TaxTMI 
TaxTMI 
2011 (7) TMI 579
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....the Assessing Officer. The assessee has declared interest income from FDRs. The Assessing Officer has noted that the assessee company during the year has not done any business activity as is clear from the profit and loss account. The Assessing Officer further stated that there were no purchases, inventory and sales during the year except interest income earned from FDRs. The Assessing Officer, therefore, asked the assessee to explain as to when the business of the assessee had not commenced, why the expense should not be disallowed. In reply thereto, the assessee vide its letter submitted on 5-9-2007 stated that the assessee company was incorporated with the main object of acting as trading and clearing member of the wholesale debt market, capital market and future and option segment of any stock exchange or association formed for organized trading in India. The assessee further submitted that to achieve its object, the assessee had filed application for trading and clearing membership of the capital market and futures and options segment of the National Stock Exchange and also given security deposit and collateral security to NSE along with requisite fees. It was thus, submitted ....
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....y proceedings under section 271(1)(c) are being initiated separately." 5. Being aggrieved, the assessee preferred an appeal before the learned CIT(A). 6. After considering the assessee's submissions and Assessing Officer's order, the CIT(A) confirmed the Assessing Officer's order by observing that though the appellant company was incorporated on 6-9-2004, the registration was granted by the National Stock Exchange on 27-2-2005 and by SEBI on 18-5-2005. The learned CIT(A) further stated that actual trading activities could be started only after 18-5-2005 when registration was granted by SEBI. The learned CIT(A) rejected the assessee's contention that the business has commenced on the date of incorporation. The learned CIT(A) relied upon the following decisions :- (1) Tetron Commercial Ltd. v. CIT [2003] 261 ITR 422/133 Taxman 781 (Cal.) (2) CIT v. Saurashtra Cement & Chemical Industries Ltd. [1973] 91 ITR 170 (Guj.); and (3) Sarabhai Management Corpn. Ltd. v. CIT [1976] 102 ITR 25 (Guj.). 7. Hence, the assessee is in further appeal before us. 8. The learned counsel for the assessee has submitted that the assessee company was incorporated as....
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.... a private limited company under the Companies Act, 1956 on 6-9-2004 to carry on the business subject to the approval of SEBI and other concerned authorities to act as a trading member and clearing member of the wholesale debt market, capital market and futures and options segments of any stock exchange. The assessee company made an application for registration dated 12-10-2004, before the National Stock Exchange of India Ltd. for trading membership of capital market and future options, which application was submitted on 15-10-2004. The assessee company then made another application dated 10-11-2004 before the National Stock Exchange of India Ltd., for trading/clearing membership of capital and future and option segments. In compliance to the above two applications, interview for membership was fixed by the National Stock Exchange on 24-11-2004 at Mumbai. Thereafter National Stock Exchange vide letter dated 24-12-2004, intimated the assessee that the Exchange had admitted the assessee as a trading member on both capital market segment and the futures and options segments as on 6-12-2004 on a provisional basis subject to fulfilment of certain specified conditions on or before 24-3-2....
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....eld that a business activity consists of three stages. The first stage relates to the activity necessary for the purpose of acquiring of raw-material and establishment of plant and machinery and the second activity comprises the processing and manufacturing by using the raw material and the plants and machinery set up for the purpose and the third category consisted of the marketing thereof. The first in point of time lays the foundation for the third activity. Therefore, the expenditure incurred for carrying on any of these activities including the first activity is also deductible in computing the profit and gains of the business in the relevant year when the activity is undertaken. 14. In the case of Sarabhai Management Corpn. Ltd. (supra), the Hon'ble Gujarat High Court has held that the business commences with the first activity for acquiring by purchase or otherwise immovable property. There may be an interval between the setting up of the business and the commencement of the business. All expenses incurred during that interval are also permissible for deduction. 15. The decision of Hon'ble Gujarat High Court in the case of Sarabhai Management Corpn. Ltd. (supra) has been a....
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.... 1-2-1996 as contended by the Assessing Officer but on 1-11-1995. From this decision, it is thus clear that the business of the assessee cannot be said to have been set up on the date when the company was incorporated under the Companies Act. There must be some activity undertaken by the assessee for the purpose of commencing its business and mere registration under Companies Act, is not enough to hold that the business has actually been set up within the meaning of section 3 of the Income-tax Act, 1961. 17. In the case of CIT v. Hughes Escorts Communications [2009] 311 ITR 253/[2007] 165 Taxman 318 (Delhi), it has been held by the Hon'ble Delhi High Court that there is a distinction between the setting up and commencement of a business, and 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. But there may be an interregnum. There may be an interval between a business which is set up and a business which is commenced, and all expenses incurred during the interregnum after the setting up of the business and before the commencement of the business, all....
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.... before it is ready to commence business, it is not set up. In other words, a business cannot be said to be set up before it is ready to commence. The actual commencement of the business may have some interval from the date when the business was set up, but in order to hold that the business is set up, it is to be seen as to whether it was ready to commence though actual commencement might not have been taken place. 21. It is only after the date of setting up of the business that the previous year of the newly set up business would commence, and the expenses incurred prior to the date of setting up of business could not be taken into account for the purposes of determining the profits of a newly set up business. 22. We, therefore, have to determine as to when, in the present case, the assessee was ready to commence business so as to say that the assessee's business had actually been set up. In the present case, the assessee shall be entitled to admissible business expenses from the day when the assessee's business could be said to have been set up i.e., from the day when the business was ready to commence and not from the date of actual commencement of the business. 23. The asse....