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TMI Blog2009 (2) TMI 236X X X X Extracts X X X X X X X X Extracts X X X X ..... under s. 234B of the IT Act. 4. On the facts and in the circumstances of the case, the CIT(A) has legally erred in dismissing the ground of appeal relating to levying interest under s. 234C of the IT Act." 3. The issue in ground Nos. 1 and 2 raised by the assessee is against the disallowance of expenditure holding that the business was not set up on incorporation. The brief facts of the case are that the assessee company is engaged in the business of international courier service and the operation of pick up and delivery of express courier shipments. The assessee company was incorporated on 24th April, 2001. After the incorporation but before the commencement of the business the assessee had incurred expenditure of Rs. 85 lakhs towards various expenses. The assessee company had claimed the pre-demerger expenses of Rs. 85 lakhs as revenue expenditure. In the notes forming part of computation of income, in Note 2.1, the assessee s41ted as under: "DHL India incurred various expenses (not being preliminary expenses) amounting to Rs. 85 lacs since its incorporation till the date of demerger. The company had commenced its activities in the sense of providing requisite training to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35D of the Act while allowing the pre-commencement business expenses does not prescribe to setting up of business or setting up of enterprise or company. Hence, in order to claim the expenditure prior to the commencement of the business, the expenditure should fall under any of the items mentioned in s. 35D(2) of the Act. The AO also noted that in the instant case none of the expenses incurred by the assessee prior to commencement of his business were covered under any item/s in s. 35D(2) of the Act and hence the assessee was not entitled to claim pre-demerger expenses as preliminary expenses under s. 35D of the Act. 5. The claim of the assessee that there was a difference between set up and commencement of business and all the expenses incurred after the set up of the business were allowable as revenue expenditure was rejected by the AO. After taking note of various judicial precedents on the issue, the AO disallowed the assessee's claim of deduction amounting to Rs. 85 lakhs. 6. Before the CIT(A), it was clarified by the learned Authorised Representative for the assessee that the total expenditure of Rs. 85 lakhs comprised of expenditure incurred from the date of incorporatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2001, the board of directors of the assessee company passed formal resolution to acquire the business of AFL Ltd. The copy of the minutes of the first meeting of board of directors of the assessee company held on 27th June, 2001 is placed at pp. 2 and 3 of the paper book. A petition was filed before the Hon'ble Bombay High Court by AFL (P) Ltd. and DHL Worldwide (the assessee company) for sanction of the scheme of the arrangement entered into between the parties. On 22nd Nov., 2002, the Hon'ble Bombay High Court sanctioned the de merger with the appointed date of demerger being 1st day of January, 2002. The copy of the order of the Hon'ble Bombay High Court is placed at pp. 8 to 11 of the paper book. The learned Authorised Representative after taking us through the various dates submitted that both the AO and the CIT(A) have accepted the date of commencement of business as 1st Jan., 2002, but under the IT Act the date of set up of business is relevant and not the date of commencement of business. The learned Authorised Representative pointed out that no doubt the commencement of business was from 1st Jan., 2002, but under s. 3 of the IT Act the date of set up of the business is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if the Court had not approved the scheme of the assessee and AFL Ltd., then all the expenditure incurred was to be held as capital expenditure. The learned Departmental Representative further submitted that amortization of expenses is recognized and the expenditure incurred by the assessee was capital expenditure on which depreciation was allowable. The learned Departmental Representative further submitted that where the assessee is not in a position to discharge his business then the business is not set up and also the Court proceedings between the parties was not merely a formality but a procedure of demerger to be approved subject to conditions. The learned Authorised Representative in rejoinder submitted that he was in conformity with the learned Departmental Representative on the proposition of the previous year and pointed out that before commencement of business there is a set up of business. Drawing our attention to the list of expenditure, it is pointed out the total expenditure was incurred on training of staff for international standards. The learned Authorised Representative clarified that there was no question of any income arising to the assessee, which arises post-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 19,51,120 is incurred upto March, 2002. A petition was filed before the Hon'ble Bombay High Court for the sanction of the scheme of arrangement arrived between the AFL Ltd. and the assessee company. The Court sanctioned the terms/arrangements embodied in the scheme of AFL Ltd. with the assessee company and further ordered that with effect from 1st Jan., 2001 the SCD of AFL Ltd. be transferred to be vested in, deemed to and vested in the assessee company. The Court further ordered that with effect from appointed date the specified liabilities pertaining to the SCD of AFL Ltd. shall be transferred to and vest in the assessee company as a going concern. In consideration of the said transfer of SCD of AFL Ltd. to the assessee company the Court ordered the assessee to issue and allot one equity share of the assessee company of Rs. 10 each credited as fully paid up to the shareholders of AFL Ltd. for every 4 equity shares of the face value of Rs. 10 each held by each shareholder in AFL Ltd. The Court further directed the assessee company to deliver the certified copy of the order to the RoC, Maharashtra, Mumbai for registration. 11. The scheme of arrangement arrived at between AF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 99 to the issue and allotment of equity shares of DHL, and (d) filing of the necessary certified copies of order/orders of High Court of Bombay referred to in cl. 12 with the RoC, Maharashtra. Clause 15 provides that though the scheme comes into operation from the appointed date but will not become effective until and unless the last of the following dates viz., (a) the date on which the last of the aforesaid consents, approvals, permissions etc. shall be obtained or passed; (b) the effective date; or (c) the appointed date. Clause 17 provides the costs to be borne by AFL Ltd. and DHL. Clause 19 provides that in case this scheme is not sanctioned by the High Court of Judicature at Bombay, or in the event of any of the approvals or conditions enumerated in cl. 15 above not being obtained and/or for any other reason the scheme is not implemented on/or before 30th June, 2002 or within such further period, the scheme shall stand revoked, cancelled and be of no effect and null and void. The said scheme was approved by the Hon'ble Bombay High Court to be implemented between the parties. 12. The question which arises in the present appeal is whether setting up of business is distinct fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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." (b) CIT vs. Western India Sea Food (P) Ltd. (1992) 107 CTR (Guj) 106 : (1993) 199 ITR 777 (Guj): 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. The words 'ready to commence' would not necessarily mean that all the integrated activities are fully carried out and/or wholly completed. The requirement is also complied with in a given case where an assessee had undertaken the first of the kind of integrated activities which the business is overall comprised of. It is not necessary that all the categories of its business activities must start either simultaneously or that the last stage must start before it can be said that the business was set up. The test to be applied is as to when a businessman would regard a business as having commenced and the approach must be f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e commencement of the business but after the setting up of its business, which two dates need not be the same would be deductible as revenue expenses.........." (f) CIT vs. Franco Tosi Ingegneria: It was held as under: "Held, that the assessee had commenced its business in India from April, 1981, when it secured and accepted the letter of intent from Neyveli Lignite Corporation and not from 1st Oct., 1981, when it opened its site office and, therefore, the assessee was entitled to the expenditure claimed by it from that date, viz., 13th April, 1981." 17. The issue before the apex Court in CWT vs. Ramaraju Surgical Cotton Mills Ltd. (relied upon by the learned Departmental Representative) was addressing the commencement of operation by the company for the establishment of such unit as occurring in s. 5(1)(xxi) of the WT Act and it was held 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 organization that it can be said that the unit has been, set up. Operations for establishme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preliminary meeting and thereafter the first meeting of board of directors on 27th June, 2001, wherein a formal resolution was passed to acquire the international express business of the AFL Ltd. The proceedings of the assessee company are underway but in no way it can be said that the business of the assessee company has been set up by mere passing of the resolution. Now, ,next is the date of 3rd Sept., 2001 when both the assessee company and the AFL Ltd. filed a petition before the Hon'ble Bombay High Court for the take over of the international express business of the AFL Ltd. Prior to filing the said petition a scheme of arrangement was arrived at between the AFL Ltd. and the assessee company, wherein the terms and conditions of the agreement entered into between the parties was formulated and agreed upon. The perusal of the various terms and conditions of the said scheme of arrangement between the parties have been referred to by us in the paras hereinabove. Cumulative reading of the said terms and conditions agreed upon establishes that it was mutually agreed between the parties that the business of AFL Ltd. relating to SCD would commence w.e.f. 1st Jan., 2002. However, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble Bombay High Court vide its order dt. 2nd Nov., 2001 have sanctioned the demerger w.e.f. 1st Jan., 2002. The assessee company has to make statutory compliances of the laws w.e.f. 1st Jan., 2002 and the service-tax compliance is to be made from 1st Jan., 2002, and the contribution to labour welfare funds is also to be made from 1st Jan., 2002. Further, the assessee company had claimed depreciation on the assets for the period starting from 1st Jan., 2002 to March, 2002. The business of the SCD of AFL Ltd. was taken over by the assessee w.e.f. 1st Jan., 2002. 22. In the facts and circumstances of the case before us, the crucial date for the setting up of the business is the date on which the Hon'ble Bombay High Court had accorded approval to the scheme of arrangement agreed upon between the assessee and the AFL Ltd. Without the approval of the Hon'ble Court to the scheme of arrangement agreed upon, the said scheme could not be acted upon nor the permissions thereafter be obtained. Drawing strength from the ratio laid down by the Hon'ble Bombay and Delhi High Courts in the cases decided in Western India Vegetable Products Ltd. vs. CIT, CIT vs. Western India Seafood (P) Ltd., Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f expenditure of Rs. 85 lakhs made by the AO without appreciating the facts of the case." 25. The issue in ground No. 1 raised by the Revenue is against the deletion of disallowance made on account of excess depreciation claimed by the assessee. The brief facts relating to the issue are that the assessee had claimed depreciation @ 50 per cent of Rs. 61,21,862 on motor cars purchased during the year by AFL Ltd. prior to the demerger. The vehicles were transferred to assessee under the scheme of de merger. Depreciation was claimed as that of commercial vehicle prescribed in entry No. (iiid) of sub-item No. 2 of item No. III relating to plant and machinery of Part A to the Appendix I of IT Rules, 1962, applicable to new commercial vehicles acquired during the financial year 2001-02. The AO treated the said motor cars being not in the nature of commercial vehicles and allowed depreciation @ 20 per cent as prescribed in sub-item No. (1A) of item No. III of plant and machinery of Part A to the Appendix I of IT Rules, 1962. The CIT(A) allowed the claim of the assessee observing that the meaning of commercial vehicle for the purpose is provided in Item (3A) of the Notes below table and i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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