Carrefour WC & C India Pvt. Ltd., Gurgaon V. ACIT (OSD), New Delhi

ITA 2835/DEL/2012

• Counselvise Citation: 283520114 RSA 2012
• Duration Of Justice: 1 year(s) 2 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-08-2013
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 05-06-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 08-06-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: DR SUDHA KUMARI
• Keywords: Business income; Depreciation; Business expenditure; Retrospective amendment; Question of law; Revenue expenditure
• Section: 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: B NEW DELHI BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND SHRI T.S.KAPOOR, ACCOUNTANT MEMBER I.T.A .NO.-2835/DEL/2012 (ASSESSMENT YEAR-2008-09) CARREFOUR WC & C INDIA PVT. LTD., VS ACIT, 2 ND FLOOR, BPTP PARK CENTRA, CIRCLE-3(1), SECTOR-30, GURGAON, NEW DELHI HARYANA-122001. PAN-AADCC2042A (APPELLANT) (RESPONDENT) APPELLANT BY: SH. AJAY VOHRA, ADV. & SH. UPVAN GUPTA, CA RESPONDENT BY: DR. SUDHA KUMARI, CIT DR ORDER PER DIVA SINGH, JM THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER DATED 02.03.2012 OF CIT(A)-VI, NEW DELHI PERTAINING TO 2008-09 ASSES SMENT YEAR ON THE FOLLOWING GROUNDS :- 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-VI , NEW DELHI [CIT(A)] HAS ERRED IN LAW AND ON FACTS IN UPH OLDING THE ASSESSED INCOME AT RS.38,95,937 MADE BY THE LEARNED ASSESSING OFFICER (AO) AS AGAINST THE RETURNED LOSS OF RS.7, 96,05,423 DECLARED BY THE APPELLANT. 2. THE LEARNED CIT(A) AND AO HAS ERRED IN LAW AND IN F ACT, IN HOLDING THAT THE BUSINESS OF THE APPELLANT WAS NOT SET UP AND COMMENCED DURING THE RELEVANT ASSESSMENT YEAR BY MISUNDERSTANDING, MISREADING AND/OR IGNORING THE FA CTS NOT APPRECIATING AND/OR UNDERSTANDING THE VARIOUS BUSIN ESS ACTIVITIES CARRIED OUT BY THE APPELLANT DURING THE SUBJECT ASS ESSMENT YEAR. 3. THAT ORDER OF LEARNED CIT(A) IS BAD IN LAW AND LIAB LE TO BE QUASHED. 4. THE LEARNED AO HAS ERRED ON THE FACTS AND THE CIRCU MSTANCES OF THE CASE AND IN LAW BY INITIATING PENALTY PROCEEDIN GS U/S 271(1)(C) AGAINST THE APPELLANT FOR FURNISHING INACCURATE PAR TICULARS OR FOR FAILURE TO DISCLOSE TRUE PARTICULARS OF INCOME. FU RTHER, THE I.T.A .NO.-2835/DEL/2012 2 LEARNED CIT(A) HAS ALSO ERRED IN LAW AND IN FACT, I N NOT ADJUDICATING ON THE GROUNDS RAISED AGAINST THE INIT IATION OF THE PENALTY PROCEEDINGS BY THE LEARNED AO. 2. IT IS SEEN THAT GROUND NO-3 IS MORE OR LESS A PR AYER AS SUCH DOES NOT REQUIRE ADJUDICATION AND GROUND NO-4 IS PREMATURE. THE FA CTS QUA GROUND NO-1 & 2 ARE THAT THE ASSESSEE FILED E-RETURN DECLARING A LOSS O F ` 7,96,05,423/-. IT WAS PROCESSED U/S 143(1) AND AFTER ISSUANCE OF NOTICE U/S 143(2) ON 04.09.2009 FOLLOWED BY A NOTICE U/S 141(1) AND QUESTIONNAIRE E TC. THE CASE WAS SELECTED FOR SCRUTINY ASSESSMENT. 2.1. A PERUSAL OF THE ASSESSMENT ORDER SHOWS THAT T HE ASSESSEE COMPANY WAS INCORPORATED ON 19.09.2007 AND THIS WAS THE FIRST Y EAR OF THE ASSESSEE. THE SAID COMPANY WAS INCORPORATED UNDER THE AUTOMATIC ROUTE AS PER FOREIGN DIRECT INVESTMENT POLICY 2006. THE ASSESSEE COMPANY WAS I NCORPORATED TO CARRY ON TRADING ACTIVITIES WHICH PRIMARILY INCLUDED WHOLESA LE CASH AND CARRY OF ALL KINDS OF CONSUMER GOODS, DURABLES, ARTICLES AND PRODUCTS. THE AO OBSERVING THAT THE ASSESSEE HAD CLAIMED EXPENSES OF ` 9,03,03,547/- AND ALSO CLAIMED A BUSINESS LOSS OF ` 8,64,07,610/- AFTER ABSORBING THE INCOME FROM OTHE R SOURCES AMOUNTING TO ` 38,95,937/- NOTED THAT IN THE AUDIT REPORT ON FORM -3 CD AGAINST COLUMN- 28(A), THE AUDITOR HAD GIVEN THE FOLLOWING REMARKS, THE SAME ARE EXTRACTED FROM THE ASSESSMENT ORDER:- 28(A) IN THE CASE OF TRADING CONCERN, GIVE NOT A PPLICABLE SINCE THE QUANTITATIVE DETAILS OF PRINCIPAL ITEMS OF COMPANY HAS NOT COMMENCED GOODS TRADED ANY ACTIVITIES (I) OPENING STOCK IN RELATION TO SALE/PURCHASE OF GOODS ETC. AND HENCE THE PROVISIONS OF CLAUSE 28(A) ARE NOT APPLICABLE TO THE COMPANY. (II) PURCHASES DURING THE PREVIOUS YEAR; (III) SALES DURING THE PREVIOUS YEAR; (IV) CLOSING STOCK; (V) SHORTAGE/EXCESS, IF ANY; 2.2. ACCORDINGLY HE REQUIRED THE ASSESSEE TO EXPLAI N WHY BUSINESS LOSS CLAIMED MAY NOT BE DISALLOWED. IN RESPONSE TO THE SAID QUE RY RAISED BY ORDER-SHEET ENTRY I.T.A .NO.-2835/DEL/2012 3 DATED 21.10.2010. THE ASSESSEE SUBMITTED ITS REPLY ON 10.12.2010 WHICH IS FOUND REPRODUCED AT PAGES 2 TO 11 OF THE ASSESSMENT ORDER . A PERUSAL OF THE SAME SHOWS THAT IT WAS CONTENDED THAT CARREFOUR WC & C W AS INCORPORATED ON SEPTEMBER 19, 2007 TO CARRY ON WHOLESALE TRADING OF ALL KINDS OF CONSUMER GOODS, DURABLES, ARTICLES AND TO CARRY OUT ANY AND ALL SUCH ACTIVITIES AS MAY BE NECESSARY OR RELATED TO OR IN CONNECTION WITH CARRY ING ON SUCH TRADING ACTIVITIES THAT CARREFOUR WC & C IS A GROUP SUBSIDIARY OF CARR EFOUR GROUP, SECOND LARGEST RETAILER OF THE WORLD; THAT THE CARREFOUR GROUP IS A WORLDWIDE PREFERRED RETAILER HAVING STORES WHERE CUSTOMERS TRUST FOR BEST PRODUC T QUALITY, PRICE AND SERVICE AND ARE NATURALLY DRAWN TO SHOP; THAT FOR CARRYING OUT ITS BUSINESS ON SUCH A HIGH REPUTATION IN INDIA, THE ASSESSEE COMPANY WAS ESTAB LISHED IN INDIA WHO WILL BE ENTERING INTO CONTRACT WITH SUPPLIERS FOR SUPPLY OF PRODUCTS TO THE STORES. FOR THE PURPOSE OF ASSISTANCE IN FINDING FRANCHISEES/CUSTOM ERS, CARREFOUR GROUP ESTABLISHED ANOTHER GROUP SUBSIDIARY OF CARREFOUR G ROUP, NAMELY-CARREFOUR MASTER FRANCHISEE COMPANY PRIVATE LIMITED (CARREFOU R MF CO.) BY PROVIDING IT FRANCHISEE RIGHTS OF CARREFOUR GROUP FOR INDIA; THA T THE FUNCTION OF CARREFOUR MF CO IS TO FIND OUT POTENTIAL FRANCHISEES/CUSTOMERS F OR RETAIL SALE OF PRODUCTS AND FOR THIS CARREFOUR HAS CONTACTED WITH LAWYERS/CONSULTAN TS/VARIOUS INTERESTED AND POTENTIAL PARTIES DURING THE SUBJECT YEAR; THAT CAR REFOUR MF CO WILL GRANT FRANCHISEE RIGHTS TO THE JOINT POTENTIAL FRANCHISEE S WHO WILL SET UP THE STORES, PURCHASE GOODS FROM THE ASSESSEE AND SELL TO RETAIL CUSTOMERS; THAT FOR PROVIDING THESE SERVICES, CARREFOUR MF CO. WILL CHARGE FRANCH ISEE FEE FROM SUCH RETAIL FRANCHISEES/CUSTOMERS. 2.2.1. ACCORDINGLY IN THE ABOVE CIRCUMSTANCES, IT W AS SUBMITTED THE ASSESSEE WOULD ONLY REQUIRE TO ESTABLISH CONTACT WITH THE SU PPLIERS AND ENTERED INTO LONG- TERM SUPPLY CONTRACTS WITH THEM. IT WAS EXPLAINED THAT THESE ACTIVITIES ARE BEING UNDERTAKEN BY THE ASSESSEE RELATING TO PLANNING THE MEETING WITH PROSPECTIVE SUPPLIERS, MARKETING, BUSINESS DEVELOPMENT IN INDIA , SEARCHING FOR THE CLIENTS IN INDIA, MARKET STUDIES ETC FOR WHICH PURPOSE IT HAS APPOINTED KEY EMPLOYEES AND I.T.A .NO.-2835/DEL/2012 4 DIRECTORS, TAKEN PROFESSIONAL ADVISES AND HAVE ALSO TAKEN BUSINESS PREMISES ON HIRE. THE BANK ACCOUNT HAS BEEN OPENED AND FIXED A SSETS HAVE BEEN PURCHASED AND LEASED AS UNDER :- COMPUTERS AND SOFTWARE- ` 3,377,573 OFFICE EQUIPMENT- ` 3,864,333 FURNITURE AND FIXTURES AND LEASEHOLD IMPROVEMENTS- ` 9,230,741 2.2.2. FOR THE PURPOSE OF SETTING UP BUSINESS ITS WAS SUBM ITTED THAT THE ASSESSEE HAS HIRED EMPLOYEES, HAS OFFICE ACCOMMODATION ON RE NT, HAS OPENED BANK ACCOUNTS, HAS CORRESPONDED WITH POTENTIAL SUPPLIERS , HAS PURCHASED FIXED ASSETS; TAKEN PROFESSIONAL ADVISE AS SUCH ALL ACTIVITIES ES SENTIAL TO SETTING UP HAVE BEEN DONE. RELIANCE WAS PLACED ON SECTION 3 AND SECTION 28 OF THE ACT IN SUPPORT OF ITS CLAIM. IT WAS SUBMITTED THAT SETTING UP OF BUS INESS CONNOTES STAGE OF READINESS TO COMMENCE BUSINESS AND THE COMMENCEMEN T OF BUSINESS INDICATES THE ACTUAL BEGINNING OF BUSINESS ACTIVITIES. THE SE TTING UP, IT WAS SUBMITTED IS USUALLY ANTERIOR TO THE COMMENCEMENT OF BUSINESS AN D THERE CAN BE A TIME INTERVAL BETWEEN THESE TWO EVENTS. THE TIME INTERV AL, IT WAS SUBMITTED WILL DEPEND UPON NATURE OF BUSINESS WHICH CAN VARY FROM FEW MONTHS TO YEARS. AS THE BUSINESS IS SET UP THE TAX-PAYER HAS TO INCUR VARIO US BUSINESS EXPENSES TO RUN THE BUSINESS AND EVEN IF THERE IS NO INCOME THE SAME SH OULD BE ALLOWED AS A DEDUCTION. RELIANCE WAS PLACED UPON THE FOLLOWING DECISIONS IN SUPPORT OF ITS CLAIM:- (I) ITO VS HINDUSTAN DIAMOND CO. LTD. 27 TTJ 142 ( MUMBAI ITAT); (II) CIT VS SAURASHTRA CEMENT AND CHEMICAL INDUSTRI ES LTD. (1973) 091 ITR 0170 (GUJ.); (III) COROMANDEL EXPORTS (P) LTD. VS INCOME TAX OFF ICER (1984) 20 TTJ (HYD.) 503; (IV) CIT VS WHIRLPOOL OF INDIA LTD. 229 CTR 435 (JU RISDICTIONAL DELHI HIGH COURT); (V) CIT VS SPONGE IRON INDIA LTD. [1993] 201 ITR 7 70 (AP); (VI) CIT VS SARABHAI SONS (P.) LTD. [1973] 90 ITR 3 18 (GUJARAT HIGH COURT); (VII) PEERLESS SECURITIES LTD. VS. JCIT 94 ITD 89 [2005] (CAL.) (SPECIAL BENCH). I.T.A .NO.-2835/DEL/2012 5 2.2.3. IT WAS ALSO SUBMITTED THAT THE ASSESSEE HAS ALSO OBTAINED VARIOUS PROFESSIONAL ADVICES IN THE YEAR UNDER CONSIDERATIO N REGARDING INDIAN BUSINESS ENVIRONMENT, WHOLESALE CASH AND CARRY OPERATIONS, S HOPS AND ESTABLISHMENTS ACTS, REGULATIONS, LICENSED AND APPROVALS AND HAS INCURRE D SUBSTANTIAL AMOUNT OF MONEY AMOUNTING TO RS.1.33 CRORE WHICH INDICATES THAT THE ASSESSEE HAS SET UP ITS BUSINESS OPERATIONS. THE EXPENSES WERE STATED TO B E INCURRED FOR CARRYING OUT THE BUSINESS ACTIVITIES WHICH ENTAILED A WIDE VARIETY O F ACTIVITIES AND ALL THESE ACTIVITIES WERE ESSENTIAL FOR SETTING UP THE BUSINE SS AND ONLY ACTUAL SALE AND PURCHASE OF THE PRODUCTS HAD NOT HAPPENED DURING TH E YEAR UNDER CONSIDERATION. IN THIS CONTEXT, ATTENTION WAS INVITED TO SECTION 3 OF THE INCOME TAX ACT, IT WAS SUBMITTED THAT THE ASSESSEE IS TAXABLE IN RESPECT O F INCOME EARNED BY IT DURING THE PREVIOUS YEAR. THE TERM PREVIOUS YEAR IN THE C ASE OF NEW BUSINESS, IT WAS SUBMITTED HAS BEEN DEFINED AS THE PERIOD BEGINNING WITH THE DATE OF SETTING UP OF THE BUSINESS AND ENDING WITH THE FINANCIAL YEAR. INVITING ATTENTION TO SECTION 28 OF THE ACT, IT WAS SUBMITTED THAT IT LAYS DOWN THAT THE PROFITS AND GAINS OF THE BUSINESS AND PROFESSION CARRIED ON BY THE ASSESSEE AT ANY TIME DURING THE PREVIOUS YEAR SHALL BE CHARGEABLE TO INCOME TAX. I T WAS CONTENDED THAT AS PER THE INCOME TAX ACT EXPENSES INCURRED AFTER THE DATE OF SET UP OF THE BUSINESS, WHOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH BUSINESS WH ICH ARE NOT SPECIFICALLY DISALLOWED UNDER ANY PROVISION OF THE ACT COULD BE CLAIMED AS DEDUCTIBLE BUSINESS INCOME FOR INCOME TAX PURPOSE IRRESPECTIVE OF THE FACT WHETHER THE ASSESSEE HAS EARNED ANY INCOME OR NOT. EXPENSES IN CURRED PRIOR TO THE DATE OF SET UP, IT WAS SUBMITTED MAY NOT BE ALLOWED AS EXPENDIT URE UNDER THE PROVISIONS OF THE ACT. 2.2.4. RELIANCE WAS PLACED UPON THE FOLLOWING DECIS IONS FOR THE PROPOSITION THAT ACQUISITION OF PLACE OF BUSINESS, RECRUITMENT OF QU ALIFIED PEOPLE MAY SIGNIFY THE DATE OF SET UP AND ACTUAL REVENUE IS NOT A PRE-COND ITION TO DETERMINE THE DATE OF SET UP OF BUSINESS. RELIANCE WAS PLACED UPON THE FO LLOWING ORDERS AS UNDER:- (I) STYLER INDIA (P.) LTD. VS JCIT 113 ITD 55 [200 8] (PUNE) (TM); I.T.A .NO.-2835/DEL/2012 6 (II) CIT VS PIEM HOTEL PVT. LTD. (1994) 209 ITR 0616 (BO M.) 2.2.5. ON THE BASIS OF ABOVE, IT WAS SUBMITTED T HAT THESE DECISIONS LAY DOWN THE PRINCIPLE THAT IT IS NOT NECESSARY THAT THE BUSINES S SHOULD COMMENCE FOR CLAIMING THE EXPENDITURE AND THAT INCOME SHOULD NECESS ARILY BE GENERATED. THE EXPENSES ARE ALLOWABLE FROM THE POINT OF TIME WHEN THE BUSINESS HAS BEEN SET UP. THE EXPENSES ARE ALLOWABLE EVEN IF THE BUSINESS HAS NOT ACTUALLY COMMENCED. IN THE FACTS OF THE PRESENT CASE, IT WAS SUBMITTED THA T THE ASSESSEE HAS SET UP ITS BUSINESS BUT HAS NOT EARNED INCOME AS ITS CORRESPON DENCE WITH SUPPLIERS FOR CONTRACTS IS NOT FINALIZED. THUS SINCE THE BUSINES S IS SET UP, THE EXPENSES SHOULD BE ALLOWED. 2.2.6. THUS IN THE LIGHT OF THE ABOVE DECISIONS, IT WAS SUBMITTED THAT SINCE THE ASSESSEE HAS OPENED THE OFFICE AND HAS HIRED THE RE QUISITE STAFF TO CARRY OUT THE BUSINESS ACTIVITIES, ITS BUSINESS CAN BE SAID TO BE SET UP. IN THE FACTS OF THE PRESENT CASE, THE ASSESSEE IS REQUIRED TO COMMENCE ITS BUSI NESS AS IT HAS HIRED THE REQUISITE STAFF WHO ARE NEGOTIATING WITH THE CLIENT S FOR ENTERING INTO CONTRACT FOR THE SUPPLY OF GOODS. AS SUCH IT WAS SUBMITTED THAT THE BUSINESS HAS BEEN SET UP. 2.2.7. ATTENTION WAS INVITED TO THE FOLLOWING DECIS IONS FOR THE PROPOSITION THAT BUSINESS CANNOTES A CONTINUOUS SET OF ACTIVITIES. EVEN WHERE ONE OF THE ACTIVITY WHICH IS REQUIRED TO BE CARRIED OUT ON AT AN INITIA L POINT OF TIME HAS STARTED THAT BUSINESS IT WAS SUBMITTED CAN BE SAID TO HAVE BEEN SET UP. RELIANCE WAS PLACED UPON THE FOLLOWING ORDERS AS UNDER :- (I) PREM CONDUCTOERS PVT. LTD. VS COMMISSIONER OF INCOM E TAX (1977) 108 ITR 0654 (GUJ.); (II) WESTERN INDIA VEGETABLE PRODUCTS LTD. VS CIT 26 ITR 151 [1954] (BOM.) 2.3. NOT CONVINCED WITH THE EXPLANATION OFFERED, TH E AO OBSERVED THAT EXPENDITURE INCURRED PRIOR TO THE SETTING UP OF A B USINESS IS NOT ALLOWED AS A DEDUCTION. REFERRING TO THE FACT THAT THERE ARE A PLETHORA OF CASES ON THE DIFFERENCE BETWEEN THE CONCEPT OF COMMENCEMENT OF A BUSINESS AND SETTING UP OF I.T.A .NO.-2835/DEL/2012 7 A BUSINESS. REFERRING TO SECTIONS 28 TO SECTION 43 D OF THE INCOME TAX ACT WHICH RELATE TO COMPUTATION OF BUSINESS INCOME, HE WAS O F THE VIEW THAT THE EXPENSES DURING THE PRE-COMMENCEMENT PERIOD WILL NOT BE DED UCTIBLE. SIMILARLY, HE WAS OF THE VIEW THAT LOSS INCURRED DURING THE PRIOR PE RIOD CAN ALSO NOT BE TREATED AS A BUSINESS LOSS AND IT CANNOT, THEREFORE, BE CARRIED FORWARD. RELIANCE WAS PLACED UPON LIQUIDATORS OF PURSA LTD. VS CIT (1975) 98 ITR 167 (SC). REFERRING TO THE SAME, IT WAS OBSERVED THAT IN THE SAID JUDGEMENT, I T HAS BEEN HELD THAT TO THE EXTENT TO WHICH SUCH EXPENSES COULD BE CAPITALIZED TO THE ASSETS, THE ASSESSEE MAY WELL BE ELIGIBLE FOR DEPRECIATION FOR THE SAID. RELIANCE WAS ALSO PLACED UPON CHALLAPALLI SUGARS LTD. VS CIT (1975) 98 ITR 167 (S C). AS OTHERWISE THE EXPENSES LIKE AUDIT FEE WOULD BE A DEAD LOSS. THE AO SUPPORTED HIS REASONING CONSIDERING THE POSITION FOR A MANUFACTURING CONCER N WHICH COULD BE SAID TO BE SET UP ONLY WHEN IT IS READY FOR PRODUCTION. IN TH E CASE OF A TRADER, THE AO WAS OF THE VIEW THAT THE DISTINCTION MAY NOT BE SIGNIFICAN T ONCE THERE ARE STOCKS TO BE SOLD. SIMILARLY IN THE CASE OF PROFESSIONAL HE WAS OF THE VIEW THE FACT THAT THE PROFESSIONAL WAS QUALIFIED FOR PRACTICE AND IS READ Y TO ENTERTAIN CLIENTS WOULD ENTITLE HIM TO CLAIM DEDUCTION. REFERRING TO CIT VS BIHAR SPINNING & WEAVING MILLS LTD. [1953] 24 ITR 108 (CAL.), HE WAS OF THE VIEW THAT SIMPLY BECAUSE THE BUSINESS WAS IN THE SECOND YEAR OF ITS COMMENCEMEN T, IT DOES NOT MEAN THAT THE EXPENSES ARE DEDUCTIBLE UNLESS IT IS SHOWN TO HAVE BEEN SET UP. IT WAS CONCLUDED THAT THE RESULT WOULD BE THAT WHEREAS THE INCOME EA RNED DURING THIS PERIOD MAY BE TAXABLE FROM OTHER SOURCES, THE EXPENDITURE WOULD BE TREATED AS NOT ADMISSIBLE ADDRESSING THE DIFFERENCE BETWEEN SET UP OF BUSINES S AND COMMENCEMENT OF A BUSINESS, REFERRING AGAIN TO THE POSITION OF MANUFA CTURING CONCERN, HE WAS OF THE VIEW THAT WHEN TRIAL PRODUCTION STARTS THE BUSINESS IS SET UP AND THE ACTUAL COMMENCEMENT OF BUSINESS CAN START ONLY AFTER ITS S ET UP AND THERE CAN BE AN INTERVAL BETWEEN THE TWO. RELIANCE WAS PLACED UPON THE CIT VS RAMARAJU SURGICAL COTTON MILLS LTD. [1967] 63 ITR 478 (SC). I.T.A .NO.-2835/DEL/2012 8 2.4. REFERRING TO THE FACTS OF THE PRESENT CASE, HE OBSERVED THAT THE ASSESSEE IS A TRADER AND TRADE IN ITS PRIMARY MEANING IS THE EX CHANGING OF GOODS FOR GOODS OR GOODS FOR MONEY AND IN THE SECONDARY MEANING IS A R EPEATED ACTIVITY IN THE NATURE OF BUSINESS CARRIED ON WITH THE PROFIT MOTIVE. THE ACTIVITY BEING MANUAL OR MERCANTILE AS DISTINGUISHED BY LIBERAL ARTS OR LEAR NED PROFESSIONALS OR AGRICULTURE HAS BEEN HELD BY THE HONBLE APEX COURT IN THE CASE OF STATE OF PUNJAB VS. BAJAJ ELECTRICALS LTD. [1968] 70 ITR 730, 732 (SC). REFER RING TO PARA 28(A) ON FORM- 3CD, THE AO OBSERVED THAT IT IS CLEARLY MENTIONED T HAT THE BUSINESS IS NOT COMMENCED THUS WHEN NO STOCK IS EITHER AVAILABLE AN D EVEN HAS NOT BEEN PURCHASED BY THE ASSESSEE, BY NO STRETCH OF IMAGINA TION IT CAN BE INFERRED THAT THE BUSINESS HAS BEEN SET UP AND READY TO COMMENCE ITS BUSINESS. ON A CONSIDERATION OF DECISIONS RELIED UPON BY THE ASSESSEE, THE AO WA S OF THE VIEW THAT THE EXPENSES CLAIMED AS A REVENUE EXPENDITURE ARE NOT A LLOWABLE ON ACCOUNT OF THE DISCUSSION ON FACTS AND LAW AT PAGES 11-13 OF THE A SSESSMENT ORDER IN PARA 3.1 TO 3.7. ACCORDINGLY THE LOSS OF BUSINESS WAS DISALLOW ED AND THE BUSINESS INCOME WAS TAKEN AS NIL. THE INTEREST INCOME AMOUNTING TO ` 38,95,937/- ON THE SHORT- TERM DEPOSITS SINCE THE BUSINESS HAD NOT COMMENCED WAS TAXED AS INCOME FROM OTHER SOURCES RELYING UPON THE CASE OF TUTICORIN AL KALI & CHEMICALS LTD. VS CIT [1997] 227 ITR 172 (SC). 3. AGGRIEVED BY THIS, THE ASSESSEE WENT IN APPEAL B EFORE THE CIT(A). BEFORE THE CIT(A), THE ACTION OF THE AO WAS ASSAILED, IT W AS REITERATED THAT THE ASSESSEE COMPANY WAS INCORPORATED ON 19.09.2007 TO CARRY ON WHOLESALE TRADING OF ALL KINDS OF CONSUMER GOODS, DURABLES, ARTICLES AND TO CARRY OUT ALL SUCH ACTIVITIES AS MAY BE NECESSARY OR RELATED TO OR IN CONNECTION WIT H CARRYING ON SUCH TRADING ACTIVITIES. RELIANCE BEFORE THE CIT(A) ASSAILING THE ACTION OF THE AO WAS PLACED UPON SECTION 2(34) READ WITH SECTION 3 SO AS TO CO NTEND THAT ACCORDING TO THE INDIAN TAX LAW EXPENSES WHICH HAVE BEEN INCURRED DU RING THE PREVIOUS YEAR ARE ALLOWED AS A DEDUCTION VIDE COMPUTING TOTAL INCOME AND WHERE EXPENSES ARE MORE THAN INCOME LOSS IS ALLOWED TO BE CARRY FORWAR DED TO NEXT YEAR FOR SET OFF I.T.A .NO.-2835/DEL/2012 9 AND SECTION 2(34) READ WITH SECTION 3 PROVIDE THAT THE PREVIOUS YEAR IN A CASE OF NEWLY SET UP BUSINESS STARTS FROM THE DATE OF SETT ING UP OF BUSINESS AND IN CASE OF NEW SOURCE OF INCOME COMING INTO EXISTENCE, PREVIO US YEAR STARTS FROM THE DATE NEW SOURCE OF INCOME COMES INTO EXISTENCE. THUS TO CLAIM BUSINESS EXPENSES AS A DEDUCTION, THE BUSINESS MUST HAVE BEEN SET UP. R ELIANCE WAS PLACED ON SARABHAI MANAGEMENT CORPORATION LTD. VS CIT 102 ITR 25 [1976] (GUJ.); CIT VS HUGHES ESCORTS COMMUNICATIONS LTD. 165 TAXMAN 318 [ 2007] (DELHI HIGH COURT), CIT VS WHIRLPOOL OF INDIA LTD. 318 ITR 347 DELHI; ITO VS HINDUSTAN DIAMOND CO,. LTD. 27 TTJ 142 (MUMBAI ITAT). 3.1. THE SAID DECISIONS WERE RELIED UPON FOR THE PR OPOSITION THAT IT HAS BEEN HELD THEREIN THAT BUSINESS IS SAID TO BE SET UP WHE N IT IS READY TO COMMENCE BUSINESS AND ACTUAL COMMENCEMENT IS NOT RELEVANT FO R SETTING UP OF THE BUSINESS. THE SETTING UP, IT WAS SUBMITTED IS USUALLY A STAGE ANTERIOR TO COMMENCEMENT OF BUSINESS AND THERE CAN BE A TIME INTERVAL BETWEEN T HE TWO EVENTS. THE TIME INTERVAL IT WAS SUBMITTED IT HAS BEEN HELD WILL DEP END UPON NATURE OF BUSINESS WHICH CAN VARY FROM FEW MONTHS TO YEARS. IN THE FA CTS OF THE PRESENT CASE IT WAS SUBMITTED THAT THE BUSINESS WAS SET UP, THE TAX PAY ER HAD TO INCUR THE VARIOUS BUSINESS EXPENSES TO RUN THE BUSINESS AND EVEN IF T HERE WAS NO INCOME, THE SAME SHOULD HAVE BEEN ALLOWED AS A DEDUCTION. THE SUBMI SSIONS ON FACTS ADVANCED BEFORE THE CIT(A) ARE EXTRACTED HEREUNDER:- 4.1. THE LEARNED AR FURTHER SUBMITTED THAT THE APP ELLANT COMPANY WAS INCORPORATED IN INDIA TO CARRY ON THE WHOLESALE TRA DING OF ALL KINDS OF CONSUMER GOODS, DURABLES, ARTICLE AND TO CARRY OUT ANY AND ALL SUCH ACTIVITIES AS MAYBE NECESSARY OR RELATED TO OR IN C ONNECTION WITH CARRYING ON SUCH TRADING ACTIVITIES. IT IS A WELL-SETTLED, LEGAL PRINCIPLE THAT IF THE BUSINESS CONSISTS OF SERIES OF ACTIVITIES, BUSINESS COMMENCES WHEN THE FIRST ACTIVITY COMMENCES. SINCE INCORPORATION, THE APPEL LANT COMPANY HAD BEEN UNDERTAKING ACTIVITIES RELATING TO PLANNING, M EETING WITH PROSPECTIVE SUPPLIERS, MARKETING/ BUSINESS DEVELOPMENT IN INDIA ETC. AND FOR THIS PURPOSE, THE APPELLANT COMPANY SET UP AN OFFICE AND FACILITIES, HIRED THE PROFESSIONAL EMPLOYEES AND DIRECTOR, INITIATED NEGO TIATIONS WITH SUPPLIERS FOR SUPPLY OF PRODUCTS ETC. DURING THE RELEVANT PR EVIOUS YEAR, THE APPELLANT COMPANY ACQUIRED THE LEASED OFFICE PREMIS ES W.E.F. 1/10/2007. THE APPELLANT COMPANY ALSO OPENED ITS BANK ACCOUNT ON 4/10/2007 AND I.T.A .NO.-2835/DEL/2012 10 INCURRED ROUTINE BUSINESS EXPENSES SUCH AS LEGAL AN D PROFESSIONAL CHARGES, TRAVEL AND CONVEYANCE, MEETING AND CONFERE NCE, SALARY AND WAGES ETC. DURING THE SUBJECT ASSESSMENT YEAR. TH E APPELLANT ALSO EMPLOYED KEY EMPLOYEES SUCH AS I.T>DIRECTOR, FMCG D IRECTOR, MERCHANDISE DIRECTOR, FINANCE DIRECTOR, ACCOUNTANTS , OTHER SUPPORTING STAFF ETC. CAPABLE OF RENDERING BUSINESS DEVELOPME NT, MARKETING AND FINANCIAL SUPPORT ACTIVITIES IN RELATION TO THE PRO DUCTS PROPOSED TO BE TRADED BY THE APPELLANT COMPANY. DURING THE SUBJEC T ASSESSMENT YEAR, THE APPELLANT COMPANY MET WITH A NUMBER OF KEY SUP PLIERS SUCH AS UNILEVER, COLGATE, RASNA, NESTLE, PEPSI, CADBURY ET C. TO NEGOTIATE SIGNIFICANT TERMS OF THE SUPPLY CONTACTS. THE APPE LLANT STARTED CREATING DATA BASE OF ITS PROSPECTIVE SUPPLIERS OF GOODS IN VARIOUS CATEGORIES TO ESTABLISH ITS OPERATIONS, THE APPELLANT COMPANY ALS O PURCHASED SIZEABLE AMOUNT OF FIXED ASSETS SUCH AS COMPUTERS AND SOFTWA RES (OF RS.33,77,573); OFFICE EQUIPMENTS (OF RS.38,64,333); FURNITURE AND FITTINGS AND LEASEHOLD IMPROVEMENTS (OF RS.92,30,741) ETC WH ICH WERE ESSENTIAL FOR CARRYING ON THE BUSINESS OF THE APPELLANT COMPA NY. IN VIEW OF THESE FACTS, THE APPELLANT COMPANY CLAIMED THAT ITS BUSIN ESS WAS SET UP FROM THE DATE OF INCORPORATION AND ITS EXPENSES TO BE ALLOWE D AS BUSINESS EXPENSES DURING THE RELEVANT ASSESSMENT YEAR. HOWEVER, ONLY ACTUAL SALES AND PURCHASES OF PRODUCTS DO NOT HAPPEN DURING THE SUBJ ECT FINANCIAL YEAR WHICH IS NOT A NECESSARY CONDITION. ACTIVITY IN OR DER TO HOLD A BUSINESS TO BE SET UP. 3.2. REFERRING TO CLAUSE 28(A) OF THE TAX AUDIT REP ORT IN FORM-3CD, IT WAS SUBMITTED THAT THE COMMENTS GIVEN BY THE TAX AUDITO R INTENDED TO MENTION FOR QUANTITATIVE DETAILS OF PRINCIPLE ITEMS OF GOODS TRADED AS NOT APPLICABLE IN THE PRESENT CASE AS NO SALE/PURCHASE HAD BEEN CARRIED O UT AND DUE TO INADVERTENCE IT WAS MENTIONED AS THAT THE APPELLANT HAS NOT CARRIED OUT ANY ACTIVITY. IT WAS SUBMITTED THAT WHAT IS RELEVANT FOR DEDUCTIBILITY O F THE EXPENSES IS THAT SETTING UP OF THE BUSINESS AND NOT ACTUAL PURCHASE OR SALES OF GOODS. FOR THE SAID PURPOSE, RELIANCE WAS PLACED UPON A) PREM CONDUCTORS PVT. LT D. VS CIT (1977) 108 ITR 0654 (GUJ.); B) CIT VS SPONGE IRON INDIA LTD. (1993 ) 201 ITR 770 (AP); C) CIT VS MOHAN STEEL LTD. 273 ITR 479 [2005] (ALL.); AND D) PEERLESS SECURITIES LTD. VS. JCIT 94 ITD 89 [2005] (CAL.) (SB). THE JUDGEME NTS RELIED UPON BY THE AO WERE STATED TO BE DISTINGUISHABLE. REFERRING TO LI QUIDATORS OF PURSA LTD. (CITED SUPRA). IT WAS SUBMITTED THAT IT HAD MADE ITS OBSE RVATIONS IN THE CONTEXT OF SECTION 10(2)(VIII) OF THE INCOME TAX ACT, 1922 WHE REIN THE ISSUE BEFORE THE I.T.A .NO.-2835/DEL/2012 11 HONBLE SUPREME COURT WAS WHETHER SURPLUS ARISING F ROM THE SALE OF PLANT AND MACHINERY OF THE COMPANY IN CASE OF LIQUIDATION IS TAXABLE AS PER THE PROVISIONS OF SECTION 10(2)(VIII) OF 1922 ACT. SIMILARLY THE JUDGEMENT RENDERED IN THE CASE OF CHALLAPALLI SUGARS LTD. (CITED SUPRA), THE QUEST ION BEFORE THE HONBLE APEX COURT WAS WHETHER THE AMOUNT OF INTEREST PAID DURIN G THE PRE-COMMENCEMENT PERIOD ON LOAN TAKEN FOR CONSTRUCTION/PURCHASE OF F IXED ASSETS WILL BE TREATED AS PART OF THE ACTUAL COST OF ASSETS AND DEPRECIATION WILL BE ALLOWED ON IT. THE HONBLE APEX COURT HELD THAT THE PRE-COMMENCEMENT P ERIOD INTEREST ON LOAN TAKEN FOR CREATION/PURCHASE OF FIXED ASSETS SHOULD BE ADDED TO THE ACTUAL COST OF THE FIXED ASSETS ELIGIBLE FOR DEPRECIATION. IT WAS SUBMITTED THAT THE HONBLE APEX COURT HAS NOWHERE HELD THAT ALL PRE-COMMENCEMENT EX PENSES ARE CAPITAL IN NATURE AND SHOULD BE ALLOWED TO BE CAPITALIZED. IN THE FA CTS OF THE PRESENT CASE, IT WAS SUBMITTED THAT THE BUSINESS OF THE ASSESSEE HAS BEE N SET UP AND IS READY TO COMMENCE AND EXPENSES BEING REVENUE IN NATURE IS NO T RELATED TO CONSTRUCTION/PURCHASE OF ANY FIXED ASSETS DESERVE T O BE ALLOWED. ACCORDINGLY, IT WAS SUBMITTED THAT THE RULINGS IN THE SAID JUDGEMEN TS RELIED UPON BY THE AO ARE NOT APPLICABLE. 3.3. CONSIDERING THESE SUBMISSION THE CIT(A) SUMMAR IZED THE DOCUMENTS FILED ON BEHALF OF THE ASSESSEE AS UNDER :- A) THE APPELLANT WAS IN OCCUPATION OF THE OFFICE P REMISES. B) THE APPELLANT HAD OPENED A BANK ACCOUNT FOR INCURRI NG THE DAY TO DAY BUSINESS ACTIVITIES. C) THE APPELLANT HAS HIRED THE REQUISITE EMPLOYEES TO CARRY ON ITS BUSINESS ACTIVITIES. D) THE APPELLANT WAS MEETING THE POTENTIAL SUPPLIERS A ND WAS INTO NEGOTIATION WITH THEM THE SIGNIFICANT TERMS OF THE SUPPLY CONTRACTS. E) THE APPELLANT HAD PURCHASE SIZABLE AMOUNT OF FIXED ASSETS WHICH WERE ESSENTIAL FOR CARRYING ON OF THE BUSINESS ACTI VITIES. 3.3.1. CONSIDERING THE RELIANCE PLACED ON THE CERTI FICATE OF INCORPORATION UNDER THE COMPANIES ACT, 1956, THE CIT(A) OBSERVED THAT A COMPANY CAN BE SAID TO HAVE COMMENCED FROM THE DATE OF INCORPORATION AND W HILE FINALIZING THE FINANCIAL I.T.A .NO.-2835/DEL/2012 12 STATEMENT OF THAT COMPANY ALL SUCH EXPENDITURE INC URRED BY THE COMPANY BEFORE SUCH DATE IS TREATED AS PRELIMINARY EXPENSES OR PRE -INCORPORATION EXPENSES AND ALL OTHER EXPENDITURE INCURRED AFTER THIS DATE ARE TREA TED AS REVENUE EXPENDITURE UNDER THE PROFIT & LOSS ACCOUNT OF THE COMPANY. HOWEVER, HE OBSERVED THAT THE POSITION UNDER THE INCOME TAX ACT, 1961, WAS DIFFER ENT WHILE FILING THE RETURN OF INCOME THE COMPANY MAY OR MAY BE SAID TO HAVE COMME NCED ITS BUSINESS AND ACCORDINGLY ALL EXPENDITURE CLAIMED AS REVENUE EXPE NDITURE AND PRE-INCORPORATION EXPENDITURE WOULD BE DISALLOWED AS THE DATE OF COMM ENCEMENT OF BUSINESS UNDER THE INCOME TAX ACT IS GOVERNED BY SECTION 3 OF THE ACT WHICH DEFINES THE PREVIOUS YEAR AS UNDER :- 3. FOR THE PURPOSES OF THIS ACT, PREVIOUS YEAR MEA NS THE FINANCIAL YEAR IMMEDIATELY PRECEDING THE ASSESSMENT YEAR. PROVIDED THAT, IN THE CASE OF A BUSINESS OR PROFESS ION NEWLY SET UP, OR A SOURCE OF INCOME NEWLY COMING INTO EXISTENCE, IN TH E SAID FINANCIAL YEAR THE PREVIOUS YEAR SHALL BE THE PERIOD BEGINNING WIT H THE DATE OF SETTING UP OF THE BUSINESS OR PROFESSION OR, AS THE CASE MAY B E, THE DATE ON WHICH THE SOURCE OF INCOME NEWLY COMES INTO EXISTENCE AND END ING WITH THE SAID FINANCIAL YEAR. 3.3.2. REFERRING TO THE DECISION OF WESTERN INDIA V EGETABLES LTD. VS CIT (CITED SUPRA), HE OBSERVED THAT IN THE SAID JUDGEMENT, THE HONBLE BOMBAY HIGH COURT MADE A CLEAR DISTINCTION BETWEEN COMMENCING A BUS INESS AND SETTING UP A BUSINESS AND THERE MAY BE AN INTERVAL BETWEEN THE S ETTING UP OF THE BUSINESS AND COMMENCEMENT OF THE BUSINESS AND ALL EXPENSES INCUR RED DURING THE INTERVAL WOULD BE PERMISSIBLE DEDUCTIONS. REFERENCE WAS AL SO MADE TO CWT VS RAMARAJU SURGICAL COTTON MILLS LTD. (CITED SUPRA) W HEREIN IT WAS HELD THAT THE WORDS SET-UP IN THE PRINCIPAL CLAUSE IS EQUIVALEN T TO THE WORD ESTABLISHED BUT OPERATIONS FOR ESTABLISHMENT CANNOT BE EQUATED WITH THE ESTABLISHMENT OF THE UNIT ITSELF OR ITS SETTING UP. THE OPERATIONS FOR ESTAB LISHMENT OF THE UNIT IT WAS HELD CANNOT BE SIMULTANEOUS WITH THE SETTING UP OF THE U NIT BUT MUST PRECEDE THE ACTUAL SETTING UP OF THE UNIT AND INFACT IT IS THE OPERATI ONS FOR ESTABLISHMENT OF A UNIT WHICH ULTIMATE RESULTS IN THE SETTING UP OF THE UNI T. RELIANCE WAS ALSO PLACED I.T.A .NO.-2835/DEL/2012 13 UPON CIT VS SARABHAI SONS PVT. LTD. (1973) 90 ITR 3 18 (GUJ.) WHEREIN IT HAD BEEN HELD THAT THERE HAS BEEN A CLEAR DISTINCTION B ETWEEN COMMENCING A BUSINESS AND SETTING IT UP. REFERRING TO SECTION 3(1)(D) OF THE ACT, 1961, THE CIT(A) OBSERVED THAT WHAT IS REQUIRED TO BE CONSIDERED THE SETTING UP OF THE BUSINESS WHEN A BUSINESS IS ESTABLISHED AND IS READY TO STAR T DOING BUSINESS, IT CANNOT BE SAID TO BE SET UP THE BUSINESS MUST BE PUT INTO SUC H A SHAPE THAT IT CAN START FUNCTIONING AS A BUSINESS OR A MANUFACTURING ORGANI ZATION. RELIANCE WAS ALSO PLACED UPON CIT VS SAURASHTRA CEMENT & CHEMICAL IND USTRIES (1973) 91 ITR 170 (GUJ.) AND DCIT VS INTERLINK PETROLEUM LTD. 83 TTJ 274 (ITAT-AHMD.). 3.3.3. ACCORDINGLY HE WAS OF THE VIEW THAT IT IS NE CESSARY TO BE SEEN FROM THE PRINCIPLES LAID DOWN IN THE JUDGEMENT IT IS CLEAR T HAT THE ISSUE OF NEWLY START UP BUSINESS OR PROFESSION NEEDS A CAREFUL EXAMINATION OF THE FACT AS WHAT CONSTITUTED DATE OF SETTING UP OF BUSINESS AS THIS IS THE DAT E FROM WHICH THE PREVIOUS YEAR OF A BUSINESS OR PROFESSION WOULD BE DEEMED TO HAVE BE EN STARTED AND THIS ASPECT NEEDS TO BE CONSIDERED ON THE BASIS OF FACTS OF EAC H CASE. REFERRING TO THE FACTS OF THE ASSESSEES CASE HE OBSERVED THAT THE ASSESSEE C OMPANY HAD BEEN INCORPORATED ON 19.09.2007 IN THE BUSINESS OF WHOLESALE TRADING OF ALL KINDS OF CONSUMER GOODS, DURABLES, ARTICLES AND TO CARRY OUT ANY AND ALL SUCH ACTIVITIES AS MAY BE NECESSARY OR RELATED TO OR IN CONNECTION WITH CARRY ING ON SUCH TRADING ACTIVITIES. MAIN OBJECTIVES OF THE BUSINESS OF THE ASSESSEE COM PANY AS PER THE MEMORANDUM OF ASSOCIATION EXTRACTED IN THE IMPUGNED ORDER AT P AGE 14 ARE REPRODUCED HEREUNDER :- 1. TO CARRY ON TRADING, INCLUDING WHOLESALE TRADIN G OF ALL KINDS OF GOODS AND PRODUCTS INCLUDING ALL KINDS OF CONSUMER GOODS, DURABLES, ARTICLES AND PRODUCTS AND TO CARRY OUT ANY AND ALL SUCH ACTIVITIES AS MAY BE NECESSARY OR RELATED TO OR IN CONNECTION WITH CA RRYING ON SUCH TRADING ACTIVITIES. 2. TO CARRY ON BUSINESS IN INDIA AND ABROAD AND AS MANUFACTURERS, IMPORTERS, EXPORTERS, BUYERS, PURCHASERS, SELLERS, WHOLESALERS, TRADERS, AGENTS, BROKERS, DISTRIBUTORS AND TO CONTRACT FOR A LL KINDS OF GOODS AND PRODUCTS INCLUDING ALL TYPES OF CONSUMER GOODS AND PRODUCTS OF EVERY KIND,, IN EVERY DESCRIPTION, IN A PREPARED, MANUFAC TURED, SEMI- 0MANUFACTURED OR RAW STATE AND TO CARRY OUT ANY AND ALL SUCH ACTIVITIES AS I.T.A .NO.-2835/DEL/2012 14 MAY BE NECESSARY OR RELATED TO OR IN CONNECTION WIT H CARRYING ON ANY OF THE ABOVE STATED ACTIVITIES. 3. TO CARRY ON THE BUSINESS OF STORAGE, WAREHOUSING , TRANSPORTATION AND HANDLING OF ALL KINDS OF PRODUCTS, GOODS AND AR TICLES FROM ONE PLACE TO ANOTHER EITHER BY LAND OR BY AIR, SEA OR BY MEAN S OF MOTOR VEHICLES AND/OR AERO PLANES OR BY ANY OTHER MEANS OF TRANSPO RT. 4. TO DELIVER, SUPPLY, FURNISH, PROVIDE, DISTRIBUTE , REPLENISH ALL KINDS OF PRODUCTS, GOODS AND ARTICLES TO RETAIL SELLERS, STO RES, SHOWROOMS ETC. IN INDIA AND OUTSIDE INDIA. 5. TO CARRY ON THE BUSINESS OF MARKETING, ADVERTISI NG AND PROMOTIONAL SUPPORT FOR ALL KINDS OF CONSUMER GOODS AND PRODUCT S ON ITS OWN ACCOUNT AND FOR AND ON BEHALF OF PERSONS, FIRMS AND COMPANI ES LOCATED IN AND OUTSIDE INDIA. 3.3.4. IN ORDER TO MEET THESE OBJECTIVES, THE ASSES SEE OPENED ITS OFFICE IN INDIA W.E.F 01.10.2007 WHICH WAS SUBSEQUENTLY SHIFTED TO GURGAON, HARYANA IN A LEASED PREMISES W.E.F 14.11.2007. THE ASSESSEE COM PANY ALSO OPENED ITS BANK ACCOUNT ON 04.10.2007 AND VARIOUS EXPENSES WERE INC URRED THE DETAILS OF WHICH ARE EXTRACTED ON PAGE 15 OF THE IMPUGNED ORDER. ON A CONSIDERATION OF THE SAME, IT WAS OBSERVED THAT THE ASSESSEE IS NOT REGISTERED UNDER THE SHOPS AND ESTABLISHMENTS ACT DURING THE RELEVANT PERIOD WHICH IS ONE OF THE ESSENTIAL CONDITIONS FOR SETTING UP OF BUSINESS OR FOR THE CO MMENCEMENT OF BUSINESS IN INDIA. IT WAS ALSO OBSERVED THAT THE ASSESSEE HAS NOT ESTABLISHED ANY STORE FROM WHERE SALE/PURCHASE OR TRADING OF GOODS WOULD TAKE PLACE. SIMILARLY NO WAREHOUSE/GODOWN WAS ESTABLISHED DURING THE RELEVAN T PREVIOUS YEAR FROM WHERE THE INTENDED GOODS FOR TRADING COULD BE STORED. NO VEHICLE/TRANSPORT ARRANGEMENT WAS MADE BY THE ASSESSEE COMPANY FOR THE TRANSPORTATION/DELIVERY/SUPPLY/DISTRIBUTION OF GOOD S. NO EXPENDITURE WAS FOUND TO BE INCURRED ON ADVERTISEMENT/PUBLICITY OF THE NE W BUSINESS OF THE ASSESSEE COMPANY. IT WAS ALSO OBSERVED THAT MOST OF THE KEY EMPLOYEES APPOINTED BY THE ASSESSEE HAVE GIVEN THEIR ACCEPTANCE FOR APPOINTMEN T AFTER THE END OF THE RELEVANT PREVIOUS YEAR. THE RELEVANT DETAILS MENTIONED ARE EXTRACTED FROM 16 OF THE IMPUGNED ORDER AS UNDER :- I.T.A .NO.-2835/DEL/2012 15 NAME OF THE EMPLOYEE POST DATE OF ISSUE OF APPOINTMENT LETTER DATE OF ACCEPTANCE OF APPOINTMENT ERIC BOUIN DIRECTOR FMCG 01.01.2008 04.07.2008 BOUZENETH BENAUDA MERCHANDISE DIRECTOR 01.01.2008 16.07.2008 LYDERICH JOUVENAUX BUSINESS DATE DEVELOPMENT MANAGER 01.01.2008 04.07.2008 PATRICE BREUIL DIRECTOR HARD GOODS 01.01.2008 04.07.2008 DOMINIQUE COULOMBEL FRUIT & VEGETABLE MANAGER 01.01.2008 04.07.2008 3.3.5. HE FURTHER OBSERVED THAT MOST OF THE CORRESP ONDENCE MADE WITH THE INTENDED SUPPLIERS WERE MADE EITHER BEFORE THE INCO RPORATION OF THE ASSESSEE COMPANY OR AFTER THE END OF THE RELEVANT PREVIOUS Y EAR. CONSIDERING THE SAMPLES OF CORRESPONDENCE WITH THE INTENDED SUPPLIERS OF GO ODS FILED ON BEHALF OF THE ASSESSEE WITH KEY EMPLOYEES OF THE ASSESSEE COMPANY , THE CIT(A) OBSERVED THAT FROM THE PERUSAL OF THE DETAILS FILED IT WAS NOTED THAT THE FMCG DIRECTOR OF THE ASSESSEE COMPANY NAMELY, MR. BOUIN, IT WAS EVIDENCE D THAT HE HAD RAISED CERTAIN QUERIES WITH NESTLE ON 12.06.2007 I.E PRIOR TO THE INCORPORATION OF THE ASSESSEE COMPANY ITSELF SINCE THE SAID COMPANY WAS INCORPORA TED W.E.F 19.09.2007. HE ALSO OBSERVED THAT MR. BOUIN HIMSELF WAS APPOINTED BY THE ASSESSEE COMPANY W.E.F. 01.01.2008 AND THUS THE CORRESPONDENCE MADE EVEN BEFORE THE INCORPORATION OF THE ASSESSEE COMPANY AND THE EVIDE NCES OF CORRESPONDENCE REGARDING THE QUERIES FOR PURCHASE OF GOODS FROM TH E INTENDED SUPPLIERS FOUND TO BE MADE WHICH IS BEFORE BEING APPOINTED AS AN EMPL OYEE OF THE ASSESSEES COMPANY WAS NOT CONSIDERING RELEVANT. HE ALSO OBSE RVED THAT THE COMPUTERS AND ACCESSORIES WERE PURCHASED AT THE FAG END OF THE AS SESSMENT YEAR AND THE NUMBER OF EMPLOYEES WAS NOT SUFFICIENT TO COMMENCE THE BUS INESS OF THE ASSESSEE COMPANY ACCORDINGLY HE HELD THAT IT CANNOT BE BELI EVED THAT THE BUSINESS OF THE ASSESSEE COMPANY WAS ESTABLISHED DURING THE RELEVAN T PREVIOUS YEAR IN THE ABSENCE OF ANY STORE OR OUTLET FOR THE BUSINESS OF TRADING, WAREHOUSE/GODOWNS, I.T.A .NO.-2835/DEL/2012 16 TRANSPORTATIONS, REGISTRATION UNDER THE SHOP AND E STABLISHMENT ACT AND PURCHASE OR SALE MADE DURING THE RELEVANT PREVIOUS YEAR. IT WAS HELD THAT THE ASSESSEE WAS NOT IN A POSITION TO DISCHARGE ITS FUNCTIONS AS A W HOLESALE TRADER. RELIANCE WAS PLACED UPON WESTERN INDIA VEGETABLES PRODUCTS LTD V S CIT; CIT VS SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD. AND CWT VS RAMR AJU SURGICAL COTTON MILLS LTD. AND IT WAS HELD THAT PRELIMINARY ENQUIRI ES CONDUCTED FOR THE PURCHASE OF GOODS AND THE PURCHASES WERE NEITHER FINALIZED N OR ANY ORDER WAS PLACED. ACCORDINGLY IT WAS HELD THAT ASSESSEE COMPANY WAS N OT IN A POSITION TO COMMENCE ITS BUSINESS AS IT WAS NOT FULLY SET UP. CONSEQUENTLY THE EXPENSES INCURRED IT WAS HELD CANNOT BE ALLOWED AS A DEDUCTI ON. AS SUCH THE DISALLOWANCE OF THE BUSINESS LOSS OF ` 8,64,07,610/- WAS CONFIRMED. 4. AGGRIEVED BY THIS, THE ASSESSEE IS IN APPEAL BEF ORE THE TRIBUNAL. LD REITERATED AT GREAT LENGTH, THE FACTS ON THE BASIS OF MATERIAL AVAILABLE ON RECORD. IT WAS RE-ITERATING THAT VARIOUS ACTIVITIE S WHICH HAD BEEN DONE BY THE ASSESSEE COMPANY WHICH WAS INCORPORATED ON 19.09.20 07 AND IT HAD ENTERED IN TO CORRESPONDENCES WITH A NUMBER OF POTENTIAL SUPPLIER S ON SPECIFIC DATES AS PER THE FOLLOWING DETAILS:- S.NO. COMPANYS NAME CORRESPONDENCE DATE 1. NESTLE 12.06.2007 2. MCCAIN FOODS INDIA PVT. LTD. 15.11.2007 3. DIAGEO 16.11.2007 4. CADBURY 17.11.2007 5. NIVEA INDIA PVT. LTD. 21.11.2007 6. PEPSI 22.11.2007 7. COLGATE INDIA (COLPAL) 12.12.2007 8. UNILEVER 19.01.2008 4.1. IT WAS HIS SUBMISSION THAT THESE ARE NOT DISPU TED FACT. IT WAS SUBMITTED THAT THE ASSESSEE HAS DEVELOPED ITS CONTACTS WITH VARIOU S SUPPLIERS IN ORDER TO CREATE AWARENESS OF ITS PRESENCE. THE ASSESSEE ALSO START ED MAINTAINING DATABASE OF PROSPECTIVE SUPPLIERS OF GOODS IN VARIOUS CATEGORIE S. IT WAS SUBMITTED THAT FROM 01.09.2007 SPECIFIC EMPLOYEES WERE ASSIGNED BY FORE IGN GROUP COMPANY WORK I.T.A .NO.-2835/DEL/2012 17 UNDER THE ASSESSEES CONTROL AND SUPERVISION IN IND IA FROM THE SAID DATE. THE COPIES OF THE LETTERS ISSUED IT WAS STATED ARE PLAC ED AT PAGES 13-20 OF THE PAPER BOOK AND PAGE 198 IS THE LIST OF THE EMPLOYEES. AF FIDAVIT OF THE ASSESSEE WITH THE TAX AUTHORITIES CONFIRMING THE FACT THAT THE EMPLOY EES WERE EFFECTIVELY WORKING FOR THE ASSESSEE ONLY SINCE 19.09.2007, IT WAS STAT ED IS AVAILABLE ON RECORD AND IS PLACED AT PAGE 88-89 OF THE PAPER BOOK. IN THIS BA CKGROUND IT WAS SUBMITTED THAT THE ASSESSEE COMPANY INCORPORATED ON 19.09.2007; H AVING ACQUIRED OFFICE PREMISES ON 01.10.2007 (COPY OF THE LEASE DEED PLAC ED AT PAGES 19-23); WHO HAD OPENED A BANK ACCOUNT ON 04.10.2007; AND ON 01.01.2 008 IT WAS SUBMITTED THE EMPLOYMENT LETTERS WERE GIVEN BY THE ASSESSEE TO IT S EMPLOYEES(COPIES OF WHICH ARE PLACED AT PAGES 21-57). THE LIST OF THE EMPLOY EES IS PLACED AT PAGE 58. THE RELEVANT EXTRACT OF THE TDS QUA THESE EMPLOYEES, IT WAS STATED IS PLACED AT PAGE 59 AND THE EXTRACT OF TDS RETURN OF THE ASSESSEE IN RESPECT OF SALARY PAYMENT TO EMPLOYEES FOR THE PERIOD 01.01.2008 TO 31.03.2008, IT WAS STATED ARE PLACED AT PAGE 59 OF THE PAPER BOOK. IT WAS SUBMITTED THAT T HE ASSESSEE HAS GOT REGISTRATION UNDER THE SHOPS AND ESTABLISHMENT ACT WITH RETROSPECTIVE EFFECT FROM JANUARY 2008 TILL 31 MARCH 2008 AND THE SAID R EGISTRATION WAS GRANTED ON 05.03.2008 AND COPY OF THE SAME IS PLACED AT PAGE 1 83 OF THE PAPER BOOK AND THE SUBMISSION ON THIS ASPECT HAS BEEN MADE BEFORE THE CIT(A) AS EVIDENCED FROM THE PAGE 200 OF THE PAPER BOOK. IT WAS EMPHASIZED THAT THIS FACT WAS WRONGLY NOTED BY THE CIT(A). THE DECISION RELIED UPON BEFO RE THE AO AND THE CIT(A) WERE HEAVILY RELIED UPON. APART FROM THAT COPY OF THE JUDGEMENT DATED 23.04.2013 IN THE CASE OF CIT VS M/S DHOOMKETU BUI LDERS PVT. LTD IN ITA NO.- 528 & 529/DEL/2012 RENDERED BY THE HONBLE HIGH COU RT WAS ALSO RELIED UPON. IN THIS BACKGROUND, IT WAS SUBMITTED THAT THE CIT(A ) HAS ERRED IN HOLDING THAT THE ASSESSEE IS NOT REGISTERED UNDER THE SHOPS AND ESTA BLISHMENT ACT AND THE REASONING THAT THE ASSESSEE HAS NOT ESTABLISHED ANY STORE FROM WHERE SALE/PURCHASE/TRADING OF GOODS WOULD TAKE PLACE OR FOR THAT MATTER THAT THE ASSESSEE HAS NOT ESTABLISHED WAREHOUSES/GODOWNS OR DOES NOT HAVE ARRANGEMENT I.T.A .NO.-2835/DEL/2012 18 FOR TRANSPORTATION/DELIVERY/SUPPLY ETC. AND HAS NOT ADVERTISED OR MADE PUBLICITY, ALL PERTAIN TO COMMENCEMENT OF BUSINESS AND NOT SET TING UP OF BUSINESS. THE FACT OF SETTING UP OF BUSINESS IT WAS SUBMITTED IS ESTAB LISHED FROM THE FACT THAT MOST OF THE KEY EMPLOYEES ACCEPTED EMPLOYMENT IN THE RELEVA NT ASSESSMENT YEAR. IT WAS SUBMITTED THAT EARLIER THE ASSESSEE DID NOT HAVE A PROPER HR HOWEVER IMMEDIATELY ON THE APPOINTMENT OF HR THE APPOINTMEN TS MADE WERE FORMALIZED AND FORMAL LETTERS OF APPOINTMENT WERE ISSUED WHICH WERE ACCEPTED. 4.1.1. ACCORDINGLY IT WAS HIS SUBMISSION THAT THE I SSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY VIRTUE OF THE JUDGEMENTS OF THE VARIOUS COURTS AS THE PRINCIPLES LAID DOWN THEREIN FULLY SUPPORT THE FACTS OF ASSESSEES CASE AS THE ACTIVITIES OF HIRING THE PERSONNEL, TAKING OFFICE PREMISES ON RENT, PURC HASING THE OFFICE FURNITURE, FIXTURES, COMPUTERS ETC. ALL PUT TOGETHER DEMONSTRA TE THAT BUSINESS HAS BEEN SET UP. THE ENQUIRY MADE WITH POTENTIAL SUPPLIERS FURT HER SUPPORTS THE CASE. RELYING UPON THE RATIO OF THE JUDGEMENTS RELIED UPON BEFORE THE AUTHORITIES AND THE BENCH IT WAS HIS SUBMISSION THAT ACTIVITIES LIKE THE OPEN ING OF BANK ACCOUNT EVIDENCE OF INCORPORATION OF THE COMPANY ALONGWITH ALL THE OTH ER ACTIVITIES DEMONSTRATES THAT THE BUSINESS HAS BEEN SET UP. IT WAS ALSO HIS SUBM ISSION THAT THE FINDING OF THE CIT(A) THAT THE ASSESSEE WAS NOT REGISTERED UNDER THE SHOPS AND ESTABLISHMENT ACT WAS AN INCORRECT FINDING OF FACT AND THE FAULT FOUND BY THE REVENUE THAT THERE WAS NO EVIDENCE OF SALE/PURCHASE WAREHOUSE/GODOWNS ETC, ARRANGEMENTS FOR TRANSPORTATION/DELIVERY AND ADVERTISEMENT ETC. WOUL D ALL RELATE TO ACTUAL COMMENCEMENT OF BUSINESS AND NOT FOR SETTING UP OF A BUSINESS. IN THE LIGHT OF THESE FACTS AND ARGUMENTS IT WAS HIS STAND THAT THE CLAIM OF THE ASSESSEE DESERVES TO BE ALLOWED. 4.2. THE LD. CIT DR, DR. SUDHA KUMARI PLACED HEAVY RELIANCE ON THE ASSESSMENT ORDER AND THE IMPUGNED ORDER AND IT WAS HER SUBMISSIONS BASED ON THE FINDING ON FACTS RECORDED THEREIN THAT THE BUSI NESS HAS NOT BEEN SET UP AND THESE EXPENSES WERE PRE-COMMENCEMENT EXPENSES AND T HE CASE LAW RELIED UPON BY THE ASSESSEE BEFORE THE ITAT IS A MERE REPETITIO N OF DECISIONS AND JUDGEMENTS I.T.A .NO.-2835/DEL/2012 19 CITED BEFORE THE AO AND THE CIT(A) WHO HAVE FULLY D ISCUSSED AND CONSIDERED THEM WHILE DECIDING THE ISSUE. IT WAS HER SUBMISSI ON REFERRING TO THE MATERIAL AVAILABLE ON RECORD THAT THE STATUS OF THE EMPLOYEE S WAS TEMPORARY AND IT IS ONLY WHEN THE HR OF THE COMPANY WAS APPOINTED THAT THE E MPLOYMENT STATUS WAS CORRECTED. REFERRING TO THE IMPUGNED ORDER IT WAS ALSO HER SUBMISSION THAT NO GODOWN/WAREHOUSE ETC. HAS BEEN TAKEN ON RENT OR LEA SED BY THE ASSESSEE. THERE IS NO INFRASTRUCTURE IN EVIDENCE FOR THE NATURE OF BUS INESS OF THE ASSESSEE NAMELY AN ARRANGEMENT FOR TRANSPORTATION OR DELIVERY OF GOODS OR SUPPLIES. IT WAS SUBMITTED THAT ALL THE DECISIONS THAT THE ASSESSEE HAS PLACED IN THE PAPER BOOK NAMELY CIT VS RAMARAJU SURGICAL COTTON MILLS LTD., WESTERN IND IA VEGETABLES LTD. VS CIT, CIT VS HUGHES ESCORTS COMMUNICATIONS LTD., CIT VS W HIRLPOOL OF INDIA LTD., ESPN SOFTWARE INDIA LTD. PLACED AT PAGES 6-9; 10-1 4; 15-18; 19-22; 23-25 HAVE BEEN FULLY DISCUSSED AND CONSIDERED BY THE CIT(A) A ND HELD TO BE INAPPLICABLE. AS SUCH IT WAS HER SUBMISSION THAT NOTHING NEW HAS BEEN SAID BY THE ASSESSEE AS HE IS MERELY RELYING UPON THE SAME FACTS AND SAME CASE LAW TO ARGUE THAT THE BUSINESS HAS BEEN SET UP. 4.2.1. REFERRING TO THE DECISION RENDERED IN JUDGEM ENT DATED 23.04.2013 IN THE CASE OF CIT VS DHOOMKETU BUILDERS & DEVELOPMENT PVT . LTD. IN ITA NO-528 & 529/DEL/2012 CITED BEFORE THE TRIBUNAL, IT WAS HER SUBMISSION THAT THE FACTS ARE ENTIRELY DISTINGUISHABLE AS IN THE FACTS OF THAT CA SE THE NATURE OF WORK OF THE ASSESSEE WAS THAT HE WAS IN THE BUSINESS OF REAL ES TATE AND THUS BY MERELY PARTICIPATING IN A TENDER FLOATED FOR ACQUIRING THE LAND WAS HELD TO AMOUNTING TO SETTING UP OF THE BUSINESS. IN THE FACTS OF THE PR ESENT CASE, IT WAS POINTED OUT THAT THE ASSESSEE IS A TRADER AS SUCH NECESSARY BUSINESS ACTIVITY WOULD BE ACQUIRING OF SHOPS OR PLACE WHERE ASSESSEE WOULD MAKE THE SALE O F ITS GOODS ACCORDINGLY EVEN BEFORE MAKING ARRANGEMENT FOR PURCHASE PLACE FOR ST ORAGE AS A GODOWN OR A SHOP OR A WAREHOUSE HAS TO BE ARRANGED BY THE ASSESSEE A ND ONLY WHEN THE FIRST PURCHASE IS MADE CAN IT BE SAID THAT THE BUSINESS H AS SET UP. I.T.A .NO.-2835/DEL/2012 20 4.2.2. SIMILARLY THE JUDGEMENT OF JURISDICTIONAL HI GH COURT IN THE CASE OF CIT VS SAUER DANFOSS PVT. LTD. IS ALSO NOT APPLICABLE AS I N THE FACTS OF THAT CASE, IT WAS ARGUED THE ASSESSEE HAD ACQUIRED A RIGHT UNDER THE AGREEMENT DATED 21.05.2001. LD. DR INVITED ATTENTION TO INDERCHAND HARI RAM VS CIT (1953) 23 ITR 437(ALL.) SUBMITTED WHAT TO TALK OF BUSINESS WHICH HAS NOT BE EN SET UP EVEN IN THE CASE OF A CONTINUING BUSINESS IF IT HAS CEASED TO EXIST THE C OURTS ARE VERY CLEAR THAT EXPENSES PERTAINING TO A CEASED BUSINESS CAN NOT BE ALLOWED. AS SUCH THE OCCASION TO ALLOW BUSINESS EXPENDITURE IN THE FACTS WHERE THE BUSINESS HAS NOT BEEN SET UP, IT WAS HER STAND DOES NOT ARISE. 4.3. LD. AR IN REPLY SUBMITTED THAT SALE OF GOODS I S A SEPARATE ACTIVITY AND THE EMPLOYEES WERE TEMPORARY ON ACCOUNT OF PECULIAR CIR CUMSTANCES WERE THE HR OF THE COMPANY WAS NOT APPOINTED AND SUBSEQUENTLY THE EMPLOYMENT LETTERS HAVE BEEN ISSUED AND RATIFIED BY THE EMPLOYEES. IT WAS ALSO HIS SUBMISSION THAT WAREHOUSES HAS BEEN ACQUIRED. SUBSEQUENTLY AND EVI DENCES SHOW IT WAS ARGUED THAT THE BUSINESS HAS BEEN SET UP AND HAS NOT COMME NCED AND LAW IS CLEAR THAT ONCE THE BUSINESS HAS BEEN SET UP THE EXPENSES PERT AINING TO THE BUSINESS HAVE TO BE ALLOWED. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE DECISIONS RELIED UPON BY THE PARTIES B EFORE US IN SUPPORT OF THEIR CLAIM HAVE BEEN TAKEN INTO CONSIDERATION. IT IS SE EN FROM THE RECORD THAT THE ASSESSEE IS A GROUP SUBSIDIARY OF CARREFOUR GROUP, THE SECOND LARGEST RETAILER OF THE WORLD. IT IS SEEN THAT AS PER THE MEMORANDUM O F ASSOCIATION, COPY PLACED AT PAGE 1-12 OF THE BOOK THE MAIN OBJECTIVES OF THE AS SESSEE ARE AS UNDER :- 1 TO CARRY ON TRADING, INCLUDING WHOLESALE TRADING OF ALL KINDS OF GOODS AND PRODUCTS INCLUDING ALL KINDS OF CONSUMER GOODS, DURABLES, ARTICLES AND PRODUCTS AND TO CARRY OUT ANY AND ALL SUCH ACTIVITIES AS MAY BE NECESSARY OR RELATED TO OR IN CONNECTION WITH CA RRYING ON SUCH TRADING ACTIVITIES. 2. TO CARRY ON BUSINESS IN INDIA AND ABROAD AND AS MAN UFACTURERS, IMPORTERS, EXPORTERS, BUYERS, PURCHASERS, AND SELLE RS, WHOLESALES, TRADERS, AGENTS, BROKERS, DISTRIBUTORS AND TO CONTRACT FOR A LL KINDS OF GOODS AND PRODUCTS INCLUDING ALL TYPES OF CONSUMER GOODS AND PRODUCTS OF EVERY I.T.A .NO.-2835/DEL/2012 21 KIND, IN EVERY DESCRIPTION, IN A PREPARED, MANUFACT URED, SEMI- MANUFACTURED OR RAW STATE AND TO CARRY OUT ANY AND ALL SUCH ACTIVITIES AS MAY BE NECESSARY OR RELATED TO OR IN CONNECTION WIT H CARRYING ON ANY OF THE ABOVE STATED ACTIVITIES. 3. TO CARRY ON THE BUSINESS OF STORAGE, WAREHOUSING, T RANSPORTATION AND HANDLING OF ALL KINDS OF PRODUCTS, GOODS AND AR TICLES FROM ONE PLACE TO ANOTHER EITHER BY LAND OR BY AIR, SEA OR BY MEAN S OF MOTOR VEHICLES AND/ OR AERO PLANES OR BY ANY OTHER MEANS OF TRANSP ORT. 4. TO DELIVER, SUPPLY, FURNISH, PROVIDE, DISTRIBUTE, R EPLENISH ALL KINDS OF PRODUCTS, GOODS AND ARTICLES TO RETAIL SELLERS, STORES, SHOWROOMS ETC IN INDIA AND OUTSIDE INDIA. 5. TO CARRY ON THE BUSINESS OF MARKETING, ADVERTISING AND PROMOTIONAL SUPPORT FOR ALL KINDS OF CONSUMER GOODS AND PRODUCTS ON ITS OWN ACCOUNT AND FOR AND ON BEHALF OF PERSONS, FIRMS AND COMPANIES LOCATED IN AND OUTSIDE INDIA. 5.1. IN THE FACTS OF THE PRESENT THE ASSESSEE HAS L EAD EVIDENCE TO SHOW THAT IT HAS ENTERED INTO CORRESPONDENCE WITH VARIOUS PARTIES TO IDENTIFY THE SUPPLIERS. REFERENCE SPECIFICALLY HAS BEEN MADE OF CORRESPONDE NCE WITH NESTLE DATED 12.06.2007; MCCAIN FOODS INDIA PVT. LTD. DATED 15.1 1.2007; DIAGEO DATED 16.11.2007 AND SIMILARLY WITH CADBURY; NIVEA INDIA PVT. LTD;. PEPSI; COLGATE INDIA (COLPAL); UNILEVER ETC. THE ASSESSEE HAS ALS O LEAD EVIDENCE TO SHOW THAT EMPLOYEES FOR THE SAID ACTIVITIES HAVE BEEN ASSIGNE D. THE COMPANY WAS INCORPORATED IN 19.09.2007, OFFICE PREMISES WERE AC QUIRED ON RENT IN OCTOBER 2007, EVIDENCED BY LEASE DEED, BANK ACCOUNT HAS BEE N OPENED ON 04.10.2007, LIST OF EMPLOYEES, THE TDS DEDUCTION FOR THE SAID EMPLOY EES, EVIDENCE HAS BEEN PLACED ON RECORD QUA THE APPLICATION FOR REGISTRATI ON UNDER THE PUNJAB SHOPS AND COMMERCIAL ESTABLISHMENT YULE ACT, 1958, SHOPS REGI STRATION ACT WHICH AS PER RECORD WAS GRANTED ON 04 MARCH 2008 W.E.F. JANUARY 2008 HAS BEEN PLACED ON RECORD AND COPY OF THE SAME PLACED ON PAGE 183 OF T HE PAPER BOOK. IT HAS ALSO BEEN SUBMITTED THAT THIS FACT HAS BEEN WRONGLY NOTE D BY THE CIT(A) WHO RECORDS A FINDING THAT THE ASSESSEE IS NOT REGISTERED UNDER THE SHOPS AND ESTABLISHMENT ACT. THE ARGUMENTS HAVE ALSO BEEN ADVANCED THAT ESTABLISHMENT OF STORE FROM WHERE SALE/PURCHASE, TRADING OF GOODS WOULD TAKE PL ACE AND THE ESTABLISHMENT OF WAREHOUSE/GODOWN INCLUDING THE ARRANGEMENT FOR TRAN SPORT, DELIVERY/SUPPLY AND I.T.A .NO.-2835/DEL/2012 22 DISTRIBUTION OF GOODS AND ADVERTISEMENT, PUBLICITY EXPENDITURE ARE EXPENDITURE WHICH WOULD RELATE TO ACTUAL COMMENCEMENT OF BUSINE SS AND NOT TO SETTING UP OF A BUSINESS AND DECISIONS RELIED UPON BEFORE THE AUT HORITIES WHICH HAVE BEEN ADDRESSED IN THE EARLIER PART OF THIS ORDER WHILE A DDRESSED THE FACTS ON RECORD AND THE ARGUMENTS OF THE PARTIES HAVE BEEN RELIED UPON BEFORE US. A PERUSAL OF THESE JUDGEMENTS AND DECISIONS ADDRESSES THE SETTLED LEG AL POSITION QUA THE ISSUE NAMELY AT WHAT STAGE A BUSINESS CAN BE SAID TO BE S ET UP IS A MATTER OF FACT AND IS NOT A QUESTION OF LAW AS SUCH IT HAS TO BE DECIDED IN EACH AND EVERY CASE ON THE FACTS OF THE SPECIFIC CASE. THIS PROPOSITION OF LA W IS AN ACCEPTED LEGAL POSITION WITH WHICH NO PARTY CAN HAVE ANY QUARREL AND THESE DECISIONS HAVE BEEN REFERRED TO IN THE EARLIER PART OF THIS ORDER. REVERTING TO THE FACTS OF THE PRESENT CASE IN THE LIGHT OF THE SETTLED LEGAL POSITION THE ASSESSEE IS PRIMARILY AS PER ITS MAIN OBJECTS INCORPORATED IN THE MEMORANDUM OF ASSOCIATION INCOR PORATED TO CARRY ON WHOLESALE CASH AND CARRY OF ALL KINDS OF CONSUMER G OODS, DURABLES, ARTICLES AND PRODUCTS ETC. THE BUSINESS OF A TRADER CAN BE SAID TO BE SET UP WHEN THE ASSESSEE MAKES A PURCHASE SUBSEQUENT TO OWNING/LEAS ING OF EITHER A SHOP OR WAREHOUSE AND IN THE FACTS OF THE PRESENT CASE EVID ENTLY THE ASSESSEE HAS NOT MADE ANY PURCHASE OR RENTED ANY SHOP PREMISES FROM WHERE SALE COULD TOOK PLACE OR FOR THAT MATTER RENTED ANY WAREHOUSE WHERE THE P URCHASED GOODS INTENDED TO BE SOLD CAN BE STORED. ACCORDINGLY ON CONSIDERATIO NS OF THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, IT CANNOT BE SAI D THAT THE BUSINESS OF THE ASSESSEE HAS BEEN SET UP AS IS THE REQUIREMENT OF P ROVISO TO SECTION 3 OF THE INCOME TAX ACT. THE DECISIONS RELIED UPON BY THE A SSESSEE ACCORDINGLY DO NOT SUPPORT THE CASE OF THE ASSESSEE AND THESE DECISION S HAVE BEEN DISTINGUISHED BY THE APPELLATE AUTHORITIES AND THE PROPOSITIONS LAID THEREIN HAVE NOT BEEN DEMONSTRATED TO BE WRONGLY APPLIED TO THE FACTS OF THE PRESENT CASE. THOUGH WE SHALL ADDRESS THESE SUBSEQUENTLY AT GREATER LENGTH HOWEVER THE FACT REMAINS THAT THE ASSESSEE HAS MERELY FILED A COMPILATION OF THE CASE LAWS RELIED UPON AND CONSIDERED BY THE CIT(A) AND THE AO AND HAS RE-ARGU ED ON SAME FACTS WITHOUT I.T.A .NO.-2835/DEL/2012 23 DEMONSTRATING HOW THE PRINCIPLE LAID DOWN IS WRONGL Y APPLIED. WE ALSO FIND ON CONSIDERATION OF THE FACT THAT THE FINDING OF FACT WRONGLY RECORDED BY THE CIT(A) THAT REGISTRATION UNDER SHOPS AND ESTABLISHMENT ACT HAS NOT BEEN GRANTED IS NOT MATERIAL TO THE ISSUE AS A PERUSAL OF PAGE 183 OF T HE PAPER BOOK SHOWS THAT THE SAID DOCUMENT DESCRIBED IN THE INDEX OF COPY OF NOT ICE DATED 04.03.2008 IN FORM B FOR EXHIBITION UNDER PUNJAB SHOPS & COMMERCIAL ESTABLISHMENT RULES, 1958 WHICH MERELY EVIDENCES THE FACT THAT NOTICE TO BE EXHIBITED U/S 20(I) OF THE SHOPS & COMMERCIAL ESTABLISHMENT ACT, 1958 AND DISC LOSES IN COLUMN NO.-1 THAT THE CLOSING DAY IF ANY CAN BE SUNDAY; IN COLU MN NO.-2 THE OPENING HOUR AND THE CLOSING HOURS WOULD BE 9.00 AM TO 8.00 PM; AT C OLUMN NO.-3 THE NAME AND PARENTAGE OF THE EMPLOYER IS GIVEN; IN THE COLUMN N O-4 THE NAME OF MANAGER IS LEFT BLANK; COLUMN NO-5 DISCLOSES THE NAME OF THE ASSESSEE AND COLUMN NO-6 GIVES THE FULL ADDRESS WHICH REFERS TO THE OFFICE P REMISES ACQUIRED ON LEASE AS PER PAGE 91 OF THE PAPER BOOK AND DEFINITELY IS NOT THE ADDRESS OF SHOP OR WAREHOUSE. IT IS NOT EVEN THE CASE OF THE ASSESSEE THAT A SHOP PREMISES OR WAREHOUSES WERE OWNED OR RENTED AT THE RELEVANT POINT OF TIME. AC CORDINGLY IT IS SEEN THAT NOTHING MUCH TURNS ON THIS INCORRECT NOTING OF FACT. SIMIL ARLY, THE EVIDENCE OF CORRESPONDENCE ENTERED INTO WITH VARIOUS POTENTIAL SUPPLIERS HAVE BEEN RIGHTLY TREATED AS NOT RELEVANT FOR DECIDING THE ISSUE. IN SIMILAR LINE, THE STAFF EMPLOYED FOR SETTING UP THE BUSINESS OF THE ASSESSEE HAVE RI GHTLY BEEN TREATED AS NOT RELEVANT. INCORPORATION CERTIFICATE OF THE ASSESSE E COMPANY IS AGAIN NOT A RELEVANT CRITERIA FOR DECIDING THE ISSUE AND SAME I S THE POSITION OF EVIDENCE OF RENTING OF OFFICE PREMISES AND PURCHASE OF OFFICE E QUIPMENT COMPUTERS ETC. AS NONE OF THESE ARE RELEVANT FOR DECIDING THE ISSUE A S THE ASSESSEE IS IN BUSINESS OF WHOLESALE TRADING OF GOODS, DURABLES, CONSUMER ITEM S ETC. AS SUCH THE CONCURRENT FINDING OF FACTS ARE UPHELD BY US. IN THE ABSENCE OF RELEVANT AND NECESSARY EVIDENCE NAMELY AN ORDER OF PURCHASE ALONGWITH RENT ING OF A SHOP OR WAREHOUSE ETC. LOOKING AT THE SPECIFIC NATURE OF ASSESSEES B USINESS THE CLAIM OF THE ASSESSEE HAS RIGHTLY BEEN REJECTED HAD THE NECESSARY AND REL EVANT EVIDENCE BEEN AVAILABLE I.T.A .NO.-2835/DEL/2012 24 ON RECORD EVEN IF THERE WAS NO INCOME THE CLAIM OF THE ASSESSEE WOULD HAVE HAD TO BE ALLOWED. IN THE ABSENCE OF RELEVANT EVIDENCE AS OBSERVED THE CLAIM HAS BEEN RIGHT REJECTED. 5.2. WE MAY REFER TO SOME OF THE CASE LAWS ON THE I SSUE WHICH FORTIFIES THE VIEW TAKEN. WESTERN INDIA VEGETABLE PRODUCTS LTD. VS CIT 26 ITR 151 ADDRESSES THIS FACT SPECIFICALLY AS IT OBSERVES THAT THERE IS A DISTINCTION BETWEEN SETTING UP OF A BUSINESS AND COMMENCEMENT OF A BUSINESS. A BUSIN ESS CAN BE SAID TO BE SET UP BEFORE IT IS READY TO COMMENCE. SIMILARLY CIT VS S AURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD. (1973) 091 ITR 0170 IS ALS O WORTH REFERRING TO IN SUPPORT OF THE VIEW TAKEN. CWT VS RAMARAJU SURGI CAL COTTON MILLS LTD. 63 ITR 478 ALSO SUPPORTS THE VIEW TAKEN AS IT HOLDS TH AT A UNIT CANNOT BE SAID TO HAVE BEEN SET UP UNLESS IT IS READY TO DISCHARGE THE FUN CTIONS FOR WHICH IT HAS BEEN SET UP AND IT IS ONLY WHEN THE UNIT HAS BEEN PUT INTO S UCH A SHAPE THAT IT CAN START FUNCTIONING AS A BUSINESS. WE MAY ALSO SPECIFICALL Y REFER TO CIT VS HUGHES ESCORTS COMMUNICATIONS LTD. 311 ITR 253 (DEL.) WHER E THE ASSESSEE WAS IN THE BUSINESS OF SATELLITE BUSINESS COMMUNICATION, IT HA S BEEN HELD THAT HAVING PLACED THE PURCHASE ORDER FOR PURCHASE OF EQUIPMENT THE BU SINESS CAN BE SAID TO HAVE BEEN SET UP IN JULY 1994. 5.3. SPECIFIC RELIANCE ON BEHALF OF THE ASSESSEE HA D BEEN PLACED ON CIT VS WHIRLPOOL OF INDIA LTD. 318 ITR 347 (DEL.) AS IN TH E SAID CASE IT WAS HELD THAT BUSINESS WAS SET UP WHEN THE DIRECTORS WERE APPOINT ED, REGIONAL AND BRANCH OFFICE STAFF WERE APPOINTED, COMPUTERS WERE PURCHAS ED ETC. SIMILARITY WITH THE PRESENT CASE HAS BEEN SOUGHT TO BE DRAWN AS IN THE FACTS OF THE PRESENT CASE KEY PERSONNEL HAVE BEEN APPOINTED OFFICE EQUIPMENT ALON GWITH COMPUTERS HAVE BEEN PURCHASED AND EVEN A BANK ACCOUNT HAS BEEN OPENED. HOWEVER ON CONSIDERATION THE RATIO DOES NOT APPLY TO ASSESSEES CASE AS THE ASSESSEE IN WHIRLPOOL OF INDIA LTD. WAS RENDERING FINANCIAL SERVICES FOR WHICH KEY PERSONNEL AT BRANCH AND REGIONAL OFFICE ALONGWITH COMPUTERS WERE AVAILABLE AND THE MERE FACT THAT BANK ACCOUNT WAS NOT OPENED WAS HELD TO NOT A MATERIAL F ACT TO DENY RELIEF WHERE AS PER I.T.A .NO.-2835/DEL/2012 25 RECORD RELATED COMPANIES WERE INCURRING EXPENDITURE . IN THE BUSINESS OF ASSESSEE IT IS NOT A FINANCIAL SERVICE WHICH IS BEING CONTEM PLATED BUT TRADING IN GOODS, IT IS THE NATURE AND TYPE OF BUSINESS WHICH WILL DETERMIN E THE ACTIVITY WHICH CAN BE SAID TO AMOUNT TO LEADING TO THE CONCLUSION THAT BU SINESS HAS BEEN SET UP. FOR A TRADER IN ELECTRONICS, CONSUMER GOODS ETC., IT IS N ECESSARY TO ATLEAST DEMONSTRATE THAT PURCHASE HAS BEEN AFFECTED AS ONLY THEN A TRAD ER CAN SELL THE GOODS FROM A SHOP/OUTLET ETC. 5.4. WE HAVE ALSO TAKEN INTO CONSIDERATION ON THE RELIANCE PLACED BY LD. AR ON CIT VS M/S DHOOMKETU BUILDERS PVT. LTD RENDERED BY THE JURISDICTIONAL HIGH COURT ON 23.04.2013 IN ITA NO.-528 & 529/DEL/2012, COPY OF WHICH HAS BEEN FILED BEFORE THE BENCH. IN THE FACTS OF THAT CASE, IT IS SEEN THE ASSESSEE WAS IN THE BUSINESS OF REAL ESTATE DEVELOPMENT INCLUDING PURCH ASE AND SALE OF LAND AND IT HAD CONTENDED THAT IT HAS BEEN SET UP ON 09.11.2005 WHE N IT DEPOSITED THE EARNEST MONEY WHILE PARTICIPATING IN THE TENDER FLOATED BY THE OFFICIAL LIQUIDATOR OF THE KARNATAKA HIGH COURT. THE SAID CLAIM WAS ALLOWED B Y THE ITAT AND WAS ASSAILED BY THE REVENUE BEFORE THE HONBLE HIGH COU RT. THE HONBLE HIGH COURT HELD THAT THE QUESTION AS TO WHEN THE BUSINE SS CAN BE SAID TO HAVE BEEN SET UP IS A QUESTION OF FACT TO BE ASCERTAINED ON FACTS AND CONSIDERATIONS OF EACH CASE AND CONSIDERING THE NATURE AND TYPE OF THE PARTICUL AR BUSINESS AND NO UNIVERSAL TEST OR FORMULA APPLICABLE TO ALL TYPES OF BUSINESS CAN BE LAID DOWN. THUS BASED ON THE FACTS OF THE ASSESSEES CASE IT WAS HELD THA T WHEN AN ASSESSEE WHOSE BUSINESS IS TO DEVELOP REAL ESTATE IS IN A POSITION TO PERFORM CERTAIN ACTS TOWARDS THE ACQUISITION OF LAND THAT WOULD CLEARLY SHOW THA T IT IS READY TO COMMENCE BUSINESS AND AS A COROLLARY THAT IT HAS ALREADY BEE N SETTING UP. THE ACTUAL ACQUISITION OF LAND IS THE RESULT OF SUCH EFFORT PU T IN BY THE ASSESSEE ONCE THE LAND IS ACQUIRED THE ASSESSEE MAY BE SAID TO HAVE ACTUAL LY COMMENCED ITS BUSINESS WHICH IS THAT OF DEVELOPMENT OF REAL ESTATE. THE A CTUAL ACQUISITION OF LAND MAY BE FIRST STAGE IN THE COMMENCEMENT OF BUSINESS BUT SE CTION 3 OF THE ACT DOES NOT SPEAK OF COMMENCEMENT OF BUSINESS AND IT SPEAKS ONL Y OF SETTING UP OF BUSINESS. I.T.A .NO.-2835/DEL/2012 26 THUS SINCE THE ASSESSEE WAS IN A POSITION TO PARTIC IPATE IN THE TENDER FLOATED ON BORROWED MONEY FOR INTEREST SHOWS THAT THE ASSESSEE S BUSINESS HAS BEEN SET UP AND IT WAS READY TO COMMENCE. THE HONBLE HIGH COU RT HELD THAT IT IS A QUESTION OF FACT AND NO SUBSTANTIAL OF QUESTION OF LAW ARE A RISE AND DISMISSED THE DEPARTMENTAL APPEAL. 5.5. THE SAID VIEW ON CONSIDERATION, IT IS SEEN FUL LY SUPPORTS THE VIEW TAKEN AS IN THE FACTS OF THE PRESENT CASE UNDISPUTEDLY THE BUSINESS CAN BE SAID TO HAVE BEEN SET UP IS THE STAGE AT WHICH THE ASSESSEE MAKE S ITS FIRST PURCHASE AND HAS A SALE OUTLET OR WAREHOUSE WHERE IT CAN BE SOLD OR ST ORED. THE ACTIVITIES RELIED UPON BY THE ASSESSEE TO CANVASS THAT IT AMOUNTS TO SETTI NG UP ON CONSIDERATION HAVE BEEN FOUND TO BE RIGHTLY REJECTED BY THE REVENUE AU THORITIES AS THEY DO NOT AMOUNT TO SETTING UP OF A BUSINESS. ACCORDING FOR THE DETAILED REASONS GIVEN HEREINABOVE, THE GROUNDS RAISED BY THE ASSESSEE IS DISMISSED. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DIS MISSED. THE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 16 TH OF AUGUST 2013. SD/- SD/- (T.S.KAPOOR) (DIVA SINGH) ACCOUNTANT MEMBER JU DICIAL MEMBER DATED: 16/08/2013 *AMIT KUMAR* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI