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TMI Blog2022 (6) TMI 942X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary infrastructure was acquired by the assessee and the assessee started paying salaries and allowance of the experts. The assessee, in the present case, had achieved the process of establishing the business. We concur with the submissions of Ld. AR that the assessee s business was already set-up during AY 2012-13. Therefore, the business expenditure as claimed by the assessee would be allowable deductions in both the years. We order so. Accordingly, the appeals, for both the years, stands allowed. AO is directed to recompute the income in terms of our above order. X X X X Extracts X X X X X X X X Extracts X X X X ..... up of business" and "commencement of business", and, that the expenses incurred in the interregnum between "setting up" and "commencement of business" can be treated as being in the nature of revenue expenditure. 6. The Ld. CIT(A) failed to consider that the provisions of section 3 and section 2(34) of the Act refer to the expression 'previous year' only in the context of 'setting up of business' and not in the context of 'commencement of business'. 7. The Ld. CIT(A) erroneously concluded that the Appellant is not eligible to claim pre-incorporation expenditure as revenue in nature and set it off against interest income from deployment of surplus funds. In fact, the expenditure claimed is not pre-incorporation but in the nature of pre-operation, which has not been considered by the Ld. CIT(A). 8. Even assuming that the source of income of the present Appellant, was liable to be taxed under the head 'income from other sources', the Appellant in any case would have been entitled to set-off business loss, being the expenditure incurred for the purposes of its business against such 'other income' in terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee (formerly known as Lebara Hotels Private Limited) being resident corporate assessee is stated to be engaged in the business of Hotels, Motels and Catering etc. The assessee was incorporated on 09.12.2010 as Nalvaravu Hospitality Services Pvt. Ltd. The name of the assessee was changed to LBR Hotels and Hospitality Services Pvt. Ltd. on 11.02.2011. Thereafter, the name was again changed to Lebara Hotels Private Ltd. on 13.08.2014. In the return of income for this year, the assessee admitted loss of Rs.56.46 Lacs. The Ld. AO noted that M/s LBR Hotels and Hospitality Services Ltd. was incorporated during 2010 with the object of entering into hospitality sector. The entire funding was done by Lebara Investment BV of Netherlands. To set up the hotel, the assessee purchased semi-constructed building which was completed in August 2013 when it was handed over to the India Hotels Company Limited (IHCL) to run the hotel under their brand name 'The Taj Gateway'. 6.2 It was also noted that during the year the assessee did not commence business operations and did not earn revenue from operations. Accordingly, Ld. AO held an opinion that Fixed Deposits (FD) interest income as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CL). As per the recitals of the agreement, the assessee as owners has appointed IHCL as hotel operator who would manage and operate the hotel in conformity with standards comparable to a first-class hotel on certain elaborate terms and conditions. The assessee also entered into project management agreement with Jones Lang LaSalle Property Consultants (India) Pvt. Ltd. for proposed the aforesaid hotel project on 23.09.2011 to lay interior fit-outs on certain terms and conditions. The perusal of financial statements for the year would reveal that the assessee had obtained long term borrowings and acquired tangible and intangible assets. The fixed asset includes Land, Building, electrical accessories, installation charges, swimming pool work, computers and other plant & machinery. The assessee paid mobilization advances to various vendors. The nature of expenses debited in the Profit & Loss Account is administrative expenses, employee's expenses & interest expenses. The administrative expenses are substantially in connection with the construction work. The assessee has deputed staff and paid salaries etc. In the notes to the accounts, it has been stated that the first venture of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al or time gap between the setting-up of the business and the commencement of the business but still all the expenses incurred during that interval would be permissible deductions. The term 'setting up', as per Oxford English Dictionary would mean 'to place on foot' or "to establish" which is in contradistinction to the term 'commence'. The distinction is this that when a business is established and is ready to commence business then it can be said that the business had been set-up. There may be in interregnum or time interval between the setting-up of the business but all expenses incurred during interregnum would be permissible deductions. The relevant observations of Hon'ble Bombay High Court in Western India Vegetable Products Ltd. (supra) were as under: - It seems to us, that the expression "setting up" means, as is defined in the Oxford English Dictionary, "to place on foot" or "to establish," and in contradistinction to "commence". The distinction is this that 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessarily maintain regular staff members, on which it had been incurring expenses. The office expenses that had been incurred were clearly of revenue nature. Considering the reasons recorded by the Tribunal and based on the valid materials and evidences, the same does not suffer from any legal infirmity. 6. In view of the foregoing conclusions, we find no error in the order of the Income-tax Appellate Tribunal and the same requires no interference. Hence, we answer the questions in favour of the assessee, against the Revenue. Accordingly, the above tax cases are dismissed. No costs. 12. This decision has subsequently been followed by Hon'ble Court in M/s Ascendas IT Park Chennai Ltd. V/s DCIT (TCA No.668 of 2016 dated 27.04.2017) wherein it has been held that the Business as defined in Sec. 2(13) includes trade, commerce, manufacture or adventure or concern in the nature of trade, commerce or manufacture. The Profit earning apparatus of the assessee has to be seen to be in place in order to legitimately accept the claim that the business has, in fact, commenced or has been set-up. Since, the fact indicate that the assessee traversed beyond the stage of exploratory activities a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods cannot be actually sold. It was pointed out that one has to bear in mind that the test is of commonsense and what in the eye of a business can be said to be the commencement of the business. It was further pointed out that one business activity may precede the other and what is required to be seen is whether one of the essential activities for the carrying on of the business of the assessee company as a whole was or was not commenced. 45. In Ralliwolf Ltd. (supra), the Court referred to the Oxford English Dictionary meaning for the expression "setting up" and held that the distinction is that when a business is established and is ready to commence, then it can be said that business that it is set up. 46. In Hughes Escorts Communications Ltd. (supra), the assessee carried on business of satellite business communications for which an equipment is used. The said equipment can be used only after establishing, maintaining and using the communication facilities on a licence from the Department of Telecommunications (DoT). The assessee therein made an application to the DoT for grant of such licence and a licence agreement was entered into and even prior to that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upra), the assessee company was incorporated on 19.09.2007 and even before incorporation, it corresponded with well known companies, which rented out office premises upon a bank account in October, 2007, employees were also appointed during the relevant years, tax deducted at source, registration under the Shops and Establishments Act was also effected and these activities were the first stage activities which would lay the foundation for placing orders for procuring the stock and storing them in a warehouse undertaken by the assessee was a precursor to commencement but post-set up and the activities demonstrated that setting up of the business by the assessee with a commitment to commence the business. Therefore, the order of the Assessing Officer disallowing the business loss was held to be not justified. 50. In Franco Tosi Ingegneria (supra), the assessee, a non-resident company secured a letter of intent from Neyveli Lignite Corporation on 13.04.1981 for carrying out certain works to establish a project office and to commence activities in India from that date. However, it secured the approval of the Reserve Bank of India for establishing its project office only, subsequently ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for manufacture of commercial vehicles. Thus, the test laid down in the aforementioned decisions if applied to the facts of the case, we have no hesitation to hold that the business of the assessee had been set up in the previous assessment year for which the assessment had been completed by the Assessing Officer. Therefore, the Tribunal erred in holding that merely because the manufacturing and sale of the vehicle did not take place, the business of the assessee has not been set up. The manufacturing activity of the assessee is a part of the composite business activities of the assessee and this was not commenced because, the construction of the building and installation of plant and machinery was in progress. It was thus held by Hon'ble Court that merely because the manufacturing did not take place, it could not be said that the business had not been set-up. The manufacturing activity of the assessee was part of composite business activities and the same had not commenced because the construction of building and installation of plant & machinery was in progress. We find that similar analogy is applicable in the present case. 14. After considering the ratio of cited judicial pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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