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Income Tax Appellate Tribunal, DELHI BENCH “SMC-I”: NEW DELHI
Before: SHRI VIJAY PAL RAO
O R D E R This appeal of the assessee is directed against the order dated 20.08.2014 of the ld CIT(A)-IX, New Delhi for the Assessment Year 2011-12. 2. The assessee has raised the following grounds:-
1. That the Id. CIT (A) erred in law and on facts in confirming the AO's action of disallowing of legal and professional expenses of Rs l,83,090/- by wrongly treating the same as capital in nature.
2. That the Id. CIT (A) erred in law and on facts in confirming the AO's action of disallowing of salary expenses of Rs.1,31,158/- by wrongly treating the same as capital in nature.
3. That the Id. CIT (A) erred in law and on facts in confirming the AO's action of disallowing of software expenses of Rs.1,59,455/- by wrongly treating the same as capital in nature.
4. That the Id. CIT(A) on the facts and circumstances of the case erred in law in not holding that the order passed by the AO u/ s143 (3) of the IT Act, 1961 is bad in law
5. That the Id. CIT (A) erred in law and on facts in not accepting assessee's submissions filed during appeal proceeding in support of the contention.
6. Without prejudice to ground No.1 to 3 above the Id CIT (A) erred in law and on facts in confirming the action of the AO of disallowance of expenses of Rs.4,54,257/-out of claimed expenses of Rs.4,74,5277- being excessive and ad hoc in nature.
Page No. 2 7. Without prejudice to ground No.1 to 6 the Id CIT (A) wrongly confirmed the action of AO in not allowing the depreciation on disallowed expenses being capital in nature.
That the order of the Id. CIT (A) is bad in law and against the facts of the case.
The assessee company was incorporated on 28.07.2009 vide Certificate of incorporation dated 28.07.2009. The assessee stated that its main object is to carry on business of an investment company and for that purpose to acquire such share, stock, debentures including debentures stock, bonds, securities by original subscription, purchase, exchange etc. as may deemed fit. The AO recorded that the assessee is engaged in the business of manufacturing industry of automobile and auto parts, whereas in its submission the assessee stated before the AO that the main object of the assessee company is to carry on business of Investment Company and to provide managerial, technical, administrative and other executive supervisory and technical services. The AO found that the assessee company has not carried any business activity during the year under consideration. However, the assessee claimed expenses of Rs.9,62,027/- on account of share capital expenses, legal and professional fee, network system and salary. Out of Rs.9,62,027/-, the assessee company Has sue motto added back share capital expenditure of Rs.4,87,500/- to arrive at business loss of Rs.4,74,527/-. The AO asked the assessee as to how the expenditure claimed by the assessee be not disallow, in view of the fact that no business activity has been performed by the assessee company during the year under consideration. The assessee filed letter dated 03.10.2013 and submitted before the AO that the assessee is a subsidiary of Mahle GMBH (a German based company) and during the FY 2010-11, the assessee company has incurred a loss of Rs.9,62,027/-. The company could not generate any revenue during the entire financial year as the company was a new entrant in the line of business. It was further submitted that out of the expense of Rs.9,62,027/- of Rs.4,87,500/- incurred on account of share capital expenses was disallowed by the assessee itself. The remaining amount of Rs.4,74,527/- includes a sum of Rs.1,83,090/- on account of legal and professional fees pertaining to statutory audit, RBI compliance etc. Therefore, expenses are statutory requirement to run a company. Further, the expenses of Rs.1,59,455/- relates to the software charges pertaining to the communication system of the company was incurred. The maintenance of Page No. 3 communication system is the backbone of the assessee company, therefore these are the allowable claim. The remaining expenses of Rs.1,31,158/- relates to salary incurred for marketing the company’s activity. The assessee stated that the TDS on the same has been deducted. Thus the assessee contended before the AO that except the expenses incurred of share capital expenses all other expenses are allowable business expenses for the assessee company. The AO did not accept the claim of the assessee and held that no business activity has been done by the assessee during the year consideration, therefore the expenses cannot be allowed. However, certain expenses are needed for the existence of the company hence, the AO allowed a sum of Rs.20,000/- and remaining amount of Rs.4,54,527/- was disallowed.
The assessee challenged the action of the AO before learned Commissioner of Income-tax (Appeals), but could not succeed. The learned Commissioner of Income-tax (Appeals) confirmed the disallowance made by the AO on the grounds that in the absence of inception of company the assessee is not entitled for expenses claimed. Therefore, the learned Commissioner of Income-tax (Appeals) has denied the claim of the assessee on the ground that the assessee has not set up or commenced the business.
Before the Tribunal the ld counsel for the assessee has submitted that since the assessee is an investment company and is a subsidiary of Mahale GMBH. It is pointed out that prior to incorporation of the assessee company, the assessee needed approval from Foreign Investment Promotion Board (FIPB), which was obtained by the assessee on 08th August 2008. The copy of the approval of FIPB is placed at Page 39 of the PB. Thus, the ld AR has contended that when the assessee has completed all the requisite formalities as well as approvals for commencement of the business then the assessee is business was set up on 1st day of Financial Year under consideration i.e. 01.04.2010. The ld AR further submitted that in the business of investment what assessee was required to put all the requisite infrastructure in place as well as the software which is necessary for the communication between the assessee and its parent company which provides the fund to the assessee for further investment in the group of company. Therefore the assessee has incurred the expenses for the software which has provided back bone of the assessee is nature of business. The ld AR has submitted that on 09.02.2011, the Page No. 4 assessee received fund from its patent company which was invested on 14.02.2011. Thus during the year under consideration the assessee carried out certain business activity and therefore finding of the AO as well as learned Commissioner of Income- tax (Appeals) that the assessee has not set up its business itself contrary to the record as well as actual fact that the assessee has actually carried out the business activity. The ld AR has further submitted that the legal and professional expenses are nothing but statutory audit fee which is accounted at the end of the year whereas, the assessee has already set up and commenced it’s business therefore at least the said amount cannot be disallowed even in the case if the set up of the business is considered on the date when the assessee has received the fund from its parent company and investment to same in the group company in the month of February 2011. In support of his contention he has relied upon the decision of the Hon’ble jurisdictional High Court in the CIT Vs. Wirlpool India Ltd. 318 ITR 347. On the other hand the ld DR has relied upon the finding of the authorities below and submitted when the AO as well as learned Commissioner of Income-tax (Appeals) has given a finding that no business activity has been carried out by the assessee during the year under consideration then there is no question of setting up or commencement of the business of the assessee and consequently the claim of expenses cannot be allowed.
6. Rival submission as well as relevant material has been considered. There is no dispute that the assessee company was incorporated on 28.07.2009, further the approval of the FIBI at pg. 39 of the PB was taken prior to incorporation. Since the assessee claimed to have engaged in the business investment by availing funds from its foreign parent entity, therefore the approval FIPB was required. It is also not in dispute after incorporation of the assessee company as well as obtaining the approval, the assessee was not required to obtain any further approval or permission from any other authority for commencement of its business activity of investment. Further, the assessee has acquired/ installed the requisite software which claimed to be back bone of the business activity of the assessee for connecting with the parent company for the purpose of availing the fund and investing the same in the other group of companies. The assessee has put all the things at place and reached to the point from whether the assessee could start and commence its business activity then the said stage will be considered and Page No. 5 regarded as setting up of business of the assessee. In the case in hand when the assessee has put all the requisite things in place for start of business then prior to the commencement of the business it can be said that the assessee was ready to start and commence its business. There is difference between setting up of business and commencement of business. The setting up of business is a stage when the assessee is ready to start the business whereas the commencement of the business is a stage when the assessee actually starts the business. Therefore there may be a time gap between the setting up of business and commencement of business. Hence the assessee has reached to a stage from where the assessee could start its business activity but due to some reasons which are not in the control of the assessee if the commencement and start of the business is delayed then such delay would not reverse have not on the stage which is already achieved by the assessee by getting ready to start business. Therefore, the requirement allowing the expenses is only the set up of business and not the commencement of the business. Section 3 of the Income Tax Act defines the previous year being the financial year immediately preceding Assessment Year and in the case of business or profession newly set up or newly came into existence the FY/ previous year shall be period beginning with the date of setting up of business or profession as the case may be. Thus, the date on which the source of earning the income came into existence will be beginning of the previous year and ending of the financial year. In the case in hand the assessee has already placed all the requisite things as a source of earning of income and therefore when the assessee was not require to do anything more to start its business activity then it will be regarded as set up of business of the assessee. In the case of CIT Vs. Whirlpool India Ltd. (supra) the Hon’ble jurisdictional High Court while dealing with the identical issue of setting up of business by a company rendering financial services has held as under:- “5. This Court in the case of Hughes Escorts Communications (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 Page No. 6 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 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 1-2-1996 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 4-9-1995 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. 17,500 for November and Rs. 25,000 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 1-11-1995. M/s S.R. Batliboi Consultants (P.) Ltd. had also submitted their bill dated 30-10-1995 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 equity investment by the Whirlpool Corporation of USA were given in January, 1996 does not mean that the business was not set up before Page No. 7 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 (e.g., Page 52) of the paper book. From the above evidence it is clear that the business was set up from 1-11-1995, by which date the company was ready and in a position to commence its business."
7. The counsel for the revenue has relied upon the decision in the case of CWT v. Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478 (SC) to canvass the proposition that it is only when actual business operation was commenced, a business is set up. We feel that the decision of the Supreme Court in Ramaraju Surgical Cotton Mills Ltd.’s case (supra) is not applicable to the facts of the present case because the said judgment was dealing with the provision of section 5(1)(xxi) of the Wealth-tax Act, 1957 along with its proviso and the language of the main section and the proviso were wholly different. In the proviso, the requirement was specifically of the company commencing operations but in the main section the expres- sion used was different viz., of setting up of the unit. In the light of the relevant provisions, the facts of that case and the claim of the assessee to get the benefit of a deduction, the Supreme Court interpreted the provisions applicable to mean that actual commencement of business was necessary. The facts of the present case are however more in line with the decision of this Court in the case of Hughes Escorts Communications (supra).”
In the case in hand the assessee claimed to be an investment company which has not been disputed by the authorities below and therefore what is required to start is business as only setting up of the infrastructure and appointment of the directors and managers as well as other staff. The assessee has already appointed its directors and the employees and also installed the requisite infrastructure for the purpose of carrying out the business activity of investment by procuring funds from its parent company and investing the same in the Indian group companies. Hence the assessee has already completed all the requisite acquisition and installation of facilities then the business of investment was set up by the assessee though it was commenced later on when the assessee has actually invested in the group of companies on 14.12.2011. It is a case of service/ investment company and not manufacturing or other production activity where a manufacturing facilities is required to be constructed prior to that the business cannot said to be set up. In view of the above facts and circumstances as well as