RHC IT SOLUTIONS PVT. LTD.,NEW DELHI vs. ACIT, NEW DELHI

Brief facts of the case are that the assessee is engaged in the business of software development, maintenance and support services. For the assessment year 2012-13, it had filed its return on 28/9/2012 declaring a loss of Rs. 67,98, 512/-. Assessment was, however, completed by an order dated 2/3/2015 under section 143(3) of the Income Tax Act, 1961 (for short “the Act”) at an income of Rs. 1,270/- by disallowing the business loss of Rs. 67,99,783/-, on the ground that the assessee failed to submit the evidence for commencement or for setup of the software development business.

Aggrieved by the same, assessee preferred an appeal before the Ld. CIT(A) and argued that the actual operations of the assessee were already commenced from the preceding Financial Year. i.e.,Financial Year 2010-11 only and the assessee had started software products useful for financial market as per the main object clause given in the Memorandum of Association of the assessee. It was further submitted that for the business operations of the assessee, they have put sufficient infrastructure in place, namely, it has taken necessary registrations from regulating authorities in India, taken premise on rent, hired employees with requisite knowledge and skills, entered into an agreement with information technology (IT) companies for assistance in software development, purchased the IT and office equipment required for the operations and started development of the software product, apart from performing the required statutory and routine compliances like an audit of accounts, conducting Annual General Meeting and filing of various returns with regulatory authorities in the ordinary course of business.

It was further submitted by the assessee before the Ld. CIT(A) that the expenses incurred directly in relation to software development to the tune of Rs. 10,31,41,613/-was capitalised and recorded in the assets side as “intangible assets underdevelopment” in the books of account; whereas the general business expenditure like rent, electricity and water, postage on telephone, printing and stationery, advertising etc to the tune of Rs. 67,98,512/- was charged to the Profit and Loss Account (P&L Account) and claimed as Revenue expenditure in the return of income. Assessee contended that since the operations of the assessee were already commenced, all the Revenue expenditure incurred for the business purpose should be allowed as per the provisions of the Act.

Ld. CIT(A), however, by way of impugned order did not agree with the contentions of the assessee and observed that even according to the assessee during the subsequent Financial Years, namely, Financial Years 2012-13 and 2013-14, the assessee had hired additional employees and consultants, acquired more assets including computers, laptops, software, biometric attendance system etc, besides which the assessee was acquiring software tools which were required by a software development. Ld. CIT(A) further observed that the assessee could complete the software on 31/3/2016 and it started earning Revenue from the Financial Year 2016-17 corresponding to the assessment year 2017-18. He, therefore, inferred that without these equipment and tools, the assessee would not have been in a position to undertake the development of software and therefore, he concluded that it cannot be said that the business of the assessee was set up till the end of the Financial Year 2011-12 relevant for the assessment year 2012-13. He accordingly upheld the assessment order and dismissed the appeal.

When this matter is called, neither the assessee nor the authorised representative is present. Notice was issued to the address given in form 36. If the assessee is available in such address, such notice should have been served on the assessee. If for any reason, the assessee is not available there, it is for the assessee to make arrangements for service of such notice by furnishing the address where the assessee would be available, or to deliver it to some authorised person, or by making request to the postal department to detain the mail till the assessee claims the same. Since the assessee does not seem to have adopted any of these methods, we are of the considered opinion that no time could be granted. Basing on the record we proceed to hear the Revenue and decide the matter on merits.

Ld. DR placed heavy reliance on the orders of the authorities below and in line with the findings of the Ld. CIT(A) submitted that unless and until the assessee is complete in all respects to start the business, it cannot be said that they have setup or commenced the business and therefore, in view of the findings of the Ld. CIT(A) that the assessee was in the process of recruiting the personnel and acquiring the fixed assets and software tools till the Financial Year 2013-14, it cannot be said that the assessee setup the business in the relevant assessment year.

We have gone through the record in the light of the submissions made on either side. It was submitted by the assessee before the Ld. CIT(A) that the assessee hired the premises, acquired the office furniture and equipment, engaged the personnel with requisite skills and qualifications and as a matter of fact entered into agreements with IT companies to devise architecture and the blueprint of the proposed products and assist in development activities. It could be found from the impugned order that the assessee furnished the copy of agreements it entered with the IT companies. It was also stated before the Ld. CIT(A) that the 1st Annual General Meeting of the assessee was held on 23/08/2010for adaptation of audited financial of Financial Year 2009-10. Above all, in unequivocal terms the assessee contended before the Ld. CIT(A) that it had entered into an agreement with TravcionTechnologies on 31/1/2012 for software development and support services and a copy of the invoice and agreement was also furnished before the Ld. CIT(A).

In the impugned order, nowhere the Ld. CIT(A) controverted any of these contentions raised before him, on factual verification. He did not comment on the veracity of the documents produced before him.He also did not dispute the contention of the assessee that by AY 2012-13 they have acquired office premises with requisite furniture and equipment, software tools and the services of IT companies to devise architecture and blueprint of the proposed product alongside the recruitment of the skilled personnel, supported by documents referred to by the Ld. CIT(A) in his order.

Ld. CIT(A) enumerated the activities undertook by the assessee till the end of the year under consideration and such activities include,-

i. duly appointing the auditors and opening of bank accounts; ii. revision of a formal business plan; iii. taking the business premises on rent by paying the water and electricity charges along with rent; iv. recruiting the employees at various levels by paying the salaries for software development and other works; v. entering into various agreements for software development activities and also hiring IT consultants; vi. acquiring various pixel assets and office equipment; conducting various workshops and seminars which were attended by the employees for business purposes; and vii. registration with various regulatory authorities. Further, it goes undisputed that the assessee had entered into an agreement with TraccionTechnologies on 31/1/2012, supported by the copy of invoice and agreement as contended by the assessee before the Ld. CIT(A).

Only reason assigned by the Ld. CIT(A) to reach the conclusion that the assessee has not set up the business and commenced the same, is that the assessee was hiring additional employees and consultants, purchasing more fixed assets which includes computers, laptops, software, biometric attendance system etc, was acquiring software tools which were required by it for software development during the financial years 2012-13 and 2013-14, and it did not complete the development of software till 31/3/2016. Ld. CIT(A), therefore, was of the opinion that the assessee was in the process of acquiring fixed assets, manpower and the software tools required for the development of software till the Financial Year 2013-14 and therefore inferred that without these equipment and tools, the assessee would not have been in a position to undertake the development of the software.

In the impugned order Ld. CIT(A) noticed the decision of the Ahmedabad Bench of this Tribunal in the case of DCIT vs. Interlinked Petroleum Ltd 83 TTJ 274 (ITAT-Ahmed) wherein it was clearly held that there is a clear distinction between a person commencing business and a person setting up of the business; that there may be an interval between setting up of business and the commencement of business; and that the assessee can be said to have setup its business from the date when one of the essential categories of its business activities is started, and it is not necessary that all categories of its business activities must start and simultaneously or that the last stage must start before it can said that the business was a setup. In this case the assessee did everything including acquisition of fixed assets, software tools, employed required skilled personnel besides securing a contract with the TraccionTechnologies on 31/1/2012 for software development and support services. It is only after securing all the infrastructure and the contract for work, the development of software and shall commence and end up with the sale of software and earning Revenues. It cannot be said that it is only on the completion of the process of development of software, the business was setup. When a business is set up and continuing, it would be but natural that the assessee would be progressive in further acquisitions and further recruitments. That does not mean that setting up of a business is coextensive with the process of expansion.

With this view of the matter we are of the considered opinion that merely because the assessee went on acquiring more assetsincluding computers, laptops, software, biometric attendance system etc, recruiting additional employees and consultants and also acquiring software tools required for the software development, it cannot be said that till such time the business was not set up. Unlike in any other industry where with the installation of the Plant and Machinery, the production will go on,in software industry new requirements of clients necessitate the acquisition of new software tools and hiring of the employees with such new programming skills.

For these reasons, we find it difficult to agree with the Ld. CIT(A) in his reasoning or conclusions. We hold that with the acquisition ofrequisite infrastructure and entering into the business contract with the TraccionTechnologies on 31/1/2012, the assessee setup its business and entitled to claim the business expenses of Rs. 67,98,512/-. We accordingly set aside the orders of the authorities below and direct the Assessing Officer to delete the disallowance. Grounds of appeal are accordingly allowed.

In the result, appeal of the assessee is allowed.