TMI Blog2009 (2) TMI 236X X X X Extracts X X X X X X X X Extracts X X X X ..... n the assessee and the AFL Ltd. Without the approval of the Hon'ble Court to the scheme of arrangement agreed upon, the said scheme could not be acted upon nor the permissions thereafter be obtained. Drawing strength from the ratio laid down by the Hon'ble Bombay and Delhi High Courts in the cases decided in Western India Vegetable Products Ltd. vs. CIT [ 1954 (3) TMI 59 - BOMBAY HIGH COURT] , CIT vs. Western India Seafood (P) Ltd.[ 1981 (2) TMI 46 - GUJARAT HIGH COURT] , Hotel Alankar vs. CIT [ 1981 (2) TMI 46 - GUJARAT HIGH COURT] and CIT vs. ESPN Software India (P) Ltd.[ 2008 (3) TMI 90 - DELHI HIGH COURT] , we are of the view that after the approval of scheme of arrangement by the Hon'ble Court on 2nd Nov., 2001, the assessee was ready to commence business and it could be said that the business has been set up though the appointed date of starting the operations of the business is from 1st Jan., 2002. The business in the case of the assessee commences from 1st Jan., 2002. As the date of setting up of business and date of commencement of business are distinct the expenses incurred after the setting up of the business are deductible as revenue expenditure as he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rming part of computation of income, in Note 2.1, the assessee s41ted as under: "DHL India incurred various expenses (not being preliminary expenses) amounting to Rs. 85 lacs since its incorporation till the date of demerger. The company had commenced its activities in the sense of providing requisite training to the personnel who were to be transferred to DHL India in the process of demerger, etc. Accordingly, such expenses have been claimed as deductible expenditure." 4. During the course of assessment proceedings the assessee was show caused vide letter dt. 30th June, 2005 to explain why the said expenditure should not be disallowed. In reply, the assessee claimed that the business could be said to have commenced right from the date of incorporation of the company and thus all the expenditure incurred after the date of incorporation was allowable expenditure. The AO noted that the assessee was able to start its business only after the order of the Hon'ble Bombay High Court which allowed the assessee to commence its business from 1st Jan., 2002. The AO further noted that the assessee had made statutory compliances to the laws applicable w.e.f. 1st Jan., 2002 only. The servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us judicial precedents on the issue, the AO disallowed the assessee's claim of deduction amounting to Rs. 85 lakhs. 6. Before the CIT(A), it was clarified by the learned Authorised Representative for the assessee that the total expenditure of Rs. 85 lakhs comprised of expenditure incurred from the date of incorporation to the date of demerger amounting to Rs. 66,23,100 and the balance amount of Rs. 19,51, 120 represented the expenditure for the period after demerger and upto the end of the accounting year. The plea of the learned Authorised Representative for the assessee was that the expenditure is to be allowed with reference to the date of setting up of the business and not from the actual commencement of the business which in the instant case could be held as on 1st Jan., 2002. The CIT(A) noted that the assessee company was formed for the purpose of acquisition of undertaking or part thereof of international express business of AFL Ltd., subject to necessary approval of law as per clauses of its memorandum of association. The CIT(A) further noted that the business was demerged from AFL Ltd. only w.e.f. 1st Jan., 2002. The CIT(A) further observed that the assessee could not h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness as 1st Jan., 2002, but under the IT Act the date of set up of business is relevant and not the date of commencement of business. The learned Authorised Representative pointed out that no doubt the commencement of business was from 1st Jan., 2002, but under s. 3 of the IT Act the date of set up of the business is to be considered. Reliance was placed on series of decisions for the proposition of what is the date of set up and the difference between the date of set up and commencement date of business by the learned Authorised Representative. We shall be dealing with the list of cases in the paras hereinbelow. 8. The learned Authorised Representative for the assessee vehemently pleaded that in view of the ratio laid down by the Hon'ble Madras High Court in CIT vs. Franco Tosi Ingegneria (2000) 241 ITR 268 (Mad) the date of intent i.e., 24th April, 2001 is the date of set up of the business. In the alternate, the learned Authorised Representative submitted that when the application is moved before the Hon'ble Bombay High Court i.e., on 3rd Sept., 2001, the business of the assessee company has been set up; otherwise the date when the Court sanctions the demerger i.e., on 2nd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness there is a set up of business. Drawing our attention to the list of expenditure, it is pointed out the total expenditure was incurred on training of staff for international standards. The learned Authorised Representative clarified that there was no question of any income arising to the assessee, which arises post-commencement of the business. 9. We have heard the rival submissions and perused the records. The assessee company was incorporated on 24th April, 2001 and the main object of the company on incorporation as per the memorandum of association of the assessee company was as under: "1. To acquire and/or purchase the undertaking or part thereof of international express business of AFL Ltd. subject to necessary approvals of laws and to undertake the business of establishing, promoting, developing, providing, operating, handling and organizing business of express delivery of documents, parcels and consignments from one place in India or abroad to another place by air, water and all surface mode of transport and to act as freight forwarders, customs clearing and forwarding agents and also to undertake warehousing, logistics and related services." 10. The copy of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d up to the shareholders of AFL Ltd. for every 4 equity shares of the face value of Rs. 10 each held by each shareholder in AFL Ltd. The Court further directed the assessee company to deliver the certified copy of the order to the RoC, Maharashtra, Mumbai for registration. 11. The scheme of arrangement arrived at between AFL Ltd. and DHL Worldwide is annexed to the order of the High Court and the said documents are placed at pp. 8 to 18 of the paper book. Under the scheme of arrangement arrived between the parties which in turn were incorporated by the Hon'ble Bombay High Court the appointed date is the first day of January, 2002 and it is provided that the SCD shall be transferred to and vest to DHL Worldwide and from the appointed date all movable properties of SCD including cash in hand and also vesting of specified liabilities pertaining to SCD as on the appointed date in assessee company as on 31st Dec., 2001 shall become the debts, liabilities and obligations of assessee company. Under cl. 7 of the scheme of arrangement in case the effective date (meaning the date on which the order of the High Court sanctioning the scheme is filed with the RoC) occurs after the appointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h June, 2002 or within such further period, the scheme shall stand revoked, cancelled and be of no effect and null and void. The said scheme was approved by the Hon'ble Bombay High Court to be implemented between the parties. 12. The question which arises in the present appeal is whether setting up of business is distinct from commencement of business and the question of allowability of expenditure for the period between setting up of business and commencement of business. 13. Sec. 2(34) of the IT Act defines previous year as under: "Previous year means the previous year as defined in s. 3." 14. Sec. 3(1) of the Act reads as under: "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 corning into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year." 15. Under the provisions of s. 3 of the IT Act, previous year is defin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is overall comprised of. It is not necessary that all the categories of its business activities must start either simultaneously or that the last stage must start before it can be said that the business was set up. The test to be applied is as to when a businessman would regard a business as having commenced and the approach must be from a common sense point of view. The question whether a business has been set up or not its always a question of fact which has to be decided on the facts and in the circumstances of each case." (c) Hotel Alankar vs. CIT (1981) 22 CTR (Guj) 252 : (1982) 133 ITR 866 (Guj): In the facts of the case before Court, after holding when a business is established and is ready to commence business, then it can be said of that business that it is set up. It was held as under: "(i) that hotel business necessarily comprised variegated activities commencing from the stage of acquisition of a proper and suitable building, making it more suitable and convenient for the hotel business, purchasing linen, cutlery, furniture etc., appointing the staff as managers, bearers, cooks, etc. and ultimately reaching the stage of receiving customers. It would be de hors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as under: "A unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up. It is only when the unit has been put into such a shape that it can start functioning as a business or a manufacturing organization that it can be said that the unit has been, set up. Operations for establishment of a unit from the very nature of the expression used in the proviso to s. 5(1)(xxi) can only signify steps that have to be taken to establish the unit. The word 'set up' in the principal clause of s. 5(1)(xxi) is equivalent to the word 'established', but operations for establishment cannot be equated with the establishment of the unit itself or its setting up. The applicability of the proviso has, therefore, to be decided by finding out when the company commenced operations for establishment of the units, which operations must be antecedent to the actual date on which the unit is held to have been set up for the purpose of the principal clause" 18. In Travancore-Cochin Chemicals (P) Ltd. vs. CWT (1967) 65 ITR 651 (SC), the issue was again of establishing of business and similar proposition was laid. The issue before us is under the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms and conditions of the said scheme of arrangement between the parties have been referred to by us in the paras hereinabove. Cumulative reading of the said terms and conditions agreed upon establishes that it was mutually agreed between the parties that the business of AFL Ltd. relating to SCD would commence w.e.f. 1st Jan., 2002. However, the said commencement of the business by the assessee company and demerger by the AFL Ltd. was conditional upon and subject to the covenants provided in cl. 14 of the scheme of arrangement. The scheme had to be passed by the majority of the members of AFL Ltd. and DHL Worldwide in the first instance and further sanction of the Hon'ble Bombay High Court had to be obtained. Thereafter, approval of RBI under Foreign Exchange Management Act, 1999 is required for the issue and allotment of equity shares of the assessee company to the non-resident equity shareholders of AFL Ltd. and also the certified copy of the order of the High Court of Judicature at Bombay was to be filed with the RoC of Maharashtra. 20. Clause 15 of the said scheme of arrangement further provided that the scheme would not come into operation from the appointed date i.e., 1st J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oval of the Hon'ble Court to the scheme of arrangement agreed upon, the said scheme could not be acted upon nor the permissions thereafter be obtained. Drawing strength from the ratio laid down by the Hon'ble Bombay and Delhi High Courts in the cases decided in Western India Vegetable Products Ltd. vs. CIT, CIT vs. Western India Seafood (P) Ltd., Hotel Alankar vs. CIT and CIT vs. ESPN Software India (P) Ltd. referred in the paras hereinabove, we are of the view that after the approval of scheme of arrangement by the Hon'ble Court on 2nd Nov., 2001, the assessee was ready to commence business and it could be said that the business has been set up though the appointed date of starting the operations of the business is from 1st Jan., 2002. The business in the case of the assessee commences from 1st Jan., 2002. As the date of setting up of business and date of commencement of business are distinct the expenses incurred after the setting up of the business are deductible as revenue expenditure as held by the Hon'ble Delhi High Court in CIT vs. ESPN Software India (P) Ltd. Respectfully following the ratio laid down by the Hon'ble Delhi High Court in CIT vs. ESPN Software India (P) Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e nature of commercial vehicles and allowed depreciation @ 20 per cent as prescribed in sub-item No. (1A) of item No. III of plant and machinery of Part A to the Appendix I of IT Rules, 1962. The CIT(A) allowed the claim of the assessee observing that the meaning of commercial vehicle for the purpose is provided in Item (3A) of the Notes below table and if read along with cl. (21) of s. 2 of Motor Vehicles Act, provides that motor cars owned by the assessee and used for the purpose of business have to be reckoned as commercial vehicles. 26. The learned Authorised Representative for the assessee relied upon the judgment in the case of Daleep S. Chandnani vs. Asstt. CIT (2007) 14 SOT 233 (Mumbai), for its entitlement to higher depreciation. 27. We have heard the rival submissions and perused the records. On perusal of records, we find that similar issue arose before the Tribunal in Dy. CIT vs. Aramex India (P) Ltd. in ITA No. 19/Mum/2007 relating to asst. yr. 2003-04 (wherein learned AM is one of the Members), it was held as under: "9. We have heard the parties. We find that admitted facts of the case are that the motor vehicles were used for the purpose of business of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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