TaxTMI 
TaxTMI 
2008 (4) TMI 388
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....ement of total income (-) 45,35,556 Add: Income from other sources 3,91,780 49,27,336 Less: Disallowance (-) 45,35,556 Total income 3,91,780 3. The CIT(A) confirmed the Assessing Officer's action and his order has bee....
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....and this being basic condition for levy of interest, under section 234B/234C was not tenable on facts and in law." 4. Shri Kishore Phadke, the ld. A.R., reiterated the arguments put forward on behalf of the assessee company before the Assessing Officer and the CIT(A). The submissions made by him are summarized below: - that a foreign collaboration agreement was entered into between the assessee and Steyr Daimler Puch, Austria ('SDP' for short) on 16-12-1997. - that SDP was a company, inter alia, engaged in the activity of providing technical know-how in the area of automotive technology. - that SDP was to provide the assessee-company with sufficient technical and marketing information in order to enable it to successfully operate. - that assessee-company was incorporated with the main object to own and operate an automotive engineering centre in India, to undertake engineering research and technical services and to set up a workshop/manufacturing facility to undertake local manufacture of products including components and parts. - that SDP and the assessee-company agreed to carryon the business in the above areas in India. - that by virtue of the collaboration ....
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....ion/Launch Expenses 15,65,239 Travelling Expenses 4,77,567 Rent 3,10,400 Advertisement 1,71,500 Expenses 1,62,551 Car Hire charges 1,06,307 Legal Charges 96,930 Exchange Rate Fluctuation 91,150 Consultation charges 55,000 Printing & Stationery 27,165 Vehicle fuel 20,243 Brokerage 20,000 Entertainment Expenses 12,097 Miscellaneous 9,389 Audit Fees 8,000 Interest 1,195 Total 49,27,336 7. The Assessing Officer was of the opinion that the business of the assessee was not set up during the previous year relevant to assessment year 1998-99 and therefore the aforesaid expenditure of Rs. 49,27,337 was not allowable under sections 30 to 37 of the Act. 8. The CIT(A), while upholding the Assessing Officer's view, inter alia, observed in his order as under. - that the main issue in this case was as to whether the assessee-company had commenced business or not or whether the business was set up or not; - that one of the main objects of the assessee was to act as a consultant, adviser and to provide technical services for the development/manufacture of new products; - that the activities handled by the managing director where in the nature of meeting ....
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....commence' business it is not 'set up', that there may be an interregnum between the point of time when a business is 'set up' and the point of time when the business is 'commenced' and all expenses incurred after the 'setting up' of the business and before the 'commencement' of the business would be permissible deduction under section 10(2) [sections 30 to 41 of the 1961 Act]. 11. In section 3 [Section 2(11) of the 1922 Act] of the 1961 Act the expression 'previous year' is defined as under: "3. For the purposes of this Act, 'previous year' means the financial year immediately preceding the assessment year: Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year." 12. The expression used in section 3 above was 'set up' and not 'commenced' and therefore the Bombay High Court chose....
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....of the business and the commencement' of the business was held as allowable expenditure. 17. In the case of Coromandel Exports (P.) Ltd., the business of the assessee-company was export of tobacco. The ITAT Hyderabad, relying, inter alia, on the decision of Bombay High Court in the case of Western India Vegetable Products Ltd. held in paragraph 5 of its order as under: "...What all is needed for setting up of the said business is to secure a business place or an office, to provide it with furniture, etc., to have a telephone to maintain the office and make ready everything to start business. If no intended exporter approached the assessee and got his product exported through the assessee it is not the fault of the assessee. Ultimately, it may be his bad luck but in legal terms it cannot be said that he had not set up his business. Therefore, we are of opinion that all the expenses incurred after the business is being set up are excludible business expenditure." 18. In the case of Neil Automation Technology Ltd., the business of the assessee was distribution of computer software and development and training of software personnel. During the previous year relevant to assessme....
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....early as in July 1997. The correspondences were also had by the assessee-company, during the year, with Mahindra and Mahindra Ltd., Kalyani Tubes, and Hindustan Motors. The foreign collaboration agreement between the assessee-company and Steyr Daimler Puch, Austria was entered into on 16-12-1997. The assessee could have not carried on its business without this collaboration agreement. Therefore in view of the facts and circumstances of the case and the position in law as discussed in the above paragraph we are of the opinion that the business of the assessee-company should be held to have been 'set up' on 16-12-1997. 22. Once it is held that the business of the assessee-company was 'set up' on 16-12-1997, all the expenses of revenue nature incurred on and after 16-12-1997 will become admissible for deduction. In the circumstances, therefore, the matter is restored back to the file of the Assessing Officer. He will examine and decide afresh the assessee's claim, in respect of the ground Nos. 1, 2, 4, 5, 6 and 7 as per the directions given above. Ground No. 3 "3. Without prejudice to Ground Nos. 1 and 2, the learned CIT(A) erred in holding that the expenditure....
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....igation on account of disagreement but primarily on the legal principles. Accordingly, I proceed herein below to place on record my dissenting views. 27. Facts as examined by me from the corresponding Assessment Order passed under section 143(3) dated 18-12-2000 were that the appellant was stated to be engaged in rendering technical design & consultancy service in respect of vehicle components/parts in the status of Company. The assessee-company was incorporated on 15-9-1997. That means the accounting period for the first year of start of business ended on 31-3-1998, consequential assessment year in question is assessment year 1998-99. The appellant is a 100 per cent subsidiary of Steyr Daimler Puch AG, Austria. The query which was raised by the Assessing Officer was in respect of deduction of an expenditure under the head "Administrative & selling expenses" of Rs. 49,27,336 as against the income declared under the head "Interest on fixed deposits with the bank" of Rs. 3,91,780. The Assessing Officer had given a categorical finding that in this first year of return, there was no income declared under the head "Business or Profession". He has (the AO) also cited the landmark decisi....
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....of correspondence did not establish the set up of the business. - That there was no employees or engineers who could impart the engineering service. - That the appointment of the General Manager was merely an operation prior to setting up of the business. - That the expenditure were meant for launching of business, as admitted by the assessee. - That the construction on the leased premises was to make fit the premises for occupation for the business. - That travelling expenditure were towards the appointment of the Director & the General Manager prior to setting up of business and not connected with running of business. - That the activity of the General Manager was in the nature of meeting & discussion with different persons to locate the prospective clients. - That there was no evidence that the appellant had even received any proposal or offer to act as a Consultant or advisor to provide technical services during the previous year. - That case law cited by the assessee viz. Neil Automation Technology Ltd.'s case was held as distinguishable on facts as there was not even any booking for providing Consultancy service by the appellant during the year. - That m....
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....t a business is set up when it is established or set on foot. I also do agree that there may be an interregnum between the setting up of a business and its actual commencement. That the accounting year would begin on the date the business is set up and not when it is actually commenced. Precisely speaking all these propositions have been laid down by the Hon'ble Court in the case of Western India Vegetable Products Ltd. and naturally applies to the facts of a particular case if falls within the four corners. Ex consequenti the issue cropped up in this appeal is about the claim of expenditure incurred even prior to setting up of the business or alternatively what should be the point of time said to be determinative of setting up of a business. 32.2 At this juncture, I am unable to withhold my thoughts that whether we are on the issue of "setting up of a company" or "setting-up of a business". In my opinion, a certificate of incorporation is nothing but a symbol disclosing the intention to start a company under a particular name and through the certificate, a nomenclature is assigned to a corporate body; to my mind a first step of the ladder prior to set up of the Business. May ....
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....e business - the date on which the source of income newly comes into existence-" Quoted from the section 3 itself and formulated for clear understanding as depicted by me by skipping few in-between phrases. To me the term "setting up" is disjunctive and cumulative with the phrase "the source of income" and should not be read separately or alternatively or even as mutually exclusively. With the result, I want to give a finding, as based upon the established facts of this case, that for the year under consideration, since admittedly there was no source of business income came into existence in the accounting year under consideration, hence beyond the scope of section 3 of the Act. I am sure there is no element of doubt or difference of opinion seeing the factual matrix of the case in respect of this finding on facts. 34. To dwell on the prerequisite of set-up of a business, I like to refer an observation made by my Ld. Brother at para 14, that this is not the case of an assessee involved either in manufacturing activity or trading activity. This assessee is stated to be in the service industry. So, I also endorse the view expressed therein that a different set of criteria will be re....
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....ns are not welcomed in the eyes of law. Such activities are primarily with the ambition and hope of setting up of a business. Fifth - Preparatory activity versus Commercial activity - This is the fundamental area of distinction. Before setting up of a business, certain preparation has to precede but the tax laws do not cover and recognize those preparatory Expenses; as discussed ante. Mere exploration of a suitable place, suitable customers before the setting-up cannot be held that the business has set-up. An exploration is too remote to be in proximity to the start or the commencement of the business. Sixth - Capacity to render Service - In terms of render of technical service, there ought to be the presence of the technology, a designated place like office, presence of equipment, covering technological field and office requirement, so that the company can authentically undertake the consultation job, and effectively discharge the function assigned, if any, as is the claim of this assessee but failed to establish. Seventh - Determinative test whether "functional" - After incorporation, a company takes shape so that in the years to come, the business can run hence processing ....
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....ought up with the hope of great future potential, say potential of rendering technical service, but logic do not permit to allow education expenses as setting up of a profession. The test is whether he had at that point of time the potential of rendering technical service immediately on approach by a client. In this appeal, admittedly there were two experts available but the fundamental question is whether they were in a position to render. the technical advice in the absence of a proper place to sit or devoid of equipments. And also, a basic query was raised that whether any technical service was rendered and for that, any bill was raised during the year ending 31-3-1998. The answer was given in negative. An argument was raised that having great technical knowledge those experts were in a position to offer technical service but the moot point is whether there was an iota of evidence that they had actually provided technical service in the accounting year under consideration. Sitting at home, every person has an ambition to do great jobs but question is whether he has done any job in a particular year resulted into income because we are dealing the issue viz-a-viz Income-tax laws w....
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....dian private limited company was set up as 100 per cent subsidiary of Steyr Daimler Puch AG, Austria. The total subscribed capital, wholly owned by the above company, was shown at Rs. 3 crores. "The company was set up with the aim to make available rich technical expertise to the Indian industry to make it achieve higher levels of competence technology and on quality front so as to keep up with the demand of international market and the increasingly discerning Indian market." 2.1 The company was to provide expertise in three main areas:- (i) Technical design and consultancy services, (ii) Systems supplier with respect to vehicle components and parts, (iii) Sourcing of vehicle components and parts from India for the global market. The assessee filed return declaring loss of Rs. 45,35,556 on 28-11-1998. The case was later taken up as a scrutiny assessment. The assessee had shown receipt of Rs. 3,91,780 under the head "Interest on fixed deposits with the banks". Against above receipt, assessee claimed expenses of Rs. 49,27,336 under the head "Administrative and selling expenses". No receipt from business or profession, according to the Assessing Officer, was disclosed. The Ass....
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....rate premises was identified at Pune and the interior and civil work was carried out." 2.4 The Assessing Officer did not agree with above contention and disallowed expenses claimed by the assessee under various heads. Reasons given by him in summary for adopting above course are as under: (i) That administrative and selling expenses were incurred before the business had commenced or even before it was set up. The Assessing Officer held that the case of Western India Vegetable Products Ltd. was not applicable to the facts of the case. The Assessing Officer relied upon decision of Bombay High Court in the case of Sarabhai Sons (P.) Ltd. The Assessing Officer further recorded as under. (ii) No employees were appointed drawing any remuneration. (iii) Detail of administrative and selling expenses of Rs. 15,65,239 showed that these were launching expenses incurred for "setting up of business" not "after setting up". The bill for construction on leased premises was raised on 30-3-1998 for Rs. 15,92,600. (iv) The correspondence with various customers filed by the assessee in support of setting up of business would not establish that business was ready to commence as there was no e....
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....eld the same to be distinguishable on facts. The learned CIT (Appeals) examined the project named, "Overseas project-1" under which parent company had advanced Rs. 62 lakhs to the assessee for supply of manpower and held that it was a device adopted to set up the claim. It was not sufficient proof to hold that business had been commenced. He accordingly dismissed grounds 1 to 3 raised by the assessee. 3.2 As regards claim of expenses, he held that all the expenses were incurred by the assessee before the setting of the business and were not permissible. He upheld assessment of interest income under the head "Other sources" and did not allow any expenses against above receipt. The entire appeal of the assessee was dismissed. 4. Being aggrieved, the assessee carried the matter in appeal before the Appellate Tribunal. After hearing both the parties, the learned Members of Income-tax Appellate Tribunal, A-Bench, Pune differed on the question whether business was set up by the assessee and whether expenses claimed under the two heads mentioned in the question were to be deducted. The learned Accountant Member, after taking note of income assessed, grounds of appeal raised before the T....
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.... (vi) Prem Conductors (P.) Ltd. v. CIT [1977] 108 ITR 654 (Guj.), (vii) Coromandel Exports (P.) Ltd v. ITO [1984] 20 TTJ (Hyd.) 503, (viii) CIT v. Western India Seafood (P.) Ltd. [1993] 199 ITR 777 (Guj.)." 4.1 Thereafter he noted the detail of expenses claimed by the assessee amounting to Rs. 49,26,141 under the various heads in Para 6. He noted that Assessing Officer had held that business was not set up during the previous year relevant to the assessment year 1998-99. Thereafter the summary of the findings of the CIT (Appeals) is noted in para 8. In para 9 of the proposed order, the learned Accountant Member has observed whether impugned expenses incurred for the year ending 31-3-1998 were admissible deduction, was precisely required to be decided. This would require to record as on what point of time the business of the assessee company can be said to have been set up. For that purpose, the learned Accountant Member observed that legal position, as laid down by various Courts would have to be examined. The learned Accountant Member accordingly referred as first case to the decision of Hon'ble Bombay High Court in the case of Western India Vegetable Products Ltd (supra)....
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....epair to make the building suitable for office purposes. In the light of decision of Hon'ble Bombay High Court in the case of Hede Consultancy (P.) Ltd., he directed the Assessing Officer to examine and decide afresh the issue raised through this ground and allow appropriate relief. The learned Accountant Member did not examine any other contention. 5. The learned Judicial Member did not agree with the view taken by the learned Accountant Member in the proposed order. He noted that Assessing Officer did not allow deduction of expenses of Rs. 49,27,336 against interest on fixed deposit of Rs. 3,91,780. He noted that Assessing Officer had given categorical finding that this is the first year of return and no income was declared under the head "Business or profession". The Assessing Officer had held that expenses claimed could not be allowed under the head "Interest income". According to the learned Judicial Member, there were two controversies namely (i) Whether expenditure claimed was not laid or expended for purposes of business in the year of consideration. Secondly, whether those expenses could be allowed as business was set up in the year under consideration. He thereafter ....
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....seeing the factual matrix of the case in respect of this finding on facts." 5.1 The learned Judicial Member then commented on observation of the learned Accountant Member in para 14 that present is not a case of an assessee involved in manufacturing or trading activity. The assessee is stated to be in service industry. He agreed that different set of criteria will be required to be applied in order to determine whether business was set up, commenced or established. The learned Judicial Member thereafter considered prerequisite which can logically be drawn on render of service and held that facts of the case do not establish that they were functional or started operating in this accounting period. 5.2 Second criteria applied was effect of an order in-the-offing. In conclusion of this criteria, the learned Judicial Member has observed, "All subsequent development do not pre-determine for sure the happenings of future hope of an order to supply the service." 5.3 The third criteria was the position of employment. The learned Judicial Member has given the example of a surgeon who is available to perform the surgery but in the absence of equipment or operation theatre, cannot perform ....
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....n has started. Naturally, a professional has to have an office to have place of discussion with his clients and from where he can impart the professional skill. So, a conclusion cannot be drawn that by the time the office was not ready, the profession cannot be said to be set up in the first year of the business. This analogy is at par with the findings of several Courts in cases of Manufacturing business or Trading business; where certain guidelines are laid down to determine the point of time of set-up of business. Mere conceiving an idea or a thought and thereafter undertaking journey to examine the future prospects or even drawing attention of the public by participating in an exhibition cannot be held as set-up of the business emphatically if it is in the first year. It is like this that every child is brought up with the hope of great future potential, say potential of rendering technical service, but logic do not permit to allow education expenses as setting up of a profession. The test is whether he had at that point of time the potential of rendering technical service immediately on approach by a client. In this appeal, admittedly there were two experts available but the f....
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.... had staff like Managing Directors and Manager to render technical advice. All the conditions of setting up of a business were satisfied. The ld. Counsel drew my attention to the following decisions which had explained what is 'set up':- (i) Western India Vegetable Products Ltd.'s case; (ii) CWT v. Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478 (SC); (iii) Prem Conductors (P.) Ltd.'s case. 6.2 The ld. DR opposed the above submission of the learned counsel for the assessee. He relied upon the proposed order of the ld. J.M. He argued that neither any receipt was shown nor there was material to establish that business was set up in the relevant period. The DR further argued that expenditure on renovation of office in the first year of business is clearly capital in nature. He also supported the disallowance of various expenses claimed under the various heads. 7. I have given careful thought to the rival submissions of the parties. In my considered opinion, there is no need to examine first principle relating to setting up of business. Various High Courts and Supreme Court have laid down the principle as to when business can be said to be set up, although....
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....nce when the activity which is first in point of time and which must necessarily precede the other activities is started. Take, for example, a case where an assessee engages in the business of a trader which consists of purchasing and selling goods. The assessee must necessarily purchase goods in order to be able to sell them and purchase of goods must, therefore, necessarily precede their sale. Can it be said in such a case that when the assessee purchases goods for the purpose of sale, he does not commence his business? Is it necessary that he must start the activity of selling goods before he can be said to have commenced his business? We have to consider the question as to when an assessee can be said to have commenced business from a common sense point of view. We have to ask ourselves the question as to when a businessman would regard a business as being commenced? Would he not consider a business as having commenced when an essential activity of that business is started? The argument of the revenue seeks to confound the commencement of a business with the establishment of the business as a whole and carrying on of all the activities of the business. This confusion is the res....
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.... engaging the garden staff, kitchen staff or other staff, buying the equipment and getting the equipment ready, making the staff familiar with the working of that equipment, etc. They are all part of the business activities of the company so that ultimately when the licensee or lessee came to occupy the premises, everything would be in shape for use of the licensee or lessee, as the case may be. Under these circumstances, following the principle laid down by the Division Bench of this Court in CIT v. Saurashtra Cement & Chemical Industries Ltd., it must be held that it is only in a loose sense that the business of the company can be said to be to give out on leave and licence basis residential or office accommodation together with the appurtenant services. The business of the company was of a three-fold category as mentioned above after a proper analysis and once that analysis is made, it is clear that from 1-10-1964, the company was carrying on the second category of its business, namely, the business activity of making the residential accommodation with all the appurtenant services available to the intended lessees or licensees. We find from the order of the Tribunal that though ....
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....#39;. There are other clauses providing for acting as consultants and advisers. At page 2 of the paper book, there is detail of the various activities handled by Managing Director Mr. Van Den Oever during his stay in India and the corporate offices he visited to carryon discussion with different persons. The corporate offices Mr. Van Den Oever visited are recorded to be situated at Delhi, Pune, Mumbai, Kolkata, Indore etc. The names of the parties include Hindustan Motors, Eicher Motors, Anand Group of Industries (Mahindra & Mahindra). Even the name of the persons he met are also given. The assessee has also furnished detailed qualification of Shri Rajiv Randive who was General Manager, Marketing and had met various prospective clients. The assessee also gave summary of various activities carried on by the above employee. The clients were shown to have contacted on tour like Eicher Motors, Hindustan Aeronautics, Hindustan Motors, Kalyani Tubes, Kinetic Pune, Mahindra & Mahindra, and Scooters India. The assessee has also placed on record correspondence exchanged with various manufacturers of automobiles. In some correspondence, problem being faced by different automobiles and how th....
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....I have also considered the reasoning given by the learned Judicial Member in the proposed order. He held that the expenses claimed by the assessee could not be allowed under the head 'Interest income'. In para 28.1, he has noted the reason given by the Assessing Officer for disallowance. In clause (ii) of that para, he has observed: 'An expenditure incurred prior to the setting up of the business falls outside the purview of section 28 of Income-tax Ace. The expression 'prior to commencement' of business is again used in clause (iii) and the two decisions quoted by the Assessing Officer in clause (iv) has no application here. 9. Now, proceeding to examine the reason given in para 29, I find that these are without any substance. What is the effect of production of correspondence is to be judged with reference to the type of business claimed to have been set up. The General Manager and the Managing Director were quite competent to render advisory services to the clients and there was no need to employ engineers or other employees for setting up the business. Taking a stall in auto exhibition for advancement of business has been misinterpreted as launching of busi....
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....al principles, it was quite unnecessary to again go to the first principle. His finding that there was no source of business income in terms of section 3 is factually incorrect. The assessee had its machinery ready to give consultancy and that was the source of income. No amount was actually received and that the amount was actually received next year is not very material. The learned J.M. accepts that, 'This is not the case of assessee involving either any manufacturing activity or trading activity. The assessee is stated to be in service industry'. As stated earlier, the assessee claimed that its business was that of consultancy as expert in automobile industry. The so-called prerequisite or criteria adopted for determining whether the business was set up, commenced or established on facts of the case are difficult to understand. The criteria are discussed hereunder:- (i) Ld. J.M. has concluded that business was not functional. This finding is not supported by any fact. The ld. J.M. has not bothered to examine expenditure claimed by the assessee. (ii) No consultancy order was procured in the relevant period. It is true that no order was procured but the assessee start....
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....d. The inferences drawn by the ld. J.M. in the proposed order are not possible on facts and circumstances of the case. I am, therefore, unable to agree with the view taken by the ld. J.M. that the business was not set up by the assessee in the previous year. I agree with the ld. A.M. 12. In the question proposed to me, there is reference to total claim of expenditure of Rs. 49,27,336 and, thereafter, two specific expenses of Rs. 17,92,600 and Rs. 15,65,239 under the heads 'Building, Repair & Renovation' and 'Exhibition/Launch Expenses' respectively. Even if it is held that the business was set up, the claim of the expenditure was required to be examined separately. Total expenditure of Rs. 49,29,336 has been claimed under various heads. On the question of Rs. 17,92,600 claimed as building, repair and renovation expenses, these expenses appear to me to be of a capital nature and, therefore, cannot be allowed. The assessee has not placed any material on record to show that repair and renovation could be treated as current repairs. The decision of Supreme Court in the case of CIT v. Sharwan Kumar Agarwal [2007] 163 Taxman 187 also goes against the assessee. Therefore,....