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TMI Blog2017 (11) TMI 1539X X X X Extracts X X X X X X X X Extracts X X X X ..... services was received on December 10, 2008. The assessee had capitalised all expenses incurred prior to September 1, 2008 as pre-operative expenses and claimed the expenses incurred thereafter as revenue expenditure. 4. The Assessing Officer noticed that the assessee did not commence the asset management services during the year under consideration. The Assessing Officer further noticed that the assessee has commenced only advisory services on December 10, 2008. Accordingly the Assessing Officer took the view that the expenses incurred after December 10, 2008 alone can be allowed as revenue expenditure. Accordingly, the Assessing Officer disallowed the expenditure incurred by the assessee from September 1, 2008 to December 10, 2008 amounting to Rs. 326.51 lakhs treating the same as pre-operative expenses. The assessee had also paid legal and professional fees of Rs. 237.48 lakhs to two legal firms. Details thereof have been discussed by the Assessing Officer as under : 5.1 It is noticed from the submissions filed by the assessee that the assessee-company has made the following two payments under the head "legal and professional fees" Sl. No. Name of the party On account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Commissioner of Income-tax (Appeals) noticed that the assessee did not deduct tax on the amount of Rs. 99 lakhs paid to M/s. FFHS&J. Accordingly he issued enhancement notice to the assessee proposing to disallow the abovesaid payment under section 40(a)(ia) of the Act. The assessee submitted that TDS has been credited in the Government treasury belatedly on April 29, 2011. Accordingly the assessee agreed for disallowance of amount of Rs. 99 lakhs paid to M/s. FFHS&J during the year under consideration. With regard to the remaining amount of Rs. 137 lakhs, the learned Commissioner of Income-tax (Appeals) took the view that they are revenue in nature. Accordingly he directed the Assessing Officer to delete the disallowance to the extent of Rs. 137 lakhs. Aggrieved by the order passed by the learned Commissioner of Income-tax (Appeals), the Revenue has filed this appeal before us. 8. We heard the parties and perused the record. The first issue relates to disallowance of Rs. 326.51 lakhs relating to pre-operative expenses. The submissions made by the assessee before the learned Commissioner of Income-tax (Appeals) and the decision taken by the learned Commissioner of Income-tax (App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are as follows : (1) Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151 (Bom) (2) CIT v. Saurashtra Cement and Chemical Industries Ltd. [1973] 91 ITR 170 (Guj) (3) CIT v. Sarabhai Management Corporation Ltd. [1991] 192 ITR 151 (SC) (4) CWT v. Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478 (SC) (5) Emirates Commercial Bank Limited (I.T.A. No. 4183/Mum/ 1985) (6) Hughes Escorts Communications Ltd. v. Joint CIT [2007] 106 TTJ 1065 (Delhi) (7) JP Morgan Chase Bank N. A. v. Asst. DIT (International Taxation) (I.T.A. No. 4311/Mum/2005) 3.1.2 The authorised representative contended that the 'setting up of a business' had not been defined under the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). Generally, the date of setting up of a business is interpreted in the context of readiness to commence business in so far as service companies like the appellant are concerned. This readiness is generally determined on the basis of the date of appointment of key persons and other qualified personnel, the date of grant of regulatory approvals, the date on which the premises for carrying out the business are leased/purchased and the date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant was ready to go ahead but was compelled by forces beyond its control to wait for a while. There appears to be merit in the authorised representatives arguments to this extent. 3.2.1 Once more, before proceeding further, it would be important to see the kind of financial arrangements the appellant had made. The consolidated foreign direct investment policy of the Department of Industrial Policy and Promotion of Ministry of Commerce of Government of India lays down the norms for non-banking financial companies. In the sphere of asset management, the policy mandates infusion of US $ 50 million, in case where foreign capital would exceed 75 per cent. of the total capital. The policy also lays down that US $ 7.5 million thereof needs to be brought in upfront, while the balance US $ 42.5 million could be brought in the following twenty- four months. The relevant extracts of the policy have been placed on the appellate record. Thus, it would be clear that the appellant had ensured injection of funds to the tune of about Rs. 250 crores (at the rough exchange rate of Rs. 50 per US dollar), out of which about Rs. 38 crores had been brought in upfront. On this background, having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness. In that context, the hon'ble Mumbai Tribunal had held as under : 'There is no dispute about the legal proposition that if the business is set up in all respects and even if the business is not commenced but set up to commence, then the period between the business set up and business commence, the expenditure is to be allowed as revenue expenditure.' 3.2.4 In the case of CWT v. Ramaraju Surgical Cotton Mills Ltd. (supra), the hon'ble Supreme Court had occasion to deal with the issue of setting LIP of a unit. It had then observed as under. 'A unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up. It is only when the unit has been put into such a shape that it can start functioning as a business or a manufacturing organisation that it can be said that the unit has been set up.' It would hence become clear that the appropriate definition of set ting up of business would be putting into shape of the said business in such a way that in can start functioning. In other words, actual functioning may be delayed for some reasons-commercial or otherwise but the expenditure incurred after the setti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived, i.e., on September 1, 2008 for commencement of AMS operation, it can be said that the business has been set up. The approval for advisory services is another activity of the assessee. Hence no fault can be found with the action of the assessee in taking the date of setting up of business as September 1, 2008. Hence all the revenue expenses incurred by the assessee after September 1, 2008 for running business enterprise cannot be treated as pre-operative expenses and should be allowable as revenue expenditure. Accordingly, we do not find any infirmity in the decision rendered by the learned Commissioner of Income-tax (Appeals) on this issue. Accordingly, we confirm the same. 10. Next issue relates to disallowance of legal and professional fees. The learned Commissioner of Income-tax (Appeals) has decided the issue with following observations : "5.4 Decision-I have carefully gone through the Assessing Officer's order and the authorised representatives submissions. The expenditure in question is seen to have been made by way of payments to an Indian legal firm (viz. AZB) and a foreign legal firm (viz. FFHS&J). The services rendered by these two firms were by way of drafti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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