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2006 (5) TMI 131 - AT - Income TaxClaimed an expenditure u/s 37 - Business of setting up satellite business communication systems - Expenses incurred in the previous year during interregnum after the setting up of the business and before the commencement of business all expenses would be permissible deduction - HELD THAT - From the facts it becomes clear that VSAT equipment is necessary for the purpose of carrying out the business of the assessee which was to set up satellite based business communication system. The fact that this system cannot become operational without getting a licence from the DoT cannot lead to a conclusion that it is only on obtaining the licence from the DoT that it can be said that the business of the assessee has been set up. As already noticed even the first step namely purchase of VSAT is an activity which is necessary before the assessee could render the service of providing satellite based business communication system to its customers. The Hon ble Gujarat High Court in the case of CIT vs. Saurashtra Cement Chemical Industries Ltd. 1972 (8) TMI 19 - GUJARAT HIGH COURT was dealing with the case of the business of manufacture and sale of cement for which the raw material was limestone. The activity of extracting limestone was held by the Hon ble High Court to be the point of time when the business was set up by the assessee. In the present case we further notice that as early as on 3rd May 1994 the draft licence agreement was forwarded by the DoT to the assessee. Even ignoring this the purchase order placed by the assessee for acquiring VSAT from M/s Hughes Network Systems USA could be said to be the point of time on which the business of the assessee had been set up or had commenced for the use of this equipment was necessary for the assessee s business. In our view the CIT(A) ought to have held that the date of set up of the business was 28th July 1994. The first purchase order placed by the assessee on 6th Oct. 1994 in our view is not the date on which it could be said that the business of the assessee was set up. We therefore direct that the revenue expenses incurred on or after 28th July 1994 be allowed as a deduction. Ground Nos. 1 and 1.1 of the appeal of the assessee are allowed while ground Nos. 1 and 2 of the Revenue are dismissed. Disallowance of expenditure on entertainment -1/3rd of the expenditure on entertainment as attributable towards employees participation - HELD THAT - Considering the ratio laid down by the Hon ble Delhi High Court in the case of CIT vs. Expo Machinery Ltd. 1991 (4) TMI 120 - DELHI HIGH COURT we are of the view that the claim of the assessee that 1/3rd of the entertainment expenses has to be attributed towards employees participation is just and fair and deserves to be allowed. We accordingly direct the AO to consider 1/3rd of the entertainment expenses as attributable towards employees participation and not disallowable u/s 37(2) of the Act. This ground of appeal of the assessee is allowed. In the result the appeal by the assessee is allowed. In the result the appeal by the assessee is allowed and the appeal by the Revenue is dismissed.
Issues Involved:
1. Date of setting up the business. 2. Disallowance of entertainment expenses. 3. Disallowance of miscellaneous expenses. Detailed Analysis: 1. Date of Setting Up the Business Assessee's Appeal: - The assessee contended that the business was set up in July 1994 when a letter of intent was secured from Bank of America, purchase orders for the equipment were placed, and substantial commercial activity had commenced. - The CIT(A) held that the business was set up on 6th Oct 1994 when the first supply order from Bank of America was received. Revenue's Appeal: - The Revenue argued that the business was set up on 15th March 1995, the date when the first hub was set up and the installation was completed. Tribunal's Findings: - The Tribunal considered the principles from various decided cases, emphasizing the distinction between setting up and commencement of business. - It was noted that the purchase of VSAT equipment was a necessary activity before the assessee could provide satellite-based business communication services. - The Tribunal concluded that the business was set up on 28th July 1994, the date when the purchase order for VSAT equipment was placed. - Consequently, the revenue expenses incurred on or after 28th July 1994 were allowed as a deduction. Decision: - Ground Nos. 1 and 1.1 of the assessee's appeal were allowed. - Ground Nos. 1 and 2 of the Revenue's appeal were dismissed. 2. Disallowance of Entertainment Expenses Assessee's Appeal: - The assessee claimed business promotion expenses, out of which a portion was identified as entertainment expenses. - The assessee contended that 1/3rd of the entertainment expenses should be attributed to employees' participation and thus should not be disallowed. CIT(A)'s Findings: - The CIT(A) refused to allow the claim that 1/3rd of the entertainment expenses should be treated as non-entertainment expenses. Tribunal's Findings: - The Tribunal referred to the Delhi High Court's decision in CIT vs. Expo Machinery Ltd., which held that expenses on food and beverages for employees while entertaining clients should be excluded from entertainment expenses. - The Tribunal found the assessee's claim that 1/3rd of the entertainment expenses were attributable to employees' participation to be just and fair. Decision: - The Tribunal directed the AO to consider 1/3rd of the entertainment expenses as attributable to employees' participation and not disallowable. - Ground Nos. 2 and 2.1 of the assessee's appeal were allowed. 3. Disallowance of Miscellaneous Expenses Revenue's Appeal: - The Revenue contended that the CIT(A) erred in deleting the disallowance of Rs. 11.93 lakhs out of miscellaneous expenses due to the absence of supporting material. CIT(A)'s Findings: - The CIT(A) found that the expenses were legitimate business expenses, mainly on account of general maintenance, insurance, security, payment to auditors, etc. - The CIT(A) noted that the expenses were duly certified by the auditors and no specific item of disallowable nature was pointed out by the AO. Tribunal's Findings: - The Tribunal reviewed the details of the expenses and found them to be legitimate business expenses. - The Tribunal concurred with the CIT(A) that the AO had not identified any specific disallowable expense. Decision: - The Tribunal dismissed the third ground of appeal by the Revenue. Conclusion: - The appeal by the assessee was allowed. - The appeal by the Revenue was dismissed.
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