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TMI Blog2024 (11) TMI 488X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Assessee : Mr. Madhur Agarwal For the Revenue : Mr. Ashok Kumar Ambastha, Sr. DR ORDER PER OM PRAKASH KANT, AM This appeal by the Revenue is directed against order dated 29.01.2024 passed by the Ld. Commissioner of Income-tax (Appeals) National Faceless Appeal Centre, Delhi [in short the Ld. CIT(A) ] for assessment year 2009-10, raising following grounds: 1. On the facts and in the circumstances of the case and in law, the Id. CIT(A) has erred in deleting addition on account of excess pre-commencement expenses Rs. 2Q,80,75,902/- by holding that salary and registration fees are allowable to assessee as revenue expenditure as same was incurred by assessee after commencement of business on 01.06.2008 as assessee paid salary, made TDS thereon and filed Form 24Q, ignoring the fact that as per slump sale agreement business was acquired by assessee on 30.11.2008 and any payment in the nature of salary expenditure before 30.11.2008 is of preoperational expenditure only and can only be amortised u/s. 35D of the Act, 2. The Appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored. 2. Briefly stated facts of the case ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12,80,16,521 along with the operating and other cost of Rs. 8,03,59,428 incurred up to December 2008, totalling to Rs. 20,83,75,949 was treated as preliminary expenses prior to the commencement of the business and to be considered for deduction under section 35D of the Income Tax Act. The assessing officer also worked out the eligible amount being the 5% of the capital deployed at Rs. 1,60,00,000 and on amortising the same over 5 years, the deduction for the current year was worked out at Rs. 32,00,000 under section 35D of the act. 7. The appellant in its written submissions during the proceedings, submitted the following the relevant paragraphs are reproduced hereunder: Our submissions 7. Having regard to the above background, we humbly submit that the aforesaid expenses cannot be considered as pre-incorporation expenses since BNPP SIPL was incorporated in India on 29 May 2008 (copy of Certificate of Incorporation has been enclosed as Annexure 3) and had commenced its business operations on 1 June 2008 by acquiring the equity research division from BNPP ISPL under a slump sale. 8. With the employees on payroll of BNPP SIPL, the equity research business of BNPP SIPL commenced from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties. Therefore, the deductibility of expenditure requires the business of the assessee to be set up and there is no requirement for the commencement of the said business. Thus, we wish to highlight the evident distinction between the date of set up of business and date of commencement of business. The aforesaid view was upheld in the case of Western India Vegetable Products v. CIT [1954] 26 ITR 151 (Bom HC) wherein it was held as under 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 setup 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 ..... m. Typically, the date of set-up of business and readiness to commence business in the context of service companies is generally determined on the basis of the following: Date of appointment of key personnel and other qualified personnel; Date of regulatory approvals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious year under section 3 of the Act and the fact that the business of BNPP SIPL had been set-up as on 1 June 2008. g. Without prejudice to the above, the Learned AO erred in not considering the fact that BNPP SIPL had earned income during the period 1 June 2008 and 31 December 2008 and that the expenses incurred during such period represent expenditure incurred wholly and exclusively for earning such income and ought to be allowed as a deduction to the Appellant under section 57(iii) of the Act. Based on the above stated facts and the various principles laid out in various judicial precedence relied upon, the Learned AO erred in making an addition in the hands of BNPP SIPL amounting to Rs 20,80,75,902. Such action of the Learned AO should be set-aside and the appeal of BNPP SIPL should be allowed. 8. I have carefully considered the assessment order and the appellant submissions on the above issue. On perusal of the underlying facts governing the issue under consideration, there appears to be a dispute regarding the date of commencement of the business of the appellant. As per the appellant, the company was incorporated on 29th May 2008 and commenced its operation from 1st June 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furtherance of the equity research business commenced by the appellant on 1st June 2008, the appellant acquired the equity research division of the BNP Paribas India solutions private limited and accordingly the effective dates as per the slump sale agreement cannot be a determining factor in so far as the date of commencement of the appellant business is concerned. As propounded in the case of Western India Vegetable Products versus CIT(referred by the appellant above), when a business is established and is ready to commence business then it can be said that the business is set up and all expenses incurred after setting up of the business and before the commencement of the business would be permissible as deductions. The fact that the company was incorporated, and the employees were in place to render their services to the appellant's equity research business shows that the business had been setup and commenced its operations. Accordingly, the expenses of the nature as disallowed by the assessing officer were allowable as expenditure under section 37 of the Income Tax Act. It is to be further noted that for the purpose of disallowances as per section 35D of the Act, the expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee commenced only on acquisition of the equity research business undertaking of BNP Paribas Solutions w.e.f. 14.11.2008 and therefore, the business of the assessee commenced only on 14/11/2008 and hence, the expenses booked prior to commencement of the business which included personal cost of Rs. 12,80,16,521/- operating and other cost of Rs. 8,03,59,428/- incurred up to December, 2008, totaling to Rs. 20,83,75,949/-, was treated as preliminary expenses prior to commencement of the business and was eligible deduction u/s 35D of the Act i.e. ( 1/5th of amount for five years) and not whole of amount under section 37(1) of the Act. The Assessing Officer also worked out eligible amount being 5% of the capital deployed at Rs. 1,60,00,000/- and on amortizing the same over 5 years, the deduction for the current year was worked out at Rs. 32,00,000/- u/s 35D of the Act and made disallowance for the balance amount accordingly. The Ld. CIT(A) however after verification of the various documents and submission of the assessee held that business of the assessee was commenced from 01.06.2008 and therefore, no disallowance is warranted and whole of the expenditure of Rs. 20,80,75,902/- was all ..... X X X X Extracts X X X X X X X X Extracts X X X X
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