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2008 (8) TMI 604 - AT - Income TaxDisallowance u/s 37 - Whether the assessee is able to demonstrate that its business for trading of paints and car refinishing products so far set up during the accounting period relevant to this assessment year and, therefore, it is entitled for deduction of business expenses as claimed in the return? - HELD THAT - Section 2(13) provides the definition of expression business according to which business includes any trade, commerce manufacture or any adventure or concern in the nature of trade, commerce or manufacture. In the present case, the only evidence brought on record by the assessee for demonstrating setting up of the business is that assessee has been incorporating. Its director came to India on 9-12-1997. Had it got order it would have delivered the goods. To our mind, this proposition is not acceptable because carrying out business would require activities systematically and continuously. The steps shown by the assessee are of preliminary steps in the direction of setting up of the business. There is nothing on the record which can suggest the potentiality and capability of the assessee to deliver the goods or invite the customer for supply of those goods. It was merely incorporated its director was exploring how to carry out the manufacturing activity. He was also exploiting the available market in India. In the next accounting year, assessee was able to arrange office space, residential space for the director and also the space for the goods. The AO has considered these lease agreement, etc., and all other relevant activities of the assessee and, thereafter, granted the deduction of expenditure in the next year. Thus, merely on the basis of incorporation of a company it cannot be concluded that business was set up. As observed carrying on a business is a regular and systematic activity. Nothing that sort of facts or circumstances could be brought before us. In the case of ESPN Software India (P.) Ltd. 2008 (3) TMI 90 - DELHI HIGH COURT , learned DR rightly highlighted that assessee got a license for providing ESPN Services and also appointed distributors. On these facts, learned CIT(Appeals) held that business was set up in that case. No such facts are available in the present case. Whether a business has been set up or not is a question of fact which will vary in each case. Assessee failed to demonstrate either with the direct evidence or with the circumstantial evidence that its business was set up in the accounting period. Whatever has been pointed out, i.e., incorporation of the assessee and appointment of the director are concerned, we are of the view that these two factors are not sufficient to record a finding that business has been set up. Therefore, the first ground of appeal raised by the assessee is rejected. CIT(Appeals) confirmed the addition of sum in AY's 1998-99 and 1999-2000 respectively - HELD THAT - Unless the FDs are matured, assessee has no right to receive the interest income, therefore, even if the assessee is following the mercantile system of accounting the right to receive would accrue on the maturity of the FDs. Therefore, interest income as assessed by the Assessing Officer in these two assessment years is not taxable. We delete both these additions in assessment years 1998-99 and 1999-2000. Before parting with this order, we would like to mention that learned counsel for the assessee has pointed out that assessee has shown interest income in AY 1999-2000 because the FD was matured in May 1998. The ld CIT(Appeals) has deleted this addition in AY 1999-2000, because he has confirmed the addition in 1998-99. Now we are deleting this addition from 1998-99. Consequently, it will be taxable in 1999-2000, more so assessee itself was shown this income in AY 1999-2000. The ld AO shall carry out necessary excuses in AY 1999-2000. In the result, the appeal bearing I.T.A. No.164/Delhi/03 is partly allowed whereas the appeal bearing I.T.A. No.165/Delhi/03 is allowed.
Issues Involved:
1. Disallowance of business expenses for the assessment year 1998-99. 2. Taxability of interest income on Fixed Deposit Receipts (FDRs) for the assessment years 1998-99 and 1999-2000. Detailed Analysis: 1. Disallowance of Business Expenses for Assessment Year 1998-99: The primary issue was whether the assessee's business was "set up" during the accounting period relevant to the assessment year 1998-99, thereby entitling it to claim business expenses as deductions. The assessee, a private limited company incorporated on 5-12-1997, claimed a total loss of Rs. 26,94,550 for the period from 5-12-1997 to 31-3-1998. The Assessing Officer (AO) found ambiguities in the computation and disallowed the claimed expenses of Rs. 26,56,199, arguing that the business had not commenced. The assessee contended that the business was set up from the date of incorporation, emphasizing that the Managing Director had started exploring business opportunities immediately after incorporation. The CIT(Appeals) upheld the AO's decision, leading the assessee to appeal to the ITAT. The assessee argued that trading activities had commenced from the date of incorporation and relied on the judgment in CIT v. ESPN Software India (P.) Ltd., where the business was considered set up from the date of obtaining a license. The assessee also cited other precedents to support its claim that the business was set up upon incorporation and the commencement of trading activities. However, the ITAT found that the activities undertaken by the assessee, such as incorporation and preliminary explorations by the Managing Director, were insufficient to demonstrate that the business was set up. The ITAT emphasized that carrying on a business requires systematic and continuous activities, which were not evident in this case. The ITAT concluded that the business was not set up during the relevant accounting period, and thus, the expenses claimed could not be allowed as business expenses. 2. Taxability of Interest Income on FDRs for Assessment Years 1998-99 and 1999-2000: The second issue concerned whether the interest income on FDRs should be taxed in the assessment years 1998-99 and 1999-2000. For the assessment year 1998-99, the assessee had made a deposit of Rs. 8,50,00,000 for three months, maturing in May 1998. The AO added the interest income of Rs. 16,34,795 to the income for the year, but the assessee argued that the right to receive the interest would only accrue upon maturity in May 1998, making it taxable in the subsequent year. The ITAT agreed with the assessee, stating that the right to receive the interest income accrues upon the maturity of the FDRs, not before. Consequently, the interest income could not be taxed in the assessment year 1998-99. For the assessment year 1999-2000, the AO had made an addition of Rs. 14,29,450 as interest income. The ITAT, following the same reasoning, held that the interest income should be taxed in the year the FDRs matured, i.e., 1999-2000. The ITAT noted that the CIT(Appeals) had deleted the addition of Rs. 16,34,795 for the assessment year 1999-2000, as it had been confirmed for 1998-99. With the ITAT now deleting the addition for 1998-99, the interest income would be taxable in 1999-2000. The AO was directed to make the necessary adjustments for the assessment year 1999-2000. Conclusion: The appeal for the assessment year 1998-99 (I.T.A. No. 164/Delhi/03) was partly allowed, with the ITAT rejecting the claim for business expenses but deleting the addition of interest income. The appeal for the assessment year 1999-2000 (I.T.A. No. 165/Delhi/03) was allowed, with the ITAT directing the AO to tax the interest income in the correct assessment year.
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