreciation on the amount capitalized that too after commencement of its business activity. In other words, the expenditure claimed by the assessee was disallowed and other income was assessed as ‘income from other sources’. For the same, reliance was placed on the decision of Hon’ble Supreme Court in the case of M/s Tuticorin Alkali Chemicals & Fertilizers Ltd (227 ITR 172). 5.3 Similar are the facts in AY 2010-11. During assessment proceedings, the assessee defended its stand. However, Ld. AO noted that the assessee company’s bio-mass power plant was synchronized to grid only from 04.07.2011. Therefore, the assessee & 1216/Chny/2017 - 5 - was not ready to produce the power till 04.07.2011 and the business was not set-up. Accordingly, similar view was taken in assessment order for AY 2010-11 and the business expenditure as claimed by the assessee were disallowed. Appellate proceedings 6.1 During the course of appellate proceedings, the assessee furnished various documentary evidences to establish the fact that the business had already been set-up and the business operations were underway. These documents include: - i. Turnover of subsidiaries ii. copy of purchase order dated 03.11.2008 placed with Shriram EPC Limited for supply of power plant equipment. iii. Copy of approval dated 11.04.2008 from Madhya Predesh Urja Vika Nigam Limited for starting I0 MW biomass based power plant in Narsingpur. iv. Copy of approval from Padmasri. Dr. DY Patil Sahakari Sakhar Karkhana Ltd, regarding sanction of co- generation project on BOOT Basis. v. Copy of BOOT { Build, Own, Operate, Transfer) Agreement dated 30.10.2008 between Orient Green Power Ltd and Padmashri Dr. D. Y. Patil SSK Ltd regarding setting up of cogeneration facility and supply of power. vi. Financial statement of the assessee vii. Copy of MOA & AOA Reliance was placed on various judicial pronouncements to bolster the claim. Another pertinent fact was that the assessee earned interest income from subsidiary companies. The assessee distinguished the case law of Tuticorin Alkali Chemicals Ltd. (supra) and submitted that the loans were advanced to subsidiary companies as a matter of commercial expediency. The subsidiary companies were promoted to achieve the main objective of power generation and therefore, the income would be assessable under the head ‘Business Income’ only. & 1216/Chny/2017 - 6 - 6.2 However, Ld. CIT(A) rejected plea on the ground that nothing was brought on record to establish that the assessee had set-up the business. The assessee only produced agreements, approvals, purchase orders etc. The above activities would not constitute commencement of business activity. The assessee had just started the preliminary work to set-up the plant. Therefore, the stand of Ld. AO, for both the years, was confirmed. Aggrieved the assessee is in further appeal before us. Our findings and Adjudication 7. After deliberating upon material facts, we find that the plea of the assessee is that the business had already been set-up but commencement did not take place due to long gestation period. We find that the term ‘previous year’ as defined in Section 3 of the Act would mean the financial year immediately preceding the assessment year. However, in the case of newly set-up business, the previous year shall be the period beginning with the date of setting-up of the business. Accordingly, till the time the business is set-up, all the expenses, even if revenue in nature, would have to be capitalized which is the stand of lower authorities in the present case. As a natural corollary, if the business is set-up, the expenditure would be allowable notwithstanding the fact that no business income was earned by the assessee during the year.

As per the decision of Hon’ble Bombay High Court in the case of Western India Vegetable Products v. CIT 26 ITR 151 (Bom.), what is to be considered is the set-up of the business and not the commencement of business. Quite clearly, the two-term ‘setting-up’ and & 1216/Chny/2017 - 7 - ‘commencement of business’ carries different connotations. What is to be seen is whether the business is set-up or not whereas actual commencement of business may or may not happen. Once the business is held to be set-up, the deduction of business expenditure would be available to the assessee. When a business is established and is ready to commence business then it could be said that the business has been set-up. There may be an interval or time gap between the setting-up of the business and the commencement of the business but still all the expenses incurred during that interval would be permissible deductions. The term ‘setting up’, as per Oxford English Dictionary would mean ‘to place on foot’ or “to establish” which is in contradistinction to the term ‘commence’. The distinction is this that when a business is established and is ready to commence business then it can be said that the business had been set-up. There may be in interregnum or time interval between the setting-up of the business but all expenses incurred during interregnum would be permissible deductions. The relevant observations of Hon’ble Bombay High Court in Western India Vegetable Products Ltd. (supra) were 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).

Keeping in mind aforesaid principles, we find that the assessee has been incorporated during 2006. The main objective of the assessee was to generate electrical power by convention and non-conventional methods including coal, gas lignite oil, bio-mass, water, thermal, solar, hydel, geo-hydel, wind and tidal waves. The assessee was also engaged to establish captive power plant on a co-operative basis for a group of industrial and other consumers and supply to the participants in the co- operative effort either directly or through the transmission lines of the state Electricity Board or other authorities by entering into appropriate arrangements. Thus, the business objective could be achieved either directly or through joint ventures in association with other entities.

The perusal of financial statements, as placed on record, would show that the assessee has substantially increased its gross block from Rs.2.16 Lacs as on 31.03.2008 to Rs.329.49 Lacs during this year which has shown further substantial increase in FY 2009-10. The major addition during FY 2008-09 is land for Rs.320.94 Lacs which is also evident from sale deed of land as placed on page nos. 246 to 252 of the paper-book. The same would show that the assessee had already & 1216/Chny/2017 - 9 - acquired the land to carry out the business activities. The nature of major expenses incurred by the assessee is employee’s cost, misc. cost and depreciation which have shown significant increase during the year. The same would show that the assessee had hired the staff to carry out the business activities. The other expenses include expenses in the nature of rent, rates & taxes, travel, legal & professional charges etc. which would show the readiness of the business to commence the activities.

Further, the assessee, vide approval letter dated 11.04.2008 (page nos. 140-141 of the paper-book), had received registration for 10MW capacity biomass-based power plant in district Narsingpur from a MP Govt. undertaking i.e. Madhya Pardesh Urja Vikas Nigam Ltd. The registration was valid for 6 months during which the assessee was required to submit Assessment report, detailed project report which would have all the relevant details of technology and the detail of land as identified for the project. The assessee was required to submit a map indicating the location of the project site along with details of water availability. Pursuant to the same, the assessee had submitted detailed project report (page nos. 142 to 245 of the paper-book) as early as during October, 2008 giving all the vital details including technological framework and plant configuration, construction & layout including operations and maintenance. The list of the Equipments, cost of project, means of finance, profit projections etc. were also detailed in the report.

Proceeding further, the assessee has issued letter of intent to a vendor namely M/s Shriram EPC Limited to carry out Engineering, procurement and construction (EPC) work for 10MW Bio-Mass Power Plant on 23.05.2009 wherein the vendor was to undertake EPC work after placing orders for necessary equipment (253-254 of the paper- & 1216/Chny/2017 - 10 - book). The assessee had also made an application for environment clearance certificate from state level expert appraisal committee to carry out the project. The assessee also entered into memorandum of agreement with M/s D.Y.Patil Sahakari Sakhar Karkhana Ltd. to set-up 20MW cogeneration plant utilizing the bagasse generated from the Sugar Plant on Built, Operate and Transfer basis at the premises of the contractee. The detailed project report of the same was submitted by the assessee as early as June, 2008. The agreement in this respect was executed by the assessee during October, 2008 and the lease agreement, in this respect was executed on 16.01.2009. The assessee also entered into a power purchase agreement with Tata Power Trading Co. Ltd. on 22.12.2008 wherein the assessee agreed to sell the power generated from its bagasse-based cogeneration power plant. To facilitate the same, the assessee applied to Maharashtra State Electricity Transmission Company Ltd. requesting for transmission line for evacuation of power from the said power plant. Lastly, the assessee could set-up power plants on co-operative basis through their Special purpose vehicles (SPV). Pursuant to the same, the assessee had advanced funds for operating and managing those SPVs which were, in turn, advancing the assessee’s business.

On the basis of all these facts and documentary evidences, it could be said that though the assessee’s business had not commenced but the business had already been set-up and the assessee undertook all preliminary steps to commence the business. The gestation period, in the kind of business in which the assessee was engaged, would generally be long and it is quite natural that it would take substantial time to start the actual business operations and generate business income. & 1216/Chny/2017 - 11 - Quite clearly, without necessary approvals and agreements, the assessee could have never been able to commence its business. All these documents were road-map to starting of actual business operations. Nevertheless, the business was established by procurement of land, staff etc. The assessee had recruited technical personnel for setting-up the power projects. The assessee had all the approvals, permissions in-hand and was in the process of commencing the business. The assessee had deployed technical personnel, obtained various approvals, placed purchase orders and also signed long-term Power Purchase Agreements with the clients. The signing of all these agreement would be important activity and very much integrated to the activities of the business of the assessee.

Upon perusal of assessment orders, we find that Ld. AO has based his reasoning solely on the fact that assessee-company’s bio-mass power plant was synchronized to grid only from 04.07.2011. Therefore, the assessee was not ready to produce the power till 04.07.2011 and hence, the business was not set-up. However, the said reasoning stresses the proposition that expenditure could not be allowed till the generation of income. The said reasoning overlooks the various vital documentary evidences furnished by the assessee in support of the fact that the business had already been set-up. We are of the considered opinion that the generation of actual business income was not an essential element to allow the business expenditure. What was required to be seen was whether the business had been set-up or not. In view of our observations in the preceding paragraphs as well as keeping in view the ratio of & 1216/Chny/2017 - 12 - various judicial pronouncements as cited before us by Ld. AR during the course of hearing (preceding para-2), it could safely be said that the assessee’s business had set-up during AY 2009-10 itself and therefore, the expenditure as claimed by the assessee would be allowable deductions.

The Hon’ble High Court of Madras in Daimler India Commercial Vehicles (P.) Ltd. V/s DCIT (107 Taxmann.com 243), considering the cited order of Hon’ble Bombay High Court in Western India Vegetable Products Ltd. (supra) as well as various other decisions, held as under: 43. In Western India Vegetable Products Ltd. (supra), it was pointed out that there is a clear distinction between a person commencing a business and a person setting up a business for the purposes of the Indian Income-tax Act (Act XI of 1922), the setting up of the business and not the commencement of the business is to be considered. It was held 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. Further, it was held that there may be an interval between the setting up of the business and the commencement of the business and all its expenses incurred during that interval would be permissible as deductions. In the said case, the company actually commenced business only on 1st November, 1946 when it purchased the groundnut oil mills, but prior to this date, there was a period when the business could be said to have been set up and the company was ready to commence business and that there was evidence before the Tribunal to hold that the assessee company set up its business as from 1st September, 1946.

In Prem Conductors (P.) Ltd.(supra), the Court held that the assessee can be said to have set up its business from the date when one of the categories of its business activity is started and it is not necessary that all the categories of its business activities must start either simultaneously or that the last stage must start before it can be said that the business was set up. In the said case, the assessee had started securing orders well in advance of the date on which it actually started production of aluminium conductors and this was held to be a factor to determine that the assessee had set up its business. Further, the activity of acquiring raw material was held to be part of business activity of a manufacturing unit because unless the raw materials are ready, production cannot start and unless production are started, the goods cannot be actually sold. It was pointed out that one has to bear in mind that the test is of commonsense and what in the eye of a business can be said to be the commencement of the business. It was further pointed out that one business activity may precede the other and what is required to be seen is whether one of the essential activities for the carrying on of the business of the assessee company as a whole was or was not commenced.

In Ralliwolf Ltd. (supra), the Court referred to the Oxford English Dictionary meaning for the expression "setting up" and held that the distinction is that when a & 1216/Chny/2017 - 13 - business is established and is ready to commence, then it can be said that business that it is set up.

In Hughes Escorts Communications Ltd. (supra), the assessee carried on business of satellite business communications for which an equipment is used. The said equipment can be used only after establishing, maintaining and using the communication facilities on a licence from the Department of Telecommunications (DoT). The assessee therein made an application to the DoT for grant of such licence and a licence agreement was entered into and even prior to that the assessee placed a purchase order for purchase of the equipments from USA. In the return of income, the assessee claimed expenditure, which was rejected by the Assessing Officer on the ground that the assessee had begun receiving the satellite signals only in the month of February, 1995 and further installation was completed only on 05.03.1995 and it can be said that the business of the assessee had been set up only in March, 1995 and not earlier. Dismissing the appeal of the Revenue, the Court held that the business of an assessee involved different activities in which the first step was to purchase the equipments for which purchase order was placed in July, 1995, application to DoT for licence was made and the signals were received after the equipment was installed in the premises of the customer and in such circumstances, the business of the assessee was held to have been set up in July, 1994 when they placed the purchase order for the equipments and expenses would be deductible as revenue expenses.

In Omniglobe Information Tech India P. Ltd. (supra), it was held that the assessee's business was set up when they acquired necessary infrastructure from its sister concern and also started making payment of salary and wages and giving training by professional experts under the supervision and control of the assessee.

In Dhoomketu Builders and Development P. Ltd. (supra), the assessee was in the business of real estate development and had obtained loan from its holding company, participated in a tender notified by the Official Liquidator of the Karnataka High Court for sale of a piece of land. The assessee, however, was not successful in producing the land and the earnest money was returned to it. On the amount borrowed from its holding company, the assessee was liable to pay interest and the assessee claimed the difference between the interest received and the interest paid as loss under the head "business". This was rejected by the Assessing Officer. The Court confirmed the order passed by the Tribunal which held that for the development of real estate, participation in the tender represented commencement of one activity which would enable the assessee for acquiring the land for development and the assessee was in a position to commence business and that meant that the business had been set up.

In Carefour WC & C India P. Ltd. (supra), the assessee company was incorporated on 19.09.2007 and even before incorporation, it corresponded with well known companies, which rented out office premises upon a bank account in October, 2007, employees were also appointed during the relevant years, tax deducted at source, registration under the Shops and Establishments Act was also effected and these activities were the first stage activities which would lay the foundation for placing orders for procuring the stock and storing them in a warehouse undertaken by the assessee was a precursor to commencement but post-set up and the activities demonstrated that setting up of the business by the assessee with a commitment to commence the business. Therefore, the order of the Assessing Officer disallowing the business loss was held to be not justified. & 1216/Chny/2017 - 14 - 50. In Franco Tosi Ingegneria (supra), the assessee, a non-resident company secured a letter of intent from Neyveli Lignite Corporation on 13.04.1981 for carrying out certain works to establish a project office and to commence activities in India from that date. However, it secured the approval of the Reserve Bank of India for establishing its project office only, subsequently. It obtained registration under the Companies Act subsequent to 13.04.1981 and in such scenario, the Income-tax Officer disallowed the expenditure incurred for the period prior to October 1, 1981, on the ground that during that period, the permission of the Reserve Bank of India was not in force. The Court held that the assessee had, in fact, commenced operations on April, 13 1981 and incurred expenditure and the expenditure so incurred was pursuant to the letter of intent granted to it by Neyveli Lignite Corporation and the assessee is, therefore, entitled to regard the expenditure so incurred, as the expenditure incurred by its during the previous year relevant to the assessment year 1981-82.

In Club Resorts P. Ltd. (supra), the assessee was in the business of promoting time share units at places of tourist interest. The question was whether the expenditure incurred on maintenance of staff, etc., could be treated as a business expenditure. The Court affirmed the view of the Tribunal and held that there are various stages; the first of which being to set up one or more operating offices from which sales personnel were to be sent to solicit customers which were already started by the assessee; and the second stage was launching a massive publicity campaign, which the assessee had already been doing, it had already acquired land and started construction, which were the subsequent changes. Accordingly, it held that the office expenses that had been incurred were clearly revenue in nature.

The above decisions clearly set out the legal position. In terms of the Memorandum of Association of the assessee, it was incorporated for a bundle of activities, viz., designing, manufacturing, distributing, selling, source of after sales engineering services and research and development of commercial vehicles and related products and components for domestic Indian and Overseas Market.

The CIT(A) has taken note of the entire factual matrix, analysed various activities, which were shown by the assessee, to have commenced during the previous year relevant to the assessment year under consideration. We fully endorse the view taken by the CIT(A) in holding that the assessee had commenced, performed activities relating to designing of commercial vehicles and related products R&D, buying and selling of parts and in the process of construction of factory building for manufacture of commercial vehicles. Thus, the test laid down in the aforementioned decisions if applied to the facts of the case, we have no hesitation to hold that the business of the assessee had been set up in the previous assessment year for which the assessment had been completed by the Assessing Officer. Therefore, the Tribunal erred in holding that merely because the manufacturing and sale of the vehicle did not take place, the business of the assessee has not been set up. The manufacturing activity of the assessee is a part of the composite business activities of the assessee and this was not commenced because, the construction of the building and installation of plant and machinery was in progress.

On the basis of the above, it could be said that business could be said to have been set-up from the date when one of the categories of business activity is started and it is not necessary that all the categories of its business activities must start either simultaneously or that the last stage must start before it can be said that the business was set-up. What is required to be seen is whether one of the essential activities for the carrying on of the business of the assessee company as a whole was or was not commenced. When a business is established and is ready to commence, then it can be said that business has been set-up. The business would be set-up when the necessary infrastructure was acquired by the assessee and the assessee started paying salaries and allowance of the experts. The assessee, in the present case, had achieved the process of establishing the business.

In view of the foregoing and in the light of various judicial pronouncements as enumerated in preceding paragraphs, we concur with the submissions of Ld. AR that the assessee’s business was already set-up during AY 2009-10. Therefore, the business expenditure as claimed by the assessee would be allowable deductions in both the years. We order so. Accordingly, the appeals stands allowed. & 1216/Chny/2017 - 16 - 18. Both the appeals stand allowed in terms of our above order. Order pronounced on 01st April, 2022 Sd/- Sd/- (MAHAVIR SINGH) (MANOJ KUMAR AGGARWAL) उपा�� /VICE PRESIDENT लेखा सद� / ACCOUNTANT MEMBER चे�ई / Chennai; िदनांक / Dated : 01-04-2022 EDN/- आदेश की �ितिलिप अ�ेिषत/Copy of the Order forwarded to : 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु� (अपील)/CIT(A) 4. आयकर आयु�/CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF