Sujay Trading Pvt. Ltd. vs Joint Commissioner Of Income Tax, ... on 9 October, 2007

[Cites 25, Cited by 1]

Income Tax Appellate Tribunal - Mumbai

Sujay Trading Pvt. Ltd. vs Joint Commissioner Of Income Tax, ... on 9 October, 2007

ORDER

1. Coming to merit, the second point of difference of opinion between the Members is as to whether investment and financing business of the assessee has commenced in the assessment year in question or not?

2. Assessee claimed that it is engaged in the business of investment and financing, whereas in the Profit & Loss Account, AO noticed, the only income shown by the assessee for the year under consideration was interest income amounting to Rs. 98,59,442/- as again previous year's interest income of Rs. 86,09,479/-. AO further noticed, assessee was receiving income by way of interest on the surplus funds. Out of total interest income received, Rs. 30,62,500/- was earned by the assessee on tax-free bonds, which has been claimed exempt under Section 10(15)(i) of the Act. The main object of the assessee company, according to AO, was not earning interest on loans and advances or investment. He further noted, assessee has not commenced its business after its incorporation on 29.05.1992. Assessee was only engaged in exploring the business as per the objectives. Assessee's main object was "to buy, sell, in bulk wholesale or retail, import, export deal and trade in all kinds of materials including commodities, goods, chemicals, metals and items of any kind whether manufactured, assembled, made or prepared. Assessee was asked why the income should not be taxed under the head "Income from other sources" as the business has not commenced. Assessee was also directed to explain why the expenses, which mainly are in the nature of pre-commencement expenses for exploring the business, should not be disallowed, as the same need to be capitalized as pre-commencement expenses. Assessee stated, the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT reported in 227 ITR 172 (SC) is distinguishable. Considering that the assessee has not commenced the business as per the main object quoted hereinabove, AO disallowed the claim of the assessee. Assessee approached the first appellate authority.

3. It was contended before the CIT(A) that there was a Resolution passed by the Board on 03.04.1993 to treat ancillary objects as the main objects of the assessee company, which is quoted by the learned JM at Page 6 of his order. It reads as under:

Resolved that the consent of the Board of Directors of the Company be and is hereby given to include and treat the ancillary objects of the Company as given in Sub-Clause (8) and (9) of Part (B) of the Clause III of the Memorandum of association of the Company as the Main Objects of the Company and accordingly the Board hereby authorizes the commencement of the new business of investing the funds of the Company in shares Stocks, debentures, debenture stocks, bonds, obligations and securities issued or guaranteed by any Company constituted or carrying on business in India or elsewhere or in any debentures, debenture stocks, bonds, obligations and securities issued and/or guaranteed by any government, Sovereign ruler, Commissioner, Public body or authority, Supreme, Municipal, local or otherwise, whether at home or abroad and of advancing and lending money either with or without security and generally to such persons and upon such terms and conditions as the Board of Directors of the Company may think fit and also to persons undertaking to building on or improve any property in which the Company is interested and to tenants, builders and contractors.

4. It was contended that the assessee had investment business and invested in various stocks, bonds, corporate deposits, advances, etc. as ancillary business for the assessment year 1993-94 and the income declared by the assessee under the head "Business income" has also been accepted by the AO, which clearly proves that assessee's activity is same for this year and the earlier yeas.

5. Learned JM held, as per Section 149(2A)(vii) of the Companies Act, assessee is entitled to change its ancillary objects into main objects by adopting a Resolution. He held, assessee has complied with this section by adopting the Resolution dated 03.04.1993, which made the above quoted ancillary objects as main objects of the assessee now. It was also the case of the assessee that various expenses incurred were necessarily, wholly and exclusively for the business purpose. Learned JM accepted the view canvassed by the assessee following the decision of the Hon'ble Supreme Court in the case of Sassoon J David and Co. Ltd. v. CIT reported in 118 ITR 261 (SC). Learned JM placed reliance upon the decision of the jurisdictional High Court in the case of Bralco Metal Industries v. CIT. reported in 206 ITR 477 (Bom) for the proposition that the expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits". Learned JM also relied upon the decision of the Hon'ble Supreme Court in the case of CIT v. Malayalam Plantations Ltd reported in 53 ITR 140 (SC)

6. Learned JM held, none of the revenue authorities disputed the fact that the assessee company's Board of Directors adopted the Resolution dated 03.04.1993. making Clauses (8) and (9) of Part (B) (ancillary objects) as main objects of the assessee. Learned JM further noted, in effect the AO accepted the proposition that assessee had business activity during the year under consideration but coming to expenditure, he draws a line between expenditure relatable to business and not relatable to business. Learned JM held, since the assessee was entitled to convert the ancillary objects into main objects and having done so, the income earned will have to be treated as income from business and not otherwise. This is because the assessee complied with the Company Law regulation in this regard.

7. On the other hand, learned AM held, there is a clear distinction between setting up of business and commencement of business and this has been made clear by the jurisdictional High Court in the case of Western India Vegetable Products Ltd. v. CIT. reported in 26 ITR 151 (Bom). He held, by merely making above ancillary object as assessee's main object, it cannot be said that the business has been set up. Assessee has to take various steps before it is ready for commencement of business. Therefore, all the expenses incurred between set up of business and commencement of business are pre-commencement expenses. Learned AM further held, business can be said to have been set up when the assessee adopted the ancillary object as its main object and commenced when the assessee entered into Memorandum Of Understanding (MOU) with M/s ZITGEIST, United States. Whatever happened before that date were only steps in pursuance of commencement of business of investment and financing. He held, after the adoption of Board Resolution, the composition of income was identical. The income before adoption of Board Resolution as well after Board Resolution was earned mainly from inter-corporate deposits and fixed deposits with bank. The only addition in the income after adoption of Board Resolution was Rs. 3,20,445/- from loans to three parties and Rs. 30,62,5007-from tax-free bonds. Hence, he held, the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT reported in 227 ITR 172 (SC) is clearly applicable.

8. Learned counsel for the assessee submitted, inviting my attention to Paper Book Page I(2). assessee's own fund is only Rs. 5,000/- Assessee has borrowed Rs. 4,63,68,669/- Hence, learned counsel submitted, AO has not appreciated the facts properly. He further submitted, the revenue itself, in the earlier years and in the subsequent years, has accepted the very same kind of transaction as assessee's business and the amount has been treated as business income.

9. Considering the rival submissions, I am of the opinion that the view taken by the learned JM is to be accepted. Learned AM has not appreciated that the assessee was empowered to convert the ancillary object into main object and by adopting the Board Resolution to this effect assessee has complied with the Company Law regulation. Assessee has in fact borrowed the funds. I am further inclined to agree with the view taken by the learned JM as the revenue itself has accepted in the preceding years and subsequent years the very same kind of transaction as business income. As such, I agree with the learned JM on this point.

10. The third point of difference of opinion between the Members is whether the amount of Rs. 1,51,668/- incurred on renovation of furniture is allowable as revenue expenditure or not.

11. This claim of the asscsscc was allowed by the learned JM vide Para 24 of his proposed order, observing as under:

24. Coming to Ground Nos. 4 and 5, we have heard the rival submissions and perused the material available on record. It has not been controverted by the lower authorities that the expenditure in question was incurred for renovation of furniture. We have verified the details' also, which are supported by voucheRs. Since no new asset came into existence, the amount in question cannot be called capital expenditure and has to be allowed as revenue expenditure. The assessee succeeds on this issue.

12. The issue has been discussed by the learned AM vide Para 36 of his order. He held that by renovation of furniture, assessee has obtained an enduring benefit and therefore the auditors had rightly classified this expenditure as capital in nature. Hence, he confirmed the view of the revenue authorities.

13. Considering the facts and after going through Paper Book Page 115 to 117, i.e. details of repairs and maintenance, I uphold the view taken by the learned JM. Repairing of furniture is difficult to hold as bringing new asset of enduring benefit. Hence, I agree with the learned JM on this point.

14. The fourth point of difference of opinion is as to whether the disallowance of 50% of expenses claimed in respect of payments made to employees is justified or not.

15. Assessee claimed Rs. 8,44,164/- as payments to employees against Rs 31,100/- paid in the preceding year. Though the assessee filed salary details, inspite of specific requirement, could not furnish any details or evidence with regard to enhanced payment. Assessee's only receipt during the year under consideration was interest on loans and advances. No business was commenced as per the main objective of the assessee. Further, AO allowed the claim to the extent of Rs. 44,164/- on estimate basis keeping in view the inflation factor. Balance Rs. 8,00,000/- was disallowed.

16. Considering that there were 20 employees working and the income earned was mainly from tax-free bonds, inter-corporate deposits and advances, CIT(A) allowed the claim only to the extent of 50%. Assessee carried the matter before the Tribunal.

17. It was submitted before the Tribunal, which is recorded by the learned JM, that the assessee was engaged in full-fledged business operations of investment in stock, bonds, advances, etc. It included joint ventures in Euro market, dealings with big investment and financial companies like Kotak Mahindra, Citibank, etc. In this type of corporate culture, assessee cannot run an office without proper staff and qualified Manages and executives. Assessee's business operations were on a higher scale. There was no allegation that salaries were not paid or paid to relatives.

18. Considering that the payments were made but not to relatives and assessee's main object was changed and assessee was in a big way having transactions with financial and investment organizations, assessee's claim was allowed by the learned JM; whereas learned AM held that since the CIT(A) allowed 50% of the claim, there was no justification in allowing the further claim disallowed by the CIT(A).

19. Considering the rival submissions, I am in agreement with the learned JM. There is no case for the revenue that the salary has not been paid or paid to the relatives. It is also borne out of record that assessee was having business relations and transactions with organizations like Ceat Tyres of India Ltd., National Engineering Industries Ltd., ICICI Securities and Finance Company Ltd., etc. As such, the claim of the assessee is to be allowed. Details regarding payment of salaries are also evidenced at Paper Book Page 50 to 71. Hence, I agree with the learned JM on this point.

20. The fifth point of difference referred for my opinion is as to whether the claim of legal expenses paid to Little and Co. of Rs. 6,21,250/- is allowable as business expenditure or as per provisions of Section 35D?

21. Assessee claimed legal and professional fees of Rs. 9,26,483/- against previous year's claim of Rs. 87,300/-. Assessee was asked to give justification for the enhanced payment. AO records that assessee could not link it with its activity of earning only interest income. As such he allowed the expenditure equal to previous year's claim and the balance was disallowed. When the matter was carried before the CIT(A), he held that the payment made to Little and Co. was expenditure incurred towards joint venture, which needs to be capitalized.

22. Learned JM vide Para 26 of his proposed order records that the assessee was in investment and finance management business and such fund management agreements were executed always in the normal course of assessee's business; whereas AO has referred the same as only joint venture as a separate and distinct business activity. It was further the case of the assessee that other expenses paid to Little and Co. were incurred for power of attorney,stamp duty, notary charges for work in connection with Citibank and Kotak Mahindra, etc. Hence, learned JM held, this expenditure is to be allowed.

23. On the other hand, learned AM held that the expenses incurred were preliminary expenses and should have been capitalized because the expenditure has been incurred for entering into an agreement. Legal expenses were incurred for entering into MOU with ZITGEIST, USA, which was the first step towards carrying out full-fledged business activity. Hence, he held that the expenditure is of capital nature and definitely Section 35D applies.

24. Learned counsel submitted that the assessee has already commenced the business. The expenditure was not for commencement business and it has nothing to do with the setting up of business as such. Learned counsel invited my attention to Paper Book Page 72, item 2. The expenses - item number 6, 8 to 12 are recorded at Page 73. Other details are given at Page 75, 76, 77 and onwards. As rightly noted by the learned JM, CIT(A) has highlighted only payment made towards joint venture, not the other items. Hence, I am in agreement with the learned JM on this point.

25. The sixth point of difference of opinion between the learned JM and the learned AM is as to whether travelling expenses incurred by the assessee amounting to Rs. 13,98,467/- are allowable as business expenditure or to be considered as per provisions of Section 35D?

26. This issue has been dealt with by learned JM vide Para 27 of his proposed order Leaned JM noticed that as far as the travel is concerned, the assessee has furnished the complete details, which are in the Paper Book and he held that undisputedly these are in connection with the business of the assessee, i.e. investment and finance. He allowed the claim of the assessee considering that there is no allegation that these were personal expenses.

27. On the other hand, learned AM held, travelling and conveyance expenses claimed includes Rs. 11,75,829/- on foreign travel, about which the assessee had neither filed any details nor any justification. Considering that the assessee was to commence its business and further considering that most of these expenses were for negotiation with various agencies, learned AM held, these are to be amortised under Section 35D of the Act.

28. Learned counsel brought my attention to Paper Book Page 89, which is travelling expenses. Counsel submitted that the expenses are incurred by the assessee for travelling abroad. The revenue authorities had mistaken that the assessee went for negotiations to set up its own business. For example, travel to London for meeting with Barclays, the assessee was only acting as an agent and the assessee was not trying to settle its business. Counsel submitted, this is the same with other foreign trips, where assessee negotiated with Standard Chartered Bank or other financial institutions and banks. Counsel further submitted, this claim of the assessee is to be allowed under Section 37(3) subject to rules framed there under. In support of the claim, learned counsel relied upon the decision of the jurisdictional High Court in the case of Bralco Metal Industries Pvt. Ltd. v. CIT reported in 206 ITR 477 (Bom).

29. Considering the fact that the assessee was acting as an agent and was negotiating on others behalf, and also considering that the assessee had commenced its business, I am of the opinion that the view taken by the learned JM is in accordance with law. Hence, I agree with the learned JM on this point.

30. The last point of difference referred for my opinion is as to whether telephone expenses Rs. 8,76,195/- and miscellaneous expenses Rs. 3,64,762/-incurred by the assessee should be allowed as business expenditure or shall be restored back to the file of AO for consideration afresh:

31. Assessee claimed Rs. 8,76,195/- telephone expenses and Rs. 3,64,764/-miscellaneous expenses. AO allowed estimated Rs. 50,000/- and Rs. 90,000/-towards telephone expenses and miscellaneous expenses respectively and the balance was disallowed. When the matter was carried before the CIT(A), he allowed the claim to the extent of Rs. 1,00,000/- telephone expenses and Rs. 1,50,000/- miscellaneous expenses on estimate basis.

32. Learned JM held, assessee is undisputedly in the business of investment and finance and the business has commenced. The disallowances were made on adhoc basis on a cryptic finding. In fairness, assessee's claim is to be allowed. Learned AM, on the other hand, held that the details given by the assessee need to be considered again by the AO. As such, he remanded the matter back to the file of AO.

33. Learned counsel brought my attention to Paper Book Page 188 to 202 and 213 to 219. It is seen that some of the expenditure are deposits with MTNL for Tatkal Scheme amounting to Rs. 90,000/- etc.

34. Considering the rival submissions and going through the reasoning of the Members constituting the Bench, I am in agreement with the learned JM. AO, vide Page 10 of his order records that the assessee has filed the details regarding telephone expenses and miscellaneous expenses. Learned AM's only reason was that the details are to be verified whereas the AO's reasoning for disallowing some of the expenses was disproportionate increase during the year under consideration vis--vis assessee's activity of earning interest Since the details were already there before the AO, further remanding the matter back to the file of AO for the same purpose of verification, I am of the opinion, is not justified. I agree with the learned JM on this point.

35. The matter will now go before the regular Bench for deciding the appeal in accordance with the opinion of the majority.

Sd/-

K.P.T. Thangal, Vice President Reference Under Section 255(4) of The Income Tax Act. 1961

1. Since there are differences of opinion vis--vis conclusions arrived at in ITA No. 4348/MUM/2001 in the case of Sujay Trading Pvt. Ltd. v. JCIT, SR-30, Mumbai, involving assessment year 1994-95, we are of the opinion that the following points of difference are required to be referred to the Third Member and for the purpose we direct that the file be put up to the Hon'ble President. Points of difference:

(1) Whether on the facts and in the circumstances of the case, the reopening of assessment in the case of the assessee for A.Y. 1994-95 is proper or not.

(2) Whether on the facts and in the circumstances of the case, it can be held or not that the investment and financing business of the assessee had commenced in the assessment year in question.

(3) Whether on the facts and in the circumstances of the case, amount of Rs. 1,51,668/- incurred on renovation of furniture is allowable as revenue expenditure or not.

(4) Whether on the facts and in the circumstances of the case, disallowance of 50% of expenses claimed in respect of payments made to employees is justified or not.

(5) Whether on the facts and in the circumstances of the case, sum of Rs. 6,21,250/- paid to Little and Co. as legal expenses is allowable as business expenditure or as per provisions of Section 35D.

(6) Whether on the facts and in the circumstances of the case, the amount of Rs. 13,98,467/- out of travelling expenses incurred by the assessee is allowable as business expenditure or is to be considered as per provisions of Section 35D.

(7) Whether on the facts and in the circumstances of the case, the following expenditure incurred by the assessee shall be allowed as business expenditure or shall be restored back to the file of assessing officer for consideration afresh:

  Telephone expenses             Rs. 8,76,195/-
Miscellaneous expenses         Rs. 3,64,762/-

Note:- The learned AM while framing this question agreed that by his separate order dated 27.3.03 in para 43 he has agreed with learned JM that expenses in regard to repairs & maintenance, software expenses and licence & registration are to be allowed. Therefore, they are not referred for consideration of third Member.

Sd/-

R.P. Tolani, Judicial Member Sd/-

S.V. Mehrotra, Accountant Member R.P. Tolani, J.M.

1. This is assessee's appeal. Following grounds are raised:

(1) Under the facts and in circumstances of the case, the honorable Commissioner of Income Tax (Appeals) erred in dismissing off the ground of appeal no.1 raised by us.

(2) The Commissioner Income Tax (Appeals) erred in ignoring the material placed on record particularly with regard to the notice under Section 154 of the Income Tax Act issued, on 30th January 1998.

(3) The Commissioner Income Tax (Appeals) erred in fact and in law in ignoring the resolution passed by the Board of Directors on 3/4/93 authorizing themselves the commencement of new business of investing funds of the company.

(4) The Commissioner of Income Tax (Appeals) erred in law and in facts in not disposing off the ground regarding allowance of the expenditure of Rs. 1,51,668 incurred on the renovation of furniture.

(5) The Commissioner of Income Tax (Appeals) erred in law and on facts in ignoring the objections of the assessee regarding the payment of the expenses of Rs. 1,51,668.

(6) The Commissioner of Income Tax (Appeals) erred in allowing only 50% of the expenses claimed in respect of payments made to the employees.

(7) The Commissioner of Income Tax (Appeals) erred in holding that the main business did not commence and the business involved in earning interest from its advances.

(8) The Commissioner of Income Tax (Appeals) erred on facts and in law in holding that payments of legal expenses to Mess Rs. Little and Co. was capital expenditure and further erred in confirming disallowance of Rs. 2,89,650 paid to Shri V. Mohan, Internal Auditor (9) The Commissioner of Income Tax (Appeals) erred in allowing only a part of expenses claimed by the assessee on account of travel, repairs and maintenance, software expenses, telephone and miscellaneous expenses without giving any reasons whatsoever.

(10) The Commissioner of Income Tax (Appeals) erred in law and on facts in sustaining the difference allowance of Rs. 15,27,835.

(11) The Commissioner of Income Tax (Appeals) erred on facts and in law in holding that only a part of the expenses incurred on travel, repairs and maintenance, software, telephone expenses and miscellaneous expenses can be allowed. She erred in not giving any reasons for her estimate.

(12) The Commissioner of Income Tax (Appeals) erred on facts and in law in not deciding the additional ground of appeal raised by us on 16th of February 2001.

(13) The Commissioner of Income Tax (Appeals) erred in law in not deciding the legal issue particularly raised by the appellant on its liabilities to the levy of any interest of Section 234 B of the Act.

2. Ground Nos. 1 and 2 challenge the reopening of assessment Under Section 147/148 of the I.T. Act. Brief facts are the assessee filed return of income, which was processed on 31.3.95 Under Section 143(1)(a) accepting the returned income of Rs. 14,36,418. On 9.8.96, order Under Section 154 was passed by assessing officer giving credit to TDS certificates of Rs. 1,92,623. This did not result in any change in the assessed income. Thereafter, again the AO issued a notice Under Section 154 dated 20th January 98 proposing to treat an expenditure of Rs. 1,51,668 incurred on renovation of furniture to be capital in nature, which was objected vide letter dated 27.1.98 contending that the proposed rectification was only change in opinion and not a mistake apparent from record. During the pendency of the second notice Under Section 154, the AO issued a notice Under Section 148 on 21.8.99 reopening the assessment for A.Y. 94-95 to assess the above escaped income, i.e. allowability of expenditure being proposed to be capital in nature. The assessee's assessment was completed Under Section 143(3) read with Section 147. Aggrieved, the assessee preferred first appeal where the reopening was challenged on the ground that when notice Under Section 154 was pending, there was no escapement of income. Similarly, the plea of change of opinion was proposed to be not a valid basis for reopening the assessment. The CIT (Appeals) upheld the reassessment on the ground that the issue covered Under Section 154 pertained to giving effect to TDS interest. The issuance of notice Under Section 148 has been done on right lines. Aggrieved, the assessee is before us on this issue.

3. The learned counsel for the assessee contended that in the audit report submitted with the return, the auditors in Form No. 3 CD at item 4 mentioned a note about the expenditure debited to the profit and loss account at Rs. 1,51,668(refers to Note -I of Annexure I), which is as under:

Annexure I, Sl. No. 1, Clause 4(i). The company is of the view that the expenditure is incurred on renovation of existing furniture of the occupied building and hence considered as revenue in nature.

Both the views of the auditor as well as of the assessee were before the AO while processing the return Under Section 143(1)(a). Since the return was processed without adjustment, it implies that the AO accepted the view of the assessee. In any case, it cannot be a mistake apparent from the record as these are two views. The AO issue notice Under Section 154 dated 30.1.98 and did not pass any order in this behalf. During the pendency of this notice, the AO issued notice Under Section 148 on 28.1.99 reopening the assessment on following grounds, which were supplied to the assessee on request:

In this case, the return filed on 31.3.1995 was processed Under Section 143(1)(a) for returned income of Rs. 14,36,418/- Order Under Section 154 was passed on 9.8.96 to give credit to the T.D.S. claimed by you.

While going through the records, it was seen that you had debited Rs. 1,51,668/- expenditure on renovation of furniture. According to Auditor's report, this expenditure is capital in nature. As the expenditure is certified by the Auditors as capital in nature, the same should have been added back to the total income.

On the basis of the information available on record, I have reasons to believe that the income chargeable to tax to the extent of Rs 1,51,668/- has escaped assessment.

In view of the above mentioned facts and the circumstances of the case the assessment made Under Section 143(1)(a) is re-opened Under Section 147 of the I.T. act.

Issue notice Under Section 148 of the I.T. Act, accordingly.

The learned counsel raised two legal challenges before us to the reassessment:

(i) The AO had issued a notice Under Section 154 in this behalf proposing the same to be a mistake apparent from the record and not income escaped from assessment. During the pendency of this notice, the issue of notice Under Section 148 was illegal. The notice was issued on an observation that it was not an income escaping but a mistake apparent from record, which signifies that the Assessing Officer has utilized his satisfaction to propose the same as a mistake and not income escaping assessment.

(ii) The validity of assessment is to be judged on the basis of reasons recorded for reopening. It is abundantly clear that the AO was of the view that according to auditor's report the expenditure is capital in nature, which should be added back to the total income and therefore the income to the extent of Rs. 1,51,668 as escaped assessment. There is no other ground of reopening. It is clear that the Assessing Officer has referred to assessee's explanation in Annexure -I at SI. No. 1 that it was company's view that the expenditure was incurred on renovation of existing furniture of the occupied building and the same was revenue in nature. The auditors opined that the same is capital in nature but they positively referred to the assessee's above claim.

4. The learned counsel contended that the same facts were available before Assessing Officer while processing the return of income and no objection was raised. Similarly, by issuing notice Under Section 154 this was held by the Assessing Officer to be mistake apparent from the record and not income escaping assessment. In addition, the nature of dispute itself speaks that it is only a change of opinion. The assessee held one view, the auditors held the other view. And the AO on these facts initially allowed it and then held thesame to be a mistake apparent from record and not escaped income. It is well settled law that a change of opinion on the similar set of facts and circumstances cannot amount to reason to believe that income has escaped assessment. The ground for reopening being a change of opinion cannot constitute a valid reason to reopen the assessment.

5. It was further contended that the CIT(A)'s observations on this issue are incorrect. The CIT(A) has mentioned that the issue covered Under Section 154 pertained to giving effect to TDS interest. The issue of 148 has been done on right lines. The learned counsel contended that in the reason itself it has been mentioned that the issue of TDS certificate credit in favour of the assessee had already been rectified Under Section 154. The CIT(A)'s observation that the issue of 154 is different is totally wrong as the pending 154 was regarding the same capital/revenue dispute.

6. It was contended that since the reason of reopening is not reason to believe but only a change of opinion, the reopening is invalid. There is no mention in the reasons about the various other additions, which have been made in the reassessment. It was contended that the reassessment is totally bad in law and the CIT(A) also failed to consider the matter on proper lines. It was urged that the reassessment made should be cancelled.

7. Ground Nos. 3 and 7 raise common issue about commencement of business. The assessee-company was incorporated in May 92. The first accounting year ended on 31.3.93. Corresponding return of income for A.Y. 93-94 was filed. The income of the assessee was assessed under the head Income from Business. The assessee's main objects as per original Memorandum of Association were as under:

To buy, sell, in bulk wholesale or retail, import, export, deal and trade in all kinds of materials including commodities, goods, chemicals, metals and items of any kind whether manufactured, assembled, made or prepared.

Following ancilliary objects were also in the original Memorandum of Association:

(8) To invest surplus funds in shares stocks, debentures, debenture stock, bonds, obligations and securities issued or guaranteed by any Company constituted or carrying on business in India or elsewhere or in any debentures, debenture-stock, bonds, obligations and securities issued guaranteed by any Government, Sovereign ruler, Commission, Public body or authority, supreme, municipal local or otherwise, whether at home or abroad.

(9) To advance and lend money, either with or without security and generally to such persons and upon such terms and conditions as the Board of Directors of the Company may think fit and also to persons undertaking to build or or improve any property in which the Company is interested and to tenants, builders and contractors.

On 3.4.93. the Board of Directors of the company resolved to treat the above ancillary objects to be the main objects of the company. The said resolution adopted was as under:

Resolved that the consent of the Board of Directors of the Company be and is hereby given to include and treat the ancillary objects of the Company as given in Sub-clause (8) and (9) of Part (B) of the clause III of the Memorandum of Association of the Company as the Main Objects of the Company and accordingly the Board hereby authorizes the commencement of the new business of investing the funds of the Company in shares, Stocks, debentures, debenture stocks, bonds, obligations and securities issued or guaranteed by any Company constituted or carrying on business in India or elsewhere or in any debentures, debenture stocks, bonds, obligations and securities issued and/or guaranteed by any government, Sovereign ruler, Commission, Public body or authority, Supreme, Municipal, local or otherwise, whether at home or abroad and of advancing and lending money either with or without security and generally to such persons and upon such terms and conditions as the Board of Directors of the Company may think fit and also to persons undertaking to build on or improve any property in which the Company is interested and to tenants, builders and contractors.

Consequently, the activities of investing surplus funds in debentures, bonds, etc. and advancing and lending money were adopted to be the main objects of the company with effect from 3.4.93. For A.Y. 94-95, the assessee filed return of income declaring its income under the head Income from Business, which comprised of investment in various corporate deposits and financing business with a view to deploy the funds in such a manner so as to maximize its yield by taking business risks. The Assessing Officer held in the order that there is no change in the activity of the assessee in preceding and the year in question quantitatively as well as qualitatively. The AO was however of the view that the main objects of the company was trading and the assessee's business had not commenced. It was proposed that why the interest income of the assessee should not be taxed under the head Income from Other Sources in view of the Supreme Court judgment in the case of Tuticorin Alkalies 227 ITR 172 as the assessee's business has not commenced. The expenses incurred were mainly in the nature of pre-commencement expenses for exploring and were required to be capitalised. The assessee contended that it was an investment and finance company engaged in the business of investment, finance, lending money, etc. from which the income is earned by way of interest. It was contended that assessee's ancillary objects were resolved to be the main objects and the Board resolution was produced. The Tuticorin's case was sought to be distinguished on the facts that the judgment was applicable to assessees whose business has not started, whereas in the assessee's case the business had already started. The business undertaken was the main objects of the assessee-company. The AO however was of the view that the assessee has not commenced its business as per the main objects and further observed that "even if we accept the assessee's contention in respect of the new business of investing the funds of the company and earning interest income on that, the expenditure which does not relate to assessee's business activity during the year can never be allowed against the interest income earned by the assessee on investment of its funds". The Assessing Officer held that the assessee's business had not started and on this finding consequential disallowances were made, which are resisted by the assessee by various other grounds:

8. Aggrieved, the assessee preferred first appeal. The assessee, in its statement of facts and grounds of appeal, reiterated the facts and contentions as raised before AO. It was emphasized that the assessee by a newly adopted resolution of Board of Directors dated 3.4.93, had adopted to make the above ancillary objects as the main objects of the assessee-company. The finding of the Assessing Officer that the assessee has not started business activity was challenged. Since the business was started, no expenditure should have been disallowed by the AO. The CIT(A) in his order in para 2.5 has referred to the Board resolution and in para 2.6 has referred to the contention of the assessee that the income does not relate to precommencement of business but from the objects, which are authorised by the Board of Directors to be the main objects of the assessee, i.e. business of investment and financing, for which all the expenses should be allowed as business expenses. At para 2.7, the CIT(A) has given a finding as under:

The Assessing Officer has not taken into cognizance the inclusion of the object of investing the funds in shares stocks, bonds etc. The Assessing Officer has alternately argued that even the appellant's contention is accepted, the expenses which does not relate to appellant's business activity during the year can never be allowed against the interest income earned by the appellant on investment of its funds.

This finding implies that the AO had alternatively accepted the assessee's contention that its activity is of business but has put forth counter contention that many expenses do not relate to assessee's business activity. The CIT(Appeals), after above observations, has not given any finding that the assessee has not started its business, however on various expenses gave further relief. The assessee's grievance is that no clear cut finding has been given by the CIT(A) on this issue, though by implications the CIT(A) has held that the Assessing Officer had not given cognizance of investment of funds in shares, stock, bonds, etc. and the Assessing Officer's plea that even if the assessee's business activity is accepted the expenses which do not relate to assessee's business activity cannot be allowed. The learned counsel tor the assessee contended that the assessee had the business of investment in various stocks, bonds, corporate deposits, advances etc. as ancillary business for A.Y. 93-94, i.e. preceding year. Similar income declared by the assessee under the head Business Income has been accepted by the Assessing Officer and there is a clear finding that the activity of the assessee is quantitatively and qualitatively same. As per Section 149(2A)(vii) of the Companies Act, the assessee is entitled to change its ancillary objects into main objects by adopting a resolution. The section has been fully complied with and by adoption of the resolution dated 3.4.93 the assessee was entitled to carry on this activity as main business. In this business activity of the assessee, the income is earned by way of interest and therefore this income becomes business income of the assessee. The whole proposition of the AO that this income was pertaining to the period of pre-commencement of business is illogical and without any basis and the application of Supreme Court judgment in Tuticorin Alkalies (supra) on these assumptions is wholly misplaced. The resolution of Board of Directors was produced before the Assessing Officer. The Assessing Officer has, in effect, accepted the argument by observing that "without going into the legal requirement in this regard, even if we accept the assessee's contention in respect of the new business of investing the funds of the company and earning interest income on that..." This goes to show that, in principle, Assessing Officer does not controvert the resolution and claim of the assessee but when it comes to disallowance of the expenditure, the same is disallowed on the footing that it was not the main business of the assessee. In the order also the AO while computing this income has not applied the head "Income from Other Sources" but assessed "Gross total income as per computation of income", which is on the basis of Income from Business or Profession, the return also has been filed accordingly. The CIT(A) also though gives a finding that the Assessing Officer has failed to consider the inclusion of these objects but when it came to disallowance of the expenditure the CIT(A) allows part of it. The CIT(A) has failed to take into consideration that the expenditure was incurred by the assessee wholly and exclusively for the purposes of business, though CIT(A) has in words held that the assessee was carrying on business on the basis of these new objects but failed to give a clear cut finding.

9. The learned counsel then adverted to issues of various expenses and being incurred wholly and exclusively for the purpose of business. There is no finding employees were not there, and there is also no finding that any expenditure was paid to any relative. On presumptions and surmises, it has been held that part of the expenditure is not relatable to the assessee's business. Comparison has been made with the preceding assessment year, which was the first year of the company after commencement and effectively comprised of a period of about three to four months. The assessee's activity was undisputedly that of business. The expenditure were incurred wholly and exclusively for the purposes of business and were allowable expenditure.Reference was made to the following judgments for the propositions mentioned hereunder:

(1) Sassoon J. David and Co. Pvt. Ltd. v. CIT 118 ITR 261 (SC) for the proposition:

The expression 'wholly and exclusively' used in Section 10(2)(xv) of the Income-tax Act, 1922, does not mean 'necessarily'. Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under Section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under Section 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law.

(2) Bralco Metal Industries v. CIT 206 ITR 477 (Bom) for the proposition that the expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits". The expression "wholly and exclusively" does not mean 'necessarily'.

(3) CIT v. Malayalam Plantations Ltd. 53 ITR 140 (SC) for the proposition:

The expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is wide ; it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for the carrying on of a business ; it may comprehend many other acts incidental to the carrying on of the business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory.

The learned counsel contended that the CIT(A) has, in fact, accepted the business activity of the assessee in minced words. However having accepted so, the test, of expenses being wholly and exclusively for the purpose of business has not been applied and on surmises and assumptions the expenses have been arbitrarily disallowed. The various grounds on specific disallowances were adverted to in following order.

10. Ground Nos. 4 and 5 pertain to renovation expenses of Rs. 1,51,668. It was contended that the expenditure was incurred not for bringing into existence any new furniture but was incurred for the repair of existing furniture and therefore the same was revenue in nature. Since no new asset was brought into existence, the expenditure incurred on repair of existing furniture cannot be called capital expenditure. The details thereof were submitted before the lower authorities along with the vouchers and are placed on paper book also. Merely because of an audit note the lower authorities have treated the same as capital expenditure without going into the details submitted by the assessee. The audit note itself refers to the company's view that the same is revenue in nature.

11. Regarding ground No. 6, the brief facts are the assessee claimed salary expenses of Rs. 8,44,164 in respect of payment made to employees. The Assessing Officer observed that in the preceding year these expenses of the assessee were Rs. 31,100 only and the assessee only filed details of the salary but not the reasons and justification. Looking at the interest income of the assessee the Assessing Officer allowed only Rs. 44,164 as reasonable and the balance of Rs. 8 lakhs was disallowed as not being an expenditure incurred in the course of the assessee's business. Aggrieved, the assessee preferred first appeal. The CIT(A) allowed 50% of the expenses claimed by the assessee holding that the preceding year's figures relate to three months only. The main business of the assessee did not commence and the assessee was merely involved in earning interest from advance. Since the assessee needed to maintain an office, 50% expenses was allowed.

12. The learned counsel contended that the finding of lower authorities that the main business of the assessee did not commence is contrary to the material available on record, the same had, in fact, commenced. Detailed arguments in this behalf have been already made. Complete details about the employees have been given. The break up of the expenses is as under:

          Salaries(Net)         706,189.00
         Profession Tax         11,297.00
         Bonus                  56,900.00
         Medical Expenses        5,270.65
         Staff Welfare          64,507.98
         Total                 844,164.63

Monthwise details in respect of all the details were furnished. The assessee was engaged in full-fledged business operations of investment in stock, bonds, advances etc. The activities included joint ventures in Euro market, dealings with big investment and financial companies like Kotak Mahindra, Citi Bank, etc. In this type of corporate culture, the assessee cannot run an office without proper staff and qualified Managers and Executives. The assessee's business operations were on a higher scale. It is the assessee's domain to decide as to how many employees will be recruited and deployed for the purpose of its business activity. There is no allegation that the salaries were paid to relatives. The CIT(A) halfheartedly harboured under the impression that the assessee's main business did not commence and disallowance was made. CIT(A) also has not given any finding that the staff employed was unnecessary. She has merely adopted a yardstick of income ratio with the expenditure.

13. Regarding ground No. 8, brief facts are the assessee claimed expenses of professional fees of Rs. 9,26,483. Similar expenditure in preceding year was Rs. 87,300. The details were filed in the course of assessment. The Assessing Officer has held that the expenditure in question could not be linked with assessee's activity of earning only interest income. Therefore the claim of this expenditure was not justified. An amount of Rs. 87,300 equal to the preceding year's claim was allowed and the balance was disallowed. Aggrieved, the assessee preferred first appeal, the CIT(A) was of the view that the preceding year cannot be the basis for disallowance, which was the first year of incorporation of business, the Assessing Officer had disallowed on ad hoc basis failing to appreciate that one year's expenditure cannot be basis for allowing expenses in future. It was held that the payment of Rs. 6,21,250 made to Little and Co. was expenditure incurred towards joint venture, which needed to be capitalised. The audit expenses of Rs. 2,89,650 paid to Shri V. Mohan was found to be not related to the business of earning interest. This was directed to be capitalised. The payment made to Hiten Talati was allowed. Aggrieved, the assessee is before us.

14. The learned counsel drew our attention to the details of legal expenses incurred, which are as under:

Legal and Professional Fees

1) Hiten Talati (Internal Auditor upto June' 93) 15,583.00

2) Little and Company (Expenses incurred towards Joint Venture) 621,250.25

3) V. Mohan(lnternal Auditor) 289,650.00

-----------

926,483.25

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It was contended that the CIT(A) though given a finding that the Assessing Officer disallowed the expenditure on ad hoc basis, has retained part disallowances on similar ad hoc basis. Shri Hiten Talati whose expenses have been allowed, was Internal Auditor till June 93. There after Shri V. Mohan was appointed as Internal Auditor and the payment to this concern is on account of these services for the rest of the period. For similar services, CIT(A) has allowed the expenditure till June 93 but for the balance period the same has been disallowed holding that the same "does not appear to relate to this business of earning interest and is an expenditure to be capitalised". The expenses were incurred for internal audit, which was of utmost necessity. The assessee's main business is already commenced. The CIT(A)'s disallowance of this amount was totally unjustified. Regarding the payment to M/s Little and Co., there is no existence of joint venture agreement, the same was for management of funds and not for a joint venture, which has been alleged on the basis of misconception. The assessee wanted to have an agreement for management of funds with 'ZEITGEIST' of United States, which is a reputed investment and finance company. The preamble of the agreement makes it very clear that both parties are investment and finance companies in India and UK respectively and intend to expand their investment and finance business to Asia and more particularly to India. The assessee has the requisite experience as Adviser and Consultant in the field of investment and finance in Indian capital market and has agreed to render services to 'ZEITGEIST' Investment and finance was regular business of the assessee and was being operated on a higher scale. Involvement of foreign participants in the investment and finance business was the business purpose of the assessee and for such participation agreements and various other formalities were to be executed and all these activities combined are in the normal course of business and the expenses incurred in this behalf are wholly and exclusively for the purpose of business. None of the authorities has bothered to look into the nature of legal expenses paid to Little and Co. The whole expenditure has been considered to be for joint venture, which is not correct. The expenses paid to Little and Co. include expenses for Notorial services work done in connection with Citi Bank and Kotak Mahindra, etc. Since the legal expenses were paid for day-to-day business activities and being wholly and exclusively for the purpose of business, the same should be allowed.

15. Ground Nos. 9, 10 and 11 pertain to part disallowance by CIT(A) to the extent of Rs. 15,27,835 on account of travel, repairs and maintenance, software expenses, telephone and miscellaneous expenses. Adopting same analogy, both the lower authorities allowed the amount to the following extent:

  Expenses               As per Assessinq Officer   As per CIT(A)
Travel                   Rs. 50,000               Rs. 1,00,000
Repairs & Maintenance    Rs. 20,000               Rs. 50,000
Software expenses        Rs. 10,000               Rs. 25,000
Telephone expenses       Rs. 50,000               Rs. 1,00,000
Licence & Registration   Nil                       -
Miscellaneous expenses   Rs. 90,000               Rs. 1,50,000

The learned counsel for the assessee contended that complete details in this behalf were filed before both the authorities. Admittedly, the assessee was dealing in investment and finance of higher segment in which foreign investments were also involved. For this business activity of the assessee, it had to undertake foreign trips. The assessee supplied complete details giving the name of the person, flight details, amount and the purpose for which the foreign travel was undertaken. Similarly, regarding repairs and maintenance, every day details were furnished along with bills and vouchers, which are also placed on record. To carry on such business operations, the assessee invariably needed a full-fledged computer system with software. Complete details of software expenses together with bills and vouchers were furnished. Similarly, telephone, licence and registration and miscellaneous expenses details were all furnished. All these expenses were essential for day-to-day business activities of the assessee. The CIT(A) has held that "Assessing Officer has reported that there were considerable amount of ISD together with the foreign travel expenses clearly indicates that the expenses were not incurred for earning interest" and inter-corporate deposits being major source of earning, interest does not necessitate much expenditure. On these observations, the ad hoc disallowances have been made without going into the details and without assigning any reason.

16. Learned departmental representative on the issue of reopening of assessment contended that pendency of 154 proceedings is no bar against issuing notice of reassessment. Regarding the reasons recorded for reopening, it was contended that the same amounted to escapement of income as the assessee had claimed expenditure as revenue in nature. It was contended that on both the counts initiation of reassessment proceedings was valid. The Assessing Officer had information in possession that the income had escaped assessment. Reassessment proceedings were valid. Order of CIT(A) was relied on.

17. Regarding ground Nos. 3 and 7, the learned DR contended that the alleged change in objects brought about by Board resolution dated 3.4.93 was clandestine in nature and an afterthought. The assessee had not given any intimation to the income-tax authorities for the change in objects and therefore the same is ineffective. The same was brought on record to give the colour of business income to the interest income of the assessee. It was contended that this Board resolution has no effect to change the interest income into business income. Since the assessee's business had not commenced, the interest income becomes income of the pre-commencement period and has to be treated under the head Income from Other Sources as per Supreme Court judgment in the case of Tuticorin Alkalies (supra). The AO was perfectly justified in applying this judgment.

18. For ground Nos. 4-5, 6, 8 and 9-11, reliance was placed on CIT(A)'s order.

19. The learned counsel for the assessee in rejoinder on these grounds contended that there is no requirement to intimate the AO to any change of making ancillary objects as main objects of a private limited company. As per Section 149(2A)(7) of the Companies Act, in case of private limited company a simple resolution is sufficient to make ancillary objects as main objects and enables the assessee to carry on such business. The lower authorities have put no such challenge to this resolution being an afterthought or clandestine. The resolution is dated 3.4.93, i.e. beginning of the accounting year. No allegation in this behalf can be made at this level. In any case, these ancillary objects were part of the objects of the company. All the details were filed before AO . There is no mention by the CIT(A) that details were not filed. The CIT(A), on the other hand, has given part relief after considering the details. Therefore it cannot be said that the assessee did not file details.

20. Regarding other grounds, the learned counsel contended that even the AO has accepted the plea of commencement of business alternatively but has held that substantial expenditure does not relate to the assessee's business activity. Similarly, the CIT(A) has also impliedly upheld the business of the assessee but on ad hoc basis expenses have been disallowed. In effect, the assessee's plea of business has been accepted impliedly and what is to be seen is the allowability of the expenditure.

21. We have heard the rival submissions and perused the material available on record. Coming to the issue of reopening of assessment, it is evident from the record that when the notice Under Section 148 was issued, notice Under Section 154 on the capital or revenue nature of the renovation expenses was already pending. The question before us is whether during this pendency reassessment notice can be issued on the same ground. There is no express bar to issue this notice in the Act. Both are different statutory functions which can be exercised by the Assessing Officer and cannot be held against each other. At the notice stage, it amounts to invoking the statutory function and not deciding the same. During the pendency of 154 proceedings, it can be said that the Assessing Officer was divested of his powers Under Section's. 147 and 148. Under these circumstances, we are of the view that the Assessing Officer had powers to issue notice Under Section 148 even though the notice Under Section 154 was issued. Coming to the second objection of the learned counsel for the assessee, the AO has mentioned "on the basis of the information available on record, I have reasons to believe that the income chargeable to tax to the extent of Rs. 1,51,668 has escaped assessment". The first aspect to be seen is whether on the basis of information a reasonable belief in terms of Section 147 can be formed. Undisputedly, the same information was available before the Assessing Officer at the time of processing with two recourses, one to disallow the same by way of prima facie adjustment and the other to issue 143(2) notice. At the time of processing return Under Section 143(1 )(a), the AO is under statutory obligation to exercise his powers enabling in this behalf. At that time also he has to decide the disallowable items if he finds that any loss, exemption, deduction, allowance or relief shown in the return is inadmissible and serve the notice Under Section 143(2) on the assessee. The words used in Section 147 are "has reason to believe", the same are not reasons to suspect. It cannot be presumed that the AO while deciding statutory function is oblivious of the powers conferred on him by other provisions. There is no claim by the AO that some other material came in his possession so as to convert his earlier decision into a belief of escapement of income. What the AO has before him are the same reasons, which existed at the time of processing return Under Section 143(1)(a). Therefore there is no change in reason to believe as existed at the time of processing return Under Section 143(1)(a) and at the time of issuing reassessment notice. Consequently, we are of the view that the Assessing Officer had no reason to believe at the time of issuing notice Under Section 148, which was in variance with what existed at the time of 143(1)(a) proceedings. The AO has marked in the above quotation that he is relying on the information available on record. According to us, this amounts to only a change of opinion and not a reason to believe in the given facts. Consequently, we are of the view that the Assessing Officer has not made out a case to have any reason to belief. The information referred to is nothing but verbatim same which was available to him at the time of processing return, i.e. an audit note, which itself referred to a view which the company adopted about the expenditure. The auditor's note is not the statutory authority to opine on the admissibility or otherwise of the expenditure. Here also they have referred to the view of the company as well. The controversy in question assumes character of a highly disputable item per se. With the availability of same material - same audit note and same views of the company -, we are unable to hold that this amounted to reasons to belief that income has escaped assessment. Consequently, we hold that the reassessment proceedings were not initiated validly. The same is bad in law.

22. Before proceeding further, we see a peculiar case where the assessment is reopened for only a capital/revenue expenditure of Rs. 1,51,668 but ultimately a huge amount of expenditure has been disallowed. We find it expedient to consider the merits of the reassessment also in the interest of substantial justice.

23. Coming to ground Nos. 3 and 7, we have heard the rival contentions and perused the material available on record. None of the lower authorities has disputed the fact that the assessee-company's Board of Directors adopted a resolution dated 3.4.93, which is reproduced above, making Clauses 8 and 9 of Part B (ancillary objects) as main objects of the company. The Assessing Officer has nowhere alleged that the resolution is an afterthought or clandestine. In para 6.7 the Assessing Officer has given a finding that without going into the controversy of legal requirement in this regard, even if we accept the assessee's contention in respect of the new business, it goes to show that he has not controverter this Board resolution and has, as an alternate plea, accepted the same. Having held like this, he has proceeded to hold that the expenditure, which does not relate to assessee's business activity during the year, can never be allowed. In effect the Assessing Officer accepted the proposition of the assessee that it had business activity during the year but on expenditure issue he draws a line between expenditure relatable to the business and not relatable to business Similarly, the CIT(A) in para 2.7 holds that the Assessing Officer has not taken cognizance of the inclusion of object of investing the funds in shares/bonds etc. The Assessing Officer has alternatively arqued that even If the assessee's contention is accepted, the expenses, which do not relate to assessee's business activity during the year, can never be allowed against the interest income earned by the assessee on investment of its funds. Here also the CIT(A)'s finding is clear that the Assessing Officer has not properly considered the issue of Board resolution. The Assessing Officer before CIT(A) has, as an alternative plea, accepted that the assessee's business activity is there and the expenses not reiatable thereto should not be allowed. We shall confine here to the view as to whether the assessee was entitled to convert the ancillary objects into main objects and having done so, whether the income earned will be treated as income from business or not. The facts of the case are discussed above. According to us, having complied with the Company Law regulation, the assessee being a private limited company was entitled to adopt its above ancillary objects as main objects by Board resolution. And having done so, the activity carried on in this area would be business activity of the assessee. Consequently, we hold that the assessee was entitled to adopt such resolution and the activity so adopted will be the business activity and the income therefrom earned has to be treated as income under the head Income from Business or Profession. The assessee by Board resolution was entitled to invest its funds in shares, debentures, bonds, obligations, securities, etc. The income earned by the assessee will be taxed under the head Income from Business or Profession. Since the assessee's business had already commenced, the Supreme Court judgment in Tuticorin Alkalies' case (supra) is not applicable to assessee's case.

24. Coming to ground Nos. 4 and 5, we have heard the rival submissions and perused the material available on record. It has not been controverted by the lower authorities that the expenditure in question was incurred for renovation of furniture. We have verified the details also, which are supported by voucheRs. Since no new asset came into existence, the amount in question cannot be called capital expenditure and has to be allowed as revenue expenditure. The assessee succeeds on this issue.

25. Coming to ground No. 6, we have heard the rival submissions and perused the material available on record. We have already given a finding that the assessee's main business had commenced. Consequently, the expenditure is to be viewed from this angle. Coming to the reasonability of the expenses, it is clear that the assessee was engaged in investment and finance activity of higher category having business transactions with big financial and investment organizations and the business acumen and prudence will prevail in deciding the number and quality of employees to be deployed for the purpose of assessee's business operations. The case laws relied on by the learned counsel above are applicable to assessee's case. The CIT(A) has not pointed out that the payment was made to relatives. There is no allegation that the expenses were not incurred wholly and exclusively for the purpose of the business. In the absence of such allegations and with a finding that the assessee's business had commenced, we are inclined to hold that the expenses were incurred by the assessee wholly and exclusively for the purpose of business. Respectfully following the above authorities of Hon'ble Supreme Court and Bombay High Court, we allow salary expenses as claimed in this ground. This ground of the assessee is allowed.

26. On ground No. 8, we have heard the rival submissions and perused the material available on record. As far as the expenses to Little and Co. are concerned, we find that what existed between assessee and ZEITGEIST was an agreement for management of funds, which is evident from the preamble and clauses of the agreement. The assessee was in investment and finance management business and such type of fund management agreements are executed in the normal course of the assessee's business. The AO has referred the same as joint venture as a separate and distinct business activity, which is not a correct observation. The agreement was executed in the normal course of business activity of the assessee and the expenditure incurred in this behalf cannot be called joint venture expenses to be capitalised and the same are to be allowed as business expenditure incurred wholly and exclusively for the purpose of business. Similarly, the other expenses paid to Little and Co. are incurred for power of attorney, stamp duty, notarial charges for works in connection with Citi Bank and Kotak Mahindra and are for the purposes of business and hence allowable as business expenditure. The lower authorities have allowed fees paid to Hiten Talati, who was Internal Auditor up to June 93. M/s. V. Mohan were appointed as internal auditors in place of Shri Hiten Talati and payment in this behalf is for these and for other services like consultation of Company Law, FERA, Income-tax and Other Acts, etc. Appointment of internal auditor is a normal function for doing such business. When the fees in this behalf up to June 93 was allowed, we see no reason to disallow the same for the balance of the period. In any case, the payment to M/s. V. Mohan was in the normal course of business and incurred wholly and exclusively for the purpose of business. The professional fees paid by the assessee is allowed as a business expenditure. Ground No. 8 is accordingly allowed in favour of the assessee.

27. Grounf Nos. 9, 10 and 11 pertain to part disallowance of expenses by CIT(A) on account of travel, repairs and maintenance, software expenses, telephone and miscellaneous expenses. Looking at the business dealing of the assessee in investment and finance of higher segment, maintenance of proper software is an essential feature, without which such business cannot be carried on on an efficient basis. Similarly, as far as the travel is concerned, the assessee has furnished complete details, which are placed on the paperbook which include all the details. The purposes are clearly spelt out, which are undisputedly in connection with the assessee's business of investment and finance. Coming to other expenses, there is no allegation that they were used for personal purposes. The disallowance was made only on ad hoc basis on a cryptic finding that the expenses incurred are not commensurate with the income of the assessee. We have already held that the assessee's business had commenced. Drawing the same analogy as held for the above expenses, we hold that the expenditures as claimed in ground Nos. 9, 10 and 11 are incurred wholly and exclusively for the purpose of business. The same are allowed. These grounds of the assessee succeed.

28. Consequently, on merits also the assessee's grounds No. 3 to 11 are allowed.

29. Ground Nos. 12 and 13 were not pressed due to retrospective amendment in this behalf. Hence they are dismissed.

30. In the result, assessee's appeal stands partly allowed.

S.V. Mehrotra A.M.

31. I have gone through the order of the learned Judicial Member and with respect unable to agree with various issues as discussed hereinafter.

32. In Ground Nos. 1 & 2, the assessee challenged the reopening of the assessment under Section 147/148 of the Income-tax Act, 1961. The learned Judicial Member has succinctly stated the relevant facts in regard to this issue and, therefore, I do not consider it necessary to repeat the same again. The assessee has challenged the reassessment proceedings on two grounds - One is that no notice under Section 148 can be issued, if the proceedings under Section 154 are pending and the second ground of challenge is that the re-assessment proceedings are initiated on account of change of opinion which is not permitted under the law. I am in agreement with the learned Judicial Member that the Assessing Officer had powers to issue notice under Section 148, even though the notice under Section 154 was issued. However, I am not in agreement with the learned Judicial Member that the re-assessment proceedings were initiated on account of change of opinion. The facts in this regard are that the Assessing Officer while going through the case records noticed that the assessee had debited Rs. 1,51,668/- to the Profit & Loss Account in respect of the expenditure on renovation of furniture, which according to the tax auditors was capital in nature. He further observed that the said expenditure being capital in nature should have been added back to the total income and, therefore, notice under Section 148 was issued to the assessee. It is settled law that merely on the basis of change of opinion, no re-assessment proceedings can be initiated. The learned Judicial Member has held that it is a case of change of opinion, but in my opinion, it is not so. Before considering this issue, it would beuseful to refer to the amendment brought about in Section 147 w.e.f. 1.4.1989. After the amendment if the A.O. has reason to believe that any income chargeable to tax has escaped assessment, he can issue notice under Section 148. As per Clause (c) of Explanation 2 to Section 147, in following cases the income chargeable to tax shall be deemed to have escaped assessment:

(c) Where an assessment has been made but--

(i) income chargeable to tax has been under-assessed; or

(ii) such income has been assessed at too low a rate; or

(iii) such income has been made the subject of excessive relief under this Act; or

(iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.

The necessity of insertion of this deeming clause was considered in view of the new scheme of assessment [Under the new scheme of assessment introduced by the Amendment Act, 1987, returns filed are accepted as such and passing of assessment order is not necessary. Therefore, there is no application of mind by the AO after the returns are filed unless the case is taken up for scrutiny and regular order is passed Under Section 143(3). Therefore, the deeming provisions have been incorporated as noted above by insertion of explanation 2 to Section 147. The object of reassessment is to assess the correct income and is a matter of procedure. With the merging of Clauses (a) & (b) of Section 147 (operative upto 31.3.1989) significant changes have been made in regard to the fulfillment of certain preliminary requirements which were mandatory conditions under pre-1989 Section 147. Under the post 1989 Section 147 the power to re-open the assessment is much wider and can be exercised even if an assesses had disclosed fully and truly all material facts. Thus, unless the case is covered by a provisio to post-1989 Section 147, the failure of the assessee to disclose fully and truly all material facts necessary for his assessment is not relevant.] The assumption of jurisdiction under Section 147 is based on existence of materials before the authority and, if, the same is there and if, on that basis, the AO forms a belief that the income has escaped assessment, then the reassessment proceedings cannot be annulled. The expression "escaped assessment" clearly connotes a very basic postulate that an income for a particular assessment went unnoticed by the AO and because of it not being noticed by him for any reason it escaped assessment. The meaning of the expression escaped assessment is so simple and straight that it does not leave anyone in doubt that power under Section 147 could be invoked by the AO. if it is a case of escapement of assessment of income for a particular year. The word "escaped assessment" are apt to cover the case of discovery of a mistake in the assessment caused either on account of erroneous construction of the transaction or due to its non-consideration, or caused by a mistake of law applicable to such transaction even where there has been a complete disclosure of all relevant facts upon which a correct assessment could have been framed - refer Praful Chunilal Patel v. M.J. Makwana ACIT 236 ITR 832. at page 840 At the initiation stage formation of a reasonable belief is needed and not a conclusive finding of a fact. The word 'reason' in the phrase 'reason to believe' would mean cause or justification. If the AO has a cause or justification to think or suppose that income had escaped assessment, he can be said to have a reason to believe that such income had escaped assessment. The words 'reason to believe' only mean that he forms a belief from the examination he makes or from any information that he receives. That income has escaped assessment. If he discovers or finds or satisfies himself that the taxable income has escaped assessment, it would amount to saying that he has reason to believe that such income had escaped assessment. His reasoning may be the result of official information or his own investigation or may come from any source that he considers reliable. In the present case, the cause or justification for forming the belief that the income had escaped assessment is the auditors opinion contained in the Tax Audit Report. In the Tax Audit Report the auditors had classified this amount under Clause 4(ii) Paper book page 1(11) and had also incorporated the views of the company in regard to this expenditure in the notes forming part of Form 3CD, which are reproduced here under:

The company is of the view that the expenditure is incurred on renovation of existing furniture of the occupied building and hence considered as Revenue in nature.

Thus, as far as the auditors were concerned, they had treated this item as capital expenditure in spite of contrary view being held by the company and, therefore, this expenditure was clearly disallowable, which adjustment was not carried out under Section 143(1)(a). Merely because the auditors incorporated the views of the company, it would not follow that the A.O. had applied his mind and then did not accept the view of the auditors but accepted the view point of the assessee company. Had the A.O. applied his mind, he would have issued notice under Section 143(2) before accepting the view of the company, this being, in any view of the matter, a debatable issue. As no notice under Section 143(2) was issued, it clearly shows that this issue had completely escaped the attention of the Assessing Officer while issuing intimation. This, in my opinion, is not a case of change of opinion, but of finding erroneous nature of earlier assessment, by detection of a mistake on an issue which was not earlier considered by the Assessing Officer.

33. In this view of the matter, I hold that the reopening of the assessment by the A.O. was justifiable.

34. As regards ground No. 3 & 7 raising common issue about commencement of new business, the learned Judicial Member has given following findings:

The income earned by the assessee will be taxed under the head income from business or profession. Since the assessee's business had already commenced, the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkalis & Chemicals & Fertilizers Ltd. 227 ITR 172 is not applicable.

This finding is based in view of the assessee adopting its ancillary object as its main object of business after complying with various requirements of Companies Act. In my opinion, merely because the assessee adopted its object of investment and financing as its main object, it cannot be concluded that business has commenced. Under Companies Act, in case of Private Limited Company, the company can commence business immediately on incorporation of company but that does not imply that business has commenced as contemplated under Income-tax Act. For determining whether the assessee has carried on busipess or not, it is to be examined what steps the assessee has taken in pursuance of its business.

35. There is well established distinction between the business being set up and the commencement of the business. This has been recognized and explained by the Hon'ble Bombay High Court in Western India Vegetable Products Ltd. v. CIT 26 ITR 151 wherein it has been held that there is clear distinction between a person commencing the business and the persons setting up a business and that for the purposes of the Income-tax Act, it is the setting up of the business that has to be considered and not the commencement. It is only when the business is set up that the previous year for that business commences and expenses incurring prior to the setting up are not a permissible deduction. It has further been held in the decision that when the business is established and is ready to commence the business, it can be said that the business is set up. Before the assessee is ready to commence the business, the business is not set up. It has, however, been recognized by the decision that there may be an interval between the setting up of the business and commencement thereof and all expenses incurred during the interval would be permissible deduction. Thus, merely by adoption of the ancillary object as its main object, it cannot be said that the business has been set up. The assessee has to take various steps before it is ready for commencement of business. Therefore, all the expenses incurred between the set up of business and the commencement of business are pre-commencement expenses. The business can be said to have been set up when the assessee adopted the ancillary object as its main object and commenced when the assessee entered into the Memorandum of Understanding with M/s. ZITGEIST, United States. Whatever happened before that day were only steps in pursuance of the commencement of the business of investment and financing. This is also evident from the fact that prior to the adoption of the Board Resolution and after the adoption of Board Resolution the composition of income was almost identical. The income before adoption of Board Resolution as well as after the adoption of Board Resolution was earned mainly from inter-corporate deposits and bank fixed deposits. The only addition in the income after the adoption of Board Resolution was of Rs. 3,20,445/- from loans to 3 parties and of Rs. 30,62,500/-from tax free bonds. Therefore, in my opinion, the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkalis, Chemicals & Fertilizers Ltd. 227 ITR 172 is applicable in the present case.

36. Ground No. 4 & 5 deals with expenditure in respect of renovation of furniture of Rs. 1,51,668/- . In this regard the AO observed that the assessee had not filed any documentary evidence in respect of his contention that the expenditure in question was revenue in nature. He had also relied on the following decisions.

1. Southern Agencies Ltd. 45 ITR 602 (Mad.), and

2. Girdhari Das and Sons 105 ITR 339(AII.) in support of the proposition that the accumulated repairs are not allowable as revenue expenditure. The learned CIT(A) confirmed the addition relying on the tax audit report. The renovation of furniture had brought in an enduring benefit to the assessee company, and, therefore, the auditors had rightly classified this expenditure as capital in nature. I am, therefore, of the opinion that this was rightly disallowed by the lower revenue authorities. However, depreciation has to be allowed on this amount.

37. Regarding ground No. 6 dealing with disallowance of 50% of the expenses claimed in respect of payments made to the employees, the facts are that the Assessing Officer had specifically asked the assessee to justify the expenditure in the backdrop of assessee's only income during the year from interest receipts, quantum of which remained almost the same as in the last year. However, in spite of the specific requirement, as per the questionnaire, the AO observed that neither any justification nor any evidence was filed in respect of the said claim. He had only allowed a sum of Rs. 44,164/- out of Rs. 8,44,164/- claimed by the assessee and disallowed the balance of Rs. 8,00,000/-. The learned CIT(A) noted that the income was mainly earned from tax free bonds, inter-corporate deposits and advances to three individuals. He noted that there were 20 employees working in the company and the appellant had to maintain an office. Taking into consideration the overall activities of the assessee he allowed 50% of the expenses claimed by the assessee. I am of the opinion that no interference is called for with the order of the learned CIT(A) as the assessee had not furnished any justification in respect of the claim before the A.O. As the assessee failed to substantiate its claim ad hoc disallowance made by the lower revenue authorities was fully justified.

38. Ground No. 8 is in respect of legal expenses paid to M/s. Little and Co. which was treated as capital in nature and also in regard to the disallowance of Rs. 2,89,650/- paid to Shri V. Mohan, Internal Auditor. The assessee had paid legal and professional fees aggregating to Rs. 9,26,483/- as under:

Legal & Professional fees:

Hiten Talati (Internal Auditor upto June 1993) Rs. 15583.00 Little and Co. (Expenses, incurred towards Joint venture) Rs. 621250.25 V.Mohan (Internal Auditor) Rs. 289650.00

--------------

Rs. 926483.25

--------------

The AO allowed only Rs. 87,300/- on the basis of last year's claim of the assessee and disallowed the balance amount of Rs. 8,39,183/- on the ground that the same had not been incurred in respect of assessee's only activity during the year i.e. earning of interest. The learned CIT(A) examined the details of legal and professional fees and allowed the internal audit fees paid to Mr. Hiten Talati.

39. As far as the finding of the learned Judicial Member in regard to the audit fees paid to V. Mohan of Rs. 2,89,650/- are concerned, I am in agreement with him. However, in regard to the sum of Rs. 6,21,250/- paid to Little and Co. I am of the opinion that the learned CIT(A) had rightly held that the expenses incurred thereon were preliminary expenses and should have been capitalized because the expenditure had been incurred for entering into an agreement. The legal expenses were incurred for entering into MOU with ZITGEIST, U.S.A. This was clearly the first step towards the carrying out full fledged business activity of the assessee as per its object. As per Section 35D(2)(b) which reads as under also this expenditure is of capital nature and, therefore, should be allowed as per provisions of Section 35D.

(b) Legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee.

40. Ground No. 9 is that the learned CIT(A) erred in allowing only part of the claim on account of travel , repairs and maintenance, software expenses, telephone and misc. expenses without giving any reasons whatsoever. The assessee had claimed a sum of Rs. 14,48,467/- under the head travelling & conveyance which also included a sum of Rs. 11,75,829/- on foreign travel. The assessee neither filed any details in respect of foreign travel nor any justification before the Assessing Officer. Therefore, he estimated an amount of Rs. 50,000/- and disallowed a sum of Rs. 13,98,467/-. The learned CIT(A) examined the expenses and noted that the assessee company was about to commence its main projects subsequently. He treated these expenses as prior period expenses. He has rightly pointed out that the assessee company was about to commence its main project subsequently which fact was clear from the legal fees paid by it. Therefore, these expenses were also in the capital field. The details of these expenses are contained at page 9 of the paper book which clearly show that the expenses were mainly for negotiation with various agencies. This expenditure was, therefore, incurred as a preliminary expenditure before undertaking full pledged business activity as per the object clause of the company. Hence, its allowability is to be considered as per provisions contained under Section 35D.

41. The assessee had also claimed the following expenses.

  Items                  Claim by the     Allowed by the
                           assessee     A.O.
Repairs & Maintenance     2,48,408      ,20,000
Software expenses         1,90,348      10,000
Telephone expenses        8,76,195      50,000
License & registration      18,120      Nil
Misc. expenses            3,64,762      90,000

42. The Assessing Officer has observed that neither any reason for increase during the year nor justification for incurring these expenses vis--vis the assessee's activity of earning interest was given. The learned CIT(A) allowed as under:

  Repairs & Maintenance            50,000
Software expenses                20,000
Telephone expenses             1,00,000
Misc. expenses                  1,50,000

43. I have gone through the details of these expenses. Both the revenue authorities disallowed these expenses on ad hoc basis on the assumption that business had not commenced and only those expenses which we incurred for earning interest were allowable and made disallowance. Therefore, in my opinion the expenses needs to be examined afresh. In regard to repairs and maintenance, software expenses and license and registration, I am in agreement with the learned Judicial Member that the same have to be allowed. However, in regard to telephone expenses and misc. expenses, I am of the opinion that the details of telephone expenses which are contained at pages 188 to 190 of the paper book needs to be examined in the light of the business activity of the assessee. Therefore, the matter be restored back to the file of the A.O. for consideration afresh.

44. In the result, the appeal is partly allowed for statistical purposes.

45. D.K. Srivastava: The assessee has filed the present appeal against the order passed by the Id. CIT(A) on 14.03.2001. The appeal was heard. However, there was a difference of opinion between the members constituting the Bench and therefore following questions were referred to the Hon'ble Third Member for his opinion Under Section 255(4) of the I-T Act.

1. Whether on the facts and in the circumstances of the case, the reopening of assessment in the case of the assessee for AY 1994-95 is proper or not?

2. Whether on the facts and in the circumstances of the case, it can be held or not that the investment and financing business of the assessee had commenced in the assessment year in question?

3. Whether on the facts and in the circumstances of the case, amount of Rs. 1,51,668/- incurred on renovation of furniture is allowable as revenue expenditure or not?

4. Whether on the facts and in the circumstances of the case, disallowance of 50% of expenses claimed in respect of payments made to employees is justified or not?

5. Whether on the facts and in the circumstances of the case, sum of Rs. 6,21,250/- paid to Little and Co. as legal expenses is allowable as business expenditure or as per provisions of Section 35D?

6. Whether on the facts and in the circumstances of the case, the amount of Rs. 13,98,467/- out of traveling expenses incurred by the assessee is allowable as business expenditure or is to be considered as per provisions of Section 35D?

7. Whether on the facts and in the circumstances of the case, the following expenditure incurred by the assessee shall be allowed as business expenditure or shall be restored back to the file of Assessing Officer for consideration afresh?

 Telephone expenses                Rs. 8,76,195/-
Miscellaneous expenses            Rs. 3,64,762/-

46. The Hon'ble Third Member has since answered all the questions referred to him for opinion vide his two separate orders of 29.06.2007 as under:

1. Question No. 1 (Ground Nos. 1 and 2): Hon'ble Third Member has agreed with the views of the Id. Accountant Member and therefore ground Nos. 1 and 2 are dismissed.

2. Question Nos. 2 to 7 (Ground Nos. 3 to 11): Hon'ble Third Member has agreed with the views of the Judicial Member and therefore ground Nos. 3 to 11 are allowed.

47. In view of the majority opinion, appeal filed by the assessee is partly allowed as aforesaid.

Order pronounced at the time of hearing.

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Sujay Trading Pvt. Ltd. vs Joint Commissioner Of Income Tax, ... on 9 October, 2007