TaxTMI 
TaxTMI 
2014 (9) TMI 793
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.... incorporated on September 19, 2007 under the Companies Act, 1956, to carry on trading activities which primarily included wholesale trading of all kinds of consumer goods durables, articles and products. The year 2008-09 was the first year of assessment. The assessee company filed an E-Return of income for the assessment year 2008-09. The appellant-assessee claimed expenses amounting to Rs. 9,03,03,547/- and claimed a business loss of Rs. 8,64,07,610/- after setting off income from other sources amounting to Rs. 38,95,937/-. Show cause notice dated October 21, 2010 was issued to the assessee as to why the business loss claimed may not be disallowed. The case of the appellant-assessee was that the loss had occurred on account of expenses incurred for earning and conducting business in India. The Assessing Officer was of the view that the expenditure incurred was prior to commencement of business as it was not fully set up. Thus expenditure was not allowed as a deduction. Sections 28 to Section 43D of the Act, which relates to the computation of business income were elucidated upon. The Assessing Officer supported his conclusion considering the case of a manufacturing concern, which....
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....business carried on with a profit motive, the activity being manual or mercantile as distinguished from the liberal arts or learned professions or agriculture as held by Supreme Court in the case of State of Punjab v. Bajaj Electricals Ltd [1968] 70 ITR 730.732 (SC). 3.6 In the audit report against para 28(a) on form 3CD it is clearly mentioned that business has not commenced. When no stock is either available or even has been purchased by the assessee, by no stretch of imagination it can be inferred that the business has been set up and ready to commence its business. 3.7 In view of the above discussion, the reply submitted by the assessee is not acceptable. As no business activities have been carried out as per audit report as discussed above and in view of the various decisions, the expenses claimed as revenue expenditure are not allowed and the loss from business is disallowed and the business income is taken at Nil. For the facts discussed, I am satisfied that the assessee Company has concealed the particulars of its income/submitted wrong particulars of its income, therefore, penalty proceedings u/s 271(1)(c) of the Income Tax Act, 1961 are initiated on this account." ....
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....llant company itself was incorporated w.e.f. 19.09.2007. Mr. Bouin himself was appointed by the appellant company w.e.f. 01.01.2008. Thus it seems that these correspondence were made even before the incorporation of the appellant company. Similarly, the evidences of correspondence regarding the queries with purchase of goods from the intended suppliers were found to be made in November 2010. It is further seen that the computers and accessories were purchased at the fag end of the assessment year and the number of employees was also not sufficient to commence the business of the appellant company. Under these facts and circumstances, I am unable to believe that the business of the appellant company was established during the relevant previous year in the absence of any store or outlet for the business of trading, ware house/ godowns, transportations, Registration under the Shop and Establishment Act and purchase or sale made during the relevant previous year, the appellant was not in a position to discharge its functions as a wholesale trader. It has been held by the honourable high court in the case of Western India Vegetables Products Ltd vs CIT (26 ITR 151) that there is a disti....
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....ounsel for the appellant-assessee submits that the appellant-assessee has set up its business in the relevant previous year and the same was evidenced by way of (a) correspondence with Indian suppliers, (b) incorporation of the company, (c) hiring of personnel, (d) opening of bank account, (e) registration under Shops and Establishments Act. It is the appellant's case that its business was thus set up during the relevant previous year as the appellant was ready to commence business although actual commencement of business did not take place during that year. The appellant challenged the order of the Tribunal and the Authorities below as being totally perverse as the Authorities below had proceeded on the premise related to actual commencement of business by overlooking the fact that the relevant consideration is whether the business has been set up or not. According to the learned counsel for the appellant, the Tribunal has erred in holding that the business of the trader is set up when such trader makes purchase subsequent to owning/leasing of either a shop or a warehouse and since such requirements were not fulfilled in appellant case, its business could not be said to have been ....
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.... CWT Vs. Ramaraju Surgical Cotton Mills Ltd., 63 ITR 478 (iii) CIT Vs. Sarabhai Management Corporation Limited, 192 ITR 151 (iv) Sarabhai Management Corporation Ltd. Vs. CIT, 102, ITR 25 (v) CIT Vs. Hughes Escorts Communications Ltd., 311 ITR 253 (vi) CIT Vs. Whirlpool of India Ltd., 318 ITR 347 (vii) CIT Vs. ESPN Software India (P) Ltd., 301 ITR 368 (viii) CIT Vs. Sauer Danfoss (P) Ltd., ITA No. 1367/2010 (ix) CIT Vs. Aspentech India (P) Ltd., 187 TAXMAN 25 (x) CIT Vs. E.Funds International India, 162 TAXMAN 1 (xi) CIT Vs. Dhoomketu Builders & Development Pvt. Ltd., 216 TAXMAN 76 (xii) CIT Vs. Samsung India Electronics Limited, 356 ITR 354 (xiii) CIT Vs. Franco Tosi Ingegnaria, 241 ITR 268 (xiv) CIT Vs. Western India Seafood (P) Ltd., 199 ITR 777 (xv) CIT Vs. Saurashtra Cement & Chemicals Industries Ltd., 91 ITR 170 8. On the other hand, Mr. Rohit Madan would support the judgment of the Tribunal and contends that this Court would not like to interfere with the conclusion arrived at by the three authorities. According to him, the main objectives of the assessee company in the Memorandum of Association incorporated to carry on trading ....
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....iness is started. On the question of setting up, the following observations are relevant:- "...A business activity consists of three stages: the first stage relates to the activity necessary for the purpose of acquiring the 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 second activity and the second activity when completed 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 profits and gains of the assessee for the relevant year when the activity is undertaken. In Sarabhai Management Corporation Ltd. v. CIT, [1976] 102 ITR 25, the Gujarat High Court took the same view and 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.....
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....and parcel of the business of a trader. The said activities continue even post first sale/purchase. When first steps are taken by a trader, the business is set up, commencement of purchase and then sales is post set up. 12. There is no dispute about the factual aspect of the expenses incurred by the petitioner. In the present case, the position of the primary objectives of the assessee company is also not in dispute. Before we deal with the respective submissions of the learned counsel for the parties, we note hereunder the relevant dates showing the setting up of a business by the assessee-company as noted from the memo of appeal: Started correspondence with various Indian suppliers 12.06.2007 Incorporation of company 19.09.2007 Hiring of personnel w.e.f. 19.09.2007 Opening of bank account 04.10.2007 Registration under Shops and Establishments Act, applied vide Application dated 04.03.2008 and granted vide order dated 05.03.2008 w.e.f. 01.01.2008 In the facts of the present case, we note that the assessee company was incorporated on September 19, 2007. Even before the incorporation, correspondence had been made with well known companies like Nes....
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....ich go to make up the business need not be started simultaneously. As soon as the activity which is the essential activity in the course of carrying on the business is started, the business must be said to have commenced. In the said case it was held that even though incorporated on August 01, 1995, the company had acquired licence to commence its business on August 15, 1995 to distribute in India through Cable Television Systems, Satellite Master Antenna Systems and DTH etc. ESPN channels. The business is said to have commenced as it was on that day the company was in a position to start the business. Trader has to select products, negotiate with manufacturers etc. and this is an essential and important facet of the activities and business of a trader. Similarly this Court in CIT vs. Aspentech India (P) Ltd. [2010] 187 Taxman 25 (Delhi) had agreed with the ITAT wherein the ITAT has held that for claiming any expenses under Section 37(1) of the Act what is required to be seen is whether the expenses are incurred for the purpose of business or not and such expenses are of not capital in nature and are not expressly disallowable under the other provisions of the Act. The Tribunal ....
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.... its business and was ready to commence on 1.4.2001. There is no dispute to the well settled legal proposition that at the point of time, the assessee is in a complete state of readiness to undertake its activity, it can be said that it has set up its business, the actual commencement of business may be at a later date. The trading business of the assessee was ready to commence upon set up of requisite infrastructure i.e. acquisition of place of business, commencement of hiring of suitable personnel, identifying clients, opening bank account etc. which enabled the assessee to carry out its object clause. ITAT Delhi Bench in the case of Whirlpool of India Ltd.- 19 SOT 293 observed that there may be interregnum(sic) between setting up of business and date of commercial commencement of business, but under the Income Tax Act, all the expenses incurred after the date of setting up of business are to be allowed as a deduction while computing the income u/s 28. The Hon'ble Bench in this case held that where the assessee company has appointed branch manager and regional manager in 1995, paid salaries including PF contribution etc. beginning from November, 1995, its business can be said....
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....the commencement of the business, but section 3 of the Act does not speak of commencement of the business, it speaks only of setting-up of the business. When the assessee in the present case was in a position to apply for the tender, borrowed money for interest albeit from its holding company and deposited the same with NGEF Ltd. on the same day, it shows that the assessee's business had been set-up and it was ready to commence business. The learned senior standing counsel for the revenue would, however, state that till the land is acquired, the business is not set- up. The difficulty in accepting the argument is that an assessee may not be successful in acquiring land for long period of time though he is ready to commence his business in real estate, and that would result in the expenses incurred by him throughout that period not being computed as a loss under the head "business" on the ground that he is yet to set-up his business. That would be an unacceptable position. The other argument of the learned standing counsel for the revenue that the tax auditors of the assessee have themselves pointed out that the assessee is yet to commence its business is also irrelevant because of ....