DCIT, NEW DELHI vs. M/S. ALBASTA WHOLESALE SERVICES LTD., NEW DELHI

3. At the time of hearing before us, learned DR heavily relied upon the assessment order and she stated that for the year under consideration, the assessee filed the return disclosing dividend income, interest on intercorporate deposits and profit on sale of investment.

3 ITA-6546/Del/2015 Thus, no business income was disclosed. That even otherwise, no business is being carried on by the assessee either in this year or in the preceding year. She stated that these factual findings are very clearly recorded by the Assessing Officer at page 2 paragraph 3 and further page 5 paragraph 4.3. Thus, when no business is being carried on by the assessee, the Assessing Officer rightly disallowed the loss on account of foreign exchange fluctuation loss. She further stated that the assessee claimed to have incurred this loss in respect of money advanced to its subsidiary for the purpose of setting up of the plant. Since no such plant was set up, the money was returned back by such subsidiary and in the process, the assessee suffered the loss because of the fluctuation in the rate of Dollar. That advancing of money to the subsidiary cannot be said to be a business. She, therefore, submitted that the Assessing Officer had rightly disallowed the foreign exchange fluctuation loss and learned CIT(A), without considering the facts of the case, directed to allow the same.

4 ITA-6546/Del/2015 July, 2009. That the above order of learned CIT(A) was accepted by the Revenue and learned DR has filed the letter from the Assessing Officer accepting the fact that no appeal was filed for assessment year 2010-11 because the then Assessing Officer in the central scrutiny report has mentioned that the order of the CIT(A) is acceptable on merits. He stated that once the Revenue has accepted the order of the CIT(A) for assessment year 2010-11 holding that the assessee has commenced the business with effect from 23rd July, 2008, there would be no justification for holding in the year under consideration that no business was commenced. He has also relied upon the following decisions in support of his claim :-

(i) CIT Vs. ESPN Software India P.Ltd. – [2008] 301 ITR 368 (Del).

(ii) CIT Vs. Dhoomketu Builders and Development P.Ltd. – [2014] 368 ITR 680 (Del).

(i) Hero Cycles P.Ltd. Vs. CIT – [2015] 379 ITR 347 (SC).

(ii) CIT Vs. Modi Entertainment Ltd. – [2014] 89 CCH 0014 (Del).

6 ITA-6546/Del/2015 He, therefore, stated that the order of learned CIT(A) should be sustained and Revenue’s appeal may be dismissed.

7 ITA-6546/Del/2015 2009-10, the assessee filed the return disclosing the loss of `75,946/- under the head ‘income from business or profession’. In the order passed u/s 143(3) dated 20th December, 2011, the Assessing Officer accepted the returned loss of `75,946/-. Thus, he accepted that the assessee was carrying on the business. In assessment year 2010-11, the assessee declared the loss of `12,85,278/-. In this year, the Assessing Officer recorded the finding that the business was not commenced by the assessee and accordingly, he assessed the total income at nil. On appeal, learned CIT(A), vide order dated 20th August, 2015, held as under :-

“The appellants’ case is squarely covered by the ratio of the principles laid down in the aforesaid judicial pronouncements of Hon'ble Delhi High Court. Since the appellant company was incorporated on 25.04.2008 and thereafter, appointed Directors, incorporated a subsidiary company in Mauritius and obtained consultancy services from ‘India Bulls Power Ltd’ for development of power projects. All these activities goes to prove that business of the appellant company was set up on 25.04.2008 and commenced its business on 23/07/2008 on receipt of certificate of commencement of business and incorporated a subsidiary company in Mauritius for bidding for construction of power projects in foreign countries.

In view of the above, it is held that business of the appellant company was set up and commenced in F.Y. 2008-09 and any expenditure incurred in the furtherance of its objective is fully allowable as business expenditure. As a result, ground of appeal no.2 and 3 are allowed.”

9. Thus, in the above order, learned CIT(A) has recorded the factual finding that the assessee commenced its business on 23rd July, 2008 on receipt of certificate of commencement of business and incorporation of a subsidiary company in Mauritius for bidding up of power projects in foreign countries. The assessee had incorporated GVL in Mauritius,

8 ITA-6546/Del/2015 and through GVL, it submitted the bid for construction of power projects in foreign countries. When it was enquired from the learned DR whether the Revenue had accepted the above order or whether any appeal is filed. The ld. CIT-DR submitted the copy of letter received from the Assessing Officer. The information as submitted by the Assessing Officer vide letter dated 14th January, 2019 is reproduced below for ready reference :-

“Required information on three questions is as under :

1. Whether Department has filed appeal on similar issues in earlier years? Ans : As per record and CSR for AY 2010-11, the assessing officer has not recommended filing of appeal for AY 2010- 11.

2. Whether Department did not file appeal on account of low tax effect? Ans : The AO in the CSR for AY 2010-11 has also not recommended filing of appeal for AY 2010-11.

3. Whether Department choose not to file appeal for AY 2010-11 &/or AY 2011-12? Ans : The Department has filed appeal before Hon’ble ITAT for AY 2011-12 as per record available in this office.

-- Regards Income Tax Officer Ward-2(2), C R Building, New Delhi – 110002 Refer to the above subject.

In this connection it is submitted that the assessee company filed its return of income for AY 2009-10, 2010-11 which were selected for scrutiny. The assessment in this case for AY 2010-11 was completed at NIL income against the declared loss of Rs.12,85,278/-. The AO had disallowed the losses claimed by the assessee based on the reason

9 ITA-6546/Del/2015 that the assessee had not commence its business activity and as such, it was not entitled for any deduction u/s 37 of the IT Act, 1961.

The CIT(A) deleted the disallowance of expenses of Rs.12,96,459/- vide order no.06/2013-14 dated 20.08.2015. The AO has sent the CSR which is as under :

-- Regards

Income Tax Officer Ward-2(2), C R Building, New Delhi – 110002.”

(i) In the case of ESPN Software India P.Ltd. (supra), Hon'ble Jurisdictional High Court held as under :-

“A business is nothing more than a continuous course of activities and for commencement of business all the activities which go to make up the business need not be started simultaneously. As soon as an activity which is the essential activity in the course of carrying on the business is started, the business must be said to have commenced.”

(ii) In the case of Dhoomketu Builders and Development P.Ltd. (supra), the facts were that the assessee was a company incorporated on August 22, 2005, and according to its memorandum of association, it was to carry on the business of real estate development including purchase and sale of land. The official liquidator of the Karnataka High Court floated a tender for sale of 140 acres of land belonging to a company which had gone into liquidation. In order to participate in the tender, the assessee obtained a loan of Rs.186 crores on November 29, 2005, from its holding company and on the same day deposited the amount as earnest money in response to the tender floated by the 11 ITA-6546/Del/2015 official liquidator. The assessee was, however, not successful in purchasing the land and, therefore, the earnest money was returned to it with interest of Rs.62,28,333. On the amount borrowed from its holding company the assessee was liable to pay interest of Rs.1,79,37,534. The assessee claimed the difference between the interest received and the interest paid as loss under the head “Business”. The claim was rejected by the Assessing Officer. The Tribunal observed that having regard to the business of the assessee, which was the development of real estate, the participation in the tender represented commencement of one activity which would enable the assessee to acquire the land for development. The assessee was in a position to commence business and that meant that the business had been set up. It allowed the claim of the assessee. On these facts, Hon'ble Jurisdictional High Court held as under :-

“Held, dismissing the appeals, that the finding of the Tribunal was a finding of fact and it could not be said that the finding was without any basis or material. Moreover, the Tribunal did take note of the distinction between the commencement of a business and setting up of a business. The loss was a business loss.”

“There is a difference between the setting up and commencement of business. 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 three 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 12 ITA-6546/Del/2015 business, all expenses during the interregnum, would be permissible deductions. The question as to when a business can be said to have been set up is a question of fact to be ascertained on the facts and circumstances of each case and considering the nature and type of the particular business and no universal test or formula applicable to all types of businesses can be laid down. The commencement of real estate business would normally start with the acquisition of land or immovable property. When an assessee whose business is to develop real estate, is in a position to perform certain acts towards the acquisition of land, that would clearly show that it is ready to commence business and, as a corollary, that it has already been set up. The actual acquisition of land is the result of such efforts put in by the assessee; once the land is acquired the assessee may be said to have actually commenced its business which is that of development of real estate. The actual acquisition of land may be the first step in the commencement of the business but section 3 of the Act does not speak of commencement of the business, it speaks only of setting-up of the business.”

13 ITA-6546/Del/2015 Apex Court as well as Hon'ble Jurisdictional High Court. In the case of S.A. Builders Ltd. (supra), Hon'ble Supreme Court held as under :-

“In order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern (e.g., a subsidiary of the assessee) should be allowed as a deduction under section 36(1)(iii) of the Income-tax Act, 1961, one has to enquire whether the loan was given by the assessee as a measure of commercial expediency. The expression “commercial expediency” is one of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency.

Decisions relating to section 37 will also be applicable to section 36(1)(iii) because in section 37 also the expression used is “for the purpose of the business”. “For the purpose of business” includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby.”

“Held, allowing the appeal, (i) that the advance to the subsidiary became imperative as a matter of business expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it would provide additional margin to the subsidiary to meet the working capital for meeting any cash losses.”

“The finding of the Tribunal was that the advancing of interest-free monies to the subsidiary companies was 14 ITA-6546/Del/2015 driven by business considerations since the subsidiaries were also engaged in the same business in which the assessee was engaged. The Tribunal accordingly held that it would be in the interest of business of the assessee and certainly would be commercially expedient for the assessee to advance interest-free monies to the subsidiaries as part of the corporate business strategy to expand its business operations through its subsidiaries. This finding of fact has not been disputed. Findings of Tribunal upheld.”

15 ITA-6546/Del/2015 of business. That learned CIT(A) has also considered all this factual position and held as under :-

“In view of the above finding, it is held that appellant company had commenced to business in F.Y. 2008-09 itself. In furtherance of its objectives appellant company has invested money of Rs.478,49,30,000/- in its overseas subsidiary M/s Galactic Ventures Ltd. for setting up a new business venture in the line of setting up of power plant: For this the appellant company took loan from its holding company M/s Ellena Power and Infrastructure Ltd. and gave this money to the above mentioned overseas company for starting the power business. However, the holding company could not set up the business and returned back the money to the appellant. While receiving back money, the appellant company suffered a loss of Rs.35,42,20,000/- because of the exchange rate difference. The activities undertaken by the appellant company for taking loan from its holding company and giving it to the overseas subsidiary for setting up a power plant in overseas amounts to the commencement of the business and these transactions were carried out in the course of normal business activities. It is not necessary that steps taken by the appellant company will result into earning of income. Sometimes, the efforts may fructify or sometime it may not fructify. But all these activities initiated by the appellant company constitute business activity. The appellant company has also given inter corporate deposits and from there it has earned interest income of Rs.4,79,86,849/-. The business model of the company is such that it can carry business on its own or by forming joint ventures or subsidiaries. In order to capture the market and extend its arm globally, the appellant invested into a company which is in the same line of business as that of appellant in accordance with its main objects. For this purpose, the object clause of the appellant company has to be read and same is reproduced hereunder:

“1. To promote, undertake, carry on either on its own or either on its own or either on its own or either on its own or through any other entity or to enter into agreements, through any other entity through any other entity through any other entity contracts, partnership, alliance or any other arrangement for technical, financial and operational assistance or sharing of profits / losses with any Person / Body / Bodies

16 ITA-6546/Del/2015

Corporate incorporated in India or abroad either under a either under a either under a either under a Strategic Strategic Strategic Strategic Alliance Alliance Alliance Alliance or or or or Joint Joint Joint Joint Ve Venture Ve Ve nture nture nture or or or or any any any any other other other other arrangement, in India or any part of the world, arrangement, in India or any part of the world, the business arrangement, in India or any part of the world, arrangement, in India or any part of the world, of generating, developing, transmitting, distributing, trading and supplying all forms of electrical power/ energy from any source whatsoever and to construct, lay down, establish, fix and carry out necessary power stations, cables, wires, lines, accumulators, lamps and works and to carry on the business of electrician, electrical and mechanical engineers, traders, suppliers of electricity for the purposes of light, heat, motive power or otherwise, and manufacturers of and dealers in apparatus and things required for or capable of being used in connection with the generation, distribution, trading, supply, accumulation and employment of electricity, Galvanism, magnetism or otherwise and business of establishing, commissioning, setting up, operating and maintaining electric power generating stations based on conventional/non- conventional resources, tie-lines, sub-stations and transmission lines on Build, Own and Operate (BOO) and/or Build, Own and Transfer (BOT), and/or Build, Own, Lease and Transfer (BOLT) and/or Build, Own, Operate and Transfer (BOOT) basis and/or otherwise, and to carry on the business of acquiring, operating, managing and maintaining existing power' generation stations, tie-lines, sub-stations and transmission lines, either owned by the private sector or public sector or the Government or Governments or other public authorities and for any or all of the aforesaid purposes, to do all the necessary or ancillary activities as may be considered necessary or beneficial or desirable and in any manner deal with or dispose of undertaking, property, assets, rights and all other effects which in the opinion of the Company is conducive to the attainment of any or all of its business objectives or to acquire and dispose of shares, securities and interest in such Businesses.

17 ITA-6546/Del/2015

Further, the object clause of the GVL which was an overseas subsidiary of the appellant company reads as under:

‘‘The principal activity of the company is that of ‘‘The principal activity of the company is that of ‘‘The principal activity of the company is that of ‘‘The principal activity of the company is that of construction and maintenance of power plants includin construction and maintenance of power plants including construction and maintenance of power plants includin construction and maintenance of power plants includin g g g trading in power plant equipments.” trading in power plant equipments.” trading in power plant equipments.” trading in power plant equipments.”

From the reading of the object clause of the appellant as well as its subsidiary, it is evident that the incorporation of the subsidiary company, having the business object same as of the assessee, and it was nothing but an expansion of its business and has been done as a measure of commercial expediency and accordingly the loss incurred on account of foreign exchange fluctuation on realization of investment money in subsidiary is nothing but an expenditure incurred wholly and exclusively for the business purposes of the appellant company.

Section 28 of the Income Tax Act which is a computing section for the income from the business and profession reads as under:

“The following income shall be chargeable to income-tax under the head "Profit and gains of business or profession - (iii) the profit and gains of any business profit and gains of any business profit and gains of any business or profession which profit and gains of any business was carried on by the assessee at any time during the previous year; (iv) …….”

Further, Section 37 of the Act is a residuary section which allows the claim of the expenditures which are not covered in any other section from 30 to 36 and have been incurred wholly and exclusively for the purpose of business.

Since, in the instant case, the investment has been done to promote its business globally, the same is nothing but a business activity of the appellant company and 18 ITA-6546/Del/2015 accordingly the foreign exchange fluctuation loss, incurred by the appellant company, is an expenditure incurred wholly and exclusively for the purpose of its business.”