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Income Tax Appellate Tribunal, DELHI BENCH ‘E’ NEW DELHI
Before: SHRI I.C. SUDHIR & SHRI L.P. SAHU
Per L.P. Sahu, Accountant Member:
This is an appeal filed by the assessee against the order of ld. CIT(A)- VIII, New Delhi dated 15.02.2010 for the assessment year 2006-07 on the following grounds :
“1. That the Commissioner of Income tax (Appeals) erred on facts and in law in sustaining the disallowance of the deduction claimed by the appellant in respect of the expenditure of Rs. 1,04,31,643 on the ground that the business of the appellant was not set up during the relevant previous year.
1.1. That the Commissioner of Income tax (Appeals) erred on facts and in law in holding that none of the main activities i.e. manufacturing facilities and activity relating to providing of consultancy services was set up by the appellant till the end of the year under consideration.
1.2. That the Commissioner of Income tax (Appeals) erred on facts and in law in holding that the appellant had failed to demonstrate either with direct evidence or with circumstantial evidence that its business was set up in the accounting period.”
The brief facts of the case are that the assessee was a company incorporated on 07.12.2005 as a SEZ with an object to manufacture, design & deal with all kinds of photovoltaic cells including developing and carrying out research in photovoltaic system. The assessee company has received its certificate of commencement of business on 04.01.2006. The assessee filed its return of income declaring loss of Rs.1,04,07,049/- on 30.11.2006. The case was selected for scrutiny. During the course of scrutiny proceedings, the Assessing Officer noted that the business was not set up during the relevant financial year and thus no expenses are allowed to be claimed. In response to this, the assessee submitted the details and relied on some case laws also. The Assessing Officer rejected the claim of the assessee and disallowed the claim of expenses made by the assessee in the profit and loss account, as the business of the assessee was not set up during the relevant period. Aggrieved by this order, the assessee preferred appeal before the first appellate authority and filed written submissions before the ld. CIT(A). The ld. CIT(A) while disposing of the appeal observed as under :
“3.1 In order to examine the various claims made on behalf of the appellant the documents filed by the learned counsel in the form of a paper book were carefully examined. On examination, it has been found that the majority of expenses are being claimed by the appellant on the basis of certain activities undertaken allegedly on its behalf by holding company namely, Moser Bear India Ltd, as no independent infrastructure had been put in place by the appellant company .Now, therefore, the question arises as to what was the nature of activities which were being carried out by the parent company on behalf of the appellant assessee. The documents placed before me do not spell out the actual nature of services provided by the parent company. As stated earlier, the issue in question here relates to a claim that the business of the appellant company which necessarily included setting up of manufacturing project, was set up in the year under consideration. However, no credible evidence has been filed by the appellant company to suggest that these manufacturing facilities were set up and put on foot to start the business. On the contrary, a perusal of records suggests that till the end of the year under consideration the company had only placed certain orders to buy plant and machinery etc. from certain foreign suppliers and against which certain advances were made. It would be seen at a later stage that the appellant company itself is claiming that profit arising on account of j foreign exchange gain was to be treated on capital account as the same pertained to the I advances given for supply of capital goods. In this situation it is difficult for me to accept the proposition that the business of the appellant company was set up during the year under consideration.
3.2 Now coming to the other activities of engaging in the business of acting as principals, agents, contractors , Lessors and consultants, the claim of the appellant is that during the year under consideration the company had hired services of certain foreign firms to carry out certain research and development activities so that the same maybe useful in training the personnel and employees/executives of the assessee company to act as advisors and consultants. Therefore, it is argued that the expenditure relating to research and development being carried out on behalf of the appellant company by some foreign universities/ institutions was in pursuance of its main objective and the assessee company is justified in claiming the expenditure pertaining to such research and development as it was incurred after setting up of business relating to providing consultancy and advisory services. However, on being asked to furnish the copies of orders/communications made on behalf of the appellant with foreign universities/institutions to carry out such research and development, the learned counsel expressed his inability and submitted that no such formal order/correspondences are available .Thus, in the absence of necessary evidence it is difficult for me to ascertain as to for what specific purposes the expenses were incurred. It is also not clear as to whether the research and development activities including training of executives/ employees (though as per assessee's own admission there were no employees/executives employed by it till the end of the financial year under consideration) was on capital account or revenue account. In this fact situation, I am of the considered opinion that none of the main activities i.e. manufacturing facilities and activity relating to providing of consultancy services was setup by the appellant till the end of the year under consideration.”
He further noted that the case laws relied by the assessee did not render help to the assessee. He accordingly disallowed the claim of assessee- company. Aggrieved by this order of first appellate authority, the assessee is in appeal before the ITAT.
At the outset, the ld. AR of the assessee submitted additional evidences under rule 29 of the ITAT, Rules, which are available at pages 124 to 318 of the paper book comprising of copy of payroll register of employees, copy of Memorandum and Articles of Association, Copy of audited annual accounts ending 31.03.07 and 31.03.2008, copy of contracts for supply of equipment for production, copy of purchase order and payment advice etc. The assessee has prayed for admission of these additional. Evidences vide application dated 10.06.2016 contending as under :
The applicant was incorporated as wholly owned subsidiary of Moser Baer India Limited ('MBIL') on 07.12.2005 (during the relevant year under consideration) with the object(s) of manufacturing, designing and dealing with photo voltaic cells including developing carrying out research in photo voltaic systems.
The applicant filed its first return of income on 30.11.2006 declaring business loss of Rs.1,04,07,049 and carried forward the same to subsequent years. In the return of income, expenditure incurred post 04.01.2006 (date of commencement of business) was claimed as revenue expenditure and expenditure incurred prior to 04.01.2006 was transferred to balance sheet for capitalization.
In the course of assessment proceedings under section 143(3) of the Income-tax Act ("the Act") / before the first appellate authority, the applicant submitted the following evidences and documents in support of the claim that its business was set up on 04.01.2006 and accordingly the revenue expenditure incurred after the said date ought to be allowed as deductible expenditure: i. Certificate of commencement of business issued by Registrar of Companies ii. Details of employees, staff and consultants appointed/ hired for the purposes of setting up solar project(s). iii. Details of various expenses, inter-alia including personnel expenses, travelling expenses, etc. incurred by the applicant and Moser Baer India Ltd. on behalf of the applicant. iv. Copy of agreement entered with by the applicant with third party for availing consultancy services. v. Copy of bills/ vouchers regarding consultants hired for setting up business/ rendering of services. vi. Details of time allocated by the employees/ staff on the solar business project of the applicant.
The applicant submitted the aforesaid documents/ details to substantiate its claim that the business of the applicant had actually been set up on 04.01.2006.
The Commissioner of Income Tax (Appeals) [CIT(A)], however, upheld the action of the assessing officer alleging that the applicant failed to place on record evidence(s) such as details of employees appointed by the applicant, nature of activities undertaken etc. to establish set up of business during the relevant year under consideration.
Pursuant to the aforesaid findings of the CIT(A) and in order to support the claim, the applicant has now obtained from its record the following evidences and documents to substantiate that its business was set up on 04.01.2006 when significant commercial activities had been undertaken:
1 Copy of payroll register of employees appointed by the applicant during the relevant year under consideration
2 Copy of Memorandum and Articles of Association of the applicant company
3 Copy of audited annual accounts of the applicant for the year ending 31.03.2007
4 Copy of the audited annual accounts of the applicant for the year ending 31.03.2008
5 Copy of contract entered between Moser Baer India Ltd. and Schmid Technology Systems GmbH for supply of equipment for production of solar cells
6 Copy of purchase order dated 10.01.2006 issued by the applicant on Schmid Technology Systems GmbH
7 Copy of payment advice dated 17.01.2006 evidencing advance of 38,25,000 Euros paid by the applicant to Schmid Technology Systems GmbH
The applicant has now obtained from its record the aforesaid papers and documents in order to rebut the findings of the first appellate authority denying its claim regarding the setting up of the business during the relevant previous year, which are sought to be placed as additional evidence in addition to the documents already placed on record with the lower authorities.
Your Honours kind attention is invited to the decision of the Delhi High Court in the case of CIT vs. Text Hundred India Pvt. Ltd.: 239 CTR 263 In that case, their Lordships held that Rule 29 permitting the Tribunal to admit additional evidence is made to enable the Tribunal to admit any additional evidence which would be necessary to do substantial justice in the matter. Their Lordships further observed that the various procedures, including that relating to filing of additional evidence is handmade for justice and justice should not be allowed to be choked only because of some inadvertent error or omission on the part of one of the parties to lead evidence.
The relevant observations of the Court are reproduced hereunder:
"13. The aforesaid case law clearly lays down a neat principle of law that discretion lies with the Tribunal to admit additional evidence in the interest of justice once the Tribunal affirms the opinion that doing so would be necessary for proper adjudication of the matter. This can be done even when application is filed by one of the parties to the appeal and it need not to be a suo motto action of the Tribunal. The aforesaid rule is made enabling the Tribunal to admit the additional evidence in its discretion if the Tribunal holds the view that such additional evidence would be necessary to do substantial justice in the matter. It is well settled that the procedure is handmade of justice and justice should not be allowed to be choked only because of some inadvertent error or omission on the part of one of the parties to lead evidence at the appropriate stage. Once n is found that the party intending to lead evidence before the Tribunal for the first time was prevented by sufficient cause to lead such an evidence and that this evidence would have material bearing on the issue which needs to be decided by the Tribunal and ends of justice demand admission of such an evidence, the Tribunal can pass an order to that effect." (emphasis supplied)
It has similarly been held in the following decisions:
- CIT v. Virgin Securities & Credits (P) Ltd.; 332 ITR 396 (Del) - CIT vs. Hewlett Packard India: 314 ITR 55 (Del) - CIT vs. Chandra Kant Sahu Bhai: 202 Taxman 262 (Del) - CIT vs. Betterways Finance: ITA 995 of 2009 (Del) - CIT vs. Chittosoh Motors: 11 taxmann.com 81 (P&H) - Atlas Cycle Industries Ltd vs. CIT : 133 ITR 231 (P&H) - Jatia Investment Co vs. CIT: 206 ITR 718 (Cal) - Electra (Jaipur) Ltd vs. IAC: 26 ITD 236 (Del Tri.) - Y. W. C. A. of India vs. IAC: 29 ITD 620 (Del Tri.)
In view of the aforesaid, in the interest of equity and justice, it is respectfully prayed that the aforesaid additional evidences being crucial for deciding the merits of the matter may kindly be admitted and taken into consideration while adjudicating the appeal.”
After hearing both the parties and the material available on record and the arguments advanced by both the parties, we are of the opinion that as per contentions raised in the application for admission of additional evidence, the additional evidences are admitted on record. However, the additional evidences so submitted before the Tribunal require to be examined and verified at the stage of Assessing Officer in order to properly decide whether the business of the appellant company was set up during the relevant period or not so as to adjudicate upon the validity of assessee’s claim. We, therefore, think it appropriate to send the matter back to the file of Assessing Officer with the direction to examine and verify the aforesaid additional evidences submitted by the ld. AR in order to decide the claim of assessee regarding setting up of the business and admissibility of impugned expenditure. On the basis of above additional evidences, in case the business of the assessee is found set up during the relevant period, the Assessing Officer may also examine the allowability of expenses in the light of the provisions of section 3 and section 35D or section 37(1) of the Income-tax Act, 1961. We, therefore, restore the appeal of the assessee to the file of AO for deciding the matter afresh in the light of observations made above. Needless to say, the assessee shall be given reasonable opportunity of being heard. Accordingly, the appeal of the assessee deserves to be allowed for statistical purposes.
In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open court on 09.02.2017.