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Before: SHRI INTURI RAMA RAO & SMT SUCHITRA KAMBLE
ORDER PER SUCHITRA KAMBLE, JM
This appeal is filed by the Revenue against the order dated 2/3/2012 passed by the Ld. CIT(A)’s VI, New Delhi.
The grounds of appeal are as under:-
“1. The Ld. CIT(A) has erred on facts and in law in deleting addition made by the A.O amounting to Rs.5,24,17,631/- on account of business expenditure.
The Ld. CIT(A) has erred in concluding that the assessee’s business was set up during the year. In para 5.4 of his order the Ld. CIT(A) has concluded that the business of the assessee was set up since incorporation, however there is no evidences to suggest that the assessee has moved any further from the initial stage of planning.”
The assessee company was incorporated on 19th September 2007 under the automatic route, as per the Foreign Direct Investment Policy, 2006. The Company was incorporated to carry to establish, develop, lease, license, master franchise rights from international/domestic brands and to further sub- franchise those rights. The assessee is a group subsidiary of Carrefour Group, second largest retailer of the world. For the relevant assessment year, the assessee filed its return of income on 30/9/2008 declaring a loss of Rs.4,80,72,481/-. During the course of assessment, the A.O observed that the assessee company claimed expenses amounting to Rs.6,32,57,573/- and claimed business loss of Rs.5,89,12,423/-, after absorbing the income from other sources amounting to Rs.43,45,150/-. The A.O also noticed that in their audit report in form 3CD, the auditor has given the following remarks:-
28.(a) In the case of a trading concern, Not applicable since the give Quantitative details of company Has not commenced principal items of goods traded; any activities in relation to sale/purchase of goods, etc, (i) Opening Stock and hence the provisions of clause 28(a) are not applicable (ii)Purchases during the year; to the Company. (ii) Sales during the previous year;
(iii) Closing Stock;
(iv) Shortage/excess, if any With these observations the A.O requested the assessee company to explain as to why business loss claimed should not be disallowed. In response to the show cause notice, the assessee company explained that during the relevant assessment year, the assessee acquired an office premises w.e.f. 1/10/2007, opened its bank account on 4/10/2007 and incurred routine business expenses such as legal and professional charges, travel and conveyance, meeting and conference, salary and wages etc. The assessee also incurred substantial amount on purchase of fixed assets such as computer and software (of Rs.16,50,180/-), office equipments (of Rs.27,53,594/-), furniture’s and fixtures and lease hold improvements (of Rs.91,46,639/-) etc. The assessee further obtained professional advices regarding the Indian business environment, market survey catchment area, products availability, supply conditions and other legal/statutory requirements, licences and approvals etc. and on this account incurred expenses to the tunes of Rs.2.8 crores which indicates that the assessee had set up its business operations. During the relevant previous years, the assessee identify various franchisees and discussed with them regarding terms of franchisee, technical services and other commercial agreements. In view of these facts, it was submitted by the assessee that it had done all the activities which were essential for the set up of the business. Therefore, the business loss amounting to Rs.5,89,12,423/- was claimed by the assessee during the subject assessment year.
The A.O held that during the relevant assessment year, the assessee’s business was not set up and he disallowed the claim of business loss of the assessee company. However, the A.O assessed the interest income shown by the assessee company in its profit and loss account as “income from other sources”, and completed the assessment under section 143(3) of the Income Tax Act, 1961 vide order dated 10/12/2010. Aggrieved by the disallowances and additions made in the assessment order, the assessee filed the appeal before CIT(A).
The CIT(A) held as under:
“However, whether business is set-up and ready to commence is a matter of fact which is to be examined in light of facts of each case. In the present case, the appellant, who is in the business of providing business franchisee rights, has received the authorization from Carrefour group to sub-franchise the rights, has hired the requisite staff and directors, taken and evaluated necessary professional advises regarding potential franchisees, including key terms of arrangements with such parties, taken business premises, opened bank account etc. Therefore, the appellant was in a position to commence its business even from its office premises from the date of its incorporation.
Further, it would be worth mentioning here that Hon’ble Delhi High Court in the case of CIT vs. ESPN Software India (P) Ltd. (184 Taxman 452) 2009 considered that date of acquiring a distributor license of ESPN Programme is a date of business set up and all expenses should be allowed from that date. Recently, similar view has been given by Mumbai ITAT in the case of De Beers India Prospecting Pvt. Ltd. (ITA no. 4(D/Mum/2006) dated 16 Dec 2011 wherein it was held that the approval received from FBPB and Government for carrying out operation relating to prospecting of diamonds and starting of prospecting activity before actual mining leads to set-up and commencement of business activity. The ITAT while forming the above view has relied upon the rulings of Sarabhai Management (SC) and Saurashtra Cement (supra). In the present case, the assessee has the Franchise rights and it has incurred expenditure for searching the potential franchisees since incorporation. It also hired requisite director and staff, taken office and necessary infrastructure for business.
Thus placing reliance upon the above judicial precedence of the Hon’ble Supreme Court and Hon’ble High Court (including Jurisdictional Delhi High Court), it can be said that the key business activity of the appellant has started.
5.4 Based on the above principles laid down by the Hon’ble Supreme Court and Hon’ble High Court and the facts of the present case, it is clear that the business of the appellant was set up since incorporation as it was having Carrefour Franchise Right and the expenses claimed by it for carrying out search for potential franchisees are expenses incurred post set up of business and are allowable as business expenditure. The AO grossly erred in understanding the facts of the assessee’s case by saying that the appellant is a trader and passing his order accordingly, despite the fact that all the evidence were placed on record which proved that the appellant was into the business of leasing/sub leasing the franchise rights.
Accordingly, the business expenditure of Rs.5,24,17,631/- for A.Y. 2008- 09 is held to be allowable business expenditure and the disallowance made by the Ld. AO is deleted and hence, the action of the Ld. AO is reversed.”
The AR submitted that the present case is covered by assessee’s group company case, Carrefour WC & C India Pvt. Ltd. Vs. DCIT decided on 22.09.2014 wherein the Hon’ble Delhi High Court has granted the relief in favour of the assessee therein. The same is annexed at page 96 to 118 of the paper book filed by the assessee. The AR further submitted that there was no trading activity and merely franchisee activity was going on. The object of the assessee company was cited from page 7 and page 97 of the paper book.
The DR submitted that the Auditor’s report in Assessment Order at para 2, 3.2, 3.3 and 3.4 as well as Form 3CD gives different scenario to the object of the assessee company. Therefore, the DR submitted that the Assessing Officer rightly added the said amount as interest income shown in its profit and loss account as “income from other sources”.
We have perused all the records and heard both the counsels. The Ld. CIT (A) has rightly taken into consideration all the aspects. It is clear that the business of the assessee was set up since incorporation as it was having Carrefour Franchise Right and the expenses claimed by it for carrying out search for potential franchisees are expenses incurred post set up of business and are allowable as business expenditure. The AO erred in understanding the facts of the assessee’s case by saying that the assessee is a trader, despite the fact that all the evidence were placed on record which proved that the assessee was into the business of leasing/sub leasing the franchise rights. Thus CIT(A) properly allowed the business expenditure of Rs.5,24,17,631/- for A.Y. 2008- 09. Besides that the case is fully covered by the assessee’s group company (Carrefour WC & C India Pvt. Ltd. Vs. DCIT decided on 22.09.2014) decided by the Hon’ble Delhi High Court. In view of the finding hereinabove, we uphold the order of Ld. CIT(A).
In the result, the appeal of the Revenue is dismissed.
The order is pronounced in the open court on 15th of January 2016