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2006 (5) TMI 131 - AT - Income TaxClaimed an expenditure u/s 37 - Business of setting up satellite business communication systems - Expenses incurred in the previous year during interregnum after the setting up of the business and before the commencement of business, all expenses would be permissible deduction - HELD THAT:- From the facts, it becomes clear that VSAT equipment is necessary for the purpose of carrying out the business of the assessee, which was to set up satellite based business communication system. The fact that this system cannot become operational without getting a licence from the DoT cannot lead to a conclusion that it is only on obtaining the licence from the DoT that it can be said that the business of the assessee has been set up. As already noticed, even the first step, namely, purchase of VSAT is an activity, which is necessary before the assessee could render the service of providing satellite based business communication system to its customers. The Hon'ble Gujarat High Court in the case of CIT vs. Saurashtra Cement & Chemical Industries Ltd.[1972 (8) TMI 19 - GUJARAT HIGH COURT] was dealing with the case of the business of manufacture and sale of cement for which the raw material was limestone. The activity of extracting limestone was held by the Hon'ble High Court to be the point of time when the business was set up by the assessee. In the present case we further notice, that as early as on 3rd May, 1994 the draft licence agreement was forwarded by the DoT to the assessee. Even ignoring this, the purchase order placed by the assessee for acquiring VSAT from M/s Hughes Network Systems, USA, could be said to be the point of time on which the business of the assessee had been set up or had commenced, for the use of this equipment was necessary for the assessee's business. In our view, the CIT(A) ought to have held that the date of set up of the business was 28th July, 1994. The first purchase order placed by the assessee on 6th Oct., 1994, in our view, is not the date on which it could be said that the business of the assessee was set up. We, therefore, direct that the revenue expenses incurred on or after 28th July, 1994 be allowed as a deduction. Ground Nos. 1 and 1.1 of the appeal of the assessee are allowed while ground Nos. 1 and 2 of the Revenue, are dismissed. Disallowance of expenditure on entertainment -1/3rd of the expenditure on entertainment as attributable towards employees' participation - HELD THAT:- Considering the ratio laid down by the Hon'ble Delhi High Court in the case of CIT vs. Expo Machinery Ltd. [1991 (4) TMI 120 - DELHI HIGH COURT], we are of the view that the claim of the assessee that 1/3rd of the entertainment expenses has to be attributed towards employees participation is just and fair and deserves to be allowed. We accordingly direct the AO to consider 1/3rd of the entertainment expenses as attributable towards employees' participation and not disallowable u/s 37(2) of the Act. This ground of appeal of the assessee is allowed. In the result, the appeal by the assessee, is allowed. In the result, the appeal by the assessee is allowed and the appeal by the Revenue, is dismissed.
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