GLOBEX ENERGIA P.LTD,MUMBAI vs. ASST CIT 6(3), MUMBAI

During the course of hearing, arguments were made by Shri Nishant Thakkar & Mis. Jasmin Amalsadvala, Authorised Representatives (AR) on behalf of the assessee and by Shri Prakash Mane, Departmental Representative (CIT-DR) on behalf of the Revenue.

The solitary issue raised in this appeal is whether the business of the assessee was set up during the year under consideration and accordingly whether the expenses incurred 3 Globex Energia P. Ltd. by the assessee during the year were allowable as business expenses or not. 3.1. The brief facts in this regard are that the assessee company was incorporated on 27.03.2008. It was not informed that the assessee company proposed to do the business of trading and installation & commissioning of specialized storage tanks. No major operations were done in financial years 2007-08. In financial year 2008-09 ( i.e. A.Y. 2009-10), expenses were incurred for the purpose of setting up of the business and these expenses were claimed as business expenses in the return filed which were allowed by the AO u/s 143(1). In the impugned F.Y. i.e. 2009-10 (pertaining to A.Y. 2010-11), the assessee filed its return of income claiming expenses incurred under various heads and showing net loss of Rs.75,28,931/-. During the course of assessment proceedings it was noticed by the AO that there was no opening stock and no sales during the year and that the assessee had earned only interest income of Rs.82,274/-. The AO also observed that during the year, the assessee had purchased some machineries viz. FRP Tank, which has been shown as ‘closing stock’ Further, the assessee had shown capital work-in-progress of Rs.2,00,29,650/- in its Balance Sheet and that there was no business activity carried out by it, except earning some incidental interest income. The AO observed that though the business of the assessee had not commenced during the year, yet it had claimed administrative expenses of Rs.56,89,150/-, interest of Rs.17,95,825/- and 4 Globex Energia P. Ltd. depreciation of Rs.88,442/- and asked the assessee as to why the expenses claimed by it should not be disallowed in view of the fact that it had not commenced and carried out any business till the end of the year. In response, the assessee explained that the assessee had already given Rs.69,23,395/- as advance to the concerned supplier for manufacturing FRP tanks as per the purchase order. The explanation of the assessee was not found to be acceptable by the AO and therefore he concluded that the assessee had not been able to show that it had commenced its business till the end of the year and that it was still in the process of purchasing some machineries and till the end of the year it was not clear in the mind of the assessee if it would use these machineries as plant & machinery (i.e. capital asset) or it would start trading the same. He further observed that the assessee, vide pare 1 & 2 of its own reply, had admitted that since there were no sales orders received in the aforesaid period, the assessee was not eligible for such expenses and hence he disallowed the entire returned loss of Rs.75,28,931/. 3.2. Being aggrieved, the assessee filed an appeal before the Ld. CIT(A) and made detailed submissions therein to demonstrate that business of the assessee was duly set up and therefore entire expenses of the revenue nature incurred by the assessee were allowable. But, Ld. CIT(A) was not impressed with the submissions of the assessee. It was held by him that business of the assessee was manufacturing of storage tank and assessee did not make requisite 5 Globex Energia P. Ltd. arrangements to manufacture the same during the year under consideration. It was also noted that the amount of purchase claimed to be made during the year was quite insignificant and there was no income from sales. After considering the entire facts of the case, Ld. CIT(A) distinguished the judgments relied upon by the assessee and concluded that business of the assessee was not set up till the end of the financial year i.e. 31st March, 2010. Under these circumstances, all the expenses were held to be disallowable and thus order of the AO was upheld. 3.3. Still being aggrieved, the assessee filed appeal before the Tribunal. During the course of hearing, Shri Nishant Thakkar & Ms. Jasmin Amalsadvala, Ld. Counsels of the assessee vehemently supported the claim made by the assessee. It was submitted that both the authorities have wrongly narrated the fact of manufacturing. The correct fact is that the assessee was engaged in the business of trading of storage tanks and in certain cases, the storage tanks were also installed and commissioned at the premises of the customers. Our attention was drawn upon various evidences enclosed in the paper book showing that during the year under consideration, requisite employees who were skilled and competent to do the business were appointed by the assessee, and sales orders were received and purchases were also made. It was vehemently argued that assessee was ready to cater to its customers and thus, it can be easily held that business of the assessee was duly ‘set up’ and thus all the expenses incurred in routine were allowable as business expenses of the year. Reliance was 6 Globex Energia P. Ltd. placed on the decisions of Mumbai Bench of the Tribunal in the case of PineBridge Investments Capital India (P.) Ltd. v. ITO 160 ITD 566(Mumbai), M/s. Multi Act Realty Enterprises Pvt. Ltd. v. ITO ( dated 28.08.2015) & Reliance Gems & Jewels Ltd. v. DCIT (ITA No.3855/Mum/2013 dated 28.10.2015) and judgment of Hon’ble Bombay High Court in the case of Western India Vegetable Products Ltd. vs. CIT 261 ITR 151(Bom). It was also argued that in A.Y. 2009-10, the AO has accepted the return of the assessee wherein assessee had claimed business expenses incurred. Per contra, Shri Prakash Mane (Ld. DR) relied upon the orders of lower authorities. 3.4. We have gone through the facts of the case and orders passed by the lower authorities as well as submissions made and copies of judgments placed before us. During the course of hearing, it was fairly accepted by the Ld. DR that the assessee was not in the business of manufacturing, but in the business of trading of specialized storage tanks and their installation and commissioning in the case of some of the customers of the assessee. This fact remained undisputed that in the preceding year i.e. A.Y. 2009-10, the assessee had filed return wherein administrative expenses were claimed to the tune of Rs.28,91,448/- and return was filed at loss of Rs.31,60,164/-, which was accepted by the AO and no disallowance was made, thereby confirming the claim of the assessee that business has already been ‘set up’. Apart from the above, it is noted by us that during the year, the assessee had received sales order from M/s. Purti Sakhar Karkhana 7 Globex Energia P. Ltd. Ltd., vide order dated April 8, 2009. The assessee had also made purchases during the year aggregating to Rs.8,14,566/- The first purchase was made on 18.05.2009 from M/s. Kira Equipment Pvt. Ltd. The assessee had also appointed various employees having requisite skill and qualification to carry out the project of the assessee. The details of employee appointed during the year shows that some of the employees were appointed in the earlier year and some were employed during the year under consideration. It is also seen that the assessee had arranged it office premises and also open bank accounts and transactions were done through banking channels only. Under these given facts we have to decide by the assessee it could be business of the assessee was set up. 3.5. We have gone through the financial statement filed along with the return of income. Admittedly, no revenue has been shown during the year. The assessee has not claimed that its business was commenced during the year. The assessee has claimed that its business was ‘set up’ during the year and the expenses were allowable after the setting up its business, even if business is not yet commenced. We find force in the argument of the Ld. Counsel. On legal principle, this issue has already been settled in many judgments. This issue was also decided by the coordinate bench in the case of Multi Act Realty Enterprises Pvt. Ltd. v. ITO (supra), wherein in the similar circumstances, it was held that there was a difference between setting up of business and commencement of business. The law provides that expenses would be allowable after the setting up of the business, even if its business was 8 Globex Energia P. Ltd. not yet commenced. Relevant part of the judgment is reproduced hereunder: “We have carefully considered arguments made by both the sides. It is noted from the facts on record that the assessee had purchased residential flats at Ashoka Towers for the purpose of resale/lease. It is also admitted fact that it is main object of the assessee company. Under these circumstances, we have to examine whether there was commencement of the business during the year or not. In this regard, we shall first refer to the definition of term ‘previous year’ as defined in section 3 of the Income Tax Act 1961, and the same is reproduced here for the sake of ready reference: “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.” (emphasis supplied)

In following cases it has been held that whether income has been earned or not and whether ultimate benefit has accrued immediately or not, the expenses 9 Globex Energia P. Ltd. incurred shall be allowable if these have been incurred for the purpose of business or for commercial expediency:- 1. Eastern Investments Ltd. Vs. CIT (20 ITR 1) (SC) 2. J.R. Patel & Sons Pvt. Ltd. 69 ITR 782 (Guj) 3. Raipur Mfg. Co. Ltd. (84 ITR 508,516) (Guj) 4. Security Printers of India Pvt. Ltd. (78 ITR 766,774) (All) 5. Tatasons Ltd. (18 ITR 460,467) (Bom) 6. Walchand & Co. P. Ltd.(65 ITR 381, 385) (SC) 7. J.K. Woolen Manufactures (72 ITR 612) (SC) 8. Aluminium Corp. of India Ltd. (86 ITR 11, 17) (SC) 9. Orissa Cement Ltd. (73 ITR 14, 17) (Del) In following cases it has been held that expenses shall become deductible after setting up of the business, even if commencement of business has not yet taken place: 1.CIT Vs. Ralliwolf Ltd. (121 ITR 262) (Bom) 2.Saurashtra Cement & Chemical Industries Ltd. (91 ITR 170) (Guj) 3.Western India Vegetable Products Ltd. (26 ITR 151) 4.Ramaraja Surgical Cottons Mills Ltd. (63 ITR 478) 5.CIT vs Whirlpool of India Ltd 318 ITR 347 (Delhi)

In the case before us, it may be seen that the assessee has already purchased residential flat for the purpose of resale/lease, and therefore assessee was apparently ready to do its business. Under these circumstances, it can be said that the business is set up by the assessee during the year under consideration. For the deductibility of expenses incurred after this stage, earning of the business income is not a mandatory condition under the law. The assessee may not have been successful in getting customers or earning the business income, but if the assessee has done requisite preparations and if the assessee can be said to be in a position to cater to its customers, then it can be said that business is set up and it would amount to carrying on the business and accordingly the expenses would stand allowable to the assessee, irrespective of the fact whether actually assessee got any customer and earned any business income during the year or not. Thus, the disallowance made by the AO is contrary to law and facts and the same is deleted and the AO is directed to allow the expenses claimed by the assessee amounting to Rs.2,69,275/-. Thus, revised ground of the assessee is allowed.”