2007 (11) TMI 331 - AT - Income Tax

Disallowance of the expenditure - advance loans for interest - Late deposit of the employee's contribution to the provident fund - Penalty levied u/s 271(1)(c). Disallowance of the expenditure - advance loans for interest - difference between the date of setting up of a business and the date of commencement of the business - HELD THAT - It is well-settled that there is a difference between the date of setting up of a business and the date of commencement of the business and this distinction has been brought out in Western India Vegetable Products Ltd. vs. CIT 1954 (3) TMI 59 - BOMBAY HIGH COURT by observing that when a business is established and is ready to commence business then it can be said that it has been set up , but before it is ready to commence business it is not set up . There may be an interregnum between the date of setting up of the business and the date of actual commencement of the business, but under the Act all expenses incurred after the date of setting up are allowed as a deduction u/s 28. This decision has been applied in its recent judgment in the case of CIT vs. Hughes Escorts Communications Ltd. 2007 (9) TMI 261 - DELHI HIGH COURT . The fact that the foreign loan and FIPB approval for equity investment by the Whirlpool Corporation of USA were given in January, 1996 does not mean that the business was not set up before these events. These are not statutory formalities and even without the foreign loan and the equity participation the assessee company was in a position to carry on the business in accordance with the objects clause of its memorandum of association from November, 1995 when it had its own offices, branches and regional managers and staff, computers installed and was ready to commence its activities. The expenses were incurred through Kelvinator and Expo Machinery and evidence to this effect is placed at the paper book. Thus, it is clear that the business was set up from 1st Nov., 1995, by which date the company was ready and in a position to commence its business. We accordingly hold that the assessee had set up its business on 1st Nov., 1995 and not on 1st Feb., 1996 as claimed by the IT authorities. The disallowance of the expenditure made on this basis is deleted and the ground is allowed. Late deposit of the employee's contribution to the provident fund - Addition to the income by invoking s. 2(24)(x) of the Act, r/w s. 36(1)(va) - HELD THAT - Under s. 10 of the General Clauses Act, 1897, if the last day prescribed for an act to be done falls on a day on which the office is closed, then the act shall be considered as done in due time if it is done on the next day afterwards in which the office is open. Applying this section, the deposit of the contribution on 22nd April, 1996 is within time. The addition of the same is accordingly deleted. The ground is allowed. In the result, the appeal is allowed. Penalty levied u/s 271(1)(c) - concealed its income or furnished inaccurate particulars - HELD THAT - When all the facts are placed by the assessee, before the AO, who has not unearthed any fact not disclosed by the assessee, but has merely taken a view different from the view expressed by the assessee, it cannot be said that the assessee either concealed his income or furnished inaccurate particulars thereof In Addl. CIT vs. Delhi Cloth General Mills Co. Ltd. 1984 (1) TMI 10 - DELHI HIGH COURT and CIT vs. Bacardi Martini India Ltd. 2006 (9) TMI 104 - DELHI HIGH COURT . Therefore, the CIT(A) has rightly cancelled the penalty. Even otherwise, the penalty has no legs to stand in view of our decision that the business was set up on 1st Nov.,1995 as claimed by the assessee and all expenses incurred after that date are allowable as deduction. Thus, the appeal of the Department is dismissed. In the result, the appeal of the assessee is allowed and that of the Department is dismissed.

Issues Involved:
1. Determination of the date when the business was "set up" for the purpose of claiming expenditure.
2. Addition of Rs. 17,518 due to late deposit of employees' contribution to the provident fund.
3. Penalty under Section 271(1)(c) for allegedly claiming pre-set up expenses.

Issue-wise Detailed Analysis:

1. Determination of the Date when the Business was "Set Up":

The primary issue was whether the business of the assessee was "set up" on 1st November 1995 or 1st February 1996. The assessee argued that the business was set up on 1st November 1995, while the Assessing Officer (AO) and the CIT(A) contended it was set up on 1st February 1996 when the bank account was opened.

The Tribunal referred to Section 3 of the IT Act, which defines "previous year" as commencing from the date of "setting up of the business." It emphasized the distinction between "setting up" and "commencement" of business, citing the Bombay High Court in Western India Vegetable Products Ltd. v. CIT (1954) 26 ITR 151 (Bom), which held that a business is set up when it is established and ready to commence operations.

The Tribunal reviewed various precedents, including cases from the Gujarat High Court and the Supreme Court, which highlighted that the determination of the setup date depends on the nature of the business and specific facts. For a financial company like the assessee, setting up was considered to occur when directors and key staff were appointed, computers were purchased, and the company was operationally ready, even if a bank account was not yet opened.

Based on the evidence, including the purchase of computers, appointment of staff, and payment of salaries from November 1995, the Tribunal concluded that the business was set up on 1st November 1995. Consequently, the disallowance of expenditure incurred before 1st February 1996 was deleted.

2. Addition of Rs. 17,518 for Late Deposit of Employees' Contribution to Provident Fund:

The second issue involved the addition of Rs. 17,518 due to the alleged late deposit of employees' provident fund contributions. The assessee contended there was no delay, as the due date for March 1996 contributions was 20th April 1996, which fell on a Saturday, and the provident fund office was closed. The deposit was made on the next working day, 22nd April 1996.

The Tribunal applied Section 10 of the General Clauses Act, 1897, which states that if the last day for an act falls on a closed day, the act is considered timely if done on the next open day. Accordingly, the Tribunal held that the deposit on 22nd April 1996 was within time and deleted the addition.

3. Penalty under Section 271(1)(c) for Claiming Pre-Set Up Expenses:

The third issue was the imposition of a penalty of Rs. 3,78,200 under Section 271(1)(c) for allegedly claiming pre-set up expenses. The CIT(A) had canceled the penalty, noting that the determination of the setup date was debatable and that the assessee had disclosed all facts to the AO.

The Tribunal agreed with the CIT(A), emphasizing that the question of when a business is set up is fact-specific and debatable. Since the assessee disclosed all facts and the AO merely disagreed with the assessee's view, it did not amount to furnishing inaccurate particulars or concealing income. The Tribunal cited precedents from the Delhi High Court supporting this view.

Moreover, since the Tribunal had determined that the business was set up on 1st November 1995, the penalty had no basis. Therefore, the Tribunal upheld the cancellation of the penalty.

Conclusion:

The appeal of the assessee was allowed, confirming that the business was set up on 1st November 1995, and the related expenditure was deductible. The addition for late provident fund deposit was deleted, and the penalty under Section 271(1)(c) was canceled. The Department's appeal was dismissed.

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