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Income Tax Appellate Tribunal - Delhi

Thomas Broadband (India) Pvt. Ltd., New ... vs Department Of Income Tax on 29 July, 2011

                                     1                     ITA No. 4529/Del/2011
                                                              Asstt.Year: 2006-07

              IN THE INCOME TAX APPELLATE TRIBUNAL
                     DELHI BENCH `H' NEW DELHI

         BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT
                            AND
        SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER

                         I.T.A.No.4529/Del/2011
                        Assessment Year : 2006-07

DCIT,               vs Thomas Broadband (India) Pvt. Ltd.,
Circle-16(1),           Now known as Thomson Holding (India) Pvt.Ltd.,
New Delhi.              302(3B), World Trade Tower,
                        Barakhamba Lane, New Delhi-110001
                        (PAN: AACCT0862G)
(Appellant)               (Respondent)
                    Appellant by: None
                    Respondent by : Shri Sameer Sharma, Sr.DR


                               ORDER

PER CHANDRA MOHAN GARG, JUDICIAL MEMBER

This appeal has been preferred by the Revenue against the order of Commissioner of Income Tax(A)-XIX, New Delhi dated 29.07.2011 in Appeal No. 77/2008-09 for AY 2006-07.

2. Ground no. 2 of the revenue is general in nature which needs no adjudication. Remaining sole ground of the revenue reads as under:-

"On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax(A)has erred in deleting the disallowance of Rs.1,26,67,497/- made by the Assessing Officer on account of presetting up expenses."

3. Briefly stated the facts giving rise to this appeal are that the assessee company is engaged in the business of providing market support and warranty support services and in research and development activities for broadband and broadcast related equipments and production systems. The assessee also intended to manufacture or alternatively sub-contract the manufacture of set top boxes in India and to carry on wholesale trading of set top boxes. Such services were provided by the assessee to its group companies. The assessee filed a return showing negative income (loss of Rs.1,06,24,721). The case was selected for scrutiny and statutory notices u/s 143(2) and 142(1) of the Income Tax Act, 1961 along with detailed questionnaire were served on the assessee. The Assessing Officer made an addition of Rs.1,26,67,497 being pre-setting up expenses and added the same to the income of the assessee. The relevant observations and findings of the Assessing Officer reads as under:-

"3.5 From the above submission, it is clear that the expense of Rs. 1,26,67,497/- was incurred by the assessee for the purpose of promotion and development of set-top box business and it pertains to pre-setup period of the said business. In the case of new business, the first previous year commenced on the date when the business or profession is setup. In the case of the assessee, the first sale was made on 22-July 2006 and it cannot be logically accepted that its business was setup in preceding previous year before the previous year in which first sale was made because a business of trading cannot such a long time for setting up a business. The AR of the assessee could not file 3 ITA No. 4529/Del/2011 Asstt.Year: 2006-07 anything substantial to refute this view. The replies filed by the AR of the assessee on this issue were considered and not found tenable. Various judicial pronouncement relied upon by the assessee are not covering the case of the assessee. In the case of the assessee, the business of sale of set top boxes will be treated as set up when the first set top box comes under its possession for sale. Section 28 applies only respect of business carried on during the previous year. As a consequence, the expenditure incurred before the setting up a business would not be deductible while computing income of the previous year. This view has been upheld by the Hon'ble Supreme Court in the case of L.M. Chhabda & Sons Vs CIT reported in 65 ITR 638. Further, if the assessee carries on two businesses: A & B, expenditure of business A is not deductible from profit and business B, if business A was not carried on during the previous year. This view has been given in the book TAXMANN's direct taxes law & practice PROFESSIONAL EDITION AY 2008-09 & 2009-10.

3.6 Therefore, expenses to the tune of Rs. 1,26,67,497/- cannot be allowed during the previous year relevant to the assessment year under scrutiny being pre-setup expenses and added to the income of the assessee. Net addition Rs. 1,26,67,497/-."

4. The aggrieved assessee preferred an appeal before the Commissioner of Income Tax(A) which was allowed by holding that similar kind of expenditure was incurred in the earlier assessment year which was allowed. The relevant operative para of the impugned order reads as under:-

"8.3 The main objects, as stated, in the Memorandum of Association of the appellant include the manufacture and/or trading of set top box. Clause 4(c) of the MOA clearly states that the appellant intended to undertake commercial activities in relation to:

"4. To manufacture, sub contract manufacture, buy, sell, import, export, distribute , repair, maintain, exchange, alter or hire, exhibit, buy, hire or sell or to construct, develop, enter into arrangement for setting up the same, either in whole or part or in any other way, to deal in all or in any of the following:

a) Broadcast equipments such as cameras, telecinema products, production switcher and video effect systems, digital news production, server and media storage, digital recorders, routers and control systems, master control systems, modular equipments, production control products, broadcast production systems and audio/ video;

b) Production systems, encoders, decoders, CoDecs, MPEG processing, network adaptors, management systems and modulators.

c) Broadband related equipment such as set top boxes and communication related equipments and all other electrical and electronic appliances and apparatus of every description and stores of all kinds"

● The appellant had hired personnel in the year FY 2004-05 to negotiate on behalf of the company, carry out marketing activities and secure business for the company.

● The appellant had taken premises 66 lease and paid rent for utilization of office space to carry out its activities in the FY 2004-05.

● The appellant incurred expenses on travel of its executives for attending various meetings for business promotion, training, seminars etc right from the FY 2004-05.

Asstt.Year: 2006-07

● The appellant had incurred expenses on marketing activities and holding meetings with various organizations since FY 2004-05.

8.4 The main contentions of the AR are that as per the memorandum of association the assessee had started the business of set-top boxes and incurred expenditure. The other contention of the AR is that set-top box business is part of the existing business of providing services such as market support, research and development and warranty support services for its group enterprises in India. In support of this proposition the AR contended that common management, common business organization and interlacing of funds. Similar kind of expenditure was incurred in the earlier assessment year which was allowed. After careful consideration of the facts and circumstances of the case, the contentions of the AR are tenable. The addition is hereby deleted.

Accordingly, Ground No.2 is allowed."

5. When the case was called for hearing, neither the assessee nor his representative appeared before us. We also noticed that there was no application for adjournment on behalf of the assessee in this case. On careful perusal of record, we find it appropriate to decide the appeal after hearing the ld. DR and we proceed to decide the appeal on merits. We have heard arguments of ld. DR and carefully perused the record. From the operative part of assessment order as reproduced hereinabove, we observe that the Assessing Officer held that the expenditure incurred before setting up of business would not be deductible while computing the income of the 6 ITA No. 4529/Del/2011 Asstt.Year: 2006-07 assessee for the previous year. The Assessing Officer further held that if the assessee carries on two businesses i.e. a) and b), the expenditure of business 'a' is not deductible from profit of business 'b' if business 'a' was not carried on during the previous year. When the matter was heard before the first appellate authority i.e. before the Commissioner of Income Tax(A), it was contended on behalf of the assessee that the set top box business is a part of existing business of the assessee providing services, such as market support, Research & Development and warranty support services for its group enterprises in India. It was also contended on behalf of the assessee that the common management, common business organization and interlacing of funds are main factors and, thus, similar kind of expenditure was incurred in the earlier assessment year which was allowed by the department. In view of above set of facts and circumstances, we are of the opinion that the Assessing Officer went wrong in making addition and in holding that the claim of the assessee cannot be allowed being pre set up expenses. On the other hand, the CIT(A) rightly observed that when similar kind of expenditure was incurred in the earlier assessment year which was allowed, then the stand cannot change without any basis and the addition was deleted. Accordingly, we hold that the addition made by the Assessing Officer on wrong assumption was rightly deleted by the Commissioner of 7 ITA No. 4529/Del/2011 Asstt.Year: 2006-07 Income Tax(A) and we are unable to see any ambiguity or perversity in the impugned order and we confirm the same. Hence, sole ground of the revenue being devoid of merits is dismissed.

6. In the result, the appeal of the revenue is dismissed.

Order pronounced in the open court on 07.03.2014.

          Sd/-                                                 Sd/-

(G.D. AGRAWAL)                                    (CHANDRA MOHAN GARG)
VICE PRESIDENT                                       JUDICIAL MEMBER

DT. 7th MARCH 2014
'GS'

Copy forwarded to:-

     1.      Appellant
     2.      Respondent
     3.      CIT(A)
     4.      CIT 5. DR                                By order

                                                     Asstt. Registrar