* IN THE HIGH COURT OF DELHI AT NEW DELHI
Judgment Reserved on August 11, 2014
Judgment Delivered on September 22, 2014
+ ITA No. 42/2014
CAREFOUR WC&C INDIA PRIVATE LIMITED ..... Petitioner
Through: Mr. Ajay Vohra, Ms.Kavita Jha,
Mr.Vaibhav Kulkarni, Advocates
versus
DEPUTY COMMISSIONER OF INCOME TAX ..... Respondent
Through: Mr.Rohit Madan, Sr.Standing
Counsel
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE V.KAMESWAR RAO
V.KAMESWAR RAO, J.
1. The present appeal has been filed by the assessee under Section
260A of the Income Tax Act, 1961 (`Act', in short), challenging the
order dated August 16, 2013 passed by the Income Tax Appellate
Tribunal (Tribunal, in short) whereby the Tribunal has upheld the order
of the Commissioner of Income Tax (Appeals) dated March 02, 2012,
affirming the findings of the Assessing Officer in the assessment order
dated December 10, 2010. The following question of law was framed on
April 15, 2014 for consideration of this Court:
"Did the Tribunal fall into error in holding that the
ITA No. 42/2014 Page 1 of 23
assessee had not set up its business till 31.03.2008".
2. Some of the relevant facts are, the assessee company was
incorporated on September 19, 2007 under the Companies Act, 1956, to
carry on trading activities which primarily included wholesale trading of
all kinds of consumer goods durables, articles and products. The year
2008-09 was the first year of assessment. The assessee company filed an
E-Return of income for the assessment year 2008-09. The appellant-
assessee claimed expenses amounting to Rs.9,03,03,547/- and claimed a
business loss of Rs. 8,64,07,610/- after setting off income from other
sources amounting to Rs. 38,95,937/-. Show cause notice dated October
21, 2010 was issued to the assessee as to why the business loss claimed
may not be disallowed. The case of the appellant-assessee was that the
loss had occurred on account of expenses incurred for earning and
conducting business in India. The Assessing Officer was of the view
that the expenditure incurred was prior to commencement of business as
it was not fully set up. Thus expenditure was not allowed as a deduction.
Sections 28 to Section 43D of the Act, which relates to the computation
of business income were elucidated upon. The Assessing Officer
supported his conclusion considering the case of a manufacturing
concern, which could be said to be set up only when it was ready for
ITA No. 42/2014 Page 2 of 23
production. In case of a trader, the Assessing Officer was of the view
that the distinction may not be significant once there were stocks to be
sold. In other words, according to him, the manufacturing concern is
said to be set up only when production gets started and in the case of the
trader, when the stocks are available to be sold. In paras 3.1 to 3.3 and
3.5 to 3.7 of the Assessment Order, the following was his conclusion:
"3.1 I have carefully considered the reply submitted
by the assessee. Expenditure incurred in respect of
any business is deductible from the date of
commencement of business but only where it has
been set up. The result is that there is plethora of
cases on the difference as between the concept of
commencement of a business and setting up of a
business Expenditure incurred prior to the setting up
of a business is not allowed as deduction. Pre-
commencement expenditure may well be a dead loss
unless it could be treated as cost of capital assets so
as to be entitled for depreciation.
3.2 Since section 28 to 43D relate to computation of
business income, which is carried on by the assessee,
it follows that the expenses during the pre-
commencement period will not be deductable.
Similarly loss incurred during the period cannot also
be treated as business loss. It cannot, therefore, be
carried forward. It has been so held in Liquidators of
Pursa Ltd. V CIT [1954] 25 ITR 265 (SC) to the
extent to which such expense could be capitalized to
the assets, the assessee may well be eligible for
depreciation as was found in Challapalli Sugars Ltd.
V CIT [1975] 98 ITR 167 (SC). As otherwise such
expenses like audit fee would be a dead loss.
3.3 A business is set up in the case of manufacturing
concern, when it is ready for production. In the case
ITA No. 42/2014 Page 3 of 23
of trader, the distinction may not be significant once
there are stocks to be sold. In the case of a
professional the fact that the professional qualifies
for practice and is ready to entertain clients would
entitle him to claim deduction listed or otherwise.
3.4 ...........
3.5 As information on the significant of accounting
policies, it is clearly mentioned that the assessee is a
trader. "Trade" in its primary meaning is the
exchanging of goods for goods or goods for money,
in its secondary meaning it is repealed activity in the
nature of business carried on with a profit motive,
the activity being manual or mercantile as
distinguished from the liberal arts or learned
professions or agriculture as held by Supreme Court
in the case of State of Punjab v. Bajaj Electricals Ltd
[1968] 70 ITR 730.732 (SC).
3.6 In the audit report against para 28(a) on form
3CD it is clearly mentioned that business has not
commenced. When no stock is either available or
even has been purchased by the assessee, by no
stretch of imagination it can be inferred that the
business has been set up and ready to commence its
business.
3.7 In view of the above discussion, the reply
submitted by the assessee is not acceptable. As no
business activities have been carried out as per audit
report as discussed above and in view of the various
decisions, the expenses claimed as revenue
expenditure are not allowed and the loss from
business is disallowed and the business income is
taken at Nil. For the facts discussed, I am satisfied
that the assessee Company has concealed the
particulars of its income/submitted wrong particulars
of its income, therefore, penalty proceedings u/s
271(1)(c) of the Income Tax Act, 1961 are initiated
on this account."
ITA No. 42/2014 Page 4 of 23
3. On an appeal before the CIT (Appeals), who, after referring to the
main objectives of the business of the assessee company, was of the
following view:
"However, it is noticed that the appellant
company has not been registered under the Shops
and Establishments Act during the relevant period
which is one of the essential conditions for setting
up of business or for the commencement of
business in India. It is further noticed that the
appellant company has not established any store
from where sale/ purchase or trading of goods
could take place. Similarly no warehouse/go down
was established during the relevant previous year
from where the intended goods for trading could
be stored. No vehicle/ transport arrangement was
made by the appellant company for the
transportation/ delivery/ supply/ distribution of
goods. No expenditure was found to be incurred
on advertisement/publicity of the new business of
the appellant company. It is also noticed that most
of the key employees were appointed by the
appellant company vide the letters of appointment
issued on 1.1.2008. These key employees have
given their acceptance for appointment after the
end of the relevant previous year. Or reference,
the names, designation, date of issue appointment
letter and the letter of acceptance by these
employees are given below:
Name of the Post Date of issue of Date of
employee appointment letter acceptance of
Eric Bouin Director FMCG 01.01.2008 appointment
04.07.2008
Bouzeneth Benauda Merchandise 01.01.2008 16.07.2008
Director
Lyderich Jouvenaux Business Date 01.01.2008 04.07.2008
Development Manager
ITA No. 42/2014 Page 5 of 23
Patrice Breuil Director Hard 01.01.2008 04.07.2008
goods
Dominique Coulombel Fruit & Vegetable Manager 01.01.2008 04.07.2008
It is also noticed that most of the correspondence made
with the intended suppliers were made either before the
incorporation of the appellant company or after the end
of the relevant previous year. In this regard, it is
relevant to mention that the appellant company has
filed some of the samples of correspondence with the
intended suppliers of goods with key employees of the
appellant company. From the perusal of the details
filed the learned AR, it is noticed that the FMCG
director of the appellant company namely, Mr. Bouin,
has raised certain queries with Nestle on 12.06.2007
whereas the appellant company itself was incorporated
w.e.f. 19.09.2007. Mr. Bouin himself was appointed by
the appellant company w.e.f. 01.01.2008. Thus it seems
that these correspondence were made even before the
incorporation of the appellant company. Similarly, the
evidences of correspondence regarding the queries
with purchase of goods from the intended suppliers
were found to be made in November 2010. It is further
seen that the computers and accessories were
purchased at the fag end of the assessment year and the
number of employees was also not sufficient to
commence the business of the appellant company.
Under these facts and circumstances, I am unable to
believe that the business of the appellant company was
established during the relevant previous year in the
absence of any store or outlet for the business of
trading, ware house/ godowns, transportations,
Registration under the Shop and Establishment Act and
purchase or sale made during the relevant previous
year, the appellant was not in a position to discharge
its functions as a wholesale trader. It has been held by
the honourable high court in the case of Western India
Vegetables Products Ltd vs CIT (26 ITR 151) that there
is a distinction between setting up of business and
commencement of business. When a business is
ITA No. 42/2014 Page 6 of 23
established and is ready to commence business, it can
be said of that business that is set up. But before, it is
ready to commence business, it is not set up. Further in
the case of CIT vs Saurashtra Cement and Chemical
Industries Ltd. (91 ITR 170) it was held that the word
"set up" is equivalent to the word "establishment", but
operation for establishment cannot be equated with the
establishment of the unit itself or its setting up. In
another case namely, CWT vs Ramraju Surgical Cotton
Mills Ltd. (63 ITR 478) it was held that a unit cannot be
said to have been set up unless it is ready to discharge
the function for which it has been set up. It is only when
the unit has been put into such a shape that it can start
functioning as a business or as a manufacturing
organisation that it can be said that the unit has been
set up. Operations for the establishments of a unit from
the very nature of expression can only signify step that
have to be taken to establish the unit. In the present
case it is found that only preliminary enquiries were
conducted for the purchase of goods and the purchasers
were neither finalized nor any order was placed during
the relevant previous year. Therefore, in my opinion,
the appellant company was not in a position to
commence its business and the business was not fully
set up. Since, the business of the appellant company
was not set up during the relevant previous year, the
expenses incurred on it cannot be allowed as deduction.
Therefore, the order of the AO regarding the impugned
disallowance of Rs. 8,64,07,610/- is hereby confirmed".
4. The appellant assessee filed an appeal before the Tribunal. The
Tribunal after noting the facts and the position of law was of the view
that the business of trader can be said to be set up when the assessee
makes a purchase subsequently to owning/leasing of either a shop or
warehouse and in the facts of the present case evidently the assessee has
not made any purchase or rented any shop premises from where sale
ITA No. 42/2014 Page 7 of 23
could take place or for that matter rented any house where the purchased
goods intended to be sold can be stored. The Tribunal eventually held
that it could not be said that the business of the assessee has been set up
as is the requirement of proviso to Section 3 of the Income Tax Act.
5. Learned counsel for the appellant-assessee submits that the
appellant-assessee has set up its business in the relevant previous year
and the same was evidenced by way of (a) correspondence with Indian
suppliers, (b) incorporation of the company, (c) hiring of personnel, (d)
opening of bank account, (e) registration under Shops and
Establishments Act. It is the appellant's case that its business was thus
set up during the relevant previous year as the appellant was ready to
commence business although actual commencement of business did not
take place during that year. The appellant challenged the order of the
Tribunal and the Authorities below as being totally perverse as the
Authorities below had proceeded on the premise related to actual
commencement of business by overlooking the fact that the relevant
consideration is whether the business has been set up or not. According
to the learned counsel for the appellant, the Tribunal has erred in holding
that the business of the trader is set up when such trader makes purchase
subsequent to owning/leasing of either a shop or a warehouse and since
such requirements were not fulfilled in appellant case, its business could
ITA No. 42/2014 Page 8 of 23
not be said to have been set up during the relevant previous year.
6. According to learned counsel for the appellant, since
incorporation, the appellant company had been undertaking activities
relating to planning, meeting with prospective suppliers,
marketing/business development in India etc. and for this purpose, the
appellant company set up an office and facilities, hired the professional
employees and directors, initiated negotiations with suppliers for supply
of products etc. During the relevant previous year, the appellant
company acquired the leased office premises with effect from October
01, 2007. The appellant company also opened its bank account on
October 04, 2007 and incurred routine business expenses such as legal
and professional charges, travel and conveyance, meeting and
conference, salary and wages etc. During the subject assessment year,
the appellant also employed key employees such as IT director, FMCG-
director, Merchandise Director, Finance Director, Accountants, other
supporting staff etc. capable of rendering business development,
marketing and financial support activities in relation to the products
proposed to be traded by the appellant company. During the subject
assessment year, the appellant company met with a number of key
suppliers such as Unilever, Colgate, Rasna, Safal, Nestle, Pepsi, Cadbury
etc. to negotiate significant terms of the supply contracts. The appellant
ITA No. 42/2014 Page 9 of 23
started creating data base of its prospective suppliers or goods in various
categories, to establish its operations, the appellant company also
purchased sizeable amount of fixed assets such as computers and
softwares (Rs.33,77,573), office equipments (Rs.38,64,333), furniture
and fittings and leasehold improvements (Rs.92,30,741) etc. which were
essential for carrying on the business of the appellant company. In view
of these facts, the appellant company claimed that its business was set up
from the date of incorporation and its expenses to be allowed as business
expenses during the relevant assessment year. Only actual sales and
purchase of products did not happen during the subject financial year
which is not a necessary condition/activity in order to hold a business
was set up.
7. The learned counsel for the assessee has filed a compilation of 15
judgments in support of his contentions, which are as under:
(i) Western India Vegetable Products Ltd. Vs. CIT, 26 ITR 151
(ii) CWT Vs. Ramaraju Surgical Cotton Mills Ltd., 63 ITR 478
(iii) CIT Vs. Sarabhai Management Corporation Limited, 192 ITR
151
(iv) Sarabhai Management Corporation Ltd. Vs. CIT, 102, ITR 25
(v) CIT Vs. Hughes Escorts Communications Ltd., 311 ITR 253
(vi) CIT Vs. Whirlpool of India Ltd., 318 ITR 347
(vii) CIT Vs. ESPN Software India (P) Ltd., 301 ITR 368
(viii) CIT Vs. Sauer Danfoss (P) Ltd., ITA No. 1367/2010
(ix) CIT Vs. Aspentech India (P) Ltd., 187 TAXMAN 25
(x) CIT Vs. E.Funds International India, 162 TAXMAN 1
(xi) CIT Vs. Dhoomketu Builders & Development Pvt. Ltd., 216
TAXMAN 76
ITA No. 42/2014 Page 10 of 23
(xii) CIT Vs. Samsung India Electronics Limited, 356 ITR 354
(xiii) CIT Vs. Franco Tosi Ingegnaria, 241 ITR 268
(xiv) CIT Vs. Western India Seafood (P) Ltd., 199 ITR 777
(xv) CIT Vs. Saurashtra Cement & Chemicals Industries Ltd., 91
ITR 170
8. On the other hand, Mr. Rohit Madan would support the judgment
of the Tribunal and contends that this Court would not like to interfere
with the conclusion arrived at by the three authorities. According to
him, the main objectives of the assessee company in the Memorandum
of Association incorporated to carry on trading activities on wholesale
basis in all kinds of consumer goods, durables, articles and products. In
terms of the Memorandum of Association, the business of the assessee is
of trading on a large scale for which the assessee requires a warehouse to
store the commodities. In the absence of such a facility, it cannot be said
that the assessee had set up a business as is the requirement of proviso to
Section 3 of the Act. According to him, except the correspondence with
various potential suppliers, the assessee has not been able to show that
the enquires had culminated in supply of material. Incorporation
certificate of the company, employment of the personnel towards the end
of the previous year were not the relevant considerations to show a set up
of the business.
9. Having considered the rival submissions made by the learned
counsel for the parties, the question which arises for consideration in the
ITA No. 42/2014 Page 11 of 23
present appeal is as to when does the assessee is said to have set up its
business? It has to be borne in mind that there is a distinction between
setting up of a business and commencement of a business. The Bombay
High Court in Western India Vegetables Products Ltd. vs. CIT [1954]
26 ITR 151 has examined the concept and noticed the difference
between commencement and setting up of a business by observing:-
"The important question that has got to be considered is
from which date are the expenses of this business to be
considered permissible deductions and for that purpose the
section that we have got to look to is section 2(11) and that
section defines the ,,previous year and for the purpose of a
business the previous year begins from the date of setting
up of the business. Therefore, it is only after the business is
set up that the previous year of that business commences
and in that previous year the expenses incurred in the
business can be claimed as permissible deductions. Any
expenses incurred prior to setting up a business would
obviously not be permissible deductions because those
expenses would be incurred at a point of time when the
previous years of the business would not have
commenced."
10. The Gujarat High Court in a subsequent judgment in the case of
CIT, Gujarat Vs. M/s. Saurashtra Cement and Chemical Industries
Ltd. (1973) 91 ITR 170 (Guj.), has held a business is said to have
commenced as soon as an essential activity of that business is started.
On the question of setting up, the following observations are relevant:-
"...A business activity consists of three stages: the first
stage relates to the activity necessary for the purpose
ITA No. 42/2014 Page 12 of 23
of acquiring the raw material and establishment of
plant and machinery and the second activity comprises
the processing and manufacturing by using the raw
material and the plants and machinery set up for the
purpose and the third category consisted of the
marketing thereof. The first in point of time lays the
foundation for the second activity and the second
activity when completed lays the foundation for the
third activity. Therefore, the expenditure incurred for
carrying on any of these activities including the first
activity is also deductible in computing the profits and
gains of the assessee for the relevant year when the
activity is undertaken. In Sarabhai Management
Corporation Ltd. v. CIT, [1976] 102 ITR 25, the
Gujarat High Court took the same view and held that
the business commences with the first activity for
acquiring by purchase or otherwise, immovable
property. There may be an interval between the setting
up of the business and the commencement of the
business. All expenses incurred during that interval are
also permissible for deduction. In CIT v. Sarabhai
Management Corporation Ltd., [1991] 192 ITR 151
(SC) the decision of the Gujarat High Court was
affirmed and went a step ahead that even the activities
at a preparatory stage is also admissible."
11. On a reading of the above referred quotations, it is clear that it is
only after the business is set up, that the expenses incurred in the
business can be claimed as permissible deduction under Section 37 of the
Act. For commencement of a business, there must be in place some
income generating asset or income earning structure. In several cases,
there is a gap or an interval between setting up and commencement.
When the business is set up, is a mixed question of law and fact and
ITA No. 42/2014 Page 13 of 23
depends upon the line, nature and character of the business/professional
activity. For example, for manufacturing business, purchase of new
material or electricity connection may be relevant point to determine
setting up but in case of a property dealer, the moment, he puts up a chair
and table, or starts talking, his business is set up.
The present assessee was engaged and incorporated for carrying
on trading activities in different commodities.
The word `trade' even though not defined in the Act is used to
denote operations of a commercial character by which a trader provides
to customer for reward, some kind of goods or services. In other words,
when the trader start providing such goods and services, the business is
said to have commenced but the same may not hold good for set up of a
business, which is a stage before the commencement. To set up a
business, the following activities become relevant:-
`Preparation of a business plan; establishment of a business
premises; research into the likely markets or profitability of the business;
acquiring assets for use in the business; registration as an entity and
under the local laws etc.' The said list of activities are not exhaustive
and facts of each case need to be considered. Indeed purchase of goods
would amount to commencement of business, but before the said act,
spade work and efforts to commence have to be undertaken. A trader
ITA No. 42/2014 Page 14 of 23
before actual purchase would possibly interact and negotiate with
manufacturers, landlords, conduct due diligence to identify prospective
customers, spread awareness etc. These are all integral part and parcel of
the business of a trader. The said activities continue even post first
sale/purchase. When first steps are taken by a trader, the business is set
up, commencement of purchase and then sales is post set up.
12. There is no dispute about the factual aspect of the expenses
incurred by the petitioner. In the present case, the position of the primary
objectives of the assessee company is also not in dispute. Before we deal
with the respective submissions of the learned counsel for the parties, we
note hereunder the relevant dates showing the setting up of a business by
the assessee-company as noted from the memo of appeal:
Started correspondence with various 12.06.2007
Indian suppliers
Incorporation of company 19.09.2007
Hiring of personnel w.e.f. 19.09.2007
Opening of bank account 04.10.2007
Registration under Shops and w.e.f. 01.01.2008
Establishments Act, applied vide
Application dated 04.03.2008 and
granted vide order dated 05.03.2008
In the facts of the present case, we note that the assessee company was
incorporated on September 19, 2007. Even before the incorporation,
correspondence had been made with well known companies like Nestle,
ITA No. 42/2014 Page 15 of 23
Cadbury, Nivea India Pvt. Ltd., Pepsi, Coalgate, Uniliver etc. It rented
out the office premises in the month of October, 2007. Bank account
was opened on October 04, 2007. Employees were also appointed
during the said period. TDS deduction for the said employees was also
placed on record. Registration under the Shops and Establishment Act
was also effected. These activities are the first stage activities which
would lay foundation for placing orders for procuring the stock and
storing them in a warehouse/shop followed by the third stage of
marketing them. Suffice to state for a foreign entity without establishing
itself under the local laws, appointing personnel, identifying the
prospective manufacturers, clients etc. obtaining storage facilities
followed by stock-in-trade, the business of trading cannot commence.
The Tribunal missed the point, that the assessee as a prudent trader could
not have made purchases without undertaking the aforesaid exercise. The
said exercise was a precursor to commencement but post set up. The
aforesaid activities demonstrate setting up of the business by the
appellant-assessee with a commitment to commence the business. This
Court in ESPN Software India P. Ltd. (supra) has held as under:-
"Since the assessee has acquired the licence on August
15, 1995, and after getting the licence, the assessee was
in a position to start the business, so, under these
circumstances, we have no hesitation in holding that the
assessee has commenced its business on or after August
ITA No. 42/2014 Page 16 of 23
15, 1995 and we do not find any infirmity with regard to
this finding in the order passed by the Tribunal."
Nothing barred or prevented the appellant from making first purchase,
after necessary legal approvals, but the fact that the appellant wanted to
commence actual trading after negotiations with several parties, would
not postpone the date when the business was set up.
13. In CIT vs. ESPN Software India Pvt. Ltd. (supra), this Court
while dealing with the case where the assessee company was
incorporated on August 01, 1995 and had filed its return declaring loss of
Rs.3,01,78,033/- by debiting expenses of Rs.2,28,85,749/- relating to the
period from August 01, 1995 to March 31, 1996 held that it is a well
settled position of law that business is nothing more than a continuous
course of activities and for commencement of business all the activities
which go to make up the business need not be started simultaneously. As
soon as the activity which is the essential activity in the course of
carrying on the business is started, the business must be said to have
commenced. In the said case it was held that even though incorporated
on August 01, 1995, the company had acquired licence to commence its
business on August 15, 1995 to distribute in India through Cable
Television Systems, Satellite Master Antenna Systems and DTH etc.
ESPN channels. The business is said to have commenced as it was on
ITA No. 42/2014 Page 17 of 23
that day the company was in a position to start the business. Trader has
to select products, negotiate with manufacturers etc. and this is an
essential and important facet of the activities and business of a trader.
Similarly this Court in CIT vs. Aspentech India (P) Ltd. [2010]
187 Taxman 25 (Delhi) had agreed with the ITAT wherein the ITAT has
held that for claiming any expenses under Section 37(1) of the Act what
is required to be seen is whether the expenses are incurred for the
purpose of business or not and such expenses are of not capital in nature
and are not expressly disallowable under the other provisions of the Act.
The Tribunal had also taken into consideration the fact that the assessee
company has achieved turnover of Rs.4 Crores with the help of seven
employees which clearly indicates that their efforts made in the year
under consideration has shown fruitful result in the succeeding years.
The Tribunal had also noted that the expenses have been incurred after
setting up of the business. The expenses on staff salary paid by the
appellant-assessee were substantial. For a trader, these expenses or
deployment of employees at this scale was not necessarily in case
business had not been set up.
14. In Commissioner of Income Tax vs. Sauer Danfoss (P) Ltd.
[2012] 22 taxmann.com251 (Delhi), the Division Bench of this Court
has held as under:-
ITA No. 42/2014 Page 18 of 23
"3. There are four other issues raised in the present
appeal. The first issue relates to the date on which
the business of the respondent assessee was set up.
The Assessing Officer has held that the business of
the respondent assessee was set up on 1st June, 2001.
The Assessing Officer, therefore, disallowed expenses
to the extent of Rs.19,37,773/-, which include
salaries, wages, bonus, staff welfare expenses,
recruitment and training etc. for the period prior to
1st June, 2001. Similar expenses have been also
disallowed on power and fuel, i.e., electricity and
water.
4. On the said aspect/question, we find that the
tribunal has dealt with the issue in depth and has
recorded several factual findings. We would like to
reproduce here paragraph 6 of the order passed by
the tribunal, which reads as under:
" We have considered the rival contentions and
found from the record that the assessee
company was duly incorporated on 5.2.2001
under the Companies Act, 1956. It has also
applied for approval to FIPB, and FIPB vide
approval dated 24.1.2001 allowed for setting
up of business in India for various activities.
The assessee set up its business from 1st April,
2001 and was ready to commence its business
operation. First director was appointed on
5.2.2001 on the date of incorporation and
additional directors were appointed on
10.2.2001. It has taken premises on lease w.e.f.
1.4.2001, the physical possession of which was
already taken w.e.f. 15.2.2001. It opened its
bank account with Dutche Bank in March first
week wherein first remittance was received on
9.2.2001. It is quite clear from these activities
of the assessee company that it has set up its
business and was ready to commence on
1.4.2001. There is no dispute to the well settled
legal proposition that at the point of time, the
ITA No. 42/2014 Page 19 of 23
assessee is in a complete state of readiness to
undertake its activity, it can be said that it has
set up its business, the actual commencement of
business may be at a later date. The trading
business of the assessee was ready to
commence upon set up of requisite
infrastructure i.e. acquisition of place of
business, commencement of hiring of suitable
personnel, identifying clients, opening bank
account etc. which enabled the assessee to
carry out its object clause. ITAT Delhi Bench
in the case of Whirlpool of India Ltd.- 19 SOT
293 observed that there may be
interregnum(sic) between setting up of business
and date of commercial commencement of
business, but under the Income Tax Act, all the
expenses incurred after the date of setting up of
business are to be allowed as a deduction while
computing the income u/s 28. The Hon'ble
Bench in this case held that where the assessee
company has appointed branch manager and
regional manager in 1995, paid salaries
including PF contribution etc. beginning from
November, 1995, its business can be said to be
set up from 1.11.1995 i.e. the date on which the
company was in a position to commence its
business, and not on 1.2.1996 when its bank
account was opened. The instant case before us
is at a more sound footing where even a bank
account was opened prior to 1.4.2001 and the
assessee has claimed the expenditure only after
it has set up its business which was ready for
commencement. Merely because assessee
entered into agreement with DHL on 21.5.2001
which was to be operative from 1.6.2001 date
on which assessee took over the running
business of DHL, it cannot be said that it has
set up its business only on 1.6.2001 and not
from 1.4.2001. Accordingly, we do not find any
merit in the action of the lower authorities for
not allowing the expenditure incurred after 1st
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April, 2001. The AO is at a liberty to verify that
the expenditure to be allowed should be
restricted to revenue expenditure. We direct
accordingly."
15. In Commissioner of Income Tax IV vs. Dhoomketu Builders &
Development (P) Ltd. [2013] 216 TAXMAN 76/34 taxmann.com 18
(Delhi), the Division Bench of this Court has held as under:-
"9. The Tribunal has observed that having regard to
the business of the assessee, which is the
development of real estates, the participation in the
tender represents commencement of one activity
which would enable the assessee to acquire the land
for development. If the assessee is in a position to
commence business, that means the business has
been set-up. The acts of applying for participation in
the tender, the borrowing of monies for interest from
the holding company, the deposit of the borrowed
monies on the same day with NGEF Ltd. as earnest
money were all acts which clearly establish that the
business had been set-up. The commencement of
real estate business would normally start with the
acquisition of land or immoveable property. When
an assessee whose business it is to develop real
estates, is in a position to perform certain acts
towards the acquisition of land, that would clearly
show that it is ready to commence business and, as a
corollary, that it has already been set-up. The actual
acquisition of land is the result of such efforts put in
by the assessee; once the land is acquired the
assessee may be said to have actually commenced its
business which is that of development of real estate.
The actual acquisition of the land may be a first step
in the commencement of the business, but section 3
of the Act does not speak of commencement of the
business, it speaks only of setting-up of the business.
When the assessee in the present case was in a
position to apply for the tender, borrowed money for
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interest albeit from its holding company and
deposited the same with NGEF Ltd. on the same
day, it shows that the assessees business had been
set-up and it was ready to commence business. The
learned senior standing counsel for the revenue
would, however, state that till the land is acquired,
the business is not set- up. The difficulty in accepting
the argument is that an assessee may not be
successful in acquiring land for long period of time
though he is ready to commence his business in real
estate, and that would result in the expenses
incurred by him throughout that period not being
computed as a loss under the head "business" on the
ground that he is yet to set-up his business. That
would be an unacceptable position. The other
argument of the learned standing counsel for the
revenue that the tax auditors of the assessee have
themselves pointed out that the assessee is yet to
commence its business is also irrelevant because of
the distinction between the commencement of the
business and setting-up of the same."
16. This Court in Commissioner of Income Tax IV vs. Samsung
India Electronics Ltd. [2013] 356 ITR 354 (Delhi) agreed with the
findings of the Tribunal and dismissed the appeal filed by the Revenue.
The relevant finding of the Tribunal is as under:-
"6. In view of the above, the business of the assessee
could be said to have been set up on September 3,
1995, as prior to this necessary agreements had
been entered into, key personnel had been recruited
and the assessee-company had started working
necessary infrastructure like office premises, office
equipment, etc. and the assessee company was ready
to commence trading operation as on the date of
incorporation, viz., August 3, 1995. Accordingly, the
Assessing Officer is directed allow the revenue
expenditure incurred after the setting up of business
ITA No. 42/2014 Page 22 of 23
which was September 3, 1995, notwithstanding the
fact that commercial operations started with effect
from October 1, 1995. For the purpose of claiming
expenditure incurred thereafter, as revenue
expenditure, reliance are placed on the following
decisions."
The aforesaid decisions affirm and reflect the view and findings recorded
by us, to justify reversal of the findings of the Tribunal and the
authorities.
17. The law being well settled, it may not be necessary to deal with all
the judgments relied upon by the appellant. We may only state here that
the orders of the authorities below do not indicate that it was the case of
the revenue that the assessee has claimed deduction of expenditure, prior
to the setting up of business.
We accordingly answer the substantial question of law in favour
of the appellant and against the revenue. The order of the Tribunal dated
August 16, 2013 is set aside. The appeal is accordingly allowed.
No costs.
(V.KAMESWAR RAO)
JUDGE
(SANJIV KHANNA)
JUDGE
SEPTEMBER 22, 2014/akb
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