TMI Blog2007 (7) TMI 432X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome for assessment year 2000-01 declaring loss of Rs. 5,20,22,092 and a loss of Rs. 5,31,22,080 in assessment year 1999-2000. The assessee company is engaged in the business of the primary purpose grass roots exploration programme as laid down in the memorandum of understanding signed on 26-10-1994 between the assessee, BHPM HZL. As per the MOU, purpose of the work was studying and identifying the potential deposits of commercially viable minerals like lead, zinc, copper, gold and associated minerals within the prospective geological terrains of Rajasthan. After considering the various clauses of the MOU and after studying the activities taken by the assessee-company, the Assessing Officer reached the conclusion that the work done was in the nature of pre-feasibility studies and so after considering the various clauses of MOU executed between the assessee and HZL, the Assessing Officer held that from the scope of the project and profile of the transactions, the expenses were not allowable as business expenditure because the same could be only considered as pre-commencement expenses. Thereafter, he disallowed the loss claimed by the assessee in both the assessment years 1999-200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actual business. But once the results are positive, the entire operation begins and the accounts of the pre-commencement period will merge with the subsequent periods. I also have no doubt that the business in this case had been set up at least when the Reserve Bank of India had granted permission to allow setting up of a Project Office in 1997, if not in 1994 when the agreement was entered into with Hindustan Zinc Ltd. The question thus is of allowing the expenditure incurred in the period between these two landmarks. In view of the cases cited and the peculiar nature of the appellant s business, I am of the view that the expenses are allowable, even if it is pre-commencement expenditure . It is also being kept in mind that this is the third year of the business being set up, and in the earlier assessment years, the department has accepted the returns, thereby allowing the claim of expenditure and losses returned in the assessment years 1997-98 and 1998-99. There does not appear to be any justification for disallowing the same in this year, and the addition on account of the same is therefore deleted and the loss returned is directed to be carried forward." 6. Before us, le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n was only applicable to the Indian Companies. Secondly, expenditure which was to be amortized by Indian Company was also to be specified. 7. On the other hand, learned DR for the revenue submitted that in the instant case, the facts of this case require to be examined very carefully because there is a Memorandum of Understanding between the two parties which also does not create any legal obligations upon the assessee towards HZL. Presently, there was no joint venture company of the assessee as the entire project has been abandoned by the assessee because the project undertaken by the assessee was not viable. In the instant case, even if section 35(E) of the Act is not strictly applicable to the assessee-company because it is a foreign company, still the allowability of the expenditure under section 37 of the Act could be considered only when the project was set up and ready to commence production. He further contended that these expenditures incurred by the assessee were merely pre-commencement expenditure, so, the same were capital in nature and cannot be allowed to the assessee as business expenditure. In support thereof, he relied upon the decision of Delhi High Court in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it can be said to be set up. The business must be put into such a shape that it can start functioning as a business. In order to see what constituted the business of the assessee we have to look into each and every activity of the assessee which is essential for the purpose of carrying on the business of the assessee and we have to also look as to which activity of the assessee is integral part of the business of the assessee so that we can arrive at a conclusion that in view of that activity the assessee could be said to have commenced its business. A business 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 business has been put to such a shape that it can start functioning as a business that it can be said that the business has been set up. Hence it can be summarized that there is a clear distinction between commencing of a business and setting up of business and for the purposes of section 37(1) of Income-tax Act, 1961 the setting up of business and not the commencement of business is to be considered. It is only after the business is set up that the previous year of the business commences and any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporation and not from October, 1981 when it opened its site office, is of no assistance to the assessee because in that case the issue before the Hon ble High Court was whether the assessee had commenced its business in India from 13-4-1981, when it secured and accepted the letter, or from the date 1-10-1981, when the assessee opened its site office, because the commencement of business or setting up of business was not an issue to be considered by the Hon ble High Court. Whereas in the decision of jurisdictional High Court of Delhi in the case of Triveni Engineering Works Ltd. ( supra ) their Lordships while considering the nature of expenditure incurred on the preparation of project reports being capital or revenue clearly laid down that the test to discriminate between a capital and a revenue expenditure is not straight. An item of expenditure though incurred wholly and exclusively for the purpose of the business may nevertheless be inadmissible as an allowance, if it is of a capital nature. The border line between a capital expenditure and a revenue expenditure is a blurred one. Different minds may come to different conclusions and may yet have valid reasons justifying each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue expenditure and the same has been rightly disallowed by the Assessing Officer and sustained by the CIT(A) for assessment year 2000-01 and wrongly deleted by the CIT(A) in assessment year 1999-2000. Accordingly, the order of CIT(A) for assessment year 2000-01 is upheld and the order of CIT(A) for assessment year 1999-2000 is set aside for the reasons mentioned hereinabove. 14. Before parting we may mention that section 35E has been wrongly applied by the CIT(A) in assessment year 2000-01 in the instant case of the assessee because this section only applies to Indian companies, whereas, admittedly, the assessee-company in appeal is a foreign company to which the section has no application. Even during the course of the arguments the ld. DR for the revenue conceded on this point. Hence, though the section 35E is not applicable in the case of the assessee for considering the claim of the impugned expenditure by the assessee but for the detailed reasoning given in our order hereinabove, we reiterate that for assessment years 2000-01 and 1999-2000 the assessee is not entitled to claim the deduction for the impugned expenditure incurred for the completion of the project report. Co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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