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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 ..... he assessee is a company and it has to incur certain expenses for functioning of corporate entity. Thus the assessee had set up the business and that expenditure incurred by it has to be allowed as business expenditure – except for the expenditure incurred on account of ROC charges for increase in authorised capital. In its letter to the AO, dtd. 28.11.2011, the assessee had agreed that it had no objection if the disputed demand was disallowed. We direct the AO to allow the remaining expenses. - Decided in favour of assessee in part. Assessment of income - activity of receiving interest income or receiving some profit on redemption of short term mutual fund investment - under the head income from other sources or business income - benefit of netting of income - Held that:- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 had been incurred prior to commencement of business, that expenditure could not be treated as revenue expenditure, that same could not be set off against income earned under the head other sources, that the assessee had made alternate contention before the AO that certain preliminary expenses such as expenditure pertaining to ROC fee was allowable under section 35D of the Act. He held that as per the Act deduction of such expenditure @ 1/10of such expenditure was allowable for over a period of 10 years, that the first year of such deduction would be the year in which business under-taking would commence its operations, that the assessee had not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 continuous course of activities, for commencement of business all the activities which go to make up the business need not be started simultaneously . As soon as an activity which is the essential activity in the course of carrying on the business is started, the business must be said to have commenced . 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tting 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 incurred during that interval would be permissible deductions that the company actually commenced business only on 1st November, 1946, when it purchased the groundnut oil mill, but prior to this date there was a period when the business could be said to have been set up and the company was ready to commence business and that there was evidence before the Tribunal to hold that the assessee company set up its business as from 1st September, 1946 . Facts of the case of Carefour WC India P. Ltd. (368 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 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 . But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deductions . In or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 ₹ 22.3 crores in a Bangalore based Hospitality Venture, that for acquisition of a plot of land it had provided ₹ 20 crores as application money in a JV, that had started consultation and preparing feasibility reports. In our opinion, the accrual or receipt of income is not the only criteria to decide the taxability of the assessees. Business is a complex commercial activity and it takes quite a long time to start the practical operations. Therefore, such an issue has to be dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ground of appeal against the assessee. As far as netting of interest is concerned, it is found that the FAA has not dealt with the issue. In our opinion, even if income is to be assesseed under the head income from other sources, benefit of netting of income cannot be denied to the assessee. AO is directed accordingly. Second ground of appeal is decided in favour of the assessee, in part. As ..... X X X X Extracts X X X X X X X X Extracts X X X X
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