TaxTMI 
TaxTMI 
2013 (9) TMI 5
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....t during the subject assessment year. 3. That order of Learned CIT(A) is bad in law and liable to be quashed. 4. The Learned AO has erred on the facts and the circumstances of the case and in law by initiating penalty proceedings u/s 271(1)(c) against the appellant for furnishing inaccurate particulars or for failure to disclose true particulars of income. Further, the Learned CIT(A) has also erred in law and in fact, in not adjudicating on the grounds raised against the initiation of the penalty proceedings by the Learned AO." 2. It is seen that ground no-3 is more or less a prayer as such does not require adjudication and ground no-4 is premature. The facts qua ground no-1 & 2 are that the assessee filed e-return declaring a loss of Rs. 7,96,05,423/-. It was processed u/s 143(1) and after issuance of notice u/s 143(2) on 04.09.2009 followed by a notice u/s 141(1) and questionnaire etc. the case was selected for scrutiny assessment. 2.1. A perusal of the assessment order shows that the assessee company was incorporated on 19.09.2007 and this was the first year of the assessee. The said company was incorporated under the automatic route as per Foreign Direct Investment ....
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....g franchisees/customers, Carrefour Group established another group subsidiary of Carrefour Group, namely-Carrefour Master Franchisee Company Private Limited (Carrefour MF Co.) by providing it franchisee rights of Carrefour Group for India; that the function of Carrefour Mf Co is to find out potential franchisees/customers for retail sale of products and for this Carrefour has contacted with lawyers/consultants/various interested and potential parties during the subject year; that Carrefour MF Co will grant franchisee rights to the joint potential franchisees who will set up the stores, purchase goods from the assessee and sell to retail customers; that for providing these services, Carrefour MF Co. will charge franchisee fee from such retail franchisees/customers. 2.2.1. Accordingly in the above circumstances, it was submitted the assessee would only require to establish contact with the suppliers and entered into long- term supply contracts with them. It was explained that these activities are being undertaken by the assessee relating to planning the meeting with prospective suppliers, marketing, business development in India, searching for the clients in India, market studies ....
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....ates that the assessee has set up its business operations. The expenses were stated to be incurred for carrying out the business activities which entailed a wide variety of activities and all these activities were essential for setting up the business and only actual sale and purchase of the products had not happened during the year under consideration. In this context, attention was invited to section 3 of the Income Tax Act, it was submitted that the assessee is taxable in respect of income earned by it during the 'previous year'. The term 'previous year' in the case of new business, it was submitted has been defined as the period beginning with the date of "setting up of the business" and ending with the financial year. Inviting attention to section 28 of the Act, it was submitted that it lays down that the profits and gains of the business and profession carried on by the assessee at any time during the previous year shall be chargeable to income tax. It was contended that as per the Income Tax Act expenses incurred after the date of set up of the business, wholly and exclusively in connection with such business which are not specifically disallowed under any provision of the A....
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.... 151 [1954] (Bom.)" 2.3. Not convinced with the explanation offered, the AO observed that expenditure incurred prior to the setting up of a business is not allowed as a deduction. Referring to the fact that there are a plethora of cases on the difference between the concept of commencement of a business and setting up of a business. Referring to sections 28 to section 43D of the Income Tax Act which relate to computation of business income, he was of the view that the expenses during the pre-commencement period will not be deductible. Similarly, he was of the view that loss incurred during the prior period can also not be treated as a business loss and it cannot, therefore, be carried forward. Reliance was placed upon Liquidators of Pursa Ltd. vs CIT (1975) 98 ITR 167 (SC). Referring to the same, it was observed that in the said judgement, it has been held that to the extent to which such expenses could be capitalized to the assets, the assessee may well be eligible for depreciation for the said. Reliance was also placed upon Challapalli Sugars Ltd. vs CIT (1975) 98 ITR 167 (SC). As otherwise the expenses like audit fee would be a dead loss. The AO supported his reasoning consid....
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....ent order in para 3.1 to 3.7. Accordingly the loss of business was disallowed and the business income was taken as NIL. The interest income amounting to Rs. 38,95,937/- on the short- term deposits since the business had not commenced was taxed as income from other sources relying upon the case of Tuticorin Alkali & Chemicals Ltd. vs CIT [1997] 227 ITR 172 (SC). 3. Aggrieved by this, the assessee went in appeal before the CIT(A). Before the CIT(A), the action of the AO was assailed, it was reiterated that the assessee company was incorporated on 19.09.2007 to carry on wholesale trading of all kinds of consumer goods, durables, articles and to carry out all such activities as may be necessary or related to or in connection with carrying on such trading activities. Reliance before the CIT(A) assailing the action of the AO was placed upon section 2(34) read with section 3 so as to contend that according to the Indian Tax Law expenses which have been incurred during the previous year are allowed as a deduction vide computing total income and where expenses are more than income loss is allowed to be carry forwarded to next year for set off and section 2(34) read with section 3 provide....
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....ant company also opened its bank account on 4/10/2007 and incurred routine business expenses such as legal and professional charges, travel and conveyance, meeting and conference, salary and wages etc. During the subject assessment year. The appellant also employed key employees such as I.T>director, FMCG director, Merchandise director, Finance director, Accountants, other supporting staff etc. Capable of rendering business development, marketing and financial support activities in relation to the products proposed to be traded by the appellant company. During the subject assessment year, the appellant company met with a number of key suppliers such as Unilever, Colgate, Rasna, Nestle, Pepsi, Cadbury etc. To negotiate significant terms of the supply contacts. The appellant started creating data base of its prospective suppliers of goods in various categories to establish its operations, the appellant company also purchased sizeable amount of fixed assets such as computers and softwares (of Rs.33,77,573); Office equipments (of Rs.38,64,333); furniture and fittings and leasehold improvements (of Rs.92,30,741) etc which were essential for carrying on the business of the appellant comp....
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....e capitalized. In the facts of the present case, it was submitted that the business of the assessee has been set up and is ready to commence and expenses being revenue in nature is not related to construction/purchase of any fixed assets deserve to be allowed. Accordingly, it was submitted that the rulings in the said judgements relied upon by the AO are not applicable. 3.3. Considering these submission the CIT(A) summarized the documents filed on behalf of the assessee as under :- "a) The appellant was in occupation of the office premises. b) The appellant had opened a bank account for incurring the day to day business activities. c) The appellant has hired the requisite employees to carry on its business activities. d) The appellant was meeting the potential suppliers and was into negotiation with them the significant terms of the supply contracts. e) The appellant had purchase sizable amount of fixed assets which were essential for carrying on of the business activities." 3.3.1. Considering the reliance placed on the Certificate of Incorporation under the Companies Act, 1956, the CIT(A) observed that a company can be said to have commenced from the date of inco....
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....that there has been a clear distinction between commencing a business and setting it up. Referring to section 3(1)(d) of the Act, 1961, the CIT(A) observed that what is required to be considered the setting up of the business when a business is established and is ready to start doing business, it cannot be said to be set up the business must be put into such a shape that it can start functioning as a business or a manufacturing organization. Reliance was also placed upon CIT vs Saurashtra Cement & Chemical Industries (1973) 91 ITR 170 (Guj.) and DCIT vs Interlink Petroleum Ltd. 83 TTJ 274 (ITAT-Ahmd.). 3.3.3. Accordingly he was of the view that it is necessary to be seen from the principles laid down in the judgement it is clear that the issue of newly start up business or profession needs a careful examination of the fact as what constituted "date of setting up of business" as this is the date from which the previous year of a business or profession would be deemed to have been started and this aspect needs to be considered on the basis of facts of each case. Referring to the facts of the assessee's case he observed that the assessee company had been incorporated on 19.09.2007 ....
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....d which is one of the essential conditions for setting up of business or for the commencement of business in India. It was also observed that the assessee has not established any store from where sale/purchase or trading of goods would take place. Similarly no warehouse/godown was established during the relevant previous year from where the intended goods for trading could be stored. No vehicle/transport arrangement was made by the assessee company for the transportation/delivery/supply/distribution of goods. No expenditure was found to be incurred on advertisement/publicity of the new business of the assessee company. It was also observed that most of the key employees appointed by the assessee have given their acceptance for appointment after the end of the relevant previous year. The relevant details mentioned are extracted from 16 of the impugned order as under :- Name of the Employee Post Date of issue of appointment letter Date of acceptance of appointment Eric Bouin Director FMCG 01.01.2008 04.07.2008 Bouzeneth Benauda Merchandise Director 01.01.2008 16.07.2008 Lyderich Jouvenaux Business Date Development Manager 01.01.2008 04.....
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.... it was held cannot be allowed as a deduction. As such the disallowance of the business loss of Rs. 8,64,07,610/- was confirmed. 4. Aggrieved by this, the assessee is in appeal before the Tribunal. Ld reiterated at great length, the facts on the basis of material available on record. It was re-iterating that various activities which had been done by the assessee company which was incorporated on 19.09.2007 and it had entered in to correspondences with a number of potential suppliers on specific dates as per the following details:- S.No. Company's Name Correspondence date 1. Nestle 12.06.2007 2. McCain Foods India Pvt. Ltd. 15.11.2007 3. Diageo 16.11.2007 4. Cadbury 17.11.2007 5. Nivea India Pvt. Ltd. 21.11.2007 6. Pepsi 22.11.2007 7. Colgate India (Colpal) 12.12.2007 8. Unilever 19.01.2008 4.1. It was his submission that these are not disputed fact. It was submitted that the assessee has developed its contacts with various suppliers in order to create awareness of its presence. The assessee also started maintaining database of prospective suppliers of goods in various categories. It was submitted....
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....made publicity, all pertain to commencement of business and not setting up of business. The fact of setting up of business it was submitted is established from the fact that most of the key employees accepted employment in the relevant assessment year. It was submitted that earlier the assessee did not have a proper HR however immediately on the appointment of HR the appointments made were formalized and formal letters of appointment were issued which were accepted. 4.1.1. Accordingly it was his submission that the issue is covered in favour of the assessee by virtue of the judgements of the various Courts as the principles laid down therein fully support the facts of assessee's case as the activities of hiring the personnel, taking office premises on rent, purchasing the office furniture, fixtures, computers etc. all put together demonstrate that business has been set up. The enquiry made with potential suppliers further supports the case. Relying upon the ratio of the judgements relied upon before the authorities and the Bench it was his submission that activities like the opening of bank account evidence of incorporation of the company alongwith all the other activities demon....
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....are entirely distinguishable as in the facts of that case the nature of work of the assessee was that he was in the business of real estate and thus by merely participating in a tender floated for acquiring the land was held to amounting to setting up of the business. In the facts of the present case, it was pointed out that the assessee is a trader as such necessary business activity would be acquiring of shops or place where assessee would make the sale of its goods accordingly even before making arrangement for purchase place for storage as a godown or a shop or a warehouse has to be arranged by the assessee and only when the first purchase is made can it be said that the business has set up. 20 I.T.A .No.-2835/Del/2012 4.2.2. Similarly the judgement of Jurisdictional High Court in the case of CIT vs Sauer Danfoss Pvt. Ltd. is also not applicable as in the facts of that case, it was argued the assessee had acquired a right under the agreement dated 21.05.2001. Ld. DR invited attention to Inderchand Hari Ram vs CIT (1953) 23 ITR 437(All.) submitted what to talk of business which has not been set up even in the case of a continuing business if it has ceased to exist the Courts ....
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.... replenish all kinds of products, goods and articles to retail sellers, stores, showrooms etc in India and outside India. 5. To carry on the business of marketing, advertising and promotional support for all kinds of consumer goods and products on its own account and for and on behalf of persons, firms and companies located in and outside India." 5.1. In the facts of the present the assessee has lead evidence to show that it has entered into correspondence with various parties to identify the suppliers. Reference specifically has been made of correspondence with Nestle dated 12.06.2007; McCain Foods India Pvt. Ltd. dated 15.11.2007; Diageo dated 16.11.2007 and similarly with Cadbury; Nivea India Pvt. Ltd;. Pepsi; Colgate India (Colpal); Unilever etc. The assessee has also lead evidence to show that employees for the said activities have been assigned. The company was incorporated in 19.09.2007, office premises were acquired on rent in October 2007, evidenced by lease deed, bank account has been opened on 04.10.2007, list of employees, the TDS deduction for the said employees, evidence has been placed on record qua the application for Registration under the Punjab Shops and Co....
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.... by the assessee accordingly do not support the case of the assessee and these decisions have been distinguished by the Appellate Authorities and the propositions laid therein have not been demonstrated to be wrongly applied to the facts of the present case. Though we shall address these subsequently at greater length however the fact remains that the assessee has merely filed a compilation of the case laws relied upon and considered by the CIT(A) and the AO and has re-argued on same facts without demonstrating how the principle laid down is wrongly applied. We also find on consideration of the fact that the finding of fact wrongly recorded by the CIT(A) that registration under Shops and Establishment Act has not been granted is not material to the issue as a perusal of page 183 of the paper book shows that the said document described in the Index of copy of notice dated 04.03.2008 in Form 'B' for exhibition under Punjab Shops & Commercial Establishment Rules, 1958 which merely evidences the fact that "Notice to be exhibited u/s 20(i) of the Shops & Commercial Establishment Act, 1958 and discloses in Column No.-1 that the closing day if any can be Sunday; in Column No.-2 the openin....
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....ave been set up unless it is ready to discharge the functions for which it has been set up and it is only when the unit has been put into such a shape that it can start functioning as a business. We may also specifically refer to CIT vs Hughes Escorts Communications Ltd. 311 ITR 253 (Del.) where the assessee was in the business of satellite business communication, it has been held that having placed the purchase order for purchase of equipment the business can be said to have been set up in July 1994. 5.3. Specific reliance on behalf of the assessee had been placed on CIT vs Whirlpool of India Ltd. 318 ITR 347 (Del.) as in the said case it was held that business was set up when the directors were appointed, regional and branch office staff were appointed, computers were purchased etc. Similarity with the present case has been sought to be drawn as in the facts of the present case key personnel have been appointed office equipment alongwith computers have been purchased and even a bank account has been opened. However on consideration the ratio does not apply to assessee's case as the assessee in Whirlpool of India Ltd. was rendering financial services for which key personnel at ....