ACIT, New Delhi V. M/s. Carrefour India Master Franchise Company Pvt. Ltd., New Delhi

ITA 2800/DEL/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 7377 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-01-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 02-11-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 07-06-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAMAN KANT GARG
• Assessee Lawyers: RUPESH J AIN
• Keywords: Business expenditure
• Section: 143(3)

Judgement Text

1 ITA NO. 2800/DEL/2012 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: B NEW DELHI BEFORE SHRI INTURI RAMA RAO A CCOUNTANT MEMBER AND SMT SUCHITRA KAMBLE , JUDICIAL MEMBER I.T.A .NO.- 2800/DEL/2012 (ASSESSMENT YEA R-2008-09) ACIT CIRCLE-3(1) NEW DELHI (APPELLANT) VS CARREFOUR INDIA MASTER FRANCHISE COMPANY PVT. LTD. 216,OKHLA INDUSTRIAL ESTATE, PHASE-III NEW DELHI AADCC2043B (RESPONDENT) APPELLANT BY SH. RAMAN KANT GARG, SR. DR RESPONDENT BY SH. RUPESH JAIN, ADV. ORDER PER SUCHITRA KAMBLE, JM THIS APPEAL IS FILED BY THE REVENUE AGAINST THE ORD ER DATED 2/3/2012 PASSED BY THE LD. CIT(A)S VI, NEW DELHI. 2. THE GROUNDS OF APPEAL ARE AS UNDER:- 1. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING ADDITION MADE BY THE A.O AMOUNTING TO RS.5,24,17,631/- ON AC COUNT OF BUSINESS EXPENDITURE. DATE OF HEARING 02 .11.2015 DATE OF PRONOUNCEMENT 15.01.2016 2 ITA NO. 2800/DEL/2012 THE LD. CIT(A) HAS ERRED IN CONCLUDING THAT THE AS SESSEES BUSINESS WAS SET UP DURING THE YEAR. IN PARA 5.4 OF HIS ORD ER THE LD. CIT(A) HAS CONCLUDED THAT THE BUSINESS OF THE ASSESSEE WAS SET UP SINCE INCORPORATION, HOWEVER THERE IS NO EVIDENCES TO SUG GEST THAT THE ASSESSEE HAS MOVED ANY FURTHER FROM THE INITIAL STA GE OF PLANNING. 3. THE ASSESSEE COMPANY WAS INCORPORATED ON 19 TH SEPTEMBER 2007 UNDER THE AUTOMATIC ROUTE, AS PER THE FOREIGN DIRECT INVE STMENT POLICY, 2006. THE COMPANY WAS INCORPORATED TO CARRY TO ESTABLISH, DEV ELOP, LEASE, LICENSE, MASTER FRANCHISE RIGHTS FROM INTERNATIONAL/DOMESTIC BRANDS AND TO FURTHER SUB- FRANCHISE THOSE RIGHTS. THE ASSESSEE IS A GROUP SU BSIDIARY OF CARREFOUR GROUP, SECOND LARGEST RETAILER OF THE WORLD. FOR THE RELE VANT ASSESSMENT YEAR, THE ASSESSEE FILED ITS RETURN OF INCOME ON 30/9/2008 DE CLARING A LOSS OF RS.4,80,72,481/-. DURING THE COURSE OF ASSESSMENT, THE A.O OBSERVED THAT THE ASSESSEE COMPANY CLAIMED EXPENSES AMOUNTING TO RS.6 ,32,57,573/- AND CLAIMED BUSINESS LOSS OF RS.5,89,12,423/-, AFTER AB SORBING THE INCOME FROM OTHER SOURCES AMOUNTING TO RS.43,45,150/-. THE A.O ALSO NOTICED THAT IN THEIR AUDIT REPORT IN FORM 3CD, THE AUDITOR HAS GIVEN THE FOLLOWING REMARKS:- 28.(A) IN THE CASE OF A TRADING CONCERN, GIVE QUANTITATIVE DETAILS OF PRINCIPAL ITEMS OF GOODS TRADED; NOT APPLICABLE SINCE THE COMPANY HAS NOT COMMENCED ANY ACTIVITIES IN RELATION TO SALE/PURCHASE OF GOODS, ETC, AND HENCE THE PROVISIONS OF CLAUSE 28(A) ARE NOT APPLICABLE TO THE COMPANY. (I) OPENING STOCK (II)PURCHASES DURING THE YEAR; (II) SALES DURING THE PREVIOUS YEAR; (III) CLOSING STOCK; (IV) SHORTAGE/EXCESS, IF ANY 3 ITA NO. 2800/DEL/2012 WITH THESE OBSERVATIONS THE A.O REQUESTED THE ASSES SEE COMPANY TO EXPLAIN AS TO WHY BUSINESS LOSS CLAIMED SHOULD NOT BE DISALLOW ED. IN RESPONSE TO THE SHOW CAUSE NOTICE, THE ASSESSEE COMPANY EXPLAINED T HAT DURING THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE ACQUIRED AN OFFICE PR EMISES W.E.F. 1/10/2007, OPENED ITS BANK ACCOUNT ON 4/10/2007 AND INCURRED R OUTINE BUSINESS EXPENSES SUCH AS LEGAL AND PROFESSIONAL CHARGES, TR AVEL AND CONVEYANCE, MEETING AND CONFERENCE, SALARY AND WAGES ETC. THE ASSESSEE ALSO INCURRED SUBSTANTIAL AMOUNT ON PURCHASE OF FIXED ASSETS SUCH AS COMPUTER AND SOFTWARE (OF RS.16,50,180/-), OFFICE EQUIPMENTS (OF RS.27,53 ,594/-), FURNITURES AND FIXTURES AND LEASE HOLD IMPROVEMENTS (OF RS.91,46,6 39/-) ETC. THE ASSESSEE FURTHER OBTAINED PROFESSIONAL ADVICES REGARDING THE INDIAN BUSINESS ENVIRONMENT, MARKET SURVEY CATCHMENT AREA, PRODUCTS AVAILABILITY, SUPPLY CONDITIONS AND OTHER LEGAL/STATUTORY REQUIREMENTS, LICENCES AND APPROVALS ETC. AND ON THIS ACCOUNT INCURRED EXPENSES TO THE TUNES OF RS.2.8 CRORES WHICH INDICATES THAT THE ASSESSEE HAD SET UP ITS BUSINESS OPERATIONS. DURING THE RELEVANT PREVIOUS YEARS, THE ASSESSEE IDENTIFY VARI OUS FRANCHISEES AND DISCUSSED WITH THEM REGARDING TERMS OF FRANCHISEE, TECHNICAL SERVICES AND OTHER COMMERCIAL AGREEMENTS. IN VIEW OF THESE FACT S, IT WAS SUBMITTED BY THE ASSESSEE THAT IT HAD DONE ALL THE ACTIVITIES WHICH WERE ESSENTIAL FOR THE SET UP OF THE BUSINESS. THEREFORE, THE BUSINESS LOSS AMOUNTI NG TO RS.5,89,12,423/- WAS CLAIMED BY THE ASSESSEE DURING THE SUBJECT ASSESSME NT YEAR. 4. THE A.O HELD THAT DURING THE RELEVANT ASSESSMENT YEAR, THE ASSESSEES BUSINESS WAS NOT SET UP AND HE DISALLOWED THE CLAIM OF BUSINESS LOSS OF THE ASSESSEE COMPANY. HOWEVER, THE A.O ASSESSED THE IN TEREST INCOME SHOWN BY THE ASSESSEE COMPANY IN ITS PROFIT AND LOSS ACCOUNT AS INCOME FROM OTHER SOURCES, AND COMPLETED THE ASSESSMENT UNDER SECTIO N 143(3) OF THE INCOME TAX ACT, 1961 VIDE ORDER DATED 10/12/2010. AGGRIEV ED BY THE DISALLOWANCES 4 ITA NO. 2800/DEL/2012 AND ADDITIONS MADE IN THE ASSESSMENT ORDER, THE ASS ESSEE FILED THE APPEAL BEFORE CIT(A). 5. THE CIT(A) HELD AS UNDER: HOWEVER, WHETHER BUSINESS IS SET-UP AND READY TO C OMMENCE IS A MATTER OF FACT WHICH IS TO BE EXAMINED IN LIGHT OF FACTS O F EACH CASE. IN THE PRESENT CASE, THE APPELLANT, WHO IS IN THE BUSINESS OF PROV IDING BUSINESS FRANCHISEE RIGHTS, HAS RECEIVED THE AUTHORIZATION F ROM CARREFOUR GROUP TO SUB-FRANCHISE THE RIGHTS, HAS HIRED THE REQUISITE S TAFF AND DIRECTORS, TAKEN AND EVALUATED NECESSARY PROFESSIONAL ADVISES REGARD ING POTENTIAL FRANCHISEES, INCLUDING KEY TERMS OF ARRANGEMENTS WI TH SUCH PARTIES, TAKEN BUSINESS PREMISES, OPENED BANK ACCOUNT ETC. THEREFO RE, THE APPELLANT WAS IN A POSITION TO COMMENCE ITS BUSINESS EVEN FROM IT S OFFICE PREMISES FROM THE DATE OF ITS INCORPORATION. FURTHER, IT WOULD BE WORTH MENTIONING HERE THAT HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. ESPN SOFTWARE INDIA (P) LTD. (184 TAXMAN 452) 2009 CONSIDERED THAT DATE OF ACQUIRING A DISTRIBUTOR LIC ENSE OF ESPN PROGRAMME IS A DATE OF BUSINESS SET UP AND ALL EXPENSES SHOUL D BE ALLOWED FROM THAT DATE. RECENTLY, SIMILAR VIEW HAS BEEN GIVEN BY MUMB AI ITAT IN THE CASE OF DE BEERS INDIA PROSPECTING PVT. LTD. (ITA NO. 4(D/M UM/2006) DATED 16 DEC 2011 WHEREIN IT WAS HELD THAT THE APPROVAL RECE IVED FROM FBPB AND GOVERNMENT FOR CARRYING OUT OPERATION RELATING TO P ROSPECTING OF DIAMONDS AND STARTING OF PROSPECTING ACTIVITY BEFORE ACTUAL MINING LEADS TO SET-UP AND COMMENCEMENT OF BUSINESS ACTIVITY. THE ITAT WHI LE FORMING THE ABOVE VIEW HAS RELIED UPON THE RULINGS OF SARABHAI MANAGE MENT (SC) AND SAURASHTRA CEMENT (SUPRA). IN THE PRESENT CASE, THE ASSESSEE HAS THE FRANCHISE RIGHTS AND IT HAS INCURRED EXPENDITURE FO R SEARCHING THE POTENTIAL 5 ITA NO. 2800/DEL/2012 FRANCHISEES SINCE INCORPORATION. IT ALSO HIRED REQU ISITE DIRECTOR AND STAFF, TAKEN OFFICE AND NECESSARY INFRASTRUCTURE FOR BUSIN ESS. THUS PLACING RELIANCE UPON THE ABOVE JUDICIAL PRECE DENCE OF THE HONBLE SUPREME COURT AND HONBLE HIGH COURT (INCLUDING JUR ISDICTIONAL DELHI HIGH COURT), IT CAN BE SAID THAT THE KEY BUSINESS ACTIVI TY OF THE APPELLANT HAS STARTED. 5.4 BASED ON THE ABOVE PRINCIPLES LAID DOWN BY THE HONBLE SUPREME COURT AND HONBLE HIGH COURT AND THE FACTS OF THE P RESENT CASE, IT IS CLEAR THAT THE BUSINESS OF THE APPELLANT WAS SET UP SINCE INCORPORATION AS IT WAS HAVING CARREFOUR FRANCHISE RIGHT AND THE EXPENSES C LAIMED BY IT FOR CARRYING OUT SEARCH FOR POTENTIAL FRANCHISEES ARE E XPENSES INCURRED POST SET UP OF BUSINESS AND ARE ALLOWABLE AS BUSINESS EX PENDITURE. THE AO GROSSLY ERRED IN UNDERSTANDING THE FACTS OF THE ASS ESSEES CASE BY SAYING THAT THE APPELLANT IS A TRADER AND PASSING HIS ORDE R ACCORDINGLY, DESPITE THE FACT THAT ALL THE EVIDENCE WERE PLACED ON RECOR D WHICH PROVED THAT THE APPELLANT WAS INTO THE BUSINESS OF LEASING/SUB LEAS ING THE FRANCHISE RIGHTS. ACCORDINGLY, THE BUSINESS EXPENDITURE OF RS.5,24,17 ,631/- FOR A.Y. 2008- 09 IS HELD TO BE ALLOWABLE BUSINESS EXPENDITURE AND THE DISALLOWANCE MADE BY THE LD. AO IS DELETED AND HENCE, THE ACTION OF THE LD. AO IS REVERSED. 6. THE AR SUBMITTED THAT THE PRESENT CASE IS COVERE D BY ASSESSEES GROUP COMPANY CASE, CARREFOUR WC & C INDIA PVT. LTD. VS. DCIT ITA NO. 42/2014 DECIDED ON 22.09.2014 WHEREIN THE HONBLE DELHI HIG H COURT HAS GRANTED THE RELIEF IN FAVOUR OF THE ASSESSEE THEREIN. THE SAME IS ANNEXED AT PAGE 96 TO 118 OF THE PAPER BOOK FILED BY THE ASSESSEE. THE AR FUR THER SUBMITTED THAT THERE 6 ITA NO. 2800/DEL/2012 WAS NO TRADING ACTIVITY AND MERELY FRANCHISEE ACTIV ITY WAS GOING ON. THE OBJECT OF THE ASSESSEE COMPANY WAS CITED FROM PAGE 7 AND P AGE 97 OF THE PAPER BOOK. 7. THE DR SUBMITTED THAT THE AUDITORS REPORT IN AS SESSMENT ORDER AT PARA 2, 3.2, 3.3 AND 3.4 AS WELL AS FORM 3CD GIVES DIFFE RENT SCENARIO TO THE OBJECT OF THE ASSESSEE COMPANY. THEREFORE, THE DR SUBMITTED T HAT THE ASSESSING OFFICER RIGHTLY ADDED THE SAID AMOUNT AS INTEREST INCOME SH OWN IN ITS PROFIT AND LOSS ACCOUNT AS INCOME FROM OTHER SOURCES. 8. WE HAVE PERUSED ALL THE RECORDS AND HEARD BOTH T HE COUNSELS. THE LD. CIT (A) HAS RIGHTLY TAKEN INTO CONSIDERATION ALL TH E ASPECTS. IT IS CLEAR THAT THE BUSINESS OF THE ASSESSEE WAS SET UP SINCE INCORPORA TION AS IT WAS HAVING CARREFOUR FRANCHISE RIGHT AND THE EXPENSES CLAIMED BY IT FOR CARRYING OUT SEARCH FOR POTENTIAL FRANCHISEES ARE EXPENSES INCUR RED POST SET UP OF BUSINESS AND ARE ALLOWABLE AS BUSINESS EXPENDITURE. THE AO E RRED IN UNDERSTANDING THE FACTS OF THE ASSESSEES CASE BY SAYING THAT THE ASS ESSEE IS A TRADER, DESPITE THE FACT THAT ALL THE EVIDENCE WERE PLACED ON RECORD WH ICH PROVED THAT THE ASSESSEE WAS INTO THE BUSINESS OF LEASING/SUB LEASING THE FR ANCHISE RIGHTS. THUS CIT(A) PROPERLY ALLOWED THE BUSINESS EXPENDITURE OF RS.5,2 4,17,631/- FOR A.Y. 2008- 09. BESIDES THAT THE CASE IS FULLY COVERED BY THE A SSESSEES GROUP COMPANY (CARREFOUR WC & C INDIA PVT. LTD. VS. DCIT ITA NO. 42/2014 DECIDED ON 22.09.2014) DECIDED BY THE HONBLE DELHI HIGH COURT . IN VIEW OF THE FINDING HEREINABOVE, WE UPHOLD THE ORDER OF LD. CIT(A). 7 ITA NO. 2800/DEL/2012 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 15 TH OF JANUARY 2016 SD/- SD/- (INTURI RAMA RAO) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 15/01/2016 R. NAHEED* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT R EGISTRAR ITAT NEW DELHI DATE 1. DRAFT DICTATED ON 09.11.2015 PS 2. DRAFT PLACED BEFORE AUTHOR 10.11.2015 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER .11.2015 JM/AM 4. DRAFT DISCUSSED/APPROVED BY JM/AM 8 ITA NO. 2800/DEL/2012 SECOND MEMBER. 5. APPROVED DRAFT COMES TO THE SR.PS/PS 15.01.2016 PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK 15.01.2016 PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.