SHRI ARIHANT TRADERS, MUMBAI V. PR CIT 20, MUMBAI

ITA 2255/MUM/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 3081 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2016
• Appeal Filed By: Assessee
• Bench Allotted: J
• Assessment Year: 2010-2011
• Appeal Filed On: 17-04-2015
• Court: TRIBUNAL
• Department Lawyers: SANJAY SINGH
• Keywords: Depreciation; Business expenditure
• Section: 143(3); 142(1); 263

Judgement Text

, , J, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES J, MUMBAI BEFORE SHRI C.N. PRASAD, JUDICIAL MEMBER, AND SHRI ASHWANI TANEJA, ACCOUNTANT MEMBER ITA NO.2255/MUM/2015 ASSESSMENT YEAR: 2010-11 SHRI ARIHANT TRADERS, 211- B PRABHAT BLDG, DEODHAR RD MATUNGA (CR) MUMBAI -400019 / VS. PR. CIT - 20 PIRMAL CHAMBERS MUMBAI- ( REVENUE ) ( RESPONDENT ) P.A. NO. ABLFS6608N ASSESSEE BY SHRI VIJAY MEHTA ( A R) REVENUE BY SHRI SANJAY SINGH ( CIT - D R) / DATE OF HEARING : 08/09/2016 / DATE OF ORDER: 21/09/2016 / O R D E R PER ASHWANI TANEJA (ACCOUNTANT MEMBER): THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST ORDER OF LD. COMMISSIONER OF INCOME TAX -20 MUMBAI, {(IN SHORT CIT}, PASSED U/S 263 DATED 30.03.2015 FOR A.Y. 2 010-11 ON THE FOLLOWING GROUNDS: BEING AGGRIEVED BY THE ORDER PASSED UNDER SECTION 263 BY THE PRINCIPAL COMMISSIONER OF INCOME-TAX - 2 0, THIS APPEAL PETITION IS SUBMITTED ON THE FOLLOWING GROUNDS WHICH MAY CONSIDERED WITHOUT PREJUDICE TO ONE ANOTH ER:- ARIHANT TRADERS 2 1.ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED PRINCIPAL CIT ERRED IN SETTING ASIDE TH E ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER HOLDING THAT THE ORDER PASSED BY AO IS NOT ONLY ERR ONEOUS BUT ALSO PREJUDICIAL TO THE INTEREST OF THE REVENUE AS MUCH AS THE ALLOWANCE OF DEPRECIATION OF RS. 59,55,717/- ON COMPUTERS IS ALLOWED BY THE AO WHILE COMPUTING THE TOTAL INCOME WITHOUT MAKING PROPER APPLICATION OF MIND AND WITHOUT RAISING SPECIFIC QU ERY OR DISCUSSION ON THE PRE-REQUISITE FACTORS SUCH AS USE FOR BUSINESS DURING THE FINANCIAL YEAR, DETAILS OF TRIA L RUNS, COMMENCEMENT OF BUSINESS ITSELF ETC. 2.ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED PRINCIPAL CIT ERRED IN DIRECTING THE AO TO DISALLOW THE CLAIM OF DEPRECIATION ON COMPUTERS OF RS. 59,55,717/- BY STATING THAT SINCE THE BUSINESS ITSE LF DID NOT COMMENCE NOR OPERATED IN F.Y. 2009-10, THE ENTI RE EXPENDITURE THAT WOULD HAVE BEEN INCURRED IN SETTIN G UP OF BUSINESS WOULD HAVE TO BE TREATED AS PRE-OPERATI VE OR PRE- COMMENCEMENT EXPENDITURE & HAS TO BE CAPITALIZED AND ALTHOUGH COMPUTERS WERE INSTALLED W ITH SOFTWARE, THE SYSTEM WAS NOT IN THE REAL SENSE READ Y FOR USE SINCE NO EVIDENCES WERE SUBMITTED FOR NECESSARY TRAINING AND ONLINE TRIAL RUNS. 3. THE APPELLANT COMPANY CRAVES LEAVE TO ADD, TO AMEND, ALTER I DELETE AND / OR MODIFY THE ABOVE GRO UNDS OF APPEAL ON OR BEFORE THE FINAL DATE OF HEARING 2. DURING THE COURSE OF HEARING, ARGUMENTS WERE MADE B Y SHRI VIJAY MEHTA, AUTHORISED REPRESENTATIVE (AR) ON BEHA LF OF THE ASSESSEE AND BY SHRI SANJAY SINGH, DEPARTMENTAL REPRESENTATIVE (CIT-DR) ON BEHALF OF THE REVENUE. 3 . THE BRIEF BACKGROUND OF THE IMPUGNED PROCEEDINGS IS THAT IN THIS CASE ORIGINAL ASSESSMENT ORDER WAS PASSED B Y THE AO U/S 143(3) DATED 15.03.2013 BY ASSESSING TOTAL INCO ME OF THE ASSESSEE AT LOSS OF RS.10,34,831/- AS AGAINST LOSS FROM BUSINESS DECLARED BY THE ASSESSEE IN ITS RETURN FOR ARIHANT TRADERS 3 RS.12,57,308/-. SUBSEQUENTLY, LD. CIT ISSUED SHOW C AUSE NOTICE U/S 263 TO THE ASSESSEE ON THE GROUND THAT T HE AO HAD ALLOWED DEPRECIATION ON THE COMPUTERS PURCHASED BY THE ASSESSEE DURING THE YEAR WITHOUT VERIFYING ACTUAL I NSTALLATION AND USAGES OF COMPUTERS AND WITHOUT VERIFYING THE F ACT WITH THE ASSESSEE HAS NOT COMMENCED BUSINESS DURING THE YEAR. THE ASSESSEE SUBMITTED DETAILED REPLY TO THE LD. CI T EXPLAINING INTER ALIA THAT COMPLETE DETAILS AND DOCUMENTARY EVIDENCES WERE SUBMITTED TO THE AO WHICH WERE DULY VERIFIED BY HIM WHEREIN ALL THE FACTS RELATING TO SETTING UP OF THE BUSINESS OF THE ASSESSEE AS WELL AS INSTALLATION AN D USAGE OF COMPUTERS WERE DULY EXPLAINED AND AFTER VERIFICATION OF THE SAME ONLY AND DUE APPLICATION OF MIND, THE AO NOT O NLY ALLOWED THE DEPRECIATION UPON COMPUTERS BUT ALLOWED OTHER BUSINESS EXPENSES ALSO AND ASSESSED THE INCOME OF T HE ASSESSEE UNDER THE HEAD INCOME FROM BUSINESS. BUT , LD. CIT WAS NOT SATISFIED WITH THE SUBMISSIONS OF THE ASSES SEE AND HE REVISED THE ORDER OF U/S 263 AND ALSO DIRECTED THE AO TO DISALLOW THE DEPRECIATION CLAIMED BY THE ASSESSEE O N THE AMOUNT OF COMPUTERS PURCHASED DURING THE YEAR. BUT, OTHER EXPENSES ALLOWED BY THE AO UNDER THE HEAD BUSINESS WERE NOT DISPUTED BY THE LD. CIT. 3.1. BEING AGGRIEVED, THE ASSESSEE FILED AN APPEAL BEFO RE THE TRIBUNAL WHEREIN THE ORDER OF THE CIT HAS BEEN CONT ESTED ON ITS MAINTAINABILITY WITH REGARD TO THE ASSUMPTION O F THE JURISDICTION U/S 263 AS WELL AS ALLOWBILITY OF DEPR ECIATION ON COMPUTERS WHICH HAS BEEN DIRECTED TO BE DISALLOWED BY THE LD. CIT. DURING THE COURSE OF HEARING, THOUGH LD. COUNS EL MADE ARIHANT TRADERS 4 ARGUMENTS ON BOTH THE ASPECTS, BUT IT WAS ALSO REQU ESTED THAT IF DEPRECIATION IS FOUND TO BE ALLOWABLE AS PER LAW AND FACTS OF THE CASE, THEN JURISDICTIONAL ASPECT OF MAINTAINABI LITY OF ORDER U/S 263 NEED NOT BE GONE INTO. 3.2. ON THE MERITS OF THE CLAIM OF DEPRECIATION, DETAIL ED ARGUMENTS HAVE BEEN MADE. LD. COUNSEL TOOK US THROU GH VARIOUS DOCUMENTARY EVIDENCES IN THE PAPER BOOK TO SHOW THAT BUSINESS OF ASSESSEE HAD BEEN UNDOUBTEDLY SET UP DURING THE YEAR, WHICH IS ALSO EVIDENT FROM THE FACT THAT AO H AD MADE CERTAIN DISALLOWANCES AND FINALLY COMPUTED INCOME O F THE ASSESSEE UNDER THE HEAD INCOME FROM BUSINESS. THE ACTION OF AO IN COMPUTING INCOME UNDER THE HEAD BUSINESS AND MAKING CERTAIN DISALLOWANCE HAS NOT BEEN DISTURBED OR DOUB TED BY THE LD. CIT. THUS, SETTING UP OF BUSINESS IS DULY ESTAB LISHED BY THE OWN ACTION OF THE AO WHICH REMAINED UNCHALLENGE D BY THE LD. CIT. IN ADDITION TO THAT, ON FACTS ALSO IT WAS SHOWN TO US THAT ASSESSEE WAS COMMITTED TO MAKE SALE OF LOTTERY TICKETS FROM THE 1 ST APRIL 2010 AND THEREFORE, BEFORE THE SAID DATE ASSESSEE HAD MADE ALL REQUISITE ARRANGEMENTS TO DO BUSINESS. IMMEDIATELY AFTER THE AGREEMENT WAS ENTERED WITH TH E PUNJAB GOVERNMENT, PREMISES WERE HIRED, STAFF WAS EMPLOYED , RETAILERS WERE APPOINTED AND COMPUTERS WERE INSTALL ED IN READY TO GO MODE AND ALL OTHER REQUIRED INFRASTRUCTURE WA S PROPERLY INSTALLED IN PROPER WORKING MODE. UNDER THESE CIRCU MSTANCES, IT COULD BE CLEARLY SAID THAT BUSINESS OF THE ASSES SEE WAS DULY SET UP. RELIANCE WAS PLACED IN THIS REGARD ON THE J UDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. HUG HES ESCORTS COMMUNICATIONS LTD. 311 ITR 253 (DELHI) FOR THE PRO POSITION ARIHANT TRADERS 5 THAT EXPENSES ARE ALLOWABLE IMMEDIATELY AFTER SETTI NG UP OF THE BUSINESS, EVEN IF BUSINESS IS NOT YET ACTUALLY COMM ENCED. WITH REGARD TO USE OF THE COMPUTERS, IT WAS SUBMITTED TH AT FROM EVIDENCES AVAILABLE ON THE RECORD, IT IS EVIDENT TH AT ALL THE COMPUTERS WERE DULY INSTALLED AT THE PREMISES OF TH E RETAILERS AND REQUIRED SOFTWARE WAS ALSO INSTALLED IN THE COM PUTERS. THESE COMPUTERS WERE USED FOR THE PURPOSE OF LOTTER Y BUSINESS. NO CONTRADICTORY MATERIAL HAS BEEN BROUGH T BY THE CIT ON RECORD TO DOUBT THESE EVIDENCES. THE AO HAD EXAMINED THESE EVIDENCES AS PER HIS UNDERSTANDING AND IN THE ABSENCE OF ANY DOUBT ARISING IN THE GIVEN CIRCUMSTANCES AND IN THE ABSENCE OF ANY OTHER CONTRADICTORY MATERIAL, THE AO HAD ACCEPTED THESE EVIDENCES AND ALLOWED DEPRECIATION O N THE COMPUTERS. IT WAS SUBMITTED THAT ONCE THE COMPUTERS WERE INSTALLED AND WERE IN POSITION TO GIVE OUTPUT ON PL UG AND PLAY BASIS, THEN IT CAN BE SAID THAT COMPUTERS WERE USED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. RELIANCE WAS P LACED IN THIS REGARD ON THE DECISIONS OF THE CHANDIGARH BENC H OF THE TRIBUNAL IN THE CASE OF TURBO SCAFFOLDING PVT. LTD. VS ACIT IN ITA NO.486/CHD/2015 DATED 21.01.2016. IT WAS ALSO SUBMITTED THAT ONCE THE ASSESSEE HAD PROVIDED THE C OMPUTERS TO ITS RETAIL DISTRIBUTORS FOR THE PURPOSE OF DOING BUSINESS BY THEM WHICH WAS ULTIMATELY MEANT FOR THE BUSINESS OF THE ASSESSEE, THEN AS FAR ASSESSEE IS CONCERNED COMPUTE RS CAN BE DEEMED TO BE PUT TO USE WHEN THESE WERE HANDED OVER BY THE ASSESSEE TO THE RETAIL DISTRIBUTORS FOR THE PURPOSE OF BUSINESS. LD. COUNSEL DREW PARITY BETWEEN THE FACTS OF THIS C ASE WITH THE FACTS OF LEASING BUSINESS WHERE THE ASSETS ARE DEEM ED TO BE ARIHANT TRADERS 6 PUT TO USE AS SOON AS THE LESSOR HANDS OVER THE ASSETS TO THE LESSEE. RELIANCE IN THIS REGARD WAS PLACED ON THE F OLLOWING JUDGMENTS: (I) CIT V. KOTAK MAHINDRA FINANCE LTD. 317 ITR 236 (BOM) (II) CIT V. REETU FINLEASE PVT. LTD. 286 ITR 652 (D EL) 3.3. PER CONTRA, LD. CIT-DR VEHEMENTLY OPPOSED IN DETAI L ALL THE ARGUMENTS OF LD. COUNSEL. IT WAS SUBMITTED THAT THE ASSESSEE WAS PERMITTED TO MAKE FIRST SALE OF ITS LO TTERY TICKETS ON 01.04.2010 AND THEREFORE, IT COULD NOT BE SAID T HAT THE ASSESSEE COMMENCED ITS BUSINESS DURING THE YEAR UND ER CONSIDERATION. SINCE THE FIRST SALE WAS NOT POSSIBL E BEFORE 01.04.2010, THEREFORE, ASSESSEE COULD NOT HAVE COMM ENCED ITS BUSINESS DURING THE YEAR UNDER CONSIDERATION AT ALL . IT WAS FURTHER SUBMITTED THAT UNLESS THE ASSESSEE BRINGS O N RECORD, THE EVIDENCES WITH REGARD TO ACTUAL DATE OF USAGES OF THE COMPUTERS, THE DEPRECIATION ON THE SAME CANNOT BE A LLOWED UNDER THE LAW. WITH REGARD TO THE EVIDENCES SHOWN B Y THE LD. COUNSEL, IT WAS SUBMITTED BY THE LD. CIT-DR THAT NO NE OF THESE EVIDENCES CONCLUSIVELY PROVED ABOUT THE INSTA LLATION OF COMPUTERS AND USAGES OF THE SAME, AND IN ANY CASE S INCE FIRST SALE HAD TAKEN PLACE ONE 01.04.2010, THEREFORE, THE SE COMPUTERS COULD NOT HAVE BEEN USED IN THE YEAR UNDE R CONSIDERATION. IT WAS FURTHER SUBMITTED THAT AO HAD NOT EXAMINED THESE EVIDENCES PROPERLY AND THEREFORE LD. CIT HAD RIGHTLY DISALLOWED THE DEPRECIATION CLAIMED ON COMP UTERS. 3.4. IN REPLY, THE LD. COUNSEL SUBMITTED THAT ALL THE E VIDENCES WERE EXAMINED BY THE AO AND THERE WAS NO DOUBT ABOU T THE FACT THAT COMPUTERS WERE PROVIDED TO THE RETAIL DIS TRIBUTORS ARIHANT TRADERS 7 AND THESE WERE DULY INSTALLED AS PER THE EVIDENCES BROUGHT ON RECORD AND NO SUCH MATERIAL HAS BEEN BROUGHT ON REC ORD BY THE CIT WHICH COULD RAISE ANY SUSPICION WITH REGARD TO THESE EVIDENCES. THUS, VALID CLAIM OF THE ASSESSEE COULD NOT HAVE BEEN DISALLOWED MERELY ON THE BASIS OF DOUBTS AND S USPICIONS CREATED IN THE AIR BY THE LD. CIT. 4. WE HAVE GONE THROUGH SUBMISSIONS MADE BY BOTH THE PARTIES ON ALL THE ASPECTS. WE SHALL FIRST DEAL WIT H THE ISSUE ON ITS MERITS AND IF THE NEED ARISES THEN WE SHALL GO INTO ASPECT OF JURISDICTIONAL VALIDITY OF ORDER PASSED U/S 263. LD . CIT HAS DIRECTED THE AO TO DISALLOW THE DEPRECIATION ON THE AMOUNT OF COMPUTERS PURCHASED BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION AND HIS REASONING FOR DISALLOWANCE CA N BE DIVIDED INTO TWO PARTS. THE FIRST PART OF THE REASONING IS THAT ASSESSEE HAD NOT COMMENCED ITS BUSINESS DURING THE YEAR AND THEREFORE, NO DEPRECIATION COULD HAVE BEEN ALLOWED AND SECOND, THE ASSESSEE COULD NOT ESTABLISH ACTUAL USER OF TH E COMPUTERS FOR THE PURPOSE OF ITS BUSINESS DURING TH E YEAR UNDER CONSIDERATION. WE SHALL DEAL WITH BOTH PARTS ONE BY ONE HEREINAFTER. 4.1. AS FAR AS FIRST REASON ABOUT ALLOWABILITY OF THE E XPENSES AFTER COMMENCEMENT OF BUSINESS IS CONCERNED, IT IS FIRSTLY ESSENTIAL TO UNDERSTAND THE LAW WITH REGARD TO ALLO WABILITY OF BUSINESS EXPENSES VIZ. FROM WHAT STAGE ONWARDS THE EXPENSES ARE ALLOWED. THE BUSINESS OF THE ASSESSEE MAY HAVE MANY STAGES. FOR EXAMPLE, FIRST OF ALL A COMPANY IS INCO RPORATED AND THEN IT MAKES REQUISITE ARRANGEMENTS TO PUT TOGETHE R AND INSTALL REQUISITE INFRASTRUCTURE TO ENABLE IT TO CA RRY ON ITS ARIHANT TRADERS 8 BUSINESS. THEREAFTER, EVENTUALLY, AFTER MAKING FURT HER EFFORTS, ACTUAL COMMENCEMENT OF BUSINESS TAKES PLACE. THUS, AT LEAST THREE STAGES ARE INVOLVED. UNDER THESE CIRCUMSTANCE S, A QUESTION ARISES THAT EXPENSES SHALL BE ALLOWABLE FR OM WHAT STAGE. IN THIS REGARD, ONE NEED NOT LABOUR MUCH, AS ANSWER OF THIS QUESTION HAS BEEN GIVEN IN THE STATUTE ITSELF. WE CAN MAKE REFERENCE OF SECTION 2(34) OF THE ACT WHICH DEFINES THE TERM PREVIOUS YEAR, WHICH IN TURN REFERS TO SECTION 3 OF THE ACT, AND SECTION 3 DEFINES PREVIOUS YEAR AS UNDER: PREVIOUS YEAR DEFINED. 3. FOR THE PURPOSES OF THIS ACT, PREVIOUS YEAR ME ANS THE FINANCIAL YEAR IMMEDIATELY PRECEDING THE ASSESSMENT YEAR: PROVIDED THAT, IN THE CASE OF BUSINESS OR PROFESSIONS NEWLY SET UP, OR A SOURCE OF INCOME NEWLY COMING INTO EXISTEN CE, IN THE SAID FINANCIAL YEAR, THE PREVIOUS YEAR SHALL BE THE PERIOD BEGINNING WITH THE DATE OF SETTING UP OF THE BUSINE SS OR PROFESSION OR, AS THE CASE MAY BE, THE DATE ON WHIC H THE SOURCE OF INCOME NEWLY COMES INTO EXISTENCE AND ENDING WIT H THE SAID FINANCIAL YEAR. 4.2. THUS, A PLAIN READING OF THE AFORESAID PROVISIONS CLEARLY SHOWS THAT FOR A NEW BUSINESS OR A SOURCE OF INCOME NEWLY COMING INTO EXISTENCE, THE PREVIOUS YEAR IS THE PER IOD BEGINNING WITH THE DATE OF SETTING-UP OF THE BUSINESS. THE COURTS HAVE EXPLAINED FROM TIME TO TIME THAT DATE O F SETTING UP OF THE BUSINESS IS THE TIME WHEN AN ENTITY IS IN A POSITION TO CATER TO ITS CUSTOMERS. IN OTHER WORDS, WHEN THE EN TIRE INFRASTRUCTURE IS PUT IN PLACE TO COMMENCE THE BUSI NESS, THEN, IT CAN BE SAID THAT BUSINESS IS SET-UP. EVEN IF ACT UAL COMMENCEMENT OF BUSINESS MAY NOT HAVE TAKEN PLACE, BUT ONCE THE COMPANY COMES IN A POSITION TO DO ITS BUSI NESS, THEN THAT DATE CAN BE TAKEN UP AS DATE OF SETTING-UP OF BUSINESS. THE LAW IN THIS REGARD WAS ALSO EXPLAINED BY HONBL E BOMBAY ARIHANT TRADERS 9 HIGH COURT IN ITS LANDMARK JUDGMENT IN THE CASE OF WESTERN INDIAN VEGETABLES PRODUCTS LIMITED V CIT 26 ITR 151; AT PAGE 157 HONBLE HIGH COURT OBSERVED THAT ONCE I T IS KNOWN WHAT THE BUSINESS OF THE ASSESSEE IS THEN: THE IMPORTANT QUESTION THAT HAS GOT TO BE CONSID ERED IS FROM WHICH DATE ARE THE EXPENSES OF THIS BUSINES S TO BE CONSIDERED PERMISSIBLE DEDUCTIONS AND FOR THAT PURP OSE THE SECTION THAT WE HAVE GOT TO LOOK TO IS SECTION 2(11) AND THAT SECTION DEFINES THE PREVIOUS YEAR AND FOR TH E PURPOSE OF A BUSINESS THE PREVIOUS YEAR BEGINS FROM THE DAT E OF SETTING UP OF THE BUSINESS. THEREFORE, IT IS ONLY A FTER THE BUSINESS IS SET UP THAT THE PREVIOUS YEAR OF THAT B USINESS COMMENCES AND IN THAT PREVIOUS YEAR THE EXPENSES INCURRED IN THE BUSINESS CAN BE CLAIMED AS PERMISSI BLE DEDUCTIONS. ANY EXPENSES INCURRED PRIOR TO SETTING UP OF A BUSINESS WOULD OBVIOUSLY NOT BE PERMISSIBLE DEDUCTI ON BECAUSE THOSE EXPENSES WOULD BE INCURRED AT A POINT OF TIME WHEN THE PREVIOUS Y EAR OF THE BUSINESS WOULD NOT HAVE COMMENCED. IN THIS CASE HONBLE BOMBAY HIGH COURT WAS DEALING WITH THE CORRESPONDING PROVISION OF THE INDIAN INCOME TAX AC T, 1922. THEIR LORDSHIP ALSO EXPLAINED THE DISTINCTION BETWE EN CONCEPT OF COMMENCEMENT AND SETTING UP OF BUSINESS AT PAGES 158 AND 159 AS UNDER: IT SEEMS TO US, THAT THE EXPRESSION SETTING UP M EANS, AS IS DEFINED IN THE OXFORD ENGLISH DICTIONARY, TO PLA CE ON FOOT OR TO ESTABLISH, AND IN CONTRADISTINCTION TO COMME NCE. THE DISTINCTION IS THIS THAT WHEN A BUSINESS IS ESTABLI SHED AND IS READY TO COMMENCE BUSINESS THEN IT CAN BE SAID O F THAT BUSINESS THAT IT IS SET UP. BUT BEFORE IT IS READY TO COMMENCE BUSINESS IT IS NOT SET UP. BUT THERE MAY B E AN INTERREGNUM, THERE MAY BE AN INTERVAL BETWEEN A BUS INESS WHICH IS SET UP AND A BUSINESS WHICH IS COMMENCED A ND ALL EXPENSES INCURRED AFTER THE SETTING UP OF THE B USINESS AND BEFORE THE COMMENCEMENT OF THE BUSINESS, ALL EXPENSES DURING THE INTERREGNUM, WOULD BE PERMISSIB LE DEDUCTIONS UNDER SECTION 10(2) ARIHANT TRADERS 10 4.3. THE ABOVE DECISION HAS BEEN FOLLOWED ON MANY OCCAS IONS BY VARIOUS COURTS OF THE COUNTRY IN LARGE NUMBER OF DECISIONS. HONBLE DELHI HIGH COURT HAS ALSO TAKEN A SIMILAR V IEW, FOLLOWING AFORESAID DECISION EXPLAINING IT FURTHER IN DETAIL IN ITS JUDGMENT IN THE CASE OF CIT V. L.G. ELECTRONIC (INDIA) LTD. 282 ITR 545 (DELHI) AND CIT V. HUGHES ESCORTS COMMUNICATIONS LTD. (DELHI) (SUPRA). IT IS FURTHER NOTED BY US THAT NO CONTRARY JUDGMENT OR ANY CONTRARY VIEW WAS BROUGHT TO OUR NOTICE BY LD. CIT-DR. THUS, WELL ACCEPTED PO SITION OF LAW AS EMERGES BEFORE US IS THAT BUSINESS EXPENSES ARE ALLOWABLE WHILE COMPUTING INCOME UNDER THE HEAD INC OME FROM BUSINESS AND PROFESSION W.E.F. THE DATE OF SETTING-UP OF THE BUSINESS , EVEN WHILE THE ACTUAL COMMENCEMENT OF BUSINESS HAS NOT YET TAKEN PLACE. 4.4. NOW, TURNING BACK TO THE FACTS OF THE CASE, WE NEE D TO FIND WHETHER THE BUSINESS OF THE ASSESSEE WAS SET-UP DUR ING THE YEAR UNDER CONSIDERATION, SO AS TO ENABLE IT TO CLA IM DEPRECIATION ON THE AMOUNT OF COMPUTERS PURCHASED A ND CLAIMED TO BE USED DURING THE YEAR UNDER CONSIDERAT ION. 4.5. THE BRIEF BACKGROUND OF THE BUSINESS OF THE ASSESS EE IS THAT DURING THE YEAR THE ASSESSEE HAD SET UP LOTTER Y BUSINESS AFTER ENTERING INTO AN AGREEMENT WITH THE PUNJAB GO VERNMENT, AS HAS ALSO BEEN STATED BY THE LD. CIT HIMSELF IN F IRST PARA OF HIS ORDER. DOCUMENTS AND EVIDENCES SUBMITTED BEFORE THE AO AS WELL AS LD. CIT SHOW THAT ASSESSEE HAD ENTERED I NTO AN AGREEMENT DATED 15.01.2010 WITH THE GOVERNMENT OF P UNJAB TO BECOME SOLE SELLING AGENT OF THE GOVERNMENT OF P UNJAB FOR DOING LOTTERY BUSINESS. AS PER CLAUSE 5 OF THE SAID AGREEMENT, ARIHANT TRADERS 11 THE ASSESSEE WAS PERMITTED TO HOLD THE FIRST DRAW I N RESPECT OF WEEKLY LOTTERY SCHEMES ON 01.04.2010. THUS, UNDER T HESE CIRCUMSTANCES, THE ASSESSEE STARTED MAKING ALL REQU ISITE ARRANGEMENTS SO AS TO ENABLE IT TO ISSUE FIRST DRAW OF LOTTERY ON 01.04.2010. IT WAS SHOWN TO US WITH THE HELP OF CER TAIN EVIDENCES THAT ASSESSEE HAD PAID REQUISITE DEPOSIT AMOUNT TO THE DIRECTOR, PUNJAB STATE LOTTERY (GOVERNMENT OF P UNJAB) AMOUNTING TO RS.6.7 CRORES. IT ALSO FURNISHED BANK GUARANTEE FOR WHICH IT HAD PAID BANK CHARGES WHICH WERE DEBIT ED IN THE INCOME & EXPENDITURE A/C AMOUNTING TO RS.11.20 LAKH S. IT WAS SHOWN TO US THAT REQUISITE STAFF WAS EMPLOYED A ND OTHER EXPENSES ON SET UP OF THE OFFICE WERE INCURRED. THE RETAIL DISTRIBUTORS WERE APPOINTED. OUR ATTENTION WAS ALSO DRAWN UPON THE INVOICES ISSUED BY THE PUNJAB STATE LOTTER Y DEPARTMENT DATED 28.03.2010 AND 29.03.2010 SHOWING PURCHASE OF LOTTERY TICKETS BY THE ASSESSEE FROM PU NJAB STATE LOTTERY DEPARTMENT. THE ASSESSEE ALSO PURCHASED COM PUTERS AND INSTALLED THEM AT THE PREMISE OF ITS RETAIL DIS TRIBUTORS FOR ENABLING ONLINE SALE OF LOTTERY TICKETS AND HELPING IN OPERATION OF LOTTERY BUSINESS. 4.6. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A O ASKED FROM ASSESSEE VARIOUS QUERIES IN THIS REGARD FROM TIME TO TIME. THE AO ISSUED ITS NOTICE U/S 142(1) DATED 13.09.2012 ASKING THE ASSESSEE TO PRODUCE DETAILS OF LOTTERY B USINESS WITH ALL DETAILS OF THE TRANSACTIONS TILL DATE AND ALSO ASKED THE ASSESSEE TO PRODUCE WITH REGARD TO CLAIM OF DEPRECI ATION, NATURE OF ASSETS AND DATE PUT TO USE AND ALLOWABILI TY OF THE SAME VIZ-A-VIZ COMMENCEMENT OF THE BUSINESS DURING THE YEAR. ARIHANT TRADERS 12 THE ASSESSEE FURNISHED ITS DETAILED REPLY VIDE ITS LETTER DATED 10.10.2012 WHEREIN IT GAVE DETAILS ON THE NATURE OF BUSINESS ACTIVITY AND SETTING-UP AND COMMENCEMENT OF BUSINES S. IT WAS EXPLAINED THAT THE ASSESSEE ENTERED INTO LOTTERY BU SINESS AFTER APPLYING FOR AND WINNING THE TENDER TO RUN AND OPER ATE LOTTERIES FORM THE STATE GOVERNMENT OF PUNJAB. THE LOTTERIES WERE ONLINE LOTTERIES (I.E. PAPER LESS) WHICH WERE OPERATED AND RUN THROUGH COMPUTER TERMINALS. SINCE THE ASSESSEE WAS THE SOLE DISTRIBUTER, IT SET-UP A NETWORK OF RETAIL DIS TRIBUTERS FOR THE LOTTERY TICKETS AND FOR THIS PURPOSE ASSESSEE W AS REQUIRED TO PROVIDE TO ITS RETAIL DISTRIBUTERS, AGAINST SECU RITY DEPOSIT AMOUNT, COMPUTER TERMINALS ALONG WITH OTHER ACCESSO RIES FOR SELLING LOTTERY TICKETS ONLINE. ACCORDINGLY, THE AS SESSEE PURCHASED COMPUTERS FROM WELL ESTABLISHED HARDWARE COMPANIES AND PROVIDED THE SAME TO THE RETAIL DISTR IBUTORS FOR SELLING ONLINE LOTTERY TICKETS OF THE ASSESSEE. IT ALSO GOT INSTALLED REQUIRED SOFTWARE INTO THESE COMPUTERS. S INCE THE ONLINE SALE WAS SCHEDULED TO TAKE PLACE W.E.F. ON 0 1.10.2010 THEREFORE, ASSESSEE MADE ALL REQUISITE ARRANGEMENTS AND ALSO CONDUCTED TRIAL RUNS BEFORE 31.03.2010 SO THAT THES E COMPUTERS MAY FUNCTION PROPERLY FOR SELLING THE LOT TERY TICKETS ONLINE. THE ASSESSEE ALSO FURNISHED COPY OF LEDGER ACCOUNTS TO THE AO SHOWING PROPER DETAILS OF PURCHASING OF COMP UTERS FROM M/S HCL INFOS SYSTEM LTD., M/S POSIFLEX TECHNO LOGY (INDIA) PVT. LTD. AND M/S REDINGTON (INDIA) LTD. AS PER LEDGER ACCOUNTS, ENTIRE AMOUNT HAD BEEN PAID BY CHEQUES/OT HER BANKING CHANNELS AND NO TRANSACTION WAS DONE IN CAS H. OUR ATTENTION WAS ALSO DRAWN UPON THE CERTIFICATE ISSUE D BY M/S ARIHANT TRADERS 13 SKILL LOTTO SOLUTIONS PVT. LTD., SOFTWARE PROVIDERS , CERTIFYING THAT THE SAID COMPANY HAD INSTALLED SOFTWARE ON ALL THE 2300 COMPUTERS LOCATED AT THE RESPECTIVE PREMISES OF VAR IOUS RETAIL DISTRIBUTORS OF THE ASSESSEE COMPANY. THE RELEVANT PART OF THE CERTIFICATE READS AS UNDER: DATE: APRIL 16 TH , 2010 WHOMSOEVER IT MAY CONCERN THIS IS TO STATE THAT WE, SKILL LOTTO SOLUTIONS PRI VATE LIMITED HAVING REGISTERED OFFICE AT NO.11, PONNAPPA LANE, TRIPLICANE, CHENNAI-600005 HAVE INSTALLED MYLOTT SO FTWARE FOR OPERATING ONLINE LOTTERY TRADE ON 2,300 COMPUTE RS OF VARIOUS RETAILERS OF SHRI ARIHANT TRADERS FOR THE B USINESS OF OPERATING ONLINE LOTTERY TICKETS OF PUNJAB STATE GO VERNMENT THROUGH THEIR AUTHORIZED DISTRIBUTORS SHRI ARIHANT TRADERS. THE MYLOTT SOFTWARE WAS INSTALLED ON COMPUTERS OF V ARIOUS CLIENTS OF SHRI ARIHANT TRADERS ON VARIOUS DATES BE TWEEN 25.03.2010 TO 31.03.2010 BY OUR AUTHORIZED PERSONAL AS DETAILED BELOW: 1. PRAKASH PRAJAPATI 2. ASHOK SINGH RAJPUT FOR SKILL LOTTO SOLUTIONS PRIVATE LIMITED SD/- AUTHORIZED SIGNATORY 4.7. ALL THESE FACTS AND EVIDENCES WERE PUT BY THE ASSE SSEE BEFORE THE AO. THERE WAS NO MATERIAL AVAILABLE AT T HE ASSESSMENT STAGE CREATING ANY DOUBT ABOUT AUTHENTIC ITY OF THESE EVIDENCES, EVEN BEFORE LD. CIT, THESE EVIDENC ES WERE SUBMITTED BY THE ASSESSEE AND LD. CIT ALSO COULD NO T BRING ANY CONTRARY MATERIAL ON RECORD TO DOUBT THESE EVID ENCES. HE DID HARBOR SOME SUSPICION BUT WITHOUT ANY COGENT BA SIS WHICH ACCORDING TO US CANNOT BE MADE THE BASIS FOR REJECT ING THE VALID CLAIM OF THE ASSESSEE. ONE CANNOT IGNORE THE SOUND JUDICIOUS PRINCIPLES WHILE EXAMINING VALIDITY OF CL AIMS OF ASSESSEE. ARIHANT TRADERS 14 4.8. THUS, THE FACTUAL SITUATION THAT MERGES BEFORE US ABOUT SETTING-UP OF BUSINESS IS THAT ASSESSEE HAD PUT UP ENTIRE INFRASTRUCTURE IN PLACE AND WAS IN A READY TO GO POSITION BEFORE 31-3-2010. UNDER THESE CIRCUMSTANCES, AND IN VIEW OF THE LEGAL POSITION DISCUSSED ABOVE, IT CAN BE UNHES ITATINGLY SAID THAT THE ASSESSEE HAD SET-UP ITS BUSINESS DU RING THE YEAR UNDER CONSIDERATION. THEREFORE, ASSESSEE WAS VERY M UCH ENTITLED TO CLAIM DEPRECIATION ON THE COMPUTERS PUR CHASED BY ASSESSEE AND INSTALLED ON THE RESPECTIVE PREMISES O F THE RETAIL DISTRIBUTORS MEANT FOR ONLINE SALE OF LOTTERY TICKE TS OF THE ASSESSEE. AS FAR AS ALLEGATION OF ABSENCE OF ACTUAL USER OF THE COMPUTERS BY THE ASSESSEE IS CONCERNED, WE DIFFER W ITH THE VIEWS OF THE LD. CIT AS WELL AS LD. CIT-DR ON THIS ASPECT FOR VARIOUS REASONS. FIRST OF ALL, THE EVIDENCES SHOW T HAT THE ASSESSEE HAD PURCHASED THE COMPUTERS AND HAD INSTAL LED THEM ON THE PREMISES OF THE RETAIL DISTRIBUTORS AND ALSO INSTALLED REQUISITE SOFTWARE TO MAKE THEM OPERATION AL FOR ONLINE SALE OF LOTTERY TICKETS. IT WAS ALSO STATED THAT TRIAL RUNS WERE ALSO CONDUCTED AND COMPUTERS WERE MADE READY T O USE ON PLUG AND PLAY BASIS. IN FACT, THE ENTIRE SUCCESS OF THE ASSESSEES LOTTERY BUSINESS WAS DEPENDENT UPON THE OPERATIONAL EFFICIENCY OF THE COMPUTERS FROM 1 ST APRIL 2010. IN ABSENCE OF THE SAME, ENTIRE BUSINESS WOULD HAVE COL LAPSED CAUSING HUGE FINANCIAL LOSS TO THE ASSESSEE. THUS, IT WAS IN ASSESSEES OWN INTEREST TO KEEP THE COMPUTERS READY FOR USE WITH EFFECT FROM THE MORNING OF 01.04.2010. UNDER T HESE CIRCUMSTANCES, IT WAS NOT JUSTIFIED ON THE PART OF LD. CIT TO MAKE DOUBTS AND SUSPICION ABOUT INSTALLATION AND WO RKING OF ARIHANT TRADERS 15 THE COMPUTERS BY 31.03.2010 THAT TOO WITHOUT ANY CO NTRARY MATERIAL IN HIS POSSESSION. IN OUR VIEW, THE ROLE O F INCOME TAX AUTHORITIES IS CERTAINLY NOT TO REJECT THE CLAIMS O F THE ASSESSEE BY FOLLOWING AN APPROACH OF HAIR SPLITTING AND CREA TING UNNECESSARY AND BASELESS DOUBTS. UNLESS A CLAIM IS FOUND TO BE BOGUS, THEN SAME SHOULD NOT GENERALLY BE REJECTE D SO LONG AS IT IS MADE IN ACCORDANCE WITH LAW. BY CREATING U NNECESSARY LITIGATION, THE FAITH OF TAXPAYERS IS ERODED. IN TH E CASE BEFORE US, EVEN IN THE WORST CASE, PRESUMABLY, IF WE ACCEP T THE ALLEGATION OF LD. CIT AS CORRECT, THE IMPUGNED CLAI M OF DEPRECIATION IF NOT ALLOWED IN THIS YEAR, EVEN THEN IT WILL BE ALLOWABLE IN THE NEXT YEAR WHEN ADMITTEDLY SALE OF LOTTERY TICKETS HAD TAKEN PLACE. IN THIS REGARD WE ARE REMI NDED OF A RECENT JUDGMENT OF HONBLE SUPREME COURT IN THE CAS E OF CIT V. EXCEL INDUSTRIES LTD. 358 ITR 295 TO DEAL WITH SUCH SITUATIONS, WHEREIN THEIR LORDSHIPS INTER-ALIA OBSERVED AS UNDER: .....32. THIRDLY, THE REAL QUESTION CONCERNING US IS THE YEAR IN WHICH THE ASSESSEE IS REQUIRED TO PAY TAX. THERE IS NO DISPUTE THAT IN THE SUBSEQUENT ACCOUNTING YEA R, THE ASSESSEE DID MAKE IMPORTS AND DID DERIVE BENEFITS U NDER THE ADVANCE LICENCE AND THE DUTY ENTITLEMENT PASS B OOK AND PAID TAX THEREON. THEREFORE, IT IS NOT AS IF TH E REVENUE HAS BEEN DEPRIVED OF ANY TAX. WE ARE TOLD T HAT THE RATE OF TAX REMAINED THE SAME IN THE PRESENT ASSESSMENT YEAR AS WELL AS IN THE SUBSEQUENT ASSESS MENT YEAR. THEREFORE, THE DISPUTE RAISED BY THE REVENUE IS ENTIRELY ACADEMIC OR AT BEST MAY HAVE A MINOR TAX E FFECT. ARIHANT TRADERS 16 THERE WAS, THEREFORE, NO NEED FOR THE REVENUE TO CO NTINUE WITH THIS LITIGATION WHEN IT WAS QUITE CLEAR THAT N OT ONLY WAS IT FRUITLESS (ON MERITS) BUT ALSO THAT IT MAY N OT HAVE ADDED ANYTHING MUCH TO THE PUBLIC COFFERS...... 4.9. APART FROM THE ABOVE, IT HAS BEEN CONTENDED THAT S INCE THE ASSESSEE HAD HANDED OVER THE COMPUTERS TO ITS R ETAIL DISTRIBUTORS FOR ONLINE SALE OF LOTTERY TICKETS OF THE ASSESSEE, THEREFORE AS FAR AS ASSESSEE IS CONCERNED, THE MOME NT THESE COMPUTERS WERE HANDED OVER TO THE RETAIL DISTRIBUTO RS BY THE ASSESSEE, IT AMOUNTS TO USER OF THE COMPUTERS IN AS SESSEES HANDS. WE ARE INCLINED TO ACCEPT THIS ARGUMENT ALSO IN VIEW OF PECULIAR FACTS OF THIS CASE. THE ASSESSEE HAD SUPPL IED THESE COMPUTERS TO ITS RETAIL DISTRIBUTORS AND ALSO GOT I NSTALLED THEREIN REQUISITE SOFTWARE AND ALSO CARRIED OUT TRI AL RUNS. THERE MAY BE SOME DEBATE OR DISCUSSION ON THE DATE OF ACTUAL USER BY THESE RETAIL DISTRIBUTORS BUT AS FAR AS ASS ESSEE IS CONCERNED, THESE CAN BE DEEMED TO BE PUT TO USE THE MOMENT THESE COMPUTERS AND THEIR SOFTWARE WERE PROVIDED BY THE ASSESSEE TO ITS RETAIL DISTRIBUTORS FOR ONLINE SALE OF LOTTERY TICKETS. OUR VIEW FIND SUPPORT FROM THE JUDGMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. KOTAK MAHIN DRA FINANCE LTD. (SUPRA) AS WELL AS JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT V. REETU FINLEASE PVT . LTD.(SUPRA) . 4.10. THUS, FROM THE ABOVE DISCUSSION IT BECOMES CLEAR T HAT THE ASSESSEE HAD SET-UP ITS BUSINESS DURING THE YEA R UNDER CONSIDERATION AND HAD ALSO PUT TO USE THE COMPUTERS ON WHICH DEPRECIATION HAS BEEN CLAIMED ON PROPORTIONATE BASI S FOR USING ARIHANT TRADERS 17 THE SAME FOR LESS THAN 180 DAYS AND THEREFORE, THE CLAIM OF THE ASSESSEE WAS VALID IN THE EYES OF LAW AND FACTS OF THIS CASE AND THEREFORE, SAME WAS RIGHTLY ALLOWED BY THE LD. AO A FTER EXAMINING ALL THE FACTS IN THIS REGARD AND THE SAME WAS WRONGLY DENIED BY THE LD. CIT AND THEREFORE HIS ACT ION IS REVERSED. THE CLAIM OF DEPRECIATION IS DIRECTED TO BE ALLOWED. SINCE, WE HAVE ALLOWED THE CLAIM ON MERITS, THE OTH ER ISSUE WITH REGARD TO JURISDICTIONAL VALIDITY OF IMPUGNED ORDER PASSED U/S 263 BECOMES ACADEMIC AND THEREFORE, WE ARE NOT GOING INTO THE SAME AT THIS STAGE. 5. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED WITH OUR DIRECTIONS AS GIVEN ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST SEPTEMBER, 2016. SD/- (C.N. PRASAD) SD/- (ASHWANI TANEJA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED: 21 /09/2016 CTX? P.S/. .. !'#$%&%'# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT, MUMBAI. 4. / CIT(A)- , MUMBAI 5. #$% &' , &' ) , / DR, ITAT, MUMBAI 6. %*+ , / GUARD FILE. / BY ORDER, # //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI