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TMI Blog2006 (5) TMI 499X X X X Extracts X X X X X X X X Extracts X X X X ..... cial activity takes place; 1.1 That the CIT (Appeals) erred on facts and in law in not holding that the business of the appellant was set up in the month of July, 1994, when a letter of intent was secured from a prospective customer, Bank of America, purchase orders for the equipment were placed and substantial commercial activity had commenced." 2.1The 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 ld. CIT (Appeals) erred in : 1. holding that the date of setting up of business was 6-10-1994 i.e. the date on which 1st supply order was secured land not 15-3-1995 which is the date when the first hub was set up; 2. allowing revenue expenditure from 6-10-1994 and not from 15-3-1995." 3. The facts necessary for adjudication of the aforesaid grounds of appeal are as follows :- The assessee is a company. As per the objects clause of the Memorandum of Association of the assessee the main objects 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of business. In the revised return, these expenses were claimed as revenue expenses and claimed as a deduction. The plea of the assessee was that these expenses were incurred after placing of purchase order to purchase the VSAT equipments by the assessee from M/s. Hughes Network Systems, USA on 28-7-1994. 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 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 15-3-1995 and, therefore, it is only on 15-3-1995 that it can be said that the business of the assessee has been set up. The Assessing Officer 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bay High Court held that for the purpose of Indian Income-tax Act, it is the setting up of the business and not the commencement of the business that is to be considered. The Hon'ble High Court further held that when the business is established 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 v. Saurashtra 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 would 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 busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of the assessee has been set up. As already noticed even the first step, namely, purchase of VSAT is an activity, which is 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 Saurashtra Cement & Chemical Industries Ltd. (supra) was dealing with the case of the business of manufacture and sale of cement for which die raw material was lime stone. The activity of extracting lime stone 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 3-5-1994 the 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 (Appeals) ought to have held that the date of set up of the business was 28-7-1994. The first purchase order pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause it is their duty and work to entertain the customers of the company. The court further held that any expenditure on the food and brewerages 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 is 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 brewerages 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 Expo Machinery Ltd. (supra) 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 Assessing Officer to consider 1/3rd of the entertainment expenses as attributable towards employees' participation and not disallowable under section 37(2) of the Act. This ground of appeal of the assessee is allowed. 10. In the result, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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