Tribunal directs income reassessment, allows consultancy fees, emphasizes need for evidence in income determination.

The Tribunal partially allowed the assessee's appeal, directing the Assessing Officer to reassess the income based on the books of account and relevant records. The disallowance of expenditure incurred between the in-principal and final approval dates was upheld, as the assessee failed to prove the business was fully set up during that period. However, the consultancy fees paid to Royal House Agency were deemed allowable by the Tribunal, overturning the decisions of the Assessing Officer and CIT (A). The Tribunal also rejected the application of Rule 10 of the Income-tax Rules, 1962, by the AO, emphasizing the need for definite evidence in income determination.

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Issues Involved:
1. Disallowance of expenditure incurred between the date of in-principal approval and final approval from the Reserve Bank of India.
2. Disallowance of consultancy fees paid to the Royal House Agency.
3. Determination of income u/s Rule 10 of the Income-tax Rules, 1962.

Summary:

Issue 1: Disallowance of Expenditure
The assessee, a non-resident company, challenged the disallowance of expenses incurred between 12-5-1998 and 2-6-1998, arguing these were revenue expenses related to salaries, professional fees, and travel. The Assessing Officer (AO) and the CIT (A) treated these as capital expenditures, as the final approval for business commencement was on 2-6-1998. The Tribunal upheld the CIT (A)'s decision, stating the onus was on the assessee to prove the business was set up in all respects during the disputed period. The assessee failed to provide sufficient evidence, leading to the dismissal of ground No. 1.

Issue 2: Disallowance of Consultancy Fees
The assessee claimed Rs. 15,10,000 paid to M/s. Royal House Agency for services related to acquiring office premises. The AO disallowed the claim as the deal did not materialize, and the CIT (A) upheld this decision. The Tribunal, however, found the expenditure allowable, noting the payment was for services rendered, and directed the AO to allow the expenditure, referencing the precedent set in Richardson Hindustan Ltd. v. CIT [1988] 169 ITR 516 (Bom.).

Issue 3: Determination of Income u/s Rule 10
The AO invoked Rule 10 of the Income-tax Rules, 1962, to estimate the assessee's income due to insufficient evidence supporting certain expenditures. The CIT (A) supported this approach. The Tribunal disagreed, stating Rule 10 should only be applied when the actual income cannot be definitely ascertained. The Tribunal found no justification for the AO's invocation of Rule 10, as the assessee maintained proper books of accounts. The Tribunal remanded the matter back to the AO for determination of income based on the books of account and relevant records, directing the assessee to produce the necessary documentation.

Conclusion:
The assessee's appeal was allowed in part, with the Tribunal directing the AO to reassess the income based on the books of account and relevant records, while upholding the disallowance of the expenditure incurred between the in-principal and final approval dates.

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