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Income Tax Appellate Tribunal, DELHI BENCHES : B : NEW DELHI
Before: SHRI R.S. SYAL & SMT. BEENA A. PILLAI
ORDER
PER R.S. SYAL, AM:
This appeal filed by the Revenue is directed against the order passed by the CIT(A) on 20.10.2010 in relation to the assessment year 2005-06.
The only issue raised in this appeal is against the deletion of addition of Rs.3,14,39,483/- on account of prior period expenses.
Succinctly, the facts of the case are that the assessee company was incorporated on 6.9.2004, being the period relevant to the assessment year under consideration. The assessee filed its return declaring loss of Rs.3,08,71,337/-. On perusal of the details, it was observed by the AO that the assessee claimed deduction for several expenses including Personnel, Administrative, Business development, Travelling and conveyance, Legal expenses and Rates and taxes. The AO noticed that first purchase was made by the assessee on 11.3.2005. It was, therefore, opined that the business commenced from such date. After allowing proportionate deduction of expenses for the month of March, 2005, amounting to Rs.10.28 lac, the AO made disallowance of the remaining expenses of Rs.3,14,39,483/-. The ld. CIT(A) deleted the disallowance by noticing that the business was set up on the date of incorporation itself. The Revenue is aggrieved against the deletion of addition.
We have heard the rival submissions and perused the relevant material on record. Section 3 of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) defining “Previous year’ provides, inter alia, that in the case of a business or profession, newly set up, the previous year shall be the period beginning with ‘the date of setting up of the business’ ending with the said financial year. Here it is significant to take note of the charging section 4, which states that the income-tax shall be charged for any assessment year in respect of the total income of the ‘previous year’ of every person. On a conjoint reading of these sections, it clearly emerges that the income of a newly set up business is calculated, starting with the date of setting up and ending with the close of the financial year. The relevant point to be highlighted is that the previous year in the case of a newly set up business, or in other words, the starting point of taxability of income or allowability of deduction, is the ‘setting up of the business’ and not the commencement of business.
There can be broadly three stages in making a business operational, viz., (i) up to the setting up of business; (ii) post setting up but before commencement of business ; and (iii) commencement of business and 3
thereafter. Setting up of a business refers to a situation in which the business is ready to discharge the functions for which it is set up. Pre- setting up would mean doing of all the necessary things culminating into the attainment of the stage of ‘ready to discharge’ functions. In the case of a manufacturing unit, the setting up would mean installing all the necessary machines etc. for manufacture. Pre-setting up would mean the phase during which the place for business is acquired, machinery purchased and then finally installed, so that the stage of setting up of business is attained, namely, ready for starting the manufacturing activity.
In the case of a trader, setting up of a business means the stage up to which the place of business is acquired and the things necessary to start trading, are done. The sum and substance of the setting up of a business is to fully gear up for undertaking the work for which the business is to be carried on and reaching a stage when such the business activity can be carried on the blow of a whistle. The third stage is the actual commencement of business. This stage simply means taking a first step in the doing of the overall income producing activity. In the case of a manufacturing unit, this stage would come when raw material etc. is procured for the start of actual manufacturing. A trader can be said to have commenced his business on purchasing material to be sold to the customers. The second stage can be termed normally as a waiting period between the ‘ready to start’ phase and the actual starting of business. Thus it is evident that the third stage of commencement of business can either coincide with the doing of work in the actual execution of order received from customers for sale or provision of services etc. or even prior to that when the businessman purchases or manufactures the goods for sale, without there being any advance order.
In CIT vs. ESPN Software India Pvt. Ltd. (2009) 184 Taxman 452 (Del), the assessee acquired license from its parent company on 15.8.95 to sub-license ESPN services for distribution of programmes in India. By virtue of the licence, the assessee entered into an agreement on 01.10.95 with a company and appointed it as the sole distributor for ESPN programmes in India. Certain expenses were incurred which were claimed as deduction. The AO opined that the business of the assessee did not commence during the relevant year and treated all expenses as having been incurred prior to commencement of business. The Tribunal held that the business was set up on 15.08.95 on the date of acquiring of licence from 5
its parent company. The Hon’ble High Court upheld the view taken by the Tribunal. In CIT vs. Samsung India Electronics Ltd. (2013) 356 ITR 354 (Del), it has been held by the Hon’ble Delhi High Court that a business is set up when it is established and is ready to commence business.
Adverting to the facts of the instant case, it is found that the assessee has been incorporated with the main objects of carrying on of the business of fruits and vegetables and other agricultural produce apart from the business of floriculture and horticulture. The assessee appointed Shri Ravi Deol as its CEO w.e.f. 6.9.2004 being the date of its incorporation and other personnel were employed in marketing, finance, HR, etc., in the months of October and November, 2004. The assessee entered into agreement with M/s Global Agri Systems which is dated 30.11.2004, whereby they were appointed as consultants for providing services in the nature of development of business plan, etc. The assessee also produced before the ld. CIT(A) copies of e-mail correspondence between its officials and employees. This shows that the assessee set up its business on 6.9.2014 itself and, hence, all the revenue expenses incurred after this date are deductible. It is a matter of record that the assessee voluntarily 6
Rs.31,29,921 as pre-operative expenses incurred prior to the setting up of business. We have perused the details of such expenses which have been incorporated in the paper book. On going through such details, it is noticed that the expenses of Rs.3.14 crore are of the revenue nature and incurred after the setting up of the business. In our considered opinion, the ld. CIT(A) rightly appreciated the facts in deleting the addition. We, therefore, uphold the same.
In the result, the Revenue’s appeal is dismissed.
The order pronounced in the open court on 08.08.2016.