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September, 27th 2014
                                  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


DEPUTY COMMISSIONER OF INCOME TAX                        ..... Respondent

                      Through:            Mr.Rohit   Madan,       Sr.Standing


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

           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
     Bouzeneth Benauda       Merchandise                  01.01.2008                          16.07.2008
     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
     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
        (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

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
        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
ITA No. 42/2014                                              Page 20 of 23
                  April, 2001. The AO is at a liberty to verify that
                  the expenditure to be allowed should be
                  restricted to revenue expenditure. We direct
15.     In Commissioner of Income Tax IV vs. Dhoomketu Builders &

Development (P) Ltd. [2013] 216 TAXMAN 76/34 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

ITA No. 42/2014                                              Page 21 of 23
        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

The aforesaid decisions affirm and reflect the view and findings recorded

by us, to justify reversal of the findings of the Tribunal and the


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)

                                                   (SANJIV KHANNA)
SEPTEMBER 22, 2014/akb

ITA No. 42/2014                                         Page 23 of 23
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