BARCLAYS SECURITIES (INDIA) P.LTD, MUMBAI V. DCIT CIR 3(1), MUMBAI

ITA 1877/MUM/2012

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7964 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 4 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-08-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 13-08-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 19-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V R PATIL
• Keywords: Business expenditure; Question of law; Revenue expenditure

Judgement Text

, CH CHCH CH INCOME TAX APPELLATE TRIBUNAL,MUMBAI - B BENCH. . . , , BEFORE S/SH.I.P.BANSAL, JUDICIAL MEMBE R & RAJENDRA,ACCOUNTANT MEMBER /. ITA NO. 1877/MUM/2012, ! ! ! ! / ASSESSMENT YEAR-2008-09 BARCLAYS SECURITIES (I) PVT. LTD. 208, CEEJAY HOUSE, SHIVSAGAR ESTATE, DR. ANNIE BESANT ROAD, WORLI, MUMBAI-400018 VS DCIT CIR 3(1), AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 PAN: AACCB8800G ( '# / APPELLANT) ( $%'# / RESPONDENT) &' &' &' &' ( ( ( ( / ASSESSEE BY : SHRI NIRAJ SHETH ) ( / REVENUE BY : SHRI V.R. PATIL ) )) ) '* '* '* '* / DATE OF HEARING : 13-08-2014 +,! ) '* / DATE OF PRONOUNCEMENT : 13-08-2014 , 1961 ) )) ) 254 )1( '-' '-' '-' '-' . . . . ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA,AM : CHALLENGING THE ORDER DATED.23.12.2011 OF THE CIT(A )-5,MUMBAI, ASSESSEE HAD RAISED FOLLOWING GROUNDS APPEAL: AGGRIEVED BY THE ORDER PASSED BY THE COMMISSIONER O F INCOME-TAX (APPEALS)- 5, MUMBAI [HEREINAFTER REFERRED TO AS 'THE LEARNED CIT(A)'], UNDER SECTION 250 OF THE INCOME-TAX ACT, 1961 ('ACT') AND BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, 8ARCLAYS SECURITIES (INDIA) PRIVATE LIMITED [HEREINAFTER REFERRED TO AS 'THE APPELLANT' ], RESPECTFULLY SUBMITS THAT THE LEARNED CIT(A) ERRED IN UPHOLDING THE ORDER OF THE DEPUTY COMMISSI ONER OF INCOME-TAX CIRCLE 3 (1), MUMBAI, [HEREINAFTER REFERRED TO AS 'THE LEARNED ASSESSING OFFICER'], THEREBY DISMISSING THE APPEAL OF THE APPELLANT. THE APPELLANT APPEALS TO THE HONORABLE I TAT TO DISMISS THE ORDER OF THE CIT (A) ON FOLLOWING GROUNDS: 1. THE EARNED CIT (A) ERRED IN DISALLOWING THE ENTI RE EXPENDITURE DEBITED TO PROFIT & LOSS ACCOUNT OF RS.5,52,55,009 ON THE GROUND THAT THE ASSESSEE H AD NOT SET UP BUSINESS DURING THE RELEVANT PREVIOUS YEAR. THE APPELLANT PRAYS THAT THE LEARNED ASSESSING OFFICER BE DIRECTED TO DELETE THE DISALLOWANCE OF ALL THE EXPENSES CLAIMED BY THE APP ELLANT AND ACCEPT THE TAXABLE INCOME AS PER THE RETURN OF INCOME FILED BY THE APPELLANT. 2.THE LEARNED CIT(A) ERRED IN NOT CONSIDERING THE F ACT THAT THE APPELLANT HAD THE NECESSARY CAPITAL, INFRASTRUCTURE AND EMPLOYEES ON BOARD, REQ UIRED TO SET UP THE BUSINESS ACTIVITIES. HENCE, THE APPELLANT PRAYS THAT ALL THE EXPENSES INCURRED POST 1 AUGUST 2007, BEING THE DATE OF SET UP, SHOULD BE ALLOWED AS REVENUE EXPENDITURE. 3. THE LEARNED CIT (A) ERRED IN UPHOLDING THE LEARN ED ASSESSING OFFICER'S ORDER AND DISMISSING THE APPELLANT'S REQUEST TO DROP THE PENALTY PROCEEDINGS INITIATED UNDER SECTION 271 (1 )(C) OF THE ACT. THE APPELLANT PRAYS THAT THE LEARNED ASSESSING OFFI CER BE DIRECTED TO DROP THE PENALTY PROCEEDINGS. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OMI T, SUBSTITUTE OR AMEND THE GROUNDS OF APPEAL, AT ANY TIME BEFORE OR AT, THE TIME OF HEARING OF THE A PPEAL, SO AS TO ENABLE THE HONORABLE INCOME TAX APPELLATE TRIBUNAL TO DECIDE THIS APPEAL ACCORDING TO LAW. 2. ASSESSEE-COMPANY,FILED ITS RETURN OF INCOME ON 27.10.2007,DECLARING LOSS OF RS.4,87,92,021/-. ITA NO. 1877/MUM/2012 BARCLAYS SECURITIES (I) PVT. LTD. 2 ASSESSING OFFICER (AO) FINALISED THE ASSESSMENT U/S .143(3) OF THE ACT,ON 28.12.2010,DETERMINING THE TOTAL INCOME OF THE ASSESSEE AT RS.29,20,808/-. EFFECTIVE GROUND OF APPEAL PERTAINS TO DISALLOWING THE EXPENDITURE,DEBITED TO PROFIT & LOSS ACCOUNT,OF RS.5,52,55,009/-.DURING THE ASSESSMENT P ROCEEDINGS AO FOUND THAT THE ASSESSEE COMPANY HAD CLAIMED THAT IT WAS INCORPORATED IN APR IL, 2006,THAT IT HAD SHOWN DATE OF SET-UP OF THE BUSINESS AS 1/8/2007,THAT THE EXPENSES PERTAINI NG TO THE PERIOD AFTER 1/8/2007 HAD BEEN CLAIMED AS REVENUE DEDUCTION WHILE COMPUTING THE TO TAL INCOME.AFTER PERUSAL OF THE FACTS OF THE CASE,HE NOTICED THAT NO BUSINESS ACTIVITIES WERE CA RRIED ON DURING THE RELEVANT PREVIOUS YEAR, THAT THE ONLY INCOME CREDITED TO P&L A/C WAS THE INTERES T INCOME ON FIXED DEPOSITS PLACED WITH BARCLAYS BANK PLC, MUMBAI BRANCH.THEREFORE,HE ASKED THE ASSESSEE WAS TO SUBSTANTIATE THAT ITS BUSINESS HAD SET-UP ON 01/08/2007.IN ITS REPLY THE ASSESSEE STATED THAT CAPITAL OF RS.5.5 CRORES WAS INFUSED IN 2006 ITSEL,THAT ON 17TH APRIL 2007 LEASE AGREEMENT FOR THE OFFICE PREMISES WAS EXECUTED FOR RENTING OF SPACE AND FACILITIES TO CAR RY ON THE BUSINESS ACTIVITIES,THAT WHOLE TIME DIRECTORS SECONDMENT LETTER WAS ISSUED BY BARCLAYS BANK PLC, INDIA BRANCH TO THE ASSESSEE W.E.F.AUGUST 1,2007,THAT ALL THE IMPORTANT FACTORS I.E. CAPITAL, PERSONNEL INFRASTRUCTURE AND SUPPORT FACILITIES WERE IN PLACE IN AUGUST 2007,THAT THE AS SESSEE HAD CONSIDERED AUGUST 1, 2007 AS THE DATE OF SET-UP OF BUSINESS.THE AO REJECTED THE SUBMISSIO NS MADE BY THE ASSESSEE HOLDING THAT IT HAD TAKEN 01/08/2007, AS THE SET-UP DATE OF THE BUSINES S ON THE STRENGTH OF MERCHANT BANKING LICENCE GRANTED BY SEBI ON 01/08/2007,THAT DURING THE REMAI NING 8 MONTHS OF RELEVANT PREVIOUS YEAR IT HAD NOT CARRIED OUT ANY SINGLE ACTIVITY AS A MERCHA NT BANKER,THAT IT EARNED FIRST FEES AS MERCHANT BANKER IN THE MONTH OF JULY,2008,THAT IT WAS ALSO T HE FIRST INCOME FROM ANY BUSINESS SOURCE EARNED BY THE ASSESSEE COMPANY,THAT THERE WAS GESTA TION PERIOD OF MORE THAN 10 MONTHS IN EARNING THE FIRST INCOME FROM ANY KIND OF BUSINESS SOURCE.,THAT -IN THE KIND OF BUSINESS THE ASSESSEE WAS OPERATING, I.E. IN THE FIELD OF INVEST MENT BANK, PMS, FINANCIAL CONSULTANCY, ETC., THE GESTATION PERIOD WAS NOT 8 TO 10 MONTHS FOR GETTING THE FIRST CLIENT,THAT IN THE FIELD OF PORTFOLIO MANAGEMENT SERVICE, GENERALLY, A COMPANY WOULD BE A BLE TO GET ITS FIRST CLIENT WITHIN 1 TO 2 MONTHS FROM THE SETTING UP OF THE BUSINESS,THAT IN THE CASE OF MERCHANT BANKING THERE COULD BE MORE TIME CONSUMED IN GETTING A CLIENT,THAT THE PER IOD OF 8 TO 10 MONTHS WAS QUITE UNCOMMON, THAT THE INFRASTRUCTURE AND THE RESOURCES REQUIRED FOR SETTING-UP AND COMMENCING OF A BUSINESS IN THE FIELD OF FINANCIAL SERVICES COULD BE ARRANGED I N SHORT PERIOD IN COMPARISON TO THAT IN THE MANUFACTURING PROCESS,THAT IN THE FINANCIAL SERVICE S SECTOR, IT WAS HIGHLY UNUSUAL TO GET FIRST CLIENT ABOUT 10 MONTHS AFTER THE DATE OF SET-UP OF THE BUS INESS,THAT IT HAD NOT BEEN ABLE TO SUBMIT ANY EVIDENCE TO PROVE THAT IT HAD MADE INTERACTION WITH NUMBER OF PROSPECTIVE CLIENTS JUST AFTER THE SETTING OF THE BUSINESS WITH A VIEW TO FETCH THE BU SINESS,THAT IT HAD NOT SUCCEEDED IN ESTABLISHING THAT IT WAS MAKING CONTINUOUS EFFORTS IN GETTING IT S FIRST CLIENT DURING THE AFORESAID PERIOD OF 8 TO 10 MONTHS AS THE ASSESSEE HAD SOUGHT TO CLAIM,THAT THERE WAS NO EVIDENCE OF WHATSOEVER NATURE WHICH MAY HAVE PROVED THAT AS ON 01/08/2007 THE ASS ESSEE HAD SET-UP ANY KIND OF DISTRIBUTION NETWORK BY ENTERING INTO AGREEMENT WITH VARIOUS PAR TIES OR HAD STARTED ADVERTISING ITS SERVICES WITH A VIEW TO MARKET THEM,THAT IT WAS NOT ABLE TO SET-UP ANY KIND OF DISTRIBUTION NETWORK NOR HAD IT CARRIED OUT ANY KIND OF INTERACTION WITH THE PRO SPECTIVE CLIENTS DURING THE RELEVANT PREVIOUS YEAR,THAT MR JAGDISH KRAPLANI HAD BEEN SECONDED TO THE ASSESSEE VIDE LETTER DATED 07/09/2007 ONLY WITH EFFECT FROM 01/08/2007,THAT HE WAS THE WHOLE T IME DIRECTOR OF THE COMPANY,THAT HE WAS THE ONLY EMPLOYEE AND THAT TOO OF DIRECTOR RANK DEPUTED TO THE ASSESSEE COMPANY ON 07/09/2007 FOR CARRYING OUT THE ACTIVITIES OF ASSESSEE COMPANY,THA T THE SECONDMENT HAD TAKEN PLACE ONLY ON 07/ 09/2007,THAT THERE WAS NO EMPLOYEE WITH THE ASSESSE E COMPANY DURING THE PERIOD FROM 01/08/ 2007 TO 07/09/2007,THAT THE APPOINTMENT OF A DIRECT OR ALONE COULD NOT BE CONSIDERED A CRUCIAL EVENT FOR DECIDING THE SETTING UP OF THE BUSINESS,T HAT THERE SHOULD BE OTHER EMPLOYEES TOO FORMING A SUBSTANTIAL ORGANISATIONAL STRUCTURE WITH SUFFICI ENT INFRASTRUCTURE IN PLACE BEFORE A BUSINESS COULD ITA NO. 1877/MUM/2012 BARCLAYS SECURITIES (I) PVT. LTD. 3 BE CLAIMED AS SET-UP,THAT A BUSINESS COULD BE SAID TO BE SET-UP WHEN IT WOULD READY TO COMMENCE, THAT WITH THE HELP OF ONLY ONE PERSON,A COMPANY IN THE FIELD OF MERCHANT BANKING, PMS, ETC,. COULD CLAIM THAT IT HAD SET-UP THE BUSINESS,THAT PO ST SET-UP THE BUSINESS PLAN WAS CLAIMED TO BE STRATEGISED,THAT THE ASSESSEE HAD CLAIMED TO HAVE B EEN GRANTED VARIOUS LICENCES,THAT FOR DECIDING THE DATE OF SET-UP VARIOUS MILESTONES ACHIEVED DURI NG THE PROCESS HAD TO BE VERIFIED,THAT THE ARGUMENT IN RESPECT OF PLANNING STRATEGISING AND DI SCUSSSION WITHIN THE GROUP WAS OF NO HELP TO IT,THAT OBTAINING CERTAIN LICENCES FROM SEBI DURING THE YEAR COULD BE CONSIDERED AS MILESTONES,THAT MOST OF THE LICENCES HAD BEEN RECEIVED ONLY IN THE MONTH OF MARCH, 2008,THAT IN MARCH, 2008, IT RECEIVED 4 LICENCES IN COMPARISON TO ONE LICENCE EA CH IN THE MONTH OF JANUARY & FEBRUARY 2008,THAT WITHOUT SUCH LICENCES IT COULD NOT CARRY OUT ANY KIND OF BUSINESS ACTIVITY,THAT IT GOT MOST OF THE LICENCES TO CARRY OUT ITS BUSINESS ONLY IN T HE MONTH OF MARCH, 2008,THAT THE DATE OF RECEIPT OF MOST OF THE LICENCES WAS QUITE FAR AWAY FROM 01/ 08/2007, THAT IT RAISED FIRST INVOICE FOR ANY KIND OF BUSINESS ACTIVITY DURING THE MONTH OF JULY, 2008 ONLY AND SUCH INCOME WAS RECEIVED FROM THE ACTIVITY OF MERCHANT BANKING,THAT IN THE FIELD OF BROKING,IT RAISED FIRST INVOICE IN THE MONTH OF AUGUST, 2008,THAT IT RECEIVED FIRST COMMISSION INCO ME IN THE MONTH OF DECEMBER, 2009,THAT ALL THOSE DATES WERE MORE THAN 3 MONTHS AWAY FROM THE E ND OF RELEVANT FINANCIAL YEAR,THAT THREE MONTHS WAS A MORE THAN SUFFICIENT GESTATION PERIOD FOR PMS, BROKING BUSINESS,THAT IT RAISED FIRST INVOICE FOR ANY KIND OF BUSINESS ACTIVITY DURING TH E MONTH OF JULY, 2008 ONLY AND SUCH INCOME WAS RECEIVED FROM THE ACTIVITY OF MERCHANT BANKING, THAT IN THE FIELD OF BROKING,IT RAISED FIRST INVOICE IN THE MONTH OF AUGUST,2008,THAT IT RECEIVE D FIRST COMMISSION INCOME IN THE MONTH OF DECEMBER, 2009,THAT ALL THOSE DATES WERE MORE THAN 3 MONTHS AWAY FROM THE END OF RELEVANT FINANCIAL YEAR,THAT THREE MONTHS WAS A MORE THAN SU FFICIENT GESTATION PERIOD FOR PMS, BROKING BUSINESS.CONSIDERING ALL THESE FACTS,HE HELD THAT T HE BUSINESS OF THE ASSESSEE WAS NOT SET-UP ON 01/08/2007. 2.1. AGAINST THE ORDER OF THE AO ASSESSEE PREFERRED AN A PPEAL BEFORE THE FIRST APPEAL AUTHORITY (FAA).AFTER CONSIDERING THE SUBMISSIONS OF THE ASSE SSEE AND THE ASSESSMENT ORDER HE HELD THAT THE ASSESSEE HAD RECEIVED MOST OF THE LICENCE ONLY IN T HE MONTH OF MARCH, 2008 AND HAD RAISED FIRST INVOICE FOR ANY KIND OF BUSINESS ACTIVITY DURING TH E MONTH OF JULY, 2008 ONLY AND THE INCOME WAS RECEIVED FROM THE ACTIVITY OF MERCHANT BANKING,THAT IN THE FIELD OF BROKING,IT HAD RAISED FIRST INVOICE IN THE MONTH OF AUGUST, 2008 AND FIRST COMM ISSION WAS RECEIVED IN THE MONTH OF DECEMBER,2008,THAT IT WAS GRANTED MERCHANT BANKING LICENCE BY SEBI ON AUGUST, 2007 AND THE SAME DATE WAS TAKEN AS SET UP DATE OF BUSINESS ON T HE STRENGTH OF MERCHANT BANKING LICENCE GRANTED BY SEBI,THAT NO ACTIVITY WAS CARRIED OUT DU RING THE YEAR AS MERCHANT BANKER,THAT THE AO WAS JUSTIFIED FOR HOLDING THAT BUSINESS WAS NOT SET UP DURING THE YEAR. 2.2. BEFORE US,AUTHORISED REPRESENTATIVE(AR) STATED THAT THERE WAS DIFFERENCE BETWEEN SETTING UP OF BUSINESS AND COMMENCEMENT OF BUSINESS,THAT THE A O HAD NOT TAKEN IN TO CONSIDERATION THE FACT THAT BUSINESS WAS SET UP DURING THE YEAR UNDER CONS IDERATION,THAT LICENCES WERE GRANTED BY THE SEBI IN JAN.2008,THAT IT HAD APPOINTED ON EMPLOYEE, THAT ACTUAL COMMENCEMENT OF BUSINESS WAS NOT A PRECONDITION FOR ALLOWING EXPENDITURE. HE REF ERRED TO PAGE NO. 107 TO 123,130, 132, 178 188,192-194 OF THE PAPER BOOK.HE RELIED UPON CASES OF ESPN SOFTWARE INDIA P.LTD. (301 ITR 368),WESTERN INDIA VEGETABLE PRODUCTS LTD. (26ITR15 1),G N G STOCK HOLDINGS (P.) LTD. (12 TAXMANN.COM.376).DEPARTMENTAL REPRESENTATIVE (DR) S UPPORTED THE ORDER OF THE FAA. 2.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ONLY ISSUE TO BE DECIDED IN THE APPEAL BEFORE US IS WHET HER THE BUSINESS WAS SETTING UP IN THE YEAR UNDER CONSIDERATION OR NOT? THE CONCEPT OF SETTING UP OF A BUSINESS AND A COMMENCEMENT OF A BUSINESS HAS BEEN DELIBERATED BY THE HON'BLE COURTS OF MORE THAN ONE OCCASIONS.IN THE CASE OF SPONGE IRON ITA NO. 1877/MUM/2012 BARCLAYS SECURITIES (I) PVT. LTD. 4 INDIA LTD. THE HON'BLE ANDHRA PRADESH HIGH COURT (2 01 ITR 770) HAS HELD AS UNDER: THE FOLLOWING ARE THE PRINCIPLES APPLICABLE TO DET ERMINE WHETHER A BUSINESS HAS COMMENCED: (I) WHETHER A BUSINESS HAS BEEN COMMENCED OR NOT IS A Q UESTION OF FACT. HOWEVER, WHAT ACTIVITIES CONSTITUTE COMMENCEMENT OF BUSINESS IS A MIXED QUES TION OF LAW AND FACT AND IT HAS TO BE DECIDED ON THE FACTS OF EACH CASE; (II) THERE IS A DISTINCT ION 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 BUSINESS CONSISTS OF A CONTINUOUS COURSE OF ACTIVITIES, FOR COMMENCEMENT OF BUSINESS ALL THE ACTIVITIES WHICH GO TO MAKE UP THE BUSINESS NEE D NOT BE STARTED SIMULTANEOUSLY. AS SOON AS AN ACTIVITY WHICH IS THE ESSENTIAL ACTIVITY IN THE COU RSE OF CARRYING ON THE BUSINESS IS STARTED, THE BUSINESS MUST BE SAID TO HAVE COMMENCED. THE FOLLOW ING ARE THE PRINCIPLES APPLICABLE TO DETERMINE WHETHER A BUSINESS HAS COMMENCED: (I) WHE THER A BUSINESS HAS BEEN COMMENCED OR NOT IS A QUESTION OF FACT. HOWEVER, WHAT ACTIVITIES CO NSTITUTE COMMENCEMENT OF BUSINESS IS A MIXED QUESTION OF LAW AND FACT AND IT HAS TO BE DECIDED O N THE FACTS OF EACH CASE; (II) THERE IS A DISTINCTI ON 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 BUSINESS CONSISTS OF A CONTINUOUS COURSE OF ACTIVITIES, FOR COMMENCEMENT OF BUSINESS ALL THE ACTIVITIES WHICH G O TO MAKE UP THE BUSINESS NEED NOT BE STARTED SIMULTANEOUSLY. AS SOON AS AN ACTIVITY WHICH IS THE ESSENTIAL ACTIVITY IN THE COURSE OF CARRYING ON THE BUSINESS IS STARTED, THE BUSINESS MUST BE SAID TO HAVE COMMENCED. THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF SARA BAI SONS LTD. (90 ITR 318) HAS MADE FOLLOWING OBSERVATIONS: THERE IS A CLEAR DISTINCTION BETWEEN COMMENCING A BUSINESS AND SETTING IT UP. FOR THE PURPOSE OF SECTION 3(1)(D) WHAT IS REQUIRED TO BE CONSIDERED I S THE SETTING UP OF A BUSINESS. WHEN A BUSINESS IS ESTABLISHED AND IS READY TO START BUSINESS IT CAN B E SAID TO BE SET UP. THE BUSINESS MUST BE PUT INTO SUCH A SHAPE THAT IT CAN START FUNCTIONING AS A BUS INESS OR A MANUFACTURING ORGANISATION. IN THE CASE OF FORGING & STAMP PVT. LTD. THE HON'BL E JURISDICTION HIGH COURT HAS DEFINED THE PHRASE SETTING UP OF BUSINESS IN FOLLOWING MANNER ( 119 ITR 616) IF A QUESTION ARISES AS TO WHETHER A PARTICULAR BU SINESS CAN BE SAID TO HAVE BEEN SET UP IN THE RELEVANT ASSESSMENT YEAR, THAT QUESTION WILL HAVE T O BE DETERMINED ON THE FACTS AND CIRCUMSTANCES APPEARING IN EACH CASE.WHEN A BUSINESS IS ESTABLISH ED 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 SUFFI CIENT BY ITSELF AND TILL SOME END PRODUCT IS OR CAN BE OBTAINED, IT CANNOT BE SAID THAT THE COMPANY IS READY TO COMMENCE PRODUCTION AND IT IS THE READINESS TO COMMENCE PRODUCTION WHICH IS EQUIVALEN T TO THE SETTING UP OF THE BUSINESS. THE HON'BLE CALCUTTA HIGH COURT IN THE CASE OF TETR ON COMMERCIAL LTD. (261 ITR 422) HAS HELD THAT A BUSINESS COMMENCES WITH THE ACTIVITIES UNDER TAKEN EVEN AT THE PREPARATORY STAGE OF SETTING UP OF THE BUSINESS. IN THE CASE OF WESTERN INDIA VEGETABLE PRODUCTS LTD .,THE ASSESSEE-COMPANY WAS INCORPORATED ON THE 29.12.1945 WITH THE OBJECT OF RUNNING AN OIL MI LL AND IT OBTAINED A CERTIFICATE OF COMMENCEMENT OF BUSINESS ON 20.04.1946. IN THE ASSE SSMENT YEAR 1947-48, THE AO DISALLOWED ALL THE EXPENSES INCURRED BY THE COMPANY PRIOR TO 1ST N OVEMBER, 1946, WHICH WAS THE DATE 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 CONSIDERA - TION THE DATE OF FIRST PURCHASE OF RAW MATERIALS AN D THE DETAILS OF THE EXPENSES INCURRED BY THE COMPANY, CAME TO THE CONCLUSION THAT ALL EXPENSES I NCURRED AFTER 01.09.1946, SHOULD BE ALLOWED. DECIDING THE MATTER THE HONBLE JURISDICTIONAL HIGH COURT(26ITR151)HELD AS UNDER: THERE IS A CLEAR DISTINCTION BETWEEN A PERSON COMM ENCING A BUSINESS AND A PERSON SETTING UP A BUSINESS AND FOR THE PURPOSES OF THE INDIAN INCOME- TAX ACT THE SETTING UP OF THE BUSINESS AND NOT THE COMMENCEMENT OF THE BUSINESS THAT IS TO BE CONS IDERED. IT IS ONLY AFTER THE BUSINESS IS SET UP THAT THE PREVIOUS YEAR OF THAT BUSINESS COMMENCES A ND ANY EXPENSE INCURRED PRIOR TO THE SETTING UP OF A BUSINESS WOULD NOT BE PERMISSIBLE DEDUCTION. W HEN A BUSINESS IS ESTABLISHED AND IS READY TO COMMENCE BUSINESS THEN IT CAN BE SAID OF THAT BUSIN ESS THAT IT IS SET UP; BUT BEFORE IT IS READY TO ITA NO. 1877/MUM/2012 BARCLAYS SECURITIES (I) PVT. LTD. 5 COMMENCE BUSINESS IT IS NOT SET UP. THERE MAY HOWEV ER BE AN INTERVAL BETWEEN THE SETTING UP OF THE BUSINESS AND THE COMMENCEMENT OF THE BUSINESS AND A LL EXPENSES INCURRED DURING THAT INTERVAL WOULD BE PERMISSIBLE DEDUCTIONSTHAT THE COMPANY A CTUALLY COMMENCED BUSINESS ONLY ON 1ST NOVEMBER, 1946, WHEN IT PURCHASED THE GROUNDNUT OIL MILL, 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 BEFOR E THE TRIBUNAL TO HOLD THAT THE ASSESSEE COMPANY SET UP ITS BUSINESS AS FROM 1ST SEPTEMBER, 1946. FROM THE ABOVE DISCUSSION, IT IS CLEAR THAT THERE I S DIFFERENCE BETWEEN ACTUAL COMMENCEMENT OF A BUSINESS AND SETTING UP OF A BUSINESS.WE FIND THAT AO AND THE FAA HAD TAKEN NOTE OF RAISING OF BILLS OR EARNING OF INCOME ONLY. IN OUR OPINION, TH E ACCRUAL OR RECEIPT OF INCOME IS NOT THE ONLY CRITERIA TO DECIDE THE SETTING UP OF A BUSINESS.IT IS A COMPLEX COMMERCIAL ACTIVITY AND IT TAKES QUITE A LONG TIME TO START THE PRACTICAL OPERATIONS.SUCH ISSUE CANNOT BE DECIDED APPLYING MATHEMATICAL FORMULAS LIKE PERIOD OF GESTATION.IN THE APPEAL BEF ORE US,THE AO HAS EMPHASISED AND MENTIONED THE FACT MORE THAN ONCE THAT A PERIOD OF THREE MONT HS CAN BE HELD TO BE REASONABLE PERIOD FOR STARTING THE BUSINESS.THE BASIS FOR HOLDING THE THR EE MONTHS PERIOD SACROSANCT HAS NOT BEEN MENTIONED BY HIM.THE FAA HAS JUST ENDORSED THE VIEW S OF THE AO.THE FACTS BROUGHT ON RECORD CLEARLY PROVE THAT CAPITAL WAS BROUGHT FOR CARRYING OUT THE BUSINESS DURING THE YEAR UNDER CONSIDERATION,INFRASTRUCTURE WAS CREATED AND AT LEA ST ONE EMPLOYEE WAS RECRUITED.BESIDES,IT HAD ALSO OBTAINED LICENCES FROM SEBI FOR CARRYING OUT B USINESS ACTIVITIES IN THE MONTH OF JANUARY AND FEBRUARY 2007. THE AO WAS OF THE OPINION THAT NUMBE R OF LICENCES I.E. 3 OBTAINED IN THE MONTH OF MARCH HAS TO BE HELD A FACTOR AGAINST THE ASSESSEE. AT THE COST REPETITION, WE WOULD LIKE TO SAY THAT NUMBERS OF LICENCE OR SUCH ARITHMETICAL CALCULATION S DO NOT GOVERN THE DOMAIN OF BUSINESS WORD. IT IS KNOWN AND ADMITTED FACT THAT NO BUSINESSMEN W OULD LIKE TO KEEP HIS MONEY AND PERSONNEL IDLE EVEN FOR A SINGLE DAY. DELAY IN CARRYING OUT A CTUAL BUSINESS OPERATIONS CAN BE BECAUSE OF SO MANY REASONS INCLUDING OBTAINING THE LICENCES.THE A SSESSEE COULD STARTS HIS OPERATIONS ONLY AFTER GETTING LICENCE AND IT HAS NO CONTROL OVER OBTAININ G THE SAME FROM REGULATORY AUTHORITIES. BUT,THAT WOULD NOT MEAN THAT BUSINESS WAS NOT SET-UP.CONSIDE RING THE FACTS LIKE BRINGING CAPITAL FOR STARTING BUSINESS,ENTERING INTO AGREEMENT FOR SPACE AND NUMBERS OF THE STAFF WITH PARENT COMPANY, APPOINTMENT OF A DIRECTOR,APPLYING FOR LICENCES,WE ARE OPINION THAT ALL THESE ACTIVITIES WERE PART OF SETTING UP OF BUSINESS.AS STATED EARLIER,GRANTIN G OF LICENCES WAS BEYOND THE CONTROL OF THE ASSESSEE,BUT IT HAD RECEIVED THE PERMISSION FROM SE BI TO START BUSINESS DURING THE YEAR UNDER CONSIDERATION.THE CUMULATIVE EFFECT OF ALL THESE FA CTORS HAS BEEN TAKEN INTO CONSIDERATION BY US. IN THE CASE OF CNG STOCK HOLDING PVT. LTD.(SUPRA) IN S IMILAR CIRCUMSTANCES IT WAS HELD THAT BUSINESS OF THE ASSESSEE WAS READY TO COMMENCES ON DAY WHEN IT GOT PROFESSIONAL REGISTRATION FROM NATIONAL STOCK EXCHANGE AND IT WAS ENTITLED TO A DE DUCTION OF ADMISSIBLE BUSINESS EXPENDITURE INCURRED BY IT.CONSIDERING THE PECULIAR FACTS AND C IRCUMSTANCES OF THE CASE AND FOLLOWING THE DECISIONS CITED ABOVE,INCLUDING THE MATTER OF CNG S TOCK HOLDING PVT. LTD. (SUPRA), WE REVERSED THE ORDER OF THE FAA.EFFECTIVE GROUND OF APPEAL IS DECIDED IN FAVOUR OF THE ASSESSEE. AS A RESULT, APPEAL FILED BY THE ASSESSEE STANDS ALLOWED. 0'1 &' 2 3 ) - 4 ) ' 56 . ORDER PRONOUNCED IN THE OPEN COURT ON 13TH AUGUST 2014 . . ) +,! 7 8 13 -' , 201 4 , ) - 9 SD/- SD/- . . / I.P. BANSAL) ( / RAJENDRA) / JUDICIAL MEMBER /ACCOUNTANT MEMBER / MUMBAI, 8 /DATE: 13 .08 . 2014. SK ITA NO. 1877/MUM/2012 BARCLAYS SECURITIES (I) PVT. LTD. 6 . . . . ) )) ) $': $': $': $': ;:!' ;:!' ;:!' ;:!' / COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE / '# 2. RESPONDENT / $%'# 3. THE CONCERNED CIT(A)/ < = , 4. THE CONCERNED CIT / < = 5. DR B BENCH, ITAT, MUMBAI / :>- $' CH , . . . 6. GUARD FILE/ - 0 %:' %:' %:' %:' $' $'$' $' //TRUE COPY// . / BY ORDER, ? / 5 DY./ASST. REGISTRAR , /ITAT, MUMBAI