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TMI Blog2010 (4) TMI 769X X X X Extracts X X X X X X X X Extracts X X X X ..... rent company as service charges. In this connection, an agreement has been entered into with Omni International USA, on 1-6-2004. In the months of April and May, 2004, the assessee incurred expenditure of Rs. 59,02,448. The details of the expenses have been mentioned on page Nos. 2 & 3 of the assessment order. These expenses were stated to be for the purpose of training of the staff etc. conducted from the premises belonging to a sister concern. The main dispute in this appeal is as to whether the aforesaid expenditure is deductible in computing the income. The finding of the Assessing Officer is that the expenditure has been incurred before the setting up of the business and its commencement. Therefore, the expenditure is not deductible in computing the income. Then, there is also a question regarding the rate of depreciation on the UPS, i.e., whether the rate should be 25 per cent or 60 per cent. The Assessing Officer has allowed deduction of depreciation at the rate of 25 per cent as against the claim of 60 per cent. The learned CIT(A) has allowed the appeal of the assessee on both the grounds. 2. In regard to ground No. 1, the learned DR furnished same facts, which are tabulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum of Rs. 1,32,81,080 as "service income". On this very date, this account has been further debited by an amount of Rs. 15,08,350 by "exchange fluctuations", and the balance advance of Rs. 72,35,870 has been carried forwarded to the next year. 3. We have considered the facts of the case and submissions made before us. The facts are that the assessee has been incorporated on 19-3-2004 for carrying out the business of the BPO. It incurred the expenditure of Rs. 59,24,809 under various heads in the months of April and May, 2004. The case of the ld. counsel is that notwithstanding the fact that it started rendering services from June, 2004, the expenses are deductible. On the other hand, the case of the learned DR is that these are the expenses incurred prior to setting up of the business. Therefore, since the business had not been set up before June, 2004, the expenses of these two months cannot be taken into account for computing the business income. 4. The learned DR relied on the decision of "F" Bench of Delhi Tribunal in the case of Akzo Nobel Car Refinishes India (P.) Ltd. v. Dy. CIT [2008] 25 SOT 226. The facts of the case are mentioned as under:- "The assessee-company was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain infrastructure facility and employed 30 to 40 persons. These persons were required to provide intellectual inputs for developing software. This activity cannot be compared with manufacturing activity as in the case of CIT v. Mohan Steel Ltd. [2005] 273 ITR 479 (All.). Under the circumstances, it has been held that no substantial question of law arises. For the sake of ready reference, the relevant portion of the judgment is reproduced overleaf:- "It has been noted that the assessee had employed as many as 30-40 employees for the purposes of developing software and had acquired requisite infrastructure such as premises, utilities etc. during the previous year relevant to the assessment year. It must be remembered that the assessee was in the business of developing software and that cannot be an overnight exercise. The assessee had put consistent efforts for developing the software and it is only thereafter that the assessee was able to procure some business. It is possible that the assessee may not have earned any income during the relevant previous year but the fact that the assessee had taken all steps necessary to obtain business including efforts for marketing itself show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty campaign, which the assessee had already been doing. In fact, it had already acquired land and started construction also, which were the subsequent changes. So, both the authorities below had given a finding that the assessee had commenced the business. For the purpose of development of the projects of construction, the assessee had to necessarily maintain regular staff members, on which it had been incurring expenses. The office expenses that had been incurred were clearly of revenue nature. Considering the reasons recorded by the Tribunal and based on the valid materials and evidences, the same does not suffer from any legal infirmity." 4.3 The learned counsel also relied on the decision of Hon'ble Delhi High Court in the case of CIT v. Whirlpool India Ltd. [2009] 318 ITR 347/185 Taxman 387. The facts are that the assessee was incorporated as financial enterprises on 27-7-1995 to carry out the business of financing all kinds of goods. The first board meeting was held on 12-8-1995, in which additional directors, executives and auditors were appointed. The assessee placed order for purchase of computers and peripherals on 4-9-1995. In the months of September and October, 1995, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of the assessee to get the benefit of a deduction, the Supreme Court interpreted the provisions applicable to mean that actual commencement of business was necessary. The facts of the present case are, however, more in line with the decision in this court in the case of CIT v. Hughes Escorts Communications Ltd. [2009] 311 ITR 253." 4.4 The aforesaid decision followed the decision in the case of CIT v. Hughes Escorts Communications Ltd. [2009] 311 ITR 253/[2007] 165 Taxman 318 (Delhi). The facts in this case are that the assessee-company was incorporated on 17-3-1992 for carrying out the business of Satellite Communication Systems for which a very small aperture terminal (VSAT) is required. The main objects are to provide products and services to the digital satellite market place in India and to initially import and gradually produce in India "the personal earth station" which is known as (VSAT). The VSAT can be used only after establishing, maintaining and using communication facilities on a license from Department of Telecommunications (DOT). The assessee entered into a license agreement with the DOT on 3-8-1994. It placed purchase order dated 28-7-1994 for purchase of VSAT eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that if space has been hired, furniture and equipment purchased and directors appointed, even then business cannot said to have been set up. E-funds International India, a company, was engaged in the business of developing software. It had acquired infrastructure facilities and employed 30 to 40 persons. The Tribunal mentioned that the activity cannot be an overnight exercise. The assessee had to put in consistent efforts for developing software and it is only thereafter that the business could be procured. Although the business was not procured, all steps necessary to obtain business including marketing had been undertaken. The facts are distinguishable to the extent that premises were not acquired. However, no publicity was required as it was intended to render services to the parent company. Further, the employees were given training and, therefore, they were not in a position to contribute any effort in the conduct of business till the end of May, 2004. In the case of Hughes Escorts Communications (supra) the Hon'ble Court distinguished between the setting up of the business and commencement of business. It has been held that the business was set up when purchase order was pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered is whether essential activity in the course of carrying on the business has started. This decision was upheld by the Hon'ble Delhi High Court by mentioning that there is no perversity in the findings of the Tribunal. The SLP against this order was also dismissed by the Hon'ble Supreme Court. 4.7 When we look to the facts of our case, it is clear that although the staff had been recruited, it was not ready for rendering services as the staff had to be trained with the systems. The assessee had not taken premises on rent and, therefore, installation of computer therein had not been done. Therefore, the assessee was not in a position to solicit custom till the end of May, 2004. The advances were received from the parent company but these were used for training the personnel and paying salaries and incidental charges, necessary for setting up the business. Thus, in a nutshell, it is held that a business is set up when it reaches a stage where it is in a position to procure business and not before. However, the expenditure becomes deductible from such stage irrespective of the date of actual receipt of the business. Therefore, it is held that the business had not been set u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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