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TMI Blog2006 (5) TMI 131X X X X Extracts X X X X X X X X Extracts X X X X ..... ive customer, Bank of America, purchase orders for the equipment were placed and substantial commercial activity had commenced." 2.1 The above grounds can be conveniently disposed of with ground Nos. 1 and 2 raised by the Revenue, which read as under: "On the facts and circumstances of the case, the learned CIT(A) erred in: 1. Holding that the date of setting up of business was 6th Oct., 1994 i.e. the date on which first supply order was secured and not 15th March, 1995 which is the date when the first hub was set up; 2. Allowing revenue expenditure from6th Oct., 1994 and not from15th March, 1995." 3. The facts necessary for adjudication of the aforesaid grounds of appeal are as follows: The assessee is a company. As per the object clause of the memorandum of association of the assessee, the main object of the assessee was to provide products and services to the digital satellite market place in India, in particular, to initially import and gradually produce in India, the "personal earth station", a very small aperture terminal product (hereinafter referred to as VSAT) and packet switch product line, including frame relay and ATM and to produce, in course of time other sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order to purchase the VSAT equipments by the assessee from M/s Hughes Network Systems, USA on 28th July, 1994. According to the assessee on placing an order for purchasing the equipment, it could be said that the business of the assessee has been set up and, therefore, the expenses on and from the date on which the business has been set up are to be allowed as a revenue expenditure and does not require to be capitalized. The case of the Revenue has, however, been that the assessee company was receiving the satellite systems only in the month of February, 1995 and that the installation was completed by the assessee only on 15th March, 1995 and, therefore, it is only on 15th March, 1995 that it can be said that the business of the assessee has been set up. The AO accordingly. held that the claim for deduction of the aforesaid sum as revenue expense cannot be allowed as it related to the period prior to setting up of the business of the assessee and had to be capitalized. 3.2 Before the CIT(A), the assessee again reiterated its submission that as on 28th July, 1994 when the equipments were purchased the business can be said to have been set up. The CIT(A) was of the view that it is o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shed and ready to commence the business, then it cannot be said that business itself is set up but before it is ready to commence, it is not set up. It further held that there may be time gap in setting up of the business and commencement of the business and all the expenses incurred during that intervening period would be permissible deduction. In CIT vs. Saurastra Cement & Chemical Industries Ltd. (1973) 91 ITR 170 (Guj), it was held that the term business connotes a continuous course of activities. All the activities, which go to make up the business, need not be started simultaneously in order that the business may commence. The business world commence, when the activity which is first in point of time and which must necessarily precede all other activities, is started. It was further held that in order to determine the question whether the business of an assessee has commenced or not, it is necessary to consider, what constitutes the business of the assessee. It was also laid down that in determining this question arising under fiscal legislation, one must consider what are the activities which constituted such business without being misguided by the loose expressions of vague ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. 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, 1994the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... beverages of the employees when they are discharging their duties to entertain the customers of the company is to be excluded from the purview of entertainment expenses. The Court further held that when the entertainment expenses are composite consisting of expenses on customers as well as the employees, resort has to be made to an estimate in ascertaining that part of the expenses incurred on food and beverages on the employees and the part so excluded cannot be disallowed as entertainment expenses. Considering the ratio laid down by the Hon'ble Delhi High Court in the case of CIT vs. Expo Machinery Ltd., 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 under s. 37(2) of the Act. This ground of appeal of the assessee is allowed. 10. In the result, the appeal by the assessee, is allowed. 11. The only other ground that remains for consideration is the third ground of appeal of the Revenue, w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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