M/S SAMBHAV INSTITUTIONS (INDIA) PRIVATE LIMITED , BANGALORE vs. INCOME TAX OFFICER WARD-12(2), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER

ITA Nos. 1758 to 1760/Bang/2018 Assessment Years : 2008-09 to 2010-11 M/s. Sambhav Institutions (INDIA) Pvt. Ltd., The Income Tax # 306, 3rd Floor, Montreal Manor Officer, Shopping Street, Serpentine Vs. Ward – 12 (2), Road, Kumara Park (West), Bangalore. Bangalore – 560 020. PAN: AAKCS3106L APPELLANT RESPONDENT Assessee by : Shri Siddesh Gaddi, CA Revenue by : Dr. P.V. Pradeep Kumar, Addl. CIT (DR) Date of hearing : 09.07.2019 Date of Pronouncement : 31.07.2019

O R D E R Per Shri A.K. Garodia, Accountant Member These three appeals are filed by the assessee directed against two separate orders of ld. CIT(A)-6, Bangalore being combined order dated 31.01.2018 for Assessment Years 2008-09 and 2009-10 and separate order of the same date for Assessment Year 2010-11. All these appeals were heard together and are being disposed of by way of this common order for the sake of convenience. 2. The grounds raised by the assessee for Assessment Year 2008-09 in ITA No. 1758/Bang/2018 are as under. “1. The Income Tax Officer, Ward 12(2) (learned Assessing Officer' or 'the AO') and Commissioner of Income Tax (Appeals) - 6 ('CIT(A)') have erred in passing the order which is bad in law and contrary to facts of the case; 2. The Learned CIT(A) has erred in upholding disallowances made in the returned income of the Appellant; 3. On the facts and in the circumstances of the case and in law, the Learned CIT(A) and AO have erred in stating that the Appellant has not commenced its business activity for the Assessment Year 2008-09. Thus, the Learned CIT(A) and AO have grossly erred in not appreciating that

ITA Nos. 1758 to 1760/Bang/2018 Page 2 of 21 the business of the Appellant is setup; 4. On the facts and in the circumstances of the case and in law, the Learned CIT(A) and AO have erred in disallowing an amount to the extent of Rs. 40,10,172/- by erroneously stating that the Appellant has not demonstrated the description and quantum of expenditure incurred to keep the company alive while the Appellant had duly submitted such details during the assessment and appellate proceedings; 5. The Learned AO has erred in law by initiating proceedings under section 271(1)(c) of the Act; 6. For these and other grounds that may be adduced at the time of hearing, the order of the Learned AO, Bangalore, to the extent upheld by the CIT(A), may be set aside and this appeal be allowed.” 3. The grounds raised by the assessee for Assessment Year 2009-10 in ITA No. 1759/Bang/2018 are as under. “1. The Income Tax Officer, Ward 12(2) ('Learned Assessing Officer' or 'the AO') and Commissioner of Income Tax (Appeals) - 6 ('CIT(A)') have erred in passing the order which is bad in law and contrary to facts of the case; 2. The Learned CIT(A) has erred in upholding disallowances made to the returned income of the Appellant; 3. On the facts and in the circumstances of the case and in law, the Learned CIT(A) and AO have erred in stating that the Appellant has not commenced its business activity for the Assessment Year 2009-10. Thus, the Learned CIT(A) and AO have grossly erred in not appreciating that the business of the Appellant is setup; 4. On the facts and in the circumstances of the case and in law, the Learned CIT(A) and AO have erred in disallowing an amount to the extent of Rs. 6,33,856/- by erroneously stating that the Appellant has not demonstrated the description and quantum of expenditure incurred to keep the company alive while the Appellant had duly submitted such details during the assessment and appellate proceedings; 5. The Learned AO has erred in law by initiating proceedings under section 271(1)(c) of the Act; 6. For these and other grounds that may be adduced at the time of hearing, the order of the Learned AO, Bangalore, to the extent upheld by the CIT(A), may be set aside and this appeal be allowed.” 4. The grounds raised by the assessee for Assessment Year 2010-11 in ITA No. 1760/Bang/2018 are as under. “1. The Income Tax Officer, Ward 12(2) ('Learned Assessing Officer' or 'the AO') and Commissioner of Income Tax (Appeals) - 6 ('CIT(A)')

ITA Nos. 1758 to 1760/Bang/2018 Page 3 of 21 have erred in passing the order which is bad in law and contrary to facts of the case; 2. The Learned CIT(A) has erred in upholding disallowance made to the returned income of the Appellant; 3. On the facts and in the circumstances of the case and in law, the Learned CIT(A) and AO have erred in stating that the Appellant has not commenced its business activity for the impugned Assessment Year. Thus, the Learned CIT(A) and AO have grossly erred in not appreciating that the business of the Appellant is setup; 4. On the facts and in the circumstances of the case and in law, the Learned CIT(A) and AO have erred in disallowing an amount to the extent of Rs. 15,39,263/- by erroneously stating that the Appellant has not demonstrated the description and quantum of expenditure incurred to keep the company alive while the Appellant had duly submitted such details (including audited financial statement) during the assessment and appellate proceedings; 5. The Learned CIT(A) and AO have erred in holding that net interest income is chargeable under section 56 of the Act; 6. The Learned AO has erred in law and on facts in not allowing credit of tax deducted at source amounting to Rs. 432,986 despite the Appellant submitting documentary evidences towards the same. The Learned CIT(A) has erred in law in not adjudicating on ground on subject issue. 7. The Learned AO has erred in law by initiating proceedings under section 271(1)(c) of the Act; 8. The Learned AO has erred in law and on facts in levying interest under section 2346 of the Act; 9. For these and other grounds that may be adduced at the time of hearing, the order of the Learned AO, Bangalore, to the extent upheld by the CIT(A), may be set aside and this appeal be allowed.” 5. It was submitted by ld. AR of assessee that in the paper book, pages1 to 20 are the written submissions for all these three Assessment Years and the same can be considered for deciding these three appeals. These written submissions are reproduced hereinbelow from pages 1 to 20 of the paper book. “With reference to the above appeal, we would like to make the following submission for your kind consideration: I. Facts of the case:

ITA Nos. 1758 to 1760/Bang/2018 Page 4 of 21 The Appellant is a private limited company incorporated under the provisions of the Companies Act on 08.02.2006 with an object of establishing for promoting educational institutions and other educational activities. 1. Facts specific to Assessment Year 2008-09 1.1. The Appellant e-filed its return of income for the Assessment Year 2008-09 on 17.09.2008 declaring a total loss of Rs.40,10,172/-. 1.2. The notice under section 148 of the Act dated 15.03.2013 was issued and served on the Appellant Company. Consequently, the Appellant Company filed a letter requesting to treat the return of income e-filed on 17.09.2008 as return in response to notice under section 148 of the Act. 1.3. The Learned AO concluded proceedings under section 143(3) read with section 147 of the Act by alleging that the company has not commenced any activity, thereby disallowing loss of Rs. 40,10,172/-, though Appellant has given explanation that the Company has set up the business and taken up steps for operation of the business. 1.4. The Appellant Company has established a Trust in the name of Pragati Educational Trust for the purpose of Public Charitable to serve the society by providing education to public etc.,. 1.5. The appellant filed an appeal against the above order of the Learned Assessing Officer before the Commissioner of Income Tax (Appeals) - 6 (learned CIT(A)'). 1.6. The Learned CIT(A) dismissed the appeal by erroneously holding that the Appellant has not been able to demonstrate description and quantum of expenditure incurred to keep the company alive. Thereby disallowing an amount of Rs. 40,10,172/-. 2. Facts specific to Assessment Year 2009-10 2.1. The Appellant e-filed its return of income for the Assessment Year 2009-10 on 11.09.2009 declaring a total loss of Rs.6,33,856/-. 2.2. The notice under section 148 of the Act dated 15.03.2013 was issued and served on the Appellant Company. Consequently, the Appellant Company filed a letter requesting to treat the return of income e-filed on 11.09.2009 as return in response to notice under section 148 of the Act. 2.3. The Learned AO concluded proceedings under section 143(3) read with section 147 of the Act by alleging that the company has not commenced any activity, thereby disallowing operating expenses of Rs. 6,33,856/-, though Appellant has given explanation that the Company has set up the business and taken up steps for operation of the business.

ITA Nos. 1758 to 1760/Bang/2018 Page 5 of 21 2.4. The Appellant Company has established a Trust in the name of Pragati Educational Trust for the purpose of Public Charitable to serve the society by providing education to public etc.,. 2.5. The Appellant filed an appeal against the above order of the Learned Assessing Officer before the Commissioner of Income Tax (Appeals) - 6 (`Learned CIT(A)'). 2.6. The Learned CIT(A) dismissed the appeal by erroneously holding that the Appellant has not been able to demonstrate description and quantum of expenditure incurred to keep the company alive. Thereby disallowing an amount of Rs. 6,33,856/- claimed as business loss. 3. Facts specific to Assessment Year 2010-11 3.1. The Appellant e-filed its return of income for the Assessment Year 2010-11 on 20.09.2010 declaring a total loss of Rs.2,75,487/—. 3.2. The said return was processed u/s. 143 (1) of IT Act on 18.04.2011 resulting in a -Nil- demand. Subsequently the case was selected for scrutiny and notice u/s 143(2) dated 26.08.2011 and notice u/s 142(1) were also issued and duly served. 3.3. The Learned AO concluded proceedings under section 143(3) of the Act by alleging that the company has not commenced any activity, thereby disallowing net expenses amounting to Rs. 2,75,487 and recharacterizing interest income under different head of income, though Appellant has given explanation that the Company has set up the business and taken up steps for operation of the business. However, the Assessing officer failed to appreciate the same and disallowed the claim of the Appellant accordingly levied the tax and computed the total income to the tune of Rs. 12,63,776/-and also levied interest under Sections 234A, 2348 and 234C of the Act. 3.4. The Learned AO has not considered credit of tax deducted at source amounting to Rs. 432,986 despite the Appellant submitting documentary evidences towards the same. The Learned CIT(A) has erred in law in not adjudicating on ground on subject issue. 3.5. The Appellant Company has established a Trust in the name of Pragati Educational Trust for the purpose of Public Charitable to serve the society by providing education to public etc. 3.6. The appellant filed an appeal against the above order of the Learned Assessing Officer before the Commissioner of Income Tax (Appeals) - 6 (learned CIT(A)'). 3.7. The Learned CIT(A) dismissed the appeal by erroneously holding that the Appellant has not been able to demonstrate description and quantum of expenditure incurred to keep the company alive and the interest has been erroneously considered under another head of Income

ITA Nos. 1758 to 1760/Bang/2018 Page 6 of 21 thereby arriving at a taxable income of Rs. 12,63,776/-. The Appellant aggrieved by the impugned order/s of the Learned Commissioner of Income Tax (Appeals) / AO (to the extent prejudice) and hence these Appeals. II. Written Representation: 1. The Income Tax Officer, Ward 12(2) (learned Assessing Officer' or the AO') and Commissioner of Income Tax (Appeals) - 6 (`CIT(A)) have erred in passing the order which is bad in law and contrary to facts of the case; [Ground 1] 2. The Learned CIT(A) has erred in upholding disallowances made in the returned income of the Appellant; [Ground 2] 3. On the facts and in the circumstances of the case and in law, the Learned CIT(A) and AO have erred in stating that the Appellant has not commenced its business activity for the impugned Assessment Year. Thus, the Learned CIT(A) and AO have grossly erred in not appreciating that the business of the Appellant is setup; [Ground 3] 3.1. As evident from statement of facts, the Appellant is a private limited company incorporated under the provisions of the Companies Act on 08.02.2006 with an object of establishing for promoting educational institutions and other educational activities. 3.2. It is relevant to note that the Appellant is operating in service sector. It is also relevant to note that the Appellant has established a Trust in the name of Pragati Educational Trust for the purpose of Public Charitable to serve the society by providing education to public etc.,. 3.3. Given above, reference can be made to provisions of section 3 of the Act: "Previous year" defined. 3. For the purposes of this Act, 'previous year" means the financial year immediately preceding the assessment year : Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year. 3.4. Further reference can be made to provisions of section 28(i) of the Act: Profits and gains of business or profession.

ITA Nos. 1758 to 1760/Bang/2018 Page 7 of 21 28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",— (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year ; 3.5.It is relevant to note from above extracted provisions that the 'previous year' in the case of newly setup business begins with the date of setting up of the business and the income thereon would be covered by provisions of section 28(i) of the Act. 3.6. The term set up is not defined in the Act. Reference may be made to following sources which has defined the term: Source Setting up to put (something or someone) in a particular place: Dictionary. corn Merriam- a: the assembly and arrangement of the tools and Webster.com: apparatus required for the performance of an operation

American Heritage 1. The way in which something is constituted, Dictionary of the arranged, or planned. English Language Collins English to begin or enable (someone) to begin (a new Dictionary: venture), as by acquiring or providing means, equipment, etc. Vocabulary.com: The way something is organized or arranged Macmillan Dictionary: the way that a particular group of people or things is organized

3.7. From the above, we note that the dictionary meaning of setting up means putting things in place or to establish. In the context of business 'setting up' means organising activities to begin business activity. 3.8. Reference may also be made to decision of various judicial bodies wherein it is noted and ruled that an assessee can claim expenses on setting up its business. It is also relevant to note therefrom that the previous year begins from the date of the setting up of the business. Therefore, it is only after the business is set up that the previous year of that business commences and in that previous year the expenses incurred in the business can be claimed as permissible deductions. Thus, it can be concluded that an assessee can claim expense on setting up of its business.

ITA Nos. 1758 to 1760/Bang/2018 Page 8 of 21 3.9. Reference can be made and reliance can be placed on the ruling of the Honourable Court in the case of Western India Vegetable Products Ltd. Vs. CIT [1954] 26 ITR 151 (BOM.) wherein the above principle has been upheld. The Honourable Court observed and held as under: Therefore if this case were to be applied to the present assessee, then we would be driven to the conclusion that, if anything, the Tribunal has taken a view of the case very favourable to the assessee because on the facts of this case it would seem that the Income-tax Officer was right in holding that the net expenses prior to the 1st of November, 1946, should not be allowed as permissible deductions. That is why it is important to consider whether the expression used in the Indian statute for setting up a business is different from the expression Mr. Justice Rowlatt was considering, viz., "commencing of the business." 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). Now applying that test to the facts here, the company actually commenced business only on the 1st of November 1946, when it purchased a ground-nut oil mill and was in a position. to crush ground-nuts and produce oil. But prior to this there was a period when the business could be said to have been set up and the company was ready to commence business, and in the view of the Tribunal one of the main factors was the purchase of raw materials from which an inference could be drawn that the company had set up its business; but that is not the only factor that the Tribunal taken into consideration. The Tribunal has as pointed out in the statement of the case, scrutinised the various details of the expenses given in the order of the Appellate Assistant Commissioner and having scrutinised those expenses the Tribunal has come to the conclusion even on an interpretation more favorable to the assessee than the one we are giving to the expression "setting up" that these expenses do not show that the business was set up prior to the 1st of September, 1946. In our opinion, it would be difficult to say that the decision of the Tribunal is based upon a total absence of any evidence. As we have often said we are not concerned with the sufficiency of evidence on a reference. It is only if there is no evidence which would

ITA Nos. 1758 to 1760/Bang/2018 Page 9 of 21 justify the decision of the Tribunal that a question of law would arise which would invoke our advisory jurisdiction which after all is a very limited jurisdiction. We will, therefore redraft the question submitted by the Tribunal as follows: "whether there was evidence before the Tribunal to hold that the assessee company set up its business as from 1st of September, 1946?" and we will answer that in the affirmative. No order as to costs. 3.10. This view taken by the Bombay High Court that, setup means ready to commence business / establish, was approved by the Supreme Court in CWT v. Ramaraju Surgical Cotton Mills [1967] 63 ITR 478. The Honourable Court held that the new spinning plant was set up after 1st April, 1957, since it was long after that date that it could be said to be ready to discharge the function for which it was set up. The business could be set up only as a culmination of operations when all that was necessary for the setting up of the business was done. Relevant extract is as follows: The High Court held that unless a factory is erected and plants and machinery installed therein, it cannot be said to have been set up. The resolution of the board of directors, the orders placed for purchasing machinery, licence obtained from the Government for constructing the machinery, are merely initial stages towards setting up, however necessary and essential they may be to further the achievement of the end. It is not, however, the actual functioning of the factory or its going into production that can alone be called setting up of the factory. The setting up is perhaps a stage anterior to the commencement of the factory. Thereafter, the High Court referred to a decision of the Bombay High Court in Western India Vegetable Products Ltd. v. Commissioner of Income-tax 11954] 26 ITR 151, and, on its basis, concluded that the proper meaning to be assigned to the expression "set up" in section 5(1)(xxi) would be "ready to commence business". We are unable to agree with the learned counsel for the Commissioner that, in arriving at this view, the High Court committed any error. A unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up. It is only when the unit has been put into such a shape that it can start functioning as a business or a manufacturing organisation that it can be said that the unit has been set up. The expression used in the proviso, under which the period for which the exemption is available is to be determined, is not the same as that used in the principal clause. In the proviso, the period of five successive years of exemption has to commence with the assessment year next following the date on which the company commences operations for the establishment of the unit. Operations for

ITA Nos. 1758 to 1760/Bang/2018 Page 10 of 21 the establishment of a unit, from the very nature of that expression, can only signify steps that have to be taken to establish the unit. The word "set up" in the principal clause, in our opinion, is equivalent to the word "established", but operations for establishment cannot be equated with the establishment of the unit itself or its setting up. The applicability of the proviso has, therefore, to be decided by finding out when the company commenced operations for establishment of the unit, which operations must be antecedent to the actual date on which the company is held to have been set up for purposes of the principal clause. This is also the meaning that the Bombay High Court derived in the case in Western India Vegetable Products Ltd. 11954] 26 ITR 151, where that court was concerned with the interpretation of the expression "set up" as used in section 2(11) of the Income-tax Act. That court held: "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." This view was expressed when that court was considering the difference between the meaning of the expression "setting up a business" and "commencing of a business". In the case before us, the proviso does not even refer to commencement of the. unit. The criterion for determining the period of exemption is based on the commencement of the operations for the establishment of the unit. These operations for establishment of the unit cannot be simultaneous with the setting up of the unit, as urged on behalf of the Commissioner, but must precede the actual setting up of the unit. In fact, it is the operations for establishment of a unit which ultimately culminate in the setting up of the unit. 3.11. Reference can be made and reliance can be placed on the ruling of the Honourable Court in the case of Sarabhai Management Corpn. Ltd. Vs. CIT [1976] 102 ITR 25 (GUJ.) wherein it was noted that the term setting up should not be interpreted loosely, rather held that being in a position to offer services would be sufficient to state that the business of the assessee is setup and it is not necessary to differ the same till the premises is actually let out (which would amount giving loose interpretation). The Honourable court observed and held as under Applying the same reasoning to the facts of the case before us, the business activities of the assessee-company can also be said to fall into three broad categories. The first business activity is to acquire either by purchase or by any other manner immovable

ITA Nos. 1758 to 1760/Bang/2018 Page 11 of 21 property so that the property can be ultimately given out either on leave and licence basis or on lease to others together with the appurtenant services. The second category of the business activity is to put these buildings and building accommodation and lands and gardens into proper shape and set up the appurtenant services so that ultimately the property can be given out on leave and licence basis and the third business activity is actually to give out on lease or on leave and licence basis. In the present case the property was acquired on March 28, 1964. Thereafter, for some time various types of alterations and additions were being carried out and the activity of getting this property ready for its licensees and making it serviceable for its licensees was attended to and it is in the process of making this accommodation available to the intended lessees or licensees that the garden staff and other staff was engaged, pieces of equipment and gadgets, etc., were acquired by purchase or otherwise, lift was installed and ultimately with effect from May 1, 1965, a portion of the accommodation was actually given out on licence basis at the fee of Rs. 27,000 per month. Therefore, if we have merely to look at giving out on licence as the business activity of the concern, then in a loose sense it can be said that the company commenced its business with effect from May 1, 1965, but that is not the only business activity of the company. The business activity of the company consists of three broad categories which we have pointed out above and the objects clause of the memorandum of association justifies such a conclusion. Therefore, when the company actually let out on leave and licence basis a portion of these particular premises with effect from May 1, 1965, the earlier preceding part of its activities were also part of the business activities of the company, for example, engaging the garden staff, kitchen staff or other staff, buying the equipment and getting the equipment ready, making the staff familiar with the working of that equipment, etc. They are all part of the business activities of the company so that ultimately when the licensee or lessee came to occupy the premises, everything would be in shape for use of the licensee or lessee, as the case may be. Under these circumstances, following the principle laid down by the Division Bench of this court in Commissioner of Income-tax v. Saurashtra Cement & Chemical Industries Ltd. [1973] 92 ITR 170 (Guj.). , it must be held that it is only in a loose sense that the business of the company can be said to be to give out on leave and licence basis residential or office accommodation together with the appurtenant services. The business of the company was of a three fold category as mentioned above after a proper analysis and once that analysis is made, it is clear that from October 1, 1964, the company was carrying on the second category of its business, namely, the business activity of making the residential accommodation with all the appurtenant services available to the intended lessees or licensees. We find from the

ITA Nos. 1758 to 1760/Bang/2018 Page 12 of 21 order of the Tribunal that though the decision of this High Court in Commissioner of Income-tax v. Saurashtra Cement & Chemical Industries Ltd. 's case (supra) was cited, the Tribunal did not think that it had any application to the facts of the case. We are unable to see how the principles laid down in Saurashtra Cement & Chemical Industries Ltd.'s case (supra) cannot be said to have any bearing on the facts of the present case. In our opinion, the desirability of avoiding thinking in a loose sense and clearly analysing the nature of the business activity of the assessee was essential for the purpose of arriving at the correct decision in this case. Under the circumstances, the Tribunal, in our opinion, has not applied the correct tests and has consequently arrived at an erroneous conclusion regarding the commencement of the business activity of the assessee-company. Under these circumstances it is clear that at any rate from October 1, 1964, the assessee can be said to have commenced its business activity of the second category and, therefore, the assessee-company had commenced, business and all expenses incurred by the assessee-company between October 1, 1964, and March 31, 1965, namely, the amount of Rs. 48,004. can be said to have been incurred by it as business expenditure. Under these circumstances, on the facts and in the circumstances of the case, this expenditure of Rs. 48,004 incurred between October 1, 1964, and March 31, 1965, should have been allowed as business expenditure. We, therefore, answer the question referred to us in the affirmative and in favour of the assessee. The Commissioner will pay the costs of this reference to the assessee. 3.12. Aforesaid decision was affirmed by the Honourable Supreme Court in the case of CIT vs. Sarabhai Management Corpn. Ltd. [1991] 192 ITR 151 (SC). 3.13. Reference can be made and reliance can be placed on the ruling of the Honourable Court in the case of Prem Conductors (P.) Ltd. Vs CIT [1977] 108 ITR 654 (GUJ.) wherein it was observed and held as under The business of the company was to manufacture aluminum and other conductors and to sell them. In the instant case, the company has started securing orders well in advance of the date on which it actually started production of aluminum conductors. The selling of aluminum conductors manufactured by it is as much a part of the business activity of the assessee-company as the manufacture of the aluminum conductors. The orders acquired by the assessee-company from the different Electricity Boards ensured ready market for the company when the company actually went into production and it purchased raw materials and stock in advance so that it could go into production on an appropriate scale and supply the goods against the orders which it had already received. As has been pointed out by Bhagwati C.J. in Saurashtra Cement and Chemical Industries' case [1973] 91

ITA Nos. 1758 to 1760/Bang/2018 Page 13 of 21 ITR 170 (Guj), even the activity of acquiring raw materials can be part of the business activity of a manufacturing unit because, unless the raw materials are ready, the production cannot start and unless the production has started, the goods cannot be actually sold. All the time we have to bear in mind that the test is of commonsense and what in the eye of a businessman can be said to be the commencement of the business. Since selling the goods manufactured by the assessee-company is an important part of the business activity, it can be said that the assessee- company in the instant case commenced its business and its business was set up when it started securing orders against further production. One business activity may precede the other. 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 this case the assessee-company has commenced its business by securing orders first and going to production later on. While the orders were being secured simultaneously, the installation of machinery, putting up of the buildings, etc., was being attended to and when the company was ready to go into production, it actually started production and supplied goods against the orders which it had already booked. In view of this particular special feature of this case, namely, that the business activity of securing orders had practically started since the very date of incorporation of the company, it is obvious that the business activity of this assessee-company started from the day of its incorporation and not from the day when the production of aluminum conductors commenced. The Tribunal was, therefore, in error in not analysing the activities of the assessee-company in the instant case into the essential components of that business activity and ascertaining whether one or the other of those component activities had commenced before the actual date of going into production. As pointed out in Sarabhai Management Corporation Ltd.'s case [1976] 102 ITR 25 (Guj) what is material is the date when the company went into one or the other business activity and started one or the other component business activities of the company. In the instant case that was certainly done from the very date of the incorporation of the company. Under these circumstances, the assessee-company was entitled to have the loss of Rs. 46,970 for assessment year 1965-66 treated as business loss and also to have the loss of Rs. 58,600 incurred by it during the period January 1, 1965, to June 26, 1965, in the previous year relevant to assessment year 1966-67, treated as a business loss. The Tribunal was in error when it overlooked this distinction between the component business activity and the business activity as a whole and the Tribunal was in error in holding that the assessee had not commenced its business prior to June 26, 1965. 3.14. Considering the ruling above, it is relevant to note from the facts in the present case that the Appellant company has also undertaken

ITA Nos. 1758 to 1760/Bang/2018 Page 14 of 21 following essential activities in connection to its business, therefore, the ratio laid down in the above judgements holds good to the facts in the present case:  Purchase of land;  Construction of security room on the land;  Applied and obtained approval from the town planning authority for construction;  Taken loan for the purpose of business;  Assigned work for protecting land to a security agency;  Various attempts to explore the possibility of setting up an educational institution, which could not materialize; 3.15. In this regard it is relevant to make reference to the ruling of the Honourable Delhi High Court in the case of CIT vs. Arcane Developers (P.) Ltd. [2014] 368 ITR 627 (Delhi). The assessee therein was incorporated to carry on real estate business. It was held that the assessee company had setup its business in the AY 2006-07 relevant to the financial year in which it had just taken loan for its business and it was held that setting up of business was complete when first steps were taken by the respondent-assessee to look around and negotiate with parties. The Honourable Court did not agree with the contentions of the Revenue that the business was setup only when JV was entered with third party on 05.07.2006 (relevant to AY 2007-08). The Honourable Court noted that the date of setting up of business depends upon facts and the nature of the business, thereby warranting reference to the objects for incorporation of the company and the main business activities in which the respondent-assessee was engaged. It was also held that issue requires a pragmatic and a practical view to be adopted. Further reliance is placed on the ruling in the case of Carefour WC 86C India (P.) Ltd. Vs. DCIT [2014] 368 ITR 692 (Delhi). 3.16. It is submitted that question of setting up is required to be considered and answered from a businessman's point of view, adopting a commonsense approach, and not in the manner in which the revenue wants. The said principle is upheld by judicial authorities as referred above. In the present case, the Appellant was in the position to provide services / perform activities for which it was established. 3.17. It is also relevant to note that the Appellant company has established a Trust in the name of Pragati Educational Trust for the purpose of Public Charitable to serve the society by providing education to public etc.,. Given this, it is submitted that the main objects of the Assessee included wide variety of subjects principally concerned with education. This could be done independently or by acting as trustee of a Trust. Reliance in this regard is placed on following rulings: - CIT vs. Gujarat Ports Infrastructure and Development Co. Ltd. [2012] 206 Taxman 35 (Gujarat)(MAG.); - Prem Conductors (P.) Ltd. v. CIT [1977] 108 ITR 654 (Guj.);

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3.18. It is pertinent to note that the appellant company is in service sector, therefore there is no question setting up factory or erection of machinery is required as noted in the decision of Honourable Supreme Court in the case of Tuticorin Alkali Chemicals 86 Fertilizers Ltd. v. CIT [1997] 227 ITR 1721 (SC). The moment the assessee-company incorporated and is able to render services either by itself or through its Trust, it will lead to the conclusion that the business of the assessee has been setup and commenced. The income shown by the assessee has to be treated as income from business and necessary benefits or deductions claimed by the assessee have to be allowed in accordance with law. 3.19. It is relevant to note from the submissions made before the Revenue Authorities that the Appellant could not commence its business during the impugned Assessment Years due to delay in getting regulatory approvals. The same is evident from the submission made before Revenue Authorities. In this regard, it is relevant to make reference to the ruling of the Honourable High Court in the case of CIT vs. Dhoomketu Builders 86 Development (P.) Ltd. [2014] 368 ITR 680 (Delhi) wherein the assessee in realty business, participated in a tender to acquire land. It obtained a loan from its holding company and deposited the same as earnest money in response to the tender. However, it could not acquire the said land and, consequently, the earnest money was returned to it with interest. On the borrowed fund, it had paid interest. The differential between the interest received and the interest paid was treated by the assessee as loss and it claimed deduction in respect of the same. The AO rejected the claim by stating that the assessee was not successful in acquiring the land, it could not be said that the business was set-up in the relevant accounting year. The High Court dismissed the revenue appeal, without interfering with the ruling of the Tribunal which was in favour of the assessee. Relevant extract of the ruling is as follows: 9. The Tribunal has observed that having regard to the business of the assessee, which is the development of real estates, the participation in the tender represents commencement of one activity which would enable the assessee to acquire the land for development. If the assessee is in a position to commence business, that means the business has been set-up. The Acts of applying for participation in the tender, the borrowing of monies for interest from the holding company, the deposit of the borrowed monies on the same day with NGEF Ltd. as earnest money were all Acts which clearly establish that the business had been set-up. The commencement of real estate business would normally start with the acquisition of land or immoveable property. When an assessee whose business it is to develop real estates, 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

ITA Nos. 1758 to 1760/Bang/2018 Page 16 of 21 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 the land may be a 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. When the assessee in the present case was in a position to apply for the tender, borrowed money for interest albeit from its holding company and deposited the same with NGEF Ltd. on the same day, it shows that the assessee's business had been set-up and it was ready to commence business. The learned senior standing counsel for the revenue would, however, state that till the land is acquired, the business is not set- up. The difficulty in accepting the argument is that an assessee may not be successful in acquiring land for long period of time though he is ready to commence his business in real estate, and that would result in the expenses incurred by him throughout that period not being computed as a loss under the head "business" on the ground that he is yet to set-up his business. That would be an unacceptable position. The other argument of the learned standing counsel for the revenue that the tax auditors of the assessee have themselves pointed out that the assessee is yet to commence its business is also irrelevant because of the distinction between the commencement of the business and setting-up of the same. 10. We do not feel constrained to refer to the authorities cited by both the sides on the question of setting-up of a business except the judgment of the Bombay High Court (supra) because as we have already observed, the question is essentially one of fact depending upon the nature of the business and none of the authorities cited by both the sides was directly on the question as to when a real estate business can be said to have been set-up. Under section 260A of the Act, an appeal lies to the High Court only on a substantial question of law. The finding of the Tribunal in the present case is a finding of fact and it cannot 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 and applied the test laid down by the Bombay High Court (supra) which decision has been noticed by us to have formed the bedrock of almost all the authorities cited before us. 3.20. Given above, it cannot be stated that the appellant has not setup its business merely because it faced difficulty in obtaining regulatory approvals. It is relevant to note from the financial statements that the appellant had borrowed adequate funds to commence its business

ITA Nos. 1758 to 1760/Bang/2018 Page 17 of 21 activity and it was in the position to render / offer services. Additional reliance is placed on the ruling of the Honourable Tribunal in the case of Hagwood Commercial Developers (P.) Ltd. Vs. ACIT [2017] 82 taxmann.com 475 (Mumbai - Trib.). 3.21. With respect to the provisions of section 28(i) of the Act requiring the Appellant to carry on business, it is submitted that the 'word' business is very wide and each case is to be determined with reference to the particular kind of activity and occupation of the persons concerned. Though ordinarily business implies a continuous activity in carrying on a particular trade of a vocation it may also include activity which may be called "quiescent", in terms of Supreme Court decision in the case of CIT v. Calcutta National Bank Limited 37 ITR 171. In view of this decision, the Appellant pleads that it had carried on activities as detailed above and hence business activities are continued. 4. AY 2008-09: On the facts and in the circumstances of the case and in law, the Learned CIT(A) and AO have erred in disallowing an amount to the extent of Rs. 40,10,172/- by erroneously stating that the Appellant has not demonstrated the description and quantum of expenditure incurred to keep the company alive while the Appellant had duly submitted such details during the assessment and appellate proceedings; [Ground 4] 5. AY 2009-10: On the facts and in the circumstances of the case and in law, the Learned CIT(A) and AO have erred in disallowing an amount to the extent of Rs. 6,33,856/- by erroneously stating that the Appellant has not demonstrated the description and quantum of expenditure incurred to keep the company alive while the Appellant had duly submitted such details during the assessment and appellate proceedings; [Ground 4] 6. AY 2010-11: On the facts and in the circumstances of the case and in law, the Learned CIT(A) and AO have erred in disallowing an amount to the extent of Rs. 15,39,263/- by erroneously stating that the Appellant has not demonstrated the description and quantum of expenditure incurred to keep the company alive while the Appellant had duly submitted such details (including audited financial statement) during the assessment and appellate proceedings; The Learned CIT(A) has erred in stating that appropriate description and quantum of expenditure incurred to keep the company alive have not been submitted. It is relevant to note that aforesaid information is clearly evident from the financial statements. The copies of financial statements for the subject years are enclosed as Annexure 1. 7. AY 2010-11: The Learned CIT(A) and AO have erred in holding that net interest income is chargeable under section 56 of the Act; [Ground 5]

ITA Nos. 1758 to 1760/Bang/2018 Page 18 of 21 8. AY 2010-11: The Learned AO has erred in law and on facts in not allowing credit of tax deducted at source amounting to Rs. 432,986 despite the Appellant submitting documentary evidences towards the same. The Learned CIT(A) has erred in law in not adjudicating on ground on subject issue. [Ground 6] In this regard, reference may be made to ITR-V Form and Form 26AS which is given as Annexure 2. 9. AY 2008-09 & 2009-10: The Learned AO has erred in law by initiating proceedings under section 271(1)(c) of the Act; [Ground 5] 10. AY 2008-09 & 2009-10: For these and other grounds that may be adduced at the time of hearing, the order of the Learned AO, Bangalore, to the extent upheld by the CIT(A), may be set aside and this appeal be allowed. [Ground 6] Therefore, it is prayed before this Honourable Tribunal that, considering the above submission of the Appellant, the appeal may be allowed.” 6. Thereafter he submitted that para no. 8 of the order of ld. CIT(A) on page no. 5 for Assessment Years 2008-09 and 2009-10 is relevant regarding his decision. He submitted that in this para, there is no finding given by ld. CIT(A) as to whether the business was set up or not. He submitted that in Assessment Year 2010-11 also, para no. 8 of the order of ld. CIT(A) is relevant and in this para also, there is no finding given regarding this aspect whether the business is set up or not. He placed reliance on the following judicial pronouncements in support of his contention. HIPL India Pvt. Ltd. Vs. ACIT in ITA No. 2149/Bang/2018 dated 03.10.2018, copy available on pages 76 to 84 of the paper book. 7. He also submitted that in these two years, this issue was raised by the assessee before ld. CIT(A) in ground no. 3 reproduced on page no. 3 of the order of ld. CIT(A) but this ground was not decided. Similarly, in Assessment Year 2010-11 as per ground no. 6 raised before ld. CIT(A), this issue was raised that the AO should have allowed TDS credit of Rs. 4,32,986/- but this ground was also not decided by ld. CIT(A) in Assessment Year 2010-11. The ld. DR of revenue supported the order of ld. CIT(A). 8. We have considered the rival submissions. We find that in Assessment Years 2008-09 and 2009-10, this issue was very much raised by assessee before ld. CIT(A) that the assessee company has already been set up / commenced

ITA Nos. 1758 to 1760/Bang/2018 Page 19 of 21 the business and for the purpose of business, the expenditure incurred were genuine and the same is allowable under the Act. The whole issue was decided by ld. CIT(A) as per para 8 of his order in those two years and therefore, for ready reference, para 8 from the order of ld. CIT(A) for Assessment Years 2008-09 and 2009-10 is reproduced hereinbelow for ready reference. “8. It may be noted that appellant has not been able to demonstrate what is the description & quantum of expenditure incurred to keep the company alive. In the absence of the same and in the absence of any business activity, the entire expenditure needs to be carried to Balance Sheet as Preoperative expenses and Capitalised as & when assets are acquired. The same cannot be allowed as revenue expenditure. Therefore, disallowance of loss of Rs.40,10,172/-&Rs.6,33,856/- for the AYs 2008-09 & 2009-10 respectively are sustained.” 9. From the above para reproduced from the order of ld. CIT(A), it is seen that it has merely proceeded on this basis that in the absence of any business activity, the entire expenditure needs to be carried to Balance Sheet as Preoperative expenses and Capitalised as and when assets are acquired. But there is no finding given by him as to whether the business was set up / commenced or not. In view of the Tribunal order cited by ld. AR of assessee as noted above, this aspect is very crucial as to whether the business was set up or not. For ready reference, we reproduce para nos. 14 to 16 of this Tribunal order from pages 82 to 84 of the paper book. These paras are as under. “14. I have considered the rival submissions. The legal position with regard to expenses claimed prior to setting up of business and the sequence of point of time when the business can be said to have been set up as follows:- The definition of the previous year as contained in Section 3(1) of the Act, which is relevant for the present case reads as follows:- 3. ‘Previous Year’ Defined. – For the purposes of this Act, previous year means the financial year immediately preceding the assessment year: Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year.” According to this section, it is setting up of the business and not the

ITA Nos. 1758 to 1760/Bang/2018 Page 20 of 21 commencement of the business that is to be considered. A business is commenced as soon as an essential activity of that business is started. Thus, a business commenced with first purchase of stock in trade, the date when the first sale is made is not material in that respect. Similarly, a manufacturer has to undertake several activities in order to bring to produce financial goods and he commences his business as soon as he undertakes first of such activities (Commissioner of Income Tax vs. Saurashtra Cement and Chemical Industries Ltd. 1973 (91) ITR 170 Gujrat). 15. The Hon’ble Delhi High Court in the case of CIT v. ESPN Software India P. Ltd. (2009) 184 Taxman 452 (Del) explaining the position with regard to the time when a business can be said to have been set up held that it is a finding based on facts of each case. In that case, the business of assessee was distribution of ESPN programming services and the fact of assessee entering into the agreement acquiring license to distribute in India ESPB programme was held to be the point of time when the business was set up. The Court held that if essential activity in the course of carrying on of business is started, then the business must be said to have been set up. 16. Applying the aforesaid principle to the facts of the present case, I am of the view that the three circumstances pointed out by the assessee before the CIT(A) viz., receipt of agency commission, travel by directors to explore the possibilities of getting business and taking the premises on lease for the purpose of manufacturing activity would be sufficient to come to the conclusion that business of assessee had been set up during the relevant previous year. Consequently, the assessee would be entitled to claim all the revenue expenses as deduction in computing its total income. I am therefore of the view that the claim made by the assessee for deduction should have been allowed by the revenue authorities. I accordingly direct the AO to allow the deduction.” 10. Since there is no finding of ld. CIT(A) regarding this important aspect as to whether the business of the assessee was set up or not, we feel it proper to restore back this matter to the file of ld. CIT(A) for fresh decision after giving this finding first as to whether the business of the assessee was set up or not and if it was set up, then it has to be stated clearly as to when it was set up because in the year of set up of business and after that year, revenue expenses for such set up business has to be allowed as revenue expenditure and same cannot be capitalized. Hence in all the three years, we feel it proper to restore the matter back to the file of ld. CIT(A) for fresh decision by way of a speaking and reasoned order. He should give a finding as to whether the business of the assessee was set up or not and if he finds that business was set up, he should also give a finding in which year the business was set up

ITA Nos. 1758 to 1760/Bang/2018 Page 21 of 21 and thereafter, he should decide the issue regarding allowability of expenses as per law in the light of such finding of fact regarding setting up of business. In Assessment Year 2010-11, one more issue was raised by assessee before ld. CIT(A) regarding non-granting of TDS credit of Rs. 4,32,986/- raised by assessee as per ground no. 6 before ld. CIT(A) and this issue was not decided by ld. CIT(A) and we hold that in the set aside proceedings, he should decide this aspect on this issue also as per ground no. 6 raised before him in Assessment Year 2010-11.

Sd/- Sd/- (PAVAN KUMAR GADALE) (ARUN KUMAR GARODIA) Judicial Member Accountant Member Bangalore, Dated, the 31st July, 2019. /MS/ Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order

Assistant Registrar, Income Tax Appellate Tribunal, Bangalore.