HIPL India Private Limited , Bangalore V. Assistant Commissioner of Income Tax Circle-3(1)(2), Bangalore

ITA 2149/BANG/2018

• Counselvise Citation: [2018] 123 COUNSELVISE.COM (IT) 0693 (ITAT-BANGALORE)
• Duration Of Justice: 2 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-10-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2015-2016
• Appeal Filed On: 09-07-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Revenue expenditure; TDS

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SMC C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER ITA NO. 2149/BANG/2018 ASSESSMENT YEAR : 2015 - 16 HIPL INDIA PRIVATE LTD., NO.2145/866, TOYOTA KIRLOSKAR MOTOR CO. ROAD, BANANDHUR, MEDANAHALLI VILLAGE, BIDADI, RAMANAGAR, BANGALORE 562 109. PAN: AADCH 4720L VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 3(1)(2), BANGALORE. APP ELLANT RESPONDENT APP ELLANT BY : SHRI K.P. SRINIVAS, CA RESPONDENT BY : SHRI RAJEND RA CHANDEKAR, JT.CIT(DR)(ITAT), BENGALURU. DATE OF HEARING : 21 .0 8 .2018 DATE OF PRONOUNCEMENT : 03.10 . 2018 O R D E R THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORD ER DATED 17.05.2018 OF THE CIT(APPEALS)-III, BENGALURU RELATING TO ASSE SSMENT YEAR 2015-16. 2. THE ASSESSEE IS A COMPANY INCORPORATED ON 19.9. 2014. AS PER THE OBJECTS CLAUSE IN THE MEMORANDUM OF ASSOCIATION, TH E ASSESSEE WAS FORMED TO PURSUE THE FOLLOWING OBJECTS ON ITS INCOR PORATION:- 1. TO SET - UP, ACQUIRE AND CARRY ON THE BUSINES S, WITHIN INDIA OR ABROAD OF DEVELOPING, MANUFACTURE, PROCURE, PROD UCE, TRADING, CONTRACTING, FRANCHISING, SELLING, BUYING, EXPORTING, IMPORTING, REPAIRING, MAINTAINING, ASSEMBLING, ENGI NEERING SERVICE PROVIDER OR OTHERWISE DEALING IN ALL KINDS OF ITA NO.2149/BANG/2018 PAGE 2 OF 9 APPLIANCES, EQUIPMENTS, DEVICES, INSTRUMENTS, COMPO NENTS, TOOLS, ACCESSORIES, SENSORS, CONTROLLERS, APPARATUS , MACHINERY, SPARE PARTS AND OTHER RELATED APPLIANCES OF HEATING ELEMENTS AND TEMPERATURE CONTROL SYSTEMS FO R ANY - DOMESTIC, COMMERCIAL ,INDUSTRIAL APPLICATION AND CU STOMER SPECIFIC SOLUTIONS. 3. THE MEMORANDUM OF ASSOCIATION (MOA) ALSO SPECIFI ES THE FOLLOWING OBJECTS CAN BE PURSUED BY THE ASSESSEE FOR FURTHERA NCE OF THE OBJECTS STATED ABOVE. ONE SUCH OBJECT WHICH IS RELEVANT FO R THE PRESENT CASE IS CLAUSE 14 OF OTHER INCIDENTAL OBJECTS WHICH READS A S FOLLOWS:- 14. TO DO ALL OR ANY OF THE ABOVE THINGS AS PRINCI PALS, AGENTS, CONTRACTORS, TRUSTEES OR OTHERWISE AND BY OR THOUGH TRUSTEES, AGENTS OR OTHERWISE AND EITHER ALONE OR IN CONJUNCT ION WITH OTHERS AND TO DO ALL SUCH OTHER THINGS AS ARE INCIDENTAL O R AS MAY BE CONDUCIVE TO THE ATTAINMENT OF THE MAIN OBJECTS OF THE TRUST. 4. THE ASSESSEE FILED A RETURN OF INCOME FOR THE AY 2015-16 DECLARING A LOSS OF RS.38,16,300. THE COMPUTATION OF TOTAL I NCOME BY THE ASSESSEE WAS AS FOLLOWS:- INCOME / LOSS FROM BUSIENSS & PROFESSION (RS.) NET LOSS AS PER PROFIT & LOSS ACCOUNT (47,14,272) ADD: ITEMS DISALLOWED INTEREST ON TAX (TDS) ANY OTHER AMOUNT NOT ALLOWABLE UNDER SECTI ON 37* *PRELIMINARY EXPENSES (4/5 OF TOTAL EXPENS E OF RS.10,53,863) DEPRECIATION AS PER COMPANIES ACT 1,252 8,43,090 94,188 9,38,530 (37,75,742) LESS: ITEMS TO BE CONSIDERED SEPARATELY DEPRECIATION AS PER INCOME TAX ACT, 1961: PRELIMINARY EXPENSE WRITE OFF ALLOWED AS P ER INCOME TAX ACT 40,563 40,563 (38,16,305) TOTAL INCOME (38,16,300) ITA NO.2149/BANG/2018 PAGE 3 OF 9 5. IT CAN BE SEEN FROM THE PROFIT & LOSS (P&L) ACC OUNT OF THE ASSESSEE THAT THE LOSS OF RS.47,14,272 WAS ARRIVED AT AS FO LLOWS:- PARTICULARS NOTE NO. PERIOD ENDED REVENUE FROM OPERATIONS - OTHER INCOME L 1 679,075 TOTAL REVENUE 679,075 EXPENSES: DEPRECIATION AND AMORTISATION OF ASSETS 94,188 OTHER EXPENSES 12 5,299,159 TOTAL EXPENSES 5,393,347 PROFIT (LOSS) BEFORE TAX (4,714,272) TAX EXPENSE: CURRENT TAX - DEFERRED TAX LIABILITY (ASSET) PROFIT (LOSS) FOR THE PERIOD - (4,714,272) 6. IT CAN BE SEEN FROM THE P&L ACCOUNT THAT ASSESSE E HAD REVENUE OF RS.6,77,075. NOTE 11 TO THE P&L ACCOUNT GIVES THE BREAK UP OF REVENUE WHICH IS AS FOLLOWS:- ITA NO.2149/BANG/2018 PAGE 4 OF 9 NOTE 11: OTHER - INCOME (AMOUNT IN RS.) COMMISSION INCOME 88,285 FOREIGN EXCHANGE FLUCTUATION ON ACCOUNT OF RESTATEM ENT 580,641 OTHER 10,149 679,075 7. THE DETAILS OF OTHER EXPENSES DEBITED IN THE P&L ACCOUNT IS GIVEN IN NOTE 12 WHICH READS AS FOLLOWS:- NOTE 12: OTHER EXPENSES (AMOUNT IN RS.) AUDIT FEES 20,000 BANK CHARGES 3,832 COMMUNICATION EXPENSE 34,256 COMPUTER REPAIR & MAINTENANCE 18,975 CONVEYANCE, TOUR AND TRAVEL 603,576 EXHIBITION EXPENSES 55,058 HOLDING FEES 337,281 N NN 1,726,11.9 OFFICE EXPENSE 98,682 PRINTING AND STATIONERY 101,681 PRELIMINARY EXPENSES 1,053,863 RENT EXPENSES 655,844 RATES & TAXES 522,312 REPAIRS & MAINTENANCE TO BUILDING 67,680 5,299,159 8. THE AO WAS OF THE VIEW THAT THE BUSINESS OF THE ASSESSEE WAS NOT SET UP AND THEREFORE REVENUE EXPENSES WHICH WERE CL AIMED AS DEDUCTION HAD TO BE CAPITALISED AS PRE-COMMENCEMENT EXPENSES AND CANNOT BE ALLOWED AS DEDUCTION. THE FOLLOWING WERE THE RELEV ANT OBSERVATIONS OF THE AO IN THIS REGARD. 4. PRIOR PERIOD EXPENSE: ON PERUSAL OF THE DETAILS FURNISHED BY THE ASSESSEE, IT WAS REVEALED THAT THE ASSESSEE COMPANY HAS DEBITED RS.53,93,347 TOWARDS EXPENSES UNDER THE HEA D- OTHER EXPENSES AND DEPRECIATION AND AMORTIZATION. COMPANY WAS INCORPORATED IN SEP 2014. THERE ARE ZERO REVENUE FR OM OPERATION. THE BUSINESS HAS SET UP, HOWEVER IT HAS NOT COMMENC E OPERATIONS. THEREFORE, THE EXPENDITURE CLAIMED CAN NOT BE ITA NO.2149/BANG/2018 PAGE 5 OF 9 ALLOWED AS REVENUE EXPENDITURES. THE ASSESSEE VIDE ORDER SHEET DATED 15.12.2017 WAS ASKED WHY PRIOR PERIOD EXPENSE OF RS.53,93,347 SHOULD NOT BE DISALLOWED. 5. IT WAS DISCUSSED WITH THE AR OF THE COMPANY AND ADMITTED THE SAME. THE AMOUNT IS THEREFORE DISALLOWED AND AD DED BACK TO THE TOTAL INCOME. 9. AGGRIEVED BY THE AFORESAID ADDITION, THE ASSESSE E PREFERRED AN APPEAL BEFORE THE CIT(APPEALS). THE CONTENTION OF THE ASSESSEE WAS THAT ITS BUSINESS HAS BEEN SET UP AND THEREFORE ALL REVE NUE EXPENSES SHOULD BE ALLOWED AS A DEDUCTION AND TOTAL INCOME OF THE ASSE SSEE AS DECLARED IN RETURN OF INCOME SHOULD BE ACCEPTED. THE ASSESSEE POINTED OUT THE FOLLOWING FACTS WHICH GOES TO SHOW THAT ITS BUSINES S WAS SET UP:- 1. IT HAD EARNED COMMISSION INCOME DURING THE RELEVANT PREVIOUS YEAR. IT ACTED AS A COMMISSION AGENT IN RESPECT OF SALE OF ITS PRINCIPALS PRODUCTS. UNDER CLAUSE 14 OF THE OBJECT S INCIDENTAL TO MAIN OBJECTS, THE BUSINESS OF ASSESSEE ALSO INCLUDE S BUSINESS OF ACTING AS COMMISSION AGENT. SINCE THERE WAS INCOME FROM BUSINESS OF COMMISSION AGENCY, IT CAN BE SAID THAT ASSESSEE HAS SET UP ITS BUSINESS DURING THE PREVIOUS YEAR. 2. ITS DIRECTORS UNDERTOOK TRAVEL FOR THE PURPOSE OF T HE TRADING SEGMENT OF THE ASSESSEES BUSINESS. THOUGH NO BUSI NESS ACTUALLY RESULTED ON ACCOUNT OF SUCH TRAVEL, THE FACT REMAIN S THAT ATTEMPTS WERE BEING MADE BY THE ASSESSEE TO DO TRADING IN AP PLIANCES, EQUIPMENTS, ETC. 3. THE ASSESSEE TOOK THE PREMISES ON LEASE FOR THE PUR POSE OF COMMENCEMENT OF ITS BUSINESS OF MANUFACTURING WHICH WAS ALSO USED FOR THE PURPOSE OF ITS TRADING ACTIVITY. THE ASSESSEE FILED COPY OF LEASE DEED IN RESPECT OF PREMISES TAKEN ON LEASE BY THE ASSESSEE. THE LEASE DEED IS DATED 11.11.2014 AND T HE LEASE WAS FOR A PERIOD OF 3 YEARS W.E.F. 10.11.2014. THE REC ITALS IN THE LEASE DEED WERE AS FOLLOWS:- ITA NO.2149/BANG/2018 PAGE 6 OF 9 WHEREAS , THE LESSOR IS THE OWNER OF THE PROPERTY MEASURING TOTAL AREA OF 7200 SQ. FT., OF BUILDING MORE PARTIC ULARLY SPECIFIED IN SCHEDULE. (HEREINAFTER COLLECTIVELY REFERRED TO AS THE 'DEMISED PREMISES'). AND WHEREAS , THE LESSEE IS IN MANUFACTURING BUSINESS. THE LESSEE REQUIRES AN INDUSTRIAL SHED FOR MANUFACTURIN G INDUSTRIAL HEATERS AND HEATING SYSTEMS. AND WHEREAS , THE LESSOR HAS EXPRESSED HIS INTENTION TO LEASE THE DEMISED PREMISES TO THE LESSEE FOR MANUFA CTURING INDUSTRIAL HEATERS AND HEATING SYSTEMS. AND WHEREAS , THE LESSOR HAS REPRESENTED THAT HE HAS ABSOLUTE RIGHT AND TITLE TO GRANT LEASE OF THE DEMI SED PREMISES TO THE LESSEE WITH AN EXCLUSIVE RIGHT TO USE THE SAME FOR USE BY THE LESSEE. AND WHEREAS , RELYING ON THE AFORESAID AND OTHER REPRESENTATIONS OF THE LESSOR, AS HEREIN CONTAINED, THE LESSEE IS DESIROUS OF TAKING ON LEASE AND THE LESSOR IS DESIR OUS OF GRANTING THE LEAD OF THE DEMISED PREMISES, FOR THE PURPOSES AS ENUMERATED ABOVE. 10. BASED ON THE ABOVE SUBMISSIONS, THE ASSESSEE PL EADED BEFORE THE CIT(A) THAT THE BUSINESS HAS BEEN SET UP AND THEREF ORE ALL REVENUE EXPENSES HAD TO BE ALLOWED AS A DEDUCTION. 11. THE CIT(A) HOWEVER DID NOT ACCEPT THE PLEA OF THE ASSESSEE FOR THE FOLLOWING REASONS:- 4.4 THE MAIN OBJECT OF THE APPELLANT COMPANY IS TO ENGAGE IN THE BUSINESS OF MANUFACTURING OR TRADING IN ALL KIN DS OF APPLIANCES, EQUIPMENT, DEVICES, INSTRUMENTS ETC REL ATED TO HEATING ELEMENTS AND TEMPERATURE CONTROL SYSTEMS. A PERUSAL OF THE ABOVE DETAILS OF EXPENDITURE AND THE AUDITED FINANCIALS O F THE COMPANY SHOWS THAT THE COMPANY IS NOT HAVING ANY EMPLOYEES, WHICH WOULD HAVE BEEN REQUIRED TO CARRY OUT DAY TO DAY AC TIVITIES AFTER SETTING UP OF THE BUSINESS. THERE ARE NO PLANT AND MACHINERY OTHER THAN ONE COMPUTER AND SOME OFFICE EQUIPMENT TO CARR Y OUT MANUFACTURING ACTIVITIES. THE APPELLANT HAS NOT BRO UGHT ON RECORD ITA NO.2149/BANG/2018 PAGE 7 OF 9 THE DETAILS OF ANY ACTIVITY CARRIED OUT BY IT, WHIC H COULD BE CONSIDERED AS SETTING UP OF THE BUSINESS BY IT. IT IS NOT SHOWN THAT THE APPELLANT HAS OBTAINED NECESSARY LICENSES AND A PPROVALS FROM THE REGULATORY AUTHORITIES FOR CARRYING OUT ITS ACT IVITIES. THERE IS NO PURCHASE OF RAW MATERIAL OR TRADING GOODS FOR PU RPOSE OF CARRYING OUT MANUFACTURING/TRADING ACTIVITY. THUS T HE EXPENSES INCURRED BY THE APPELLANT ARE PRE-OPERATIVE AND PRE PARATORY EXPENSES WHICH WERE INCURRED PRIOR TO SETTING UP OF BUSINESS AND PRIOR TO COMING INTO AN EXISTENCE AN ALTOGETHER NEW SOURCE OF INCOME. SO THESE EXPENSES CANNOT BE ALLOWED AS REVE NUE EXPENDITURE. THE RELIANCE OF THE APPELLANT ON DIFFE RENT DECISIONS IS FOUND TO BE MISPLACED AS NONE OF THEM WAS RENDER ED ON SIMILAR FACTS AS IN THE CASE UNDER CONSIDERATION. 12. AGGRIEVED BY THE ORDER OF CIT(APPEALS), THE ASS ESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 13. I HAVE HEARD THE RIVAL SUBMISSIONS. THE LD. CO UNSEL FOR THE ASSESSEE BROUGHT TO MY NOTICE THE FACTS WHICH WERE STATED BEFORE THE CIT(A) AND ALSO PLACED RELIANCE ON CERTAIN JUDICIAL PRONOUNCEMENTS. THE LD. DR RELIED ON THE ORDER OF CIT(A). 14. I HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE L EGAL POSITION WITH REGARD TO EXPENSES CLAIMED PRIOR TO SETTING UP OF B USINESS AND THE SEQUENCE OF POINT OF TIME WHEN THE BUSINESS CAN BE SAID TO HAVE BEEN SET UP AS FOLLOWS:- THE DEFINITION OF THE PREVIOUS YEAR AS CONTAINED IN SECTION 3(1) OF THE ACT, WHICH IS RELEVANT FOR THE PRESENT CASE READS A S FOLLOWS:- 3. PREVIOUS YEAR DEFINED. 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 IN TO 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 ITA NO.2149/BANG/2018 PAGE 8 OF 9 WHICH THE SOURCE OF INCOME NEWLY COMES INTO EXISTEN CE AND ENDING WITH THE SAID FINANCIAL YEAR. ACCORDING TO THIS SECTION, IT IS SETTING UP OF THE BUSINESS AND NOT THE COMMENCEMENT OF THE BUSINESS THAT IS TO BE CONSIDER ED. A BUSINESS IS COMMENCED AS SOON AS AN ESSENTIAL ACTIVITY OF THAT BUSINESS IS STARTED. THUS, A BUSINESS COMMENCED WITH FIRST PURCHASE OF S TOCK IN TRADE, THE DATE WHEN THE FIRST SALE IS MADE IS NOT MATERIAL IN THAT RESPECT. SIMILARLY, A MANUFACTURER HAS TO UNDERTAKE SEVERAL ACTIVITIES IN ORDER TO BRING TO PRODUCE FINANCIAL GOODS AND HE COMMENCES HIS BUSINE SS AS SOON AS HE UNDERTAKES FIRST OF SUCH ACTIVITIES (COMMISSIONER O F INCOME TAX VS. SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD. 1973 (91) ITR 170 GUJRAT). 15. THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT V. ESPN SOFTWARE INDIA P. LTD. (2009) 184 TAXMAN 452 (DEL) EXPLAINING THE POSITION WITH REGARD TO THE TIME WHEN A BUSINESS CAN BE SAID TO H AVE BEEN SET UP HELD THAT IT IS A FINDING BASED ON FACTS OF EACH CASE. IN THAT CASE, THE BUSINESS OF ASSESSEE WAS DISTRIBUTION OF ESPN PROGRAMMING SE RVICES AND THE FACT OF ASSESSEE ENTERING INTO THE AGREEMENT ACQUIRING LICE NSE TO DISTRIBUTE IN INDIA ESPB PROGRAMME WAS HELD TO BE THE POINT OF TIME WHE N THE BUSINESS WAS SET UP. THE COURT HELD THAT IF ESSENTIAL ACTIVITY I N THE COURSE OF CARRYING ON OF BUSINESS IS STARTED, THEN THE BUSINESS MUST BE S AID TO HAVE BEEN SET UP. 16. APPLYING THE AFORESAID PRINCIPLE TO THE FACTS O F THE PRESENT CASE, I AM OF THE VIEW THAT THE THREE CIRCUMSTANCES POINTED OU T BY THE ASSESSEE BEFORE THE CIT(A) VIZ., RECEIPT OF AGENCY COMMISSIO N, TRAVEL BY DIRECTORS TO EXPLORE THE POSSIBILITIES OF GETTING BUSINESS AND T AKING THE PREMISES ON LEASE FOR THE PURPOSE OF MANUFACTURING ACTIVITY WOU LD BE SUFFICIENT TO COME TO THE CONCLUSION THAT BUSINESS OF ASSESSEE HAD BEE N SET UP DURING THE RELEVANT PREVIOUS YEAR. CONSEQUENTLY, THE ASSESSEE WOULD BE ENTITLED TO CLAIM ALL THE REVENUE EXPENSES AS DEDUCTION IN COMP UTING ITS TOTAL INCOME. ITA NO.2149/BANG/2018 PAGE 9 OF 9 I AM THEREFORE OF THE VIEW THAT THE CLAIM MADE BY T HE ASSESSEE FOR DEDUCTION SHOULD HAVE BEEN ALLOWED BY THE REVENUE A UTHORITIES. I ACCORDINGLY DIRECT THE AO TO ALLOW THE DEDUCTION. 17. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS AL LOWED. PRONOUNCED IN THE OPEN COURT ON THIS 3 RD DAY OF OCTOBER, 2018. SD/- ( N.V. VASUDEVAN ) JUDICIAL MEMBER BANGALORE, DATED, THE 3 RD OCTOBER, 2018. / D ESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.