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TMI Blog2014 (9) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... essee had not been setup - The business of the appellant had been setup as the appellant-assessee had acquired the necessary infrastructure from their sister concern, M/s Agilis, and had also started making payment of salary and wages - This training was given by professional experts under the supervision and control of the appellant-assessee - The moment the operations were commenced, the business had been setup and the subsequent rendering of service to third parties would be at a later date when the actual services were rendered to the parent/holding company – relying upon CIT Vs. Saurashtra Cement and Chemical Industries Limited [1972 (8) TMI 19 - GUJARAT High Court]. Upon recruitment of employees, the factum that expenditure under the different heads, as noticed above, was incurred is indicative that business was set up - Training to the employees was given to ensure that when the work was undertaken and performed, there were no glitches, trouble or problems - It is not indicative of the fact that necessary infrastructure was not there and actual business could not have commenced or was not set up - Training was post set up as the employees were recruited - The training con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;. The appellant-assessee had placed on record, before the Commissioner of Income Tax (Appeals), a copy of the agreement dated 30th March, 2004, between M/s Agilis Information Technologies International Pvt. Ltd ( M/s Agilis , for short) and the appellant company. Under the said agreement, the appellant assessee was entitled to use to use the premises taken on lease by M/s Agilis, during 2000 hrs to 0800 hrs. It stipulated that the appellant assessee was entitled to use personal computers of M/s Agilis or install their new personal computers in the premises, but upon termination of the agreement, personal computers belonging to the assessee would be removed. The appellant-assessee could use furniture and fixtures of M/s Agilis. However, the appellant asseessee was to pay on pro rata basis, charges for water, electricity, energy, or power consumed. Lastly, it was agreed that the appellant-assessee would not use the internet facility of the provider, i.e. M/s Agilis, but would install a separate internet link from an internet service provider. 5. The break-up of the amount of ₹ 59,02,448/-, which was disallowed as revenue expenditure but capitalised, is as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total Expenses pertaining to April May 04 5902448 This break-up was noticed in the assessment order itself and is not disputed. 6. What is clearly noticeable is that the appellant-assessee had incurred substantial expenses on wages and salary in addition to recruitment and housekeeping expenses. Payments were also made towards generator running maintenance, water, electricity, sewerage and transportation charges and, importantly, the lease line charges, which were in respect of the internet connection. The agreement between the appellant-assessee and M/s Agilis was taken on record by the Commissioner of Income Tax (Appeals) under Rule 46A of the Income Tax Rules, 1962. The Tribunal has not given any adverse finding or held that the said evidence should not have been admitted and taken on record under the said Rules. Revenue had thereafter, filed an appeal before the Tribunal and it was their duty to place the said agreement on record in case they wanted to challenge the findings/observations of the Commissioner of Income Tax (Appeals). It appears that the Revenue did not file the said agreement and the Tribunal has recorded that they did n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an inference could be drawn that the company had set up its business; but that is not the only factor that the Tribunal has taken into consideration. The Tribunal has, as pointed out in the statement of the case, scrutinised the various details of the expenses given in the order of the Appellate Assistant Commissioner and having scrutinised those expenses the Tribunal has come to the conclusion even on an interpretation more favourable to the assessee than the one we are giving to the expression setting up that these expenses do not show that the business was set up prior to the 1st of September, 1946. In our opinion, it would be difficult to say that the decision of the Tribunal is based upon a total absence of any evidence. As we have often said, we are not concerned with the sufficiency of evidence on a reference. It is only if there is no evidence which would justify the decision of the Tribunal that a question of law would arise which would invoke our advisory jurisdiction which after all is a very limited jurisdiction. The said case, related to an assessee, who was engaged in the business of manufacturing of edible oils and was in the process of setting up of a groundnu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n for business and to proceed further and conclude the deal. The aforesaid facts have been examined and highlighted by the first appellate authority. The said findings of fact have been affirmed by the tribunal. A pragmatic and a practical view has to be taken. 11. In Century SPG and Mfg. Co.Ltd Vs. Commissioner of Wealth Tax [1978] 112 ITR 497(Bom), it has been observed:- This interpretation put by this court upon the expression set up has been followed by the Madras High Court in the case of Ramaraju Surgical Cotton Mills Ltd. v. Commissioner of Wealth-tax [1962] 46 ITR 820. This is a case under the Wealth-tax Act and the expression set up came to be interpreted in the context of section 5(1)(xxi) as exemption was claimed as a new and separate unit set up after the commencement of the Act. The Madras High Court at page 824 observes: Unless a factory is erected and the plant and machinery installed therein, it cannot be said to have been set up. The resolutions of the board of directors, the orders placed for purchasing the machinery, the licence obtained from the Government for constructing the factory, are merely initial stages toward, setting up, however neces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to employees recruited, or, testing their performance can be treated as a pre-setup expenditure. The appellant assessee had either employed or taken help of trainers/seniors for the said purpose. The moment employees were recruited and enrolled, and infrastructure to use their service was in place, setup was complete. It was indicative of the fact that business operations had been setup. In the BPO industry, training of employees is an important, essential and integral element of the business activities and when the assessee has the infrastructure in place, the business can be treated as set-up. As a service industry, the first step is to recruit right kind of employees, then to interact, train or check their performance. Unlike the manufacturing activity, where requisite plant and machinery has to be procured, installed and then business operations start, in the BPO industry, the process starts with the recruitment of employees, who are to work in the said industry. Training or introduction after recruitment would be akin to the trial production or the first step in production undertaken by a manufacturer of goods. Of course it has to be seen, whether the infrastructure to utiliz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriate, in this regard, to reproduce findings recorded by the CIT (Appeals), who had called for the remand report from the Assessing Officer in view of the contentions raised:- I have considered the comments of the AO given by him in the remand report and the rejoinder filed by the appellant on the same. During the course of remand proceedings, it is seen that appellant has submitted a note on the training imparted to the employees during the month of April and May, 2004 in the premises taken from M/s Agilis Information Technologies International Private Limited. The appellant also filed copies of the ledger accounts of pantry expenses, professional expenses, recruitment expenses, computer hire charges, transportation charges, lease line charges. Copies of the audited balance sheet of M/s Agilis Information Technologies International Private Limited and addresses of the employees who are still working with the appellant company to whom the salaries were paid in the months of April and May, 2004. The appellant has also filed the name and address of the parties to whom the expenses of pantry, professional charges, recruitment expenses, computer hire charges were paid and TDS ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 up till the end of May, 2004. Accordingly, the assessee is not entitled to deduction of these expenses. It is held accordingly. 18. In view of the aforesaid discussion, we do not think that the reasoning given by the Tribunal and the Assessing Officer shows that the business of the appellant-assessee had not been setup. The business of the appellant had been setup as the appellant-assessee had acqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question of fact, but what activities constitute commencement of business was a mixed question of law and fact. Secondly, there was a distinction drawn between setting up of business and commencement of the business . Business is said to be 'set up' when it is ready to commence. Thirdly, when business consists of continuous course of activity, all activities which go to make up the business need not be started simultaneously. As soon as the activity which is essential in the course of carrying on business is started, business is said to be set up, if not commenced. 20. Upon recruitment of employees, the factum that expenditure under the different heads, as noticed above, was incurred is indicative that business was set up. Training to the employees was given to ensure that when the work was undertaken and performed, there were no glitches, trouble or problems. It is not indicative of the fact that necessary infrastructure was not there and actual business could not have commenced or was not set up. Training was post set up as the employees were recruited. In case of service industry, training and up gradation of skills of employees is a part and parcel of the business ..... X X X X Extracts X X X X X X X X Extracts X X X X
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