Delhi High Court
Indian Railway Stations Development ... vs Pr. Commissioner Of Income Tax-Iv on 26 March, 2019
Author: S. Ravindra Bhat
Bench: S. Ravindra Bhat, Prateek Jalan
$~20
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Decided on: 26th March, 2019.
+ W.P.(C) 6782/2018
INDIAN RAILWAY STATIONS DEVELOPMENT
CORPORATION LTD. ..... Petitioner
Through: Mr. G.C. Srivastava & Mr. Suvinay
Kumar Dash, Advs.
versus
PR. COMMISSIONER OF INCOME TAX-IV ..... Respondent
Through: Mr. Sanjay Kumar, Std. Counsel.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE PRATEEK JALAN
S. RAVINDRA BHAT, J. (OPEN COURT)
%
1. The writ petitioner seeks the intervention of this Court to set aside an
order of the Principal Commissioner of Income Tax [CIT] under Section
264 of the Income Tax Act, 1961. The petitioner is aggrieved by the
assessment order made by the Assessing Officer (AO) for the assessment
year (AY) 2013-2014, wherein the AO disallowed three items of
expenditure claimed as deduction, i.e., depreciation, preliminary expenses,
and employees' remuneration.
2. The assessee/petitioner company was incorporated under the old
Companies' Act on 12.04.2012 as a joint venture company of Indian
Railway Construction Company Ltd. (IRCON) and Rail Land Development
Authority (RLDA); these two entities held equity shareholding in the
proportion of 51% and 49%, respectively. The assessee declared loss to the
W.P.(C) 6782/2018 Page 1 of 13
tune of ₹44,70,035/-. Upon scrutiny, the AO also observed that the assessee
claimed expenditure amounting to more than ₹1.92 crores, but had not
claimed any business income from its activity. An amount of ₹85,83,365
shown in the P&L accounts, was held to be income from other sources. The
assessee therefore preferred a revision petition filed under Section 264,
which was declined.
3. The assessee in furtherance of its claim before the CIT had urged that
it had, in fact, set up a business inasmuch as various preliminary steps had
been taken by it which included the appointment of key personnel,
preparation of draft model Development Agreement and initiation of
process to tender financial and advisory services. The CIT however rejected
the assessee's claim for revision affirming the view of the AO. The relevant
extract of the CIT's revisional order, is reproduced below:-
"8. It is clear that the assessee company is providing
services. As it was established by the government for specific
purpose of developing old stations, merely allotment of
stations for feasibility studies would not mean that it has
necessary infrastructure particularly technical and financial
expertise available with it from the date itself.
In fact, the assessee company follows a model where it has
some key persons supervising on its rolls. However, the entire
major services are outsourced to consultants - technical and
legal. Unless (i) the key persons of the assessee company
have been appointed who can decide how to go about
tendering, selecting the consultants and advisors are in
place; (ii) the draft model development agreement is finalized
(iii) financial and bid advisory services are appointed and (iv)
at least one of the consultants for Architectural and technical
feasibility studies is appointed; in my considered view; the
business is not established.
As far as the certificate of commencement from the ministry of
Corporate Affairs is concerned, this is given an application by
W.P.(C) 6782/2018 Page 2 of 13
the company and actual establishment of setting up of business
is not a criteria for them.
Now, I will proceed to decide when the above key elements of
the business were available to the assessee.
(a) Appointment of key persons on its Rolls:
Mr. S.P. Mahi as Chief Joined on November 12th
Executive Officer 2012.
Mr. Parag Verma as Chief Joined on July 13th 2012
Operating Officer
2. Mr. B.B. Walecha as Joined on June 25th 2012
Manager, Confdl.
3. Ms. Suman Sofat, as Joined on July 13th 2012
Asst. Officer (Fin.)
4. Mr. Vijay Kr. Sharma, as Joined on September 19th
Dy. Manager Civil 2012
5. Mr. Davendra Sohaya, Joined on September 25th
Manager Civil 2012
6. Mr. Raj Kumar, Asst. Joined on September 27th
Manager (Finance) 2012
7. Mr.Ankita Gaur, As Joined on September 26th
Architect 2012
8. Mr. Ashish Mishra as Joined on October 1st
Company Secretary 2012
(b) The draft model development agreement was finalized
The work of "Preparations of Legal Project Document"
was assigned to legal consultants only on 24.08.2012.
Realistically it is taken that even the draft legal Project
Documents would have taken more than two months to
be finalized (as there are five types of such documents
in the suite), therefore, this part of basic business
requirement is taken to be in place on 31.10.2012.
(c) Financial and bid advisory services are appointed
W.P.(C) 6782/2018 Page 3 of 13
The awards and appointment of financial and bid
advisory services was made only in April, 2013 after the
tenders were invited on 17.12.2012.
(d) At least one of the consultants for Architectural and
technical feasibility studies is appointed
The first consultant was appointed on 01.02.2013 after
issuing tender notice on 18.09.2012.
9. Therefore, in my considered opinion, the entire set up
key persons of the assessee company have been appointed
who can decide how to go about tendering, selecting the
consultants and advisors were in place only on 12.11.2012;
(ii) the draft model development agreement is finalized in end
of October 2012 (iii) financial and bid advisory services were
not appointed even till the end of the previous year and (iv)
the first consultant for Architectural and technical feasibility
studies was appointed only on 01.02.2013; in my considered
view, the business was not set up till the end of the previous
year.
10. In view of the above, no expense can be allowed u/s
37(1) of the Act. Only amortization of certain preliminary
expenses is permitted u/s 35D of the Act and debit of these are
allowed after commencement of business as per the provisions
of that section. Hence, I refuse to revise the impugned order
dated 15.01.2016, passed under section 143 (3) of the Act, on
the grounds raised by the Assessee Petitioner. The petition is
decided accordingly."
4. It is contended by Mr. G.C. Srivastava, learned counsel for the
petitioner that the Principal Commissioner's view is erroneous in law. It is
urged that the assessee, as an SPV, does not engage itself in procuring
material or goods or even manufacturing unit, rather, is engaged in
providing services. These services involve taking various steps towards the
ultimate aim of preparing separate project plans for the railway stations
which need to be developed. The project plans are, in fact, coterminous
with the development and its finalisation for each of the station.
W.P.(C) 6782/2018 Page 4 of 13
5. It is emphasised that the preliminary steps involving appointment of
management and key personnel were completed during the assessment year
and that process for engaging other services, such as financial and bid
advisory service were, in fact, commenced.
6. In these circumstances, the claim for deduction against expenditure
towards employees' remuneration, depreciation and such like expenditure
fell within business expenditure, and had to be allowed. In support of this
contention learned counsel for petitioner relies on the Division Bench
judgment of this Court in Commissioner of Income Tax vs. Hughes Escorts
Communications (2007) 311 ITR 253, Commissioner of Income-tax-IV vs.
Dhoomketu Builders and Development Private Limited (2013) 368 ITR 680
and Carefour WC & C India Pvt. Ltd. vs. Deputy Commissioner of Income
Tax (2015) 368 ITR 692. Counsel emphasizes that unlike manufacturing
units, there cannot be a clear cut line between commencement and setting
up of a service entity and that the initiation of the preliminary steps, ipso
facto, in some circumstances is conclusive of this fact.
7. The Revenue counsel, Mr. Sanjay Kumar contend that the facts
presented before the AO and CIT(A) clearly show that there was no
business activity, but rather business inactivity. It is emphasized that even
though the key personnel were engaged, nothing further was done or
achieved. It is urged, as stated in the counter affidavit, that the following
facts are relevant:-
"(i) the entire set up key persons of the petitioner company
that were appointed, who could decide how to go about
tendering, selecting the consultants and advisors, were only in
place on 12.11.2012;
(ii) the draft model development agreement was finalized in
end of October 2012
W.P.(C) 6782/2018 Page 5 of 13
(iii) financial and bid advisory services were not appointed
even till the end of the previous year and
(iv) the first consultant for Architectural and technical
feasibility studies was appointed only on 01.02.2013."
8. It was submitted that until something substantial in regard to the
business plan and development of railway stations actually crystallized, the
assessee could not have been said to have commenced or set up its business
or be engaged in part of its business.
9. The commercial activity the petitioner is, undoubtedly, engaged in is
setting up as an SPV providing services. These services are of specific kind,
i.e., preparation of development plans and projects for the development of
railway stations. The Indian Railways apparently conceived the idea of
setting up the petitioner as a special purpose vehicle to re-develop its
railway stations. Each of the railway stations, therefore, as part of its plan
needs to be bid for separately and each station needs to be presented with a
development plan. Not only was the SPV/petitioner required to draw a
development plan but also engaged itself in the entire project.
10. The MoU entered between the petitioner's promoters i.e. IRCON and
RLDA, inter alia, states certain provision which are as follows:-
"2. BROAD SCOPE OF WORK AND REVENUE
STREAM OF THE SPV
2.1 The scope of the Project(s) will be to develop/redevelop
the existing/new railway station(s) which will consist of
upgrading the level of passenger amenities by new
constructions/renovations including redevelopment of the
station buildings, platforms surfaces, circulating area to better
standards so as to serve the need of the passengers. Details
are given in the succeeding paragraphs.
2.2 SPV shall be responsible for design, construction,
financing, maintenance, generation and collection of revenues
W.P.(C) 6782/2018 Page 6 of 13
through identified passenger amenities, retail and such other
commercial activities at the station in such a manner that each
Project becomes financial viable.
2.3 Implementation of Projects will be through self
financing mechanism in which the scope and parameters of a
Project will be selected in such a manner that the capital and
running cost of the Project is financed through the future
Project revenues (one time and/or recurring) itself together
with a specified minimum return on capital deployed.
Depending upon the Business Plan for each project, the SPV
will implement the Projects primarily through Developer or by
mobilizing of funds through mechanisms such as equity, debt,
subordinate debt, government grants/annuity or other similar
means including its own resources.
xxxx xxxx xxxx xxxx
3.0 RESPONSIBILITIES OF SPV
3.1 The SPV will initially prepare the Overall Business
Plan. Later on, station specific Feasibility Study and Business
Plan shall be prepared for the identified railway stations
assigned to the SPV by MOR through RLDA. The overall
Business Plan will also suggest broad commercial terms and
conditions of the agreement to be entered into between the
SPV & the Developer, SPV & zonal Railway for maintenance
work, SPV & facility management agency and between the
SPV & RLDA, standards of redevelopment, alternative models
of funding, alternative business and implementation models,
O&M strategy, general technical parameters etc.
The SPV shall however take up only financially viable
Projects.
3.2 Feasibility Study and Station Specific Business Plan will
include identification of the requirement of up-
gradation/construction of new assets, estimation of revenue
earning potential of each project, estimation of construction
and maintenance costs, field/geotechnical surveys, preparation
of master plan for the redevelopment of station, identification
of land areas/spaces that can be used for commercial
development, development of alternative financial models,
land valuation, project implementation mechanism, phasing
W.P.(C) 6782/2018 Page 7 of 13
and construction methodology, specific technical details,
tender drawings, draft of station specific maintenance contract
to be entered with zonal railway etc. The output of this study
should enable the SPV to proceed ahead with the invitation of
bids for appointment of Developer for the station.
3.3 Rehabilitation of identified structures/ encumbrances at
the Project site: Railway‟s assistance shall be sought in
removal of encroachments and religious structures, if any on
the project site.
3.4 Designing, financing and constructing each Project and
maintaining the identified components during the specified
period including subcontracting the Project work. Maintaining
the station areas handed over to the zonal railway, if the zonal
railway so desire, through a separate contract to be executed
with the zonal railway.
xxxx xxxx xxxx xxxx
7.0 PROJECT TERM
The rights assigned by RLDA to the SPV in respect of each
Project shall continue till the expiry of lease period mentioned
for each project from the date of assignment. After the expiry
of this period all the rights shall get reverted/transferred to
RLDA/Railway.
11. The extract of the CIT's order makes it clear that during the
assessment year the assessee had, in fact, engaged all key personnel. The
Chief Executive Officer (CEO) took charge sometime in the beginning of
November, 2012. It finalised a tender for obtaining financial bid and tender
advisory service on 17.12. 2013 and the first consultant was appointed on
01.02.2013. As to what is setting up of a business, the judgment in Hughes
Escorts Communications (supra) interestingly deals with this question and
had held as follows in :-
"10. A plain reading of the above provision shows that for a
new business the previous year is the period beginning with
W.P.(C) 6782/2018 Page 8 of 13
the date of setting up of the business. As explained by the
Bombay High Court in Western India Vegetable Products
Limited once it is known what the business of an assessee is:
". . . the important question that has got to be
considered in from which date are the expenses of
this business to be considered permissible
deduction and for that purpose the section that we
have got to look to is section 2(11) and that section
defines the „previous year‟ and for the purpose of
a business the previous year begins from the date
of the setting up of the business. Therefore, it is
only after the business is set up that the previous
year of that business commences and in that
previous year the expenses incurred in the
business can be claimed as permissible deductions.
Any expenses incurred prior to the setting up of a
business would obviously not be permissible
deductions because those expenses would be
incurred at a point of time when the previous year
of the business would not have commenced...
11. The Bombay High Court, which was in this case dealing
with the corresponding provision of the Indian Income-tax Act,
1922, then explained the distinction between the concepts of
„commencement‟ and „setting up‟ of business:
". . . It seems to us, that the expression „setting
up‟ means, as is defined in the Oxford English
Dictionary, „to place on foot‟ or „to establish‟, and in
contradistinction to „commence‟. The distinction is
that when a business is established and is ready to
commence business then it can be said of that
business that it is set up. But before it is ready to
commence business it is not set up. But there may be
an interregnum, there may be an interval between a
business which is set up and a business which is
commenced and all expenses incurred after the
setting up of the business and before the
commencement of the business, all expenses during
the interregnum would be permissible deductions
under section 10(2). . . ." (P.158)
W.P.(C) 6782/2018 Page 9 of 13
The above decision has been followed in a large number of
decisions including this Court in L.G. Electronic (India) Ltd.‟s
case (supra)."
12. In Dhoomketu Builders (supra), the assessee which was in realty
business, tendered for the purpose of land acquisition and obtaining a loan
from its holding company which deposited it as earnest money. It could not
acquire the land and hence, the earnest money was returned to it. Since this
was the first assessment year, the AO was of the view that it had not
commenced business because its commercial activity was aborted. This
Court in its judgment turned down the Revenue's contentions, and held as
follows :-
"8. On a careful consideration of the issue in the light of the
facts and the rival contentions, it seems to us that the decision
of the Tribunal is based on the relevant tests that have been
handed down judicially for the purpose ascertaining as to
when a business can be said to have been set-up. The question
as to when a business can be said to have been set-up is a
question of fact to be ascertained on the facts and
circumstances of each case and considering the nature and
type of the particular business and no universal test or formula
applicable to all types of businesses can be laid down. In
recognition of this position the Indore Bench of the Madhya
Pradesh High Court in Precision Electricals & Electronics
(P.) Ltd. v. CIT [1989] 176 ITR 453/[1988] 41 Taxman 108
has held that the question as to when the business of the
assessee had commenced is a question of fact and if the
Tribunal as, after appreciating the entire material on record,
found that the business of the assessee was set-up on a
particular date, it would be a finding of fact from which no
question of law can be said to arise. The attempt, therefore,
should be to see as to whether the Tribunal had taken note of
the appropriate circumstances and applied the proper tests in
arriving at the conclusion which it did. The locus classicus on
the question as to when a business can be said to have been
W.P.(C) 6782/2018 Page 10 of 13
set-up is the judgment of the Bombay High Court speaking
through Chief Justice Chagla, in Western India Vegetable
Products Ltd. v. CIT [1954] 26 ITR 151. The following pithy
observations are worth quoting:-
"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 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 sec. 10(2)."
13. In Carefour (supra) the assessee company was incorporated on
19.09.2007, for the purpose of carrying on trading activities involving
wholesale trading of all kinds of goods. It claimed expenses as business
losses. The AO rejected its claim for deduction on expenditure holding that
they did not commence any business as they did not sell goods. This Court
allowed and observed as follows:-
"11. On a reading of the above referred quotations, it is clear
that it is only after the business is set up, that the expenses
incurred in the business can be claimed as permissible
deduction under Section 37 of the Act. For commencement of
a business, there must be in place some income generating
asset or income earning structure. In several cases, there is a
gap or an interval between setting up and commencement.
When the business is set up, is a mixed question of law and fact
and depends upon the line, nature and character of the
business/professional activity. For example, for
manufacturing business, purchase of new material or
W.P.(C) 6782/2018 Page 11 of 13
electricity connection may be relevant point to determine
setting up but in case of a property dealer, the moment, he puts
up a chair and table, or starts talking, his business is set up.
The present assessee was engaged and incorporated for
carrying on trading activities in different commodities.
The word „trade‟ even though not defined in the Act is used to
denote operations of a commercial character by which a
trader provides to customer for reward, some kind of goods or
services. In other words, when the trader start providing such
goods and services, the business is said to have commenced
but the same may not hold good for set up of a business, which
is a stage before the commencement. To set up a business, the
following activities become relevant:-
"Preparation of a business plan; establishment of a
business premises; research into the likely markets
or profitability of the business; acquiring assets for
use in the business; registration as an entity and
under the local laws etc.‟ The said list of activities
are not exhaustive and facts of each case need to be
considered. Indeed purchase of goods would amount
to commencement of business, but before the said
act, spade work and efforts to commence have to be
undertaken. A trader before actual purchase would
possibly interact and negotiate with manufacturers,
landlords, conduct due diligence to identify
prospective customers, spread awareness etc. These
are all integral part and parcel of the business of a
trader. The said activities continue even post first
sale/purchase. When first steps are taken by a
trader, the business is set up, commencement of
purchase and then sales is post set up."
14. The common thread of reasoning, which runs through these decisions
cited by the assessee, is that in these cases there is no bright line that can be
determinative as to when business commences. In case of the service sector,
where the entity has involved itself in various kinds of steps, some of which
are preliminary to setting up the main substantial commercial venture, the
W.P.(C) 6782/2018 Page 12 of 13
linkage between these preliminary steps and nature of the ultimate activity
may be a relevant factor to be taken into account. Therefore, Carefour dealt
with this trading related aspect and stated that even certain kinds of
preliminary steps, such as engaging in negotiation or employment of
personnel, could be relevant even though actual activity might not be
involved.
15. Keeping this principle in mind, this Court is of the opinion that the
petitioner's activity, which it claims to be preliminary steps towards the
fulfillment of the purpose, which is embodied in the MoU and extracts of
which have been reproduced above, clearly indicates that it had set up its
business and that these steps were for the ultimate fulfillment of its
purposes, which was the preparation of development plans leading to the
projects.
16. The Principal Commissioner of Income Tax, in the impugned order,
was plainly wrong in holding otherwise. For the aforesaid reasons, we are
of the opinion that this writ petition is to succeed. The impugned order of
the CIT, as well as the AO are set aside. The matter is remitted to the AO to
give tax effect and to ensure that the deduction claims are appropriately
granted. The writ petition is allowed in the above terms.
S. RAVINDRA BHAT, J.
PRATEEK JALAN, J. MARCH 26, 2019 „j‟ W.P.(C) 6782/2018 Page 13 of 13