TMI Blog2022 (7) TMI 325X X X X Extracts X X X X X X X X Extracts X X X X ..... i Shamim Yahya, Accountant Member And Ms. Astha Chandra, Judicial Member For the Assessee : Shri Anil Bhalla, CA For the Revenue : Shri Sanjay Gupta, CIT DR ORDER PER SHAMIM YAHYA, ACCOUNTANT MEMBER : This appeal by the assessee is directed against the order of the ld. Pr.CIT-6, Delhi dated 28.03.2018 pertaining to assessment year 2012-13. 2. The grounds of appeal raised by the assessee read as under :- 1. That having regard to facts circumstances of the case, ld. Pr. Commissioner of Income-tax has erred both on facts and in law in assuming jurisdiction u/s. 263 and further erred in holding the assessment order u/s. 143(3)/144C(1) dated 22-03-2016 is erroneous insofar as it is prejudicial to the interest of revenue. 1.1. The order passed by the learned Pro Commissioner of Incometax is bad in law and on the facts and in the circumstances of the appellant's case and is prayed to be quashed. 1.2. That having regard to facts circumstances of the case, ld. Pr. Commissioner of Income-tax has erred both on facts and in law in holding that the learned Assessing officer has passed the Assessment Order without making proper enquiries and wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue from the date of purchase of licence/software from January 2012 till the end of year 2016. Ld. Pr.CIT held that whether business is set up or is ready to commence, it is a matter of fact which requires to be examined in the light of the facts and circumstances of each case. He noted that in the present case, the assessee, who is stated to have entered into the business of providing software services, had acquired the desired software license and had hired the requisite staff and had claimed to have taken and evaluated necessary professional advices including the key arrangements with such parties such as taking business premise, opening bank account etc., but it still had not carried out any business. The assessee has failed to produce any documentary evidence relating to commencement of business activity. The assessee has also not generated any revenue out of the business activity claimed to have been commenced by it. It is also noted that no increase in the inventory or start of production/sale have been shown in its balance sheet and so the claim that the assessee had put the assets under consideration to use for business is not correct. Further, even during the course of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submitted that all the necessary steps for the setting up of the business was already in place and Pr.CIT has not found any infirmity in the same. He further submitted that the Explanation 2 to section 263 has been wrongly invoked as none of the conditions provided in the Explanation is applicable in this case. Ld. counsel further referred catena of cases in this regard including decision of Hon ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT 243 ITR 83 and Hon ble Delhi High Court in the case of CIT vs. Sunbeam Auto Ltd. 332 ITR 167. He further submitted additional case laws in the case of Maruti Insurance Broking Pvt. Ltd. v. Dy. CIT (2021) 435 ITR 34 with regard to allowability of expenses after setting up of business. 8. During the course of hearing, a query was raised to the ld. counsel of the assessee regarding any date of commencement of software platform. In this regard, ld. counsel has submitted as under :- 1.1 This is not a conventional technology purchase for purposes of manufacturing/ engineering. 1.2 The impugned agreement is for purchase of software in regard to items of intellectual property and was received in the form of open ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure. It is noted that ld. Pr.CIT himself has noted that AO has made enquiry in this regard. We note that in the paper book submitted before us, at pages 1 to 4, the notice of the AO is incorporated. On this issue, AO has made elaborate enquiry which reads as under :- 2. i. The technology license fees paid on 30-01-2012 amounting to Rs.22,17,35,396/-; ii) The development fees has been paid 29-02-2012,01-03-2012 and 26-02-2012 Rs.65,14,167 and Rs.1,29,71,850 is provided for in accounts on 31.03.2012; iii) Recruitment expenses have been incurred only after receipt of share capital in February and March Rs.26,38,125/-. iv) Revenue from operations is Nil. v) Accounting policy of-pre-operative expenses reads as follows: ''Expenditure incurred: by the' Company from the date of start of new business, upto the date of commencement of commercial operations, not directly attributable to Fixed asset are charged to Profit and Loss in the year in which such expense is incurred. This means expense related to Fixed asset is to be capitalized in the year of commencement of operations. v) As per Accounting policy of research and development, deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from tax auditor when the same is not applicable. Furnish copy of technology cost agreement and agreement for development of platform entered with OAK Pacific Holdings. 13. The assessee made comprehensive reply which is submitted vide letter dated 10th March, 2015, which is attached at paper book pages 5 to 99. In the said reply, assessee made following submissions :- 1. In para 2 of your questionnaire you have referred to certain observations based upon which you have concluded that the business of the assessee is not yet set up for the previous year relevant to Asstt. Year 2012-13 and you have directed to show cause why all expenses debited to Profit Loss Account and. claimed including depreciation on technology cost should not be disallowed. 2. Section 3 of the Income Tax Act states-- Previous year defined. 3. For the purposes of this Act, previous year' means the financial year immediately preceding the assessment year. Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the development cost will be capitalized only if technical. and commercial feasibility of the project demonstrates future economic benefits capable of being measured and utilised. In other words only benefits of enduring nature can be capitalized. 5. Development activity started in December 2011 which was outsourced to Oak Pacific Holdings (Japan). The work was done in China. This work of software development for the mobile platform was ,supervised by Mr. 'Kavin B Mittal who was director in the company. 5.1 Details of Development expenses are attached. 5.2 As part of the JV Agreement with OPHJ BSBH Pte Ltd dated .6th January 2012, Mobinteco entered. into development agreement with OPHJ to (i) customize the software on the mobile platform for feature phone requirement product features that Mobinteco desired suitable for Indian market. India was and still is a predominant feature phone market compared to Western, Chinese or South East Asian markets like Japan Korea. (ii) build games to be hosted on the platform. Games consisting of those from: their own inventory in China localized for India, new games fr0IT!. ground up. The business was set up in Decembe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to mobile devices' popularity and utility. 8.2.1 The dramatic adoption of these new consumer electronics has been accompanied by the emergence of a model for software development and distribution referred to broadly as the fI apps ecosystem. Apps (a term that is simply short for applications ) are small software programs designed to run on a mobile device. Apps are characterized by convenience (installable with just one touch), low prices (including many free and ad-supported apps), and variety (including games, cookbooks, financial tools, etc.). Apps that run locally on a device take advantage of operating system functionality not available to websites rendered in a browser and often have access to a users personal data that is stored on the device. Apps have seen significant commercial success. For example, Apple's app store offers around half a million apps, and these have been downloaded 15 billion times. Other app stores are growing rapidly and many private companies are considering their own sales environments. 8.2.2 This app explosion has been facilitated by a powerful intermediary: the mobile platform. mobile platform which is based on any cloud-bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to cannot be a reason to disallow the expenditure. Ld. Pr.CIT is himself aware of this proposition and hence even after noting that after 4 years of the purchase of software and establishment of business, assessee has not earned any revenue, the ld. Pr.CIT has not directed that expenditure is to be disallowed. Rather he wants the AO to make further fishing roving enquiry without specifying what enquiries are to be done. As regards invocation of Explanation 2 to section 263 is concerned, the same mandates that the order of AO can be held to be erroneous insofar as it is prejudicial to the interests of Revenue, if in the opinion of Pr.CIT, ( a ) the order is passed without making inquiries or verification which should have been made; ( b ) the order is passed allowing any relief without inquiring into the claim; ( c ) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; and ( d ) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. We find that none of the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion on the vent item from the assessee and the assessee had furnished its explanation. This fact was conceded by the Commissioner himself in his order. This showed that the Assessing Officer had undertaken the exercise of examining as to whether the expenditure incurred by the assessee in the replacement of dies and tools was to be treated as revenue expenditure or not. Therefore, it could not be said that it was a case of lack of inquiry. The accounting practice followed for a number of years had the approval of the income- tax authorities. Even for future assessment years, the very same accounting practice was accepted. (iii) Maruti Insurance Broking (P.) Ltd. 435 ITR 34 (Del.) It was held in this case that business does not conform to cold start doctrine and most cases, there was gap between time a person or entity is ready to do business and when business is conducted and during this period, expenses are incurred towards keeping business primed up and these expenses cannot be capitalized. Hence, it was held that expenditure incurred between setting up and commencement of business could not have been capitalized and was to be allowed as business expenditure. 16. Whe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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