ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-10(1) NEW DELHI, ITO C.R. BUILDING NEW DELHI vs. IKEA INDIA PRIVATE LIMITED, NEW DELHI

In course of assessment proceedings, while verifying the audited financial statements of the assessee, the Assessing Officer noted that assessee has debited expenses to the tune of Rs.18,94,65,541 in assessment year 2014-15 and Rs.50,13,18,999 in assessment year 2015-16. Whereas, assessee has not shown any receipts from business in the aforesaid two assessment years. Being of the view that in absence of any business operation during the year, no expenses can be allowed. The Assessing Officer issued a show cause notice to the assessee proposing disallowance of the expenses. In response to the show cause notice, assessee filed a detailed submission objecting to the proposed disallowance. However, rejecting the contentions of the assessee, Assessing Officer proceeded to disallow the expenses in both the assessment years under dispute.

After considering the submissions of the assessee in the context of facts and material on record, learned Commissioner (Appeals) held that the assessee has set up its business activities. He observed, merely because the assessee has not undertaken any sales/purchase, it cannot be said that business has not been set up. Relying upon various judicial precedents including the decision of Hon'ble jurisdictional High Court in the case of Carefour WC& C India (P) Ltd. vs. DCIT (2015) 53 Taxmann.com 289, learned Commissioner (Appeals) deleted the disallowances.

Before us, learned Departmental Representative submitted, though, business has been set up, however, it has not commenced its business as actual purchase and sales activities have not been undertaken by the assessee. She further submitted that some of the expenses appear to be falling within the provisions of section 35D of the Act, hence, have to be amortized. Thus, she relied upon the observations of the Assessing Officer.

Learned counsel for the assessee submitted that before incorporation of the assessee, its holding company has already obtained the approval from the Department of Industrial Policy and Promotion (DIPP) on 14.06.2013 for setting up of its subsidiary in India. He submitted, after incorporation, assessee entered into various agreements, hired employees for undertaking business operation and also opened bank account for undertaking business transactions. In this context, he drew our attention to the sequence of events indicating various steps taken by the assessee for setting up the business. He submitted, the major part of the expenses relates to salary cost of employees. He submitted, once the assessee has set up its business, merely because the assessee had not earned any revenue by undertaking purchase and sales transactions, it cannot be said that business has not been set up. He submitted, date of set up and date of commencement of business are distinct from each other and expenses incurred post setting up of the business are allowable as revenue expenses. He submitted, the term ‘set up’ means to place on foot or to establish. He submitted, various steps taken by the assessee such as opening place of business, hiring of employees, identifying clients, opening bank accounts etc. clearly demonstrate setting up of the business. In support of such contentions, learned counsel relied upon the decision of Hon'ble jurisdictional High Court in case & 2991/Del/2023 Ikea India Pvt. Ltd. of Carefour WC& C India (P) Ltd. vs. DCIT (2015) 53 Taxmann.com 289 (supra). Thus, he submitted, the decision of learned First Appellate Authority has to be affirmed.

We have considered rival submissions in the light of judicial precedents cited before us and perused the material on record. The dispute between the assessee and the Revenue is within the narrow compass as to whether the assessee has set up its business activities so as to claim expenses. The Assessing Officer has observed, since, assessee has not reported any income from business operation, it cannot be said that it has commenced its business activities. However, from the material available on record, it is observed that assessee’s holding company has obtained an approval from DIPP on 14.06.2013 to set up a subsidiary in India. Thereafter, assessee company was incorporated on 02.08.2013. After its incorporation, assessee has entered into trade mark and trade name agreement, service agreement with another group entity for availing various services. It has opened a bank account with Standard Chartered Bank in August 2013 for carrying out its business activities. Further, it has entered into various land agreement to kick start its business activities including agreement with State Government and other entities for purchase/leasing space for its retail stores. The assessee has also hired employees such as CEO, Deputy Country Sales Manager, Finance Manager, HR Manager, Real Estates Project Manager, Legal Manager, Administrative Officer, Marketing Assessment and Risk Manager, and various other supporting staff to undertake the business operation. The assessee has also acquired tangible and other assets, essentially required for basic infra-structure and running of business.

On a perusal of audited financial statement, it is observed that major part of the expenses relate to salary, rent payment, security expenses, rates and taxes, electricity and water charges, repairs and maintenance, travelling and conveyance, insurance, legal and professional fee, communication expenses, vehicle expenses etc. It is further observed, certain expenses incurred by the assessee have been amortized. Thus, the aforesaid facts brought on record clearly demonstrate that the assessee has set up its business activities. In our view, the Assessing Officer has disallowed the expenses without understanding the fine distinction between the terms ‘set up’ and ‘commencement’ and has, therefore, fallen into error while disallowing the expenses. In our view, the issue is squarely covered by the decision of the Hon'ble jurisdictional High Court in & 2991/Del/2023 Ikea India Pvt. Ltd. the case of Carefour WC& C India (P) Ltd. vs. DCIT (2015) 53 Taxmann.com 289 (supra), wherein, the Hon'ble High Court while considering identical nature of dispute has held as under: “There is no dispute about the factual aspect of the expenses incurred by the assessee. The position of the primary obje4ctives of the assessee company is also not in dispute. In the facts of the instant case, the assessee company was incorporated on 19.9.2007. Even before the incorporation, correspondence had been made with well-known companies like Nestle, Cadbury, Nivea India (P) Ltd., Pepsi, Colgate, Uniliver etc. It rented out the office premises in the month of October, 2007. Bank account was opened on 4.10.2007. Employees were also appointed during the said period. TDS deduction for the said employees was also placed on record. Registration under the Shops and Establishment Act was also affected. These activities are the first stage activities which would lay foundation for placing orders for procuring the stock and storing them in a warehouse/shop followed by the third stage of marketing them. Suffice to state for a foreign entity wito9ut establishing itself under the local laws, appointing personnel, identifying the prospective manufactures, clients, etc. obtaining storage facilities followed by stock-in-trade, the business of trading cannot commence. The Tribunal missed the point that the assessee as a prudent trader could not have made purchases without undertaking the aforesaid exercise. The said exercise was a precursor to commencement but post set up. The aforesaid activities demonstrate setting up of the business by the assessee with a commitment to comme4nce the business. Nothing barred or prevented the assessee from making first purchases, after necessary legal approvals, but the fact that the assessee wanted to commence actual trading after negotiations with several parties, would not postpone the date when the business was set up.”

As could be seen from the observations of the Hon'ble jurisdictional High Court, commencement of actual trading cannot postpone the date of set up of business. In the facts of the present appeal, merely because, assessee has not commenced its purchase and sales activities, it cannot be said that the business has not been set up. In view of the aforesaid, we uphold the decision of learned First Appellate Authority while dismissing the grounds raised by the Revenue.”

Same order to follow in the Revenue’s latter appeal since raising the very sole substantive ground.