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2008 (4) TMI 388 - AT - Income TaxPre-operative expenses disallowance - Allowability of expenditure - commencement of business or not? - expenditure under the head 'Building, Repair Renovation' and 'Exhibition/Launch Expenses' - Difference of Opinion between the learned Members - Third Member Decision - Principle relating to ''setting up of business'' - Assessee, an Indian private limited company was set up as 100 per cent subsidiary of Steyr Daimler Puch AG, Austria - HELD THAT - In the case of Sarabhai Management Corpn. Ltd. 1972 (7) TMI 7 - GUJARAT HIGH COURT , referring to the provisions of section 3 of 1961 Act and relying on the decision in the case of Western India Vegetable Products Ltd. 1954 (3) TMI 59 - BOMBAY HIGH COURT , held that it was only after the business was 'set up' that the previous year of that business 'commences' and any expenditure incurred prior to the 'setting up' of a business would not be a permissible deduction, that there may be an interval between the 'setting up' of the business and the 'commencement ' of the business and all expenses incurred during that interval would be a permissible deduction. Order Ld AM - HELD THAT - The Accountant Member thereafter observed that in case of a new business, engaged in trading or in the service sector, no plant or machinery are installed and no trial runs are necessary and, therefore, a different set of criteria will be required to be applied in order to determine whether such a type of business had been established, so as to be ready to commence business. After considering three decisions, the learned Accountant Member proceeded to apply the legal proposition enunciated in those decisions to the facts of this case. He has observed that in the present case, the assessee company was incorporated on 15-9-1997. Necessary approval was granted by the Ministry in December, 1997 for a foreign collaboration. The assessee company entered into correspondence with Scooter India Ltd., a prospective customer, as early as in July, 1997. The company also carried correspondence with Mahindra and Mahindra Ltd., Kalyani Tubes and Hindustan Motors. The foreign collaboration agreement between assessee-company and its parent company was entered into on 16-12-1997. The learned Accountant Member then proceeded to consider allowability of expenses incurred on construction, repair to make the building suitable for office purposes. In the light of decision of Hon'ble Bombay High Court in the case of Hede Consultancy (P.) Ltd. 2002 (6) TMI 19 - BOMBAY HIGH COURT , he directed the Assessing Officer to examine and decide afresh the issue raised through this ground and allow appropriate relief. The learned Accountant Member did not examine any other contention. Order Ld JM - The learned Judicial Member did not agree with the view taken by the learned Accountant Member in the proposed order. He noted that Assessing Officer did not allow deduction of expenses against interest on fixed deposit. He noted that Assessing Officer had given categorical finding that this is the first year of return and no income was declared under the head Business or profession . The Assessing Officer had held that expenses claimed could not be allowed under the head Interest income . According to the learned Judicial Member, there were two controversies namely (i) Whether expenditure claimed was not laid or expended for purposes of business in the year of consideration. Secondly, whether those expenses could be allowed as business was set up in the year under consideration. He thereafter noted the head and the basis on which expenses were claimed by the assessee. the learned Judicial Member held that there is nothing on record to establish that there was an existence of any tool/equipment/office machinery/presence of technology etc. ready in hand to make use of them for imparting technical service. learned Judicial Member observed as under for denying claim of deduction as business was not set up by the assessee. Order Third Member - HELD THAT - In the case of Western India Vegetable Products Ltd., Chagla, Chief Justice observed as under - When a business is established and is ready to commence business then it can be said of that business that it is set up. But before it is set up to commence, it is not set up. In the case of Ramaraju Surgical Cotton Mills Ltd. 1966 (10) TMI 41 - SUPREME COURT , their Lordships of Supreme Court considered the question whether the factory of the assessee could be said to have been set up so as to entitle the assessee to the exclusion of that portion of the net wealth which was employed in the factory. It is difficult to hold that the assessee did not set up business in the relevant period. The assessee had a place of business; it had qualified people who could give advice on automobile industry. There is material to show that the assessee contacted various clients who entered into agreement with the assessee in the subsequent years and paid fees for consultation. The assessee, without a doubt, did not show any consultancy receipt but merely because actual receipts were not shown, it cannot be said that the assessee did not set up its business. In fact, the business was set up and commenced when the assessee was ready to give consultancy to its prospective customers. Not only that, there is material on record to show that the assessee took steps to give actual consultancy to its customers. Of course, consultancy charges were received in the subsequent year. But merely because no actual amount was received as charges, it cannot be said that the business was not set up. There is reference to total claim of expenditure and, thereafter, two specific expenses under the heads 'Building, Repair Renovation' and 'Exhibition/Launch Expenses' respectively. Even if it is held that the business was set up, the claim of the expenditure was required to be examined separately. Total expenditure has been claimed under various heads. On the question of claimed as building, repair and renovation expenses, these expenses appear to me to be of a capital nature and, therefore, cannot be allowed. The assessee has not placed any material on record to show that repair and renovation could be treated as current repairs. The decision of Supreme Court in the case of CIT v. Sharwan Kumar Agarwal 2005 (2) TMI 111 - SC ORDER also goes against the assessee. Therefore, I agree with the revenue authorities that the above expenditure could not be allowed. As far as expenditure on exhibition is concerned, it is clear from the record that the assessee had taken a stall in Auto Expo 1998 at Delhi in January 1998. All the expenses were aimed to propagate the assessee's business and no material is brought on record by the revenue authorities to show that the expenses claimed were inadmissible. I accordingly allow these expenses. As far as balance expenses are claimed, I am not in a position to hold that these expenses were incurred; no arguments were addressed nor any detail of these expenses was brought to my knowledge during the course of hearing of this appeal. In these circumstances, I am unable to allow them. These have been rightly disallowed. Therefore, I agree with the learned Accountant Member to the extent that the deduction be allowed to the assessee out of expenses claimed under the head 'Business'. The balance expenses claimed are to be disallowed. I agree as above with the learned Accountant Member. The matter is now placed before the regular Bench for disposal in accordance with law.
Issues Involved:
1. Whether the assessee had set up its business during the previous year relevant to the assessment year 1998-99. 2. Whether the expenditure of Rs. 49,27,336 was allowable. 3. Whether the income of Rs. 3,91,780 was assessable as business income. 4. Whether the expenditure of Rs. 17,92,600 incurred on the leased premises was capital or revenue in nature. 5. Whether the assessee was liable to pay interest under sections 234A, 234B, and 234C. Issue-wise Detailed Analysis: 1. Setting up of Business: The primary issue was whether the assessee had set up its business during the previous year relevant to the assessment year 1998-99. The assessee argued that it had set up its business from the date of incorporation, supported by a foreign collaboration agreement dated 16-12-1997 and various correspondences with prospective clients. The Tribunal examined the legal position on the distinction between 'setting up' and 'commencement' of business, referencing cases such as Western India Vegetable Products Ltd. v. CIT and Sarabhai Management Corpn. Ltd. v. CIT. The Tribunal concluded that the business was set up on 16-12-1997, the date of the foreign collaboration agreement, as the assessee had the necessary infrastructure and was ready to provide consultancy services. 2. Allowability of Expenditure: The assessee claimed an expenditure of Rs. 49,27,336 under various heads, including building repairs, exhibition expenses, and administrative expenses. The Tribunal, after considering the legal precedents and the facts, held that all revenue expenses incurred on or after 16-12-1997 were admissible for deduction. The matter was remanded to the Assessing Officer to examine and decide afresh the assessee's claims in light of the Tribunal's directions. 3. Assessment of Income: The assessee contended that the income of Rs. 3,91,780 from bank fixed deposits should be assessed as business income. The Tribunal, however, did not specifically address this issue in detail within the provided text. The matter was left to be re-examined by the Assessing Officer on remand. 4. Nature of Expenditure on Leased Premises: The Tribunal examined whether the expenditure of Rs. 17,92,600 on the leased premises was capital or revenue in nature. Relying on the decision of the Bombay High Court in CIT v. Hede Consultancy (P.) Ltd., the Tribunal directed the Assessing Officer to re-examine this issue in light of the legal principles laid down in that case, which allowed for such expenditures to be treated as revenue if they did not result in the creation of an asset belonging to the assessee. 5. Liability to Pay Interest: The assessee argued against the levy of interest under sections 234A, 234B, and 234C, claiming it was not liable to pay advance tax. The Tribunal did not provide a specific ruling on this issue within the provided text, leaving it to be addressed by the Assessing Officer on remand. Separate Judgments: The Tribunal's members delivered separate judgments. The Accountant Member concluded that the business was set up on 16-12-1997 and remanded the matter to the Assessing Officer for re-examination of the claims. The Judicial Member disagreed, holding that the business was not set up during the relevant period and thus, the expenses were not allowable. The matter was referred to a Third Member, who agreed with the Accountant Member, allowing the deduction of Rs. 15,65,239 for exhibition expenses but disallowing the building repair expenses as capital in nature. The Third Member also remanded the matter for re-examination of other expenses.
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