TMI Blog2022 (4) TMI 336X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee had recruited technical personnel for setting-up the power projects. The assessee had all the approvals, permissions in-hand and was in the process of commencing the business. The assessee had deployed technical personnel, obtained various approvals, placed purchase orders and also signed long-term Power Purchase Agreements with the clients. The signing of all these agreement would be important activity and very much integrated to the activities of the business of the assessee. AO has based his reasoning solely on the fact that assessee-company s bio-mass power plant was synchronized to grid only from 04.07.2011. Therefore, the assessee was not ready to produce the power till 04.07.2011 and hence, the business was not set-up. However, the said reasoning stresses the proposition that expenditure could not be allowed till the generation of income. The said reasoning overlooks the various vital documentary evidences furnished by the assessee in support of the fact that the business had already been set-up. We are of the considered opinion that the generation of actual business income was not an essential element to allow the business expenditure. What was required to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income Tax (Appeals) 3, dated 31.03.2017 is against law and facts of the case. 2) The CIT(A) erred in confirming the disallowance of expenditure of ₹ 3,37,82,447/- claimed under the head Business . 3) The CIT(A) erred in holding that the appellant has not commenced business activities and that the appellant had just started preliminary work to set up power plant. 4) The CIT(A) erred in not appreciating the fact that appellant had setup the business and therefore, the expenditure claimed is allowable. As evident the assessee is aggrieved by confirmation of disallowance of business expenditure in view of the findings of lower authorities that the assessee did not commence business activities during the year. 2. The learned AR, drawing our attention to the documents placed in the paper book, submitted that assessee had duly set-up its business during the year and all the work to set up the plant was already done by the assessee. Reliance has been placed on the decision of Hon ble Delhi High Court in the case of Pr. CIT V/s Miele India Private Ltd. (127 Taxmann.com 684) wherein it was held that when the assessee was ready to carry on business in previous year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come was offered to tax. It was concluded by Ld. AO that though the assessee had not commenced its business operations, however, certain expenses like employee costs, other costs, depreciation and interest charges to the extent of ₹ 337.82 Lacs were claimed in the Profit Loss Account. Accordingly, it was held that the assessee would be entitled to claim depreciation on the amount capitalized that too after commencement of its business activity. In other words, the expenditure claimed by the assessee was disallowed and other income was assessed as income from other sources . For the same, reliance was placed on the decision of Hon ble Supreme Court in the case of M/s Tuticorin Alkali Chemicals Fertilizers Ltd (227 ITR 172). 5.3 Similar are the facts in AY 2010-11. During assessment proceedings, the assessee defended its stand. However, Ld. AO noted that the assessee company s bio-mass power plant was synchronized to grid only from 04.07.2011. Therefore, the assessee was not ready to produce the power till 04.07.2011 and the business was not set-up. Accordingly, similar view was taken in assessment order for AY 2010-11 and the business expenditure as claimed by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year. However, in the case of newly set-up business, the previous year shall be the period beginning with the date of setting-up of the business. Accordingly, till the time the business is set-up, all the expenses, even if revenue in nature, would have to be capitalized which is the stand of lower authorities in the present case. As a natural corollary, if the business is set-up, the expenditure would be allowable notwithstanding the fact that no business income was earned by the assessee during the year. 8. As per the decision of Hon ble Bombay High Court in the case of Western India Vegetable Products v. CIT 26 ITR 151 (Bom.), what is to be considered is the set-up of the business and not the commencement of business. Quite clearly, the two-term setting-up and commencement of business carries different connotations. What is to be seen is whether the business is set-up or not whereas actual commencement of business may or may not happen. Once the business is held to be set-up, the deduction of business expenditure would be available to the assessee. When a business is established and is ready to commence business then it could be said that the business has been set-up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inciples, we find that the assessee has been incorporated during 2006. The main objective of the assessee was to generate electrical power by convention and non-conventional methods including coal, gas lignite oil, bio-mass, water, thermal, solar, hydel, geo-hydel, wind and tidal waves. The assessee was also engaged to establish captive power plant on a co-operative basis for a group of industrial and other consumers and supply to the participants in the co-operative effort either directly or through the transmission lines of the state Electricity Board or other authorities by entering into appropriate arrangements. Thus, the business objective could be achieved either directly or through joint ventures in association with other entities. 10. The perusal of financial statements, as placed on record, would show that the assessee has substantially increased its gross block from ₹ 2.16 Lacs as on 31.03.2008 to ₹ 329.49 Lacs during this year which has shown further substantial increase in FY 2009-10. The major addition during FY 2008-09 is land for ₹ 320.94 Lacs which is also evident from sale deed of land as placed on page nos. 246 to 252 of the paper-book. The sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted by the assessee as early as June, 2008. The agreement in this respect was executed by the assessee during October, 2008 and the lease agreement, in this respect was executed on 16.01.2009. The assessee also entered into a power purchase agreement with Tata Power Trading Co. Ltd. on 22.12.2008 wherein the assessee agreed to sell the power generated from its bagasse-based cogeneration power plant. To facilitate the same, the assessee applied to Maharashtra State Electricity Transmission Company Ltd. requesting for transmission line for evacuation of power from the said power plant. Lastly, the assessee could set-up power plants on co-operative basis through their Special purpose vehicles (SPV). Pursuant to the same, the assessee had advanced funds for operating and managing those SPVs which were, in turn, advancing the assessee s business. 13. On the basis of all these facts and documentary evidences, it could be said that though the assessee s business had not commenced but the business had already been set-up and the assessee undertook all preliminary steps to commence the business. The gestation period, in the kind of business in which the assessee was engaged, would gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43. In Western India Vegetable Products Ltd. (supra), it was pointed out that there is a clear distinction between a person commencing a business and a person setting up a business for the purposes of the Indian Income-tax Act (Act XI of 1922), the setting up of the business and not the commencement of the business is to be considered. It was held that when a business is established and is ready to commence business, then it can be said of that business that it is set up. Further, it was held that there may be an interval between the setting up of the business and the commencement of the business and all its expenses incurred during that interval would be permissible as deductions. In the said case, the company actually commenced business only on 1st November, 1946 when it purchased the groundnut oil mills, but prior to this date, there was a period when the business could be said to have been set up and the company was ready to commence business and that there was evidence before the Tribunal to hold that the assessee company set up its business as from 1st September, 1946. 44. In Prem Conductors (P.) Ltd.(supra), the Court held that the assessee can be said to have set up its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al of the Revenue, the Court held that the business of an assessee involved different activities in which the first step was to purchase the equipments for which purchase order was placed in July, 1995, application to DoT for licence was made and the signals were received after the equipment was installed in the premises of the customer and in such circumstances, the business of the assessee was held to have been set up in July, 1994 when they placed the purchase order for the equipments and expenses would be deductible as revenue expenses. 47. In Omniglobe Information Tech India P. Ltd. (supra), it was held that the assessee's business was set up when they acquired necessary infrastructure from its sister concern and also started making payment of salary and wages and giving training by professional experts under the supervision and control of the assessee. 48. In Dhoomketu Builders and Development P. Ltd. (supra), the assessee was in the business of real estate development and had obtained loan from its holding company, participated in a tender notified by the Official Liquidator of the Karnataka High Court for sale of a piece of land. The assessee, however, was not suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tent granted to it by Neyveli Lignite Corporation and the assessee is, therefore, entitled to regard the expenditure so incurred, as the expenditure incurred by its during the previous year relevant to the assessment year 1981-82. 51. In Club Resorts P. Ltd. (supra), the assessee was in the business of promoting time share units at places of tourist interest. The question was whether the expenditure incurred on maintenance of staff, etc., could be treated as a business expenditure. The Court affirmed the view of the Tribunal and held that there are various stages; the first of which being to set up one or more operating offices from which sales personnel were to be sent to solicit customers which were already started by the assessee; and the second stage was launching a massive publicity campaign, which the assessee had already been doing, it had already acquired land and started construction, which were the subsequent changes. Accordingly, it held that the office expenses that had been incurred were clearly revenue in nature. 52. The above decisions clearly set out the legal position. In terms of the Memorandum of Association of the assessee, it was incorporated for a bundle ..... X X X X Extracts X X X X X X X X Extracts X X X X
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