TaxTMI 
TaxTMI 
2021 (10) TMI 907
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....1-2016 by the DDIT(lnv.), Unit-1(2), Hyderabad. In connection with search & seizure operation in Vivirnid labs, a survey operation u/s.133A of the Income Tax Act, 1961 were conducted on 09-11-2016 in the case of assessee. Accordingly, this case had been selected for compulsory scrutiny. The assessee company had filed its return of income u/s.139(1) of the Income Tax Act on 28-10-2017 declaring total income of Rs. 2,02,870/- admitted income under 115JB at Rs. 2,78,636/-. Accordingly, notices u/s.143(2) and 142(1) were issued by the Assessing Officer. 3.1 After examining the material on record and the information furnished, assessment was completed by the Assessing Officer u/s.143(3) of the Income Tax Act, 1961, making the following additions j disallowances: 1. Business income u/s.28(i) of the IT Act - Rs. 22,50,00,000/- 2. of capital expenditure - Rs. 42,52,628/- 4. When the assessee preferred an appeal before the CIT(A), the CIT(A) confirmed the order of AO. 5. Aggrieved by the order of CIT(A), the assessee is in appeal before the ITAT. 6. As regards the issue of addition of Rs. 22,50,00,000/- towards business income u/s.28(i) of the IT Act, the AO observed that from Fin....
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....s of the assessee and considering the agreement submitted by the assessee, the AO observed that the same was not acceptable. In this connection, he referred to the Article - 4 - 'Consideration Prices' of the said agreement, which states as under: "4.1. For the agreement of global exclusive distribution rights to DISTRIBUTOR and/or a D1STRlBUTOR affiliate to any and all products which MANUFACTURER produces/will produce and holds/will hold a Marketing Authorization, DISTRIBUTOR shall pay to manufacturer Rs. 22,50,00,000/-." 6.5. Further the assessee had replied that the assessee is foregoing its rights in respect of trademark, fixing of price of the product, and to have incurred expenditure towards package, export transport and other related expenditure. Further it was stated that this corresponds to period of 15 years and further renewal period of 5 years, in this process, the assessee will incur huge losses for a long period. To compensate these losses, it has received an amount of Rs. 22.50 Cr. from the 'distributor'. 6.6 Rejecting the above contention of the assessee, the AO observed that the assessee Company had received this money in the process of business transact....
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....on the record and gave an opportunity to the assessee to explain the same by way of show cause notice which was in turn replied by the assessee and these facts were considered by the AO on merits. Therefore, it is not correct to state that the AO has not appreciated the facts of the case and has not considered the submissions made by the assessee. He, therefore, upheld the addition made by the AO by observing as under: "5.3.12 To sum up, the appellant received Rs. 22.50 crores for assigning the territory distribution rights exclusively to M/s. BllPl for an initial period of 15 years extendable by another 5 years. The consideration is non-refundable. This was received as the appellant has exercised its business right of appointing distributor in the territories across the globe and appointed Mis. BllPl who in turn has paid the consideration for purchasing the distributor rights. This amount received is not linked to the pricing of the product or to compensate future losses. There are separate clauses in the agreement as to how the cost of the product is reimbursed by the distributor and the profit margin is shared between them. There are no trademarks foregone by the appellant as ....
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....d seeking to align with a global distribution partner, it has entered marketing agreement on 01-04-2016 with M/s. BOEHRINGER Ingelheim India Pvt. t.td., Mumbai which was effected w.e.f. 01-04-2016. According to the agreement, the above distributed company M/s. Boehringerlngelheim India Pvt. ltd.., has paid Rs. 22,50,00,000/- to the appellant for the assignment of Global Exclusive Distribution Rights to it and/ or it affiliated to any and all products which the appellant produces/ will produce and holds/will hold a Marketing Authorization for a period of 15 years from 01-04-2016. The above amount of Rs. 22,50,00,000/- was paid to the appellant as non refundable for fulfilling the conditions as laid down in the said agreement by the appellant. 9.1 He submitted that for fulfilling the clauses in the agreement as well as also the other clauses in the said agreement, of the distributor viz., M/s BOEHRINGER ingelheim India Pvt. ltd, Mumbai, the Manufacturing company, viz., the appellant has to lose substantial amounts for 15 Years from the date of agreement made on 01-04-2016, or from date of starting its manufacturing of the said products and to compensate the same, the distributor has....
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....e the accounting treatment and the Income Tax liability of a person depends on the nature of his business and objects. Further, no part of the advance can accrue in the present assessment year as the assessee is yet to render the services in this behalf. The amount is received with a view to incur expenditure in future. Since, the amount is in respect of a future liability in the form of incurring costs for rendering the said services, the amount could not partake of character of income until it was earned and could be said to be earned only when the assessee would render the said services in future, He pointed out that this fact that the assessee is under an obligation to render services in the future has not been disputed by the AO considering the fact that the amount of advance is received towards future services for which costs are to be incurred in future and the same is non-refundable, no addition need to made during this year. Moreover, the receipt in advance amount do not come within the provisions of sec 4 & 5 and they cannot be treated as income in the hands of the appellant. 9.4 He submitted that the financial statements of the company are prepared in accordance with th....
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....ar that the assessee has not undertaken any business activity and he has received only advance for setting off of losses for future years, which commence w.e.f. 01/04/2016, but, no commercial activity has been started, which is clear from the audited financial statements. Therefore, the agreement in this regard for treating it as a revenue income cannot arise. On perusal of the agreement, which is placed at page nos. 23 to 56 of the paper book, the agreement will be in force when the commercial activity will start. Accordingly, we observe that the advance received of Rs. 22.50 crores is not a revenue in nature for the year under consideration. The relevant part of the agreement in this regard is as under: "Article 4 - Consideration/Prices: 4.1 For the assignment of global exclusive distribution rights to Distributor and/or a distributor affiliate to any and all products which manufacturer produces/will produce and holds/will a marketing authorization, distributor shall pay to manufacturer Rs. 22,50,00,000/- (in words Rupees Twenty two crores fifty thousand only) 4.2 The parties agree that the transfer price shall be 50% of distributor's net selling price of a product as defin....
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....of revenue receipts, giving rise to taxable income in the hands of the assessee. It is not any and every receipt linked to the trading activity that acquires the quality of revenue receipt. The Tribunal or the Court should go further and delve into the true nature, character and purpose of the realizations. If the amounts are meant to be held as deposits liable to be returned to the depositor at a specified point of time or on the happening of specified contingencies which are by no means uncertain or are otherwise treated as members' money-the depository having no unfettered dominion over the said funds, then, it is difficult to characterize them as the income of the assessee. [Para 21] On an analysis of the relevant bye-laws regarding sugarcane price and non-refundable deposits, the following salient features were discernible: 1. The price of sugarcane was fixed every year by the Board of Directors, on a consideration of relevant factors. 2. However, so long as the share capital contributions of the State Government and/or the loans taken on capital account from IFCI and other Central Financial Institutions remained outstanding, the price as fixed by the State Governmen....
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.... additional shares was, however, postponed till the repayment of loans towards capital expenditure and the repayment of Government share capital. In other words, till such time, the member/depositor had no immediate right to demand the payment. Nevertheless, the obligation to repay stood annexed to the deposited amount at the time it was received by the assessee subject of course to the occurrence of the contingency specified in the bye-laws itself It could not be said, as had been said by the High Court, that "under the bye-laws, no event or contingency had been contemplated" under which the members could demand the repayment of the deposit. Nor could it be said that even after the happening of the event specified in the bye-laws, the right to demand repayment becomes illusory in view of the discretion reserved to the Board of Directors of the Society. [Para 28] Once the loans of the description mentioned in the bye-laws which were outstanding on the date the deposit was made were repaid, the Board of Directors of Society was bound to convert the deposit amount into shares. The discretion was always coupled with a duty; the discretion could not be used to circumvent the obligati....
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....f membership or to his legal heirs in case of death. were important indicators against the treatment of the deposited amount as the money belonging to the Society. The payment of interest from year to year at a specified rate was another important factor that supported the conclusion of the disputed sum being a deposit. Such payment of interest was only consistent with the fact that the deposited amount still belonged to the member. The fact that the deposited amounts were credited to individual accounts of the members was a corroborative circumstance to indicate that deposits belonged to the members. [Para 33] Further, the manner of user of the deposit was limited by the bye-laws. Which provided that the amount of deposits shall be utilized jar the repayment of term loans taken for the capital expenditure from the banks and financial institutions. The fact that depositor could seek transfer of the deposit to another member by filing an application for that purpose again highlights the fact that the power of disposal of the deposit lies with the member. The obligation to convert the deposits into shares subsequent to the repayment of certain types of loans coupled with the righ....
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....ng rendering assistance to the members. There is an authority for the proposition that the bye-laws of the Co-operative Society constitute a contract between the society represented by its managing body and its constituents. That apart, the mere fact that the contract has to be entered into in conformity with and subject to restrictions imposed by law does not per se impinge on the consensual element in the contract. [Para 41] CONCLUSION For the aforesaid reasons it was concluded that the non-refundable and refundable deposits could not be treated as the income of the assessee-society. Therefore, appeals filed by the assessees were allowed. [Para 41J OTHER FUNDS As regards the Chief Minister's Relief Fund, Late YB. Chavan Memorial Fund and Hutment Fund, the assessee had merely acted as an agent in collecting the amounts and remitting the same to the Government/Trustees. In truth and in substance, the money collected by the assessee was not reaching the assessee as part of its income, but the collection was made for and on behalf of the person to whom it is payable'. It had no manner of right or title over the said monies. The amount collected towards Hutment Fund st....
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....nt Fund should be treated as income of the assessee. [Para 48J CONCLUSION Therefore, the appeal of the Commissioner of Income-tax partly in respect of the amounts collected by the respondent-societies towards the Cane Development Fund and was allowed, the amount collected towards the Cane Development Fund would be treated as the income of the assessees and any claim for deduction would be entertained and decided by the Tribunal. [Para 49J In the ultimate analysis, the assessee's appeals were allowed and the Commissioner's appeals were partly allowed to the extent indicated above." 11.4 Considering the totality of the facts and circumstances of the case, we find substance in the submissions made by the ld. AR of the assessee and accordingly, we direct the AO to delete the addition made on this count. Thus, the grounds raised by the assessee on this issue are allowed. 12. As regards ground No. 14 relating to the addition of Rs. 42,52,628/-, the AO observed that from the Profit and loss account, total amount of Rs. 42,51,628/- was claimed as expenditure for the year under consideration. He further observed that, from the financials, the assessee company had not carried....
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....put to use. There is no business income on account of sale of products offered in the P&L A/c. except interest from bank. These facts dearly show that the appellant has not set up his business yet and is still in pre-commencement period. Therefore, the expenses though of revenue nature are to be capitalized to the capital work-in-progress Ale. till the time period of actual commencement of business. The Proviso to Section 3 of the I.T. Act refers to the date of setting up of business and the previous year would commence only thereafter. The assessee has not produced any evidence to prove that it has actually set up its business. The Hon1ble Supreme Court in CWT Vs. Rama Raju surgical Cotton Mills ltd. [1967] 63 ITR 478 (SC) ruled that a unit cannot be said to have been set up unless it is ready to discharge the functions for which it is being set-up. The installation of machineries, purchase of land, etc. were merely operations for setting up of business and business would be set-up on culmination of these operations. Similar view was taken by the Madras High Court in CIT vs. Electron India (241 ITR 1661 [20011 and Delhi High Court in CIT vs, Samsung India Electronics ltd. [2013] [....
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....icense, selection/ purchase of land, installation of plant and machinery, construction activities, R&D activities, market research activities and employee recruitments, compliance with the govt. departments, etc. During this period, the company has to incur some expenditure which may be either in capital in nature or may be in revenue in nature. The revenue expenditure is allowed u/s 37 in the previous year in which it has been incurred. The Section 3 of the Income Tax Act, which defines "previous year", in the context of first year of business operation, states that the same previous year shall start from date of "setting up" of business. Accordingly, date of setting up assumes importance because expenses prior to setting up of business will not be covered under section 37 of IT Act. This is however subject to section 35D of IT Act wherein specifically provision has been made by legislature for allowance of preliminary expenses. It has to be borne in mind that there is a distinction between setting up of a business and commencement of a business. The Bombay High Court in Western India Vegetables Products Ltd. v. CIT [1954] 26 ITR 151 has examined the concept and noticed the differ....
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....ase of Carrefour WC & C India Private Ltd. v. Deputy Commissioner Of Income Tax (September 2014) made the following observations on setting up:- "The present assessee i.e. Carrefour was engaged and incorporated for carrying on trading activities in different commodities. The word 'trade' even though not defined in the Act is used to denote operations of a commercial character by which a trader provides to customer for reward, some kind of goods or services. In other words, when the trader start providing such goods and services, the business is said to have commenced but the same may not hold good for set up of a business, which is a stage before the commencement. To set up a business, the following activities become relevant:- 'Preparation of a business plan; establishment of a business premises; research into the likely markets or profitability of the business; acquiring assets for use in the business; registration as an entity and under the local laws etc.' The said list of activities are not exhaustive and facts of each case need to be considered. Indeed purchase of goods would amount to commencement of business, but before the said act, spade work and eff....