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Samsara Hospitality Pvt. Ltd. Versus ITO-1 (3) (2) , Mumbai

2017 (8) TMI 481 - ITAT MUMBAI

Disallowance of expenditure - business setting up in the year under consideration or not - proof of commencement of business - accrual or receipt of income - Held that:- AO and the FAA had taken note of expenditure incurred only they had dealt with the concept of setting up of business and commencement of business. We find that after getting approval from FIPB the assessee had made downstream investments of ₹ 22.3 crores in a Bangalore based Hospitality Venture, that for acquisition of a p .....

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and the FAA have held that expenses incurred were pre-operative period. Besides, the assessee is a company and it has to incur certain expenses for functioning of corporate entity. Thus the assessee had set up the business and that expenditure incurred by it has to be allowed as business expenditure – except for the expenditure incurred on account of ROC charges for increase in authorised capital. In its letter to the AO, dtd. 28.11.2011, the assessee had agreed that it had no objection if the .....

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jects. It had never applied to RBI for getting a certificate of registra-tion as NBFC. Just because it sold some debentures it cannot be treated an NBFC or an investment company. In our opinion, activity of receiving interest income or receiving some profit on redemption of short term mutual fund investment was not in nature of business. Income arising out of above two activities cannot be termed business income and that the revenue authorities have rightly taxed it under the head income from ot .....

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he Revenue : Shri Rajesh Ojha DR For The Assessee : Shri Rituraj Gujar Order u/s. 254(1) of the Income- tax Act, 1961 (Act) PER RAJENDRA, AM Challenging the orders, dated 28.03.2014, of the CIT(A)-2, Mumbai the Assessee has filed the present appeal. Assessee-company is in the business of setting up of new hotels, investment in hotel project and derives income comprising of interest income on debentures and gain on redemption of short term mutual fund investment. It filed its return of income on .....

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sessee had earned interest income on debentures and had earned profit on sale of mutual fund units aggregating to ₹ 31.36 lakhs. He held that income earned by the assessee on account of interest and from sale of units of mutual fund was to be assessed under the head other sources. He further found that it had claimed expenditure of ₹ 27.46 lakhs against the said income. The AO was of the opinion that all the items of expenditure were of capital nature and included preliminary expendi .....

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ities, that the expenditure incurred by it indicated that they were pre-operative and preliminary in nature, that the expenses had been incurred prior to commencement of business, that expenditure could not be treated as revenue expenditure, that same could not be set off against income earned under the head other sources, that the assessee had made alternate contention before the AO that certain preliminary expenses such as expenditure pertaining to ROC fee was allowable under section 35D of th .....

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commencement of operations. With regard to other expenses like miscellaneous expenses, he held that same were not attributable to earning of income u/s. 56 of the Act, that the expenditure incurred by the assessee were in the nature of pre-operative expenditure and not allowable. He, finally, upheld the disallowance made by the AO. 4. During the course of hearing before us, the Authorised Representative (AR) argued that the assessee was in the business of hotels, that it was incorporated in the .....

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sing out of other sources, that the principles of netting had to be applied. He referred to para 4.15 of the statement of facts and stated that assessee had made an alternate claim before the FAA. He referred to the case of M/s. Multi Act Reality Enterprises Pvt. Ltd. (ITA/7274/Mum/2011, AY.2008-09 dtd.28/08/2015) Preimus Investment & Finance Ltd. (171 TTJ 794). The DR stated that business had not started, the expenses incurred by assessee were of capital nature, that the object of the asses .....

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commencement of a business has been deliberated by the Hon'ble Courts of more than one occasions. In the case of Sponge Iron India Ltd. the Hon'ble Andhra Pradesh High Court (201 ITR 770) has held as under: The following are the principles applicable to determine whether a business has commenced: (i) whether a business has been commenced or not is a question of fact. However, what activities constitute commencement of business is a mixed question of law and fact and it has to be decided .....

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d to have commenced. The following are the principles applicable to determine whether a business has commenced: (i) whether a business has been commenced or not is a question of fact. However, what activities constitute commencement of business is a mixed question of law and fact and it has to be decided on the facts of each case; (ii) there is a distinction between setting up of business and commencement of business. A business is said to be set up when it is ready to commence; (iii) where the .....

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uestion arises as to whether a particular business can be said to have been set up in the relevant assessment year, that question will have to be determined on the facts and circumstances appearing in each case. When a business is established and is ready to commence business, then it can be said of that business that it is set up. In the case of a manufacturing company, the installation and erection of machinery is not sufficient by itself and till some end product is or can be obtained, it can .....

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e when it purchased the groundnut oil mill. The FAA held that the expenses incurred after getting the certificate of commencement of the business should be treated as expenses incurred for the purposes of carrying on the business in the year of account. The Tribunal, taking into consideration the date of first purchase of raw materials and the details of the expenses incurred by the company, came to the conclusion that all expenses incurred after 01.09.1946, should be allowed. Deciding the matte .....

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duction. When a business is established and is ready to commence business then it can be said of that business that it is set up; but before it is ready to commence business it is not set up. There may however be an interval between the setting up of the business and the commencement of the business and all expenses incurred during that interval would be permissible deductions……that the company actually commenced business only on 1st November, 1946, when it purchased the groundnut .....

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t rented out office premises in the month of October, 2007. A bank account was opened on 4/10/2007. Employees were also appointed during that period. Tax deduction at source for the employees was also placed on record. Registration under the Shops and Establishments Act was also effected. Deciding the matter, the Hon ble Delhi High Court held that these activities were the first stage activities which would lay the foundation for placing orders for procuring the stock and storing them in a wareh .....

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ess. We would also like to refer to the case of Omni Globe Information (369 ITR 1)of the Hon ble Delhi High Court. In that matter the assessee was incorporated on 19.03.2004, as a subsidiary as a business process service provider. It entered into an agreement with its sister concern, to use its premises between 8 p.m. and 8 a. m. between 1.04.2004 and 30.06. 2004. Sister concern was paid on pro rata basis for water, electricity, energy and power consumption charges. Further, the assessee had to .....

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e had commenced its operations only from 1.06.2004, i.e., the date on which the assessee entered into the service agreement with its parent company. On appeal the Hon ble High Court held that the business of the assessee had been set up on 1.04.2004, as the assessee had acquired the necessary infrastructure from its sister concern, A, and had also started making payment of salary and wages, that training was given by professional experts under the supervision and control of the assessee, that th .....

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up. But before it is ready to commence business it is not set up. But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deductions. In order to determine whether business had been set up or not, the factual matrix of the case, especially, the nature and charact .....

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ected to the setting up of the business. From the above discussion, it is clear that there is difference between actual commencement of a business and setting up of a business. It is only after the business is set up, that the expenses incurred in the business can be claimed as permissible deduction u/s. 37 of the Act. For the commencement of a business, there must be in place some income-generating asset or income-earning structure. In some cases, there may a gap or an interval between setting .....

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sed to denote operations of a commercial character by which a trader provides to a customer for reward, some kind of goods or services. In other words, when the trader starts providing such goods and services, the business is said to have commenced but the same may not hold good for setting up of a business, which is a stage before the commencement. To set up a business, the following activities become relevant: preparation of a business plan ; establishment of a business premises ; research int .....

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r. The activities continue even post-first sale/purchase. When the first steps are taken by a trader, the business is set up, commencement of purchase and then sales is post-set up. 5.1. We find that AO and the FAA had taken note of expenditure incurred only they had dealt with the concept of setting up of business and commencement of business. We find that after getting approval from FIPB the assessee had made downstream investments of ₹ 22.3 crores in a Bangalore based Hospitality Ventur .....

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l before us, the AO and the FAA have held that expenses incurred were pre-operative period Besides, the assessee is a company and it has to incur certain expenses for functioning of corporate entity. After considering the cumulative effect of all these factors, we are of the opinion that the assessee had set up the business and that expenditure incurred by it has to be allowed as business expenditure - except for the expenditure incurred on account of ROC charges for increase in authorised capit .....

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s. 4.70 lakhs) and profit on sale of units of mutual fund (Rs.26.66 lakhs) were assessable under the head other sources in view of specific provisions of section 56 of the Act. Confirming the order of the AO, the FAA held that income arising out of interest and sale of units of mutual fund were assessable under the head other sources in view of specific provisions of section 56 of the Act. 7. During the course of hearing before us, the AR argued that the auditors had given specific direction the .....

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