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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI AMARJIT SINGH, JM
Assessee by: Shri Karthik Natarajan Department by: Shri N. P. Singh सुनवाई क� तार�ख / Date of Hearing: 01.04.2016 घोषणा क� तार�ख /Date of Pronouncement: 13.07.2016 आदेश / O R D E R PER AMARJIT SINGH, JM:
The assessee has filed the present appeal against the order dated 12.09.2013 passed by the Commissioner of Income Tax (Appeals) 12, Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the A.Y.2008-09.
ITA No.7045/M/2013 A.Y. 2008-09
The assessee has raised the following grounds:-
“ On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming that the business had not commenced and further erred in confirming disallowance of entire expenditure of Rs.10,89,22,383 without appreciating that the said expenditure was incurred after setting up of the business in retail space.”
3. The brief facts of the case are that the assessee filed his return of income on 30.09.2008 declaring total loss to the tune of Rs.10,89,22,383/-. The case was selected for scrutiny and notice u/s.143(2) Income Tax Act, 1961 (in short “the Act”) was issued on 17.09.2009 which was duly served upon the assessee. Thereafter notice u/s.142(1) of the Act along with questionnaire was issued on 08.07.2010 which was also served upon the assessee. On verification of Profit & Loss Account, it was seen that the assessee did not show any receipts. There was not credit entry in the Profit & Loss Account of the assessee for the year ending on 31.03.2008 and there was no receipt shown under any head. The assessee company has not made any sales i.e. has not commenced its business operations. Therefore, the assessee was called upon to show cause as to why the expenses claimed during the year under consideration should not be disallowed. Since the assessee company has not commenced its business operations and the entire expenses debited in the P & L Account be treated as pre-commencement expenses. Thereafter the ITA No.7045/M/2013 A.Y. 2008-09 expenditure were treated as pre commenced business. Thereafter the assessee filed an appeal before CIT(A) who confirmed the same, therefore the assessee is before us.
ISSUE NO.1:-
We have heard the arguments advanced by the learned representative of the parties and perused the record. Learned representative of the assessee has argued that while deciding the issue in question assessing officer did not go through the object of the company and also did not give finding in connection with the establishment of the assessee company and the business was set up in the first year and thereafter the assessee company started to run its business in the next year therefore in the said circumstances the order passed by the CIT(A) is wrong against law and facts and is liable to be set aside. It is also argued that the Assessing Officer did not consider the nature and purpose of the expenditure of the business which are revenue in nature, therefore the assessing officer has wrongly arrived at this conclusion that the expenditure is capital in nature and the assessed the income as Nil, therefore the observation of the Assessing Officer which has been confirmed by the order of CIT(A) in question is wrong against law and facts and is liable to be set aside. It is also argued that the assessee company had incurred all these expenses in connection with business activities and also planned to venture into emerging modern retail space with specialized retail stores across the ITA No.7045/M/2013 A.Y. 2008-09 country. It is also argued that assessee company established the business during the first year and in the second year the assessee company carried out certain activities such as appointment of consultants, employees, locating the premises etc. and the assessee company incurred the expenses for the business activities which is liable to be allowable as business expenditure, therefore the order of the CIT(A) on this point is wrong and is liable to be set aside. In support of his contention the learned representative of the assessee has placed reliance upon the law settled in Income Tax Appellate Tribunal, Mumbai bench in case of Tata Realty & Infrastructure Ltd., in ITA No.6380/Mum/2011. The Departmental representative of the department has strongly relied upon the order passed by the CIT(A). Before going further it is necessary to record the events of the company on record. The company was incorporated in 3rd September 2007.
The first meeting of board of directors was held on 21st 2. September 2007 wherein the following decisions were taken: • Open bank account • Appoint first auditors • Authority for obtaining statutory permissions and complete formalities such as PAN/TAN. • Appointment of first Directors • Appointment of Managing Director
ITA No.7045/M/2013 A.Y. 2008-09
The company entered into the consultancy agreement with M/s.Technopak Advisors Pvt. Ltd. for retail advisory and business planning and implementation assistance.
The second meeting of board was held on 27th November 4. 2007 wherein the following matter has been decided: • Approved theme of specialized stores for mothers and kids • Details of stores to be opened • Estimated investments / projections 5. The company entered into the consultancy agreement with M/s. Vertabrand Management Consulting Pvt. Ltd. for brand and marketing strategy development on 31st January 2008.
However the assessee has also given the details of his business which is hereby mentioned below:- “Mahindra Retail Private Limited was incorporated on 3' September, 2007 under Companies Act of India, 1956 with the objective to establish Retail Stores in the Mother & Child segment and to provide the best of products and services to pregnant women /young mothers, infants and children up to the age of 9 years of age.
The company located its Corporate and Administrative
ITA No.7045/M/2013 A.Y. 2008-09 Office in Bangalore to ensure access to better and affordable and adequate retail manpower For this purpose, Mahindra Retail Private Limited lease a property situated at 16512, 1 Main Road, Krishna Raju Layout, Dorai Sam Palya, Bannerghatta Road, Bangalore 560 076 for a period of 5 years at monthly rental of 8,50,000/- plus service tax (w.e.f 01.04.08) by paying a security deposit amount of 1,02,00,0001- in February, 2008 (Agreement Enclosed - annexure 1) In the interim as the property was still under development company rented space in Mahindra & Mahindra Ltd premises in Bangalore paying a rent of 3,04,6431- The company moved to new office in Sep/ember, 2008 During F.Y 2007-08 company concentrated on Market Research, Establishing of Organization and Infrastructure, and preparation of Business Plan In order to achieve these, company appointed various consultants having extensive experience in retail sector The major expenses during the year were towards employee cost, travel and consultancy services incurred to set up the business.
As the Mahindra Retail Private Limited was new to retail and the concept was new to the Indian Market, M,'s Technopark Advisors Pvt. Ltd. was approached to the advise on store set
ITA No.7045/M/2013 A.Y. 2008-09 up and provide project implementation (complete end to end solutions for project implementation) - from conceptualization of the execution of the project to the execution of the project, working in tandem with the various stake holder and participating in all the key elements of implementation. This included business in modeling, Strategy Formulation & Preparation for implementation, launch and elevation.
M/s Techniopark Advisors Pvt. Ltd. are specialized in Retail Advisory services and provide services to major retailers in India in areas of retail stores business advisory and retail project implementation assistance. The total cost agreed was 15 crores plus service tax M/s Verte brand Management Consulting Pvt Ltd specializes in Brand management for corporate and were appointed as Outsourced Brand Strategy and marketing development partners for the company at a Total cost of 5 lacs per month plus tax plus additional operating costs for a period of 1 year commencing from February 08.
Their scope included developing the Brand positioning of MRPL and its Unique Value Proposition. This included working with the communication partners as chosen by the company such as advertising agencies, retail design firms,
ITA No.7045/M/2013 A.Y. 2008-09 PR firms, etc. to create Mother brand and sub brand names, Brand designs & Logos, Brand Manuals in electronic and hard copy format, advertising templates and packaging resulting into allow effective communication to its target audience.
M/s Drshti Strategic Research Services Pvt. Ltd., is an integrated market research company providing high quality inputs for effective market decisions. They were appointed for conducting research on Developing Retail experience for Mothers & Children across nation as a support for M/s Vertebrand Management Consulting Pvt Ltd. to take informed Brand Management decisions.
MRPL was entering into specialty lifestyle retailing format catering to specific segment of the society and hence needed its stores to be state of the art and appealing to its target audience Hence, M/s Dalziel & Pow Design Consultants Ltd., UK based consultants specializing in retail store design and layout were appointed to develop and design the retail store layout and interiors for MRPL.
Now before going further it is to be seen what is the object of the company. The object of the company is to establish the retail stores in the mother and child segment and to provide the best of products and services to the pregnant women / young mothers, infants
ITA No.7045/M/2013 A.Y. 2008-09 and children up to the age of 9 years. The chronically events which has been mentioned above nowhere speaks that the assessee has started its business from the very beginning i.e. after the incorporation of the company. The assessee itself admits that the company has located its office at Bangalore and for its business the assessee has leased the property for period of five years w.e.f 1 4 2008 i.e, after 31.3.2008. The assessee further states that, since the property was still under development, the assessee rented the space in Mahindra & Mahindra Limited and moved to the new office in September, 2008. This reply of the assessee clearly shows that the assessee has not carried out any activity from the company office as they have shifted to the same in September, 2008. The assessee took another premise for its business activity. This fact does not prove that the assessee commenced its business activity during the year under consideration. The assessee further states that the retail concept was also new to the Indian market and accordingly the assessee approached at consultant for advice on store set up and on project implementation which included business modeling strategy formulation and preparation for implementation. The assessee further states that M/s Technopark Advisors Pvt. Ltd. are specialized in retail advisory services. From this reply it can be seen that these expenses are pre-operative in nature. The assessee incurred these expenses for the market research.
ITA No.7045/M/2013 A.Y. 2008-09 The market research is done prior to the commencement of business. Even if it is incurred during the course of its regular business it cannot be at all treated as revenue expenditure. Accordingly, this should not have been claimed by the assessee as revenue expenditure. The assessee made the payment to explore the business of the retail in the country. The payment is in nature of consultancy or technical fees. There is no sale during the year only research was going on. The Profit and Loss Account of the assessee speaks about the 90% consultancy charges and deputation charges in connection with the market research. These are efforts to establish the business. The services of the M/s. Vertabrand Management Consulting Pvt. Ltd. was for marketing and brand development of the assessee which is pre-commencement in nature. The expenses are in connection with the market research there is no sale or receipt in connection with the business purpose. Here keeping in mind of the object of the company, we are of the view that the assessee did not commence his business. So far as the law relied by the Hon’ble Delhi High Court in the case of Carefour WC&C India Private Limited Vs. DCIT (ITA No.42/2014 dated 22.09.2014) and Hon’ble jurisdictional Bombay High Court in the case of Western India Vegetable Products Ltd. Vs. CIT (1954) (26 ITR 151) are concerned these are having non-identical facts wherein the company has started its business after the incorporation of the company. The activities of recruitment has been started whereas in the instant case
ITA No.7045/M/2013 A.Y. 2008-09 there was nothing on record with regard to the working of the company in pursuance of its object at the very time of initialization of the company, therefore in view of the said circumstances we are of the view that CIT(A) has decided these issues judiciously and correctly which does not require to be interfere with at this appellate stage. Accordingly this issue is decided in favour of the revenue and against the assessee. 7. In the result, the appeal filed by the assessee is hereby dismissed.
Order pronounced in the open court on 13th July, 2016.