Income Tax Appellate Tribunal - Delhi
Gng Stock Holdings Pvt. Ltd., New Delhi vs Assessee on 22 December, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `C': NEW DELHI
BEFORE SHRI C.L.SETHI, JUDICIAL MEMBER AND
SHRI K.G. BANSAL, ACCOUNTANT MEMBER
I.T. A. No.913/Del/2011
Assessment Year : 2005-06
M/s. GNG Stock Holdings Pvt. Ltd., Dy. Commissioner of Income-tax,
Y-12, Loha Mandi, Naraina, Vs. Circle 12(1), New Delhi.
New Delhi.
PAN: AACCG2166L
(Appellant) (Respondent)
Appellant by: Shri S.M. Mathur, CA.
Respondent by: None.
ORDER
PER C.L. SETHI, JUDICIAL MEMBER:
The assessee is in appeal against the order dated 22.12.2010 of the learned Commissioner of Income-tax (Appeals) passed in the matter of an assessment made by the Assessing Officer under sec. 143(3) of the Income- tax Act, 1961 (the Act), for the Assessment Year 2005-06.
2. The only issue raised in this appeal is with regard to the disallowance of assessee's claim of expenses of Rs.2,15,145/- made by the Assessing Officer on the ground that the business had not been commenced during the year under consideration.
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3. The assessee company filed its return of income declaring total loss of Rs.35,289/- on 30.10.2005. The case was selected for scrutiny and notice u/s 143(2) was issued on 11.09.2006. The Assessee's Authorized Representative appeared before the AO from time to time and submitted requisite details before the AO. The assessee has declared interest income from FDRs. The AO has noted that the assessee company during the year has not done any business activity as is clear from the profit and loss account. The AO further stated that there were no purchases, inventory and sales during the year except interest income earned from FDRs. The AO, therefore, asked the assessee to explain as to when the business of the assessee had not commenced, why the expense should not be disallowed. In reply thereto, the assessee vide its letter submitted on 5.09.2007 stated that the assessee company was incorporated with the main object of acting as trading and clearing member of the wholesale debt market, capital market and future and option segment of any stock exchange or association formed for organized trading in India. The assessee further submitted that to achieve its object, the assessee had filed application for trading and clearing membership of the capital market and futures and options segment of the National Stock Exchange and also given security deposit and collateral security to NSE along with requisite fees. It was thus, submitted by the 3 assessee that business activities had commenced during the year under consideration.
4. After considering the assessee's submissions, the AO found the same to be unacceptable by observing that the business expenses can be allowed only if any business activity is carried out by the assessee and since no business activity has been carried out by the assessee, the expenses claimed prior to commencement of business activity could not be allowed. The AO further stated that the securing of membership of the NSE and payment of required deposits and fee can only be termed as the stepping stones towards the setting up of the business. The AO's observations in this regard are as under:-
"4. The submissions made by the assessee have been duly considered and found unacceptable. As per the provisions of the Act, business expenses can be allowed only if any business activity is carried out by the assessee. IN the instant case, the perusal of the P&L A/c reveals that no business activity as such has been carried out by the assessee. The securing of membership of the NSE and payment of required deposits and fee can only be termed as the stepping-stones towards the setting up of the business. Without securing the membership of the relevant stock exchange, the business activities of the assessee can in any case not commence. The claim of expenses under section 37(1) of the Income Tax act, 1961 can only be allowed if the expenses have been laid out or expended wholly and exclusively for the purpose of business or profession carried during the year. Mere incorporation of the company cannot be said to be the commencement of business. Further, merely by acquiring the membership of the stock exchange, the assessee cannot say that its business ahs commenced. Business 4 can only be said to commence when the actual trading activities begin which is not the case with the assessee. None of the activities for which the company has been incorporated, have been carried out by the assessee during the relevant year and the only income which it has derived is by way of interest income. Therefore, the expenses debited to the P & L A/c amounting to Rs.215145/- cannot be allowed under section 37(1) and are added back to the income of the assessee. Since I am satisfied that the assessee has furnished inaccurate particulars of its income, penalty proceedings under section 271(10( c) are being initiated separately."
5. Being aggrieved, the assessee preferred an appeal before the learned CIT(A).
6. After considering the assessee's submissions and AO's order, the CIT(A) confirmed the AO's order by observing that though the appellant company was incorporated on 6.09.2004, the registration was granted by the National Stock Exchange on 27.02.2005 and by SEBI on 18.05.2005. The learned CIT(A) further stated that actual trading activities could be started only after 18.05.2005 when registration was granted by SEBI. The learned CIT(A) rejected the assessee's contention that the business has commenced on the date of incorporation. The learned CIT(A) relied upon the following decisions:-
(1) Tetron Commercial Ltd. vs. CIT, 261 ITR 422; (2) CIT vs. Saurashtra Cement and Chemical Industries Ltd., 91 ITR 170 (Guj.); & (3) Sarabhai Management Corporation Ltd., 102 ITR 25.
7. Hence, the assessee is in further appeal before us.
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8. The learned counsel for the assessee has submitted that the assessee company was incorporated as a private limited company on 6th September, 2004 to carry on the main business of acting as trading members and clearing members of the wholesale debt market, capital market and futures and options segments of any stock exchange or association formed for organized trading in India or elsewhere to make arrangements with members of other exchange in such manner subject to approval of SEBI and other concerned authorities where required. He further submitted that these activities were further be expended to act as stock and share broker, to act as underwriters, brokers to the issue of securities and dealers in securities etc. etc. He, therefore, stated that since the assessee company was incorporated as a private limited company being duly approved by the Registrar of Companies on 6th September, 2004, the assessee company had been set up on 6th September, 2004 itself. He further submitted that the assessee had applied on 12.10.2004 for getting trading membership of both capital market and futures and options segments with National Stock Exchange which was granted on 27.02.2005 by National Stock Exchange. He further pointed out that the company had also simultaneously applied for SEBI registration which was also granted to the assessee company on 18th May, 2005. In the light of these facts, he submitted that the business of the assessee company 6 had actually been set up on 6th December, 2004 when it was incorporated as private limited and the first business activity of the assessee company had commenced when it had applied for registration with National Stock Exchange on 12.10.2004. He, therefore, submitted that all the expenditure incurred by the assessee on or after 6th September, 2004, for the purpose of business are allowable expenses under sec. 37(1) of the Act. The learned counsel for the assessee has relied upon various decisions, which shall be discussed by us hereinafter.
9. The learned DR on the other hand, supported the orders of the authorities below to contend that the assessee's business can be said to have been set up only on 27.05.2005 when registration was granted SEBI to the assessee company. He, therefore, submitted that the expenses incurred prior to 27.05.2005 are not allowable deduction within the meaning of sec. 37 of the Act.
10. We have heard both the parties and have carefully perused the orders of the authorities below.
11. It is not in dispute that the assessee company was incorporated as a private limited company under the Companies Act, 1956 on 6.09.2004 to carry on the business subject to the approval of SEBI and other concerned authorities to act as a trading member and clearing member of the wholesale 7 debt market, capital market and futures and options segments of any stock exchange. The assessee company made an application for registration dated 12.10.2004, before the National Stock Exchange of India Ltd. for trading membership of capital market and future options, which application was submitted on 15.10.2004. The assessee company then made another application dated 10.11.2004 before the National Stock Exchange of India Ltd. for trading/clearing membership of capital and future and option segments. In compliance to the above two applications, interview for membership was fixed by the national Stock Exchange on 24th November, 2004 at Mumbai. Thereafter National Stock Exchange vide letter dated 24th December, 2004, intimated the assessee that the Exchange had admitted the assessee as a trading member on both capital market segment and the futures and options segments as on December 6, 2004 on a provisional basis subject to fulfillment of certain specified conditions on or before March 24, 2005. In this letter dated December 24, 2005, the assessee was advised to comply with all the requirements mentioned therein and complete all other formalities including remittance of the fees/deposits mentioned in the demand advice enclosed therewith. It was also stated in the said letter that the exchange has reserved its right to grant extension/withdraw trading membership so granted to the assessee on provisional basis in the event of 8 assessee's failure to fulfill any of the conditions within the time stipulated. It was also stated therein that the exchange would forward assessee's application to SEBI for registration of capital market segment and the futures and options segment soon after the assessee made the necessary payments and all other relevant payments to National Stock Exchange. It was also stated that the assessee shall be enable on the NEAT system and allowed trade in the respective segment only after receipt of certificate from SEBI and installation of the connectivity system. The assessee was also asked to fulfill all the conditions that may be stipulated by the SEBI for enablement on the trading system of the respective segments etc. The amount stated in the demand advice raised by the National Stock Exchange was required to be paid on or before 24.03.2005. The assessee was also admitted as a clearing member on the capital market segment as on December 16, 2004 on provisional basis subject to fulfillment of certain conditions on or before March 24, 2005, vide letter dated 24th December, 2004 of National Securities Clearing Corporation Ltd.
12. The assessee vide letter dated 28.02.2005 intimated the National Stock Exchange of India Ltd. that the various conditions mentioned in the registration letter on provisional basis have been complied with and necessary documents in support thereof were furnished. Thereafter, National 9 Stock Exchange of India Ltd. issued a certificate of Registration for the cash market segment vide letter dated May 27, 2005. SEBI also registered the assessee as a trading member on derivative segment vide certificate dated May 18, 2005. The first transaction as a broker was carried out by the assessee company on 13.07.2005.
13. In the case of CIT Vs. Saurashtra Cement and Chemical Inds., 91 ITR 170 (Guj.), the Hon'ble Gujarat High Court has laid down the following test in order to determine the commencement of business activities - The Hon'ble Gujarat High Court has held that a business activity consists of three stages. The first stage relates to the activity necessary for the purpose of acquiring of raw-material and establishment of plant and machinery and the second activity comprises the processing and manufacturing by using the raw material and the plants and machinery set up for the purpose and the third category consisted of the marketing thereof. The first in point of time lays the foundation for the third activity. Therefore, the expenditure incurred for carrying on any of these activities including the first activity is also deductible in computing the profit and gains of the business in the relevant year when the activity is undertaken.
14. In the case of Sarabhai Management Corp. Ltd. vs. CIT, 102 ITR 25, the Hon'ble Gujarat High Court has held that the business commences with 10 the first activity for acquiring by purchase or otherwise immovable property. There may be an interval between the setting up of the business and the commencement of the business. All expenses incurred during that interval are also permissible for deduction.
15. The decision of Hon'ble Gujarat High court in the case of Sarabhai Management Corp. Ltd. (supra) has been affirmed by the Hon'ble Supreme Court in the case of CIT vs. Sarabhai Management Corp. Ltd. (1991) 192 ITR 151 (SC), where the Hon'ble Supreme Court went a step ahead that even the activities at a preparatory stage are also admissible.
16. In the case of CIT vs. Whirlpool of India Ltd. (2009) 318 ITR 347 (Delhi), the assessee company was incorporated on July 27, 1995 as a financial enterprise. The first board meeting was held on August 12, 1995. On September 4, 1995, the company placed orders for purchase of computers and peripherals. During the months of September and October, 1995, various key employees were appointed. During the period from November 1995 to January, 1996, the assessee paid salary to the staff and employees through two companies. A bank account was opened on February 1, 1996, in the name of the company and thereafter the expenses were incurred from the same. In the return, the assessee claimed that the business had been set up with effect from November 1, 1995. However, the 11 AO took the view that the business could be set to have been set up only on February 1, 1996 when the bank account was opened in the assessee's name and therefore, only the expenditure incurred thereafter could be allowed as a deduction. The AO's view was confirmed by the learned CIT(A). The Tribunal held that the expression "setting up of the business in the previous year" as per sec. 3 of the Income-tax Act. 1961, was different from commencement of the business, and in the case of a company engaged in rendering financial services, it was possible to say that the business was set up when the directors were appointed, such as regional and branch managers were appointed, and their salaries were paid, computers were acquired and installed and the company was ready to commence business. The Tribunal further held that it could not be said that the business was set up only when the bank account was opened on February 1, 1996. The appeal filed by the department against the Tribunal's order was dismissed by the Hon'ble High court by holding that the question as to when the business was set up depends on the facts of each case and the nature of the business and no hard and fast rule could be laid down as to when the business was set up. The Hon'ble High Court observed that the order of the Tribunal exhaustively detailed the facts and the reasons as to why the business was set up not on February 1, 1996 as contended by the AO but on November 1, 1995. From 12 this decision, it is thus clear that the business of the assessee cannot be said to have been set up on the date when the company was incorporated under the Companies Act. There must be some activity undertaken by the assessee for the purpose of commencing its business and mere registration under Companies Act, is not enough to hold that the business has actually been set up within the meaning of sec. 3 of the Income-tax Act, 1961.
17. In the case of CIT vs. Hughes Escorts Communications Ltd. (2009) 311 ITR 253 (Delhi), it has been held by the Hon'ble Delhi High Court that there is a distinction between the setting up and commencement of a business, and when a business is established and is ready to commence business, then it can be said of that business that it is set up. But before it is ready to commence business, it is not set up. But there may be an interregnum. There may be an interval between a business which is set up and a business which is commenced, and all expenses incurred during the interregnum after the setting up of the business and before the commencement of the business, all expenses would be permissible deductions. In this case, the assessee carried on the business of satellite business communications for which a very small aperture terminal VSAT equipment is used. The assessee placed the purchase order for the purchase of VSAT equipment on July 28, 1994. VSAT equipment can be used only 13 after establishing, maintaining and using the communication facilities on a licence from the Department of Telecommunications. The assessee made an application to the department of Telecommunications for grant of such licence. On August 3, 1994, a licence agreement was entered into between the assessee and the Department of Telecommunications. In the light of these facts, it was held that the business was set up when the order for purchase of VSAT equipment was placed and the application to the Department of Telecommunication for licence and receipt of satellite signals were the consequent stages.
18. In view of these aforesaid decisions, it is thus clear that the expenses incurred by the assessee after setting up of the business can be said to be incurred under the normal circumstances of the business activity.
19. The Hon'ble Delhi High Court in the case of CIT Vs. Hughes Escorts Communications Ltd. (supra) has considered the decision of Hon'ble Bombay High Court in the case of Western India Vegetable Products Ltd. Vs. CIT (1954) 26 ITR 151, where the Hon'ble Bombay High Court has explained the distinction between the concepts of commencement and setting up of a business by holding as under:-
"It seems to us, that the expression `setting up' means, as is defined in the Oxford English Dictionary, `to place on foot' or `to establish', and in contradiction to `commence'. The distinction is this that when a business is established and is 14 ready to commence business then it can be said of that business that it is set up. But before it is ready to commence business it is not set up. But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deductions under section 10(2)."
20. From these decisions, it is clear that when a business is established and is ready to commence business, then it can be said of that business that it is set up. But before it is ready to commence business, it is not set up. In other words, a business cannot be said to be set up before it is ready to commence. The actual commencement of the business may have some interval from the date when the business was set up, but in order to hold that the business is set up, it is to be seen as to whether it was ready to commence though actual commencement might not have been taken place.
21. It is only after the date of setting up of the business that the previous year of the newly set up business would commence, and the expenses incurred prior to the date of setting up of business could not be taken into account for the purposes of determining the profits of a newly set up business.
22. We, therefore, have to determine as to when, in the present case, the assessee was ready to commence business so as to say that the assessee's business had actually been set up. In the present case, the assessee shall be 15 entitled to admissible business expenses from the day when the assessee's business could be said to have been set up i.e. from the day when the business was ready to commence and not from the date of actual commencement of the business.
23. The assessee's contention that the assessee's business to act as a trading member and clearing member of the wholesale debt market, capital market and futures and options segments of any Stock Exchange had actually been set up as soon as the assessee company was registered as a private limited company under the Companies Act, 1956, is found to be of without any merit inasmuch as mere incorporation of a company under the Companies Act cannot be a sole factor to establish that the company has set up its business on the day of registration itself. The mere registration of the assessee company under the Companies Act, cannot be said to be the first stage relating to the activity of acting as trading members and clearing members of the wholesale debt market, capital market and futures and options segments of any stock exchange. The criteria laid down by the Hon'ble Gujarat High Court in the case of CIT vs. Saurashtra Cement & Chemical Inds. Ltd. (supra) and in the case of Sarabhai Management Corp. Ltd. Vs. CIT (supra) does not support this contention of the assessee that the assessee's business had actually been set up merely for the reason that the 16 assessee company was registered as a private limited company under the Companies Act. It is not in dispute that the assessee made application for registration before the National Stock Exchange of India Ltd. for trading membership of capital and future options segments on 15.10.2004 by paying application fee of Rs.10,000/- vide demand draft dated 12.10.2004 payable at Mumbai. In order to commence the business of acting as trading membership of capital market and futures options segments, it was necessary on the part of the assessee to get requisite registration from the Stock Exchange. The assessee's application for registration was allowed on provisional basis on and from December 6, 2004. Thereafter, the assessee also made applications before SEBI as well as National Securities Clearing Corporation Ltd. by paying necessary fees and complying with all the requirements. In this case, the first stage relates to the activity of acting as trading members and clearing member of the wholesale debt market, capital market and futures and options segments of any Stock Exchange was to get registration from the Stock Exchange. It is well settled that all the expenses incurred after the business had been set up are allowable as business deduction u/s 37 of the Act. There may be interval between the setting up of the business and the actual commencement of the business but all the expenses incurred during the interval of setting up of the business and the 17 commencement of the business are also permissible for deduction as so held in the above referred decisions. Having regard to the nature of the assessee's business of acting as a trading member and clearing member of the wholesale debt market etc., it can be said that assessee's business was set up as soon as the assessee got registration by the National Stock Exchange for trading membership of capital market and futures options segments inasmuch as the assessee's business was ready to commence on the day when the assessee got provisional registration from the National Stock Exchange. We are, therefore, of the considered view that the expenses incurred on or after 06.12.2004 are permissible for deduction as business expenses and in order to allow these expenses as admissible deduction, it is not necessary that the assessee should have earned some income out of such activity or all the three stages referred to by the Hon'ble Gujarat High Court in the above referred decision should have been completed. It is enough that the first stage of the business had started in order to claim the business expenses as admissible deduction. We, therefore, hold that the assessee is entitled to a deduction of admissible business expenses incurred by it on or after 06.12.2004 when the business can be said to have been set up by the assessee. We, therefore, direct the Assessing Officer to quantify the amount of expenses in the light of our decision above and allow the same as per law 18 after examining and verifying the genuineness of the expenses and their admissibility under the provisions of Income-tax Act. The AO shall provide reasonable opportunity of being heard to the assessee while quantifying the amount of business expenses incurred by the assessee on or after 15.10.2004. We order accordingly.
24. In the result, the appeal of the assessee is partly allowed in the manner as indicated above.
25. This decision is pronounced in the Open Court on 22nd July, 2011.
Sd/- Sd/-
(K.G. BANSAL) (C.L. SETHI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 22nd July, 2011.
Copy of the order forwarded to:-
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
By Order
*mg Deputy Registrar, ITAT.