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TMI Blog2013 (9) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... rchased 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. - I.T.A. No. 2835/Del/2012 - - - Dated:- 16-8-2013 - Smt. Diva Singh And Shri T. S. Kapoor,JJ. For the Appellant : Sh. Ajay Vohra, Adv. Sh. Upvan Gupta, CA For the Respondent: Dr. Sudha Kumari, CIT DR ORDER Per Diva Singh, JM. This is an appeal filed by the assessee against the order dated 02.03.2012 of CIT(A)-VI, New Delhi pertaining to 2008-09 assessment year on the following grounds :- '1. The Learned Commissioner of Income Tax (Appeals)-VI, New Delhi [CIT(A)] has erred in law and on facts in upholding the assessed income at Rs.38,95,937 made by the Learned Assessing Officer (AO) as against the returned loss of Rs.7,96,05,423 declare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... give quantitative details of principal items of goods traded (i) Opening stock Not applicable since the company has not commenced any activities in relation to sale/purchase of goods etc. and hence the provisions of clause 28(a) are not applicable to the company. (ii) purchases during the previous year;(iii) sales during the previous year;(iv) closing stock;(v) shortage/excess, if any; 2.2. Accordingly he required the assessee to explain why business loss claimed may not be disallowed. In response to the said query raised by order-sheet entry dated 21.10.2010. The assessee submitted its reply on 10.12.2010 which is found reproduced at pages 2 to 11 of the assessment order. A perusal of the same shows that it was contended that Carrefour WC C was incorporated on September 19, 2007 to carry on wholesale trading of all kinds of consumer goods, durables, articles and to carry out any and all such activities as may be necessary or related to or in connection with carrying on such trading activities that Carrefour WC C is a group subsidiary of Carrefour Group, second largest retailer of the world; that the Carrefour Group is a worldwide preferred re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was submitted that "setting up of business" connotes stage of readiness to commence business and "the commencement of business" indicates the actual beginning of business activities. The setting up, it was submitted is usually anterior to the commencement of business and there can be a time interval between these two events. The time interval, it was submitted will depend upon nature of business which can vary from few months to years. As the business is set up the tax-payer has to incur various business expenses to run the business and even if there is no income the same should be allowed as a deduction. Reliance was placed upon the following decisions in support of its claim:- "(i) ITO vs Hindustan Diamond Co. Ltd. 27 TTJ 142 (Mumbai ITAT); (ii) CIT vs Saurashtra Cement and Chemical Industries Ltd. (1973) 091 ITR 0170 (Guj.); (iii) Coromandel Exports (P) Ltd. vs Income Tax Officer (1984) 20 TTJ (Hyd.) 503; (iv) CIT vs Whirlpool of India Ltd. 229 CTR 435 (Jurisdictional Delhi High Court); (v) CIT vs Sponge Iron India Ltd. [1993] 201 ITR 770 (AP); (vi) CIT vs Sarabhai Sons (P.) Ltd. [1973] 90 ITR 318 (Gujarat High Court); (vii) Peerless Securities Ltd. vs. JCIT 94 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y down the Principle that it is not necessary that the business should commence for claiming the expenditure and that income should necessarily be generated. The expenses are allowable from the point of time when the business has been set up. The expenses are allowable even if the business has not actually commenced. In the facts of the present case, it was submitted that the assessee has set up its business but has not earned income as its correspondence with suppliers for contracts is not finalized. Thus since the business is set up, the expenses should be allowed. 2.2.6. Thus in the light of the above decisions, it was submitted that since the assessee has opened the office and has hired the requisite staff to carry out the business activities, its business can be said to be set up. In the facts of the present case, the assessee is required to commence its business as it has hired the requisite staff who are negotiating with the clients for entering into contract for the supply of goods. As such it was submitted that the business has been set up. 2.2.7. Attention was invited to the following decisions for the proposition that "business cannotes a continuous set of activities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sources, the expenditure would be treated as not admissible Addressing the difference between set up of business and commencement of a business, referring again to the position of manufacturing concern, he was of the view that when trial production starts the business is set up and the actual commencement of business can start only after its set up and there can be an interval between the two. Reliance was placed upon the CIT vs Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478 (SC). 2.4. Referring to the facts of the present case, he observed that the assessee is a trader and "trade" in its primary meaning is the exchanging of goods for goods or goods for money and in the secondary meaning is a repeated activity in the nature of business carried on with the profit motive. The activity being manual or mercantile as distinguished by liberal arts or learned professionals or agriculture has been held by the Hon'ble Apex Court in the case of State of Punjab vs. Bajaj Electricals Ltd. [1968] 70 ITR 730, 732 (SC). Referring to para 28(a) on form- 3CD, the AO observed that it is clearly mentioned that the business is not commenced thus when no stock is either available and even has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for setting up of the business. The setting up, it was submitted is usually a stage anterior to commencement of business and there can be a time interval between the two events. The time interval it was submitted it has been held will depend upon nature of business which can vary from few months to years. In the facts of the present case it was submitted that the business was set up, the tax payer had to incur the various business expenses to run the business and even if there was no income, the same should have been allowed as a deduction. The submissions on facts advanced before the CIT(A) are extracted hereunder:- "4.1. The learned AR further submitted that the appellant company was incorporated in India to carry on the wholesale trading of all kinds of consumer goods, durables, article and to carry out any and all such activities as maybe necessary or related to or in connection with carrying on such trading activities. It is a well-settled, legal principle that if the business consists of series of activities, business commences when the first activity commences. Since incorporation, the appellant company had been undertaking activities relating to planning, meeting with p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt for deductibility of the expenses is that setting up of the business and not actual purchase or sales of goods. For the said purpose, reliance was placed upon a) Prem Conductors Pvt. Ltd. vs CIT (1977) 108 ITR 0654 (Guj.); b) CIT vs Sponge Iron India Ltd. (1993) 201 ITR 770 (AP); c) CIT vs Mohan Steel Ltd. 273 ITR 479 [2005] (All.); and d) Peerless Securities Ltd. vs. JCIT 94 ITD 89 [2005] (Cal.) (SB). The judgements relied upon by the AO were stated to be distinguishable. Referring to Liquidators of Pursa Ltd. (cited supra). It was submitted that it had made its observations in the context of section 10(2)(viii) of the Income Tax Act, 1922 wherein the issue before the Hon'ble Supreme Court was whether surplus arising from the sale of plant and machinery of the company in case of liquidation is taxable as per the provisions of section 10(2)(viii) of 1922 Act. Similarly the judgement rendered in the case of Challapalli Sugars Ltd. (cited supra), the question before the Hon'ble Apex Court was whether the amount of interest paid during the pre-commencement period on loan taken for construction/purchase of fixed assets will be treated as part of the actual cost of assets and depreci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eans the financial year immediately preceding the assessment year. Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year." 3.3.2. Referring to the decision of Western India Vegetables Ltd. vs CIT (cited supra), he observed that in the said judgement, the Hon'ble Bombay High Court made a clear distinction between "commencing" a business and setting up a business and there may be an interval between the setting up of the business and commencement of the business and all expenses incurred during the interval would be permissible deductions. Reference was also made to CWT vs Ramaraju Surgical Cotton Mills Ltd. (cited supra) wherein it was held that the words "set-up" in the principal clause is equivalent to the word "established" but operations for establishment cannot be equated with the establishment of the unit itself or its setting up. The operations for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents, brokers, distributors and to contract for all kinds of goods and products including all types of consumer goods and products of every kind,, in every description, in a prepared, manufactured, semi- 0manufactured or raw state and to carry out any and all such activities as may be necessary or related to or in connection with carrying on any of the above stated activities. 3. To carry on the business of storage, warehousing, transportation and handling of all kinds of products, goods and articles from one place to another either by land or by air, sea or by means of motor vehicles and/or aero planes or by any other means of transport. 4. To deliver, supply, furnish, provide, distribute, replenish all kinds of products, goods and articles to retail sellers, stores, showrooms etc. in India and outside India. 5. To carry on the business of marketing, advertising and promotional support for all kinds of consumer goods and products on its own account and for and on behalf of persons, firms and companies located in and outside India." 3.3.4. In order to meet these objectives, the assessee opened its office in India w.e.f 01.10.2007 which was subsequently shifted to Gurgaon, H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2007 i.e prior to the incorporation of the assessee company itself since the said company was incorporated w.e.f 19.09.2007. He also observed that Mr. Bouin himself was appointed by the assessee company w.e.f. 01.01.2008 and thus the correspondence made even before the incorporation of the assessee company and the evidences of correspondence regarding the queries for purchase of goods from the intended suppliers found to be made which is before being appointed as an employee of the assessee's company was not considering relevant. He also observed that the computers and accessories were purchased at the fag end of the assessment year and the number of employees was not sufficient to commence the business of the assessee company accordingly he held that it cannot be believed that the business of the assessee company was established during the relevant previous year in the absence of any store or outlet for the business of trading, warehouse/godowns, transportations, Registration under the Shop and Establishment Act and purchase or sale made during the relevant previous year. It was held that the assessee was not in a position to discharge its functions as a wholesale trader. Relianc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .09.2007; having acquired office premises on 01.10.2007 (copy of the lease deed placed at pages 19-23); who had opened a bank account on 04.10.2007; and on 01.01.2008 it was submitted the employment letters were given by the assessee to its employees(copies of which are placed at pages 21-57). The list of the employees is placed at page 58. The relevant extract of the TDS qua these employees, it was stated is placed at page 59 and the extract of TDS return of the assessee in respect of salary payment to employees for the period 01.01.2008 to 31.03.2008, it was stated are placed at page 59 of the paper book. It was submitted that the assessee has got Registration under the Shops and Establishment Act with retrospective effect from January 2008 till 31 March 2008 and the said registration was granted on 05.03.2008 and copy of the same is placed at page 183 of the paper book and the submission on this aspect has been made before the CIT(A) as evidenced from the page 200 of the paper book. It was emphasized that this fact was wrongly noted by the CIT(A). The decision relied upon before the AO and the CIT(A) were heavily relied upon. Apart from that copy of the judgement dated 23.04.201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umari placed heavy reliance on the assessment order and the impugned order and it was her submissions based on the finding on facts recorded therein that the business has not been set up and these expenses were pre-commencement expenses and the case law relied upon by the assessee before the ITAT is a mere repetition of decisions and judgements cited before the AO and the CIT(A) who have fully discussed and considered them while deciding the issue. It was her submission referring to the material available on record that the status of the employees was temporary and it is only when the HR of the company was appointed that the employment status was corrected. Referring to the impugned order it was also her submission that no godown/warehouse etc. has been taken on rent or leased by the assessee. There is no infrastructure in evidence for the nature of business of the assessee namely an arrangement for transportation or delivery of goods or supplies. It was submitted that all the decisions that the assessee has placed in the paper book namely CIT vs Ramaraju Surgical Cotton Mills Ltd., Western India Vegetables Ltd. vs CIT, CIT vs Hughes Escorts Communications Ltd., CIT vs Whirlpool of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness has been set up and has not commenced and law is clear that once the business has been set up the expenses pertaining to the business have to be allowed. 5. We have heard the rival submissions and perused the material available on record. The decisions relied upon by the parties before us in support of their claim have been taken into consideration. It is seen from the record that the assessee is a group subsidiary of Carrefour Group, the second largest retailer of the world. It is seen that as per the Memorandum of Association, copy placed at page 1-12 of the book the main objectives of the assessee are as under :- "1 To carry on trading, including wholesale trading of all kinds of goods and products including all kinds of consumer goods, durables, articles and products and to carry out any and all such activities as may be necessary or related to or in connection with carrying on such trading activities. 2. To carry on business in India and abroad and as manufacturers, importers, exporters, buyers, purchasers, and sellers, wholesales, traders, agents, brokers, distributors and to contract for all kinds of goods and products including all types of consumer goods and pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tribution of goods and advertisement, publicity expenditure are expenditure which would relate to actual commencement of business and not to setting up of a business and decisions relied upon before the authorities which have been addressed in the earlier part of this order while addressed the facts on record and the arguments of the parties have been relied upon before us. A perusal of these judgements and decisions addresses the settled legal position qua the issue namely at what stage a business can be said to be set up is a matter of fact and is not a question of law as such it has to be decided in each and every case on the facts of the specific case. This proposition of law is an accepted legal position with which no party can have any quarrel and these decisions have been referred to in the earlier part of this order. Reverting to the facts of the present case in the light of the settled legal position the assessee is primarily as per its main objects incorporated in the Memorandum of Association incorporated to carry on wholesale cash and carry of all kinds of consumer goods, durables, articles and products etc. The business of a trader can be said to be "set up" when the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the evidence of correspondence entered into with various potential suppliers have been rightly treated as not relevant for deciding the issue. In similar line, the staff employed for setting up the business of the assessee have rightly been treated as not relevant. Incorporation Certificate of the assessee company is again not a relevant criteria for deciding the issue and same is the position of evidence of renting of office premises and purchase of office equipment computers etc. as none of these are relevant for deciding the issue as the assessee is in business of wholesale trading of goods, durables, consumer items etc. as such the concurrent finding of facts are upheld by us. In the absence of relevant and necessary evidence namely an order of purchase alongwith renting of a shop or warehouse etc. looking at the specific nature of assessee's business the claim of the assessee has rightly been rejected had the necessary and relevant evidence been available on record even if there was no income the claim of the assessee would have had to be allowed. In the absence of relevant evidence as observed the claim has been right rejected. 5.2. We may refer to some of the case laws on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a trader can sell the goods from a shop/outlet etc. 5.4. We have also taken into consideration on the reliance placed by Ld. AR on CIT vs M/s Dhoomketu Builders Pvt. Ltd rendered by the Jurisdictional High Court on 23.04.2013 in ITA No.-528 529/Del/2012, copy of which has been filed before the Bench. In the facts of that case, it is seen the assessee was in the business of real estate development including purchase and sale of land and it had contended that it has been set up on 09.11.2005 when it deposited the earnest money while participating in the tender floated by the official liquidator of the Karnataka High Court. The said claim was allowed by the ITAT and was assailed by the Revenue before the Hon'ble High Court. The Hon'ble High Court held that the question as to when the business can be said to have been set up is a question of fact to be ascertained on facts and considerations of each case and considering the nature and type of the particular business and no universal test or formula applicable to all types of business can be laid down. Thus based on the facts of the assessee's case it was held that when an assessee whose business is to develop real estate is in a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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