TMI Blog2014 (9) TMI 793X X X X Extracts X X X X X X X X Extracts X X X X ..... l, identifying the prospective manufacturers, clients etc. obtaining storage facilities followed by stock-in-trade, the business of trading cannot commence. The Tribunal missed the point that the assessee as a prudent trader could not have made purchases without undertaking the aforesaid exercise - The exercise was a precursor to commencement but post set up – reling upon COMMISSIONER OF INCOME-TAX Versus ESPN SOFTWARE INDIA P. LTD. [2008 (3) TMI 90 - DELHI HIGH COURT] – the activities demonstrate setting up of the business by the assessee with a commitment to commence the business - nothing barred or prevented the appellant from making first purchase, after necessary legal approvals, but the fact that the appellant wanted to commence actual trading after negotiations with several parties, would not postpone the date when the business was set up - the orders of the authorities below do not indicate that it was the case of the revenue that the assessee has claimed deduction of expenditure, prior to the setting up of business – Decided in favour of assessee. - ITA No. 42/2014 - - - Dated:- 22-9-2014 - Sanjiv Khanna And V. Kameswar Rao,JJ. For the Petitioner : Mr. Ajay Voh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the trader, when the stocks are available to be sold. In paras 3.1 to 3.3 and 3.5 to 3.7 of the Assessment Order, the following was his conclusion: 3.1 I have carefully considered the reply submitted by the assessee. Expenditure incurred in respect of any business is deductible from the date of commencement of business but only where it has been set up. The result is that there is plethora of cases on the difference as between the concept of commencement of a business and setting up of a business Expenditure incurred prior to the setting up of a business is not allowed as deduction. Pre-commencement expenditure may well be a dead loss unless it could be treated as cost of capital assets so as to be entitled for depreciation. 3.2 Since section 28 to 43D relate to computation of business income, which is carried on by the assessee, it follows that the expenses during the pre-commencement period will not be deductable. Similarly loss incurred during the period cannot also be treated as business loss. It cannot, therefore, be carried forward. It has been so held in Liquidators of Pursa Ltd. V CIT [1954] 25 ITR 265 (SC) to the extent to which such expense could be capitalize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itions for setting up of business or for the commencement of business in India. It is further noticed that the appellant company has not established any store from where sale/ purchase or trading of goods could take place. Similarly no warehouse/go down was established during the relevant previous year from where the intended goods for trading could be stored. No vehicle/ transport arrangement was made by the appellant company for the transportation/ delivery/ supply/ distribution of goods. No expenditure was found to be incurred on advertisement/publicity of the new business of the appellant company. It is also noticed that most of the key employees were appointed by the appellant company vide the letters of appointment issued on 1.1.2008. These key employees have given their acceptance for appointment after the end of the relevant previous year. Or reference, the names, designation, date of issue appointment letter and the letter of acceptance by these employees are given below:- Name of the employee Post Date of issue of appointment letter Date of acceptance of Eric Bouin Direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is a distinction between setting up of business and commencement of business. When a business is established and is ready to commence business, it can be said of that business that is set up. But before, it is ready to commence business, it is not set up. Further in the case of CIT vs Saurashtra Cement and Chemical Industries Ltd. (91 ITR 170) it was held that the word set up is equivalent to the word establishment , but operation for establishment cannot be equated with the establishment of the unit itself or its setting up. In another case namely, CWT vs Ramraju Surgical Cotton Mills Ltd. (63 ITR 478) it was held that a unit cannot be said to have been set up unless it is ready to discharge the function for which it has been set up. It is only when the unit has been put into such a shape that it can start functioning as a business or as a manufacturing organisation that it can be said that the unit has been set up. Operations for the establishments of a unit from the very nature of expression can only signify step that have to be taken to establish the unit. In the present case it is found that only preliminary enquiries were conducted for the purchase of goods and the purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid to have been set up during the relevant previous year. 6. According to learned counsel for the appellant, since incorporation, the appellant company had been undertaking activities relating to planning, meeting with prospective suppliers, marketing/business development in India etc. and for this purpose, the appellant company set up an office and facilities, hired the professional employees and directors, initiated negotiations with suppliers for supply of products etc. During the relevant previous year, the appellant company acquired the leased office premises with effect from October 01, 2007. The appellant company also opened its bank account on October 04, 2007 and incurred routine business expenses such as legal and professional charges, travel and conveyance, meeting and conference, salary and wages etc. During the subject assessment year, the appellant also employed key employees such as IT director, FMCG-director, Merchandise Director, Finance Director, Accountants, other supporting staff etc. capable of rendering business development, marketing and financial support activities in relation to the products proposed to be traded by the appellant company. During the sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on trading activities on wholesale basis in all kinds of consumer goods, durables, articles and products. In terms of the Memorandum of Association, the business of the assessee is of trading on a large scale for which the assessee requires a warehouse to store the commodities. In the absence of such a facility, it cannot be said that the assessee had set up a business as is the requirement of proviso to Section 3 of the Act. According to him, except the correspondence with various potential suppliers, the assessee has not been able to show that the enquires had culminated in supply of material. Incorporation certificate of the company, employment of the personnel towards the end of the previous year were not the relevant considerations to show a set up of the business. 9. Having considered the rival submissions made by the learned counsel for the parties, the question which arises for consideration in the present appeal is as to when does the assessee is said to have set up its business? It has to be borne in mind that there is a distinction between setting up of a business and commencement of a business. The Bombay High Court in Western India Vegetables Products Ltd. vs. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness. All expenses incurred during that interval are also permissible for deduction. In CIT v. Sarabhai Management Corporation Ltd., [1991] 192 ITR 151 (SC) the decision of the Gujarat High Court was affirmed and went a step ahead that even the activities at a preparatory stage is also admissible. 11. On a reading of the above referred quotations, it is clear that it is only after the business is set up, that the expenses incurred in the business can be claimed as permissible deduction under Section 37 of the Act. For commencement of a business, there must be in place some income generating asset or income earning structure. In several cases, there is a gap or an interval between setting up and commencement. When the business is set up, is a mixed question of law and fact and depends upon the line, nature and character of the business/professional activity. For example, for manufacturing business, purchase of new material or electricity connection may be relevant point to determine setting up but in case of a property dealer, the moment, he puts up a chair and table, or starts talking, his business is set up. The present assessee was engaged and incorporated for carrying on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt case, we note that the assessee company was incorporated on September 19, 2007. Even before the incorporation, correspondence had been made with well known companies like Nestle, Cadbury, Nivea India Pvt. Ltd., Pepsi, Coalgate, Uniliver etc. It rented out the office premises in the month of October, 2007. Bank account was opened on October 04, 2007. Employees were also appointed during the said period. TDS deduction for the said employees was also placed on record. Registration under the Shops and Establishment Act was also effected. These activities are the first stage activities which would lay foundation for placing orders for procuring the stock and storing them in a warehouse/shop followed by the third stage of marketing them. Suffice to state for a foreign entity without establishing itself under the local laws, appointing personnel, identifying the prospective manufacturers, clients etc. obtaining storage facilities followed by stock-in-trade, the business of trading cannot commence. The Tribunal missed the point, that the assessee as a prudent trader could not have made purchases without undertaking the aforesaid exercise. The said exercise was a precursor to commencemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are incurred for the purpose of business or not and such expenses are of not capital in nature and are not expressly disallowable under the other provisions of the Act. The Tribunal had also taken into consideration the fact that the assessee company has achieved turnover of ₹ 4 Crores with the help of seven employees which clearly indicates that their efforts made in the year under consideration has shown fruitful result in the succeeding years. The Tribunal had also noted that the expenses have been incurred after setting up of the business. The expenses on staff salary paid by the appellant-assessee were substantial. For a trader, these expenses or deployment of employees at this scale was not necessarily in case business had not been set up. 14. In Commissioner of Income Tax vs. Sauer Danfoss (P) Ltd. [2012] 22 taxmann.com251 (Delhi), the Division Bench of this Court has held as under:- 3. There are four other issues raised in the present appeal. The first issue relates to the date on which the business of the respondent assessee was set up. The Assessing Officer has held that the business of the respondent assessee was set up on 1st June, 2001. The Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that where the assessee company has appointed branch manager and regional manager in 1995, paid salaries including PF contribution etc. beginning from November, 1995, its business can be said to be set up from 1.11.1995 i.e. the date on which the company was in a position to commence its business, and not on 1.2.1996 when its bank account was opened. The instant case before us is at a more sound footing where even a bank account was opened prior to 1.4.2001 and the assessee has claimed the expenditure only after it has set up its business which was ready for commencement. Merely because assessee entered into agreement with DHL on 21.5.2001 which was to be operative from 1.6.2001 date on which assessee took over the running business of DHL, it cannot be said that it has set up its business only on 1.6.2001 and not from 1.4.2001. Accordingly, we do not find any merit in the action of the lower authorities for not allowing the expenditure incurred after 1 st April, 2001. The AO is at a liberty to verify that the expenditure to be allowed should be restricted to revenue expenditure. We direct accordingly. 15. In Commissioner of Income Tax IV vs. Dhoomketu Builders Development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the learned standing counsel for the revenue that the tax auditors of the assessee have themselves pointed out that the assessee is yet to commence its business is also irrelevant because of the distinction between the commencement of the business and setting-up of the same. 16. This Court in Commissioner of Income Tax IV vs. Samsung India Electronics Ltd. [2013] 356 ITR 354 (Delhi) agreed with the findings of the Tribunal and dismissed the appeal filed by the Revenue. The relevant finding of the Tribunal is as under:- 6. In view of the above, the business of the assessee could be said to have been set up on September 3, 1995, as prior to this necessary agreements had been entered into, key personnel had been recruited and the assessee-company had started working necessary infrastructure like office premises, office equipment, etc. and the assessee company was ready to commence trading operation as on the date of incorporation, viz., August 3, 1995. Accordingly, the Assessing Officer is directed allow the revenue expenditure incurred after the setting up of business which was September 3, 1995, notwithstanding the fact that commercial operations started with effect from ..... X X X X Extracts X X X X X X X X Extracts X X X X
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