DCIT -1(3)(2), MUMBAI V. TATA LOCKHEED MARTINAEROSTRUCTURES LTD., HYDERABAD

ITA 2667/MUM/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 4440 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 3 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-08-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 11-04-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V JUSTIN
• Keywords: Capital asset; Business expenditure; Search and seizure; Earning of tax free income; Wholly owned subsidiary; Capital expenditure
• Section: 143(3); 14A

Judgement Text

E IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ./ I.T.A. NO.2667/ MUM/2016 ( / ASSESSMENT YEAR : 2011 - 12) DCIT - 1(3)(2) ROOM NO. 540, 5 TH FLOOR, A AYAKAR BHAVAN, M.K ROAD, MUMBAI - 400020 / V. TATA LOCKHEED MARTIN AEROSTRUCTURES LTD. SURVEY NO. 64, UNIT NO. 1, BUILDING NO. 9, 6 TH FLOOR, RAHEJA MINDSPACE, MADHAPUR, HYDERABAD - 500081, ANDHRA PRADESH ./ PAN : AA DCT5968N ( / APPELLANT ) .. ( / RESPONDENT ) REVENUE BY : SHRI V. JUSTIN ,DR ASSESSEE BY: MS. ARATI VISSANJI / DATE OF HEARING : 10.07.2018 / DATE OF PRONOUNCEMENT : 08.08 .2018 / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER THIS APPEAL, FILED BY THE R EVENUE, BEING ITA NO. 2667/MUM/2016, IS DIRECTED AGA INST APPELLATE ORDER DATED 29. 0 1 .2016 PASSED BY LEARNED COMMISS IONER OF INCOME TAX (APPEALS) - 3 , MUMBAI (HEREINAFTER CALLED THE CIT(A)), FOR ASSESSMENT YEAR 2011 - 12, THE APPELLATE PROCEEDINGS HAD ARISEN BEFORE LEARNED CIT(A) FROM ASSESSMENT ORDER DATED 07.02.2014 PASSED BY LEARNED ASSESSING OFFICER (HEREINAFTER CALLED THE AO) U/S 143(3) OF THE INCOME - TAX ACT, 1961 (HEREINAFTER CALLED THE ACT) FOR AY 2011 - 12. I.T.A. NO.2667/ MUM/2016 2 2. THE G ROUNDS OF APPEAL RAISED BY THE R EVENUE IN THE MEMO OF A PPEAL FILED WITH THE INCOME - TAX APPELLATE TRIBUNAL, MUMBAI (HEREINAFTER CALLED THE TRIBUNAL) READ AS UNDER: - 1 .(A) 'WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON LAW, THE LD. CIT( A) ERRED IN NOT ACCEPTING THE DISALLOWANCE U/S 14A R.W. RULE 8D AMOUNTING TO RS.39,84,218/ - MADE BY THE AO AND DIRECTING TO REDUCE IT TO RS.22,37,456/ - BY TAKING 20% OF THE EXEMPT INCOME AS AD - HOC ALLOWANCE U/S 14A. 1.(B) 'WHETHER ON THE FACTS AND I N THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID.CIT( A) ERRED IN MAKING AD - HOC ESTIMATION OF DISALLOWANCE U/S 14A AND DIRECTING THE AO TO DISALLOW 20% OF THE EXEMPT INCOME AND THEREBY FAILING TO APPRECIATE THAT ONCE THE PRINCIPLE OF THE EXPENDITURE INCUR RED FOR EARNING TAX FREE INCOME IS ACCEPTED, THEN THE DISALLOWANCE U/S 14A IS NECESSARILY REQUIRED TO BE COMPUTED BY THE METHODOLOGY PROVIDED BY RULE 8D.' 2.(A) 'WHETHER ON THE FACTS AND IN THE CIRCU MSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN ALLOWING DEDUCTION OF AN AMOUNT OF RS.2,10,11,032/ - WHICH HAS BEEN DISALLOWED BY THE AO AS PRE - OPERATIVE EXPENDITURE. 2.(B) 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN HOLDING THAT THE BUSINESS OF THE AS SESSEE HAS COMMENCED DURING THE PREVIOUS YEAR AND OVERRULING THE FINDINGS OF THE AO THAT THE ACTIVITIES OF THE ASSESSEE WERE AT PRE - OPERATIVE STAGE. 2.(C) 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN HOLD ING THAT THE BUSINESS OF THE ASSESSEE HAS COMMENCED DURING THE PREVIOUS YEAR EVEN THOUGH THE AO HAD RECORDED THE FINDING THAT THE FIRST SALE WAS EFFECTED ON 0 4/05/2011 AND THERE WAS NO REVENUE EARNED DURING THE PREVIOUS YEAR RELEVANT TO A.Y. 2011 - 12 FOR WH ICH THE IMPUGNED EXPENSES HAD BEEN CLAIMED.' THE APPELLANT CRAVES LEAVE TO ADD TO, AMEND OR WITHDRAW THE AFORESAID GROUND OF APPEAL . 3. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE COMPANY WAS INCORPORATED ON 5 TH APRIL, 2010 WITH THE MAIN OBJECT OF D OING BUSINESS OF ASSEMBLY, MANUFACTURE AND SUPPLY OF ADVANCE SPACE, AVIATION, HOMELAND SECURITY AND DEFENCE RELATED TECHNOLOGIES. THE ASSESSEE ENTERED INTO JOINT VENTURE AGREEMENTS WITH LOCKHEED MARTIN AEROSTRUCTURE CORPORATION , A WHOLLY OWNED SUBSIDIARY OF LOCKHEED MARTIN CORPORATION OF USA FOR THE PURPOSE OF ASSEMBLING, MANUFACTURING AND SUPPLYING OF C130/C130J AIRCRAFT STRUCTURAL ART ICLES I.E. EMPENNAGES AND CENTER WING BOX (FINISHED PRODUCTS). THE ASSESSEE IS A J.V COMPANY FO RMED BY TATA ADVANCES SYSTEM LTD. A ND LOCKHEE D MARTIN AEROSTRUCTURE CORPORATION , USA WHEREIN TATAS I.T.A. NO.2667/ MUM/2016 3 HOLD 74% AND LOCKHEED MARTIN AEROSTRUCTURE CORPORATION, USA HOLDS 26% OF THE EQUITY OF THE ASSESSEE COMPANY . THE ASSESSEE COMPANY IS SETTING UP MANUFACT URING UNIT AT ADIBATLA VILLAGE, HYDERABAD TO ASSEMBLE , MANUFACTURE AND SUPPLY TO LOCKHEED MARTIN AEROSTRUCTURE CORPORATION, USA AND/ OR ITS AFFILIATES OF C - 130/C130J AIRCRAFT STRU CTURAL ARTICLES CONSISTING OF E MPENNAGES AND CENTER WING BOX . THE AFORESAID P ROJECT FOR SETTING UP MANUFACTURING UNIT AT HYDERABAD IS UNDER CONSTRUCTION UP TO THE END OF THE FINANCIAL YEAR . 4. THE FIRST ISSUE RAISED BY THE REVENUE IN THIS APPEAL IS VIDE GROUNDS OF APPEAL NUMBER 1(A) AND 1(B) IN THE MEMO OF APPEAL FILED WITH THE TRIBUNAL WHICH CONCERNS ITSELF WITH DISALLOWANCE OF EXPENSES TO THE TUNE OF RS. 39,84,218/ - U/S . 14A OF THE 1961 ACT READ WITH RULE 8D OF THE INCOME - TAX RULES, 1962 BY THE AO VIDE ASSESSMENT ORDER DATED 07 - 02 - 2014 PASSED U/S 143(3) OF THE 1961 ACT WHILE PA RT RELIEF WAS GRANTED BY LEARNED CIT(A) , VIDE APPELLATE ORDER DATED 29.01.2016 . . T HE ASSESSEE HAD RECEIVED DIVIDEND INCOME RS. 1,11,87,282/ - WHICH WAS CLAIMED AS AN EXEMPT INCOME U/S 10(34) OF THE 1961 ACT . THE AO INVOKED PROVISION OF S ECTION 14A R.W.R . 8D OF THE 1962 RULES AND ASKED ASSESSEE TO EXPLAIN WHY THE DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EARNING OF AN EXEMPT INCOME BE NOT MADE . T HE ASSESSEE SUBMITTED BEFORE THE AO DURING ASSESSMENT PROCEEDINGS CONDUCTED U/S 143(3) R.W.S. 143(2) OF THE 1961 ACT THAT EXPENSES WERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS OF THE ASSESSEE . I T WAS ALSO SUBMITTED BY THE ASSESSEE BEFORE THE AO THAT TOTAL EXPENSES OF RS. 3,38,41,890/ - WERE INCURRED WHILE EXPENSES AMOUNTING OF RS. 1,2 8,62,629/ - WERE VOLUNTARILY DISALLOWED IN THE COMPUTATION OF INCOME FILED WITH REVENUE WHILE REST OF THE EX PENSES TO THE TUNE OF RS. 2,10,11,032/ - WERE REVENUE EXPENSES INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS OF THE ASSESSEE WHICH OUGHT TO BE ALLOWED AS DEDUCTION WHILE COMPUTING INCOME WITHIN THE PROVISIONS OF THE 1961 ACT . IT WAS SUBMITTED THAT THESE EXPENSES HAVE DIRECT NEXUS WITH THE BUSINESS OF THE ASSESSEE COMPANY AND THESE EXPENSES HAVE NOT BEEN INCURRED IN RELATION TO HOLDIN G OF INVESTMENTS IN SHARES, THE INCOME WHEREOF BEING EXEMPT FROM THE TAX . THE AO REJECTED THE CONTENTION S OF THE ASSESSEE AND OBSERVED TH AT THAT ASSESSEE HAS NOT ATTRIBUTED ANY EXPENSES WHICH HAVE BEEN INCURRED TO EARN EXEMPT INCOME AND SOME EXPENSES MUST NEC ESSARILY HAD TO BE INCURRED TO EARN AN I.T.A. NO.2667/ MUM/2016 4 EXEMPT INCOME , WHICH NEEDED TO BE DISALLOWED KEEPING IN VIEW M ANDATE OF PROVISIONS OF SECTION 14A OF THE 1961 ACT . T HE AO OBSERVED THAT THESE INVESTMENTS DECISIONS ARE VERY COMPLEX IN NATURE AND REQUIRE LOT OF MA RKET RESEARCH , DAY TO DAY ANALYSIS OF MARKET TRENDS ETC. W . R . T . ACQUISITION , RETENTION AND SALE OF SHARES AT THE MOST APPROPRIATE TIME WHICH DEFINITELY INVOLVED EXPENSES . THE AO OBSERVED THAT SINCE THE ASSESSEE HAS NOT DISALLOWED THE EXPENSES INCURRED IN RELATION TO EARNING OF AN EXEMPT INCOME , MECHANISM HAS BEEN LAID DOWN UNDER PROVISION OF S ECTION 14A OF THE 1961 ACT FOR COMPUTING EXPENDITURE INCURR ED IN RELATION TO THE EARNING OF THE EXEMPT INCOME WHICH EXPENSES NEEDED TO BE DISALLOWED. THE AO RELIED UPON DECISIONS OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING COMPANY LIMITED V. DCIT REPORTED IN 234 CTR 1 (BOM) AND DECISION OF SPECIAL BENCH OF ITAT,DELHI IN THE CASE OF CHEMINVEST LIMITED V. ITO REPORTED IN 317 ITR 86(AT) . T HE AO INVOKED PROVISION S OF SECTION 14A OF THE 1961 ACT R.W.R. 8D OF THE 1962 RULES , WHEREIN AO DISALLOWED EXPENSES OF RS. 39,84,218/ - UNDER RULE 8D(2)(III) OF THE 1962 RULES R.W.S. 14A OF THE 1961 ACT, BEING 0.5% OF THE AVERAGE INVESTMENTS HELD BY THE ASSESSEE VIDE ASSESSMENT ORDER DATED 07.02.2014 PASSED BY THE AO U/S 143(3) OF THE 1961 ACT , AS DETAILED HERE UNDER: - SR.NO PARTICULARS AMOUNT 1. THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME - RULE 8D(2)(I) [DEMAT CHARGES ] 2. EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NO T DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY: A X B C A=0 B=796843641 C= A=THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR. B= THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT I.T.A. NO.2667/ MUM/2016 5 FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEA R C= THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR - RULE 8D(2}(II) 3. I. AVERAGE VALUE OF INVESTMENTS - OPENING BALANCE OF INVESTMENTS + CLOSING BALANCE OF INVESTMENTS / 2 NIL + 1593687282 = RS 796843641 2 - 8D (2)(III) I I . DISALLOWANCE AN AMOUNT EQUAL TO ONE HALF PER CENT OF THE AVERAGE OF THE VALUE OF INVESTMENT INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. III. 0.5% OF RS 796843641/ - 39,84,218 4. TOTAL DISALLOWANCE 39,84,218 5. AGGRIEVED BY THE ASSESSMENT ORDER DATED 07.02.2014 PASSED BY THE AO U/S 143(3), THE ASSESSEE FILED FIRST APPEAL WITH LEARNED CIT(A) . T HE ASSESSEE SUBMITTED BEFORE LEARNED CIT(A) THAT IT R ECEIVED DIVIDEND INCOME OF RS. 1,11,87,282/ - WHICH WAS CLAIMED AS AN EXEMPT INCOME U/S. 10(34) OF THE 1961 ACT. THE ASSESSEE SUBMITTED THAT IT RECEIVED SHARE APPLICATION MONEY OF RS. 165.74 CRORES FROM ITS J.V . PARTNER S WHICH WAS TEMPORARILY DEPLOYED BY MAKING INVESTMENT S OF RS. 165 CRORE S IN THE UNITS OF TATA L I QUID SUPER HIGH I NVESTMENT FUND ON 21.02.2011 , FROM WHICH DIVIDEND INCOME OF RS.1.12 CRORES WAS RECEIVED . IT WAS SUBMITTED THAT THE ASSESSEE REDEEMED INVESTMENT OF RS. 6.75 CRORES DURING THE YEAR, WHILE INVESTMENTS OF RS. 159.37 CRORES WAS HELD AS AT YEAR END. IT WAS SUBMITTED THAT DIVIDEND RECEIVED BY IT WAS RE - INVESTED IN MUTUAL FUNDS. THE LEA RNED CIT(A) CONSIDERED THE SUBMISSIONS OF THE ASSESSEE AND UPHELD THE DISALLOWANCE OF EXPENDITURE U/S 14A OF THE 1961 ACT TO THE TUNE OF RS. 22,37,456/ - TOWARDS ADMINISTRATIVE EXPENSES BEING 20% OF EXEMPT INCOME INSTEAD OF RS. 39,84,218/ - AS WAS DISALLOWA NCE BY THE AO I.E. PART RELIEF WAS ALLOWED BY LEARNED CIT(A) , BY HOLDING AS UNDER VIDE APPELLATE ORDER DATED 29.01.2016 AS UNDER: - I.T.A. NO.2667/ MUM/2016 6 6.1 THE APPELLANT HAS FURTHER SUBMITTED THAT IT HAS NOT INCURRED EXPENDITURE FOR THE PURPOSE OF MAKING INVESTMENTS IN THE UNITS OF MUTUAL FUNDS AND HOLDING THEREOF AS OF THE YEAR END. THE APPELLANT IS OF THE VIEW THAT AO SHOULD NOT INVOKE SECTION 14A AND RULE 8D FOR MAKING ANY DISALLOWANCE AS NO EXPENDITURE WAS INCURRED FOR THE INVESTMENTS IN MUTUAL FUNDS. I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. THE APPELLANT HAD ACQUIRED FUNDS FROM SHARE CAPITAL WHICH WERE NOT IMMEDIATELY BEEN REQUIRED TO UTILIZE FO R THE BUSINESS PURPOSES; THEREFORE, IT HAD INVESTED IN THE MUTUAL FUNDS. THE INVESTMENT IN ANY OF THE PORTFOLIO IS NOT A SUO - MOTO PROCESS AND IT REQUIRES SKILLED/PROFESSIONAL MANPOWER AND SUBORDINATE HUMAN RESOURCES IN DECISION MAKING PROCESS. THEREFORE, A DMINISTRATIVE EXPENSES ARE REQUIRED TO BE INCURRED FOR SUCH DECISION MAKING PROCESS. THOUGH THE APPELLANT HAS NOT SHOWN ANY EXPENDITURE TOWARDS ADMINISTRATIVE EXPENSES INCURRED FOR THE INVESTMENT IN MUTUAL FUNDS, HOWEVER SUCH INDIVISIBLE EXPENSES ARE BOUND TO BE INCURRED ON SUCH INVESTMENTS. FOR THE FAIRNESS AND JUSTIFICATION 20% OF THE EXEMPT INCOME IS DISALLOWED TOWARDS THE ADMINISTRATIVE EXPENSES. THEREFORE, DISALLOWANCE OF RS. 22,37,456/ - IS DISALLOWED TOWARDS ADMINISTRATIVE EXPENSES INSTEAD OF RS. 39,8 4,218/ - . HENCE, GROUND NO. 1 IS PARTLY ALLOWED. 6 . AGGRIEVED BY THE PART RELIEF GRANTED BY LEARNED CIT(A), THE R EVENUE IS IN APPEAL BEFORE THE TRIBUNAL . THE L D. COUNSEL FOR THE ASSESSEE AS WELL AS LD. DR HAVE BOTH SUBMITTED THAT THE MATTER IS COVERED BY THE DECISION OF THE TRIBUNAL IN ASSESSEE S OWN CASE IN ITA NO. 2144/MUM/2016 FOR AY 2011 - 12 VIDE ORDERS DATED 12 - 01 - 2018, WHEREIN THE TRIBUNAL RESTORED THE MATTER TO THE FILE OF AO WITH SPECIFIC DIRECTIONS WHICH ARE REPRODUCED AS HEREUNDER: - 4. WE H AVE HEARD COUNSELS FOR BOTH THE PARTIES AT LENGTH AND WE HAVE ALSO PERUSED THE MATERIAL PLACED ON RECORD AS WELL AS THE ORDERS PASSED BY REVENUE AUTHORITIES. AS PER THE FACTS OF THE PRESENT CASE, THE ASSESSEE HAS RECEIVED DIVIDEND INCOME OF RS. 11,87,282/ - WHICH HAS BEEN CLAIMED EXEMPT U/S 10(34) OF THE I.T. ACT. AS THE ASSESSEE HAD NOT MADE ANY DISALLOWANCE AGAINST THE DIVIDEND INCOME AND THE AO WHILE INVOKING RULE 8D(2)(III) OF I.T. RULES HAD MADE DISALLOWANCE OF RS. 39,84,218/ - . LD. AR SUBMITTED THAT T HE ASSESSEE HAD NOT INCURRED EXPENDITURE FOR THE PURPOSE OF MAKING INVESTMENT IN THE UNITS OF MUTUAL FUNDS AND HOLDING THEREOF AS THE YEAR END. IT WAS ALSO SUBMITTED THAT AO SHOULD NOT HAVE INVOKED THE PROVISIONS OF SECTION 14A AND RULE 8D FOR MAKING ANY D ISALLOWANCE AS NO EXPENDITURE WAS INCURRED FOR THE INVESTMENTS IN MUTUAL FUNDS. LD. AR FURTHER SUBMITTED THAT THE ASSESSEE HAD ACQUIRED FUNDS FROM SHARE CAPITAL WHICH WAS NOT IMMEDIATELY REQUIRED TO UTILIZE FOR THE BUSINESS PURPOSES, THEREFORE, IT HAD INVE STED IN THE MUTUAL FUNDS. LD. AR FURTHER SUBMITTED THAT THE AO HAD NOT RECORDED ANY SATISFACTION AS TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE HAVING REGARD TO THE ACCOUNT OF ASSESSEE. THE LD. AR ALSO RELIED UPON T HE FOLLOWING JUDGMENTS : - (A) CIT V. HERO MANAGEME NT SERVICE LIMITED (2014) 360 ITR 68 (DELHI HIGH COURT) (B) CIT V. PRINTERS HOUSE PRIVATE LTD. (2010) 188 TAXMAN 70 (DELHI HIGH COURT) (C) SWAPNA MURARKA VS. ACIT [2015] 58 TAXMANN.COM 369 (MUMBAI - TRIBUNAL) I.T.A. NO.2667/ MUM/2016 7 (D) CIT V. WALFORT SHARE AND STOCK BROKERS PRIVATE LIMITED (2009) 310 ITR 421 (BOM ) [AFFIRMED IN 326 ITR I (SC)] (E) CIT V. RELIANCE INDUSTRIES LTD. 339 ITR 632 (BOM ) (F) CIT V. METALMAN AUTO P. LTD. (2011) 336 ITR 434 (P&H) (G) CIT V. HERO CYCLES LTD. (2010) 323 ITR 518 (P&H) (H) CIT V. WINSO ME TEXTILE INDUSTRIES LTD. 319 IT R 204 (P&H) (I) GODREJ & BOYCE MANUFACTURING CO LTD, 328 ITR 81 (BOMBAY HIGH COURT) (J) WIMCO SEE DLINGS LTD. V. DCIT (2007) 107 I TD 267 (DE L ) (TM) (K) RELAXO FOOTWEARS LTD.,V. ACIT (2012) 50 SOT 102 (DEL); (I) CHANAKYA INTERNATIONAL PVT. LTD.V. ACIT (2013) 36 CCH 032 (MUM); (M) JUSTICE RAM P BHARUCHA V. ADDL. CIT (2012) 53 SOT 192. 5. OUR ATTENTION WAS DRAWN TO THE JUDGMENTS OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD, HONBLE KOLKATA TRIBUNAL IN THE CASE OF CHAMPION COMMERCIAL CO. LTD (2012) 139 ITD 108(KOL). BEFORE WE DECIDE THE MERITS OF THE CASE, IT IS NECESSARY TO EVALUATE THE PROVISIONS OF SUB SECTION (2) TO SECTION 14A OF THE I.T. ACT WHICH IS AS UNDER: - '(2) THE ASSESSING OFFIC ER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, F THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT.' FURTHER THE MUMBAI TRIBUNAL HAS ALSO IN THE CASE OF M/S AUCHTEL PRODUCTS LT D. (2012) 52 SOT 39 HAS HELD THAT NO DISALLOWANCE CAN BE MADE BY THE AO WITHOUT RECORDING A SATISFACTION THAT THE EXPLANATION GIVEN BY THE ASSESSEE IS NOT PROPER. THE OPERATIVE PARA IS REPRODUCED BELOW. 15. A BARE PERUSAL OF THE ABOVE PROVISIONS INDICAT ES THAT THE AO SHALL DETERMINE THE AMOUNT DISALLOWABLE AS PER RULE 8D, IF HE, 'IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE' IN RESPECT OF SUCH EXPENDITURE IN RELATION TO EXEMPT INCOME. EVEN IF THE ASSESSEE CLAIMS THAT NO EXPENDITURE WAS INCURRED IN RESPECT OF EXEMPT INCOME, THE AO IS SUPPOSED TO FOLLOW THE MANDATE OF RULE 8D IF HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE ASSESSEE'S CLAIM. TO PUT IT SIMPLY, THE FURTHER DISALLOWANCE U/S.14A IS CALLED FOR WHEN THE AO IS NOT SATISFIED WITH THE ASSESSEE'S CLAIM OF HAVING INCURRED NO EXPENDITURE OR SOME AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME. SATISFACTION OF THE AO AS TO THE INCORRECT CLAIM MADE BY THE ASSESSEE IN THIS REGARD IS SINE QUA NON FOR INVOKING THE APPLICABILITY OF RULE 8D. SUCH SATISFACTION CAN B E REACHED AND RECORDED ONLY WHEN THE CLAIM OF THE ASSESSEE IS VERIFIED. IF THE ASSESSEE PROVES BEFORE THE AO THAT IT INCURRED A PARTICULAR EXPENDITURE IN RESPECT OF EARNING THE EXEMPT INCOME AND THE AO GETS SATISFIED, THEN T HERE IS NO REQUIREMENT TO STILL PROCEED WITH THE COMPUTATION OF AMOUNT DISALLOWABLE AS PER RULE 8D. FROM THE ASSESSMENT ORDER, IT IS OBSERVED THAT THE AO SIMPLY KEPT THE ASSESSEE'S SUBMISSIONS ON RECORD WITHOUT APPRECIATING AS TO WHETHER THESE WERE CORRECT OR NOT. HE PROCEEDED ON THE PREMISE AS IF THE DISALLOWANCE AS PER RULE 8D IS AUTOMATIC IRRESPECTIVE OF THE GENUINENESS OF THE ASSESSEE'S CLAIM IN RESPECT OF EXPENSES I.T.A. NO.2667/ MUM/2016 8 INCURRED IN RELATION TO EXEMPT INCOME. IT IS AN INCORRECT COURSE ADOPTED BY THE AO. THE C ORRECT SEQUENCE, IN OUR CONSIDERED OPINION, FOR MAKING ANY DISALLOWANCE U/S. 14A IS TO, FIRSTLY, EXAMINE THE ASSESSEE'S CLAIM OF HAVING INCURRED SOME EXPENDITURE OR NO EXPENDITURE' IN RELATION TO EXEMPT INCOME. IF THE AO GETS SATISFIED WITH THE SAME, THEN THERE IS NO NEED TO COMPUTE DISALLOWANCE AS PER RULE 8D. IT IS ONLY WHEN THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE OR NO EXPENDITURE HAVING BEEN INCURRED IN RELATION TO EXEMPT INCOME, THAT THE MANDATE OF RULE 8D WILL OPERATE. IN THE INSTANT CASE, THE AUTHORITIES BELOW HAVE DIRECTLY GONE TO THE SECOND STAGE OF COMPUTING DISALLOWANCE U/S. 14A AS PER RULE 8D WITHOUT RENDERING ANY OPINION ON THE CORRECTNESS OR OTHERWISE OF THE ASSESSEE CLAIM IN THIS REGARD. WE, THEREFORE, SET ASIDE THE IMPUGNED ORDER ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF AO TO RECOMPUTE DISALLOWANCE, IF ANY, IN ACCORDANCE WITH OUR ABOVE OBSERVATIONS AFTER DULY EXAMINING THE ASSESSEES CLAIM IN THIS REGARD. 6. CONSIDE RING THE FACTS AND CIRCUMSTANCES OF THE CASE WE FIND THAT THE AO HAS NOT RECORDED ITS SATISFACTION BY GIVING SPECIFIC REASONS AS TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE LD. CIT(A) WHILE PARTLY ALLO WING THIS GROUND HAD ESTIMATED THE ADMINISTRATIVE EXPENSES AND RESTRICTED THE DISALLOWANCE OF RS. 22,37,456/ - . BE THAT AS IT MA Y , SINCE THE AO HAS NOT RECORDED ITS SATISFACTION BY GIVING SPECIFIC REASONS AS TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, THEREFORE, WE SET ASIDE THE ORDER OF LD. CIT(A) AND REMIT THE MATTER BACK TO THE FILE OF AO WITH A DIRECTION TO VERIFY REGARDING THE CLAIM OF ASSESSEE THAT NO EXPENSES WERE INCURRED FOR EARNING THE EXEMPT INCOME, HAVING REGARD TO THE ACCOUNTS OF THE ASSES SEE. THE AO SHALL ALSO VERIFY ANY OTHER CLAIM IF SO RAISED BY THE ASSESSEE, AND THEREAFTER PASS AFRESH ORDER OF ASSESSMENT. IT IS NEEDLESS HERE TO MENTION THAT BEFORE PASSING THE ORDER OF ASSESSMENT, THE AO SHALL PROVIDE SUFFICIENT OPPORTUNITY OF HEARING T O THE ASSESSEE. BEFORE PARTING, WE MAY MAKE IT CLEAR THAT OUR DECISION TO RESTORE THE MATTER BACK TO THE FILE OF AO SHALL IN NO WAY BE CONSTRUED AS HAVING ANY REFLECTION OR EXPRESSION ON THE MERITS OF THE DISPUTE, WHICH SHALL BE ADJUDICATED BY THE AO INDEP ENDENTLY IN ACCORDANCE WITH LAW. RESULTANTLY, THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. THUS , KEEPING IN VIEW AFORESAID DECISION FOR AY 2011 - 12 ITSELF, THE END OF JUSTICE WILL BE MET IN THE INSTANT APPEAL IF THE ISSUE CONCERNING DISALLOWANCE OF EXPENDITURE U/S 14A OF THE 1961 ACT IS SET ASIDE AND RESTORED BACK TO THE FILE OF THE AO FOR FRESH ADJUDICATION OF THE ISSUE DENOVO IN ACCORDANCE WITH THE DIRECTION GIVEN BY THE TRIBUNAL IN ITA NO. 2144/MUM/2016 FOR AY 2011 - 12 IN ASSESSEES APPEAL VIDE TRIBUNALS ORDER DATED 12.01.2018 , WHICH ORDER OF THE TRIBUNAL FOR AY 2011 - 12 ITSELF IS REPRODUCED ABOVE . WE DO NOT FIND ANY REASONS TO DEVIATE FROM THE AFORESAID ORDERS OF THE TRIBUNAL. THESE GROUNDS OF APPEAL BEARING NO 1(A) A ND 1(B) ARE , THUS, ALLOWED FOR STATISTICAL PURPOSES AS INDICATED ABOVE WITH SIMILAR DIRECTIONS AS WERE GIVEN BY TRIBUNAL I.T.A. NO.2667/ MUM/2016 9 IN ITA NO. 2144/MUM/2016 VIDE ORDERS DATED 12.01.2018 . WE ORDER ACCORDINGLY. 7 . NOW WE COME TO SECOND ISSUE IN REVENUES APPEAL VIDE G ROUND NO. 2(A) TO (C) FILED WITH MEMO OF APPEAL FILED WITH THE TRIBUNAL . THE ASSESSEE CLAIMED RS. 2,10,11,032/ - AS REVENUE EXPENSES AS DEDUCTION FROM INCOME IN THE RETURN OF INCOME FILED WITH REVENUE . T HE AO OBSERVED THAT THE ASSESSEE IS AT PRE - OPERATIVE STAGE AND THE PRODUCTION HAD NOT YET COMMENCED EVEN TILL THE END OF THE PREVIOUS YEAR. T HE AO ALSO OBSERVED THAT NO SALES WERE BOOKED DURING THE YEAR. THE AO OBSERVED THAT THESE ARE PRE - OPERATIVE EXPENSES WHICH ARE CAPITAL IN NATURE AND CANNOT BE ALLOWED A S REVENUE EXPENSES . THE ASSESSEE W AS ASKED TO EXPLAIN THE SAME AND THE ASSESSEE SUBMITTED AS UNDER: - 6.1. THE ASSESSEE VIDE ITS WRITTEN SUBMISSION DATED 25.12.2013 SUBMITTED AS UNDER: - FROM THE ABOVE FACTS, IT WILL BE OBSERVED AS UNDER: - (A) THE ASSESSEE COMPANY HAS SECURED ORDERS FOR SUPPLY OF FURNISHED PRODUCTS BY ENTERING INTO SUPPLY AGREEMENT. (B) THE ASSESSEE COMPANY COMMENCED FOLLOWING ACTIVITIES DURING THE YEAR: (I) SETTING UP OF THE PROJECT (II) EXECUTION OF PO'S FOR THE CENTER WING BOX AND EMPENNAGE TOOLING, A REVENUE GENERATING ACTIVITY. (III) THE EMPLOYEES WERE FULLY INVOLVED IN DETAILED VERIFICATION OF THE TOOLS PROVIDED BY THE VENDORS. (IV) ON 4TH MAY 2011 THE ASSESSEE COMPANY HAS RAISED ITS FIRST INVOICE CENTER WING BO X TOOLING FOR US$ 18,15,587.90. BY END OF MARCH 2013, THE ASSESSEE COMPANY HAS COMPLETED TOOLING ACTIVITY IN CENTRE WING BOX AND INVOICED TO LOCKHEED MARTIN THE AGREED VALUE AS PER PO AND (V) REVIEW OF ASSEMBLY OPERATION SHEETS BY THE EMPLOYEES. ASS EMBLY OPERATION SHEET GUIDES THE EMPLOYEES FOR VARIOUS OPERATIONS INVOLVED IN THE ASSEMBLY PROCESS AND AL SO ACTS AS TRACKER FOR VARIOUS F UNCTIONS INVOLVED IN THE PROCESS I.E. PROVIDES KNOWLEDGE/TECHNIQUE OF PRODUCTION. (C) REVENUE EXPENSES CHARGED OFF TO THE PROFIT AND LOSS ACCOUNT HAVE NO CONNECTION WITH THE SETTING - UP OF THE PROJECT BUT HAD DIRECT NEXUS/ CONNECTION WITH EXECUTION OF PO'S FOR TOOLING AND PRODUCTION OF FINISHED GOODS, BEING BOTH REVENUE GENERATING ACTIVITIES. I.T.A. NO.2667/ MUM/2016 10 (D) IT HAD STARTED THE ACTIVI TY OF PLANNING THE PRODUCTION OF CENTER WING BOX AND EMPENNAGE (FINISHED PRODUCTS) BY MAKING THE EMPLOYEES GO THROUGH THE STEPS INVOLVED IN ASSEMBLING THE FINISHED PRODUCTS (I.E. REVIEW OF ASSEMBLY OPERATION SHEETS), BEING AN ESSENTIAL ACTIVITY FOR CARRYIN G ON THE BUSINESS OF THE ASSESSEE COMPANY. (E) THE EXPENDITURE WHICH HAS BEEN INCURRED DURING THE YEAR IS FOR THE ACTIVITIES AS MENTIONED IN PARA NO. (B)(II) TO (V) WHICH RELATED TO THE CARRYING ON OR CONDUCT OF THE BUSINESS AS THE SAME RELATED TO PROFIT EARNING PROCESS AND NOT FOR ACQUISITION OF ANY ASSET. (F) THE ASSESSEE COMPANY HAD COMMENCED THE WORK FOR PRODUCTION OF FINISHED PRODUCTS. (G) HENCE, THE ABOVE FACTORS CLEARLY ESTABLISH THAT THE ASSESSEE COMPANY HAS COMMENCED ITS BUSINESS DURING THE YEA R AND HENCE, REVENUE EXPENSES AMOUNTING TO RS 2,10,11,032/ - HAVE BEEN RIGHTLY CLAIMED AS AN ALLOWABLE DEDUCTION.' 8 . THE AO OBSERVED FROM THE SUBMISSIONS AS WERE MADE BY THE ASSESSEE BEFORE HIM DURING THE COURSE OF ASSESSMENT PROCEEDINGS U/S 143(3) R.W.S. 143(2) OF THE 1961 ACT , AS UNDER: - A. THE ASSESSEE HAS EFFECTED THE FIRST SALES ON 04.05.2011. B. THE ASSESSEE WAS STILL AT PRE - OPERATIVE STAGE ON 31.03.2013. C. PERUSAL OF EXPENSES OF RS. 2,10,11,032/ - CLAIMED BY THE ASSESSEE REVEAL THAT THE SAME ARE ADMINISTRATIVE IN NATURE AND THE EXPENDITURE ARE PERTAINING TO PRODUCTION. THE SAME ARE REPRODUCED HERE UNDER: - S.NO. PARTICULARS AMOUNT (RS) REMARKS 1 PERSONNEL EXPENSES (A] SALARIES AND ALLOWANCES 8138161 SALARIES PAID TO EMPLOYEES (B) CONTRIBUTION TO PROVIDENT FUND AND ALLIED FUNDS 177169 COMPANY'S SHARE OF CONTRIBUTION TO PROVIDENT FUND (C) STAFF WELFARE EXPENSES 121849 WELFARE EXPENSES 2 OFFICE AND ADMINISTRATIVE EXPENSES (A) RENT 1552580 RENT PAID IN RESPECT OF OFFICE IN BENGUMPET. HYDERABAD. (B) ELECTRICITY CHARGES 185770 ELECTRICITY CHARGES INCURRED FOR BEGUMPET, HYDERABAD (C) RATES AND TAXES 104485 TAXES PAID TO GOVERNMENT AND LOCAL AUTHORITIES, ROC FILING FEE I.T.A. NO.2667/ MUM/2016 11 D. THE ASSESSEE IS INVOLVED IN THE BUSINESS OF ASSEMBLY, MANUFACTURE AND SUPPLY OF ADVANCED SPACE, AVIATION, HOMELAND SECURIT Y AND DEFENSE RELATED TECHNOLOGIES. IN FURTHERANCE THEREOF, IT HAS ENTERED INTO JOINT VENTURE (JV) AGREEMENT WITH LOCKHEED MARTIN AEROSTRUC TURE CORPORATION (LOCKHEED MARTIN) A WHOLLY OWNED SUBSIDIARY OF L O C K H E E D M A R T I N C O RPORATION, USA FOR TH D. THE ASSESSEE IS INVOLVED IN THE BUSINESS OF ASSEMBLY, MANUFACTURE AND SUPPLY OF ADVANCE D SPACE, AVIATI ON, HOMELAND SECURITY AND DEFENS E RELATED TECHNOLOGIES. IN FURTHERANCE THEREOF, IT HAS ENTERED INTO JOINT VENTURE(JV) AGREEMENT WITH LOCKHEED MA RTIN AREOSTRCUTURE CORPORATION ( L OCKHEED MARTIN) A WHOLLY OWNED SUBSIDIARY OF LOCKHEED MARTIN CORPORATION, USA FOR THE PURPOSE OF ASSEMBLING, MANUFACTURING AND SUPPLYING OF C130/C130J AIRCRAFT STRUCTURAL ARTICLES I.E. EMPENNAGES AND CENTER WING BOX (FINISHED PRODUCTS). 6.3 THIS ACTIVITY IS HIGHLY SPECIALISED AND REQUIRES HIGHLY TECHNICAL SKILL, MACHINERY AND RAW MATERIAL. 6.4 THE ABOVE FACTS CLEARLY REVEAL THAT NO MANUFACTURING ACTIVITY WAS CARRIED OUT BY THE ASSESSEE AND IT IS MERELY AT PRE - OPERATIVE STAGE . HENCE , THE EXPENSES ARE TREATED AS PRE - OPERATIVE AND TREATED AS CAPITAL IN NATURE . SINCE, RS. 39,84,218/ - HAS BEEN DISALLOWED AND TREATED AS CAPITAL IN NATURE. THE DISALLOWANCE ON THIS SCORE WORKS OUT TO RS. 1,70,26,814/ - THUS, THE AO CONCLUDED THAT NO M ANUFACTURING ACTIVITY WAS CARRIED OUT BY THE ASSESSEE DURING THE ENTIRE PREVIOUS YEAR RELEVANT TO IMPUGNED ASSESSMENT YEAR UNDER CONSIDERATION AND THE ASSESSEE IS MERELY AT A PRE - OPERATIVE STAGE WHICH LED THE AO TO HOLD THAT THE EXPENSES ARE PRE - OPERATIVE EXPENSES B EING CAPITAL IN NATURE WHICH CANNOT BE ALLOWED AS REVENUE EXPENSES AND HENCE THE SAME WERE DISALLOWED BY THE AO WHILE FRAMING (D) LEGAL AND PROFESSIONAL CHARGES 5757293 FEES PAID FOR MANAGEMENT CONSULTANCY, LEGAL CONSULTANCY, CHARTERED ACCOUNTANT SERVICES, COMPANY SECRETARY SERVICES ETC. (E) TRAVELLING AND CONVEYANCE EXPENSES 4405805 TRAVELLING EXPENSES, BOARDING & LODGING EXPENSES OF EMPLOYEES ON OFFICIAL TOURS. (F) COMMUNICATION EXPENSES 124879 TELEPHONE, MOBILE AND INTERNET CHARGES ( G) AUDIT FEES 75000 STATUTORY AUDIT FEE (H) BUSINESS PROMOTION EXPENSES 43644 EXPENSES INCURRED TOWARDS BUSINESS PROMOTION ETC. (I) PRINTING AND STATIONERY 221104 PRINTING AND STATIONERY EXPENSES INCURRED. (J) MISCELLANEOUS EXPENSES 103242 MEMBERSHIP AND SUBSCRIPTION CHARGES AND OFFICE EXPENSES. 21011032 I.T.A. NO.2667/ MUM/2016 12 ASSESSMENT VIDE ASSESSMENT ORDER DATED 07.02.2014 PASSED U/S 143(3) OF THE 1961 ACT. 9 . A GGRIEVED BY THE DECISION OF THE AO VID E ASSESSMENT ORDER DATED 07.02.2014 PASSED U/S. 143(3) OF THE 1961 ACT, THE ASSESSEE FILED FIRST APPEAL WITH LEARNED CIT(A). THE LEARNED CIT(A) CONSIDER ED THE SUBMISSION OF THE ASSESSEE AND GRANTED RELIEF TO THE ASSESSEE BY ALLOWING THE APPEAL OF THE ASSE SSEE , VIDE APPELLATE ORDER DATED 29.01.2016, BY HOLDING AS UNDER : - 7.1 ON THE OTHER HAND THE APPELLANT SUBMITTED THAT IT HAS DEBITED RS. 3.38 CRORE IN THE P&L A/C OUT OF WHICH IT HAS ALREADY DISALLOWED RS. 1.29 CRORE AS PRE - OPERATIVE EXPENSES AND DISALLOWED IN THE COMPUTATION OF INCOME; AS EXPENSES INCURRED TOWARDS SHARE APPLICATION EXPENSES ETC. THE REMAINING RS. 2.10 CRORE ARE THE EXPENSES OF REVENUE NATURE WHICH IS ALLOWABLE AS BUSINESS EXPENSES. THE APPELLANT SUBM ITTED THAT THE COMPANY HAS ACQUIRED PURCHASE ORDER ON 18.02.2011 AND TAMAL HAS ACQUIRED ORDERS ON 28.02.2011. THE COMPANY HAS STARTED THE DIGITIZED PROCESS ON 05.03.2011 AND RAISED INVOICE ON 05.05.2011. THE APPELLANT HAS SUBMITTED THAT FOR COMMENCEMENT OF BUSINESS THE COMPANY HAD APPOINTED THE VARIOUS TECHNICAL AND NON - TECHNICAL STAFF, ACQUIRED SOFTWARE AND CREATED INFRASTRUCTURE FOR THE OPERATION OF BUSINESS AND IT IS INCORRECT TO SAY THAT THE BUSINESS WAS NOT COMMENCED DURING THE PREVIOUS YEAR RELEVANT T O THE AY 2011 - 12. THE APPELLANT HAS ALREADY CAPITALIZED THE PRE - OPERATIVE EXPENSES AND THERE IS NOTHING LEFT WHICH IS TO BE CAPITALIZED FURTHER WHATEVER EXPENSES DEBITED IN THE P&L A/C ARE VERY MUCH REVENUE IN NATURE AND THE ACCOUNTS ARE DUL Y AUDITED. 7 .2 I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND THE FACTS OF THE CASE. THE DETAILS SUBMITTED REVEALED THAT THE COMPANY HAS STARTED ITS BUSINESS DURING THE PREVIOUS YEAR AND WHATEVER EXPENSES RELATED TO PRE - OPERATIVE EXPENSES; THE APPELLANT HAS ALR EADY DISALLOWED IN ITS COMPUTATION OF INCOME AND WHATEVER EXPENSES DEBITED TO THE P & L A/C ARE VERY MUCH REVENUE IN NATURE , HENCE SAME ARE ALLOWABLE AS BUSINESS EXPENDITURE. THEREFORE, THE ENTIRE EXPENSES DISALLOWED BY THE AO ARE NOT SUSTAINABLE. THEREF ORE, GROUND NO. 2 IS ALLOWED. 10 . A GGRIEVED BY THE APPELLATE ORDERS DATED 29.01.2016 PASSED BY LD. CIT(A) , THE REVENUE HAS COME IN AN APPEAL BEFORE THE TRIBUNAL. THE LEARNED DR OPENED THE ARGUMENTS AND BROUGHT TO OUR NOTICE ASSESSMENT ORDER DATED 07.02.2014 PASSED BY THE AO U/S 143(3) OF THE 1961 ACT . IT WAS SUBMITTED BY LEARNED DR THAT BUSINESS OF THE ASSESSEE HAS NOT COMMENCED EVEN TILL THE END OF THE PREVIOUS YEAR UNDER CONSIDERATION AS THE ASSESSEE WAS STILL IN PRE - OPERATIVE STAGE AS THE MANUFACTURING UNIT TO BE SET UP AT I.T.A. NO.2667/ MUM/2016 13 HYDERABAD WAS STILL UNDER IMPLEMENTATION WHICH DID NOT COMMENCE PRODUCTION . OUR ATTENTION WAS DRAWN TO PROVISIONS OF SECTION 3 OF THE 1961 ACT TO CONTEND THAT SINCE NO BUSINESS OF THE ASSESSEE COMMENCED EVEN AS AT THE END OF THE PREVIOUS YEAR , THE EXPENSES CANNOT BE ALLOWED AS DEDUCTION AS REVENUE EXPENSES WHILE COMPUTING INCOME CHARGEABLE TO INCOME - TAX WITHIN PROVISIONS OF THE 1961 ACT . OUR ATTENTION WAS ALSO DRAWN TO PAGE 83 - 85 OF PAPER BOOK FILED BY THE ASSESSEE WITH T HE TRIBUNAL WHEREIN DETAILED NOTE IS PLACED AS TO THE NATURE OF ACTIVITIES CARRIED ON BY THE ASSESSEE COMPANY. THUS, RELIANCE WAS PLACED BY LEARNED DR ON THE ASSESSMENT ORDER FRAMED BY THE AO U/S 143(3) AND NON COMMENCEMENT OF PRODUCTION BY THE MANUFACTUR ING UNIT BEING SET UP BY THE ASSESSEE AT HYDERABAD TO MAKE HIS POINT AS TO NON ALLOWABILITY OF EXPENSES AS REVENUE EXPENSES WHILE COMPUTING INCOME CHARGEABLE TO INCOME - TAX . THE LD. AR ON THE OTHER HAND VEHEMENTLY AND STRENUOUSLY ARGUED THAT BUSINESS OF THE ASSESSEE WAS IN FACT SET - UP BY THE END OF THE PREVIOUS YEAR AND THE ASSESSEE IS ENTITLE D FOR CLAIMING EXPENSES TO THE TUNE OF RS. 2,10,11,032/ - AS REVENUE EXPENSES . OU R ATTENTION WAS DRAWN TO PAGE NO.7 OF THE PAP ER BOOK WHEREIN WRITTEN SUBMISSION S DATED 25.12.2013 AS WERE SUBMITTED BEFORE THE AO DURING ASSESSMENT PROCEEDINGS U/S 143(3) R.W.S. 143(2) ARE PLACED TO CONTEND THAT ASSESSEE WAS EX ECUTI NG PURCHASE ORDER FOR THE CENTER WING BOX AND E MPENNAGE TO OLING , A REVENUE GENERATING ACTIVI TY. OUR ATTENTION WAS DRAWN TO P ROVISION S OF SECTION 3 OF ACT AND IT WAS SUBMITTED THAT ALL THE E XPENSES WHICH ARE INCURRED POST - SETTING UP OF THE BUSINESS ARE TO BE ALLOWED AS BUSINESS EXPENSES WHICH IS MANDATE OF SECTION 3 OF THE 1961 ACT AND COMMENCEMENT OF BUS INESS HAS NO RELEVANCE . OUR ATTENTION WAS ALSO DRAWN TO PAGE NO. 83 TO 85 OF THE PAPER BOOK WHEREIN DETAIL ED NATURE OF ACTIVITIES CARRIED OUT BY THE ASSESSEE DURING THE YEAR ENDED 31 ST MARCH, 2011 WERE DETAILED. THE SAID NOTE ON ACTIVITIES WERE SUBMITTED BY THE ASSESSEE VIDE WRITTEN SUBMISSIONS DATED 22 - 12 - 2015 FILED BY THE ASSESSEE BEFORE LEARNED CIT(A) . OUR ATTENTION WAS ALSO DRAWN TO PAGE NO 70 OF THE PAPER BOOK WHEREIN PURCHASE ORDER DATED 28.02.2011 RAISED IN FAVOUR OF M/S. TAL MANUFACTURING SOLUTI ONS LTD. BY THE ASSESSEE NAMELY M/S TATA AEROSTRUCTUE LTD. IS PLACED . THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE COMPANY IS IN FACT EARLIER KNOWN AS TATA AEROSTRUCTURES LTD. AND CONSEQUENT TO NAME CHANGE , THE ASSESSEE IS NOW I.T.A. NO.2667/ MUM/2016 14 KNOW N AS TATA LOCKHEED MARTIN AEROSTRUCTURES LIMITED . I T WAS SUBMITTED BY LEARNED COUNSEL FOR THE ASSESSEE THAT ASSESSEE RECEIVED ORDER DATED 18 - 2 - 2011 FROM LOCKHEED MARTIN AERONAUTICS, USA (PB/PAGE 12) AND CONSEQUENTLY THE ASSESSEE PLACED ORDER S ON TAL MANUFACTURING SOLUTIONS LTD. DATED 28 - 2 - 2011(PB/PAGE 70) , TATA CONSULTANCY SERVICES LIMITED DATED 05 - 03 - 2011 (PB/PAGE 71) AND TATA TECHNOLOGIES LIMITED DATED 05 - 03 - 2011 (PB/PAGE 72 - 73) TO SUB - CONTRACT TO THESE VENDORS IN ORDER TO EXECUTE THE ORDER S RECEIVED BY THE ASSESSEE FROM LOCKHEED MARTIN AERONAUTICS, USA . OUR ATTENTION WAS ALSO DRAWN TO PAGE NO. 40 OF THE PAPER BOOK WHEREIN THE PURCHASE ORDER DATED 1 8.02.2011 FOR USD 12,76 8,133/ - IN FAVOUR OF ASSESSEE ISSUED BY LOCKHEED MARTINE AEROSTRUCTURE , USA IS PLACED. OUR ATTENTION WAS ALSO DRAWN TO PAGE NO. 75 OF THE PAPER BOOK WHEREIN THE ASSESSE E HAS INVOICED MATERIAL WORTH U S D 181,55,87.90 FOR CENTER WING BEAM TOOLING VIDE INVOICE DATED 04.05.2011 IS PLACED , WHEREIN THE ASSESSEE IS SHOWN AS EXPORTE R OF THE MATERIAL WHILE BUYER IS STATED TO BE LOCKHEED MARTIN AERONAUTICS , USA AND THE CONSIGNEE OF THE MATERIAL IS SHOWN TO BE ASSESSEE ITSELF . IT IS P ERTINENT TO MENTION THAT IN THE SAID INVOICE SO FAR AS PORT OF LOADING AND PORT OF DISCHARGE AS WELL FINAL DESTINATION IS SHOWN TO BE NOT APPLICABLE AND THE CONSIGNEE IS ASSESSEE ITSELF. O UR ATTENTION WAS ALSO DRAWN TO PAGE NO. 84 OF THE PAPER BOOK TO CONTEND THAT ASSESSEE HAS SET UP THE BUSINESS AND HENCE ASSESSEE WAS ENTITLE D FOR EXPENSES AS REVENUE EXPENSES . I T WAS SUBMITTED THAT THE ASSESSEE IS ENGAGED IN EXECUTION OF PURCHASE ORDER S FOR CENTER WING B OX AND EMPENNAGE S FOR C130/C130J AIRCRAFT TO CONTEND THAT IT IS A REVENUE GENERATING ACTIVITY. OUR ATTENTION WAS ALSO DRAWN TO PAGE NO. 77 TO 78 OF THE PAPER BOOK WHEREIN PURCHASE ORDER S DATED 05 - 03 - 2011 ISSUE D BY ASSESSEE IN FAVOUR OF T ATA C ONSULTANCIES S ERVICES LIMITED AND TATA TECHNOLOGIES LIMITED FOR CENTER WING BOX IS PLACED. OUR ATTENTION WAS ALSO DRAWN TO PAGE NO. 8 6 OF THE PAPER BOOK WHERE THE FL OW CHARTS OF PROCESSES FOR ASSEMBLY OPERATIO NS , TOOLS FOR CENTER WING BOX ACTIVITY CARRIED DURING THE YEAR ENDED 31 ST MARCH, 2011 IS PLACED. THE ASSESSEE RELIED ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF WESTER N INDIA VEGETABLE PRODUCTS LIMITED V. CIT REPORTED IN (1954) 26 ITR 151 (BOM.) . THE ASSESSEE ALSO RELIED UPON DECISION OF ITAT, MUMBAI IN THE CASE OF HA GWOODS COMMERCIAL DEVELOPERS P. LTD. & ORSS IN ITA NO. 1306/MUM/2015 & ORS. FOR AY 2012 - 13 , VIDE CONSO LIDATED ORDER DATED 08.02.2017 , WHEREIN BOTH OF US WERE THE MEMBERS O F THE DIVISION B ENCH I.T.A. NO.2667/ MUM/2016 15 WHO PASS ED THE AFORESAID CONSOLIDATED ORDER DATED 08.02.2017 . RELIANCE WAS ALSO PLACED BY LEARNED COUNSEL FOR THE ASSESSEE ONTO THE DECISION OF ITAT, MUMBAI IN THE CASE OF ACIT V. RELIANCE DEFENCE & OFFSHORE ENGINEERING CO. LTD. IN ITA NO. 4692/MUM2014 AND ITA NO. 372/MU M /2015 FOR AY 2008 - 09 & 2009 - 10 , VIDE CONSOLIDATED ORDER DATED 31.08 .2017. IT WAS SUBMITTED BY LEARNED COUNSEL FOR THE ASSESSEE THAT TOOLS WERE ACQUIRED BY THE ASSESSEE FROM LOCKHEED MARTIN AERONAUTICS , USA WHICH WAS MANUFACTURED INDIGENOUSLY BY SAID LOCKHEED MARTIN AERONAUTICS, USA WHEREIN THE ORDER IN TURN FOR INDIGENOUS MANUFACTURING OF TOOLS WAS PLACED BY SAID LOCKHEED MARTIN AERONAUTICS , US A BY SUB - CONTRACTING IN FAVOUR OF THE ASSESSEE, WHILE ASSESSEE IN TURN PLACED SUB - SUB CONTRACTS WITH TCS, TATA TECHNOLOGIES LIMITED ETC TO GET THE MANUFACTURING OF TOOLS DO NE INDIGENOUSLY . THE MAIN CONTRACT WAS FIRSTLY AWARDED BY ASSESSEE IN FAVOUR OF LO CKHEED MARTIN AEROSTRUCTURE CORPORATION, USA AND THEREAFTER SUB - CONTRACT AND SUB - SUB CONTRACT FOLLOWED. IT WAS SUBMITTED THAT EVEN WHERE THE ACTIVITIES ARE PREPARATORY IN NATURE TO THE ATTAINMENT OF MAIN ACTIVITIES, IT CAN B E CONSIDERED THAT THE BUSINES S WA S SET UP. THE ASSESSEE ALSO RELIED ON THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT V. SAURASHTR A CEMENT & CHEMICAL INDUSTRIES L TD. (1972) 91 ITR 170, (GUJ. HC) . THE ASSESSEE ALSO RELIED ON THE DECISION OF HONBLE BOMBAY HIGH C OURT IN TH E CASE OF CIT V. RALLIWOLF LIMITED (1978) 121 ITR 262 (BOM. HC). IT WAS SUBMITTED BY LEARNED COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE RECEIVED ORDERS FROM LOCKHEED MARTIN AERONAUTICS , USA FOR MANUFACTURING TOOLS INDIGENOUSLY FOR THE ASSEMBLY UNIT BEING SET UP BY THE ASSESSEE AT HYDERABAD AND THE BUSINESS WAS SET UP WHEN THE SAID ORDERS WERE RECEIVED FOR EXECUTION BY THE ASSESSEE . THE ASSESSEE COUNSEL STRONGLY RELIED ON THE DE CISION OF HONBLE GUJARAT HIGH C OURT IN THE CASE OF PREM CONDUCTORS P. LTD. V. C IT (1976 ) 108 ITR 654 (GUJ. HC) . THE LD. DR IN REJOINDER SUBMITTED THAT SETTING UP OF THE BUSINESS AND COMMENCEMENT OF THE BUSINESS ARE ONE AND THE SAME THING WITHIN MEANING OF SECTION 3 OF THE 1961 ACT AND NO DISTINCTION CAN BE DRAWN . IT WAS VEHEMENT LY AND STRONGLY ARGUED BY LEARNED DR THAT THE ASSESSEE IS NOT ENTITLE D FOR RELIEF BY WAY OF ALLO W ABILITY OF EXPENSES AS REVENUE EXPENSES AS IS CLAIMED BY THE ASSESSEE , THUS PRAYERS ARE MADE TO UPHOLD ASSESSMENT ORDER OF LEARNED AO AND TO SET ASIDE APPELL ATE ORDER OF LEARNED CIT(A). I.T.A. NO.2667/ MUM/2016 16 THUS, I N NUT - SHELL BOTH LEARNED AR AND LEARNED DR HAS MADE VERY STRENUOUS CONTENTIONS STRONGLY ARGUING THAT THE APPEAL BE DECIDED IN THEIR FAVOUR BASED ON FACTUAL MATRIX OF THE CASE AND LEGAL PROPOSITIONS AS ARE CONTAINED IN STATUTE AND JUDICIAL PRECEDENTS. WE PL ACE ON RECORD OUR APPRECIATION FOR BOTH THE COUNSEL FOR THEIR SINCERE EFFORTS IN ARGUING THEIR CASE BEFORE US ON THIS ISSUE. 11 . WE HAVE CONSIDERED RIVAL CONTENTIONS AND PERUSED THE M ATERIAL ON RECORD INCLUDING CASE LAWS CITED BY BOTH THE RIVAL PARTIES BEF ORE US. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY WAS INCORPORATED ON 5 TH APRIL, 2010 WITH THE MAIN OBJECT OF DOING BUSINESS OF ASSEMBLY, MANUFACTURE AND SUPPLY OF ADVANCE SPACE, AVIATION, HOMELAND SECURITY AND DEFENCE RELATED TECHNOLOGIES . THE ASSESSEE ENTERED INTO JOINT VENTURE AGREEMENTS WITH LOCKHEED MARTIN AEROSTRUCTURE CORPORATION , USA A WHOLLY OWNED SUBSIDIARY OF LOCKHEED MARTIN CORPORATION OF USA FOR THE PURPOSE OF ASSEMBLING, MANUFACTURING AND SUPPLYING OF C130/C130J AIRCRAFT STRU CTURAL ARTICLES I.E. EMPENNAGES AND CENTER WING BOX (FINISHED PRODUCTS). THE ASSESSEE IS A J.V COMPANY FORMED BY TATA ADVANCED SYSTEMS LTD. AND LOCKHEED MARTIN AEROSTRUCTURE CORPORATION(LMAC), WHE REIN TATAS HOLD 74% AND LOCKHEED MARTIN AEROSTRUCTURE CORPORATION, USA HOLDS 26% OF THE EQUITY OF THE ASSESSEE COMPANY. THE ASSESSEE COMPANY IS SETTING UP MANUFACTURING UNIT AT ADIBATLA VILLAGE, HYDERABAD TO ASSEMBLE, MANUFACTURE AND SUPPLY TO LOCKHEED MARTIN AEROSTRUCTURE CORPORATION ,USA OR ITS AFFILIATES O F C - 130/C130J AIRCRAFT STRUCTURAL ARTICLES CONSISTING OF EMPENNAGES AND CENTER WING BOXES . THE AFORESAID PROJECT FOR SETTING UP MANUFACTURING /ASSEMBLY UNIT AT HYDERABAD IS UNDER CONSTRUCTION /IMPLEMENTATION UP TO THE END OF THE PREVIOUS YEAR RELEVANT TO THE IMPUGNED ASSESSMENT YEAR .SO FAR SO GOOD. THE ASSESSEE HAS C LAIMED AS PER ITS JV AGREEMENT THAT THE JV PARTNERS AND THE ASSESSEE COMPANY HAS EXECUTED DEFINITIVE AGREEMENTS , WHICH INCLUDES SUPPLY AGREEMENT FOR SUPPLY OF FINISHED GOODS CONSISTING OF CENT ER WING BOXES AND EMPENNAGES FOR C130/C130J AIRCRAFTS TO LOCKHEED MARTIN AEROSTRUCTURE CORPORATION, USA AND/OR ITS AFFILIATES. THE COPIES OF SUPPLY AGREEMENT WAS FURNISHED BEFORE THE AUTHORITIES BELOW (PB/PAGE 3) . THE ASSESSEE COMPANY INCURRED TOTAL EXPE NSES OF RS. 3.39 CRORES OUT OF WHI CH EXPENSES AGGREGATING TO RS. 1.29 CRORES WERE DISALLOWED BY THE ASSESSEE ITSELF , WHILE CLAIM FOR DEDUCTION OF I.T.A. NO.2667/ MUM/2016 17 EXPENSES TO THE TUNE OF RS. 2.10 CRORES AS REVENUE EXPENSES WAS MADE BY THE ASSESSEE FROM THE INCOME OF THE A SSESSEE COMPUTED WITHIN PROVI SIONS OF THE 1961 ACT WHICH WAS DENIED BY REVENUE, WHICH IS A SUBJECT MATTER OF DISPUTE BETWEEN RIVAL PARTIES. THE AFORESAID EXPENSES TO THE TUNE OF RS. 2.10 CRORES WHICH WERE CLAIMED AS REVENUE EXPENSES AND WHICH ARE SUBJECT MATTER OF DISPUTE BETWEEN RIVAL PARTIES ARE MAINLY IN THE NATURE OF PERSONNEL EXPENSES , OFFICE AND ADMINISTRATIVE EXPENSES. THE ASSESSEE IS CLAIMING THAT ITS BUSINESS WAS SET UP AND HENCE THE ASSESSEE IS ENTITLED FOR CLAIMING DEDUCTION OF SAID EXPENSES AS REVENUE EXPENSES WHILE COMPUTING INCOME UNDER THE PROVISIONS OF THE 1961 ACT WHILE IT IS THE SAY OF THE REVENUE THAT NO DEDUCTION OF THESE PERSONNEL, ADMINISTRATIVE AND OFFICE EXPENSES CAN BE ALLOWED AS BUSINESS EXPENSES AS THE BUSINESS OF THE ASSESSEE H AS NOT YET BEEN SET UP TILL THE END OF RELEVANT PREVIOUS YEAR AND THESE EXPENSES BEING PRE - OPERATIVE EXPENSES PARTAKE THE CHARACTER OF CAPITAL EXPENDITURE WHICH ARE NOT ALLOWABLE AS DEDUCTION WHILE COMPUTING INCOME OF THE ASSESSEE WITHIN THE MANDATE OF THE 1961 ACT. THE DETAILS OF SAID EXPENSES ARE AS UNDER: S.NO. PARTICULARS AMOUNT (RS) REMARKS 1 PERSONNEL EXPENSES (A] SALARIES AND ALLOWANCES 8138161 SALARIES PAID TO EMPLOYEES (B) CONTRIBUTION TO PROVIDENT FUND AND ALLIED FUNDS 177169 COMPANY'S SHARE OF CONTRIBUTION TO PROVIDENT FUND (C) STAFF WELFARE EXPENSES 121849 WELFARE EXPENSES 2 OFFICE AND ADMINISTRATIVE EXPENSES (A) RENT 1552580 RENT PAID IN RESPECT OF OFFICE IN BENGUMPET. HYDERABAD. (B) ELECTRICITY CHARGES 185770 ELECTRICITY CHARGES INCURRED FOR BEGUMPET, HYDERABAD (C) RATES AND TAXES 104485 TAXES PAID TO GOVERNMENT AND LOCAL AUTHORITIES, ROC FILING FEE (D) LEGAL AND PROFESSIONAL CHARGES 5757293 FEES PAID FOR MANAGEMENT CONSULTANCY, LEGAL CONSULTANCY, CHARTERED ACCOUNTANT SERVICES, COMPANY SECRETARY SERVICES ETC. I.T.A. NO.2667/ MUM/2016 18 IT HAPPENED SO THAT THE ASSESSEE WAS SETTING UP MANUFACTURING /ASSEMBLY UNIT AT HYDERABAD FOR MANUFACTURING/ASSEMBLY OF CENTER WING BOXES AND EMPENNAGES FOR C130/C130J AIRCRAFT WHICH UNDISPUTEDLY WAS NOT SET UP TILL THE END OF THE RELEVANT PREVIOUS YEAR UNDER CONSTRUCTION . THERE IS NO DISPUTE SO FAR AS THIS FACTUAL MATRIX IS CONCERNED. THE DISPUTE AROSE BECAUSE THE ASSESSEE FOR ITS MANUFACTURING /ASSEMBLY UNIT WHICH WAS BEING SE T UP AT HYDERABAD FOR MANUFACTURING/ ASSEMBLY PROCESS FOR CENTER WING BOX AND EMPENNAGES (FINISHED PRODUCTS) ) FOR C130/C130J AIRCRAFTS, REQUIRED TOOLS AND JIGS FOR THIS MANUFACTURING/ASSEMBLY UNIT WHICH WAS BEING SET UP AT HYDERABAD . SINCE THESE TOOLING AND JIGS ARE REQUIRED AS PART OF THE MANUFACTURING /ASSEMBLY UNIT BEING SET UP AT HYDERABAD BY ASSESSEE, THESE TOOLINGS AND JIGS PARTAKE THE CHARACTER OF CAPITAL GOODS . AS PER JV AGREEMENT BETWEEN LOCKHEED MARTIN AND THE ASSESSEE COMPANY, TOOLS AND JIGS R EQUIRED FOR PRODUCTION/ASSEMBLY PROCESS WERE TO BE PROVIDED BY LOCKHEED MARTIN AEROSTRUCTURE CORPORATION, USA TO THE ASSESSEE (PAGE 5/PB) AS PER CLAUSE 7 ON PAGE 4 OF BUSINESS PLAN, WHICH BUSINESS PLANS WAS SUBMITTED BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW. HOWEVER, LOCKHEED MARTIN AEROSTRUCTURE CORPORATION , USA SUGGESTED THAT THESE TOOLS AND JIGS REQUIRED FOR ASSEMBLY/PRODUCTION PROCESS BEING SET UP AT HYDERABAD BE BUILT INDIGENOUSLY BY THE ASSESSEE COMPANY WHEREIN SUB - CONTRACT WAS AWARDED TO THE AS SESSEE COMPANY BY LOCKHEED MARTIN AEROSTRUCTURE CORPORATION, USA. ACCORDINGLY LOCKHEED MARTIN AEROSTRUCTURE CORPORATION , (E) TRAVELLING AND CONVEYANCE EXPENSES 4405805 TRAVELLING EXPENSES, BOARDING & LODGING EXPENSES OF EMPLOYEES ON OFFICIAL TOURS. (F) COMMUNICATION EXPENSES 124879 TELEPHONE, MOBILE AND INTERNET CHARGES ( G) AUDIT FEES 75000 STATUTORY AUDIT FEE (H) BUSINESS PROMOTION EXPENSES 43644 EXPENSES INCURRED TOWARDS BUSINESS PROMOTION ETC. (I) PRINTING AND STATIONERY 221104 PRINTING AND STATIONERY EXPENSES INCURRED. (J) MISCELLANEOUS EXPENSES 103242 MEMBERSHIP AND SUBSCRIPTION CHARGES AND OFFICE EXPENSES. 21011032 I.T.A. NO.2667/ MUM/2016 19 USA ISSUED PURCHASE ORDERS FOR CENTER WING BOX AND EMPENNAGE TOOLING ON 18 TH FEBRUARY 2011 FOR US$ 25,93,697/ - AND US $ 1,27,68,133/ - RESPECTIVELY(PB/PAGE 5) IN FAVOUR OF THE ASSESSEE COMPANY . THE COPIES OF THE SAID POS WERE ENCLOSED AND ARE AS PART OF PAPER BOOK(PB/PAGE 12 AND 40). THE ASSESSEE COMPANY INSTE AD OF MANUFACTURING THE SAID TOO LS AND JIGS ITSELF INITIATED THE TOOL /JIGS M ANUFACTURED/ASSEMBLED BY OUTSOURCING THE SAME TO INDIGENOUS MANUFACTURERS AND SUPPLIERS VIZ. TAL MANUFACTURING SOLUTIONS LIMITED, TATA TECHNOLOGIES LIMITED AND TATA CONSULTANCY SERVICES LIMITED. THE SAID SUB - SUB - CONTRACTS AWARDED BY THE ASSESSEE COMPANY T O THESE THREE VENDOR COMPANIES ARE PART OF PAPER BOOK FILED BY THE ASSESSEE WITH THE TRIBUNAL(PB /PAGE 70 - 74) . LOCKHEED MARTIN AEROSTRUCTURE CORPORATION,USA SHARED NECESSARY ENGINEERING DRAWINGS , DRAWINGS AND SPECIFICATIONS ALONG WITH SOURCE BO O K FOR MAN UFACTURING/ASSEMBLING OF TOOLS/JIGS, BASED ON WHICH ASSEMBLY OPERATION SHEETS ARE PREPARED. THESE ASSEMBLY OPERATION SHEETS ARE CATEGORIZED IN SUB ASSEMBLY, MAJOR ASSEMBLY AND FINAL INTEGRATION. THESE ASSEMBLY OPERATION SHEETS ARE REQUIRED IN ASSEMBLY PROC ESSES FOR CENTER WING BOX AND EMPENNAGES . THESE ASSEMBLY OPERATION SHEETS ACTS AS GUIDE TO STAFF FOR VARIOUS OPERATIONS INVOLVED IN THE ASSEMBLY PROCESS AND ALSO ACTS AS TRACKER FOR VARIOUS FUNCTIONS INVOLVED IN A PROCESS. THE ASSESSEE COMPANY PLACED ORD ERS WITH TCS AND TATA TECHNOLOGIES LIMITED ON 5 TH MARCH 2011 , FOR DEVELOPMENT OF ASSEMBLY OPERATIONS SHEETS AND THE SAID ASSEMBLY OPERATIONS SHEETS WERE REVIEWD BY THE EMPLOYEES OF THE ASSESSEE COMPANY. THESE OPERATIONAL DETAILS ARE EXTRACTED FROM WRITTEN SUBMISSIONS FILED BEFORE THE AUTHORITIES BELOW(PB/PAGE 1 - 6) . T HE WRITTEN SUBMISSIONS WITH RESPECT TO NATURE OF ACTIVITIES CARRIED ON BY THE ASSESSEE. WHICH WERE SUBMITTED BY THE ASSESSEE BEFORE LEARNED CIT(A) VIDE SUBMISSIONS DATED 22.12.2015 (PAGE 79/ PB) AS ANNEXURE B (PAGE 83/PB) IS REPRODUCED HERE UNDER: - ANNEXURE 'B' TATA LOCKHEED MARTIN AEROSTRUCTURES LIMITED NATURE OF ACTIVITIES CARRIED OUT BY THE APPELLANT DURING THE YEAR ENDED 31ST MARCH, 2011 1. FACILITY: LAND WAS ACQUIRE D AND CONSTRUCTION WORK OF THE PROJECT WAS STARTED. THE TOTAL AMOUNT OF CAPITAL EXPENDITURE INCURRED, INCLUDING PRE - OPERATIVE I.T.A. NO.2667/ MUM/2016 20 EXPENSES, OF RS. 150.28 LAKHS AS UPTO 31ST MARCH, 2011 WAS RS. 765.26 LAKHS THE CONSTRUCTION WORK, INCLUDING SUPERVISION OF THE PR OJECT WAS OUTSOURCED. 2. MANPOWER: (A) MANPOWER RECRUITMENT STARTED IN AUGUST 2010 AND AS ON MARCH, 2011, E MPLOYEE HEADCOUNT WAS SIXTY ONE - MAJORITY OF THEM HAVING 'TECHNICAL BACKGROUND / QUALIFICATION'. (B) MOST OF THE EMPLOYEES WERE INVOLVED IN THE TECHNICAL ACTIVITY OF REVIEW OF ASSEMBLY OPERATION SHEETS GIVEN BY SERVICE PROVIDERS AND ALSO DETAILED VERIFICATION OF TOOLS PROVIDED BY THE SUPPLIERS. 3. TOOLING: (A) . ASSEMBLY PROCESS FOR FINISHED PRODUCTS REQUIRED TOOLS AND JIGS. AS A PART OF JV AGREEMENT BETWEEN LOCKHEED MARTIN AND THE APPELLANT, TOOLS /JIGS REQUIRED FOR PRODUCTION / ASSEMBLY PROCESS WERE TO BE PROVIDED BY LOCKHEED MARTIN TO THE APPELLANT (REFERENCE IS DRAWN TO CLAUSE 7 ON PAGE 4 OF THE BUSINESS PLAN) [ REFER PAGE NO . 33 OF PAPER BOOK NO.I]. HOWEVER, LOCKHEED MARTIN SUGGESTED TO - BUILD ALL THE TOOLS REQUIRED FOR ASSEMBLY / PRODUCTION PROCESS INDIGENOUSLY. ACCORDINGLY, LOCKHEED MARTIN ISSUED PURCHASE ORDERS FOR CENTER WING BOX AND EMPENNAGE TOOLING ON 18TH FEBRUARY, 201 1 FOR US$ 25,93,697 AND US$ 1,27,68,133 RESPECTIVELY [REFER PAGE NOS. 34 TO 91 OF PAPER BOOK NO.I]. (B) ACCORDINGLY, THE APPELLANT INITIATED THE PROCESS OF TOOL BUILDING BY OUTSOURCING THE SAME TO VARIOUS - INDIGENOUS MANUFACTURERS AND SUPPLIERS, WH ICH IS EXPLAINED AS UNDER: - (I) PLACED ORDERS WITH TAL MANUFACTURING SOLUTIONS LIMITED FOR MANUFACTURE, SUPPLY, INSTALLATION AND COMMISSIONING OF TOOLS REQUIRED FOR BOTH CENTER WING BOX AND EMPENNAGE STRUCTURES ON 28TH FEBRUARY 2011 FOR 477.32 LA KHS. ACCORDINGLY, THE APPELLANT PAID AN ADVANCE OF RS. 84.85 LAKHS TO TAL MANUFACTURING SOLUTIONS LIMITED ON 7TH MARCH 2011 AS PER THE PO TERMS TO START THE TOOL MANUFACTURING ACTIVITY [REFER PAGE NO. 92 OF PAPER BOOK \ NO.1]. (II) TOOL DESIGN AND DIGITIZATION OF DRAWINGS IS A PART OF TOOLING ACTIVITY FOR BOTH CENTER WING BOX AND EMPENNAGE STRUCTURES AND THE APPELLANT HAS PLACED ORDERS FOR THIS ACTIVITY ON TATA TECHNOLOGIES LIMITED AND TATA CONSULTANCY SERVICES LIMITED ON 5TH MARCH, 2011[REFER PAGE NOS. 93 TO 96 OF PAPER BOOK NO.I]. NOTE: ON 4LH MAY, 2011, THE APPELLANT HAS RAISED ITS FIRST INVOICE AGAINST CENTER WING BOX TOOLING FOR US$ 18,15,587.90. BY END OF MARCH 2013, THE APPELLANT HAS COMPLETED TOOLING ACTIVITY IN CENTER WING BOX AND INVOICE D TO LOCKHEED MARTIN THE AGREED VALUE AS PER PO [REFER PAGE NO. 91 OF PAPER BOOK NO.I]. 4. MANUFACTURING / ASSEMBLY: (A) LOCKHEED MARTIN HAS SHARED ENGINEERING DRAWINGS AND SPECIFICATIONS ALONG WITH SOURCE BOOK, BASED ON WHICH THE ASSEMBLY I.T.A. NO.2667/ MUM/2016 21 OPERA TION SHEETS (AOS) ARE PREPARED. AOS ARE CATEGORIZED IN SUB ASSEMBLY, MAJOR ASSEMBLY AND FINAL INTEGRATION. (B) ASSEMBLY OPERATION SHEETS ARE REQUIRED IN ASSEMBLY FOR FINISHED PRODUCTS. AOS ACT AS GUIDE TO STAFF FOR VARIOUS OPERATIONS INVOLVED IN TH E ASSEMBLY PROCESS AND ALSO ACTS AS TRACKER FOR VARIOUS FUNCTIONS INVOLVED IN A PROCESS. THE APPELLANT PLACED ORDER WITH TATA CONSULTANCY SERVICES LIMITED AND TATA TECHNOLOGIES LIMITED ON 5TH MARCH, 2011, FOR DEVELOPMENT OF ASSEMBLY OPERATION SHEETS AND TH E' AOS SO PREPARED WERE REVIEWED BY THE EMPLOYEES OF THE APPELLANT [REFER PAGE NOS. 98 & 99 OF PAPER BOOK NO.I]. 5. FROM THE ABOVE FACTS, IT IS OBSERVED AS UNDER: - . ( A ) THE APPELLANT HAS SECURED ORDERS FOR SUPPLY OF FINISHED PRODUCTS BY ENTERING INTO SUPPLY AGREEMENT; ( B ) THE APPELLANT COMMENCED FOLLOWING ACTIVITIES DURING THE YEA R: ( I ) SETTING - UP OF THE PROJECT; (II) EXECUTION OF PO'S FOR FOR CENTER WING BOX AND EMPENNAGE TOOLING, A REVENUE GENERATING ACTIVITY. ' . (III) THE EMPLOYEES WERE FULLY INVOLVED IN DETAILED VERIFICATION OF THE TOOLS PROVID ED BY THE VENDORS. (IV) ON 4LH MAY, 2011, THE APPELLANT HAS RAISED ITS FIRST INVOICE AGAINST CENTER WING BOX TOOLING FOR US$ 18,15,587.90. BY END OF MARCH 2013, THE APPELLANT HAS COMPLETED TOOLING ACTIVITY IN CENTER WING BOX AND INVOICED TO LOCKHE ED MARTIN THE AGREED VALUE AS PER PO.; AND (V) REVIEW OF ASSEMBLY OPERATION SHEETS BY THE EMPLOYEES. ASSEMBLY OPERATION SHEETS GUIDES THE EMPLOYEES FOR VARIOUS OPERATIONS INVOLVED IN THE ASSEMBLY PROCESS AND ALSO ACTS AS TRACKER FOR VARIOUS FUNCTIONS INVOLVED IN THE PROCESS I.E. PROVIDES KNOWLEDGE / TECHNIQUE OF PRODUCTION. (B) REVENUE EXPENSES CHARGED OFF TO THE PROFIT AND LOSS ACCOUNT HAVE NO CONNECTION WITH THE SETTING - UP - OF THE PROJECT BUT HAD DIRECT NEXUS / CONNECTION WITH EXECUTION OF PO 'S FOR TOOLING AND PRODUCTION OF FINISHED GOODS, BEING BOTH REVENUE GENERATING ACTIVITIES; (C) IT HAD STARTED THE ACTIVITY OF PLANNING THE PRODUCTION OF FINISHED PRODUCTS BY MAKING THE EMPLOYEES GO' THROUGH THE STEPS INVOLVED IN ASSEMBLING THE FIN ISHED PRODUCTS (I.E. REVIEW OF ASSEMBLY OPERATION SHEETS), BEING AN ESSENTIAL ACTIVITY FOR CARRYING ON THE BUSINESS OF THE APPELLANT. (D) THE EXPENDITURE WHICH WAS INCURRED DURING THE YEAR IS FOR THE ACTIVITIES AS MENTIONED IN PARA NO. (B)* (II) TO (V) WHICH RELATED TO THE CARRYING ON OR CONDUCT OF THE BUSINESS AS THE SAME RELATED TO PROFIT EARNING PROCESS AND NOT FOR ACQUISITION OF ANY ASSET. I.T.A. NO.2667/ MUM/2016 22 (E) THE APPELLANT HAD COMMENCED THE WORK FOR PRODUCTION OF FINISHED PRODUCTS. (F) HENCE, THE ABOVE FACTORS CLEARLY ESTABLISHED THAT THE APPELLANT HAD SET - UP AND COMMENCED ITS BUSINESS DURING THE YEAR. 6. PROCESS FLOW CHART IS ENCLOSED TO EXPLAIN THE FLOW OF ACTIVITIES CARRIED OUT DURING THE YEAR ENDED 31ST MARCH, 2011 SO , IN NUTSHELL WHA T TRANSPIRES IN SHORT IS THAT THE ASSESSEE COMPANY IS A JV COMPANY FORMED BY TATA ADVANCED SYSTEMS LIMITED AND LOCKHEED MARTIN AEROSTRUCTURE CORPORATION , USA, WHEREIN TATAS HOLD 74% OF EQUITY CAPITAL WHILE 26% IS HELD BY LOCKHEED MARTIN AEROSTRUCTURE CORP ORATION , USA. THE JV AGREEMENT PROVIDED THAT THE ASSESSEE COMPANY WILL ASSEMBLE, MANUFACTURE AND SUPPLY C130/130J AIRCRAFT STRUCTURAL ARTICLES I.E.CENTER WING BOX AND EMPENNAGES TO LOCKHEED MARTIN AEROSTRUCTURE CORPORATION ,USA AND / OR ITS AFFILIATES . THE MANUFACTURING/ASSEMBLY UNIT OF THE ASSESSEE COMPANY FOR MANUFACTURING /ASSEMBLY OF CENTER WING BOX AND EMPENNAGE FOR C130/C130J AIRCRAFTS WAS BEING SET UP AT HYDERABAD WHICH DID NOT BECOME OPERATIONAL TILL THE END OF THE PREVIOUS YEAR RELEVANT TO THE IMPUGN ED ASSESSMENT YEAR. THE ITEM TO BE ASSEMBLED /MANUFACTURED NAMELY CENTER WING BOX AND EMPENNAGES FOR C130/C130J AIRCRAFT BEING HIGHLY SPECIALISED, TECHNICAL , COMPLEX AND GUARDED TECHNOLOGY, THE LOCKHEED MARTIN AEROSTRUCTURE CORPORATION ,USA WAS TO UNDERTA KE THE JOB OF IMPLEMENTING THE PROJECT VIDE AGREEMENT ENTERED INTO WITH THE ASSESSEE WHICH , INTER - ALIA, PROVIDED FOR SUPPLY OF ENGINEERING DESIGNS, DRAWINGS, TOOLS , JIGS , TECHNICAL KNOWHOW ETC. . THUS, ON THE ONE HAND LOCKHEED MARTIN AEROSTRUCTURE CORPORATION , USA WAS EQUITY SHAREHOLDER OF ASSESSEE COMPANY INFUSING 26% CAPITAL AND AT SAME TIME WAS INVOLVED IN SETTING UP OF MANUFACTURING/ASSEMBLY UNIT BY THE ASSESSEE FOR CENTER WING BOX AND EMPENNAGES FOR C130/C130J AIRCRAFT AND SAID LOCKHEED MART IN AEROSTRUCTURE CORPORATION, USA AND/OR ITS AFFILIATES WERE ALSO THE CUSTOMER FOR FINAL PRODUCT NAMELY CENTER WING BOX AND EMPENNAGES FOR C130/C130J AIRCRAFT MANUFACTURES/ASSEMBLED BY ASSESSEE. THUS, LOCKHEED MARTIN AEROSTRUCTURE CORPORATION , USA AND / OR ITS AFFILIATES WERE PERFORMING MULTIPLE ROLES AT THE SAME TIME SO FAR AS DEALING WITH THE ASSESSEE COMPANY ARE CONCERNED VIZ. EQUITY INVESTORS, PARTICIPATING IN SETTING UP OF MANUFACTURING / ASSEMBLY UNIT FOR CENTER WING BOX AND EMPENNAGES FOR C130/C130 J AIRCRAFT FOR WHICH TECHNICAL KNOWHOW WAS HELD BY LOCKHEED I.T.A. NO.2667/ MUM/2016 23 MARTIN AEROSTRUCTURE CORPORATION , USA AND SAID COMPANY NAMELY LOCKHEED MARTIN AEROSTRUCTURE CORPORATION, USA WAS ALSO BUYER OF THE FINAL PRODUCT BEING CENTER WING BOX AND EMPENNAGES FOR C130/C13 0J ASSEMBLED/MANUFACTURED BY THE ASSESSEE IN ITS UNIT AT HYDERABAD WHICH WAS UNDER THE STAGE OF IMPLEMENTATION AT THE YEAR END AND PRODUCTION COULD NOT BE COMMENCED BY THE END OF THE PREVIOUS YEAR AND NOT EVEN TRIAL RUNS STARTED. THE SAID LOCKHEED MARTIN A EROSTRUCTURE CORPORATION , USA NOW UNDER AN OBLIGATION TO SUPPLY TECHNICAL KNOW HOW, DRAWINGS, ENGINEERING DESIGNS ETC TO THE ASSESSEE FOR SETTING UP ITS ASSEMBLY/MANUFACTURING UNIT FOR CENTER WING BOX AND EMPENNAGES FOR C130/C130J AIRCRAFT WAS ALSO ,INTER - ALIA, REQUIRED TO SUPPLY TOOLS AND JIGS. THESE TOOLS AND JIGS BEING SUPPLIED AT THE TIME OF OR BEFORE SETTING UP OF THE PROJECT ARE PART OF CAPITAL ASSETS WHICH NEEDS T O BE CAPITALISED. THE SAID LOCKHEED MARTIN AEROSTRUCTURE CORPORATION , USA WHO WAS , INTE R - ALIA, UNDER AN OBLIGATION TO SUPPLY ENGINEERING DESIGNS, DRAWINGS, TOOLS , JIGS ETC. BUT LOCKHEED MARTIN AEROSTRUCTURE CORPORATION , USA INSTEAD OF SUPPLYING SOME OF THE TOOLS AND JIGS ITSELF INSTEAD AWARDED THE WORK TO MANUFACTURE/ASSEMBLE THESE TOOL S AND JIGS TO THE ASSESSEE INDIGENOUSLY BY WAY OF SUB - CONTRACT FOR WHICH NECESSARY DESIGNS AND DRAWINGS WERE SUPPLIED BY LOCKHEED MARTIN AEROSTRUCTURE CORPORATION , USA. THE ULTIMATE RESPONSIBILITY FOR EXECUTION OF THE AGREEMENT FOR SETTING UP MANUFACTURING /ASSEMBLY UNIT AT HYDERABAD RESTED WITH LOCKHEED MARTIN AEROSTRUCTURE CORPORATION , USA UNDER THE MAIN CONTRACT AWARDED BY THE ASSESSEE TO LOCKHEED MARTIN AEROSTRUCTURE CORPORATION, USA BUT CERTAIN PORTION OF THE CONTRACT WITHIN THE MAIN CONTRACT WAS CARVE D OUT AND ASSIGNED BY LOCKHEED MARTIN AEROSTRUCTURE CORPORATION , USA TO ASSESSEE ITSELF AS SUB - CONTRACT TO MANUFACTURE THESE TOOLS AND JIGS REQUIRED FOR THE PROJECT INDIGENOUSLY OF COURSE FOR WHICH TECHNICAL SPECIFICATION, DESIGNS AND DRAWINGS WERE SUPPLI ED BY LOCKHEED MARTIN AEROSTRUCTURE CORPORATION , USA AND ULTIMATE TECHNICAL SUPERVISION AND OTHER RESPONSIBILITIES VESTED WITH LOCKHEED MARTIN AEROSTRUCTURE CORPORATION , USA FOR SUCCESSFUL IMPLEMENTATION OF SUPPLIES OF TOOLS AND JIGS FOR THE PROJECT UNDER IMPLEMENTATION WHICH WERE MANUFACTURED INDIGENOUSLY BY ASSESSEE THROUGH SUB - SUB CONTRACTORS/ VENDORS NAMELY TCS ETC. APPOINTED BY THE ASSESSEE TO SUPPLY TO ITS OWN ASSEMBLY/MANUFACTURING UNIT BEING SET UP AT HYDERABAD WHICH HAD NOT BECOME OPERATIONAL EVEN BY YEAR END AND NOT EVEN TRIAL RUNS STARTED BY THE END OF THE RELEVANT PREVIOUS YEAR. I.T.A. NO.2667/ MUM/2016 24 THE ASSESSEE ON ITS PART ON RECEIPT OF THE SAID SUB - CONTRACT FROM LOCKHEED MARTIN AEROSTRUCTURE CORPORATION ,USA FOR SUPPLYING SOME OF THE TOOLS AND JIGS WHICH WERE TO BE CONSUMED /UTILISED BY THE ASSESSEE ITSELF IN ITS MANUFACTURING/ASSEMBLY UNIT BEING SET UP AT HYDERABAD FURTHE R OUTSOURCED THE SAID JOB OF SUPPLYING TOOLS AND JIGS TO TCS, TATA TECHNOLOGIES LIMITED A ND TAL MANUFACTURING SUPPLIES LIMITED FOR WHICH SUPERVISION WAS DONE BY THE ASSESSEE UNDER SUB - CONTRACT AWARDED BY LOCKHEED MARTIN AEROSTRUCTURE CORPORATION , UAS FOR WHICH FINAL RESPONSIBILITY VESTED WITH LOCKHEED MARTIN AEROSTRUCTURE CORPORATION, USA AS MAIN CONTRACTOR/VENDOR WHILE THE ASSESSEE ITSELF WAS RESPONSIBLE AS SUB - CONTRACTOR/VENDOR . THE ULTIMATELY RESPONSIBILITY FOR COMPLETE EXECUTION OF MAIN CONTRACT REMAINED WITH LOCKHEED MARTIN AEROSTRUCTURE CORPORATION , USA W.R.T. SETTING UP OF MANUFACTURI NG/ASSEMBLY UNIT FOR THE ASSESSEE COMPANY AT HYDERABAD WHILE THE ASSESSEE AS SUB - CONTRACTOR/VENDOR BECOME RESPONSIBLE FOR TOOLS AND JIGS MANUFACTURED BY IT THROUGH TCS, TAL MANUFACTURING SOLUTIONS LIMITED AND TATA TECHNOLOGIES LIMITED TO THE MAIN VENDOR N AMELY LOCKHEED MARTIN AEROSTRUCTURE CORPORATION , USA. BUT THE FACT REMAINED THAT THESE TOOLS AND JIGS WERE TO BE USED/CONSUMED IN THE MANUFACTURING/ASSEMBLY UNIT BEING SET UP BY THE ASSESSEE AT HYDERABAD FOR MANUFACTURING OF CENTER WING BOX AND EMPENNAGES FOR C130/C130J AIRCRAFTS WHICH PROJECT WAS UNDER IMPLEMENTATION AS AT THE END OF THE RELEVANT PREVIOUS YEAR . IN NUTSHELL THE ACTIVITIES OF THE ASSESSEE FOR MANUFACTURING OF TOOLS AND JIGS INDIGENOUSLY UNDER SUB - CONTRACT FROM LOCKHEED MARTIN AEROSTRUCTURE CORPORATION , USA ARE DIRECTED TOWARDS SETTING UP OF THE MAIN ASSEMBLY/MANUFACTURING UNIT FOR MANUFACTURE/ASSEMBLY OF CENTER WING BOX AND EMPENNAGES FOR C130/C130J AIRCRAFT AT HYDERABAD FOR WHICH MAIN CONTRACT WAS AWARDED BY THE ASSESSEE IN FAVOUR OF THE SA ME LOCKHEED MARTIN AEROSTRUCTURE CORPORATION, USA . UNDER THESE CIRCUMSTANCES, CAN IT BE SAID THAT THE ASSESSEE COMPANY WHO PARTICIPATED IN THE SETTING UP OF ITS OWN MANUFACTURING/ASSEMBLY UNIT AT HYDERABAD UNDER A SUB - CONTRACT FROM LOCKHEED MARTIN AEROSTRU CTURE CORPORATION , USA FOR WHICH MAIN CONTRACT WAS AWARDED BY THE ASSESSEE ITSELF IN FAVOUR OF THE SAME LOCKHEED MARTIN AEROSTRUCTURE CORPORATION , USA WHEREIN THE ASSESSEE BY GETTING SOME OF THE TOOLS/JIGS MANUFACTURED/ ASSEMBLED BY FURTHER SUB - SUB - CONTRA CTING TO TCS, TATA TECHNOLOGIES LIMITED AND TAL MANUFACTURING SUPPLIES LIMITED EVER INTENDED TO ENTER INTO AN BUSINESS OF MANUFACTURING /ASSEMBLY OR SUPPLIES I.T.A. NO.2667/ MUM/2016 25 OF TOOLS AND JIGS RATHER ITS ACTIVITIES AND EFFORTS WERE ALL DIRECTED TOWARDS THE BUSINESS OF SETT ING UP OF MANUFACTURING /ASSEMBLY UNIT BEING SET UP AT HYDERABAD FOR MANUFACTURING/ASSEMBLY OF CENTER WING BOX AND EM PENNAGES FOR C130/C130J AIRCRAFT. THUS, WE CONCLUDE THAT THE ASSESSEE NEVER INTENDED TO SET UP ANY BUSINESS OF MANUFACTURING/ASSEMBLY OF TO OLS AND JIGS REQUIRED FOR SUPPLIES TO BE MADE TO ITS ASSEMBLY/MANUFACTURING UNIT BEING SET UP AT HYDERABAD WHICH WAS UNDER IMPLEMENTATION AS AT YEAR END FOR WHICH EVEN TRIAL RUN DID NOT STARTED BY YEAR END. THE ACTIVITIES OF SUPPLY OF TOOLS/JIGS BY THE AS SESSEE AS SUB - CONTRACTOR /VENDOR TO LOCKHEED MARTIN AEROSTRUCTURE CORPORATION , USA WHICH WAS EXECUTED BY ASSESSEE THROUGH SUB - SUB CONTRACTORS/VENDORS NAMELY TCS ETC FOR ULTIMATE SUPPLY OF TOOLS/JIGS TO THE ASSESSEE ITSELF TO BE USED FOR ITS MANUFACTURING/A SSEMBLY UNIT AT HYDERABAD WHICH WAS UNDER IMPLEMENTATION AT THE YEAR END WERE ALL INEXTRICABLY LINKED TO THE ASSESSEES MAIN ACTIVITY OF SETTING UP OF MANUFACTURING /ASSEMBLY UNIT AT HYDERABAD FOR MANUFACTURE / ASSEMBLY OF CENTER WING BOX AND EMPENNAGES FO R C130/C130J AIRCRAFT AN D WHICH IN ITSELF IS NOT AN INDEPENDENT ACTIVITY PER - SE TO BE CATEGORISED AS SEPARATE BUSINESS ACTIVITY. THE ASSESSEE CLAIMS THAT IT KEPT HIGHLY TECHNICAL AND SUPERVISORY STAFF TO OVERSEE THESE ACTIVITIES INCLUDING REVIEWING OF A SSEMBLY OPERATION SHEETS SUPPLIED BY LOCKHEED MARTIN AEROSTRUCTURE CORPORATION , USA BUT IN OUR CONSIDERED VIEW THESE ARE NORMAL REQUIREMENTS IN CONNECTION WITH SETTING UP OF MANUFACTURING / ASSEMBLY UNIT AT HYDERABAD FOR MANUFACTURING/ASSEMBLY OF CENTER WING BOX AND EMPENNAGES FOR C130/C130J AIRCRAFT , WHICH IS HIGHLY TECHNICAL AND COMPLEX ACTIVITY REQUIRING HIGHLY SPECIALISED TECHNICAL STAFF . THE ACTIVITIES OF ASSEMBLY AND MANUFACTURING OF CENTER WING BOX AND EMPENNAGES FOR C130/C130J AIRCRAFT BEING HIGH LY COMPLEX , TECHNOLOGICALLY SOPHISTICATED ACTIVITY INVOLVING GUARDED TECHNOLOGY NEED HIGHLY SPECIALISED , EXPERIENCED AND TECHNICAL PERSONNELS , AND THE ASSESSEE CANNOT AFFORD TO APPOINT NECESSARY STAFF ONLY AFTER THE UNIT BECOMES OPERATIONAL AS BY THE T IME UNIT GOES INTO PRODUCTION , THE ASSESSEE OUGHT TO HAVE ALL SPECIALISED , TRAINED, EXPERIENCE AND TECHNICAL STAFF WITH IT READY AND WELL VERSED/TRAINED TO HANDLE ACTUAL MANUFACTURING/ASSEMBLY OF CENTER WING BOXES AND EMPENNAGES FOR C130/C130J AIRCRAFTS. THE APPOINTING OF TECHNICAL AND SPECIALISED STAFF PRIOR TO UNIT BEING INSTALLED AND READY TO COMMENCE PRODUCTION WILL NOT MAKE THE SAME AS REVENUE EXPENSES EVEN THOUGH THESE TEC HNICAL AND I.T.A. NO.2667/ MUM/2016 26 SPECIALISED STAFF WERE REVIEWING THE ASSEMBLY OPERATION SHEETS FOR MANUFACTURING/ASSEMBLY OF CENTER WING BOXES AND EMPENNAGES FOR C130/C130J AIRCRAFT FOR WHICH ORDER WAS ALREADY RECEIVED BY THE ASSESSEE FROM LOCKHEED MARTIN AEROSTRUCTURE CORPORATION , USA, AS ALL THESE ARE PR E - OPERATIVE EXPENSES WHICH NEEDED TO BE CAPITALISED AS PART OF THE COST OF THE PROJECT BECAUSE THERE WAS NO POSSIBILITY OF COMMENCING PRODUCTION/MANUFACTURING/ASSEMBLY UNLESS THE UNIT IS READY TO COMMENCE PRODUCTION WHICH IN THE INSTANT CASE EVEN BY THE YE AR END UNIT WAS NEITHER INSTALLED NOR TRIAL RUNS COMMENCED . WE HAVE CAREFULLY GONE THROUGH THE CASE LAWS CITED BY LEARNED COUNSEL FOR THE ASSESSEE AND WE HAVE OBSERVED THAT THOSE CASE LAWS WERE DECIDED ON THEIR OWN FACTUAL MATRIX WHICH HAS NO APPLICABILITY SO FAR AS PECULIAR FACTUAL MATRIX AS IS APPLICABLE TO THE ASSESSEE IN THE INSTANT CASE . HOWEVER, FOR THE SAKE OF COMPLETENESS , WE WILL NOW REFER TO ALL THE CASE LAWS RELIED UPON BY THE ASSESSEE : A ) THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE O F WESTERN INDIA VEGETABLE PRODUCTS LIMITED V. CIT REPORTED IN (1954) 26 ITR 151(BOM.) . IN THIS DECISION THE HONBLE HIGH COURT OF THE BOMBAY HELD THAT THE PREVIOUS YEAR OF THE BUSINESS WILL COMMENCE FROM SETTING UP OF BUSINESS WHICH IS RELEVANT FOR CLAIMI NG DEDUCTION OF EXPENSES AS BUSINESS EXPENSES. THERE IS NO DISPUTE AS TO THIS PROPOSITION OF LAW IS CONCERNED BUT IN THE INSTANT CASE WE HAVE HELD THAT THE ASSESSEE BY TAKING SUB - CONTRACT FROM LOCKHEED MARTIN, USA FOR INDIGENOUSLY MANUFACTURING /ASSEMBLIN G OF TOOLS AND JIGS TO BE ULTIMATELY SUPPLIED TO IT SELF TO BE USED/CONSUMED IN ITS PROJECT FOR MANUFACTURING/ASSEMBLY OF CENTER WING BOXES AND EMPENNAGES FOR C130/C130J AIRCRAFT HAD NEVER INTENDED TO SET UP BUSINESS OF ASSEMBLING/MANUFACTURING OF TOOLS AND JIGS WHICH ULTIMATELY IT SUB - SUB CONTRACTED TO TCS ETC. AS THE BUSINESS IT INTENDED TO SET UP WAS FOR MANUFACTURING /ASSEMBLING OF CENTER WING BOXES AND EMPENNAGES FOR C130/C130J AIRCRAFT AT HYDERABAD WHICH WAS NOT READY TO COMMENCE PRODUCTION EVEN BY YEA R END. B ) THE DECISION OF ITAT, MUMBAI IN THE CASE OF HAGWOODS COMMERCIAL DEVELOPERS P. LTD. & ORSS IN ITA NO. 1306/MUM/2015 & ORS. FOR I.T.A. NO.2667/ MUM/2016 27 AY 2012 - 13 , VIDE CONSOLIDATED ORDER DATED 08.02.2017 . THE ASSESSEE HAS RELIED UPON THIS CASE AND IT CONTENDED THAT EVEN WHEN SHOPPING MALL WAS UNDER CONSTRUCTION , THE EXPENSES WERE ALLOWED AS BUSINESS EXPENSES. WE ARE AFRAID THAT THE ASSESSEES COUNSEL TOTALL Y MISCONSTRUED THE FACTS OF THAT CASE . IN THAT CASE , OF WHICH BOTH OF US WERE MEMBERS OF THE DIVISION BENCH WHO P ASSED THE ORDER, THE TAXPAYER WAS ENGAGED IN DEVELOPMENT AND SALE OF RESIDENTIAL PROJECT AS WELL CONSTRUCTION OF MALL. SINCE THE RESIDENTIAL PROJECT WAS FOR SALE AND ACTIVITIES STARTED , THE BUSINESS WAS HELD TO BE SET UP. THE MALL WAS BEING CONSTRUUCTD BY THE TAXPAYER FOR WHICH DIRECT COSTS WERE CAPITALISED AND INDIRECT OVERHEADS WERE CHARGED AS REVENUE EXPENSES. ON THOSE FACTUAL MATRIX, THE TRIBUNAL HELD THAT BUSINESS WAS SET UP AS THE TAXPAYER WAS DEVELOPING RESIDENTIAL PROJECT FOR SALE AND IT IS NOT NEC ESSARY THAT TILL MALL IS CONSTRUCTED , THE INDIRECT COST REPRESENTING BY OVERHEADS ALSO NEEDED TO BE CAPITALISED RATHER THESE INDIRECT OVERHEAD COSTS WERE HELD TO BE REVENUE EXPENSES. THUS THIS CASE WAS DECIDED ON PECULIAR FACTUAL MAT RIX PREVAILING ON ITS OWN FACTS AND HAS NOT RELEVANT TO THE INSTANT CASE BEFORE US. C ) T HE DECISION OF ITAT, MUMBAI IN THE CASE OF ACIT V. RELIANCE DEFENCE & OFFSHORE ENGINEERING CO. LTD. IN ITA NO. 4692/MUM2014 AND ITA NO. 372/MUM/2015 FOR AY 2008 - 09 & 2009 - 10, VIDE CONSOLIDAT ED ORDER DATED 31.08.2017. IN THIS CASE THE TAXPAYER WAS ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SHIP BUILDING AND SHIP REPAIRING YARD. THE TAXPAYER RECEIVED ORDERS AND ADVANCE PAYMENTS FOR SUPPLIES OF SHIP BUILDING FOR WHICH THE TAXPAYER PURCHASED STEEL FOR SHIP BUILDING . VARIOUS ACTIVITIES STARTED TOWARDS SHIP BUILDING AND ON THOSE FACTUAL MATRIX , IT WAS HELD THAT THE ASSESSEE HAS SET UP THE BUSINESS AND EXPENSES WERE ALLOWED. BUT IN THE INSTANT CASE BEFORE US, IT IS OBSERVED THAT THE ASSESSEE IS TO I NDIGENOUSLY SUPPLY TOOLS AND JIGS UNDER A SUB - CONTRACT FROM LOCKHEED MARTIN, USA WHICH SUPPLIES ARE TO BE UTILISED/CONSUMED BY THE ASSESSEE ITSELF IN ITS MANUFACTURING/ ASSEMBLY UNIT BEING SET UP AT HYDERABAD WHICH WAS UNDER I.T.A. NO.2667/ MUM/2016 28 IMPLEMENTATION AS AT THE YEAR END AND NOT EVEN TRIAL RUN COMMENCED TILL THE END OF PREVIOUS YEAR. THUS, ON THAT FACTUAL MATRIX IT IS HELD THAT THE ASSESSEE NEVER INTENDED TO SET UP ANY BUSINESS FOR SUPPLY OF TOOLS AND JIGS FOR ITS OWN UNITS AS ITS EFFORTS FOR SUPPLY OF TOOLS AND JIGS A RE DIRECTED TOWARDS SETTING UP ITS OWN MANUFACTURING/ASSEMBLY UNITS FOR MANUFACTURE AND ASSEMBLY OF CENTER WING BOXES AND EMPENNAGES FOR C130/C130J AIRCRAFT AND NOT FOR SETTING UP MANUF ACTURING /ASSEMBLY UNITS FOR TOO LS/JIGS. D ) T HE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT V. SAURASHTRA CEMENT & CHEMICAL INDUSTRIES LTD.(1972) 91 ITR 170,(GUJ. HC) . IN THIS CASE , THE TAXPAYER WAS ENGAGED IN MANUFACTURE AND SALE OF CEMENT. THE TAXPAYER OBTAINED MINING LEASE FOR QUAR RYING LIMESTONE AND STARTED MINING OPERATIONS. THE LIMESTONE WAS RAW MATERIAL FOR MANUFACTURING OF CEMENT. IT WAS HELD THAT THIS ACTIVITY OF EXTRACTING LIMESTONE BY QUARRYING THE LEASED LAND WAS NECESSARY FOR THE PURPOSES OF ACQUIRING RAW MATERIAL TO BE U TILISED IN MANUFACTURING OF CEMENT.THE SECOND ACTIVITY CONSTITUTED THE ACTIVITY OF MANUFACTURING OF CEMENT BY USER OF PLANT AND MACHINERY SET UP FOR THAT PURPOSE AND THE THIRD CATEGORY CONSISTED OF SELLING MANUFACTURED CEMENT. ALL THESE THREE ACTIVITIES CO NSTITUTED BUSINESS OF THE TAXPAYER. IT WAS HELD THAT IT IS NOT NECESSARY THAT ALL THE THREE ACTIVITIES SHOULD COMMENCE , THEN THE BUSINESS WAS DEEMED TO BE SET UP. IT WAS HELD THAT WITH THE COMMENCEMENT OF FIRST ACTIVITY BUSINESS WAS SET UP AS IT LAID FOUN DATION FOR THE SECOND ACTIVITY AND COMMENCEMENT OF SECOND ACTIVITY LAID THE FOUNDATION OF THIRD ACTIVITY. BUT THE INSTANT CASE BEFORE US IS DISTINGUISHABLE AS THE ASSESSEE NEVER INTENDED TO SET UP BUSINESS OF MANUFACTURING/ASSEMBLY OF TOOLS AND JIGS REQUI RED FOR SETTING UP ASSESSEES OWN UNIT AT HYDERABAD FOR MANUFACTURING/ASSEMBLY OF CENTER WING BOXES AND EMPENNAGE S FOR C130/C130J AIRCRAFTS. EVEN IF THE TOOLS AND JIGS ARE REQUIRED FOR THE MANUFACTURING AND ASSEMBLING OF CENTER WING BOXES AND EMPENNAGES FO R C130/C130J AIRCRAFTS, THE SAID ACTIVITY FOR GETTING IT MANUFACTURED/ASSEMBLED THROUGH SUB - SUB CONTRACTORS/VENDORS NAMELY TCS ETC BY THE ASSESSEE WILL NOT CONSTITUTE SETTING UP OF A I.T.A. NO.2667/ MUM/2016 29 SEPERATE BUSINESS OF MANUFACTURING/ASSEMBLING OF TOOLS AND JIGS AS IT IS NOT THE INTENTIONS OF THE ASSESSEE TO SET UP THE SAID BUSINESS OF MANUFACTURING /ASSEMBLING OF TOOLS AND JIGS AND IT HAPPENS SO THAT THE MAIN CONTRACTOR/VENDOR NAMELY LOCKHEED MARTIN, USA TO WHOM THE ASSESSEE AWARDED CONTRACT , INTER - ALIA FOR TOOLS AND JIG S HAS SUB - CONTRACTED THE WORK OF SUPPLY OF TOOLS AND JIGS TO THE ASSESSEE BACK TO BE MANUFACTURED/ASSEMBLED INDIGENOUSLY, WHICH WORK/CONTRACT WAS FURTHER SUB - SUB CONTRACTED BY THE ASSESSEE TO TCS ETC. . THUS, IT IS CLEAR THERE WAS NEVER AN INTENTION ON PAR T OF THE ASSESSEE TO SET UP THIS BUSINESS OF MANUFACTURING TOOLS AND JIGS. E ) THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. RALLIWOLF LIMITED (1978) 121 ITR 262(BOM. HC). IN THIS CASE, HONBLE COURT DISTINGUISHED BETWEEN SET UP OF BUSINES S AND COMMENCEMENT OF BUSINESS AND HELD THAT EXPENSES SHALL BE ALLOWABLE FROM THE DATE BUSINESS IS SET UP. THIS CASE WE ARE AFRAID IS OF NO HELP TO THE ASSESSEE AS IN THE INSTANT CASE BEFORE US , WE HAVE HELD THAT THE ASSESSEE NEVER INTENDED TO SET UP BUSI NESS OF MANUFACTURING/ASSEMBLING OF TOOLS AND JIGS. F ) THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF PREM CONDUCTORS P. LTD. V. CIT (1976) 108 ITR 654(GUJ. HC). THE STRONG RELIANCE IS PLACED BY LEARNED COUNSEL FOR THE ASSESSEE ON THIS CASE. IN THI S CASE THE ASSESSEE TOOK OVER RUNNING CONCERN FROM ITS PROMOTERS. IT WAS NOT A CASE OF SETTING OF NEW INDUSTRIAL UNDERTAKING. THE TAXPAYER SECURED ORDERS FROM ELECTRICITY BOARDS, PURCHASED RAW MATERIAL ETC TO KEEP THINGS READY FOR PRODUCTION ONCE THE MACHI NERIES ARE INSTALLED ETC. . UNDER THESE CIRCUMSTANCES HON'BLE GUJARAT HIGH COURT HELD THAT BUSINESS SHALL BE DEEMED TO BE SET UP AND EXPENSES ALLOWABLE FROM DATE WHEN ORDERS WERE SECURED BY THE TAXPAYER ALTHOUGH FACTORY HAS NOT COMMENCED PRODUCTION WHICH S HALL BE ALLOWABLE. THIS CASE IS DISTINGUISHABLE AS THE ASSESSEE ALTHOUGH SECURED ORDERS FOR CENTER WING BOXES AND EMPENNAGES FOR C130/C130J AIRCRAFT EVEN PRIOR TO SETTING UP OF UNIT AT HYDERABAD FOR MANUFACTURING/ASSEMBLING OF CENTER WING BOXES AND EMPENNA GES FOR C130/C130J BUT THE DIFFERENCE IS THAT THE ASSESSEE HAS UNDERTAKEN JOB OF GETTING TOOLS I.T.A. NO.2667/ MUM/2016 30 AND JIGS WHICH WERE REQUIRED IN ITS UNIT UNDER IMPLEMENTATION AT HYDERABAD MANUFACTURED/ASSEMBLED THROUGH SUB - SUB CONTRACTORS NAMELY TCS ETC AND WE HAVE HELD THA T IT COULD NOT BE INTENTION OF THE ASSESSEE TO SET UP BUSINESS OF MANUFACTURING/ ASSEMBLY OF TOOLS AND JIGS. THE ASSESSEE IN THE INSTANT CASE DID NOT PURCHASE ANY RAW MATERIAL ETC RATHER IT WAS IMPLEMENTING SETTING UP OF UNIT FOR MANUFACTURING / ASSEMBLING OF CENTER WING BOX AND EMPENNAGES FOR C130/C130J AIRCRAFT WHEREIN TOOLS AND JIGS REQUIRED FOR THE MANUFACTURING/ASSEMBLING UNIT WAS GOT INDIGENOUSLY SUPPLIED BY THE ASSESSEE THROUGH SUB - SUB CONTRACTORS NAMELY TCS ETC WHEREIN THE MAIN CONTRACT WAS AWARDED BY THE ASSESSEE TO LOCKHEED MARTIN, USA WHO SUBCONTRACTED PORTION OF THE MAIN CONTRACT TOWARDS SUPPLYING OF TOOLS AND JIGS FOR USAGE/CONSUMPTION IN ITS UNDER IMPLEMENTATION PROJECT AT HYDERABAD. THIS CASE THUS IS DISTINGUISHABLE AS IT WAS NEVER THE INTENTI ON OF THE ASSESSEE TO SET UP BUSINESS OF MANUFACTURING OF TOOLS/JIGS TO BE SUPPLIED FOR IN HOUSE CONSUMPTION IN ITS UNDER IMPLEMENTATION UNIT FOR MANUFACTURING/ASSEMBLY OF CENTER WING BOXES AND EMPENNAGES FOR C130/C130J AIRCRAFTS AND THE CASE RELIED UPON B Y LEARNED COUNSEL FOR THE ASSESSEE IS NOT RELEVANT FOR DECIDING DISPUTE BETWEEN RIVAL PARTIES THUS, BASED ON OUR DETAILED REASONING AND DISCUSSIONS AS S ET OUT ABOVE, WE DO NOT FIND ANY MERITS IN THE CONTENTIONS OF THE ASSESSEE AND THUS, THE APPELLATE OR DER OF LEARNED CIT(A) IS SET ASIDE AND ADDITIONS AS WERE MADE BY THE AO ARE SUSTAINED WITH THE CONCLUSIONS AND REASONING AS ARE ARRIVED AT BY US AS ABOVE. THE GROUND NO 2(A) TO 2(C) ARE ALLOWED WITH ABOVE CONCLUSIONS AND REASONING AS SET OUT IN OUR ORDER. WE ORDER ACCORDINGLY. I.T.A. NO.2667/ MUM/2016 31 12. IN THE RESULT , APPEAL OF THE REVENUE IS PARTLY ALLOWED AS INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 08.08 .2018 08.08 .2018 SD/ - SD/ - (SAKTIJIT DEY) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 08.08 .2018 NISHANT VERMA SR. PRIVATE SECRETARY COPY TO 1 . THE APPELLANT 2 . THE RESPONDENT 3 . THE CIT(A) CONCERNED, MUMBAI 4 . THE CIT - CONCERNED, MUMBAI 5 . THE DR BENCH, 6 . MASTER FILE // TUE COPY// BY ORDER DY/ASSTT. REGISTRAR ITAT, MUMBAI