TMI Blog2011 (7) TMI 579X X X X Extracts X X X X X X X X Extracts X X X X ..... ommence on the day when the assessee got provisional registration from the National Stock Exchange. Therefore the expenses incurred on or after 6-12-2004 are permissible for deduction as business expenses and in order to allow these expenses as admissible deduction, it is not necessary that the assessee should have earned some income out of such activity or all the three stages should have been completed. It is enough that the first stage of the business had started in order to claim the business expenses as admissible deduction - direct the AO to quantify the amount of expenses and allow after examining and verifying the genuineness of the expenses and their admissibility under the provisions of Income-tax Act - partly in favour of assessee. - IT APPEAL NO. 913 (DELHI) OF 2011 - - - Dated:- 22-7-2011 - C.L. SETHI, K.G. BANSAL, JJ. S.M. Mathur for the Appellant. ORDER C.L. Sethi, Judicial Member. The assessee is in appeal against the order dated 22-12-2010 of the learned Commissioner of Income-tax (Appeals) passed in the matter of an assessment made by the Assessing Officer under section 143(3) of the Income-tax Act, 1961 (the Act), for the assessment year 2005 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stepping stones towards the setting up of the business. The Assessing Officer's observations in this regard are as under : "4. The submissions made by the assessee have been duly considered and found unacceptable. As per the provisions of the Act, business expenses can be allowed only if any business activity is carried out by the assessee. In the instant case, the perusal of the P L A/c reveals that no business activity as such has been carried out by the assessee. The securing of membership of the NSE and payment of required deposits and fee can only be termed as the stepping-stones towards the setting up of the business. Without securing the membership of the relevant stock exchange, the business activities of the assessee can in any case not commence. The claim of expenses under section 37(1) of the Income-tax Act, 1961 can only be allowed if the expenses have been laid out or expended wholly and exclusively for the purpose of business or profession carried during the year. Mere incorporation of the company cannot be said to be the commencement of business. Further, merely by acquiring the membership of the stock exchange, the assessee cannot say that its business has commen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that since the assessee company was incorporated as a private limited company being duly approved by the Registrar of Companies on 6-9-2004, the assessee company had been set up on 6-9-2004 itself. He further submitted that the assessee had applied on 12-10-2004 for getting trading membership of both capital market and futures and options segments with National Stock Exchange which was granted on 27-2-2005 by National Stock Exchange. He further pointed out that the company had also simultaneously applied for SEBI registration which was also granted to the assessee company on 18-5-2005. In the light of these facts, he submitted that the business of the assessee company had actually been set up on 6-12-2004 when it was incorporated as private limited and the first business activity of the assessee company had commenced when it had applied for registration with National Stock Exchange on 12-10-2004. He, therefore, submitted that all the expenditure incurred by the assessee on or after 6-9-2004, for the purpose of business are allowable expenses under section 37(1) of the Act. The learned counsel for the assessee has relied upon various decisions, which shall be discussed by us her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ket segment and the futures and options segment soon after the assessee made the necessary payments and all other relevant payments to National Stock Exchange. It was also stated that the assessee shall be enable on the NEAT system and allowed trade in the respective segment only after receipt of certificate from SEBI and installation of the connectivity system. The assessee was also asked to fulfil all the conditions that may be stipulated by the SEBI for enablement on the trading system of the respective segments etc. The amount stated in the demand advice raised by the National Stock Exchange was required to be paid on or before 24-3-2005. The assessee was also admitted as a clearing member on the capital market segment as on 16-12-2004 on provisional basis subject to fulfilment of certain conditions on or before 24-3-2005, vide letter dated 24-12-2004 of National Securities Clearing Corporation Ltd. 12. The assessee vide letter dated 28-2-2005 intimated the National Stock Exchange of India Ltd. that the various conditions mentioned in the registration letter on provisional basis have been complied with and necessary documents in support thereof were furnished. Thereafter, Nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period from November 1995 to January, 1996, the assessee paid salary to the staff and employees through two companies. A bank account was opened on 1-2-1996, in the name of the company and thereafter the expenses were incurred from the same. In the return, the assessee claimed that the business had been set up with effect from 1-11-1995. However, the Assessing Officer took the view that the business could be set to have been set up only on 1-2-1996 when the bank account was opened in the assessee's name and therefore, only the expenditure incurred thereafter could be allowed as a deduction. The Assessing Officer's view was confirmed by the learned CIT(A). The Tribunal held that the expression "setting up of the business in the previous year" as per section 3 of the Income-tax Act, 1961, was different from commencement of the business, and in the case of a company engaged in rendering financial services, it was possible to say that the business was set up when the directors were appointed, such as regional and branch managers were appointed, and their salaries were paid, computers were acquired and installed and the company was ready to commence business. The Tribunal further held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of Telecommunications. In the light of these facts, it was held that the business was set up when the order for purchase of VSAT equipment was placed and the application to the Department of Telecommunication for licence and receipt of satellite signals were the consequent stages. 18. In view of these aforesaid decisions, it is thus clear that the expenses incurred by the assessee after setting up of the business can be said to be incurred under the normal circumstances of the business activity. 19. The Hon'ble Delhi High Court in the case of Hughes Escorts Communications (supra) has considered the decision of Hon'ble Bombay High Court in the case of Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151, where the Hon'ble Bombay High Court has explained the distinction between the concepts of commencement and setting up of a business by holding as under : "It seems to us, that the expression 'setting up' means, as is defined in the Oxford English Dictionary, 'to place on foot' or 'to establish', and in contradiction to 'commence'. The distinction is this that when a business is established and is ready to commence business then it can be said of that business t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be said to be the first stage relating to the activity of acting as trading members and clearing members of the wholesale debt market, capital market and futures and options segments of any stock exchange. The criteria laid down by the Hon'ble Gujarat High Court in the case of Saurashtra Cement Chemical Inds. Ltd. (supra) and in the case of Sarabhai Management Corpn. Ltd. (supra) does not support this contention of the assessee that the assessee's business had actually been set up merely for the reason that the assessee company was registered as a private limited company under the Companies Act. It is not in dispute that the assessee made application for registration before the National Stock Exchange of India Ltd., for trading membership of capital and future options segments on 15-10-2004 by paying application fee of Rs. 10,000 vide demand draft dated 12-10-2004 payable at Mumbai. In order to commence the business of acting as trading membership of capital market and futures options segments, it was necessary on the part of the assessee to get requisite registration from the Stock Exchange. The assessee's application for registration was allowed on provisional basis on and from ..... X X X X Extracts X X X X X X X X Extracts X X X X
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