AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2019 (3) TMI 1295
X X X X Extracts X X X X
X X X X Extracts X X X X
....e circumstances of the case and in law, the Ld.CIT(A) was justified in deleting the disallowance of various expenses of Rs. 1,99,35,754/-u/s.37(1) of the I.T. Act since the assessee could not commence business without obtaining approval of SEBI and the approval is beyond the purview of the A.Y. under consideration." The appellant craves leave to add to, amend or withdraw the aforesaid ground of appeal." 3. The assessee is an asset management company incorporated on 8th August 2011. It is undisputed that the assessee is required to obtain Securities and Exchange Board of India(hereinafter called "the SEBI" ) approval for undertaking such business. The solitary question which has arisen in this appeal before us is whether the assessee has set up his business during the impugned assessment year so as to claim deduction of expenses incurred by it as revenue/business expenses keeping in view provisions of Section 37(1) of the 1961 Act r.w.s. 3 of the 1961 Act. The assessee was incorporated on 08th August 2011. The assessee has incurred an expenses of Rs. 1,99,35,754/- during the impugned assessment year which was claimed as an business expense /revenue expenses, as detailed ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nabled it to commence business, which approval was granted by SEBI after the end of the financial year under consideration without which the assessee could not do its business and hence the aforesaid expenses are not allowable as revenue/business expenses. The AO vide assessment order dated 29.02.2016 passed u/s 143(3) held as under:- " 4.4 The submission of the assessee is considered but not found tenable. The assessee's business was not set up because it was not yet ready to commence its initial activity during the year under consideration. It is noticed that the assessee received certificate granting registration for the mutual fund only on 08/04/2013 without which the assessee could not do business. It can be safely concluded that it was not ready to perform initial activity because certificate from SEBI is imperative for the assessee to start business. In turn, it can be said that as the assessee was not ready to perform initial activity, its business was not even set up 4.5 In view of the above, it is established that the assessee's business has not commenced and it has not earned any income from the said business during the year under consideration.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tions and written submissions of the appellant and material available on record. The AO observing that the appellant company has not commenced and earned any income from business during the previous year, has disallowed the expenditure claimed towards remuneration, rent, rates and taxes, repairs & maintenance and other administrative expenses of Rs. 1,99,35,754/ - treating the same to be pre-operative expenses. The AO has relied on the following case laws: 1. K. Sampat Kumar vs. CIT (1986) 158 ITR 25 (Mad.) 2. CIT vs. Piem Hotels (P) Ltd. 116 CTR 401 (Bom) 3. Precism Electricals & Electronics (P) Ltd. vs CIT (1989) 176 ITR 453 (MP) 7.1 However, the AR of the appellant relies on the following case laws: (1) Carefor WC & C India Private Limited Versus Deputy Commissioner of Income Tax [2014] 368 ITR 692 (Del). In this case, the assessee company was incorporated on September 19, 2007. It rented out the office premises in the month of October, 2007. Bank account was opened on October 04, 2007. Employees were also appointed during the said period. TDS deduction for the said employees was also placed on record. These activities are the first s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ble only when there are receipts. If the expenses are incurred for the purpose of business, then these are to be allowed." (6) Guj HC ruling in Saurashtra Cement 91 ITR 170, wherein it was held that the business would commence when the activity which is first in point of time and which must necessarily precede all other activities, is started. (7) CIT, Delhi-IV, New Delhi vs. ESPN Software India (P) Ltd. wherein it is held that expenses incurred on or after the first activity which must necessarily precede all other activities and on that activity being done, the business of the assessee would be deemed to be have been set up. 7.2 The AO is also of the opinion that the set-up of business is only subsequent to obtaining necessary approval from SEBI. However, the appellant company has offered income from other sources at Rs. 1,32,44,671/- and Short term capital gain of Rs. 2,44,479/-. The Ld. CIT(A) for the immediately preceding year i.e. A.Y.2012-13 on similar facts of the case of the assessee on the same issue has allowed relief by relying on the judicial decision of Hon'ble ITAT Delhi in the case of Whirlpool of India 114 TTJ 211 wherein it is held t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ual Fund to manage its schemes . It is undisputed that the assessee is required to obtain SEBI approval for undertaking such business. The PPFAS Mutual Fund, the sponsor got an in principal approval to set up a mutual fund on 12.07.2011. The solitary question which has arisen in this appeal before us is whether the assessee has set up his business during the impugned assessment year so as to claim deduction of expenses incurred by it as revenue/business expenses keeping in view provisions of Section 37(1) of the 1961 Act r.w.s. 3 of the 1961 Act. The assessee has incurred an expenses of Rs. 1,99,35,754/- during the impugned assessment year which was claimed as an business expense /revenue expenses, as detailed here under:- Sl. No Details Amount (in Rs) 1 Employee Benefit Expenses 12,687,038/- 2 Depreciation and amortization expenses 11,36,166/- 3 Other Expenses 6,1 12,550/- Total 19,935,754/- 6.2 The assessee has declared income from interest of Rs. 1,29,75,114/- and Rs. 2,44,479/- from sale of investments, which income were declared by the assessee in its return of income as income from other sources. The AO was of the view....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., "to place on foot" or "to establish," and in contradistinction to "commence". The distinction is this 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. 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 after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deductions under Section 37(1) of the 1961 Act . (Refer Whirlpool Of India Limited v. JCIT reported in (2008) 19 SOT 593(Del-trib) and Western India Vegetable Products Limited v. CIT reported in (1954) 26 ITR 151(Bom.). Thus, it is very important for us to determine keeping in view factual matrix of the case and nature of the business of the assessee before us as to when its business was set up and ready to commence its operations in contradistinction to actual commencement of business by the assessee. 6.5 The assessee had before learned CIT(A) claimed that SEBI had approved the assessee as an asset manag....
X X X X Extracts X X X X
X X X X Extracts X X X X
....istration of a mutual fund." 6.6.3. The Sub-regulation (2) of Regulation 21 of the 1996 Regulation provides for grant of approval by SEBI after considering an application with reference to matters specified in Sub-regulation (1) of Regulation 21 of the 1996 Regulation. The said eligibility criteria for approval of an asset management company by SEBI are reproduced hereunder: "Eligibility criteria for appointment of asset management company 21. (1) For grant of approval of the asset management company the applicant has to fulfil the following: - (a) in case the asset management company is an existing asset management company it has a sound track record, general reputation and fairness in transactions; Explanation: For the purpose of this clause sound track record shall mean the networth and the profitability of the asset management company. [(aa) the asset management company is a fit and proper person.] (b) the directors of the asset management company are persons having adequate professional experience in finance and financial services related field and not found guilty of moral turpitude or convicted of any economic offence ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o appoint an asset management company by sponsor of Mutual Fund or by the trustee of the Mutual Fund, if so authorised by trust deed, which is reproduced hereunder: "Appointment of an asset management company 20. (1) The sponsor or, if so authorised by the trust deed, the trustee shall, appoint an asset management company, which has been approved by the Board under sub-regulation (2) of regulation 21. (2) The appointment of an asset management company can be terminated by majority of the trustees or by seventy five per cent of the unit-holders of the scheme. (3) Any change in the appointment of the asset management company shall be subject to prior approval of the Board and the unitholders." Thus, for every sponsor or the trustee of the Mutual Fund, if so authorised by trust deed, it is mandatory to appoint an asset management company which is approved by SEBI under Sub-regulation(2) of Regulation 21 of the 1996 Regulation to manage schemes of the Mutual Fund. 6.6.5. Regulation 22 of the 1996 Regulation provides for the terms and conditions to be complied with by an asset management company, which are reproduced hereunder: "Terms a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ied in Regulation 23 of the 1996 Regulation that when eligibility criteria are not met as laid down in Regulation 21 of the 1996 Regulation, SEBI may reject the application filed by an asset management company. The said Regulation 23 of the 1996 Regulation is reproduced hereunder: "Procedure where approval is not granted 23. Where an application made under regulation 19 for grant of approval does not satisfy the eligibility criteria laid down in regulation 21, the Board may reject the application." 6.6.7. Regulation 24 of the 1996 Regulation provides restriction on business activities of an asset management company, which are reproduced hereunder: "Restrictions on business activities of the asset management company 24. The asset management company shall (1) not act as a trustee of any mutual fund; (2) not undertake any other business activities except activities in the nature of [portfolio management services] management and advisory services to offshore funds, pension funds, provident funds, venture capital funds, management of insurance funds, financial consultancy and exchange of research on commercial basis if any of such....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... (6) Notwithstanding anything contained in any contract or agreement or termination, the asset management company or its directors or other officers shall not be absolved of liability to the mutual fund for their acts of commission or omissions, while holding such position or office. [(6A) The Chief Executive Officer (whatever his designation may be) of the asset management company shall ensure that the mutual fund complies with all the provisions of the regulations and the guidelines or circulars issued in relation thereto from time to time and that the investments made by the fund managers are in the interest of the unit holders and shall also be responsible for the overall risk management function of the mutual fund. Explanation: For the purpose of this sub-regulation, the words these regulations shall mean and include the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 as amended from time to time. (6B) The fund manager (whatever the designation may be) shall ensure that the funds of the schemes are invested to achieve the objectives of the scheme and in the interest of the unit holders.] {(7) (a) An asset ma....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uired by the Board. (10) In case the asset management company enters into any securities transactions with any of its associates a report to that effect shall be sent to the trustees [***] at its next meeting]. (11) In case any company has invested more than 5 per cent of the net asset value of a scheme, the investment made by that scheme or by any other scheme of the same mutual fund in that company or its subsidiaries shall be brought to the notice of the trustees by the asset management company and be disclosed in the half yearly and annual accounts of the respective schemes with justification for such investment [provided the latter investment has been made within one year of the date of the former investment calculated on either side.] (12) The asset management company shall file with the trustees and the Board (a) detailed bio-data of all its directors along with their interest in other companies within fifteen days of their appointment; and (b) any change in the interests of directors every six months. [(c) a quarterly report to the trustees giving details and adequate justification about the purchase and sale of the securities of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....quirement for every sponsor of Mutual Fund scheme or the trustee of the Mutual Fund, if so authorised by trust-deed to compulsorily have an asset management company to act as an investment manager to manage mutual fund schemes in accordance with these Regulations. Thus, the assessee company which was registered/incorporated on 08.08.2011 to undertake business as an asset management company to act as an investment manager for PPFAS Mutual Fund could not have commenced its business until it received certificate of approval from SEBI as provided under Sub-regulation (2) of Regulation 21 of the 1996 Regulation which was granted by SEBI only on 17.10.2012 as is emanating from contentions of the assessee before learned CIT(A) and which vital and relevant fact to adjudicate the matter between rival parties were in-fact missed by both the authorities below. The assessee could not have undertaken business of an asset management company to act as an investment manager to manage schemes of the Mutual funds until it is approved by SEBI under Sub-regulation (2) of Regulation 21 of the 1996 Regulation and it is this date i.e. 17.10.2012 which is the most vital and relevant date to decide the dis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed by trust deed are mandatorily required to appoint an approved asset management company to act as an investment manager to manage its mutual funds scheme in terms of Sub-regulation (1) of the Regulation 20 of the 1996 Regulations. There are stiff conditions imposed by 1996 Regulation in terms of Sub-regulation (1) of Regulation 21 and 22 of the 1996 Regulations which needed to be met by an asset management company for getting an approval from SEBI to act as an asset management company. It is also pertinent to mention that merely filing of an application for approval as an asset management company under Regulation 19 of the 1996 Regulations will not entitle the assessee nor it grant any vested rights in favour of the applicant to get an approval under Sub-regulation (2) of Regulation 21 of the 1996 Regulation from SEBI as several stiff criteria's both objective and subjective are to be met by the applicant before the approval is granted by SEBI as laid down in Sub-regulation (1) of Regulation 21 and 22 of the 1996 Regulations, which extends to qualifications and experience of Directors, employees, net worth/capital criteria, declaration that it is a fit and proper person, profitab....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a mandatory requirement for a Mutual Fund to appoint an asset management company to be its investment manager for managing Mutual Fund Scheme. Thereafter on 19.12.2012, the assessee filed an application with SEBI for approval of the mutual fund scheme of PPFAS Mutual Fund which approval was granted by SEBI on 08.04.2013 wherein the assessee was acting as an investment manager of the said scheme in accordance with the Regulation 28 of the 1996 Regulation. Thus, the day when it applied to SEBI on 19.12.2012 for grant of approval of the scheme of PPFAS Mutual Fund in accordance with Regulation 28 of the 1996 Regulation and to act as an investment manager being an asset management company for the said scheme, the assessee was already doing/conducting its normal business activities as an asset management company to act as an investment manager for the Mutual Fund Scheme by filing an application for approval of the scheme of PPFAS Mutual Fund as its business had already been set up and ready to commence its business on 17.10.2012 on receipt of approval from SEBI in accordance with Sub-regulation (2) of Regulation 21 of the 1996 Regulation. The approval granted by SEBI on 17.10.2012 unde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....criteria of acting as an asset management company as prescribed under the 1996 Regulations otherwise SEBI would not have granted its approval while actual business commenced when the scheme of mutual fund of PPFAS Mutual Fund was approved by SEBI on 08.04.2013 in terms of Regulation 28 of the 1996 Regulation wherein actual business activities of the assessee to act as an asset management company for PPFAS Mutual Fund commenced. All the expenses incurred in the interregnum between 17.10.2012 when the assessee business was set up and ready to commence its business till actual commencement of its business on 08.04.2013 shall be allowed as normal business expenses provided other conditions for the allowability of those expenses as provided vide applicable provisions of the 1961 Act are met. Thus, in our considered view, all the expenses incurred by the assessee prior to 17.10.2012 cannot be allowed as business expenses/ revenue expenses because the business of the assessee was only set up on 17.10.2012 when SEBI granted approval to assessee to act as an asset management company in accordance with Sub-regulation (2) of Regulation 21 of the 1996 Regulations, which met the requirements of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....India Limited(supra), is reproduced hereunder: "The assessee in this appeal is a company, incorporated on 27-7-1995 as a financial enterprise, the main objects according to the memorandum of association being to carry on the business of financing all kinds of goods, including consumer goods and consumer durables, machinery, equipment etc., to purchase or finance all kinds of financial instruments such as notes, drafts, bills of exchanges, commercial paper, bill of lading and so on and so forth, to finance private industrial enterprise in India by way of loans or advances and to infuse capital in them and to carry on the business of hire purchase, general finance brokers and bill brokers. The first board meeting was held on 12-8-1995 in which additional directors, executives and auditors were appointed. On 4-9-1995 the company placed orders for purchase of computers and peripherals. During the months of September and October 1995, various key employees such as branch managers, regional managers, consumer finance managers, company secretary and finance manager and accounts manager etc. were appointed. On 30-10-1995, M/s. S.R. Batliboi Consultants P. Ltd. sent their invoice t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eady to commence business then it can be said that it has been "set up" but before it is ready to commence business it is not "set up". There may be an interregnum between the date of setting up of the business and the date of actual commencement of the business but under the Act all expenses incurred after the date of setting up are allowed as a deduction under section 28. This decision has been applied by the Hon‟ble Delhi High Court in the case of CIT v. Hughes Escorts Communications Ltd. [2007] 165 Taxman 318 (copy of the judgment filed before us) and it has been held that where the business has been set up, though the same has not been commenced, the expenditure incurred after the date of setting up has to be allowed as a deduction. But the question as to when it can be said that a business is "set up" must largely depend on the facts of each case and the nature of the business. There can be no hard and fast rule by which it can be determined as to when the business was set up. In the judgment of the Bombay High Court cited supra, it was a case of a manufacturing concern. It was held that the business was set up when the first order of purchase of raw material was placed....
X X X X Extracts X X X X
X X X X Extracts X X X X
....be given to the fact that it cannot commence its activities overnight. It was pointed out that the business of boarding and lodging would necessarily comprise of variegated activities commencing from the stage of acquisition of a proper and suitable building making it more suitable for the hotel business, purchasing linen, cutlery, furniture etc., appointing staff of managers, cooks, bearers and ultimately reaching the stage of receiving customers and that it would be de hors commercial sense to hold that one would be reaching the stage of having set up the business only when one reaches the stage of receiving customers. It was ultimately held that where there are several integrated activities to be undertaken serially, one forming the foundation for the other, it can be said that the business was „set up‟ when the first of such activities was undertaken. It was ultimately held that the business was set up when the building was acquired and was placed at the disposal of the firm. In ITO v. M. Varadarajan [1989] 30 ITD 414 the Madras Bench of the Tribunal held in the case of a sole-selling agent that his business could be said to have been set up once he obtained the sol....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ave also been given therein and are not reproduced here for the sake of brevity. The office rent of Rs. 17,500 for November and Rs. 25,000 each for December 1995 and January 1996 have also been paid. It is thus clear that the establishment and staff were put in place by the end of October 1995 and the company was ready to commence its business from 1-11-1995. M/s. S.R. Batliboi Consultants Pvt. Ltd. had also submitted their bill dated 30-10-1995 for Rs. 2,91,486 for professional services rendered in connection with recruitment of 19 candidates for the post of accounts manager and incidental expenses. The fact that the foreign loan and FIPB approval for equity investment by the Whirlpool Corporation of USA were given in January 1996 does not mean that the business was not set up before these events. These are not statutory formalities and even without the foreign loan and the equity participation the assessee-company was in a position to carry on the business in accordance with the objects clause of its memorandum of association from November 1995 when it had its own offices, branch and regional managers and staff, computers installed and was ready to commence its activities. The ex....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... business is set up that the previous year of that business commences from the date of setting up of the business and in that previous year the expenses incurred in the business can be claimed as permissible deductions from the date of setting up of business. Any expenses incurred prior to the setting up of a business would not be permissible deductions because those expenses would be incurred at a point of time when the previous year of the business would not have commenced. Thus, for the tax-payer it is vital and relevant for allowing of the expenses is the setting up of the business when the business is ready to commence its operations and it is not material that the business has actually commenced for allowability of the expenses nor is it material whether it actually received any income or not . It is also held by Hon'ble High Court that in the interregnum period after the setting up of the business when it was ready to commence its business and till business is actually commenced, there could be expenses incurred by the tax-payer which are to be allowed as business expenses albeit the business has not actually commenced. So as we have already held in the instant case before u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to be considered is from which date are the expenses of this business to be considered permissible deductions and for that purpose the section that we have got to look to is Section 2(11) and that section defines the "previous year" and for the purpose of a business the previous year begins from the date of the setting up of the business. Therefore it is only after the business s set up that the previous year of that business commences and in that previous year the expenses incurred in the business can be claimed as permissible deductions. Any expenses incurred prior to the setting up of a business would obviously not be permissible deductions because those expenses would be incurred at a point of time when the previous year of the business would not have commenced. We must therefore look at the decision of the Tribunal as really referring to the setting up of the business in the language of Section 2(11) and not expenses connected with the commencement of the business. Mr. Palkhiwalla says that if that be the correct approach, then the Tribunal has misdirected itself in considering the commencement of the business and not the setting up of the business. Let us try and understand w....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., and having got their machinery and plant, and having also employed their foremen, and having got their works erected and generally got everything ready, then they began to take the raw materials and to turn out their products." Therefore if this case were to be applied to the present assessee, then we would be driven to the conclusion that, if anything, the Tribunal has taken a view of the case very favourable to the assessee because on the facts of this case it would seem that the Income-tax Officer was right in holding that the net expenses prior to the 1st of November, 1946, should not be allowed as permissible deductions. That is why it is important to consider whether the expression used in the Indian statute for setting up a business is different from the expression Mr. Justice Rowlatt was considering, viz., "commencing of the business." It seems to us, that the expression "setting up" means, as is defined in the Oxford English Dictionary, "to place on foot" or "to establish," and in contradistinction to "commence". The distinction is this 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. B....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ess was to undertake business of acting as trading and clearing member of the wholesale debt market, capital market and Futures and Options segment of stock exchanges. To achieve this object, the tax-payer filed an application with NSE for trading and clearing membership of the capital markets and futures and options segment of National Stock Exchange and also gave security deposit and collateral security to NSE along with requisite fees. The tribunal after going through several case laws, factual matrix of the case and nature of the business of the tax-payer held that the business of the tax-payer was set up and ready to commence its business only from the date when provisional registration was granted by NSE for trading membership of capital market and future and option segments, by holding as under:- " 20. From these decisions, it is clear 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. 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 inter....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e of India Ltd. for trading membership of capital and future options segments on 15.10.2004 by paying application fee of Rs. 10,000/- vide demand draft dated 12.10.2004 payable at Mumbai. In order to commence the business of acting as trading membership of capital market and futures options segments, it was necessary on the part of the assessee to get requisite registration from the Stock Exchange. The assessee's application for registration was allowed on provisional basis on and from December 6, 2004. Thereafter, the assessee also made applications before SEBI as well as National Securities Clearing Corporation Ltd. by paying necessary fees and complying with all the requirements. In this case, the first stage relates to the activity of acting as trading members and clearing member of the wholesale debt market, capital market and futures and options segments of any Stock Exchange was to get registration from the Stock Exchange. It is well settled that all the expenses incurred after the business had been set up are allowable as business deduction u/s 37 of the Act. There may be interval between the setting up of the business and the actual commencement of the business bu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n by NSE were allowed. The tribunal went into facts and circumstances of the case and nature of business of the tax-payer to come to aforesaid conclusion. In the instant case before us, non granting of approval by SEBI under Sub-regulation (2) of Regulation 21 of the 1996 Regulation directly impede the commencement of business of the assessee and in the absence of the said approval of the SEBI, the doctrine of impossibility will come into play and the assessee will never be in a position to commence its business. The grant of approval by SEBI was on 17.10.2012 which is the relevant date when the business of the assessee before us was set up and it was ready to commence business . The assessee, thus, shall be entitled to claim expenses w.e.f. 17.10.2012 as deduction as business expenses provided other ingredients of allowability of these expenses are met as laid down in the relevant provisions of the 1961 Act. Thus, our decision in the instant case, is in line with the decision of co-ordinate benches of ITAT, Delhi in the case of GNG Stock Holdings Private Limited(supra) . 6.11 The assessee has also relied upon the decision of co-ordinate bench of ITAT, Mumbai in the case of Pine....