TMI Blog2022 (1) TMI 145X X X X Extracts X X X X X X X X Extracts X X X X ..... ll or any of such things or a combination thereof and to act as broker, auctioneer, importer, exporter, distributor, agent, wholesaler, merchant, goldsmith, silversmith, jewellers, manufacturer, polishers, processors in relation to all or any of the above and to take up all such incidental acts and things necessary for attainment of the above objects. In pursuance of its object, the assessee incurred various expenses. We find that nature of expenses was not examined. The AO, disallowed the expenses by taking view that business of assessee was not setup during the year under consideration. CIT(A) confirmed the action of AO on similar lines. CIT(A) also confirmed the disallowance of additional ground that the expenses were incurred by assessee for illegal business. We may note that we have already held that invocation of explanation to section 37 is uncalled for as the assessee has not made any expenses for purchase of diamonds rather entire expenses are in the nature of preoperative business expenses. The various expenses incurred by the assessee are not at all prohibited by law. All expenses were incurred in anticipation of business. It is a settled law that the AO cannot sit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... findings of the AO on whether the business was set up during the year under consideration. 2. The learned CIT(A) has erred both in law and on the facts of the case in confirming the action of learned AO but by taking a completely different view of the facts and holding that the business was set up but the business expenditures incurred by the appellant were for a Illegal Business. 3. Without prejudice to the above, the benefit of netting off of interest income against interest or other expenditure ought to have been granted. 4. Both the lower authorities have passed the orders without properly appreciating the fact and that they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed. 5. The learned CIT(A) has erred in law and on facts of the case in confirming action of the ld. AO in levying interest u/s 234A/B/C/D of the Act. 6. The learned CIT(A) has erred in law and on facts of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come Tax Act. 4. The AO recorded that in response to the show cause notice, against proposing various disallowance, the assessee requested for making a reference under section 144A of the Act to Additional Commissioner of Income- tax (Range Head). The Addl.CIT vide his order dated 27.03.2014, disposed off the application of assessee and no relief was given to the assessee. The relevant part of order of Addl.CIT is extracted on page 5 of the assessment order. The AO on receipt of direction of Addl.CIT, Range-4, examined the activities of assessee undertaken from 30.09.2010 till 31.03.2011 as recorded on page no.10 to 15 of the assessment order. On the basis of observation of all the activities allegedly undertaken by the assessee, the AO was of the view that business of assessee was not setup during the Financial Year 2010-11, therefore, the expenses debited to Profit and Loss Account including Depreciation cannot be allowed as deduction for the year under consideration. The AO accordingly disallowed the entire expenses of ₹ 1.03 crore. 5. Aggrieved by the additions, the assessee filed an appeal before the ld.CIT(A). Before the ld.CIT(A), the assessee filed detailed writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s from Harare since International Airlines and insurers under United State and European Union pressure, refused to carry and insure the goods. The goods kept lying in Harare in safety vault and deemed custody of C.D. Jewels and assessee. The goods finally arrived in Dubai on 20.11.2011 and reached in India in end November 2011. All the aforesaid imports were duly accompanied and supported by relevant legal documents, such as bill of entry, K.P. Certificate, Invoices etc. 7. The assessee further explained that at the time of execution of agreement, there was no ban of sourcing of rough diamonds from Zimbabwe. Even the article news print dated 15.10.2010 takes note of this fact. This article states that all the Kimberly Process (KP) approved the sale of portion of Marange goods in August and September, which of which went to Indian Buyer. However, further sales have been withheld pending K.P. review machine reported to be discussed at the organisations plenary, to be held in Jerusalem during November. Further, the notifications/circular issued by Ministry of Finance during the relevant period clearly stated that import of K.P. Certificate Zimbabwe rough diamonds were legally very ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee was asked the status of DRI case. The assessee submitted that goods were released after obtaining indemnity bond for the value of ₹ 5.00 crore and the case is still under the investigation. As per the Panchnama draft by DRI 30.11.2011, the diamonds were seized as exact mining area in Zimbabwe could not be ascertained, nor any proof could be submitted. The contention of assessee that DRI has released its consignments as it was found to be explained, is misplaced and devoid of facts. The seized stock has been released against the bank guarantee and case of DRI is under progress. The ld.CIT(A) further held that the claim of assessee company about starting of business activity and making advance payments to C.D. Jewels in February, 2011 to show that assessee has started his business is not supported with proper documentation and evidence. During the Financial year 2010-11, relevant to the current Assessment Year, Zimbabwe diamonds were under UNA embargo. During this period, the assessee claimed that it has brought Zimbabwe Diamond through C.D. Jewels through its subsidiaries SRDSILF ZE for US 15millions amounts to illegal business transaction. 9. The ld CIT(A) furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal Law was applicable to India as well. Dubai was one of the major centres for trading rough diamond and was the first country to allow dealings with Zimbabwe, hence, the assessee open wholly owned subsidiary namely SRDSIL FZE in United Arab Emirates (UAE). The assessee advanced loan to its UAE subsidiaries out of funds lying in its bank account in accordance of the procedure prescribed by RBI as is evident from the bank statement of assessee. Copy of which is placed at page no.78 of paper book. The assessee s subsidiary in turn placed an order for purchase of diamonds from C. D. Jewels and also made payment against the same have been received from the assessee. The ledger account of C. D. Jewels and bank statement of assessee s subsidiary and annual account of assessee s subsidiary in Dubai is placed on record. C. D. Jewels, in turn procured diamonds from MBABDA Diamonds Private Limited through Mineral Metal Trading Corporation of Zimbabwe. Copy of invoices of MBABDA is also placed on record. Ultimately, such diamonds purchased by C. D. Jewels was received by assessee s subsidiary in Dubai and in turn the same was imported by assessee in Nov, 2011 i.e. immediately succeeding yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, the ld. Senior Counsel for the assessee relied upon the decision of Hon ble Apex Court on S. A. Builders 288 ITR 1 (SC). The ld. Senior Counsel further submits that ld.CIT(A) erroneously held that expenses were incurred by the assessee for an illegal business particularly in view of ban on sale of rough diamonds from Zimbabwe imposed by UNA under Kimberly Process. The learned Senior Counsel submits that it is an undisputed fact that during the year under consideration, the assessee has not purchased any diamonds worth a single rupee. The expenses claimed by assessee were on account of administrative expenses, preliminary and pre-operative expenses, written off, financial expenses and depreciation. The expenses such as organising Gala dinners for Zimbabwe Authorities and others giving Gifts etc., have been incurred broadly for developing relation with person in Zimbabwe anticipating that the same would bring business to assessee in future, such activities are neither an offence, nor prohibited by law, hence, the explanation under section 37 cannot be invoked in case of assessee to disallow expenses for such activities. There is no prohibition on inviting foreign guests, organisin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice completing only on 08.02.2011 and the staff was deputed at the end of relevant assessment year. The AO clearly held that opening of bank account making same correspondence with bank and MBADA Diamond Private Limited of Zimbabwe was not sufficient for claiming exorbitant expenses. 17. We have considered the rival submission of both the parties and have gone through the orders of Lower Authorities carefully. The short controversy for our adjudication is whether the assessee is entitled for pre-operative administrative expenses, preliminary expenses, financial expenses and depreciation or not. It is an undisputed fact that during the period under consideration, the assessee has not imported a single piece of diamond, nor made any payment thereof, therefore, the invocation of explanation to section 37 by ld. CIT(A) is uncalled for. The assessee has placed on record the copy of Memorandum of Association (MOA) of Assessee Company. The assessee is a Special Purpose Vehicle company formed and registered in India as a Public Limited Company, engage in business of sourcing of rough diamonds globally. The assessee is to carry out its business as per MOA, for procuring, cleaving, sawing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gress. The Hon ble High Court while referring its earlier decision in CIT Vs Sarabhai Sons (P.) Ltd., [1973] 90 ITR 318, (Guj); and in CIT Vs Saurashtra Cement and Chemicals Industry [91 ITR 170 (Guj)] held that when business can be said to have been setup, the Court observed that when each one of the activities essential and vital and combined together constitute business of the assessee and things being a continuous process, all activities which go to make a business need not be started simultaneously of entire term business without proceeding other activities, no fault can be found. On the finding of the Tribunal, it held the businesses have to be setup without same being commenced and ultimately dismissed the appeal of the Revenue. 20. At the cost of repetition that the quantum of expenses has not been examined nor been disputed nor the legitimacy of the expenses were disputed. The assessee has incurred expenses for the purpose of business. Thus, in view of the aforesaid factual and legal discussion, we are of the view that the disallowance of expenses of ₹ 1.03 Crore incurred by assessee on various preoperative expenses is not justified. Hence, we direct the AO to all ..... X X X X Extracts X X X X X X X X Extracts X X X X
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