Income Tax Appellate Tribunal - Pune
Styler India (P) Ltd. vs Joint Commissioner Of Income Tax on 8 April, 2008
Equivalent citations: [2008]113ITD55(PUNE), (2008)116TTJ(PUNE)333
ORDER
Ahmad Fareed, A.M.
1. This appeal by the assessee is directed against the order of CIT(A) dt. 31st Jan., 2003 for asst. yr. 1998-99.
2. The assessee company was floated in India by Styler Daimler Puch, Austria. It was incorporated on 15th Sept., 1997. The business of the assessee company was to provide engineering assistance and technology to vehicle and component manufacturers. The return for asst. yr. 1998-99 was filed on 28th Nov., 1998, declaring loss of Rs. 45,35,556. In the assessment order passed by the AO under Section 143(3) on 18th Dec, 2000, the total income was assessed at Rs. 3,91,780 as under:
Particulars (Rs.)
Loss as per statement of total income (-) 45,35,556
Add:
Income from other sources 3,91,780
___________
49,27,336
Less: Disallowance (-) 45,35,556
___________
Total income 3,91,780
___________
3. The CIT(A) confirmed the AO's action and his order has been
challenged by the assessee in the present appeal.
Ground Nos. 1, 2, 4, 5, 6, and 7
1. The learned CIT(A) erred in upholding the finding of the learned AO that the assessee had not set up its business during the previous year relevant to the assessment year under appeal and thereby in confirming disallowance of expenditure of Rs. 49,27,336. The learned CIT(A) in this behalf erred in not appreciating the facts and circumstances of the case and in rejecting the evidence on the ground that it was 'mere correspondence'. He also erred in not considering the distinction between setting up of the business and commencement of the business. It is requested that the assessee's contention that it had set up its business from the beginning that is from incorporation may kindly be upheld and the expenditure of Rs. 49,27,336 may kindly be allowed.
2. Without prejudice to ground No. 1 and assuming without admitting and alternately that the business of the assessee was not set up from the beginning that is from incorporation, the learned CIT(A) ought to have given a finding from which other day during the previous year, the business could be considered to be set up. It is requested that on appreciation of evidence on record, Hon'ble Tribunal may please give finding regarding date from which the business could be said to be set up and allow the expenditure accordingly.
4. Without prejudice to grounds 1 and 2, the learned CIT(A) erred in confirming the expenditure of Rs. 15,65,239 on exhibition and launching without appreciating facts and legal position. The expenditure may kindly be held to be allowable.
5. The learned CIT(A) erred in confirming the finding of the learned AO that the income of Rs. 3,91,780 being earned prior to setting up of the business, said income was not assessable as business income. It may kindly be held that the said income was income from business.
6. Subject to ground Nos. 1 and 2, the assessee's business loss after setting off of the interest of Rs. 3,91,780 may kindly be directed to be carried forward.
7. The learned CIT(A) erred in upholding levy of interest under Sections 234A, 234B and 234C. He failed to appreciate that liability to interest under Sections 234B and 234C could not arise because the assessee was not liable to pay advance tax at all in terms of Section 208 r/w Section 209 and this being basic condition for levy of interest, under Section 234B/234C was not tenable on facts and in law.
4. Shri Kishore Phadke, the learned Authorised Representative, reiterated the arguments put forward on behalf of the assessee company before the AO and the CIT(A). The submissions made by him are summarized below:
that a foreign collaboration agreement was entered into between the assessee and Styler Daimler Puch, Austria (SDP for short) on 16th Dec., 1997.
that SDP was a company, inter alia, engaged in the activity of providing technical know-how in the area of automotive technology.
that SDP was to provide the assessee company with sufficient technical and marketing information in order to enable it to successfully operate.
that assessee company was incorporated with the main object to own and operate an automotive engineering centre in India, to undertake engineering research and technical services and to set up a workshop/manufacturing facility to undertake local manufacture of products including components and parts.
that SDP and the assessee company agreed to carry on the business in the above areas in India.
that by virtue of the collaboration agreement dt. 16th Dec, 1997, the assessee company came in possession of the technical know-how and since the business of the assessee company was to give technical know-how to its customers, the business of the company should be held to have been 'set up' and 'commenced' on 16th Dec, 1997.
that the assessee was a knowledge company and it was its business to supply know-how, knowledge and technology to its customers.
that the business of the assessee company was, as per Ministry of Industry Acknowledgement No. 550/SIA/FC/97 dt. 5th Aug., 1997, to set up wholly owned Indian subsidiary and automotive engineering and research consultancy services.
that approval was given by the Ministry of Industry for foreign collaboration in December, 1997.
that reliance was placed on the decisions in the following cases:
(i) Western India Vegetable Products Ltd. v. CIT ;
(ii) Sarabhai Management Corporation Ltd. v. CIT ;
(iii) Neil Automation Technology Ltd. v. Dy. CIT (2002) 120 Taxman 205 (Mumbai)(Mag) in ITA No. 3263/Mum/1988 dt. 5th July. 2001;
(iv) Chakradhari Wheels (P) Ltd. v. ITO (2005) 96 7TJ (Del) 517;
(v) CIT v. Sarabhai Sons (P) Ltd. ;
(vi) Prem Conductors (P) Ltd. v. CIT ;
(vii) Coromandel Exports (P) Ltd. v. ITO (1984) 20 TTJ (Hyd) 503;
(viii) CIT v. Western India Sea Food (P) Ltd. .
5. Shri V.S. Kumar, the learned Departmental Representative, supported the orders of the AC) and the CIT(A). He vehemently argued saying that the order of the CIT(A) needed to be upheld.
6. We have considered the rival submissions in the light of material available on record and the precedents cited. The business of the assessee company was to extend consultative services and to advice its customers in the area of automotive technology. The return for asst. yr. 1998-99 was filed on 28th Nov., 1998 declaring loss of Rs. 45,35,556. During assessment proceeding, it was noticed by the AO that in the P&L a/c, the assessee had shown income of Rs. 3,91,780 under the head 'Interest on bank fixed deposits' and had claimed expenses of Rs. 49,26,141 under the head 'Administrative selling expenses' as under:
Particulars (Rs.)
Building repairs, improvement and renovation 17,92,600
Exhibition/Launch expenses 15,65,239
Travelling expenses 4,77,567
Rent 3,10,400
Advertisement 1,71,500
Expenses 1,62,551
Car hire charges 1,06,307
Legal charges 96,930
Exchange rate fluctuation 91,150
Consultation charges 55,000
Printing & stationery 27,165
Vehicle fuel 20,243
Brokerage 20,000
Entertainment expenses 12,097
Miscellaneous 9,389
Audit fees 8,000
Interest 1,195
___________
Total 49,27,336
___________
7. The AO was of the opinion that the business of the assessee was not set up during the previous year relevant to asst. yr. 1998 99 and therefore the aforesaid expenditure of Rs. 49,27,337 was not allowable under Sections 30 to 37 of the Act.
8. The CIT(A), while upholding the AO's view, inter alia, observed in his order as under:
that the main issue in this case was as to whether the assessee company had commenced business or not or whether the business was set up or not;
that one of the main objects of the assessee was to act as a consultant, adviser and to provide technical services for the development/manufacture of new products;
that the activities handled by the managing director where in the nature of meeting and discussion with different persons and to locate prospective clients who could be provided services by the assessee company;
that the stand of the assessee, that it had not only commenced business by contacting prospective customers but had also booked one consultancy assignment, was only partially correct because neither any payments have been received nor any specific agreement has been there;
that the assessee's aforesaid claim was based merely on certain letters including a quotation for the project named as 'overseas project-1'; but the nature of the project had not been finalized;
that merely receiving advance from the parent company was not a sufficient proof that the business had commenced.
9. In order to examine the assessee's claim that the impugned expenses incurred during the year ended 31st March, 1998 were admissible for deduction, we have to decide, precisely, as to on what point of time the business of the assessee company can be said to have been 'set up'. Before proceeding further we consider it necessary to examine the legal position in this regard, as laid down by the Courts, in the following paras.
10. We find that the leading decision on this issue was of Bombay High Court in the case of Western India Vegetable Products Ltd. v. CIT (supra), which was followed in later decisions of other High Courts. In this case it was held by the Bombay High Court that one must give a different meaning to the expression 'setting up' from the expression 'commenced', that for the purpose of a business the 'previous year' begins from the date of the 'setting up' of the business, that any expenditure incurred prior to the 'setting up' of a business would obviously not be permissible deduction because those expenses would be incurred at a point of time when the previous year of the business would not have commenced, that in the language of Section 2(11) (Section 3 of 1961 Act) the expression used is 'setting up' of the business and not 'commencement' of the business, that the expression 'setting up' means 'to place on foot' or to establish' in contradistinction to 'commence', 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', that there may be an interregnum between the point of time when a business is 'set up' and the point of time when the business is 'commenced' and all expenses incurred after the 'setting up' of the business and before the 'commencement' of the business would be permissible deduction under Section 10(2) (Sections 30 to 41 of the 1961 Act).
11. In Section 3 [Section 2(11) of the 1922 Act] of the 1961 Act the expression previous year' is defined as under:
3. For the purposes of this Act, 'previous year' means the financial year immediately preceding the assessment year:
Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year.
12. The expression used in Section3 above was 'set up' and not 'commenced' and therefore the Bombay High Court chose this expression in contradistinction to the expression 'commence'.
13. In the case of Sarabhai Management Corporation Ltd. v. CIT (supra), the Gujarat High Court, referring to the provisions of Section3 of 1961 Act and relying on the decision of Bombay High Court in the case of Western India Vegetable Products Ltd. (supra), held that it was only after the business was 'set up' that the previous year of that business 'commences' and any expenditure incurred prior to the 'setting up' of a business would not be a permissible deduction, that there may be an interval between the 'setting up' of the business and the 'commencement' of the business and all expenses incurred during that interval would be a permissible deduction.
14. The question as to the point of time when a new business can be said to have been 'set up' will depend upon the facts of that particular case. The criteria, applicable to a new business involving manufacturing activity, and that engaged in providing services or in trading activity, will surely differ. The expression 'setting up' means 'to place on foot' or 'to establish' in contradistinction to the expression 'commence'. In the case of a new business engaged in trading or in the service sector, no plant and machinery are to be installed, and no trial runs are necessary; and therefore a different set of criteria will be required to be applied in order to determine whether such a type of business had been established so as to be ready to 'commence' business.
15. In the following three cases the new business involved processing of marine products, export of tobacco and distribution of computer software and development and training of software personnel, respectively.
16. In the case of CIT v. Western India Sea Food (P) Ltd. (supra) the business of the assessee was processing marine products and during the relevant year, acquired godown where processing of marine products could start after fish became available. It was held by the Gujarat High Court that it was the starting point of the setting up of business of processing marine products and the actual arrival of fish later on could not postpone the 'setting up' of such business. The expenditure claimed by the assessee was allowed. In other words, the expenses incurred during the interval between the 'setting up' of the business and the 'commencement' of the business were held as allowable expenditure.
17. In the case of Coromandel Exports (P) Ltd. v. ITO (supra), the business of the assessee company was export of tobacco. The Tribunal, Hyderabad, relying, inter alia, on the decision of Bombay High Court in the case of Western India Vegetable Products Ltd. (supra) held in para 5 of its order as under:
...What all is needed for setting up of the said business is to secure a business place or an office, to provide it with furniture, etc., to have a telephone to maintain the office and make ready everything to start business. If no intended exporter approached the assessee and got his product exported through the assessee it is not the fault of the assessee. Ultimately, it may be his bad luck but in legal terms it cannot be said that he had not set up his business. Therefore, we are of opinion that all the expenses incurred after the business is being set up are excludable business expenditure.
18. In the case of Neil Automation Technology Ltd. v. Dy. CIT (supra), the business of the assessee was distribution of computer software and development and training of software personnel. During the previous year relevant to asst. yr. 1993-94 the assessee company entered into correspondence with various parties in order to make them aware of the product in which the assessee was to deal with the expenses incurred during the year were claimed which were disallowed by the AO and the CIT(A). The Tribunal was of the view that in this line of business it was essential to enter into correspondence with various parties to make them aware of the products in which the assessee was dealing, that writing of letters and giving quotations to various prospective customers in respect of various softwares which the assessee was ready to supply was an essential activity in the course of carrying on the business and therefore the expenditure incurred by the assessee during the year was for the purpose of business and the same was allowable as the business was set up during the previous year and the same was ready for commencement.
19. In the case of Prem Conductors (P) Ltd. v. CIT (supra), a similar view was taken by the Gujarat High Court.
20. It is seen from the decisions in the aforesaid three cases that a new business, in the service sector or that which is engaged in trading activity, can be said to have been 'set up' if, inter alia, correspondence was entered into with various parties to make them aware of the products in which the assessee was dealing, letters had been written to various prospective customers giving them quotations in respect of various softwares which the assessee was ready to supply, a business place or an office had been acquired. These were essential activities in the course of carrying on the business and therefore in these types of business such activities can be said to be determinative of the question whether the business had been 'set up' and that it was 'ready to commence'. The actual receipt of an order from a prospective client for supply of product or services cannot postpone the 'setting up' of the business.
21. We now proceed to apply the legal position enunciated in the above paras to the facts of this case. It is seen that in the present case the assessee company was incorporated on 15th Sept., 1997. The necessary approval was granted by the Ministry of Industry, Government of India in December, 1997 for a foreign collaboration. The assessee entered into a correspondence with Scooters India Ltd., a prospective customer, as early as in July, 1997. The correspondences were also had by the assessee company, during the year, with Mahindra & Mahindra Ltd., Kalyani Tubes and Hindustan Motors. The foreign collaboration agreement between the assessee company and Styler Daimler Puch, Austria was entered into on 16th Dec, 1997. The assessee could have not carried on its business without this collaboration agreement. Therefore in view of the facts and circumstances of the case and the position in law as discussed in the above para we are of the opinion that the business of the assessee company should be held to have been 'set up' on 16th Dec, 1997.
22. Once it is held that the business of the assessee company was 'set up' on 16th Dec, 1997, all the expenses of revenue nature incurred on and after 16th Dec, 1997 will become admissible for deduction. In the circumstances, therefore, the matter is restored back to the file of the AO. He will examine and decide afresh the assessee's claim, in respect of the ground Nos. 1, 2, 4, 5, 6, and 7 as per the directions given above.
Ground No. 33. Without prejudice to grounds 1 and 2, the learned CIT(A) erred in holding that the expenditure of Rs. 17,92,600 incurred on the leased premises by the assessee to make it suitable for office purposes was in the nature of capital expenditure and was thus not allowable. The finding of the learned CIT(A) being factually and legally untenable, the expenditure may kindly be held to be allowable revenue expenditure.
23. We find that this issue is covered in favour of the assessee by the decision of Bombay High Court in the case of CIT v. Hede Consultancy (P) Ltd. and Anr. . In this case, the Court held as under (headnotes):
The assessee had taken a godown on lease. It spent Rs. 9,20,436 for converting the godown premises into office by renovating it, incurring expenses on interior decoration, which resulted in replacement of the existing roof with that of cement sheets, replacement of floor with that of marble, plastering of walls and construction of bathrooms and W.C. etc. The assessee claimed the said expenditure of Rs. 9,20,436 as revenue expenditure. The AO disallowed the claim but the Tribunal allowed it. On further appeal to the High Court:
Held, dismissing the appeal, that since the assets created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using modern business premises at a low rent, thus saving considerable revenue expenditure for a considerably long period, the Tribunal was perfectly justified in coming to the conclusion that the expenditure should be looked upon as revenue expenditure.
24. The AO will examine and decide afresh, the issue raised through this ground, in the light of the decision of Bombay High Court in the case of CIT v. Hede Consultancy (P) Ltd. and Anr. (supra) and the directions given by us in paras 21 and 22 above 25. The AO will, accordingly, pass a fresh order after giving adequate opportunity of being heard to the assessee.
25. In the result the appeal filed by the assessee is partly allowed for statistical purposes.
Mukul Shrawat, J.M.
26. The proposed order of the learned AM has been carefully and thoroughly perused by me. I have discussed the matter with him but regretted my inability to persuade myself to agree with the conclusion arrived at. Though the legal aspect of the issue has been comprehensively set out by learned AM, but I want to place my own reasons which may give rise to this litigation on account of disagreement but primarily on the legal principles. Accordingly, I proceed hereinbelow to place on record my dissenting views.
27. Facts as examined by me from the corresponding assessment order passed under Section 143(3) dt. 18th Dec, 2000 were that the appellant was stated to be engaged in rendering technical design and consultancy service in respect of vehicle components/parts in the status of company. The assessee company was incorporated on 15th Sept., 1997. That means the accounting period for the first year of start of business ended on 31st March, 1998, consequential assessment year in question is asst. yr. 1998-99. The appellant is a 100 per cent subsidiary of Styler Daimler Puch AG, Austria.
28. The query which was raised by the AO was in respect of deduction of an expenditure under the head "Administrative and selling expenses" of Rs. 49,27,336 as against the income declared under the head "Interest on fixed deposits with the bank" of Rs. 3,91,780. The AO had given a categorical finding that in this first year of return, there was no income declared under the head "Business or profession". He (the AO) has also cited the landmark decision on this question of the Hon'ble apex Court delivered in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997) 141 CTR (SC) 387 : (1997) 227 1TR 172 (SC) for the proposition that nature of expenditure was such which could not be allowed against the "interest income" declared since the so claimed expenditure was not laid or expended for the purpose of the business income of the year under consideration (see p. 3, para 4 of assessment order). This is the first plank of the controversy raised from the side of the Revenue Department.
29. The second controversy raised was whether those expenditure could be allowed being for the purpose of "setting up" of the business. Details of the expenditure have already been placed in the proposed order (supra) by my learned Brother, out of which, the main two components are under the heads "Building, repair, improvement and renovation" of Rs. 17,92,602 and "Exhibition/launch expenditure" of Rs. 15,65,239 and explanation tendered concisely was:
(a) That "building, repair, improvement and renovation" was carried out at a leased premises, thus the argument of the assessee was that no asset was created by spending the said expenditure, therefore, to be treated as revenue expenditure.
(b) That exhibition and launch expenditure was incurred at Autoexpo' 98 held at Delhi in the month of January' 98 to be allowed as revenue expenditure.
29.1 On the basis of above information, the AO has formed an opinion summarized below:
(i) Allowability of an expenditure depends whether laid out for the business in existence in the year of claim.
(ii) An expenditure incurred prior to the setting up of the business falls outside the purview of Section 28 of IT Act.
(iii) Also, an expenditure incurred prior to commencement of business which is not even established, though may be in the process of setting up but has not set up is also not allowable.
(iv) AO has placed reliance on (a) Western India Vegetable Products (supra); Sarabhai Sons (P) Ltd. (supra).
Finally, the total income was computed at Rs. 3,91,380 after the disallowance of the alleged expenditure in question.
30. The first appellate authority has elaborately discussed all the main issues; can be crystallized in the following manner:
(a) The question of the allowability of an expenditure made during the set up of a business was dealt with in detail, summed up:
• That mere production of correspondence did not establish the set up of the business.
• That there were no employees or engineers who could impart the engineering service.
• That the appointment of the general manager was merely an operation prior to setting up of the business.
• That the expenditure was meant for launching of business, as admitted by the assessee.
• That the construction on the leased premises was to make fit the premises for occupation for the business.
• That travelling expenditure was towards the appointment of the director and the general manager prior to setting up of business and not connected with running of business.
• That the activity of the general manager was in the nature of meeting and discussion with different persons to locate the prospective clients.
• That there was no evidence that the appellant had even received any proposal or offer to act as a consultant or advisor to provide technical services during the previous year.
• That case law cited by the assessee viz. Neil Automation Technology Ltd. (supra) was held as distinguishable on facts as there was not even any booking for providing consultancy service by the appellant during the year.
• That merely receiving certain advances from the parent company was not a sufficient proof of commencement of business.
(b) The question of allowability of expenditure on renovation and furnishing of office premises was dealt with by learned CIT(A) briefly as follows:
• That it was not a current repair, hence not allowable.
• That in view of Ballimal Naval Kishore v. CIT it was capital in nature.
• That the decision in the case of CIT v. Madras Auto Service (P) Ltd. is distinguishable on facts mainly on the ground that even the business was not set up by the assessee, therefore, not incurred in the course of running of the business.
(c) The question of allowability of expenditure incurred on exhibition and launch has also been dealt with--summed up below:
• That the expenditure was admittedly before the setting up of the business.
• That the expenditure was named as "exhibition and launch expenditure" shows the launching of the business yet to set up or commence.
• That the expenditure was not wholly verifiable, hence to be disallowed.
(d) The question of admissibility of such an expenditure against the income under the head "Other sources" has been held not allowable on the, ground that the law stood settled not to set off the same.
31. What had germane from the two orders of the Revenue authorities are to be briefly summarized and deliberated upon in detail, so that the line of action of the Revenue authorities could be properly appreciated.
32. The arguments of the rival sides have already been considered by my learned Brother need not to be repeated again.
33. In the light of the above points raised hereinabove, I want to express my own opinion pointwise as follows.
33.1 The first point, which is very crucial to decide the issue in hand, is that undisputedly when the company has been incorporated on 15th Sept., 1997 whether for the purpose of allowability of certain expenditure it can be held that day as the date of set up of the business as prescribed in Section 3 and Section 29 of IT Act. No doubt that the language of the Section 3 makes it clear that in the case of a new business (as is the case of this appellant) the first accounting year must in every case commence on the date of the "setting up" of the business. Taking pause for a minute, I do agree with my learned Colleague for the proposition that a business is set up when it is established or set on foot. I also do agree that there may be an interregnum between the setting up of a business and its actual commencement. That the accounting year would begin on the date the business is set up and not when it is actually commenced. Precisely speaking all these propositions have been laid down by the Hon'ble Court in the case of Western India Vegetable Products (supra) (ante) and naturally applies to the facts of a particular case if falls within the four corners.
Ex consequenti the issue cropped up in this appeal is about the claim of expenditure incurred even prior to setting up of the business or alternatively what should be the point of time said to be determinative of setting up of a business.
33.2 At this juncture, I am unable to withhold my thoughts that whether we are on the issue of "setting up of a company" or "setting up of a business" (underlined, italicised in print, to put emphasis). In my opinion, a certificate of incorporation is nothing but a symbol disclosing the intention to start a company under a particular name and through the certificate, a nomenclature is assigned to a corporate body; to my mind a first step of the ladder prior to set up of the business. May I also mention here that Section 149 of Companies Act, thereafter, provides the procedure of commencement of business of a company. To make myself clear, I take shelter of the definition of the word "business" as defined in Black's Law Dictionary, i.e. "employment, occupation, profession or commercial activity engaged in for gain or livelihood. Activity or enterprise for gain, benefit, advantage or livelihood. That which habitually busies or occupies or engages the time, attention, labor, and effort of persons as a principal serious concern or interest or for livelihood or profit". Thus a "business" is a series of action to be taken by a businessman in a systematic manner step by step and once all the preliminary requisites are completed, then it can be said to be the set up of the business. It can be added that a simple test can be laid down that the business would commence when the activity which is the first in point of time and which must necessarily precede the other activity is started, so that the wheel of commercial or professional activity started rolling.
33.2 Before I proceed to elaborate the pre-requisites of set up of a business, it is better to put across the intention of the legislature and the related provision i.e. Section 28 and Section 29 of IT Act, according to which, an income is to be computed in accordance with the provisions contained in Sections 30 to 43D circumventing the expenditure incurred prior to setting up cannot be allowed since it would fall outside the ambit of the accounting year prescribed under Section 3 of IT Act. Apropos Section 3 of the Act, it applies only to a business which is "carried on". However, on the basis of tone and tenor of the statute, an expenditure incurred after the business is set up may be allowed under Sections 30 to 37 even if it is incurred before the business has actually commenced in view of the judicial pronouncement that there may be an interregnum between set up and commencement but concomitant with the basic question elaborated ante.
34. Even before I deal with the pre-requisite of set up of a business, the main Section 3 of the Act, as reproduced by my learned Brother at para 11, is also to be dwelled upon. My humble understanding of Section 3 of the Act is quote, "in the case of a business--newly set up--the previous year shall be the period beginning with the date of setting up of the business--the date on which the source of income newly comes into existence"--Quoted from the Section 3 itself and formulated for clear understanding as depicted by me by skipping few in between phrases. To me the term "setting up" is disjunctive and cumulative with the phrase "the source of income" and should not be read separately or alternatively or even as mutually exclusively. With the result, I want to give a finding, as based upon the established facts of this case, that for the year under consideration, since admittedly there was no source of business income that came into existence in the accounting year under consideration, hence beyond the scope of Section 3 of the Act. I am sure there is no element of doubt or difference of opinion seeing the factual matrix of the case in respect of this finding on facts.
35. TO dwell on the pre-requisite of set up of a business, I will like to refer an observation made by my learned Brother at para 14; that this is not the case of an assessee involved either in manufacturing activity or trading activity. This assessee is stated to be in the service industry. So, I also endorse the view expressed therein that a different set of criteria will be required to be applied in respect of an assessee engaged in providing services, in order to determine whether under the present set of facts and circumstances either the business was "set up" or "commenced" or "established". The pre-requisites or the criteria can be logically drawn as follows:
First-Render of service--At what point of time such an assessee is in a position to render the service to it's clients. Naturally when series of formalities have been completed i.e. employment of technical persons; a consultation room or office; drawings/designs or related equipment; office equipment/furniture, telephones, fax and computer, all in functional stage etc. etc. Facts of the case do not establish that were they functional or started operating in this accounting period? On the contrary the office was under preparation and not functional.
Second--An order in-the-offing: A question is that in the expectation of happening of an event is it justifiable to presume that the procurement of the order to render consultations is definitely going to happen specially when there is no fixed time frame? All subsequent developments do not predetermine for sure the happenings of future hope of an order to supply the service.
Third--Position of employment. As in the case of manufacturing and trading activity the employment of labours, technicians, workers etc., is the must, but in service industry the employment of a technical or professional person is a must to carry out a specified service as also capable to render the service. For example, a surgeon may be available to perform the surgery but in the absence of equipment or operation theatre, he cannot perform the surgery, thus definitely not engaged in rendering medical service. Mere presence does not qualify for the claim as per the language of the statute.
Fourth--Incorporation certificate--It is the start point of the company or the. start point of the setting up of the business. Undoubtedly, by issuance of the certificate the incorporation of the company viz-a-viz share capital, names of the directors is established and most importantly the name of the company is designated but nothing more than that. Whether the company shall positively launch its business or may fail to perform is not determinative on that occasion? The company will run thereafter or not cannot be determined at that point of time. Predictions are not welcomed in the eyes of law. Such activities are primarily with the ambition and hope of setting up of a business.
Fifth--Preparatory activity versus commercial activity. This is the fundamental area of distinction. Before setting up of a business, certain preparation has to precede but the tax laws do not cover and recognize those preparatory expenses, as discussed ante. Mere exploration of a suitable place, suitable customers before the setting up cannot be held that the business has set up. An exploration is too remote to be in proximity to the start or the commencement of the business.
Sixth-- Capacity to render service--In terms of render of technical service, there ought to be the presence of the technology, a designated place like office, presence of equipment, covering technological field and office requirement, so that the company can authentically undertake the consultation job, and effectively discharge the function assigned, if any, as is the claim of this assessee but failed to establish.
Seventh--Determinative test whether "functional". After incorporation, a company takes shape so that in the years to come, the business can run, hence processing of taking a shape cannot be equated with the term "functional".
36. These criteria or pre-requisites cannot be expected to be exhaustive but illustrative because of obvious reason that the question of set up of a particular type of business is always a question of facts which can be decided only on the peculiarity of the facts and circumstances of a particular case; but should be within the broad guidelines provided by different Hon'ble Courts based upon which an attempt has been made hereinabove.
37. In the background of the above discussion, my findings are that there is nothing on record to establish that there was an existence of any tools/equipments/office machinery/presence of technology etc. etc., readily in hand to make use of them for imparting technical service. Even from the schedule of fixed assets, part of the balance sheet, there is no proof of existence of any of such assets. This was only the preparatory stage of the setting up of the business going to take a shape, as alleged, in the years to follow.
37.1 Next, admitted sequence of events is that the assessee company was incorporated on 15th Sept., 1997, thereafter a collaboration agreement was executed on 16th Dec, 1997 (see p. 3 of paper book II). Next was an exhibition at Delhi held in January, 1998 and incurring of travelling expenditure during these months. Side by side the office, stated to be on lease, was under preparation/construction and the final bill of construction was dt. 30th March, 1998 [see para 3(iii) of p. 6 of AO's order]. Once it is an established fact that the office was not even ready for professional use, how it can be held that the profession has started. Naturally, a professional has to have an office to have place of discussion with his clients and from where he can impart the professional skill. So, a conclusion cannot be drawn that by the time the office was not ready, the profession cannot be said to be set up in the first year of the business. This analogy is at par with the findings of several Courts in cases of manufacturing business or trading business; where certain guidelines are laid down to determine the point of time of set up of business. Mere conceiving an idea or a thought and thereafter undertaking journey to examine the future prospects or even drawing attention of the public by participating in an exhibition cannot be held as set up of the business emphatically if it is in the first year. It is like this that every child is brought up with the hope of great future potential, say potential of rendering technical service, but logic does not permit to allow education expenses as setting up of a profession. The test is whether he had at that point of time the potential of rendering technical service immediately on approach by a client. In this appeal, admittedly there were two experts available but the fundamental question is whether they were in a position to render the technical advice in the absence of a proper place to sit or devoid of equipments. And also, a basic query was raised that whether any technical service was rendered and for that, any bill was raised during the year ending 31st March, 1998. The answer was given in negative. An argument was raised that having great technical knowledge those experts were in a position to offer technical service but the moot point is whether there was an iota of evidence that they had actually provided technical service in the accounting year under consideration. Sitting at home, every person has an ambition to do great jobs but question is whether he has done any job in a particular year resulted into income because we are dealing the issue vis-a-vis IT laws which recognize an expenditure as revenue in nature when there is revenue generation through spending of the money. The assessee has utterly failed to demonstrate that whether any contract with any client was executed or any order was received from any concern seeking technical advice. In the absence of such an evidence, it is illogical to hold that the business was set up much less it was commenced.
37.2 One more argument was raised connected with the "launching expenses" but to me the distinction is obvious between launching of a product belonging to a running business and launch of a product yet to come into existence. Such a launch depict itself that it was yet to set up and said to be prior to setting up of a business.
38. In the light of the reasons assigned hereinabove, I am of the view that ground Nos. 1 and 2 are to be dismissed and since ground No. 3 is without prejudice to these two grounds, hence on account of dismissal of ground Nos. 1 and 2, this remaining ground do not survive on the same reasons pro tanto.
Reference Under Section 255(4) of the IT Act, 1961 17th Aug., 2007 By virtue of the provisions contained in Section 255(4) of IT Act, we differ in opinion on certain points, therefore, hereby refer the following question:
1. Whether on the facts and circumstances of the case, the assessee is entitled for expenditure of Rs. 49,27,836, mainly comprising Rs. 17,92,600 expenditure under the head Building, repair and renovation' and Rs. 15,65,239 under the head 'Exhibition/launch expenses' disallowed being expended prior to setting up of the business?
2. We accordingly refer this issue to the Hon'ble President, Tribunal, for reference to a Third Member or any other order as the Hon'ble President deem fit.
Vimal Gandhi, President (as Third Member)
1. On account of difference between learned Members of Tribunal, A-Bench, Pune, the following question has been referred to me under Section 255(4) of the IT Act:
Whether on the facts and circumstances of the case, the assessee is entitled for expenditure of Rs. 49,27,336, mainly comprising Rs. 17,92,600 expenditure under the head 'Building, repair and renovation' and Rs. 15,65,239 under the head 'Exhibition/launch expenses' disallowed being expended prior to setting up of the business?
2. The facts of the case are that assessee, an Indian private limited company was set up as 100 per cent subsidiary of Styler Daimler Puch AG, Austria. The total subscribed capital, wholly owned by the above company, was shown at Rs. 3 crores. "The company was set up with the aim to make available rich technical expertise to the Indian industry to make it achieve higher levels of competence technology and on quality front so as to keep up with the demand of international market and the increasingly discerning Indian market."
2.1 The company was to provide expertise in three main areas:
(i) Technical design and consultancy services,
(ii) Systems supplier with respect to vehicle components and parts,
(iii) Sourcing of vehicle components and parts from India for the global market.
The assessee filed return declaring loss of Rs. 45,35,556 on 28th Nov., 1998. The case was later taken up as a scrutiny assessment. The assessee had shown receipt of Rs. 3,91,780 under the head "Interest on fixed deposits with the banks". Against above receipt, assessee claimed expenses of Rs. 49,27,336 under the head "Administrative and selling expenses". No receipt from business or profession, according to the AO, was disclosed. The AO, vide his letter dt. 23rd Oct., 2000, asked the assessee company to file detail of expenses claimed under the head "Building, repairs, improvements and renovations". He was of the opinion that expenses of Rs. 17,92,600 were capital in nature. The AO also requested the assessee to show cause as to why exhibition and launch expenses of Rs. 15,65,239 be not disallowed as preliminary expenses in nature. Some other queries were also raised with which I am not concerned in this appeal.
2.2 In respect of repair, improvements and renovations, assessee explained that premises for carrying business were obtained on long lease. As a lessee, the assessee has not created any asset in its own name. Therefore, expenditure was claimed to be of revenue nature. In support of the contention, reliance was placed on certain High Court and Supreme Court decisions.
2.3 In regard to exhibition and launch expenses of Rs. 15,65,239, the assessee claimed that the company was formed on 15th Sept., 1997. It attended an exhibition in January, 1998 at Autoexpo'98 at Delhi. After the commencement of the business and for purposes of business, assessee took a stall and participated in the exhibition to promote the business interest of the company and to increase its visibility in the eyes of Indian automotive industry. Expenses claimed were admissible under Section 37(1). It was further claimed that assessee had commenced its business after setting up the same. It was explained that Mr. Van Den Oever, managing director was available for giving technical advise to customers. When managing director was out of India, Mr. Rajeev Randive was also available to the potential customers as is evident from correspondence which was placed on record. The assessee placed reliance on decision of Bombay High Court in the case of Western India Vegetable Products Ltd. v. CAT . The contention of the assessee is further recorded by the AO as under:
1. The first operating year was for a period of six and half months. The company commenced its activity but could not achieve any turnover during this period. During the financial year the operating facilities have been set up and initial contacts have been established with major players in the industry and potential clients.
2. The company decided to start its corporate office at Pune because of its strategic location. Accordingly, the place for corporate premises was identified at Pune and the interior and civil work was carried out.
2.4 The AO did not agree with above contention and disallowed expenses claimed by the assessee under various heads. Reasons given by him in summary for adopting above course are as under:
(i) That administrative and selling expenses were incurred before the business had commenced or even before it was set up. The AO held that the case of Western India Vegetable Products Ltd. (supra) was not applicable to the facts of the case. The AO relied upon decision of Bombay High Court in the case of CIT v. Sarabhai Sons (P) Ltd. . The AO further recorded as under:
(ii) No employees were appointed drawing any remuneration.
(iii) Detail of administrative and selling expenses of Rs. 15,65,239 showed that these were launching expenses incurred for "setting up of business not "after setting up". The bill for construction on leased premises was raised on 30th March, 1998 for Rs. 15,92,600.
(iv) The correspondence with various customers filed by the assessee in support of setting up of business would not establish that business was ready to commence as there was no employee or engineer who could impart the engineering services. The AO again referred to the decision in the case of Sarabhai Sons (P) Ltd. (supra).
(v) Mere production of correspondence does not establish that the business is set up. The appointment of general manager by the assessee was merely an operation for setting up business.
(vi) Other expenses claimed by the assessee i.e. on travelling etc. were mainly in connection with the appointment for director and general manager.
2.5 In the light of above facts and decision of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CAT and decision in the case of Sarabhai Sons (P) Ltd. (supra), the AO held that interest income was liable to be assessed under the head "Other sources" and expenses claimed amounting to Rs. 49,27,336 were not admissible and disallowed.
2.6 The building repairs and improvement and renovation expenses amounting to Rs. 17,92,600 were held to be disallowable as these were not relating to current repairs or revenue expenses. The AO placed reliance on decision in the case of Ballimal Naval Kishore v. CIT . In the light of above, AO computed assessee's total income at Rs. 3,91,780.
3. The assessee challenged above assessment in appeal before the CIT(A) and contended that AO was wrong in not setting off of interest of Rs. 3,91,780 against loss and expenses claimed by the assessee under the head "Business". It was contended that assessee company had commenced business and, therefore, after setting up of business, expenses claimed were to be allowed. It was explained that business was set up when its managing director and one other officer were made available for services after the incorporation of the company. Above persons were in a position to offer technical services as experts in automobile field. Customers had started contacting them for advise and services. There were various discussions on technical matters with customers. Travelling expenses were incurred for business purposes and not for appointment of director and the general manager. Assessee placed reliance on certain correspondence carried by the assessee with his customers.
3.1 The learned CIT(A) did not find any force in the appeal of the assessee. He first examined the case of the assessee with the case of Neil Automation Technology Ltd. v. Dy. CIT (2002) 120 Taxman 205 (Mumbai)(Mag)--ITA No. 3263/Mum/1988 and held the same to be distinguishable on facts. The learned CIT(A) examined the project named, "Overseas project-1" under which parent company had advanced Rs. 62 lakhs to the assessee for supply of manpower and held that it was a device adopted to set up the claim. It was not sufficient proof to hold that business had been commenced. He accordingly dismissed grounds 1 to 3 raised by the assessee.
3.2 As regards claim of expenses, he held that all the expenses were incurred by the assessee before the setting of the business and were not permissible. He upheld assessment of interest income under the head "Other sources" and did not allow any expenses against above receipt. The entire appeal of the assessee was dismissed.
4. Being aggrieved, the assessee carried the matter in appeal before the Tribunal. After hearing both the parties, the learned Members of Tribunal, A-Bench, Pune differed on the question whether business was set up by the assessee and whether expenses claimed under the two heads mentioned in the question were to be deducted. The learned AM, after taking note of income assessed, grounds of appeal raised before the Tribunal, noted the contention of the assessee as under:
4. Shri Kishore Phadke, the learned Authorised Representative, reiterated the arguments put forward on behalf of the assessee company before the AO and the CIT(A). The submissions made by him are summarized below:
That a foreign collaboration agreement was entered into between the assessee and Styler Daimler Puch, Austria (SDP for short) on 16th Dec, 1997.
• That SDP was a company, inter alia, engaged in the activity of providing technical know-how in the area of automotive technology.
• That SDP was to provide the assessee company with sufficient technical and marketing information in order to enable it to successfully operate.
• That assessee company was incorporated with the main object to own and operate an automotive engineering centre in India, to undertake engineering research and technical services and to set up a workshop/manufacturing facility to undertake local manufacture of products including components and parts.
• That SDP and the assessee company agreed to carry on the business in the above areas in India.
• That by virtue of the collaboration agreement dt. 16th Dec., 1997, the assessee company came in possession of the technical know-how and since the business of the assessee company was to give technical know-how to its customers, the business of the company should be held to have been 'set up' and 'commenced' on 16th Dec, 1997.
• That the assessee was a knowledge company and it was its business to supply know-how, knowledge and technology to its customers.
• That the business of the assessee company was, as per Ministry of Industry Acknowledgement No. 550/SIA/FC/97 dt. 5th Aug., 1997, to set up wholly owned Indian subsidiary and automotive engineering and research consultancy services.
• That approval was given by the Ministry of Industry for foreign collaboration in December, 1997.
• That reliance was placed on the decisions in the following cases:
(i) Western India Vegetable Products Ltd. v. CIT ;
(ii) Sarabhai Management Corporation Ltd. v. CIT ;
(iii) Neil Automation Technology Ltd. v. Dy. CIT (2002) 120 Taxman 205 (MumbaiHMag) in ITA No 3263/Mum/1988 dt. 5th July, 2001;
(iv) Chakradhari Wheels (P) Ltd. v. ITO (2005) 96 TTJ (Del) 517;
(v) CIT v. Sarabhai Sons (P) Ltd. ;
(vi) Prem Conductors (P) Ltd. v. CIT ;
(vii) Coromandel Exports (P) Ltd. v. ITO (1984) 20 TTJ (Hyd) 503;
(viii) CIT v. Western India Sea Food (P) Ltd. .
4.1 Thereafter he noted the detail of expenses claimed by the assessee amounting to Rs. 49,26,141 under the various heads in para 6. He noted that AO had held that business was not set up during the previous year relevant to the asst. yr. 1998-99. Thereafter the summary of the findings of the CIT(A) is noted in para 8. In para 9 of the proposed order, the learned AM has observed whether impugned expenses incurred for the year ending 31st March, 1998 were admissible deduction, was precisely required to be decided. This would require to record as on what point of time the business of the assessee company can be said to have been set up. For that purpose, the learned AM observed that legal position, as laid down by various Courts would have to be examined. The learned AM accordingly referred as first case to the decision of Hon'ble Bombay High Court in the case of Western India Vegetable Products Ltd. (supra) and observed that in that case the Court has pointed out that expression, "setting up" of the business is not "commencement" of the business. When business is established and is ready to commence, then it can be said of that business that it is 'set up'. But before it is ready to commence, business is not set up and there may be an interregnum period between the point of time when a business is 'set up' and the point of time when the business is 'commenced' and all expenses incurred after 'setting up' of the business and before the 'commencement' would be permissible deduction.
4.2 The learned AM, thereafter referred to the case of Sarabhai Management Corporation Ltd. v. CIT wherein the Gujarat High Court referring to provisions of Section 3 of 1961 Act and relying on the decision of Bombay High Court in the case of Western India Vegetable Products Ltd. (supra), laid down the same proposition of law. The AM thereafter observed that in case of a new business, engaged in trading or in the service sector, no plant or machinery are installed and no trial runs are necessary and, therefore, a different set of criteria will be required to be applied in order to determine whether such a type of business had been established, so as to be ready to commence business. After considering three decisions, the learned AM proceeded to apply the legal proposition enunciated in those decisions to the facts of this case. He has observed that in the present case, the assessee company was incorporated on 15th Sept., 1997. Necessary approval was granted by the Ministry in December, 1997 for a foreign collaboration. The assessee company entered into correspondence with Scooters India Ltd., a prospective customer, as early as in July, 1997. The company also carried correspondence with Mahindra & Mahindra Ltd., Kalyani Tubes and Hindustan Motors. The foreign collaboration agreement between assessee company and its parent company was entered into on 16th Dec., 1997.
4.3 In support of above view, the learned AM relied upon the following decisions:
(1) CIT v. Western India Sea Food (P) Ltd. ;
(2) Ned Automation Technology Ltd. v. Dy. CIT (supra) in ITA No. 3263/Mum/1988 dt. 5th July, 2001;
(3) Prem Conductors (P) Ltd. v. CIT .
4.4 The learned AM then proceeded to consider allowability of expenses of Rs. 17,92,600 incurred on construction, repair to make the building suitable for office purposes. In the light of decision of Hon'ble Bombay High Court in the case of CIT v. Hede Consultancy (P) Ltd. and Anr. , he directed the AO to examine and decide afresh the issue raised through this ground and allow appropriate relief. The learned AM did not examine any other contention.
5. The learned JM did not agree with the view taken by the learned AM in the proposed order. He noted that AO did not allow deduction of expenses of Rs. 49,27,336 against interest on fixed deposit of Rs. 3,91,780. He noted that AO had given categorical finding that this is the first year of return and no income was declared under the head "Business or profession". The AO had held that expenses claimed could not be allowed under the head "Interest income". According to the learned JM, there were two controversies namely (i) whether expenditure claimed was not laid or expended for purposes of business in the year of consideration. Secondly, whether those expenses could be allowed as business was set up in the year under consideration. He thereafter noted the head and the basis on which expenses of Rs. 17,92,602 and Rs. 15,65,239 were claimed by the assessee. Thereafter the basis of disallowance given by the AO in para 28.1 and by the learned CIT(A) in para 29 as noted by the learned JM. In para 31, the learned JM observed that arguments of rival sides have already been considered by my learned Brother and need not be repeated again. Thereafter the learned JM records his reasons for his dissenting opinion. These are summarized as below:
(i) The assessee cannot be said to have set up its business in terms of Section 3 and Section 29 of IT Act on 15th Sept., 1997 when undisputedly it was incorporated. The learned JM has recorded in agreement with the learned AM that business is set up when it is established or set on foot and that there may be an interregnum between the setting up of a business and its actual commencement. He thereafter refers to the distinction between "setting up of a company" and "setting up of a business" and observed that setting up of a company is not setting up of business. He refers to definition of word "business" in Black's law Dictionary and observed that business is a series of action to be taken by a businessman in a systematic manner step by step and once all the preliminary requisites are completed, then it can be said to be set up of the business. He thereafter referred to Section 28 and Section 29 of the IT Act. According to him, income is to be computed in accordance with provisions contained in Sections 30 to 43D of the IT Act. Thereafter reference is made to Section 3 of the IT Act. While dealing with Section 3 of the IT Act relating to setting up of a new business in the previous year, the learned Member observed that the term "setting up" is disjunctive and cumulative with the phrase "the source of income" and should not be read separately. Thereafter the learned JM concludes as under:
With the result, I want to give a finding, as based upon the established facts of this case, that for the year under consideration, since admittedly there was no source of business income came into existence in the accounting year under consideration, hence beyond the scope of Section 3 of the Act. I am sure there is no element of doubt or difference of opinion seeing the factual matrix of the case in respect of this finding on facts.
5.1 The learned JM then commented on observation of the learned AM in para 14 that present is not a case of an assessee involved in manufacturing or trading activity. The assessee is stated to be in service industry. He agreed that different set of criteria will be required to be applied in order to determine whether business was set up, commenced or established. The learned JM thereafter considered pre-requisite which can logically be drawn on render of service and held that facts of the case do not establish that they were functional or started operating in this accounting period.
5.2 Second criteria applied was effect of an order in the offing. In conclusion of this criteria, the learned JM has observed, "All subsequent developments do not predetermine for sure the happenings of future hope of an order to supply the service".
5.3 The third criteria was the position of employment. The learned JM has given the example of a surgeon who is available to perform the surgery but in the absence of equipment or operation theatre, cannot perform surgery, thus definitely not engaged in medical service.
5.4 The fourth criteria is incorporation certificate. According to the learned JM, issuance of certificate of incorporation of a company is merely designation and nothing more than that. Such activities are primarily carried with the ambition and hope of setting up of a business.
5.5 The fifth criteria according to learned JM is consideration of preparatory activities versus commercial activities. He observed that before setting up of a business, certain preparation has to precede but the tax laws do not cover and recognize those preparatory expenses.
5.6 The sixth criteria is capacity to render service. In terms of render of technical service, there ought to be the presence of the technology, a designate place like office, presence of equipment, covering technological field and office requirement etc. The company could authentically undertake the consultation job and effectively discharge the function assigned, if any.
5.7 The seventh criteria, which according to learned JM is determinative test, was functional.
5.8 The JM further observed that abovenoted criterias were not exhaustive but illustrative because of obvious reason that the question of set up of a particular type of business is always a question of fact which can be decided only on peculiar facts and circumstances of the case. In the background of above observations, the learned JM held that there is nothing on record to establish that there was an existence of any tool/equipment/office machinery/presence of technology etc. etc. ready in hand to make use of them for imparting technical service.
5.9 In the ultimate analysis, the learned JM observed as under for denying claim of deduction as business was not set up by the assessee:
36.1 Next, admitted sequence of events are that the assessee company was incorporated on 15th Sept., 1997, thereafter a collaboration agreement was executed on 16th Dec, 1997 (see p. 3 of paper book II). Next was an exhibition at Delhi held in January, 1998 and incurring of travelling expenditure during these months. Side by side the office, stated to be on lease, was under preparation/construction and the final bill of construction was dt. 30th March, 1998 [see para 3(iii) of p. 6 of AO's order]. Once it is an established fact that the office was not even ready for professional use, how it can be held that the profession has started. Naturally, a professional has to have an office to have place of discussion with his clients and from where he can impart the professional skill. So, a conclusion cannot be drawn that by the time the office was not ready, the profession cannot be said to be set up in the first year of the business. This analogy is at par with the findings of several Courts in cases of manufacturing business or trading business where certain guidelines are laid down to determine the point of time of set up of business. Mere conceiving an idea or a thought and thereafter undertaking journey to examine the future prospects or even drawing attention of the public by participating in an exhibition cannot be held as set up of the business emphatically if it is in the first year. It is like this that every child is brought up with the hope of great future potential, say potential of rendering technical service, but logic do not permit to allow education expenses as setting up of a profession. The test is whether he had at that point of time the potential of rendering technical service immediately on approach by a client. In this appeal, admittedly there were two experts available but the fundamental question is whether they were in a position to render the technical advice in the absence of a proper place to sit or devoid of equipments. And also, a basic query was raised that whether any technical service was rendered and for that, any bill was raised during the year ending 31st March, 1998. The answer was given in negative. An argument was raised that having great technical knowledge those experts were in a position to offer technical service but the moot point is whether there was an iota of evidence that they had actually provided technical service in the accounting year under consideration. Sitting at home, every person has an ambition to do great jobs but question is whether he has done any job in a particular year resulted into income because we are dealing the issue vis-a-vis IT laws which recognize an expenditure as revenue in nature when there is revenue generation through spending of the money. The assessee has utterly failed to demonstrate that whether any contract with any client was executed or any order was received from any concern seeking technical advice. In the absence of such an evidence, it is illogical to hold that the business was set up much less it was commenced.
36.2 One more argument was raised connected with the 'launching expenses' but tome the distinction is obvious between launching of a product belonging to a running business and launch of a product yet to come into existence. Such a launch depicts itself that it was yet to set up and said to be prior to setting up of a business.
6. On account of difference between the learned Members, this matter has been referred to me under Section 255(4) of the IT Act. The case was fixed and I have heard the learned representatives of both the parties.
6.1 Shri Kishore Phadke, the learned Counsel for the assessee brought to my notice that the assessee company was set up to render advisory service in automobiles. Styler Daimler Puch AG, Austria, a worldwide group, is involved in research and advisory services to increase efficiency of automobiles, improvement of process of assembly and had set up the Indian subsidiary. The assessee company is performing a highly technical job. The learned Counsel drew my attention to the correspondence which the assessee exchanged with several prospective customers. It was further submitted that the assessee had a place of business. It had staff like managing directors and manager to render technical advice. All the conditions of setting up of a business were satisfied. The learned Counsel drew my attention to the following decisions which had explained what is 'set up':
(i) Western India Vegetable Products Ltd. v. CAT (supra);
(ii) CWT v. Ramaraju Surgical Cotton Mills Ltd. ;
(iii) Prem Conductors (P) Ltd. v. CIT (supra).
6.2 The learned Departmental Representative opposed the above submission of the learned Counsel for the assessee. He relied upon the proposed order of the learned JM. He argued that neither any receipt was shown nor there was material to establish that business was set up in the relevant period. The Departmental Representative further argued that expenditure on renovation of office in the first year of business is clearly capital in nature. He also supported the disallowance of various expenses claimed under the various heads.
7. I have given careful thought to the rival submissions of the parties. In my considered opinion, there is no need to examine first principle relating to setting up of business. Various High Courts and Supreme Court have laid down the principle as to when business can be said to be set up, although the question is one of fact and would depend upon the circumstances involved in a particular case. In the case of Western India Vegetable Products Ltd. v. CIT (supra), Chagla Chief Justice observed as under:
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 set up to commence, it is not set up.
7.1 In the above case, Chagla, C.J., also dealt with the treatment of the expenditure incurred after the setting up of the business but before it is commenced and observed:
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 10(2).
7.2 In the case of CWT v. Ramaraju Surgical Cotton Mills Ltd. (supra), their Lordships of Supreme Court considered the question whether the factory of the assessee could be said to have been set up so as to entitle the assessee to the exclusion of that portion of the net wealth which was employed in the factory.
7.3 Their Lordships observed as under:
Where erection of machinery and plant for a new unit commenced from June, 1957 and construction was completed by December, 1957, unit was completed and became ready to go into business only after the Act had come into force and, therefore, assessee was entitled to exemption under Section 5(1)(xxi) in respect of assets used up in setting up the unit.
7.4 Their Lordships approved the observations of Chagla Chief Justice in the case of Western India Vegetable Products Ltd. v. CIT (supra).
7.5 In the case of CIT v. Saurashtra Cement & Chemical Industries Ltd. , their Lordships observed as under:
It may be that the whole business was not set up when the activity of quarrying the leased area of land and extracting limestone was started. That would be set up only when the plant and machinery was installed, the manufacture of cement started and an organization for sale of manufactured cement was established. But, as pointed out above, business is nothing more than a continuous course of activities and all the activities which go to make up the business need not be started simultaneously in order that the business may commence. The business would commence when the activity which is first in point of time and which must necessarily precede the other activities is started. Take, for example, a case where an assessee engages in the business of a trader which consists of purchasing and selling goods. The assessee must necessarily purchase goods in order to be able to sell them and purchase of goods must, therefore, necessarily precede their sale. Can it be said in such a case that when the assessee purchases goods for the purpose of sale, he does not commence his business? Is it necessary that he must start the activity of selling goods before he can be said to have commenced his business? We have to consider the question as to when an assessee can be said to have commenced business from a common sense point of view. We have to ask ourselves the question as to when a businessman would regard a business as being commenced ? Would he not consider a business as having commenced when an essential activity of that business is started ? The argument of the Revenue seeks to confound the commencement of a business with the establishment of the business as a whole and carrying on of all the activities of the business. This confusion is the result of a loose description of the business of the assessee as a business of manufacture and sale of cement.
7.6 Again, in the case of Sarabhai Management Corporation Ltd. v. CIT (supra), the Hon'ble Gujarat High Court noted the above decision and observed as under:
Applying the same reasoning to the facts of the case before us, the business activities of the assessee company can also be said to fall into three broad categories. The first business activity is to acquire either by purchase or by any other manner immovable property so that the property can be ultimately given out either on leave and licence basis or on lease to others together with the appurtenant services. The second category of the business activity is to put these buildings and building accommodation and lands and gardens into proper shape and set up the appurtenant services so that ultimately the property can be given out on leave and licence basis and the third business activity is actually to give out on lease or on leave and licence basis. In the present case the property was acquired on 28th March, 1964. Thereafter, for some time various types of alterations and additions were being carried out and the activity of getting this property ready for its licensees and making it serviceable for its licensees was attended to and it is in the process of making this accommodation available to the intended lessees or licensees that the garden staff and other staff was engaged, pieces of equipment and gadgets, etc., were acquired by purpose or otherwise, lift was installed and ultimately w.e.f. 1st May, 1965, a portion of the accommodation was actually given out on licence basis at the fee of Rs. 27,000 per month. Therefore, if we have merely to look at giving out on licence as the business activity of the concern, then in a loose sense it can be said that the company commenced its business w.e.f. 1st May, 1965, but that is not the only business activity of the company. The business activity of the company consists of three broad categories which we have pointed out above and the objects clause of the memorandum of association justifies such a conclusion. Therefore, when the company actually let out on leave and licence basis a portion of these particular premises w.e.f. 1st May, 1965, the earlier preceding part of its activities were also part of the business activities of the company, for example, engaging the garden staff, kitchen staff or other staff, buying the equipment and getting the equipment ready, making the staff, familiar with the working of that equipment, etc. They are all part of the business activities of the company so that ultimately when the licensee or lessee came to occupy the premises, everything would be in shape for use of the licensee or lessee, as the case may be. Under these circumstances, following the principle laid down by the Division Bench of this Court in CIT v. Saurashtra Cement & Chemical Industries Ltd., it must be held that it is only in a loose sense that the business of the company can be said to be to give out on leave and licence basis residential or office accommodation together with the appurtenant services. The business of the company was of a threefold category as mentioned above after a proper analysis and once that analysis is made, it is clear that from 1st Oct., 1964, the company was carrying on the second category of its business, namely, the business activity of making the residential accommodation with all the appurtenant services available to the intended lessees or licensees. We find from the order of the Tribunal that though the decision of this High Court in CIT v. Saurashtra Cement & Chemical Industries was cited, the Tribunal did not think that it had any application to the facts of the case. We are unable to see how the principles laid down in Saurashtra Cement & Chemical Industries Ltd.'s case cannot be said to have any bearing on the facts of the present case. In our opinion, the desirability of avoiding thinking in a loose sense and clearly analyzing the nature of the business activity of the assessee was essential for the purpose of arriving at the correct decision in this case. Under the circumstances, the Tribunal, in our opinion, has not applied the correct tests and has consequently arrived at an erroneous conclusion regarding the commencement of the business activity of the assessee company.
7.7 The aforesaid decision was confirmed by the Hon'ble Supreme Court in the case of CIT v. Sarabhai Management Corporation Ltd. .
7.8 In the case of Coromandel Exports (P) Ltd. v. ITO (1984) 20 TTJ (Hud) 503, Hyderabad Bench of the Tribunal observed as under:
17. In the case of Coromandel Exports (P) Ltd. v. ITO (1984) 20 TTJ (Hud) 503, the business of the assessee company was export of tobacco. The Tribunal Hyderabad, relying, inter alia, on the decision of Bombay High Court in the case of Western India Vegetable Products Ltd. (supra) held in para 5 of its order as under:
What all is needed for setting up of the said business is to secure a business place or an office, to provide it with furniture, etc., to have a telephone to maintain the office and make ready everything to start business. If no intended exporter approached the assessee and got his product exported through the assessee it is not the fault of the assessee. Ultimately, it may be his bad luck but in legal terms it cannot be said that he had not set up his business. Therefore, we are of the opinion that all the expenses incurred after the business is being set up are excludable business expenditure.
8. Having in mind the aforesaid principle, I proceed to examine the facts and circumstances of this case. In the memorandum of association of the assessee company, one of the main objects is to act as "consultant, adviser and provide technical service for the development/manufacture of new products, modification in methods/systems of manufacture, assembly, fabrication and in the design, lay out of the vehicles, components, parts, bodies". There are other clauses providing for acting as consultants and advisers. At p. 2 of the paper book, there is detail of the various activities handled by managing director Mr. Van Den Oever during his stay in India and the corporate offices he visited to carry on discussion with different persons. The corporate offices Mr. Van Den Oever visited are recorded to be situated at Delhi, Pune, Mumbai, Kolkata, Indore etc. The names of the parties include Hindustan Motors, Eicher Motors, Anand Group of Industries (Mahindra & Mahindra). Even the names of the persons he met are also given. The assessee has also furnished detailed qualification of Shri Rajiv Randive who was general manager, marketing and had met various prospective clients. The assessee also gave summary of various activities carried on by the above employee. The clients were shown to have contacted on tour like Eicher Motors, Hindustan Aeronautics, Hindustan Motors, Kalyani Tubes, Kinetic Pune, Mahindra & Mahindra, and Scooters India. The assessee has also placed on record correspondence exchanged with various manufacturers of automobiles. In some correspondences, problem being faced by different automobiles and how the assessee can help in improving their product are also stated.
8.1 The assessee during the relevant year is shown to have incurred the following expenses as recorded by the learned AM:
Particulars (Rs.) Building, repairs, improvement and renovation 17,92,600 Exhibition/Launch expenses 15,65,239 Travelling expenses 4,77,567 Rent 3,10,400 Advertisement 1,71,500 Expenses 1,62,551 Car hire charges 1,06,307 Legal charges 96,930 Exchange rate fluctuation 91,150 Consultation charges 55,000 Printing & stationery 27,165 Vehicle & fuel 20,243 Brokerage 20,000 Entertainment expenses 12,097 Miscellaneous 9,389 Audit fees 8,000 Interest 1,195 Total 49,27,336
8.2 The correctness of the above facts has been verified with reference to copy of P&L a/c and balance sheet available at p. 112 of the paper book. The expenditure clearly showed that the assessee had a building on which rent of Rs. 3,10,400 was incurred. It further carried advertisement related to the business it had set up and other miscellaneous expenses connected with the consultative services the assessee intended to provide. It is also a part of record that the assessee participated and took a stall in "Auto fair" held in the relevant period in Delhi. The objective of the above fair was to advance assessee's business of consultancy.
8.3 On the above facts, it is difficult to hold that the assessee did not set up business in the relevant period. The assessee had a place of business; it had qualified people who could give advice on automobile industry. There is material to show that the assessee contacted various clients who entered into agreement with the assessee in the subsequent years and paid fees for consultation. The assessee, without a doubt, did not show any consultancy receipt but merely because actual receipts were not shown, it cannot be said that the assessee did not set up its business. In fact, the business was set up and commenced when the assessee was ready to give consultancy to its prospective customers. Not only that, there is material on record to show that the assessee took steps to give actual consultancy to its customers. Of course, consultancy charges were received in the subsequent year. But merely because no actual amount was received as charges, it cannot be said that the business was not set up.
8.4 I have also considered the reasoning given by the learned JM in the proposed order. He held that the expenses claimed by the assessee could not be allowed under the head "Interest income". In para 28.1, he has rioted the reason given by the AO for disallowance. In Clause (ii) of that para, he has observed : "An expenditure incurred prior to the setting up of the business falls outside the purview of Section 28 of IT Act." The expression "prior to commencement" of business is again used in Clause (iii) and the two decisions quoted by the AO in Clause (iv) have no application here.
9. Now, proceeding to examine the reasons given in para 29, I find that these are without any substance. What is the effect of production of correspondence is to be judged with reference to the type of business claimed to have been set up. The general manager and the managing director were quite competent to render advisory services to the clients and there was no need to employ engineers or other employees for setting up the business. Taking a stall in auto exhibition for advancement of business has been misinterpreted as launching of business. As noted earlier, travelling expenses have been incurred by the director and manager to contact various clients. Meetings and discussions with different persons to locate prospective clients is an indication of setting up of business. When the assessee was ready to offer advice on matters and problems indicated in the correspondence with clients, it is immaterial that no fees for consultancy was received in the year under consideration.
[Some text of the order seems to be missing here--Ed.]
(b) The renovation of a building may be capital but that does not make any difference to the question involved. It is nobody's case that building was not ready for use. On consideration of detail of expenses, it is seen that apart from rent, other expenses pertaining to use of building like electricity and telephone expenses are also debited along with other administrative expenses.
(c) The observations made about exhibition and launch expenses are misstated. Auto Expo 1998 was held in January, 1998. The company was set up much earlier to that. Therefore, it is wrong to say that the expenditure on exhibition was incurred before the setting up of the business. I have already stated that the word "launch" is being read out of context. If expenditures were not wholly verifiable, the Revenue authorities could have disallowed part of the expenses. Thus, all the reasons given under Clause (c) are without any basis or supporting evidence.
(d) The assessee had claimed expenses as business expenses. The question of claiming them under other sources did not arise.
10. Now, I consider other reasons given by the learned JM in the proposed order. In the light of case law referred to by the learned AM in his proposed order, it was not necessary for the learned JM to go to the first principles of Sections 3 and 29 of the Act and particularly when he accepts the proposition, "that a business is set up when it is established or set on foot and which is a stage immediately before the commencement of the business". Learned JM also accepts the principle laid down in the case of Western India Vegetable Products (supra) though the citation is wrongly recorded by him. It is nobody's claim that setting up of a company is setting up of a business. He accepts that expenditures incurred after setting up and before the commencement of the business are to be allowed as a deduction. After accepting legal principles, it was quite unnecessary to again go to the first principle. His finding that there was no source of business income in terms of Section 3 is factually incorrect. The assessee had its machinery ready to give consultancy and that was the source of income. No amount was actually received and that the amount was actually received next year is not very material. The learned JM accepts that, "This is not the case of assessee involving either any manufacturing activity or trading activity. The assessee is stated to be in service industry". As stated earlier, the assessee claimed that its business was that of consultancy as expert in automobile industry. The so-called pre-requisites or criteria adopted for determining whether the business was set up, commenced or established on facts of the case are difficult to understand. The criteria are discussed hereunder:
(i) Learned JM has concluded that business was not functional. This finding is not supported by any fact. The learned JM has not bothered to examine expenditure claimed by the assessee.
(ii) No consultancy order was procured in the relevant period. It is true that no order was procured but the assessee started efforts to procure order and in fact, procured the same in the subsequent years. In the light of correspondence carried on by the assessee and the queries received by it from its prospective customer, it cannot be said that business was not set up.
(iii) As per the learned JM, employment of labours, technicians and workers is a must in the service industry. "Mere presence does not qualify for the claim as per the language of the statute". It is difficult to understand "the language of which statute" was being considered by the learned JM. As discussed earlier, the assessee had qualified people to render advisory service. Why their presence was not taken sufficient for accepting setting up of the business is difficult to understand.
(iv) It is nobody's claim that incorporation of company was not setting up of business.
(v) Learned JM says that preparatory activities do not lead to setting up of business. In his view, "Mere exploration of a suitable place, suitable customers before the setting up cannot be held that the business has been set up". It is difficult to agree with the above statement. The assessee had a suitable place and machinery to render advisory services and thus has claimed that business was set up.
(vi) In the view of the learned JM, the assessee ought to have technology, office, equipment, technological field so that the company can authentically undertake the consultation job effectively. This was not established. As per discussion in earlier paras, I find it difficult to agree with the observations of learned JM.
(vii) According to the learned JM, functional was the determinative test. According to him, the process of taking a shape cannot be equated with the term "functional". On the facts of the case, the assessee's business had taken a shape and was rightly claimed to be set up.
11. The seven criteria stated by the JM do not have factual support nor any law has been cited in support of above criteria. The above discussed seven criteria are again repeated in para 36.1 of the proposed order. I would only like to state that the assessee did not claim to have conceived an idea. It had an office from which advice could be given in the automobile industry. All the correspondences are addressed to a particular address in Pune. The assessee had the machinery to render advice in the technical field. The inferences drawn by the learned JM in the proposed order are not possible on facts and circumstances of the case. I am, therefore, unable to agree with the view taken by the learned JM that the business was not set up by the assessee in the previous year. I agree with the learned AM.
12. In the question proposed to me, there is reference to total claim of expenditure of Rs. 49,27,336 and, thereafter, two specific expenses of Rs. 17,92,600 and Rs. 15,65,239 under the heads "Building, repair and renovation" and "Exhibition/launch expenses" respectively. Even if it is held that the business was set up, the claim of the expenditure was required to be examined separately. Total expenditure of Rs. 49,29,336 has been claimed under various heads. On the question of Rs. 17,92,600 claimed as building, repair and renovation expenses, these expenses appear to me to be of a capital nature and, therefore, cannot be allowed. The assessee has not placed any material on record to show that repair and renovation could be treated as current repairs. The decision of Supreme Court in the case of CAT v. Shrawan Kumar Agarwal (2007) 210 CTR (SC) 616 ; (2007) 163 Taxman 187 (SC) also goes against the assessee. Therefore, I agree with the Revenue authorities that the above expenditure could not be allowed. As far as expenditure of Rs. 15,65,239 on exhibition is concerned, it is clear from the record that the assessee had taken a stall in Auto Expo 1998 at Delhi in January, 1998. All the expenses were aimed to propagate the assessee's business and no material is brought on record by the Revenue authorities to show that the expenses claimed were inadmissible. I accordingly allow these expenses. As far as balance expenses are claimed, I am not in a position to hold that these expenses were incurred; no arguments were addressed nor any detail of these expenses was brought to my knowledge during the course of hearing of this appeal. In these circumstances, I am unable to allow them. These have been rightly disallowed. Therefore, on facts and circumstances of the case, I agree with the learned AM to the extent that the deduction of Rs. 15,65,239 be allowed to the assessee out of expenses claimed under the head 'Business'. The balance expenses claimed are to be disallowed.
I agree as above with the learned AM.
The matter is now placed before the regular Bench for disposal in accordance with law.