TMI Blog2019 (7) TMI 877X X X X Extracts X X X X X X X X Extracts X X X X ..... d also the pre-activities essential for commencement of manufacture - HELD THAT:- The AO at no point of time, disputed the date on which the business of the assessee was set up. The only dispute raised by the AO was that the assessee has not commenced its commercial activity, viz., manufacture and sale of vehicles. Thus, the Tribunal proceeded on basis, which is prejudicial to the assessee in the sense what was not the subject matter of dispute before the AO has been raised by the Tribunal for the first time. In other words, the benefit which accrued to the assessee not only in the assessment year under consideration, but also the earlier assessment year 2009-10 has been taken away by the Tribunal. The question is whether this can be done. The definite answer to this question is an emphatic no. Tribunal committed an error in venturing into an issue which was never an issue before the AO and unsettling the date on which the business of the assessee was set up and as the Tribunal has no jurisdiction to do so and the said finding has necessarily to be set aside. Set up of business by appellant or not - HELD THAT:- We fully endorse the view taken by the CIT(A) in holding that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel assisted by Mr.N.P.Vijaykumar For the Respondent : Ms.R.Hemalatha, Senior Standing Counsel JUDGMENT T.S.SIVAGNANAM, J. This appeal filed by the assessee under Section 260A of the Income-tax Act, 1961 (hereinafter referred to as the Act ), is directed against the order dated 31.05.2018 passed by the Income-tax Appellate Tribunal 'A' Bench, Chennai ( the Tribunal , for brevity) in I.T.A.No.563/Chny/2017 for the assessment year 2010-11. 2.The appeal was admitted on 21.12.2018, on the following substantial questions of law:- i. Whether the Tribunal erred in law in exceeding in its jurisdiction while holding that the business of the appellant was not set up, which was not even the case of the Assessing Officer/Revenue Department? ii. Whether the Tribunal erred in law in holding that the business of the appellant was not set up despite uncontroverted material/facts available on record to establish that the appellant's business had already commenced? iii. Whether the Tribunal erred in law in disputing set up of business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s.Ricardo, UK Ltd., and M/s.Magna Powertrain-Engineering Centre Steyr Gmbh Co KG. Upon considering the reply given by the assessee, the Assessing Officer stated that R D is one of the activities of the company, the main revenue generating activity and the purpose of entering into joint venture with Hero Group of India is to design, manufacture and sell commercial vehicles in Indian domestic Markets and such activity has not commenced so far. It is further stated that the assessee's main source of income are interest income, dividend income, gain on foreign exchange etc., and not by way of commercial activities. 6.Referring to the decision of the Delhi Bench of the Tribunal in the case of Citi Financial Consumer Finance India Ltd., vs. Department of Income Tax, I.T.A.Nos.2687, 2688 and 5191/Del/2010, dated 26.03.2010 it was stated that expenditure incurred prior to commencement of business is capital expenditure. Reference was also made to the decision of the Delhi Tribunal in the case of ITO vs. Omni Global Information Technologies India P Ltd., I.T.A.No.1380/Del/2016, dated 15.04.2019. Reference was also made to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ories. Thus, the assessee contended that they had commenced to perform activities relating to the four objectives as contained in the Memorandum of Association of the assessee company. The assessee produced documents to controvert the finding of the Assessing Officer that activities relating to design and manufacture had not commenced. 10.It was further contended that the assessee had already commenced bundle of activities in consonance with the objects specified in the Memorandum of Understanding and manufacturing activity is a part of the composite business activity which was not commenced, since construction of factory building and installation of plant and machinery was under process during the year under consideration. Thus, it was the assessee's contention that although manufacturing activity per-se did not commence, the activities essential to manufacturing, comprising of development of prototype vehicle, testing all these vehicles, identification of suppliers had been undertaken in the assessment year 2009-10 itself. 11.It was further submitted that on the above basis, considering that the business of the assessee had been set up and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or profession wherein the Assessing Officer taxed the assessee under certain items and reduced certain items which makes it evidently clear that the Assessing Officer has accepted the computation of income under the aforesaid head except for disallowance of operating expenses, financial expenses and deprecation debited to the profit and loss account. 15.The CIT(A) by order dated 19.12.2016, allowed the assessee's appeal. The CIT(A) noted that the assessee had two limbs of business activity; first relating to setting up of manufacturing facility for commercial and heavy vehicles; and second business relating to import and sale of readymade light and commercial vehicles. It was pointed out that in the case of manufacturing, the assessee was engaged in designing, manufacturing and selling of light, medium and heavy duty commercial purposes and for such purposes, it would source components from Daimler Global Facilities and also undertakes in-house research and development for new products towards supporting its manufacturing activity. The CIT(A) held that the assessee had already commenced activities relating to design and also the pre-activities essential for co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... just completed the process of registering the lease of the land and started set up of its plant in such land during the relevant previous year. The sale on bus effected by the assessee was held not to substantiate the claim of the assessee that its business was set up. 19.With regard to the various decisions cited by the assessee, the Tribunal referred to two of the decisions and held that none of the judgments would further the case of the assessee. Accordingly, the appeal filed by the Revenue was allowed. 20.Mr.Ajay Vohra, learned Senior Counsel for Mr.N.P.Vijaykumar, learned counsel for the assessee after elaborately referring to the factual details including the audited financial statement of the assessee in the year ending 31.03.2010 along with the Director's report, relevant to the assessment year under consideration; Memorandum of Association of the assessee; certificate of incorporation, dated 10.12.2007; certificate of commencement of business, dated 18.12.2007; technical engineering and service agreements with Mercedes-Benz Project Consult GmbH for production, planning and logistics, dated 01.04.2008; licensing agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer had computed loss of ₹ 19,28,26,321/- under the said head. Further, it is submitted that the Tribunal exceeded its jurisdiction to take away the benefit granted by the Assessing Officer when it asserts the business loss. In support of such contention, reliance was placed on the decisions in Mcorp Global (P.) Ltd., vs. CIT, [2009] 309 ITR 434 (SC); Sanmar Speciality Chemicals Ltd., vs. Income-tax Officer, Company Ward VI(1) Chennai, [2018] 93 taxmann.com 330 (Madras). 22.The learned Senior Counsel referred to the findings recorded by the CIT(A) regarding the setting up of business and submitted that the Tribunal erred in reversing the finding of the CIT(A) by brushing aside vital facts. Further, it submitted that all deductions which were made by the Assessing Officer were in terms of Sections 30 to 43D which will go to show that the Assessing Officer himself accepted that the business of the assessee is already set up. Thus, the Tribunal erred in making out a new case which was never the case of the Assessing Officer. 23.The learned Senior Counsel referred to the assessment order for the assessment year 2009-10 and subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivity does not have any bearing for determining the date of set up of business. 26.In support of the above submissions, the learned counsel relied on the decisions in Western India Vegetable Products Ltd., vs. CIT, [1954] 26 ITR 151 (Bombay); Prem Conductors (P.) Ltd., vs. CIT, [1977] 180 ITR 654 (Gujarat); CIT vs. Ralliwolf Ltd., [1980] 121 ITR 262 (Bombay); CIT vs. Franco Tosi Ingegneria, [2000] 241 ITR 268 (Madras); CIT vs. Club Resorts P. Ltd., [2006] 287 ITR 552 (Madras); CIT vs. Hughes Escorts Communications Ltd., [2009] 311 ITR 253 (Delhi); CIT vs. Dhoomketu Builders and Development P. Ltd., [2014] 368 ITR 680 (Delhi); Carefour WC C India P. Ltd., vs. Deputy Commissioner of Income-tax, [2014] 368 ITR 692 (Delhi); Omniglobe Information Tech India P. Ltd., vs. CIT, [2014] 369 ITR 1 (Delhi); and Indian Railway Stations Development Corporation Ltd., vs. Pr. Commissioner of Income Tax-IV, W.P.(C) No.6782/2018, dated 26.03.2019 (Delhi). 27.The lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30.Further, it is submitted that the TPO also has recorded that the assessee has not commenced commercial operation of manufacture and sale which was not rebutted by the assessee. It is further submitted that for setting up of the business, the basic requirement is to secure the land which itself was not done by the assessee and therefore, the order passed by the Tribunal is proper. To support her contention, the learned counsel relied on the decisions in CIT vs. Ramaraju Surgical Cotton Mills Ltd., [1967] 63 ITR 478 (SC); Addl. Commissioner of Income-tax vs. Speciality Paper Ltd., [1982] 133 ITR 879 (Gujarat)(App.); CIT vs. Instrumentation Ltd., [1993] 70 Taxman 18 (Raj.); CIT vs. Piem Hotel (P.) Ltd., [1994] 73 Taxman 295 (Bom.); and ALD Automotive (P.) Ltd., [2018] 91 taxmann. Com 475 (Bombay). 31.With the above submissions, the learned Senior Standing Counsel prayed for sustaining the order of the Tribunal. 32.Ms.R.Hemalatha, raised a preliminary objection with regard to the maintainability of the appeal. It is her submission that the assessee has filed a petition under Section 254(2) of the Act before the Tribunal seeking to rectify th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s incorporated to carry out composite business encompassing multiple lines of activity of which manufacturing of commercial vehicles was one line of activity and it is a matter of record that the assessee had already commenced bundle of activities in consonance with the objects specified in the Memorandum of Association. 37.With regard to the manufacturing activity, the CIT(A) found that it is part of the composite business activities of the assessee and this was not commenced, as the construction of the factory building, installation of plant and machinery was under progress. Further, the CIT(A) noted that the expenditure related to construction of the manufacturing facility was capitalised as part of the capital work in progress forming part of the audited accounts and no deprecation on the same was claimed during the year under consideration, but claim was made only for the assessment year 2013-14 on the amount capitalised. Further, the CIT(A) noted that the Assessing Officer in his order had accepted the computation of income under the head profits and gains of business except for the disallowance of expenditure under the aforementioned three heads. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tial questions of law are answered in favour of the assessee. 42.Next we move on to consider as to what would connote setting up of business and commencement of business under the provisions of the Act and the distinction between both. 43.In Western India Vegetable Products Ltd. (supra), it was pointed out that there is a clear distinction between a person commencing a business and a person setting up a business for the purposes of the Indian Income-tax Act (Act XI of 1922), the setting up of the business and not the commencement of the business is to be considered. It was held 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. Further, it was held that there may be an interval between the setting up of the business and the commencement of the business and all its expenses incurred during that interval would be permissible as deductions. In the said case, the company actually commenced business only on 1st November, 1946 when it purchased the groundnut oil mills, but prior to this date, there was a period when the business could be said to have been set up and the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected by the Assessing Officer on the ground that the assessee had begun receiving the satellite signals only in the month of February, 1995 and further installation was completed only on 05.03.1995 and it can be said that the business of the assessee had been set up only in March, 1995 and not earlier. Dismissing the appeal of the Revenue, the Court held that the business of an assessee involved different activities in which the first step was to purchase the equipments for which purchase order was placed in July, 1995, application to DoT for licence was made and the signals were received after the equipment was installed in the premises of the customer and in such circumstances, the business of the assessee was held to have been set up in July, 1994 when they placed the purchase order for the equipments and expenses would be deductible as revenue expenses. 47.In Omniglobe Information Tech India P. Ltd. (supra), it was held that the assessee's business was set up when they acquired necessary infrastructure from its sister concern and also started making payment of salary and wages and giving training by professional experts under the supervision and con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 13.04.1981 and in such scenario, the Income-tax Officer disallowed the expenditure incurred for the period prior to October 1, 1981, on the ground that during that period, the permission of the Reserve Bank of India was not in force. The Court held that the assessee had, in fact, commenced operations on April, 13 1981 and incurred expenditure and the expenditure so incurred was pursuant to the letter of intent granted to it by Neyveli Lignite Corporation and the assessee is, therefore, entitled to regard the expenditure so incurred, as the expenditure incurred by its during the previous year relevant to the assessment year 1981-82. 51.In Club Resorts P. Ltd. (supra), the assessee was in the business of promoting time share units at places of tourist interest. The question was whether the expenditure incurred on maintenance of staff, etc., could be treated as a business expenditure. The Court affirmed the view of the Tribunal and held that there are various stages; the first of which being to set up one or more operating offices from which sales personnel were to be sent to solicit customers which were already started by the assessee; and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. (supra), the relief was denied to the assessee company, as they were holding trial production and having their plant and machinery being tested to ascertain the quantity and quality of the production so satisfactory. This was held to not satisfy the test that the assessee was ready to go in the business of production. In any event, the decision is clearly distinguishable on facts. 56.In Instrumentation Ltd. (supra), the assessee was denied relief, as the assessee failed to prove that the expenditure incurred was directly related to the orders booked for the new unit as alleged before the Tribunal. 57.Similarly, the decision in ALD Automotive (P.) Ltd. (supra), was also a case where the assessee failed to produce necessary evidence in support of his claim that business was set up and it was ready to commence. 58.Therefore, the decisions cited by the Revenue are clearly distinguishable on facts and does not assist the case of the Revenue. 59.Earlier, while approving the findings of the CIT(A), we held that the assessee is in a composite business or in other words, it has a bucket of business activities, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Produce Exchange Corporation Ltd. (supra), the Hon'ble Supreme court applied the test laid down in Prithvi Insurance Co. Ltd. (supra) and held that in the said case there was a common management and other lines of businesses, unity of trading organisation, common employees, common administration, a common fund and a common place of business. 63.In Veecumsees (supra), the Court found that the business carried on by the assessee as jeweller and in running the cinema theatre, etc., was composite. 64.In Monnet Industries Ltd., (Delhi), the assessee was granted relief by taking note of the fact that there was a common board of Directors controlling both the plants, viz., Ferro-alloys Manufacturing Plant and Sugar Plant. Funds of the two plants were common. There was intermingling and interlacing of funds even though the two plants were geographically located at different sites, yet marketing of final products was carried out under the supervision and control of same set of executives at head office. The finding of the Tribunal, which held that sugar plant was a mere extension of existing business of ferro-alloys plant and therefore, i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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