TaxTMI 
TaxTMI 
2008 (4) TMI 388
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.... (Rs.) Loss as per statement 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....
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....34C could not arise because the assessee was not liable to pay advance tax at all in terms of section 208 read with section 209 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 co....
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....80 under the head 'Interest on bank fixed deposits' and had claimed expenses of Rs. 49,26,141 under the head 'Administrative selling expenses' as under: Particulars (Rs.) Building Repairs, Improvement and Renovation 17,92,600 Exhibition/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....
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....#39; of the business and not 'commencement' of the business, that the expression 'setting up' means 'to place on foot; or 'to establish' in contradistinction to 'commence', that when a business is established and is ready to 'commence' business then it can be said of that business that it is 'set up', but before it is ready to '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....
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....d start after fish became available. It was held by the Gujarat High Court that it was the starting point of the setting up of business of processing marine products and the actual arrival of fish later on could not postpone the 'setting up' of such business. The expenditure claimed by the assessee was allowed. In other words, the expenses incurred during the interval between the 'setting up' 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....
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..... 21. We now proceed to apply the legal position enunciated in the above paragraphs to the facts of this case. It is seen that in the present case the assessee-company was incorporated on 15-9-1997. The necessary approval was granted by the Ministry of Industry, Government of India in December, 1997 for a foreign collaboration. The assessee entered into a correspondence with Scooters India Ltd., a prospective customer, as 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 in....
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.... is partly allowed for statistical purposes. Per Mukul Shrawat, Judicial Member.- 26. The proposed order of the Learned Accountant Member has been carefully and thoroughly perused by me. I have discussed the matter with him but regretted my inability to persuade myself to agree with the conclusion arrived at. Though the legal aspect of the issue has been comprehensively set out by Ld. AM, but I want to place my own reasons which may give rise to this litigation 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 w....
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.... placed reliance on Western India Vegetable Products Ltd.'s case and Sarabhai Sons (P.) Ltd.'s case. Finally, the total income was computed at Rs. 3,91,380 after the disallowance of the alleged expenditure in question. 29. The first appellate authority has elaborately discussed all the main issues; can be crystallized in the following manner: (a) The question of the allow ability of an expenditure made during the set-up of a business was dealt with in detail, summed up- - That mere production 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 busines....
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....int-wise as follows. 32.1 The first point, which is very crucial to decide the issue in hand, is that undisputedly when the company has been incorporated on 15-9-1997 whether for the purpose of allow ability of certain expenditure it can be held that day as the date of set-up of the business as prescribed in section 3 and section 29 of IT Act. No doubt that the language of the section 3 makes it clear that in the case of a new business (as is the case of this appellant) the first accounting year must in every case commence on the date of the "setting-up" of the business. Taking pause for a minute, I do agree with my ld. Colleague for the proposition that 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....
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....nditure incurred after the business is set up may be allowed under sections 30 to 37 even if it is incurred before the business has actually commenced in view of the judicial pronouncement that there may be an interregnum between set up and commencement but concomitant with the basic question elaborated ante. 33. Even before I deal with the prerequisite of set-up of a business, the main section 3 of the Act, as reproduced by my Ld. Brother at Para II, is also to be dwelled upon. My humble understanding of section 3 of the Act is quote, "in the case of a business - newly set up - the previous year shall be the period beginning with the date of setting up of the 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 admi....
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....ely not engaged in rendering medical service. Mere presence do not qualify for the claim as per the language of the statute. Fourth - Incorporation Certificate - It is the start point of the Company or the start point of the setting up of the business. Undoubtedly, by issuance of the certificate the incorporation of the company viz-a-viz share capital, names of the directors is established and most importantly the name of the company is designated but nothing more than that. Whether the company shall positively launch its business or may fail to perform is not determinative on that occasion? The company will run thereafter or not cannot be determined at that point of time. Predictions 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 ....
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.... 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 fundamental question is whether they were in a position to render. the technical advice in the ....
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....ue to the Hon'ble President, ITAT, for reference to a Third Member or any other order as the Hon'ble President deem fit. THIRD MEMBER ORDER Per Vimal Gandhi, President.- 1. On account of difference between learned Members of Income-tax Appellate Tribunal, A-Bench, Pune, the following question has been referred to me under section 255(4) of the Income-tax Act: "Whether on the facts and circumstances of the case, the assessee is entitled for expenditure of Rs. 49,27,336, mainly comprising Rs. 17,92,600 expenditure under the head "Building, Repair & Renovation" and Rs. 15,65,239 under the head "Exhibition/Launch Expenses" disallowed being expended prior to setting up of the business?" 2. The facts of the case are that assessee, an Indian 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 marke....
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....f India, Mr. Rajeev Randive was also available to the potential customers as is evident from correspondence which was placed on record. The assessee placed reliance on decision of Bombay High Court in the case of Western India Vegetable Products Ltd. The contention of the assessee is further recorded by the Assessing Officer as under: "1. The first operating year was for a period of six and half months. The company commenced its activity but could not achieve any turnover during this period. During the financial year the operating facilities have been set up and initial contacts have been established with major players in the industry and potential clients. 2. The company decided to start its corporate office at Pune because of its strategic location. Accordingly, the place for corporate 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 com....
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...., therefore, after setting up of business, expenses claimed were to be allowed. It was explained that business was set up when its Managing Director and one other officer were made available for services after the incorporation of the company. Above persons were in a position to offer technical services as experts in automobile field. Customers had started contacting them for advise and services. There were various discussions on technical matters with customers. Travelling expenses were incurred for business purposes and not for appointment of Director and the General Manager. Assessee placed reliance on certain correspondence carried by the assessee with his customers. 3.1 The learned CIT (Appeals) did not find any force in the appeal of the assessee. He first examined the case of the assessee with the case of Neil Automation Technology Ltd. and held 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 commen....
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....owledge company and it was its business to supply know-how, knowledge and technology to its customers. - That the business of the assessee-company was, as per Ministry of Industry acknowledgement No. 550/SIA/FC/97, dated 5-8-1997, to set up wholly owned Indian subsidiary and automotive engineering and research consultancy services. - That approval was given by the Ministry of Industry for foreign collaboration in December 1997. - That reliance was placed on the decision in the following cases: (i) Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151 (Bom.), (ii) Sarabhai Management Corpn. Ltd. v. CIT [1976] 102 ITR 25 (Guj.), (iii) Neil Automation Technology Ltd. v. Dy. CIT [2002] 120 Taxman 205 (Mum.), in ITA No. 3263 (Mum.) of 1988, dated 5-7-2001 (Mag.), (iv) Chakradhari Wheels (P.) Ltd. v. ITO [2005] 96 TTJ (Delhi) 517, (v) CIT v. Sarabhai Sons (P.) Ltd. [1973] 90 ITR 318 (Guj.), (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 7....
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....roceeded to apply the legal proposition enunciated in those decisions to the facts of this case. He has observed that in the present case, the assessee company was incorporated on 15-9-1997. Necessary approval was granted by the Ministry in December, 1997 for a foreign collaboration. The assessee company entered into correspondence with Scooter India Ltd., a prospective customer, as early as in July, 1997. The company also carried correspondence with Mahindra and Mahindra Ltd., Kalyani Tubes and Hindustan Motors. The foreign collaboration agreement between assessee-company and its parent company was entered into on 16-12-1997. 4.3 In support of above view, the learned Accountant Member relied upon the following decisions: 1. Western India Seafood (P.) Ltd.'s case. 2. Neil Automation Technology Ltd.'s case. 3. Prem Conductors (P.) Ltd.'s case. 4.4 The learned Accountant Member then proceeded to consider allowability of expenses of Rs. 17,92,600 incurred on construction, repair 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 ....
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....uisites are completed, then it can be said to be set-up of the business. He thereafter referred to section 28 and section 29 of the Income-tax Act. According to him, income is to be computed in accordance with provisions contained in sections 30 to 43D of the Income- tax Act. Thereafter reference is made to section 3 of the Income-tax Act. While dealing with section 3 of the Income-tax Act relating to setting up of a new business in the previous year, the learned Member observed that the term "setting up" is disjunctive & cumulative with the phrase "the source of income" and should not be read separately. Thereafter the learned Judicial Member concludes as under: "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." 5.1 The learned Judicial Member then commented on observation of the learne....
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....tion of fact which can be decided only on peculiar facts and circumstances of the case. In the background of above observations, the learned Judicial Member held that there is nothing on record to establish that there was an existence of any tool/equipment/office machinery/presence of technology etc. ready in hand to make use of them for imparting technical service. 5.9 In the ultimate analysis, the learned Judicial Member observed as under for denying claim of deduction as business was not set up by the assessee: "36.1 Next, admitted sequence of events are that the assessee company was incorporated on 15-9-1997, thereafter a collaboration agreement was executed on 16-12-1997. Next was an exhibition at Delhi held in Jan. 98 and incurring of travelling expenditure during these months. Side by side the office, stated to be on lease, was under preparation/construction and the final bill of construction was dated 30-3-1998. Once it is an established fact that the office was not even ready far professional use, how it can be held that the profession has started. Naturally, a professional has to have an office to have place of discussion with his clients and from where he can....
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.... is obvious between launching of a product belonging to a running business and launch of a product yet to come into existence. Such a launch depict itself that it was yet to set up and said to be prior to setting up of a business." 6.0n account of difference between the learned Members, this matter has been referred to me under section 255(4) of the Income- tax Act. The case was fixed and I have heard the learned representatives of both the parties. 6.1 Shri Kishore Phadke, the learned counsel for the assessee brought to my notice that the assessee company was set up to render advisory service in automobiles. Steyr Daimler Puch AG, Austria, a worldwide group, is involved in research and advisory services to increase efficiency of automobiles, improvement of process of assembly and had set up the Indian subsidiary. The assessee company is performing a highly technical job. The ld. Counsel drew my attention to the correspondence which the assessee exchanged with several prospective customers. It was further submitted that the assessee had a place of business. It had staff like Managing Directors and Manager to render technical advice. All the conditions of setting up of a busin....
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....a new unit commenced from June 1957 and construction was completed by December, 1957, unit was completed and became ready to go into business only after the Act had come into force and, therefore, assessee was entitled to exemption under section 5(1)(xxi) in respect of assets used up in setting up the unit." 7.4 Their Lordships approved the observations of Chagla, Chief Justice in the case of Western India Vegetable Products Ltd. 7.5 In the case of CIT v. Saurashtra Cement & Chemical Industries Ltd. [1973] 91 ITR 170 (Guj.), their Lordships observed as under:- "It may be that the whole business was not set up when the activity of quarrying the leased area of land and extracting limestone was started. That would be set up only when the plant and machinery was installed, the manufacture of cement started and an organization for sale of manufactured cement was established. But, as pointed out above, business is nothing more than a continuous course of activities and all the activities which go to make up the business need not be started simultaneously in order that the business may commence. The business would commence when the activity which is first in point of time a....
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....t serviceable for its licensees was attended to and it is in the process of making this accommodation available to the intended lessees or licensees that the garden staff and other staff was engaged, pieces of equipment and gadgets, etc., were acquired by purpose or otherwise, lift was installed and ultimately with effect from 1-5-1965, a portion of the accommodation was actually given out on licence basis at the fee of Rs. 27,000 per month. Therefore, if we have merely to look at giving out on licence as the business activity of the concern, then in a loose sense it can be said that the company commenced its business with effect from 1-5-1965, but that is not the only business activity of the company. The business activity of the company consists of three broad categories which we have pointed out above and the objects clause of the memorandum of association justifies such a conclusion. Therefore, when the company actually let out on leave and licence basis a portion of these particular premises with effect from 1-5-1965, the earlier preceding part of its activities were also part of the business activities of the company, for example, engaging the garden staff, kitchen staff or o....
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.... 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 the opinion that all the expenses incurred after the business is being set up are excludible business expenditure.'" 8. Having in mind the aforesaid principle, I proceed to examine the facts and circumstances of this case. In the Memorandum of Association of the assessee company, one of the main objects is to act as (Consultant, Adviser and provide technical service for the development/manufacture of new products, modification in methods/systems of manufacture, assembly, fabrication and in the design, layout ,of the vehicles, components, parts, bodies'. There are other clau....
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....ed to provide. It is also a part of record that the assessee participated and took a stall in 'Auto Fair' held in the relevant period in Delhi. The objective of the above Fair was to advance assessee's business of consultancy. 8.3 On the above facts, it is difficult to hold that the assessee did not set up business in the relevant period. The assessee had a place of business; it had qualified people who could give advice on automobile industry. There is material to show that the assessee contacted various clients who entered into agreement with the assessee in the subsequent years and paid fees for consultation. The assessee, without a doubt, did not show any consultancy receipt but merely because actual receipts were not shown, it cannot be said that the assessee did not set up its business. In fact, the business was set up and commenced when the assessee was ready to give consultancy to its prospective customers. Not only that, there is material on record to show that the assessee took steps to give actual consultancy to its customers. Of course, consultancy charges were received in the subsequent year. But merely because no actual amount was received as charges, i....
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....ve already stated that the word 'launch' is being read out of context. If expenditures were not wholly verifiable, the revenue authorities could have disallowed part of the expenses. Thus, all the reasons given under clause (c) are without any basis or supporting evidence. (d) The assessee had claimed expenses as business expenses. The question of claiming them under other sources did not arise. 10. Now, I consider other reasons given by the learned Judicial Member in the proposed order. In the light of case law referred to by the ld. A.M. in his proposed order, it was not necessary for the learned Judicial Member to go to the first principles of sections 3 and 29 of the Act and particularly when he accepts the proposition, 'that a business is set up when it is established or set on foot and which is a stage immediately before the commencement of the business'. Ld. J.M. also accepts the principle laid down in the case of Western India Vegetable Products Ltd. though the citation is wrongly recorded by him. It is nobody's claim that setting up of a company is setting up of a business. He accepts that expenditure incurred after setting up and before the....
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....et up'. It is difficult to agree with the above statement. The assessee had a suitable place and machinery to render advisory services and thus has claimed that business was set up. (vi) In the view of the learned J.M., the assessee ought to have technology, office, equipment, technological field so that the company can authentically undertake the consultation job effectively. This was not established. As per discussion in earlier paras, I find it difficult to agree with the observations of ld. J.M. (vii) According to the ld. J.M., functional was the determinative test. According to him, the process of taking a shape cannot be equated with the term 'functional'. On the facts of the case, the assessee's business had taken a shape and was rightly claimed to be set up. 11. The seven criteria stated by the J.M. do not have factual support nor any law has been cited in support of above criteria. The above discussed seven criteria are again repeated in para 36.1 of the proposed order. I would only like to state that the assessee did not claim to have conceived an idea. It had an office from which advice could be given in the automobile industry. All t....