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Income Tax Appellate Tribunal, DELHI BENCH ‘A’, NEW DELHI
Before: SHRI J. SUDHAKAR REDDY & SHRI A.T. VARKEY
ORDER PER J. SUDHAKAR REDDY, ACCOUNTANT MEMBER
This is an appeal filed by the Revenue directed against the order of the Ld.Commissioner of Income Tax (Appeals)-VI, New Delhi dated 02.03.2012 pertaining to the Assessment Year (A.Y.) 2008-09.
Facts in brief:- The assessee is a company and is formed with an objective of carrying on business of hire purchase financing, factoring and leasing in connection with the retail sale of all types of automobile vehicles. The assessee had filed its return of income for the relevant A.Y. on 30.9.2008 declaring income of Rs.2,84,56,074/-. Subsequently, the assessee company filed revised return of income u/s 139(5) of the Act on 12.8.2009 and declared a loss of Rs.2,68,67,610/- in the computation of its total income. The Assessing Officer (A.O.) in his assessment order held that, the interest income received by the company amounting to ITA 2842/Del/2012 A.Y. 2008-09 Bussan Auto Finance P.Ltd., New Delhi Rs.2,84,56,074/- is assessable under the head ‘income from other sources’. He further held that the claim of deduction of expenses made by the assessee under the head ‘business income’ is not allowable as revenue expenditure, as the assessee has not set up its business during the year. The assessee company had deducted these expenses incurred under the head ‘employees remuneration and benefits’, ‘administrative and other expenses’ and ‘interest and finance charges’. The A.O. issued a show cause notice to the assessee company as to why the expenses claimed in its profit and loss a/c not be disallowed. The assessee replied as follows. “In this regard we would like to submit that the assessee company, inadvertently omitted to set off its business loss of Rs.6,41,55,461/- for the F.Y. 2007-08 against interest income for the same year amounting to Rs.2,84,56,074/- in accordance with the provisions of sub section (1) of s.71 of the Income Tax Act, 1961 (the Act). Since the mistake occurred inadvertently while preparing computation of income for the F.Y. 2007-08, in order to rectify this omission and rectify the disclosures made in the original return, the assessee company revised its income tax return for FY 2007-08 and set off its business loss amounting to Rs.6,41,55,461/- for the FY 2007-08 against interest income, for the same year amounting to Rs.2,84,56,074/- and remaining loss of Rs.3,56,99,387/- was carried forward to be set off in future years.’ 2.1. The AO rejected the contention of the assessee on the following grounds. i. During the relevant year, the assessee has not carried out any business activity; ii. Expenditure incurred in respect of any business is deductible from the date of commencement of business but only where it has been set up; iii. Expenditure incurred prior to the setting up of a business is not allowed as a deduction. Pre-commencement expenditure may well be a dead loss unless it could be treated as cost of capital assets so as to be entitled for depreciation.
ITA 2842/Del/2012 A.Y. 2008-09 Bussan Auto Finance P.Ltd., New Delhi iv. Since S.28 to 43D relate to computation of business income, which is carried on by the assessee, it follows ‘that the expenses during the pre- commencement period will not be deductible’. v. Similarly losses incurred during the period cannot be treated as business loss and therefore, cannot be carried forward. vi. By relying on certain case laws, the Ld.AO observed that a business is set up when it is ready to operate. Actual commencement of business can start only after it is set up. There can be interval between thetwo.
2.2. On appeal the First Appellate Authority agreed with the contentions of the assessee and granted relief.
2.3. Aggrieved with this order, the assessee is in appeal before us on the following ground .
1. The Ld.CIT(A) has erred on facts and in law in deleting disallowance of business loss of Rs.6,41,55,461/-.
We have heard Shri CJS Nanda, the Ld.Counsel for the assessee and Shri SK Jain, Ld.D.R. on behalf of the Revenue.
On a careful consideration of the facts and circumstances of the case, perusal of material on record, orders of lower authorities, case laws cited, we hold as follows.
The undisputed fact in this case is that the assessee appointed various senior executives during the year like Directors, Managing Director, Chief Administrative Officer, Marketing Heads, Operation Heads and various other members of the staff. The salaries, wages and allowances paid to such executives and staff during the year amounted to Rs.1,87,35,439. The assessee also incurred administrative and other expenses of Rs.3,42,24,191/- for carrying on the business, capital expenditure of Rs.15,62,891/- for acquiring office equipments, Rs.62,22,308/- for computer systems, Rs.1,79,80,247/- for softwares, Rs.3,54,836/- for ITA 2842/Del/2012 A.Y. 2008-09 Bussan Auto Finance P.Ltd., New Delhi furniture and fixtures, Rs.36,81,929/- for leasehold improvements, vehicles of Rs.26,97,892/-.
5.1. One of the most important event which is to be taken into consideration is the registration granted by the RBI only on 9th April,2008 i.e. in the subsequent F.Y. On these facts we have to see whether the claim of the assessee that it has set up business, has rightly been upheld by the Ld.CIT(A).
5.2. A number of case laws have been relied upon by both sides. The pith and substance of these case laws is that, the question, as to when a business may be said to have been set up is dependent on the facts of each case and largely on the nature of business proposed to be undertaken.
5.3. The Ahmedabad Bench of the Tribunal in the case of DCIT vs. Interlink Petroleum Ltd., 83 TTJ 274 (ITAT-Ahmd.) culled out the propositions laid down by the Hon’ble Supreme Court as well as various High Courts on this issue. It held as follows.
“The principles of law emerging from the various judgements cited by the Ld.Representatives of both sides can be briefly summarised as under: (a) There is a clear distinction between a person commencing business and a person setting up of the business. There may be an interval between setting up of business and the commencement of the business. (b) When a business is established and is ready to commence, the unit would be considered as part of a business which is set up. (c) The expenses incurred during the intervening period between setting up of the business and commencement of the business would be permissible deductions. However, expenses incurred during the preparatory stage period to setting up business would not qualify the deduction. (d) The assessee can be said to have set up its business from the date which one of the essential categories of its business activities is started
ITA 2842/Del/2012 A.Y. 2008-09 Bussan Auto Finance P.Ltd., New Delhi and it is not necessary that all categories of its business activities must start either simultaneously or that the last stage must start before it can be said that the business was set up. (e) The question as to when business can be said to have been set up and commenced will depend on facts and surrounding circumstances of each case. The test to be applied is as to when a businessman would regard a business as being set up and/or commenced and the approach must be adopted from a common sense point of view.
5.4. The assessee company is formed with an objective of carrying on finance operations. In a similar matter the Hon’ble Delhi High Court in the case of CIT vs. Whirlpool of India Ltd.(2009) 185 Taxman 387 held as follows.
“5. This Court in the case of Hughes Escorts Communications Ltd. (supra) has clearly held that a business is set up though the same may not have commenced and the expenditure incurred after the date of setting up has to be allowed as a deduction. It was further held that the question as to when the business is set up depends on the facts of each case and the nature of the business and no hard and fast rule can be laid down as to when the business was set up.
In view of the above, the following paragraph of the judgment of the ITAT which exhaustively details the facts and the reasons as to why the business is set up not on 1.2.1996 as contended by the Assessing Officer but on 1.11.1995 is reproduced below and with which we concur:
“4. It may thus be seen that the question when a business may be said to have been set up is dependent on the facts of each case and largely on the nature of the business proposed to be undertaken. Different considerations may apply depending on whether the business is that of manufacture of a product, or leading of property, or sole selling agency or financial business or it is a hospitality industry (such as a hotel) or a service industry (such as financial or marketing services). The assessee before us is a financial
ITA 2842/Del/2012 A.Y. 2008-09 Bussan Auto Finance P.Ltd., New Delhi company authorized to advance loans for interest to facilitate customers to purchase consumer durables, though the business is not limited to advancing monies for acquiring consumer durables. We have already referred to the memorandum of association in this regard. The business is not also limited to consumers who propose to buy products of Kelvinator India Limited or Whirlpool India. In the case of a company engaged in rendering financial services, it is possible to say that the business is set up when the directors are appointed, staff such as regional and branch managers are appointed and their salaries are paid, computers are acquired and installed and the company is ready to commence business. It cannot be said that the business was set up only when the bank account was opened on 01.02.1996 because prior thereto the company, though it did not have a bank account, was incurring the expenditure through Kelvinator India Ltd or Expo Machinery Ltd. The absence of a bank account cannot impede the setting up of the business. We may advert to the evidence in this behalf. Computers and peripherals were purchased vide order placed on HCL Hewlett Packard Ltd of Noida on 04.09.1995 and the required end-user certificate was also issued. The total cost of the purchase was Rs.29.84 lakhs (pages 21-23 of the paper book). Branch managers at Bhopal, Bhubaneswar and Pune were appointed in October 1995 (pages 37-42 of the paper book). Regional managers at Bombay, Calcutta and Gauhati were appointed during the same time (pages 43 to 48 of the paper book). Page 2 of the assessment order shows that the salaries were paid from November 1995 including allowances, bonus, gratuity and contribution to provident and other funds. The amount of such payments have also been given therein and are not reproduced here for the sake of brevity. The office rent of Rs.17500 for November and Rs.25000 each for December 1995 and January 1996 have also been paid. It is thus clear that the establishment and staff were put in place by the end of October 1995 and the company was ready to commence its business from 01.11.1995. M/s S.R.Batliboi Consultants Pvt Ltd had also submitted their bill dated 30th October 1995 for Rs.2,91,486 for professional services rendered in connection with recruitment of 19 candidates for the post of accounts manager and incidental expenses. The fact that the foreign loan and FIPB approval for ITA 2842/Del/2012 A.Y. 2008-09 Bussan Auto Finance P.Ltd., New Delhi equity investment by the Whirlpool Corporation of USA were given in January, 1996 does not mean that the business was not set up before these events. These are not statutory formalities and even without the foreign loan and the equity participation of the assessee-company was in a position to carry on the business in accordance with the objects clause of its memorandum of association from November 1995 when it had its own offices, branch and regional managers and staff, computers installed and was ready to commence its activities. The expenses were incurred through Kelvinator and Expo Machinery and evidence to this effect is placed at pages 24-31 and at other pages (eg. Page 52) of the paper book. From the above evidence it is clear that the business was set up from 01.11.1995, by which date the company was ready and in a position to commence its business.” (Emphasis ours).
5.5. In the case of CIT vs. L.G. Electronics India Ltd. 282 ITR 545 (Delhi), the Hon’ble Jurisdictional High Court at para 9 held as follows.
9. There is no doubt that the date of setting up a business and the date of its commencement could be two separate dates. Section 3(1) of the Act, as it stood at the relevant time (and even as it stands today) has reference to the date of setting up the business. The CIT(A) and the Tribunal merely relied on the explicit language of the Section to come to the conclusion that the view of the AO was incorrect. This being the clear position, we do not find any infirmity in the impugned order or does it raise any substantial question of law.
5.6. The Ld.CIT(A) has applied the propositions in law laid down in these decisions and granted relief to the company. We find no infirmity in the same. Hence we uphold the same and dismiss the ground of revenue on this issue.
6. Coming to the issue of carry forward and set off, we do not find any infirmity in the order of the Ld.CIT(A), wherein he had directed the A.O. to ITA 2842/Del/2012 A.Y. 2008-09 Bussan Auto Finance P.Ltd., New Delhi grant set off of business loss with the interest income as per S.71 of the Income Tax Act, 1961. Thus this ground of revenue is also dismissed.
In the result the appeal of the Revenue is dismissed.
Order pronounced in the Open Court on 10th March, 2016.