2013 (9) TMI 5 - AT - Income Tax

Setting up a business / commencement of business - claim of business loss - at what stage a business can be said to be set up - assessee is a group subsidiary of Carrefour Group, the second largest retailer of the world - Held that - The business of a trader can be said to be set up when the assessee makes a purchase subsequent 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 could took place or for that matter rented any warehouse where the purchased goods intended to be sold can be stored. Accordingly on considerations of the facts and circumstances of the present case, it cannot 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. Reliance is placed upon the judgments s.a. State of Punjab vs. Bajaj Electricals Ltd. 1967 (12) TMI 28 Supreme Court , wherein it has been held that business is not commenced thus when no stock is either available and even has not 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 business. Again in CWT vs Ramaraju Surgical Cotton Mills Ltd. 1966 (10) TMI 41 - SUPREME Court also supports the view taken as it holds that a unit cannot be said to have been set up unless it is ready to discharge the functions for which it has been set up and it is only when the unit has been put into such a shape that it can start functioning as a business. - Decided against the assessee.

Issues Involved:
1. Whether the business of the appellant was set up and commenced during the relevant assessment year.
2. Whether the assessed income should be upheld as against the returned loss declared by the appellant.
3. The initiation of penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars or failure to disclose true particulars of income.

Issue-Wise Detailed Analysis:

1. Whether the business of the appellant was set up and commenced during the relevant assessment year:

The appellant argued that their business was set up during the relevant assessment year, citing various activities such as incorporation, hiring employees, securing office premises, opening a bank account, purchasing fixed assets, and corresponding with potential suppliers. They relied on several legal precedents to support their claim that business expenses should be allowed from the date of setting up the business, even if actual sales had not commenced.

The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, stating that the business had not been set up as there were no purchases or sales, no warehouse or godown, and no registration under the Shops and Establishments Act during the relevant period. The AO emphasized that expenses incurred before the business is set up are not deductible, and the CIT(A) upheld this view, noting that the business must be in a position to discharge its functions to be considered set up.

The Tribunal reviewed the facts and legal precedents, concluding that the business of a trader can be said to be set up when the first purchase is made and a shop or warehouse is rented. Since the appellant had not made any purchases or rented any shop or warehouse, the Tribunal upheld the decision that the business was not set up during the relevant assessment year.

2. Whether the assessed income should be upheld as against the returned loss declared by the appellant:

The appellant had declared a loss of Rs. 7,96,05,423, which was disallowed by the AO, who assessed the income at Rs. 38,95,937. The AO's decision was based on the finding that the business had not been set up and that the claimed expenses were pre-commencement expenses, which are not deductible.

The CIT(A) upheld the AO's decision, and the Tribunal agreed, noting that the business had not been set up and the expenses were correctly disallowed. The Tribunal emphasized that the appellant had not demonstrated how the principles laid down in the cited legal precedents were wrongly applied to their case.

3. The initiation of penalty proceedings under section 271(1)(c):

The appellant contended that the initiation of penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars or failure to disclose true particulars of income was premature and should be quashed.

The Tribunal noted that this ground was premature and did not require adjudication at this stage, as the primary issue of whether the business was set up was not resolved in favor of the appellant.

Conclusion:

The Tribunal upheld the decisions of the AO and CIT(A), concluding that the business of the appellant was not set up during the relevant assessment year, and therefore, the claimed expenses were not deductible. Consequently, the assessed income was upheld, and the initiation of penalty proceedings under section 271(1)(c) was deemed premature. The appeal of the appellant was dismissed.

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