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TMI Blog2017 (8) TMI 481X X X X Extracts X X X X X X X X Extracts X X X X ..... to Rs. 27.46 lakhs. During the assessment proceedings, the AO found that the assessee had earned interest income on debentures and had earned profit on sale of mutual fund units aggregating to Rs. 31.36 lakhs. He held that income earned by the assessee on account of interest and from sale of units of mutual fund was to be assessed under the head other sources. He further found that it had claimed expenditure of Rs. 27.46 lakhs against the said income. The AO was of the opinion that all the items of expenditure were of capital nature and included preliminary expenditure. Therefore, he held that deduction was not allowable against the income assessable under the head 'other sources'. 3. Aggrieved by the order of the AO, assessee preferred an appeal before the First Appellate Authority (FAA). It also relied upon certain case laws and stated that there was a distinction between setting up of business and commencement of business. After considering the order of the AO and submission of the assessee, he held that the assessee had not commenced its business activities, that the expenditure incurred by it indicated that they were pre-operative and preliminary in nature, that the expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tels and restaurants, that it was not in the business of selling of mutual funds, that the business was not ready to start, that deductions available under section 57 only were allowable in such cases. 5. We have heard the rival submissions and perused the material before us. We find that the first issue to be decided, in the appeal before us, is whether the business was setting up in the year under consideration or not? The concept of setting up of a business and a commencement of a business has been deliberated by the Hon'ble Courts of more than one occasions. In the case of Sponge Iron India Ltd. the Hon'ble Andhra Pradesh High Court (201 ITR 770) has held as under: "The following are the principles applicable to determine whether a business has commenced: (i) whether a business has been commenced or not is a question of fact. However, what activities constitute commencement of business is a mixed question of law and fact and it has to be decided on the facts of each case; (ii) there is a distinction between setting up of business and commencement of business. A business is said to be set up when it is ready to commence; (iii) where the business consists of a continuo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncement of the business should be treated as expenses incurred for the purposes of carrying on the business in the year of account. The Tribunal, taking into consideration the date of first purchase of raw materials and the details of the expenses incurred by the company, came to the conclusion that all expenses incurred after 01.09.1946, should be allowed. Deciding the matter, the Hon'ble jurisdictional High Court (26 ITR 151) held as under: "There is a clear distinction between a person commencing a business and a person setting up a business and for the purposes of the Indian Income-tax Act the setting up of the business and not the commencement of the business that is to be considered. It is only after the business is set up that the previous year of that business commences and any expense incurred prior to the setting up of a business would not be permissible deduction. When a business is established and is ready to commence business then it can be said of that business that it is set up; but before it is ready to commence business it is not set up. There may however be an interval between the setting up of the business and the commencement of the business and all expenses i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imed exemption u/s.10B for the period commencing from 1.4.2004, to 31.05.2004, contending that it had obtained approval as a 100%export oriented unit under the STPI scheme and had commenced operations from April,2004. The AO as well as the Tribunal held that the assessee had commenced its operations only from 1.06.2004, i.e., the date on which the assessee entered into the "service agreement" with its parent company. On appeal the Hon'ble High Court held that the business of the assessee had been set up on 1.04.2004, as the assessee had acquired the necessary infrastructure from its sister concern, A, and had also started making payment of salary and wages, that training was given by professional experts under the supervision and control of the assessee, that the moment the operations were commenced, the business had been set up. It further held as under: "There is a distinction between "setting up of business" and "commencement of business". The proviso to section 3 of the Income-tax Act, 1961, refers to and defines the term "previous year" in relation to newly set up business or profession and not with reference to the date of commencement. When a business is established and is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a stage before the commencement. To set up a business, the following activities become relevant: preparation of a business plan ; establishment of a business premises ; research into the likely markets or profitability of the business ; acquiring assets for use in the business ; registration as an entity and under the local laws, etc. The list of activities is not exhaustive and the facts of each case have to be considered. A trader before the actual purchase would possibly interact and negotiate with manufacturers, landlords, conduct due diligence to identify prospective customers, spread awareness, etc. These are all an integral part and parcel of the business of a trader. The activities continue even post-first sale/purchase. When the first steps are taken by a trader, the business is set up, commencement of purchase and then sales is post-set up. 5.1. We find that AO and the FAA had taken note of expenditure incurred only they had dealt with the concept of setting up of business and commencement of business. We find that after getting approval from FIPB the assessee had made downstream investments of Rs. 22.3 crores in a Bangalore based Hospitality Venture, that fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee had made an alternate claim before the FAA. The DR stated that business had not started, the expenses incurred by assessee were of capital nature, that the object of the assessee was to operate and run hotels and restaurants, that it was not in the business of selling of mutual funds, that the business was not ready to start, that deductions available under section 57 only were allowable in such cases. 8. We have heard the rival submissions and perused the material before us. We find that the assessee company was incorporated to carry on business of setting up of new hotels and investment in hotel projects. It had never applied to RBI for getting a certificate of registra-tion as NBFC. Just because it sold some debentures it cannot be treated an NBFC or an investment company. In our opinion, activity of receiving interest income or receiving some profit on redemption of short term mutual fund investment was not in nature of business. In other words, income arising out of above two activities cannot be termed business income and that the revenue authorities have rightly taxed it under the head income from other sources. Confirming the order of the FAA, we decide second gro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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