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Income Tax Appellate Tribunal, MUMBAI BENCH “H”, MUMBAI
Before: SHRI G.S. PANNU, HONBLE & SHRI C.N. PRASAD, HONBLE,
PER C.N. PRASAD (JM) 1. This appeal is filed by the assessee against the order of the Learned Commissioner of Income Tax (Appeals)-2, Mumbai dated 16.06.2016 for the Assessment Year 2012-13.
2. The assessee in its appeal raised the following grounds: - 1. On facts and in circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) [hereinafter referred to as Ld.CIT(A)] erred in disallowing 2 ITA.No.5490/MUM/2016 (A.Y: 2012-13) M/s. Stepan (India) Private Limited the employee expenses, on the ground that the extent of trading conducted by the Company is not commensurate with the salary offered, without appreciating the fact that it is incurred wholly and exclusively for the purpose of Appellant’s trading business and the same should be allowable as deduction u/s. 37(1) of the Act.
The Ld.CIT(A) erred in law and on facts, in disallowing other expenses such as professional fees, rent, security, telephone, conveyance etc., on ad-hoc basis, without considering the submissions of the Appellant appreciating the fact that the same are incurred wholly and exclusively for the purpose of Appellant’s trading business and it should be allowable as deduction u/s. 37(1) of the Act.
Briefly stated facts are that, the assessee for the Assessment Year 2012-13 filed its return of income on 29.11.2012 declaring loss of ₹.70,23,812/-. The assessment was completed u/s. 143(3) of the Act on 27.03.2015 determining the income/loss at Nil by the Assessing Officer. The Assessing Officer rejected the claim for loss made by the assessee holding that assessee has not carried out its business activities and is in the process of setting up of manufacturing facilities at Dahej Industrial Area, Ankleshwar, Gujarat for manufacture of Ethoxylates, Specialty Chemicals. The Assessing Officer was of the view that the assessee has not started its business activity during the year but only shown purchases and sale of traded goods on which profit of ₹.5,12,666/- was shown by the assessee. Assessing Officer observed that assessee was claiming huge expenses in the guise of business activity done by it and actually the 3 ITA.No.5490/MUM/2016 (A.Y: 2012-13) M/s. Stepan (India) Private Limited income from purchases and sale of goods earned by the assessee is on account of commission or income from other sources but claimed expenditure like employee cost and other expenses totaling to ₹.71.66 lakhs which according to him is not allowable u/s. 37(1) of the Act.
On appeal by the assessee Ld.CIT(A) upheld the action of the Assessing Officer in denying the expenses claimed by the assessee observing that assessee was in the process of setting up of manufacturing facility for chemical products in Dahej Industrial Area, Ankleshwar, Gujarat and in the current Assessment year assessee had commenced its trading operations of importing chemical products from Philippines and selling the same in local market. Ld.CIT(A) also observed that the increase in salary expenses shows that one Mr. M.R. Sawant, was appointed as Country Manager who had been paid gross salary of ₹.31.46 lakhs during the year and his appointment letter stated that he was appointed as Country Manager-India Surfactants based in Mumbai and not as a Country Manager Stepan (India) Pvt. Ltd., which is in contrast to the appointment letter in respect of Ms. Prachi Bade which does not referred to India Surfactants. Ld.CIT(A) also observed that the extent of trading conducted by the assessee during the year is not commensurate with the salary offered to Mr. M.R. Sawant and the details of rendered services are not available and if his services were in respect of manufacturing plant those
4 ITA.No.5490/MUM/2016 (A.Y: 2012-13) M/s. Stepan (India) Private Limited have to be capitalized. With these observations Ld.CIT(A) sustained the action of the Assessing Officer in not allowing the expenses and the loss claimed by the assessee in its return of income.
Learned Counsel for the assessee submits that the assessee is into composite business of trading and manufacturing of chemicals. During this assessment year the assessee commenced trading operations and was in the process of setting up of manufacturing facility for chemical products. Learned Counsel for the assessee submits that this is the first year of operation. Learned Counsel for the assessee referring to Page No. 27 of the Paper Book which is the Memorandum of Association of the assessee company submits that assessee is into both manufacturing and trading of chemical and this fact was also brought to the notice of the Assessing Officer. Learned Counsel for the assessee referring to Page No.24 of the Paper Book which is the letter filed before the Assessing Officer in the course of the Assessment Proceedings submits that, the fact that the company was in the process of setting up of manufacturing facility in the Dahej Industrial Area, Ankleshwar, Gujarat for production of chemicals and also the company undertaken its trading operation in chemical business was brought to the notice of the Assessing Officer. The Learned Counsel for the assessee further submits that in response to the query from the Assessing Officer as to why the employee cost which was 5 ITA.No.5490/MUM/2016 (A.Y: 2012-13) M/s. Stepan (India) Private Limited claimed as deduction from its business income or trading operations and why such employee expenses were not capitalized to capital work in progress in relation to setting up of proposed manufacturing facility, it was submitted that expenditure which was directly connected with the proposed manufacturing plant have been capitalized during its pre-operative period for which the details were already furnished and the employees expenses in question are not directly related to setting up of the plant and hence there is no question of capitalizing the same to the cost of the plant. Learned Counsel for the assessee further submits that the brief description of activities carried on by Mr. M.R. Sawant and Ms.Prachi Bade in respect of the trading operations of the company were also furnished before the Assessing Officer and it was also explained that these two employees rendered services only in the trading operations of the company, therefore employee cost incurred by the company are essentially for the trading activities undertaken by the company.
Learned Counsel for the assessee referring to the observations of the Ld.CIT(A) submits that Ld.CIT(A) wrongly presumed that the appointment letter issued to Mr. M.R. Sawant is different to that of Ms.Prachi Bade since in the appointment letter of Mr. M.R. Sawant it was mentioned that he was appointed as Country Manager-India Surfactants. Learned Counsel for the assessee submits that “India Surfactants” is a 6 ITA.No.5490/MUM/2016 (A.Y: 2012-13) M/s. Stepan (India) Private Limited name of the chemical in which the assessee is dealing with. Therefore, he submits that both the employees are employed in the trading activities of the assessee and no part of their services were related to the setting up of chemical plant.
Learned Counsel for the assessee further relying on the decision of the Hon'ble Jurisdictional High Court in the case of CIT v. Ralliwof Ltd. [121 ITR 262] submits that when the business of the assessee is a composite business i.e., manufacturing as well as the trading and the assessee has commenced its trading business the expenses relating to trading business have to be allowed though the manufacturing activity was not commenced.
The Learned Counsel for the assessee further submits that the Assessing Officer himself partially allowed the expenses claimed by the assessee to the extent of profit of ₹.5,12,666/- earned by the assessee which shows that in principle he has accepted that the expenses are allowable. The Learned Counsel for the assessee further referring to Page Nos. 19 to 23, 24 to 23 submits that complete details regarding the claim for expenses and the functions of the principle staff were furnished before the Assessing Officer as well as the Ld.CIT(A) and this fact was also stressed in the Ground No. 2.3 of grounds of appeal filed before the 7 ITA.No.5490/MUM/2016 (A.Y: 2012-13) M/s. Stepan (India) Private Limited Ld.CIT(A). Therefore, he submits that the observation of the Ld.CIT(A) that no details were furnished is not correct.
9. Ld.DR referring to Para 4.4 of the Assessment Order submits that no documentary evidence produced by the assessee incurring the expenses and therefore the Assessing Officer rightly disallowed the claim of the assessee. He strongly placed reliance on the orders of the Assessing Officer and the Ld.CIT(A) in denying the claim for expenses and the loss claimed by assessee.
We have heard the rival submissions, perused the orders of the authorities below. The undisputed fact is that the assessee is into the composite business of manufacturing and trading of chemicals. During the assessment year the assessee commenced its business of trading in chemicals and was also in the process of setting up of plant for manufacturing of chemicals. Assessing Officer while completing the assessment denied the expenses claimed in respect of the trading activities on the ground that the assessee has earned only ₹.5,12,666/- as income from trading operations and whereas the assessee incurred huge salary and other expenses. He was also of the view that since assessee had not commenced the manufacturing operations no activity has been commenced during the Assessment Year and assessee is not 8 ITA.No.5490/MUM/2016 (A.Y: 2012-13) M/s. Stepan (India) Private Limited entitled for deduction of the expenses. Ld.CIT(A) sustained the action of the Assessing Officer.
On a perusal of the documents furnished before us, it suggests that assessee in the course of Assessment Proceedings furnished the complete details in respect of the expenses incurred by the assessee in respect of the employee cost relating to trading activity. On a specific query by the Assessing Officer the assessee also replied why the employee expenses in respect of trading activity was claimed as deduction against profit earned in trading business and why such expenses have not been capitalized, stating that none of these expenses related to the proposed manufacturing facility but were incurred in the operations of trading activity. Assessee also submitted that expenditure directly connected with the proposed manufacturing plant have been capitalized during its pre-operative period and also furnished such details to the Assessing Officer. The duties and activities undertaken by the employees Mr. M.R. Sawant and Ms.Prachi Bade were also furnished to the Assessing Officer and it was submitted that these employees were rendering services in the trading operations of the assessee. In our considered view the Assessing Officer and the First Appellate Authority have not appreciated the submissions of the assessee in a proper perspective. The Memorandum of Association clearly shows that 9 ITA.No.5490/MUM/2016 (A.Y: 2012-13) M/s. Stepan (India) Private Limited assessee is into business of manufacturing, producing, buying, purchasing, selling, distributing, supplying, merchandising, trading, importing, exporting or otherwise dealing in chemicals, chemical compounds, organic and inorganic forms in solid, liquid and gaseous etc., Therefore, assessee is into composite business of manufacturing as well as trading into chemicals.
The Hon'ble Jurisdictional High Court in the case of CIT v. Ralliwof Ltd (supra) held that if buying and selling and dealing in tools was one of the essential parts of business of the assessee company, then simply because in the relevant accounting period no manufacturing activity was started, it could not be said that the assessee’s business was not set up during the relevant accounting period and expenses are not allowable. While holding so the Hon'ble High Court observed as under: - “The expression "setting up" means, "to place on foot" or "to establish", and in contradistinction to "commence". The distinction is that when a business is established and is ready to be commenced 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 s. 10(2) of the 1922 Act. In the instant case, the Tribunal had found that trading in spare parts was a part of the activities of the 10 ITA.No.5490/MUM/2016 (A.Y: 2012-13) M/s. Stepan (India) Private Limited assessee-company. The assessee by purchasing items during the relevant accounting period could be said to have commenced business. On examination of facts, the Tribunal was satisfied that the assessee was carrying on business in spare parts as an integral activity associated with manufacture. This was one of the grounds on which the Tribunal took the view that the assessee carried on business during the relevant accounting period. Further, one of the primary objects for which the assessee- company was incorporated, the manufacture of the various items mentioned in this object clause was not merely the principal object for which it was incorporated but it had also as one of its primary objects to buy sell or deal in portable electrical tools and tools of all kinds, implements and machinery. If buying and selling and dealing in these tools is one of the essential parts of the business of the assessee-company, then simply because in the relevant accounting period no manufacturing activity was started, it cannot be said merely for that reason that the assessee's business was not set up during the relevant accounting period. It is undoubtedly true that in the relevant accounting period there were no sales effected of the spares by the assessee, but it had effected purchases, which could be utilized either for manufacturing of the various items or for sale of spares. The very fact that in the relevant accounting period purchases were effected by the company would go to show that there was material on the basis of which the Tribunal could have taken the view that trading in spare parts was a part of one of the activities of the assessee- company, and by purchasing the various the assessee could be said to have commenced the business. Bearing in mind one of the objects for which the company was formed, it could not be said that the finding of the Tribunal that carrying on business in spare parts was an integral activity for which the assessee-company was, inter alia, incorporated is perverse or based on no evidence. Therefore, the tribunal was justified in taking the view that he assessee could be said to have commenced the business during the previous year.”
11 ITA.No.5490/MUM/2016 (A.Y: 2012-13) M/s. Stepan (India) Private Limited 13. Therefore, respectfully following the said decision, we hold that since the assessee is into the business of trading and manufacturing of chemicals and since the assessee has commenced its activities in trading during this Assessment Year the expenses relating to the trading activities cannot be denied for the reason that assessee has not commenced its manufacturing operations of chemicals. We also see no reason for denying the expenses simply because assessee has incurred huge expenses towards salary and other expenses in trading activity which has only commenced during this Assessment Year. Thus, we direct the Assessing Officer to accept the assessee’s claim for expenses as returned by the assessee in its return of income and allow the loss claimed by the assessee on account of the claim for such expenses. Grounds raised by the assessee are allowed.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on the 11th October, 2017.