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Facts
The Revenue appealed against the order of the CIT(A) who deleted the addition on account of excess pre-commencement expenses. The assessee company acquired an equity research business through a slump sale agreement. The core issue is the date of commencement of business and the deductibility of expenses incurred prior to that date.
Held
The Tribunal held that the assessee's business commenced on June 1, 2008, as evidenced by the hiring of employees, commencement of services, and raising invoices, even before the transfer of all tangible assets. Therefore, expenses incurred from June 1, 2008, onwards were considered legitimate business expenditures.
Key Issues
Whether expenses incurred for salary and other costs prior to the formal transfer of all assets under a slump sale agreement can be considered pre-commencement expenses and disallowed under Section 35D of the Income Tax Act, or if they are allowable as business expenditure under Section 37(1).
Sections Cited
Sec. 35D, Sec. 37(1), Sec. 3, Sec. 57(iii), Sec. 271(1)(c), Sec. 234B, Sec. 244A
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Income Tax Appellate Tribunal, MUMBAI BENCH “B” MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI SANDEEP SINGH KARHAIL
This appeal by the Revenue is directed against order dated 29.01.2024 passed by the Ld. Commissioner of Income-tax (Appeals) – National Faceless Appeal Centre, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2009-10, raising following grounds:
1. On the facts and in the circumstances of the case and in law, the Id.
On the facts and in the circumstances of the case and in law, the Id.
1. On the facts and in the circumstances of the case and in law, the Id. CIT(AJ has erred in deleting addition on account of excess pre erred in deleting addition on account of excess pre- erred in deleting addition on account of excess pre commencement expenses Rs.2Q,80,75,902/ commencement expenses Rs.2Q,80,75,902/- by holding that salary and by holding that salary and registration fees are allowable to assessee as revenue expenditure as registration fees are allowable to assessee as revenue expenditure as registration fees are allowable to assessee as revenue expenditure as same was incurred by assessee after commencement of business on same was incurred by assessee after commencement of business on same was incurred by assessee after commencement of business on 01.06.2008 as assessee paid salary, made TDS thereon and filed Form .06.2008 as assessee paid salary, made TDS thereon and filed Form .06.2008 as assessee paid salary, made TDS thereon and filed Form 24Q, ignoring the fact that as per slump sale agreement business was 24Q, ignoring the fact that as per slump sale agreement business was 24Q, ignoring the fact that as per slump sale agreement business was acquired by assessee on 30.11.2008 and any payment in the nature of acquired by assessee on 30.11.2008 and any payment in the nature of acquired by assessee on 30.11.2008 and any payment in the nature of salary expenditure before 30.11.2008 is salary expenditure before 30.11.2008 is of preoperational expenditure onal expenditure only and can only be amortised U/S.35D of the Act, only and can only be amortised U/S.35D of the Act, 2. The Appellant prays that the order of the 2. The Appellant prays that the order of the CIT(A) on the above grounds on the above grounds be set aside and that of the Assessing Officer be restored. be set aside and that of the Assessing Officer be restored.
2. Briefly stated facts of the case are that the assess Briefly stated facts of the case are that the assess Briefly stated facts of the case are that the assessee company M/s BNP Paribas Securities Pvt Ltd, (BNP Paribas Securities) was M/s BNP Paribas Securities Pvt Ltd, (BNP Paribas Securities) M/s BNP Paribas Securities Pvt Ltd, (BNP Paribas Securities) incorporated on 29.05.2008 and under slum incorporated on 29.05.2008 and under slump sale agreement, sale agreement, which registered on 19.11.2008, the assessee acquired equity which registered on 19.11.2008, the assessee acquired equity which registered on 19.11.2008, the assessee acquired equity research business of research business of M/s BNP Paribas India Solutions Pvt. L BNP Paribas India Solutions Pvt. Ltd. (BNP Paribas Solutions). In the year under consideration, the (BNP Paribas Solutions). In the year under consideration, the (BNP Paribas Solutions). In the year under consideration, the assessee filed return of income on 30.09.2009 declaring total assessee filed return of income on 30.09.2009 dec assessee filed return of income on 30.09.2009 dec income income of of Rs. Rs. Nil Nil a after fter claiming claiming current current year year loss loss of of Rs.26,78,16,233/-. In the case of the assessee assessment u/s . In the case of the assessee assessment u/s . In the case of the assessee assessment u/s 143(3) of the Income e Income-tax Act, 1961 (in short ‘the Act’) was tax Act, 1961 (in short ‘the Act’) was completed on 30.12.2011 completed on 30.12.2011, wherein the Assessing Officer made wherein the Assessing Officer made various additions including addition for disallowance of pre- various additions including addition for disallowance of pre various additions including addition for disallowance of pre commencement expenses of Rs.20,80,75,902/ commencement expenses of Rs.20,80,75,902/-.
3. On further appeal, the Ld. First Appell On further appeal, the Ld. First Appellate Authority upheld the ate Authority upheld the disallowance/addition made by the Assessing Officer. disallowance/addition made by the Assessing Officer. disallowance/addition made by the Assessing Officer.
4. On further appeal, the Income On further appeal, the Income-tax Appellate Tribunal (in short tax Appellate Tribunal (in short ‘the Tribunal’) restored the matter back to the file of the Assessing ‘the Tribunal’) restored the matter back to the file of the Assessing ‘the Tribunal’) restored the matter back to the file of the Assessing Officer in view of additional evidence fi Officer in view of additional evidence filed by the assessee led by the assessee. In second round of the proceedings, t econd round of the proceedings, the Assessing Officer again he Assessing Officer again sustained the disallowance in respect of pre sustained the disallowance in respect of pre- -commencement expenses of Rs.20,80,75,902/ expenses of Rs.20,80,75,902/-. However, in second round , in second round , the Ld. CIT(A) deleted the addition for the said pre CIT(A) deleted the addition for the said pre- -commencement expenses observing as under: expenses observing as under:
“6. From the assessment order para 9 and para 10, It is noted that the 6. From the assessment order para 9 and para 10, It is noted that the 6. From the assessment order para 9 and para 10, It is noted that the appellant company was incorporated on 29/5/2008 and a slump sale appellant company was incorporated on 29/5/2008 and a slump sale appellant company was incorporated on 29/5/2008 and a slump sale agreement was registered on 14/11/2008 to acquire the equity research agreement was registered on 14/11/2008 to acquire the equity research agreement was registered on 14/11/2008 to acquire the equity research business of BNP Paribas India Solution Private Limi business of BNP Paribas India Solution Private Limited. As per the said ted. As per the said agreement, the transfer of employees and employees' benefit will take agreement, the transfer of employees and employees' benefit will take agreement, the transfer of employees and employees' benefit will take effect from 01/6/2008 and the transfer of other assets will take effect effect from 01/6/2008 and the transfer of other assets will take effect effect from 01/6/2008 and the transfer of other assets will take effect from 14/11/2008. Based on the above, it is inferred that the services of from 14/11/2008. Based on the above, it is inferred that the services of from 14/11/2008. Based on the above, it is inferred that the services of the employees were p the employees were placed at the disposal of the appellant w.e.f. laced at the disposal of the appellant w.e.f. 01/06/2008 by BNP Paribas India Solutions Private Limited even before 01/06/2008 by BNP Paribas India Solutions Private Limited even before 01/06/2008 by BNP Paribas India Solutions Private Limited even before the actual transfer of the business undertaking on 14/11/2008 or the actual transfer of the business undertaking on 14/11/2008 or the actual transfer of the business undertaking on 14/11/2008 or 30/11/2008 and accordingly the assessing officer observed that the 30/11/2008 and accordingly the assessing officer observed that the 30/11/2008 and accordingly the assessing officer observed that the deduction of expenditure relating to the employee salary and other on of expenditure relating to the employee salary and other on of expenditure relating to the employee salary and other benefits incurred by it before the actual transfer of business on benefits incurred by it before the actual transfer of business on benefits incurred by it before the actual transfer of business on 30/11/2008 was not allowable/sustainable as per law and the same 30/11/2008 was not allowable/sustainable as per law and the same 30/11/2008 was not allowable/sustainable as per law and the same has to be treated as part of the pre commencement expenses of the has to be treated as part of the pre commencement expenses of the has to be treated as part of the pre commencement expenses of the appellant. Such personal cost of Rs.12,80,16,521 along with the appellant. Such personal cost of Rs.12,80,16,521 along with the appellant. Such personal cost of Rs.12,80,16,521 along with the operating and other cost of Rs.8,03,59,428 incurred up to December operating and other cost of Rs.8,03,59,428 incurred up to December operating and other cost of Rs.8,03,59,428 incurred up to December 2008, totalling to 20,83,75,949 was treated as preliminary expenses 2008, totalling to 20,83,75,949 was treated as preliminary expenses prior to the commencement of the business and to be co prior to the commencement of the business and to be co prior to the commencement of the business and to be considered for deduction under section 35D of the Income Tax Act. The assessing officer deduction under section 35D of the Income Tax Act. The assessing officer deduction under section 35D of the Income Tax Act. The assessing officer also worked out the eligible amount being the 5% of the capital deployed also worked out the eligible amount being the 5% of the capital deployed also worked out the eligible amount being the 5% of the capital deployed at Rs.1,60,00,000 and on amortising the same over 5 years, the at Rs.1,60,00,000 and on amortising the same over 5 years, the at Rs.1,60,00,000 and on amortising the same over 5 years, the deduction for the current year was deduction for the current year was worked out at Rs.32,00,000 under worked out at Rs.32,00,000 under section 35D of the act. section 35D of the act.
The appellant in its written submissions during the proceedings, 7. The appellant in its written submissions during the proceedings, 7. The appellant in its written submissions during the proceedings, submitted the following & the relevant paragraphs are reproduced following & the relevant paragraphs are reproduced hereunder: Our submissions Our submissions 7. Having regard to the above backgrou 7. Having regard to the above background, we humbly submit that the nd, we humbly submit that the aforesaid expenses cannot be considered as pre expenses cannot be considered as pre-incorporation expenses incorporation expenses since BNPP SIPL since BNPP SIPL was incorporated in India on 29 May 2008 (copy of was incorporated in India on 29 May 2008 (copy of Certificate of Incorporation has Certificate of Incorporation has been enclosed as Annexure 3) and had been enclosed as Annexure 3) and had commenced its busine commenced its business operations on 1 June 2008 by acquiring the June 2008 by acquiring the equity research division from BNPP ISPL under a slump equity research division from BNPP ISPL under a slump sale. sale.
8. With the employees on payroll of BNPP SIPL, the equity research 8. With the employees on payroll of BNPP SIPL, the equity research 8. With the employees on payroll of BNPP SIPL, the equity research business of BNPP SIPL commenced from 1 June 2008. We have attached BNPP SIPL commenced from 1 June 2008. We have attached BNPP SIPL commenced from 1 June 2008. We have attached the list of empl the list of employees engaged by BNPP SIPL during the period between engaged by BNPP SIPL during the period between June 2008 to December 2008 as June 2008 to December 2008 as Annexure 14.
9. The Appellant had issued employment letters to these employees on 31 9. The Appellant had issued employment letters to these employees on 31 9. The Appellant had issued employment letters to these employees on 31 May 2008 which was effective from 1 June 2008 (copy of sample which was effective from 1 June 2008 (copy of sample which was effective from 1 June 2008 (copy of sample employment letter issued b employment letter issued by BNPP SIPL is enclosed as Annexure 15). BNPP SIPL is enclosed as Annexure 15). 10.BNPP SIPL had also directly paid salaries to the employees from June 10.BNPP SIPL had also directly paid salaries to the employees from June 10.BNPP SIPL had also directly paid salaries to the employees from June 2008 on which tax was deducted at source under section 192 of the Act. which tax was deducted at source under section 192 of the Act. which tax was deducted at source under section 192 of the Act. Withholding tax Withholding tax returns filed by BNPP SIPL (evidencing deduction of tax returns filed by BNPP SIPL (evidencing deduction of tax at source from salaries paid at source from salaries paid by BNPP SIPL to its employees) for the period by BNPP SIPL to its employees) for the period June 2008 to December 2008 is June 2008 to December 2008 is enclosed as Annexure 16. 11.The Appellant had applied for registration of Employees Provident 11.The Appellant had applied for registration of Employees Provident 11.The Appellant had applied for registration of Employees Provident Fund Organization on 16 August 2008 and the same was gran Organization on 16 August 2008 and the same was gran Organization on 16 August 2008 and the same was granted with effect from 1 June effect from 1 June 2008. 12.The employees commenced equity research work immediately and 12.The employees commenced equity research work immediately and 12.The employees commenced equity research work immediately and published the first equity research report in July 2008 itself. first equity research report in July 2008 itself. first equity research report in July 2008 itself. 13.The Appellant entered into a Service Level Agreement dated 1 July 13.The Appellant entered into a Service Level Agreement dated 1 July 13.The Appellant entered into a Service Level Agreement dated 1 July 2008 with its client, Geo client, Geojit Financial Services Limited (GFSL) for rendering jit Financial Services Limited (GFSL) for rendering equity research equity research services. 14. For the services rendered by BNPP SIPL through its employees, it had 14. For the services rendered by BNPP SIPL through its employees, it had 14. For the services rendered by BNPP SIPL through its employees, it had already started raising invoices on its customers from the month of July started raising invoices on its customers from the month of July started raising invoices on its customers from the month of July 2008. 15. Without prejudice to 15. Without prejudice to the above, the Learned AO has failed to the above, the Learned AO has failed to appreciate the true appreciate the true meaning of the term ‘commencement’ or ‘set meaning of the term ‘commencement’ or ‘set-up’ of business as referred to in section business as referred to in section 35D and section 3 of the Act. In this 35D and section 3 of the Act. In this regard, we wish to submit the following: a. Under regard, we wish to submit the following: a. Under section 37(1) of the Ac section 37(1) of the Act, business income chargeable to tax is computed for each business income chargeable to tax is computed for each ‘previous year’. ‘previous year’. In computing such income, all expenditures incurred during the In computing such income, all expenditures incurred during the In computing such income, all expenditures incurred during the ‘previous year’ by the assessee for the purpose of its business would be allowable year’ by the assessee for the purpose of its business would be allowable year’ by the assessee for the purpose of its business would be allowable as a deduction. b. The term ‘previo a deduction. b. The term ‘previous year’ has been defined under us year’ has been defined under section 3 of the Act section 3 of the Act to mean the financial year immediately preceding the to mean the financial year immediately preceding the assessment year. Further, it is assessment year. Further, it is provided in section 3 of the Act that in the provided in section 3 of the Act that in the case of a business or profession newly set case of a business or profession newly set up, in the said financial year up, in the said financial year, the previous year shall be the period beginning with the the previous year shall be the period beginning with the date of setting date of setting up of the business or profession and ending with the said financialyear. up of the business or profession and ending with the said financialyear. up of the business or profession and ending with the said financialyear. c. The term ‘set c. The term ‘set-up’ of business has not been explained or defined in the up’ of business has not been explained or defined in the Act. The date of set The date of set-up is distinct from the date of actual commencement t from the date of actual commencement of the business of the business activities. Therefore, the deductibility of expenditure activities. Therefore, the deductibility of expenditure requires the business of the requires the business of the assessee to be set up and there is no assessee to be set up and there is no requirement for the commencement of the said requirement for the commencement of the said business. Thus, we wish business. Thus, we wish to highlight the evident distinction between the date of set ght the evident distinction between the date of set up of business up of business and date of commencement of business. The aforesaid view was and date of commencement of business. The aforesaid view was and date of commencement of business. The aforesaid view was upheld in the case of Western India Vegetable Products v. CIT [1954] 26 ITR 151 in the case of Western India Vegetable Products v. CIT [1954] 26 ITR 151 in the case of Western India Vegetable Products v. CIT [1954] 26 ITR 151 (Bom HC) wherein it was held as under “…… when a (Bom HC) wherein it was held as under “…… when a (Bom HC) wherein it was held as under “…… when a business is established and is established and is ready to commence business then it can be said of ready to commence business then it can be said of that business that it is set that business that it is set-up. But before it is ready to commence before it is ready to commence business it is not set business it is not set-up. But there may be an interregnum, there may be interregnum, there may be an interval between a business wh an interval between a business which is setup and a business which is business which is commenced and all expenses incurred after the setting up of the commenced and all expenses incurred after the setting up of the commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the and before the commencement of the business, all expenses during the and before the commencement of the business, all expenses during the interregnum, would be permissible deductions….....” interregnum, would be permissible deductions….....” m. Typically, the date of m. Typically, the date of set-up of business and readiness to commence up of business and readiness to commence business in the context of service companies is generally determined on the context of service companies is generally determined on the context of service companies is generally determined on the basis of the the basis of the following: • Date of appointment of key personnel and following: • Date of appointment of key personnel and other qualified personnel; Date of regulatory approvals/ other appr other qualified personnel; Date of regulatory approvals/ other appr other qualified personnel; Date of regulatory approvals/ other approvals, if required, for set up; • Date on which if required, for set up; • Date on which premises for carrying out business premises for carrying out business is leased/ purchased n. In other words, the date of is leased/ purchased n. In other words, the date of set-up shall be the up shall be the date on which the entity is ready to discharge the functions for date on which the entity is ready to discharge the functions for date on which the entity is ready to discharge the functions for which it is set-up while actual date up while actual date of rendering the services under a contractual of rendering the services under a contractual obligation may follow. obligation may follow. 16.In view of the above, we humbly submit the following: a. Employees 16.In view of the above, we humbly submit the following: a. Employees 16.In view of the above, we humbly submit the following: a. Employees are the key resource for rendering equity research services by BNPP SIPL resource for rendering equity research services by BNPP SIPL resource for rendering equity research services by BNPP SIPL to its customers and to its customers and since, employees were transferred to BNPP SIPL transferred to BNPP SIPL effective from 1 June 2008, BNPP effective from 1 June 2008, BNPP SIPL commenced its business SIPL commenced its business operations in June 2008.. The effective date of operations in June 2008.. The effective date of transfer of tangible assets transfer of tangible assets such as mobile phones, chairs, LCDs, fax machines, such as mobile phones, chairs, LCDs, fax machines, printers from BNPP printers from BNPP ISPL to BNPP SIPL as per ISPL to BNPP SIPL as per the Slump Sale Agreement was 14 the Slump Sale Agreement was 14 November 2008. However, as can be observed from clause 14 and clause 14(d) of 2008. However, as can be observed from clause 14 and clause 14(d) of 2008. However, as can be observed from clause 14 and clause 14(d) of the TAR (enclosed as Annexure 9) for the subject AY, BNPP SIPL had, on the TAR (enclosed as Annexure 9) for the subject AY, BNPP SIPL had, on the TAR (enclosed as Annexure 9) for the subject AY, BNPP SIPL had, on it’s own accord, purchased (and put to use) tangible assets on various accord, purchased (and put to use) tangible assets on various accord, purchased (and put to use) tangible assets on various dates before the date es before the date of transfer of the tangible assets from BNPP ISPL to of transfer of the tangible assets from BNPP ISPL to BNPP SIPL in order to conduct BNPP SIPL in order to conduct it’s equity research business. Thus, it’s equity research business. Thus, independent of the date of transfer of the tangible independent of the date of transfer of the tangible assets pertaining to assets pertaining to the equity research business of BNPP ISPL to the equity research business of BNPP ISPL to BNPP SIPL, BNPP SIPL, BNPP SIPL already had the appropriate infrastructure in place in order to carry out already had the appropriate infrastructure in place in order to carry out already had the appropriate infrastructure in place in order to carry out the equity research functions and the transfer of the tangible assets from the equity research functions and the transfer of the tangible assets from the equity research functions and the transfer of the tangible assets from BNPP ISPL to BNPP SIPL under the agreement merely added to the block to BNPP SIPL under the agreement merely added to the block to BNPP SIPL under the agreement merely added to the block of assets alread of assets already in possession and under the use and control of BNPP possession and under the use and control of BNPP SIPL. c. Also, in 2009, there was SIPL. c. Also, in 2009, there was no license or registration required to no license or registration required to commence the equity research business and commence the equity research business and thus, with on thus, with on-boarding of employees with effect from 1 June 2008, BNPP SIPL employees with effect from 1 June 2008, BNPP SIPL employees with effect from 1 June 2008, BNPP SIPL immediately commenced its business. d. Thus, the Learned AO erred in invoking the commenced its business. d. Thus, the Learned AO erred in invoking the commenced its business. d. Thus, the Learned AO erred in invoking the provisions of section 35D of the Act for disallowing the expenditure provisions of section 35D of the Act for disallowing the expenditure provisions of section 35D of the Act for disallowing the expenditure incurred by BNPP incurred by BNPP SIPL upto 31 December 2008. e. Without prejudice to SIPL upto 31 December 2008. e. Without prejudice to the same, the Learned AO the same, the Learned AO erred in invoking the provisions of section 35D provisions of section 35D of the Act for the month of December of the Act for the month of December 2008 considering that even as per 2008 considering that even as per the Learned AO, the business of SIPL the Learned AO, the business of SIPL commenced in November 2008. f. commenced in November 2008. f. The Learned AO erred in not granting a deduction The Learned AO erred in not granting a deduction of the expenditure of the expenditure incurred by BNPP SIPL u incurred by BNPP SIPL upto 30 November 2008 under section pto 30 November 2008 under section 37(1) of the Act considering the definition of ‘previous year’ under section 3 of the Act Act considering the definition of ‘previous year’ under section 3 of the Act Act considering the definition of ‘previous year’ under section 3 of the Act and the fact that the business of BNPP SIPL had been set and the fact that the business of BNPP SIPL had been set and the fact that the business of BNPP SIPL had been set-up as on 1 June 2008. g. Without prejudice to the above, the Learned AO er Without prejudice to the above, the Learned AO erred in not Without prejudice to the above, the Learned AO er considering the fact that considering the fact that BNPP SIPL had earned income during the period BNPP SIPL had earned income during the period 1 June 2008 and 31 December 1 June 2008 and 31 December 2008 and that the expenses incurred 2008 and that the expenses incurred during such period represent expenditure during such period represent expenditure incurred wholly and exclusively incurred wholly and exclusively for earning such income and ought to for earning such income and ought to be allowed as a deduction to the deduction to the Appellant under section 57(iii) of the Act. Based on the above stated Appellant under section 57(iii) of the Act. Based on the above stated Appellant under section 57(iii) of the Act. Based on the above stated facts and the various principles laid out in various judicial precedence relied and the various principles laid out in various judicial precedence relied and the various principles laid out in various judicial precedence relied upon, the Learned AO erred in making an addition in the hands of BNPP Learned AO erred in making an addition in the hands of BNPP Learned AO erred in making an addition in the hands of BNPP SIPL amounting to Rs PL amounting to Rs 20,80,75,902. Such action of the Learned AO 20,80,75,902. Such action of the Learned AO should be set-aside and the appeal of aside and the appeal of BNPP SIPL should be allowed. BNPP SIPL should be allowed.
8. I have carefully considered the assessment order and the appellant 8. I have carefully considered the assessment order and the appellant 8. I have carefully considered the assessment order and the appellant submissions on the above issue. On perusal of the underl submissions on the above issue. On perusal of the underl submissions on the above issue. On perusal of the underlying facts governing the issue under consideration, there appears to be a dispute issue under consideration, there appears to be a dispute issue under consideration, there appears to be a dispute regarding the date of regarding the date of commencement of the business of the appellant. As commencement of the business of the appellant. As per the appellant, the company per the appellant, the company was incorporated on 29th May 2008 and was incorporated on 29th May 2008 and commenced its operation from 1st commenced its operation from 1st June 2008. Further it was submitted 2008. Further it was submitted that as per the slump sale agreement, BNP Paribas that as per the slump sale agreement, BNP Paribas India solutions India solutions private limited transferred its employees to the appellant company private limited transferred its employees to the appellant company private limited transferred its employees to the appellant company with effect from 1st June 2008 and it was only the tangible assets which were effect from 1st June 2008 and it was only the tangible assets which were effect from 1st June 2008 and it was only the tangible assets which were transferred with effect from 14th November 2008. Accordingly, the transferred with effect from 14th November 2008. Accordingly, the transferred with effect from 14th November 2008. Accordingly, the appellant argued appellant argued that equity research business of the appellant that equity research business of the appellant commenced its operation from 1 commenced its operation from 1st June 2008 and submitted that the June 2008 and submitted that the learned assessing officer erred in invoking the learned assessing officer erred in invoking the provisions o provisions of section 35D of the Act, for disallowing expenditure incurred by the of the Act, for disallowing expenditure incurred by the appellant up to appellant up to 31st December 2008. On the other hand, the assessing officer was of 31st December 2008. On the other hand, the assessing officer was of 31st December 2008. On the other hand, the assessing officer was of the view that since the specified date of transfer of business as per the view that since the specified date of transfer of business as per the view that since the specified date of transfer of business as per the slump sale agreement regist agreement registered on 14/11/2008 was 30/11/2008, ered on 14/11/2008 was 30/11/2008, being the effective date of being the effective date of commencement of the business of equity commencement of the business of equity research, no benefit of deduction under research, no benefit of deduction under section 37 of the Act, can be section 37 of the Act, can be given for the expenditure relating to the employees given for the expenditure relating to the employees transferred prior to transferred prior to the transfer of their actual business on 30/11/2008. Accordingly, r of their actual business on 30/11/2008. Accordingly, the r of their actual business on 30/11/2008. Accordingly, assessing officer held that the expenditure relating to the employees/ assessing officer held that the expenditure relating to the employees/ assessing officer held that the expenditure relating to the employees/ personal cost and other operating costs incurred up to December 2008 cost and other operating costs incurred up to December 2008 cost and other operating costs incurred up to December 2008 will be treated as precommencement will be treated as precommencement expenses and are to be expenses and are to be allowed as per section 35D of the Act. per section 35D of the Act.
From the above facts and circumstances there appears to be some sort 9. From the above facts and circumstances there appears to be some sort 9. From the above facts and circumstances there appears to be some sort of confusion about the date of commencement of the appellants business confusion about the date of commencement of the appellants business confusion about the date of commencement of the appellants business as well as the date of acquisition of the equity research division of BN date of acquisition of the equity research division of BNP Paribas India solutions Paribas India solutions private limited under the slump sale agreement. private limited under the slump sale agreement. The appellant submission, the The appellant submission, the certificate of incorporation and the Form certificate of incorporation and the Form No.24Q evidencing the tax deduction of at No.24Q evidencing the tax deduction of at source from salaries paid by source from salaries paid by the appellant to its employees for the the appellant to its employees for the period June 2008 period June 2008 to December 2008, clearly show that the appellant had set up its business and had 2008, clearly show that the appellant had set up its business and had 2008, clearly show that the appellant had set up its business and had employees in its payroll to carry on the operations of the business employees in its payroll to carry on the operations of the business employees in its payroll to carry on the operations of the business starting from June starting from June 2008 onwards. Further as per the slump sale 2008 onwards. Further as per the slump sale agreement as well the empl agreement as well the employees of the business of the undertaking business of the undertaking acquired by the appellant were transferred with effect acquired by the appellant were transferred with effect from 1st June from 1st June 2008. Merely because the other assets and liabilities under the slump 2008. Merely because the other assets and liabilities under the slump 2008. Merely because the other assets and liabilities under the slump sale agreement was transferred on a later date that is 14th November sale agreement was transferred on a later date that is 14th November sale agreement was transferred on a later date that is 14th November 2008, the Business of the appellant cannot be said to have commenced Business of the appellant cannot be said to have commenced Business of the appellant cannot be said to have commenced after the slump sale after the slump sale agreement. In my view, it is in furtherance of the agreement. In my view, it is in furtherance of the equity research business equity research business commenced by the appellant on 1st June 2008, commenced by the appellant on 1st June 2008, the appellant acquired the equity the appellant acquired the equity research division of the BNP Paribas of the BNP Paribas India solutions private limited and accordingly India solutions private limited and accordingly the effective dates as per the effective dates as per the slump sale agreement cannot be a determining factor in the slump sale agreement cannot be a determining factor in the slump sale agreement cannot be a determining factor in so far as the date of commencement of the appellant business is concerned. date of commencement of the appellant business is concerned. date of commencement of the appellant business is concerned. As propounded in the case of As propounded in the case of Western India Vegetable Products versus Western India Vegetable Products versus CIT(referred by the appellant above), when a business is established and CIT(referred by the appellant above), when a business is established and CIT(referred by the appellant above), when a business is established and is ready to commence business then it can be said that the business is commence business then it can be said that the business is commence business then it can be said that the business is set up and all expenses set up and all expenses incurred after setting up of the business and incurred after setting up of the business and before the commencement of the before the commencement of the business would be permissible as business would be permissible as deductions. The fact that the company was deductions. The fact that the company was incorporated, and the incorporated, and the employees were in place to render their services to the employees were in place to render their services to the appellant's equity appellant's equity research business shows that the business had been se research business shows that the business had been se research business shows that the business had been setup and commenced its operations. Accordingly, the expenses of the nature as commenced its operations. Accordingly, the expenses of the nature as commenced its operations. Accordingly, the expenses of the nature as disallowed by the assessing officer were allowable as expenditure under the assessing officer were allowable as expenditure under section 37 of the Income section 37 of the Income Tax Act. It is to be further noted that for the purpose of disallowances as per It is to be further noted that for the purpose of disallowances as per It is to be further noted that for the purpose of disallowances as per section 35D of the Act, the expenses are to be the ones, which would 35D of the Act, the expenses are to be the ones, which would 35D of the Act, the expenses are to be the ones, which would come within the ambit come within the ambit of those expenses listed under section 35D of the of those expenses listed under section 35D of the Act. By mere narration in the profit Act. By mere narration in the profit on loss account-it is clear that it is clear that-the expenses are in the nature of personnel and expenses are in the nature of personnel and operating cost of the operating cost of the appellant and the appellant submitted before the assessing appellant and the appellant submitted before the assessing appellant and the appellant submitted before the assessing officer that no pre incorporation expenses were booked in the profit and loss account no pre incorporation expenses were booked in the profit and loss account no pre incorporation expenses were booked in the profit and loss account pertaining to the assessment year under consideration. Considering the pertaining to the assessment year under consideration. Considering the pertaining to the assessment year under consideration. Considering the fact that the app appellant company had commenced its operation from 1st ellant company had commenced its operation from 1st June 2008 onwards and June 2008 onwards and the expenses claimed in the profit and loss the expenses claimed in the profit and loss account are in the nature of regular account are in the nature of regular operational expenses of the appellant operational expenses of the appellant and as such cannot in whole be brought within and as such cannot in whole be brought within the ambit of sub the ambit of sub-section 2 of section 35D of the Act, I do not find any merit in of section 35D of the Act, I do not find any merit in disallowing the whole disallowing the whole expenditure of expenditure of 20,80,75,902 under section35D of the Act and 20,80,75,902 under section35D of the Act and hereby delete the above addition made and accordingly Ground Nos.4 delete the above addition made and accordingly Ground Nos.4 delete the above addition made and accordingly Ground Nos.4-8 relating to the above issue are allowed the above issue are allowed.
Ground Nos. 9, 10 &11 relates to initiation of penalty under section 10. Ground Nos. 9, 10 &11 relates to initiation of penalty under section 10. Ground Nos. 9, 10 &11 relates to initiation of penalty under section 271(1)(c) and levy of interest u/s 234B/244A consequent to the above levy of interest u/s 234B/244A consequent to the above levy of interest u/s 234B/244A consequent to the above additions. Since the additions additions. Since the additions are deleted, as a consequence the above are deleted, as a consequence the above grounds are treated as allowed. grounds are treated as allowed.”
Before us, the Ld. counsel for the assessee has filed a Paper e us, the Ld. counsel for the assessee has filed a Paper e us, the Ld. counsel for the assessee has filed a Paper Book containing paged 1 to 140 which consist of invoices raised by Book containing paged 1 to 140 which consist of invoices raised by Book containing paged 1 to 140 which consist of invoices raised by the assessee i.e. BNP Paribas Securities the assessee i.e. BNP Paribas Securities . Said invoices are available aid invoices are available on paper book page 72 to 83. The assessee was incorporated on on paper book page 72 to 83. The assessee was incorporated on on paper book page 72 to 83. The assessee was incorporated on 29.05.2008 and acquired the equity research business of BNP 29.05.2008 and acquired the equity research business of BNP 29.05.2008 and acquired the equity research business of BNP Paribas Solutions under registered slum Paribas Solutions under registered slump agreement dated agreement dated 14.11.2008. Under the said agreement transfer of employees and 14.11.2008. Under the said agreement transfer of employees and 14.11.2008. Under the said agreement transfer of employees and along with employee employee’s benefit was provided to take effect from s benefit was provided to take effect from 01.06.2008 and transfer of other assets was provided to take effect 01.06.2008 and transfer of other assets was provided to take effect 01.06.2008 and transfer of other assets was provided to take effect on 14.11.2008. In view of the above agreement, the contention of on 14.11.2008. In view of the above agreement, the on 14.11.2008. In view of the above agreement, the the assessee was that services of the employees of BNP Paribas that services of the employees of BNP Paribas that services of the employees of BNP Paribas Solutions were placed at the disposal of the aced at the disposal of the aced at the disposal of the assessee w.e.f. 01.06.2008 i.e. even before the actual transfer of the business 01.06.2008 i.e. even before the actual transfer of the business 01.06.2008 i.e. even before the actual transfer of the business undertaking of ‘BNP Paribas Solutions BNP Paribas Solutions’. It is the contention of the . It is the contention of the assessee that business of the assessee was commenced from June, assessee that business of the assessee was commenced assessee that business of the assessee was commenced 208, which is evident from the services rendered and the invoices ident from the services rendered and the invoices ident from the services rendered and the invoices raised on M/s Geojit Financial Services Ltd. and M/s BNP Paribas on M/s Geojit Financial Services Ltd. and M/s BNP Paribas on M/s Geojit Financial Services Ltd. and M/s BNP Paribas Hong Kong. But accordingly to the Assessing Officer, business of Hong Kong. But accordingly to the Assessing Officer Hong Kong. But accordingly to the Assessing Officer the assessee commenced only the assessee commenced only on acquisition of the acquisition of the equity research business undertaking of ndertaking of ‘BNP Paribas Solutions’ w.e.f. 14.11.2008 w.e.f. 14.11.2008 and therefore, the business of the assessee commenced only on and therefore, the business of the assessee commenced and therefore, the business of the assessee commenced 14/11/2008 and and and hence, hence, hence, the the the expenses expenses expenses booked booked booked prior prior prior to to to commencement of the business which included personal cost of commencement of the business which included personal cost of commencement of the business which included personal cost of Rs.12,80,16,521/- operatin operating and other cost of Rs.8,03,59,428/ g and other cost of Rs.8,03,59,428/- incurred up to December, 2008 to December, 2008, totaling to Rs.20,83,75,949/ to Rs.20,83,75,949/-, was treated as preliminary expenses prior to commencement of the s preliminary expenses prior to commencement of the s preliminary expenses prior to commencement of the business and was eligible eligible deduction u/s 35D of the Act deduction u/s 35D of the Act i.e. ( 1/5th of amount for five years of amount for five years) and not whole of amount under section ) and not whole of amount under section 37(1) of the Act. The Assessing Officer also worked out eligible . The Assessing Officer also worked out eligible . The Assessing Officer also worked out eligible amount being 5% of the capital deployed at Rs.1,60,00,000/- and amount being 5% of the capital deployed at Rs.1,60,00,000/ amount being 5% of the capital deployed at Rs.1,60,00,000/ on amortizing the same over 5 years, the deduction for the current on amortizing the same over 5 years, the deduction for the current on amortizing the same over 5 years, the deduction for the current year was worked out year was worked out at Rs.32,00,000/- u/s 35D of the Act and u/s 35D of the Act and made disallowance for the balance amount for the balance amount accordingly. The Ld. accordingly. The Ld. CIT(A) however after verification of the various documents and CIT(A) however after verification of the various documents and CIT(A) however after verification of the various documents and submission of the assessee held that business of the assessee was submission of the assessee held that business of the assessee submission of the assessee held that business of the assessee commenced from 01.06.200 commenced from 01.06.2008 and therefore, no disallowance is 8 and therefore, no disallowance is warranted and whole of the expenditure of Rs.20,80,75,902/- was warranted and whole of the expenditure of Rs.20,80,75,902/ warranted and whole of the expenditure of Rs.20,80,75,902/ allowable.
Before us, the Ld. counsel for the assessee referred to Before us, the Ld. counsel for the assessee referred to Before us, the Ld. counsel for the assessee referred to appointment letter issued to various employees on 31.05.2008 appointment letter issued to various employees on 31.05.2008 appointment letter issued to various employees on 31.05.2008 which are available on P which are available on Paper Book pages 26 to 33. He further 26 to 33. He further referred to the quarterly TDS return of the assessee company which referred to the quarterly TDS return of the assessee company which referred to the quarterly TDS return of the assessee company which is available on Paper Book page is available on Paper Book pages 34 to 37 and submitted that tax 34 to 37 and submitted that tax was duly deducted on the salary payment to the concerned was duly deducted on the salary payment to the concerned was duly deducted on the salary payment to the concerned employees. Ld. counsel further employees. Ld. counsel further referred to Paper Book page referred to Paper Book pages 38 to 41, which is registration of the assessee under which is registration of the assessee under which is registration of the assessee under ‘Employees Provident Fund’ dated 31.12.2008 dated 31.12.2008, however same is effective from however same is effective from 01.06.2008. The Ld. counsel further referred to the service 01.06.2008. The Ld. counsel further referred to the se 01.06.2008. The Ld. counsel further referred to the se agreement between the assessee and M agreement between the assessee and M/s Geojit Investment /s Geojit Investment Services Ltd. for rendering services of the equity research, which is Services Ltd. for rendering services of the equity research Services Ltd. for rendering services of the equity research available on Paper Book page available on Paper Book pages 66 to 72. The Ld. counsel further 66 to 72. The Ld. counsel further referred to invoices raised by the assessee on Geojit Investment referred to invoices raised by the assessee on Geojit Investment referred to invoices raised by the assessee on Geojit Investment Services Ltd., which are available o , which are available on Paper Book page ook pages 73 to 79. The Ld. counsel also referred to the relevant annexure of the tax The Ld. counsel also referred to the relevant annexure of the tax The Ld. counsel also referred to the relevant annexure of the tax audit report relating to the Provident Fund deduction and audit report relating to the Provident Fund deduction and audit report relating to the Provident Fund deduction and payments. The said payments. The said annexures are available on Paper Book page are available on Paper Book pages 95 to 97.
7. On perusal of the page 97 On perusal of the page 97, it is seen that Provident Fund has it is seen that Provident Fund has been deducted from the month of June, 2008 onwards. been deducted from the month of June, 2008 onwards. been deducted from the month of June, 2008 onwards.
7.1 On appreciation of the above documents, it is evident that On appreciation of the above documents, it is evident that On appreciation of the above documents, it is evident that business of the assessee was duly set up and commenced from business of the assessee was duly set up and commenced from business of the assessee was duly set up and commenced from June, 2008 and therefore, finding of the Ass June, 2008 and therefore, finding of the Assessing Officer that essing Officer that business of the assessee commenced only business of the assessee commenced only with effect with effect from acquisition of the equity research unit of BNP Paribas Solutions acquisition of the equity research unit of BNP Paribas Solutions acquisition of the equity research unit of BNP Paribas Solutions under the slump sale agreement under the slump sale agreement, is not found to be found to be correct. Accordingly, we uphold the finding of the Ld. CIT(A) on the issue in Accordingly, we uphold the finding of the Ld. CIT(A) o Accordingly, we uphold the finding of the Ld. CIT(A) o dispute. The ground of appeal of the Revenue is accordingly dispute. The ground of appeal of the Revenue is accordingly dispute. The ground of appeal of the Revenue is accordingly dismissed.
In the result, the appeal of the Revenue is dismissed. In the result, the appeal of the Revenue is dismissed. In the result, the appeal of the Revenue is dismissed.