ITO, New Delhi V. M/s. Omni Globel Information Technologies India (P) Ltd, New Delhi

ITA 3465/DEL/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4107 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 8 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 19-04-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 06-08-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K RAVI RAMA CHANDARAN
• Keywords: Business income; Depreciation; Additional evidence; Question of law; Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : E : NEW DELHI BEFORE SHRI I.P. BANSAL AND SHRI K.G. BANSAL ITA NO.3465/D/09 ASSESSMENT YEAR : 2005-06 INCOME TAX OFFICER, VS. M/S OMNI GLOBEINFORMATION WARD 13(4), TECHNOLOGIES INDIA (P) LTD., NEW DELHI E-11, RAJOURI GARDEN, N.D. PAN NO. AAACO-6606M ( APPELLANT ) ( RESPONDENT ) APPELLANT BY : SHRI K. RAVI RAMACHANDARAN, SR. DR RESPONDENT BY : SHRI ANIL BHALLA, CA O R D E R PER K.G. BANSAL, AM: THE FACTS OF THE CASE ARE THAT THE ASSESSEE-COMPANY FILED ITS RETURN ON 30.10.2005 DECLARING TOTAL INCOME OF `27,600/-. THIS RETURN WAS PROCESSED U/S 143(1) OF THE INCOME-TAX ACT, 1961 (THE ACT), ON 20.0 4.2006. THEREAFTER, NOTICE U/S 143(2) WAS SERVED ON THE ASSESSEE FOR MAKING ASSESSMENT U/ S 143(3). 1.1 IN THE COURSE OF SCRUTINY, IT WAS FOUND THAT THE ASSESSEE-COMPANY HAD BEEN INCORPORATED ON 19.03.2004 FOR CARRYING ON THE BUSINES S PROCESS OUTSOURCING SERVICES (THE BPO) TO PROVIDE SUCH SERVICES TO OMNIGLOBE I NTERNATIONAL, USA, THE PARENT COMPANY. THE ASSESSEE ALSO OBTAINED APPROVAL AS 1 00% EXPORT ORIENTED 3465-2009-OGTI 2 UNIT (EOU) UNDER THE STPI SCHEME IN THIS YEAR. THIS IS T HE FIRST YEAR OF ITS OPERATIONS. THE ASSESSEE HAS RECEIVED AN AMOUNT OF `7,68,66,355/- FROM THE PARENT COMPANY AS SERVICE CHARGES. IN THIS CONNECTION, AN AGREEMENT HAS BEEN ENTERED INTO WITH OMNI INTERNATIONAL USA, ON 01.06.2004. IN THE MONTHS OF APRIL AND MAY, 2004, THE ASSESSEE INCURRED EXPENDITURE OF `59,02,448/-. THE DETAI LS OF THE EXPENSES HAVE BEEN MENTIONED ON PAGE NOS. 2 & 3 OF THE ASSESSMENT OR DER. THESE EXPENSES WERE STATED TO BE FOR THE PURPOSE OF TRAINING OF THE STAFF ETC. CONDUCTED FROM THE PREMISES BELONGING TO A SISTER CONCERN. THE MAIN DISPUTE IN THIS APPEAL IS AS TO WHETHER THE AFORESAID EXPENDITURE IS DEDUCTIBLE IN COMPUTING THE INCOME. THE FINDING OF THE ASSESSING OFFICER IS THAT THE EXPENDITURE HAS BEEN INCURRED BEFORE THE SETTING UP OF THE BUSINESS AND ITS COMMENCEMENT. THEREFOR E, THE EXPENDITURE IS NOT DEDUCTIBLE IN COMPUTING THE INCOME. THEN, THERE IS ALSO A QUESTION REGARDING THE RATE OF DEPRECIATION ON THE UPS, I.E., WHETHER THE RATE SHOUL D BE 25% OR 60%. THE ASSESSING OFFICER HAS ALLOWED DEDUCTION OF DEPRECIATION @ 25% AS AGAINST THE CLAIM OF 60%. THE LEARNED CIT(A) HAS ALLOWED THE APPEAL OF THE ASSESSEE ON BOTH THE GROUNDS. 2. IN REGARD TO GROUND NO.1, THE LEARNED DR FURNISHED SA ME FACTS, WHICH ARE TABULATED HEREUNDER:- S.NO. DATE REMARKS . 1. 19.03.2004 DATE OF INCORPORATION 2. 01.03.2005 COMMENCEMENT OF OPERATIONS AS PER ASSESSEE. 3465-2009-OGTI 3 3. 01.06.2004 SERVICE AGREEMENT WITH THE PARENT COMPANY. 4. 15.06.2004 RENT AGREEMENT. 2.1 THE CASE OF THE LEARNED DR IS THAT BPO IS A SERVICE INDUSTRY AND IT IS DIFFERENT FROM MANUFACTURING INDUSTRY. IN THIS LINE OF BUSINES S, NO SERVICE CAN BE RENDERED UNLESS THE EMPLOYEES ARE CONVERSANT WITH SYSTEMS. IN OTHER WORDS, THE BUSINESS CAN BE STARTED ONLY AFTER THE EMPLOYEES HAVE BEEN FULLY TRAINED IN THEIR WORK. THE PERIOD OF APRIL, 2004 AND MAY, 2004 WAS USED FOR IMPA RTING TRAINING. THEREAFTER, THE ASSESSEE ENTERED INTO THE SERVICE AGREEMENT. THE PREMISES WERE ALSO TAKEN ON RENT THEREAFTER. THEREFORE, IT IS A CASE WHERE THERE WAS NO MA NAGEMENT OR PREMISES AVAILABLE WITH THE ASSESSEE FOR CARRYING OUT THE BUSINESS IN THESE TWO MONTHS. ACCORDINGLY, IT IS AGITATED THAT THE EXPENSES HAD BEEN INC URRED PRIOR TO SETTING UP OF THE BUSINESS, WHICH CANNOT BE DEDUCTED IN COMPUTING THE I NCOME. 2.2 IN REPLY, THE LEARNED COUNSEL FOR THE ASSESSEE REFERRED TO THE FINDINGS OF THE LEARNED CIT(A), FURNISHED ON PAGE NOS. 22 TO 25 OF THE I MPUGNED ORDER. IT APPEARS THAT THE AGREEMENT TO USE THE PREMISES OF A SISTER CONCERN FO R IMPARTING TRAINING WAS NOT THERE BEFORE THE ASSESSING OFFICER, WHICH WAS FILED AS AN ADDITIONAL EVIDENCE BEFORE THE LEARNED CIT(A). THE REMAND REPORT OF THE ASSESSIN G OFFICER WAS ALSO OBTAINED. THE LEARNED CIT(A) IS OF THE VIEW THAT THE AGREEM ENT IS ONLY ONE PIECE OF EVIDENCE TO SHOW THAT THE BUSINESS HAD COMMENCED IN THE MON TH OF APRIL, 2004. THERE ARE OTHER EVIDENCES, WHICH SUPPORT THIS CONCLUSION. THE ASSESSEE HAD RECRUITED EMPLOYEES AND PAID SALARIES IN THESE MONTHS. PRO VIDENT FUND ETC. 3465-2009-OGTI 4 DEDUCTIONS WERE ALSO MADE AND PAID. THEN, THERE IS EVIDENC E IN THE FORM OF COMPUTER HIRE CHARGES, PANTRY EXPENSES, TRANSPORTATION CH ARGES, LEASE LINE CHARGES AND DEDUCTION OF TAX IN APPLICABLE CASES. THEREFORE, HE CA ME TO THE CONCLUSION THAT THE BUSINESS HAD BEEN SET UP IN APRIL, 2004. ACCORDINGL Y, THE EXPENSES HAVE BEEN ALLOWED. 2.3 LEARNED COUNSEL DREW OUR ATTENTION TOWARDS PAGE NO.39 6 OF THE PAPER BOOK, WHICH IS THE LEDGER ACCOUNT OF THE PARENT COMPANY. IT SHOWS THREE RECEIPTS ON 07.04.2004, 01.05.2004 AND 21.05.2004 AS ADVANCES . ADVANCES HAVE THEREAFTER BEEN RECEIVED RIGHT UPTO 18.03.2005. ON 31.03 .2005, THIS ACCOUNT HAS BEEN DEBITED BY A SUM OF `1,32,81,080/- AS SERVICE INCOM E. ON THIS VERY DATE, THIS ACCOUNT HAS BEEN FURTHER DEBITED BY AN AMOUNT OF `1 5,08,350/- BY EXCHANGE FLUCTUATIONS, AND THE BALANCE ADVANCE OF `72,35,870/ - HAS BEEN CARRIED FORWARDED TO THE NEXT YEAR. 3. WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSION S MADE BEFORE US. THE FACTS ARE THAT THE ASSESSEE HAS BEEN INCORPORATED ON 19. 03.2004 FOR CARRYING OUT THE BUSINESS OF THE BPO. IT INCURRED THE EXPENDITURE O F `59,24,809/- UNDER VARIOUS HEADS IN THE MONTHS OF APRIL AND MAY, 2004. THE CASE OF THE LD. COUNSEL IS THAT NOTWITHSTANDING THE FACT THAT IT STARTED RENDERING SERVICES FROM JUNE, 2004, THE EXPENSES ARE DEDUCTIBLE. ON THE OTHER HAND, THE CASE OF THE L EARNED DR IS THAT THESE ARE THE EXPENSES INCURRED PRIOR TO SETTING UP OF THE BU SINESS. THEREFORE, SINCE 3465-2009-OGTI 5 THE BUSINESS HAD NOT BEEN SET UP BEFORE JUNE, 2004, THE EXPEN SES OF THESE TWO MONTHS CANNOT BE TAKEN INTO ACCOUNT FOR COMPUTING THE BUSINESS INCOME. 4. THE LEARNED DR RELIED ON THE DECISION OF F BENCH OF D ELHI TRIBUNAL IN THE CASE OF AKZO NOBEL CAR REFINISHES INDIA LIMITED VS. DCIT , (2008) 25 SOT 226. THE FACTS OF THE CASE ARE MENTIONED AS UNDER:- THE ASSESSEE-COMPANY WAS INCORPORATED IN INDIA ON 5-12 -1997 FOR PURPOSE OF MANUFACTURE OF CERTAIN PRODUCTS, I.E., PAIN TS FOR AUTOMOBILES. PRINCIPAL COMPANY OF THE ASSESSEE WAS BASED IN NETHERLANDS. AFTER ITS INCORPORATION ITS MANAGING DIREC TOR HAD ARRIVED IN INDIA ON 9-12-1997 AND STAYED IN A HOTEL FOR EXPLOR ING THE BUSINESS POTENTIAL. IT HAD INCURRED CERTAIN EXPENDITURES AND CLAIM ED DEDUCTION OF THE SAME. HOWEVER, THE ASSESSING OFFICER DISALLOWED ITS CLAIM BECAUSE IN HIS OPINION THE ASSESSEE HAD NOT COMMENCED ITS B USINESS DURING THE RELEVANT ACCOUNTING PERIOD. ON APPEAL, THE AS SESSEE SUBMITTED THAT IT HAD STARTED OPERATIONS FROM THE ' HOT EL RIGHT FROM THE DATE O[ INCORPORATION AND LATER ON, FROM THE RESIDENCECU M-OFFICE OF THE MANAGING DIRECTOR. IT FURTHER EXPLAINED THAT IT HAD TAKEN SALES OFFICES IN DELHI, MUMBAI AND BANGALORE ON LEASE FOR THREE YEARS AND CHENNAI SALES OFFICE FOR TWO YEARS, AND HAD ALSO INVESTED SMALL AMOUNTS FOR LEASEHOLD IMPROVEMENTS, OFFICE EQUIPMENT, FUR NITURE, COMPUTER EQUIPMENT, ETC., IN EACH SALES OFFICE AND, THEREF ORE, EXPENSES INCURRED BY IT WERE TO BE ALLOWED. THE COMMISSIONER (APPEALS), HOWEVER, DISALLOWED THE ASSESSEE'S CLAIM. THE TRIBUNAL INTER ALIA CONSIDERED THE DECISION OF HONB LE DELHI HIGH COURT IN THE CASE OF CIT VS. ESPN SOFTWARE (INDIA) (P) LIMITED, (2 008) 301 ITR 368, TO THE EFFECT THAT THE ASSESSEE HAD OBTAINED A LICENSE FOR PROVID ING ESPN SERVICES AND APPOINTED DISTRIBUTORS. ON THESE FACTS, THE LEARNED CIT( A) RIGHTLY HELD THAT THE 3465-2009-OGTI 6 BUSINESS HAD BEEN SET UP, A DECISION CONFIRMED BY HONB LE DELHI HIGH. HOWEVER, NO SUCH FACT IS AVAILABLE IN THE PRESENT CASE. THE INCOR PORATION OF THE ASSESSEE- COMPANY AND APPOINTMENT OF THE DIRECTORS ARE NOT SUFFIC IENT TO RECORD A FINDING THAT THE BUSINESS HAD BEEN SET UP. 4.1 ON THE OTHER HAND, THE LEARNED COUNSEL HAD RELIED ON TH E DECISION IN THE CASE OF CIT VS. E FUNDS INTERNATIONAL INDIA, (2007) 1 62 TAXMAN 1 (DELHI). THE FACTS OF THE CASE ARE THAT THE ASSESSEE FILED RETURN ON 26.11.1998 CLAIMING LOSS OF ABOUT `4.4 CRORES. THE ASSESSEE HAD SHOWN MEAGER INTEREST INCOME, WHICH WAS TAXABLE UNDER THE RESIDUARY HEAD. THE ASSESSEE CLAIMED THAT THE BUS INESS HAD BEEN SET UP. THE ASSESSING OFFICER DID NOT ACCEPT THIS SUBMISSION AN D COMPUTED THE TOTAL INCOME AT `3,68,950/-. THE HONBLE COURT MENTIONED THAT THE ASS ESSEE WAS IN THE BUSINESS OF DEVELOPING SOFTWARE. FOR THIS PURPOSE, IT HAD ACQUI RED CERTAIN INFRASTRUCTURE FACILITY AND EMPLOYED 30 TO 40 PERSONS. THESE PERSONS W ERE REQUIRED TO PROVIDE INTELLECTUAL INPUTS FOR DEVELOPING SOFTWARE. THIS ACTIV ITY CANNOT BE COMPARED WITH MANUFACTURING ACTIVITY AS IN THE CASE OF CIT VS. MOHA N STEEL LIMITED (2004) 191 CTR (ALLD.) 279. UNDER THE CIRCUMSTANCES, IT HAS BEEN HELD THAT NO SUBSTANTIAL QUESTION OF LAW ARISES. FOR THE SAKE OF READY REFERENCE, THE RELEVANT PORTION OF THE JUDGMENT IS REPRODUCED OVERLEAF:- IT HAS BEEN NOTED THAT THE ASSESSEE HAD EMPLOYED AS MANY AS 30- 40 EMPLOYEES FOR THE PURPOSES OF DEVELOPING SOFTWARE AND H AD ACQUIRED REQUISITE INFRASTRUCTURE SUCH AS PREMISES, UTILI TIES ETC. DURING 3465-2009-OGTI 7 THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR. IT MUST BE REMEMBERED THAT THE ASSESSEE WAS IN THE BUSINESS OF DEVELOPING SOFTWARE AND THAT CANNOT BE AN OVERNIGHT EXERCISE. THE ASS ESSEE HAD PUT CONSISTENT EFFORTS FOR DEVELOPING THE SOFTWARE AND IT IS ONLY THEREAFTER THAT THE ASSESSEE WAS ABLE TO PROCURE SOME BUSINES S. IT IS POSSIBLE THAT THE ASSESSEE MAY NOT HAVE EARNED ANY INCOME DU RING THE RELEVANT PREVIOUS YEAR BUT THE FACT THAT THE ASSESSEE HA D TAKEN ALL STEPS NECESSARY TO OBTAIN BUSINESS INCLUDING EFFORTS FO R MARKETING ITSELF SHOWS THAT THE ASSESSEE HAD COMMENCED BUSINESS IN THE RELEVAN T PREVIOUS YEAR. APART FROM THE AFORESAID, IT HAS ALSO SH OWN PRE- INCORPORATION EXPENDITURE OF `11.32 CRORES AS HAVING BEE N EXPENDED FOR THE PURPOSES OF SETTING UP ITS BUSINESS. THE TRIBUNA L HAS NOTED THAT NONE OF THE FACTUAL FINDINGS THAT HAVE BEEN ARRIVED AT BY THE CIT(A) WAS CONTROVERTED BY THE REVENUE IN APPEAL. THE ASSESSEE HAD AL SO PRODUCED SOME ADDITIONAL EVIDENCE BEFORE THE CIT(A) AND EVEN THIS WAS NEITHER OBJECTED TO NOR CONTROVERTED BY THE REVENUE. 4.2 FURTHER, HE RELIED ON THE DECISION OF HONBLE MADRAS H IGH COURT IN THE CASE OF CIT VS. CLUB RESORTS (P) LIMITED, (2006) 287 ITR 5 52. THE FACTS ARE THAT THE ASSESSEE HAD BEEN CARRYING ON THE BUSINESS OF PROMOTING T IME-SHARE UNIT AT PLACES OF TOURISTS INTEREST AND MARKETING SUCH UNITS. THE SY STEM OF ACCOUNTING HAD BEEN THAT ALL RECEIPTS WERE ACCUMULATED TOWARDS THE SALE OF TIM E-SHARE COTTAGE UNDER CURRENT LIABILITIES. THE EXPENDITURE ON CONSTRUCTION WAS CARRIED AS CAPITAL WORK IN PROGRESS UNDER CURRENT ASSETS. AS AND WHEN A COTTAGE WAS READY FOR OCCUPATION, THE DIRECT EXPENDITURE ON CONSTRUCTION WAS TAKEN AS COST TO THE DEBIT OF PROFIT AND LOSS ACCOUNT AND RECEIPTS AS THE SALE PRICE AND TAKEN T O THE CREDIT OF PROFIT AND LOSS ACCOUNT. THE COTTAGE RETAINED FOR USE BY THE ASSESSEE IN HO TEL INDUSTRY WAS SHOWN AS AN ASSET AND DEPRECIATION WAS CLAIMED. NOTE NO.9 TO THE ACCOUNTS STATED THAT NO AMOUNT HAD BEEN ACCOUNTED FOR SALES, SINCE THE PROJECT WAS STILL UNDER WAY. 3465-2009-OGTI 8 RELYING ON THIS NOTE, THE ASSESSING OFFICER DISALLOWED TH E LOSS. THE HONBLE COURT ALLOWED THE CLAIM OF THE ASSESSEE BY OBSERVING AS FOLLOWS: - HEARD COUNSEL. THE ASSESSEE IS NOT A CONSTRUCTION COMPA NY. THE COMPLETION OF THE CONSTRUCTION AT THE PROJECT SITE COULD NOT BE AN INDICATOR FOR THE COMMENCEMENT OF THE BUSINESS OF THE COM PANY. THE ASSESSEE HAD NOT CARRIED OUT THE CONSTRUCTION ON ITS OWN EXCEPTING THAT IT GIVES THE WORK TO THE CONTRACTOR TO CARRY ON T HE CONSTRUCTION ACTIVITY ON THE LAND IT POSSESSED AND MERE COMPLETION OF CONSTRUCTION COULD NOT BE TAKEN AS A COMMENCEMENT OF THE ASSESSEE'S BU SINESS. THE TIME-SHARE RESORT BUSINESS INVOLVES VARIOUS STAGES OF DEVELOPMENT. THE FIRST STAGE WAS SETTING UP OF ONE OR MORE OPERATING OFFICES FROM WHICH THE SALES PERSONNEL WERE SENT TO SOLICIT CUSTOMERS, WHICH THE ASSESSEE HAD ALREADY STARTED. THE SECOND STAGE WAS LAUNCHING A MASSIVE PUBLICITY CAMPAIGN, WHICH THE ASS ESSEE HAD ALREADY BEEN DOING. IN FACT, IT HAD ALREADY ACQUIRED LAN D AND STARTED CONSTRUCTION ALSO, WHICH WERE THE SUBSEQUENT CHANGES. SO, BOTH THE AUTHORITIES BELOW HAD GIVEN A FINDING THAT THE ASSESSEE HA D COMMENCED THE BUSINESS. FOR THE PURPOSE OF DEVELOPMENT OF TH E PROJECTS OF CONSTRUCTION, THE ASSESSEE HAD TO NECESSARILY MAINTAIN REGULAR STAFF MEMBERS, ON WHICH IT HAD BEEN INCURRING EXP ENSES. THE OFFICE EXPENSES THAT HAD BEEN INCURRED WERE CLEARLY OF REVENUE NATURE. CONSIDERING THE REASONS RECORDED BY THE TRIBUNAL AND BASED ON THE VALID MATERIALS AND EVIDENCES, THE SAME DOES NOT SUF FER FROM ANY LEGAL INFIRMITY. 4.3 THE LEARNED COUNSEL ALSO RELIED ON THE DECISION OF HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. WHIRLPOOL INDIA LIMITED (2009) 318 ITR 347. THE FACTS ARE THAT THE ASSESSEE WAS INCORPORATED AS FINANCIAL ENTERPRISES ON 2 7.07.1995 TO CARRY OUT THE BUSINESS OF FINANCING ALL KINDS OF GOODS. THE FIR ST BOARD MEETING WAS HELD ON 12.08.1995, IN WHICH ADDITIONAL DIRECTORS, EXECUTIVES A ND AUDITORS WERE APPOINTED. 3465-2009-OGTI 9 THE ASSESSEE PLACED ORDER FOR PURCHASE OF COMPUTERS AND PERI PHERALS ON 04.09.1995. IN THE MONTHS OF SEPTEMBER AND OCTOBER, 19 95, VARIOUS KEY EMPLOYEES SUCH AS MANAGERS, REGIONAL MANAGERS, CONSUMER FI NANCE MANAGERS, COMPANY SECRETARIES, FINANCE MANAGER, ACCOUNTS MANAGER ET C. WERE APPOINTED. M/S S.R. BOTLIBOI CONSULTANTS (P) LTD. RAISED THE FIRS T INVOICE FOR RECRUITMENT CHARGES ON 30.10.1995. IN THE MONTH OF JANUARY, 1996, THE AS SESSEE APPLIED FOR APPROVAL OF FOREIGN INVESTMENT PROMOTION BOARD FOR INVESTMENT BY WHIRLPOOL FINANCIAL CORPORATION, USA. IT ALSO APPLIED TO RESERVE BANK OF IN DIA FOR APPROVAL TO RECEIVE FOREIGN EXCHANGE LOAN AGAINST FUTURE ACTIVITIES. IN TH E MONTHS OF NOVEMBER, 1995 AND JANUARY, 1996, THE ASSESSEE-COMPANY PAID SALARY TO STAFF AND EMPLOYEES THROUGH KALVINATOR OF INDIA LIMITED AND EXPO MACHINER Y LIMITED. THE BANK ACCOUNT WAS OPENED IN THE NAME OF THE COMPANY ON 01.02.1996. TH E ASSESSEE CLAIMED THAT THE BUSINESS HAD BEEN SET UP IN NOVEMBER, 1995, WHILE THE ASSESSING OFFICER HELD THAT THE BUSINESS WAS SET UP ON01.02.1996 WHEN THE B ANK ACCOUNT WAS OPENED. THE TRIBUNAL CAME TO THE CONCLUSION THAT IN TH E CASE OF A COMPANY ENGAGED IN RENDERING FINANCIAL SERVICES, IT IS POSSIBLE TO SAY THAT THE BUSINESS IS SET UP WHEN THE DIRECTORS ARE APPOINTED, STAFF AT REGIONAL AN D BRANCH LEVEL IS APPOINTED AND THEIR SALARIES ARE PAID, COMPUTERS ARE ACQU IRED AND INSTALLED AND THE COMPANY IS READY TO COMMENCE BUSINESS. THEREFORE, IT W AS HELD THAT THE BUSINESS WAS SET UP ON 01.11.1995, BY WHICH DATE THE CO MPANY WAS READY AND IN A 3465-2009-OGTI 10 POSITION TO COMMENCE ITS BUSINESS. THIS FINDING WAS U PHELD BY THE HONBLE COURT WITH THE FOLLOWING OBSERVATIONS:- COUNSEL FOR THE REVENUE HAS RELIED UPON THE DECISION IN THE CASE OF CWT V. RAMARAJU SURGICAL COTTON MILLS LTD. (1967) 63 ITR 478 (SUPREME COURT) TO CANVASS THE PROPOSITION THAT IT IS O NLY WHEN ACTUAL BUSINESS OPERATION WAS COMMENCED, A BUSINESS IS SET UP. WE FEEL THAT THE DECISION OF THE SUPREME COURT IN RAMARAJU SURGICA L COTTON MILLS LTD. (1967) 63 ITR 478 IS NOT APPLICABLE TO TH E FACTS OF THE PRESENT CASE BECAUSE THE SAID JUDGMENT WAS DEALING WITH THE PROVISION OF SECTION 5(1)(XXI) OF THE WEALTH-TAX ACT, 1957, ALONGWLTH ITS PROVISO AND THE LANGUAGE OF THE MAIN SECTION AND THE PR OVISO WERE WHOLLY DIFFERENT. IN THE PROVISO, THE REQUIREMENT WAS SPECI FICALLY OF THE COMPANY COMMENCING OPERATIONS BUT IN THE MAIN SECTION THE EXPRESSION USED WAS DIFFERENT, VIZ., OF SETTING UP OF THE UNIT. IN THE LIGHT OF THE RELEVANT PROVISIONS, THE FACTS OF. THAT CA SE AND THE CLAIM OF THE ASSESSEE TO GET THE BENEFIT OF A DEDUCTION, THE SUPREME COUR T INTERPRETED THE PROVISIONS APPLICABLE TO MEAN THAT ACTUAL COMMENCEMENT OF BUSINESS WAS NECESSARY. THE FACTS OF THE PR ESENT CASE ARE, HOWEVER, MORE IN LINE WITH THE DECISION IN THIS C OURT IN THE CASE OF CIT V. HUGHES ESCORTS COMMUNICATIONS LTD. (20 09) 311 ITR 253. 4.4 THE AFORESAID DECISION FOLLOWED THE DECISION IN THE CA SE OF CIT VS. HUGHES ESCORTS COMMUNICATIONS LIMITED (2009) 311 ITR 253. THE FACTS IN THIS CASE ARE THAT THE ASSESSEE-COMPANY WAS INCORPORATED ON 17.03.1992 FOR CARRYING OUT THE BUSINESS OF SATELLITE COMMUNICATION SYSTEMS FOR WHICH A VERY SMALL APERTURE TERMINAL (VSAT) IS REQUIRED. THE MAIN OBJECTS ARE TO PROV IDE PRODUCTS AND SERVICES TO THE DIGITAL SATELLITE MARKET PLACE IN INDIA AND TO IN ITIALLY IMPORT AND GRADUALLY PRODUCE IN INDIA THE PERSONAL EARTH STATION WHICH IS KNOWN AS (VSAT). THE VSAT CAN BE USED ONLY AFTER ESTABLISHING, MAINTAINING AND US ING COMMUNICATION FACILITIES ON A LICENSE FROM DEPARTMENT OF TELECOMMUNICATIONS (DOT). THE ASSESSEE ENTERED 3465-2009-OGTI 11 INTO A LICENSE AGREEMENT WITH THE DOT ON 03.08.1994. IT PLACED PURCHASE ORDER DATED 28.07.1994 FOR PURCHASE OF VSAT EQUIPMENT. IN THE RETURN FOR ASSESSMENT YEAR 1995-96, IT CLAIMED EXPENSES OF `28,96,269/-. IT W AS CLAIMED THAT THE BUSINESS COMMENCED WHEN IT HAD PLACED THE PURCHASE ORDER ON 28.07.1994. ON THAT DATE, THE BUSINESS HAD BEEN SET UP. ANY EXPENDITURE TH EREAFTER WAS DEDUCTIBLE IN COMPUTING THE INCOME. ON THE OTHER HAND, THE CASE OF THE REVENUE WAS THAT THE ASSESSEE STARTED RECEIVING SATELLITE SIGNALS IN FEBRUARY, 19 95 AND INSTALLATION WAS COMPLETED ON 15.03.1995. THEREFORE, THE BUSINESS WAS SET U P ON 15.03.1995. THE HONBLE COURT HELD THAT THE BUSINESS HAD BEEN SET UP ON 2 8.07.1994, WHEN THE PURCHASE ORDER WAS PLACED. THE APPLICATION TO THE DOT A ND RECEIPT OF SIGNALS WERE CONSEQUENTIAL STAGES. THE EXPENDITURE INCURRED AFTER SETT ING UP OF THE BUSINESS IS ALLOWABLE AS REVENUE EXPENDITURE EVEN IF IT HAS BEEN INCURRED PRIOR TO THE COMMENCEMENT OF BUSINESS. FOR THE SAKE OF READY REFERENC E, THE RELEVANT PORTION OF THE JUDGMENT IS REPRODUCED OVERLEAF:- TURNING THE FACTS OF THE PRESENT CASE, IT IS CLEAR THAT THE BUSINESS OF THE ASSESSEE INVOLVED DIFFERENT ACTIVITIES IN WHICH THE FIRS T STEP WAS THE PURCHASE OF THE VSAT EQUIPMENT, THERE WAS NO QUESTION OF AS SESSEE HAVING TO PLACE A PURCHASE ORDER WITH M/S HUGHES NETWORK SYSTEMS, USA, FOR A PURPOSE OTHER THAN THAT OF ITS BUSI NESS, THE SAID PURCHASE ORDER WAS PLACED ON 28TH JULY 1994, THE APPLIC ATION TO DOT FOR LICENCE AND THE RECEIPT OF THE SATELLITE SIGNALS WER E THE CONSEQUENTIAL STAGES, THE SIGNALS WERE TO BE RECEIVED AFTER TH E VSAT EQUIPMENT WAS INSTALLED IN THE PREMISES OF THE CUSTOMER. I N THE CIRCUMSTANCES. WE ARE OF THE VIEW THAT THE BUSINESS OF TH E ASSESSEE SHOULD BE HELD TO HAVE BEEN SET UP ON 28TH JULY, 1994, TH IS IS THE RELEVANT DATE FOR DETERMINING THE NATURE OF THE EXPENSES INCUR RED THEREAFTER. THE EXPENSES INCURRED IN THE PREVIOUS YEAR, PRIOR TO THE 3465-2009-OGTI 12 COMMENCEMENT OF THE BUSINESS BUT AFTER THE SETTING UP ITS B USINESS, WHICH TWO DATES NEED NOT BE THE SAME, WOULD BE DEDUCTIBLE REV ENUE EXPENSES. 4.5 HAVING CONSIDERED THE FACTS AND THE JURISPRUDENCE, THE RELEVANT QUESTION TO BE EXAMINED IS AS TO WHETHER THE BUSINESS HAS BEEN SET UP. A FTER THIS EVENT, REVENUE EXPENSES ARE DEDUCTIBLE IN COMPUTING BUSINESS INCOME, EVEN THOUGH THE COMMENCEMENT OF BUSINESS MAY BE ON A LATER DATE. COMING TO THE DECIDED CASES, AKZO NOBEL CAR REFINISHING INDIA PRIVATE LIMITED WAS A MANUFACTURING CONCERN. HOWEVER, THE RELEVANT RATIO IS THAT IF SPACE HAS BEEN HIRED, FURNITURE AND EQUIPMENT PURCHASED AND DIRECTORS APPOINTED, EVEN THEN BUSINESS CANN OT SAID TO HAVE BEEN SET UP. E-FUNDS INTERNATIONAL INDIA, A COMPANY, WAS ENGAGED IN THE BUSINESS OF DEVELOPING SOFTWARE. IT HAD ACQUIRED INFRASTRUCTURE FAC ILITIES AND EMPLOYED 30 TO 40 PERSONS. THE TRIBUNAL MENTIONED THAT THE ACTIVITY CA NNOT BE AN OVERNIGHT EXERCISE. THE ASSESSEE HAD TO PUT IN CONSISTENT EFFORTS FO R DEVELOPING SOFTWARE AND IT IS ONLY THEREAFTER THAT THE BUSINESS COULD BE PROCURED. ALTHOUGH THE BUSINESS WAS NOT PROCURED, ALL STEPS NECESSARY TO OBTAIN BUSINESS INC LUDING MARKETING HAD BEEN UNDERTAKEN. THE FACTS ARE DISTINGUISHABLE TO THE EXTENT TH AT PREMISES WERE NOT ACQUIRED. HOWEVER, NO PUBLICITY WAS REQUIRED AS IT WAS INTENDED TO RENDER SERVICES TO THE PARENT COMPANY. FURTHER, THE EMPLOYEES WERE GIVEN TRA INING AND, THEREFORE, THEY WERE NOT IN A POSITION TO CONTRIBUTE ANY EFFORT I N THE CONDUCT OF BUSINESS TILL THE END OF MAY, 2004. IN THE CASE OF HUGHES ESCORTS COMMUN ICATIONS LIMITED, THE HONBLE COURT DISTINGUISHED BETWEEN THE SETTING UP OF THE BUSINESS AND 3465-2009-OGTI 13 COMMENCEMENT OF BUSINESS. IT HAS BEEN HELD THAT THE BUSINES S WAS SET UP WHEN PURCHASE ORDER WAS PLACED ON 28.07.1994. THIS DECISION APPARENTLY ADVANCES THE CASE OF THE ASSESSEE AS IT HAD RECRUITED THE EMPLOYEES AND STA RTED TRAINING THEM FOR RENDERING BPO SERVICES. IN THE CASE OF WHIRLPOOL INDIA LIMITED, THE BUSINESS WAS HELD TO HAVE BEEN SET UP ON 01.11.1995 WHEN THE COMPANY W AS READY AND IN A POSITION TO COMMENCE ITS ACTIVITIES BY APPOINTING REGIO NAL MANAGERS AND BRANCH MANAGERS AND THE COMPUTERS WERE ACQUIRED AND INSTALLED. A CCORDING TO US, THIS IS THE STAGE WHEN THE BUSINESS CAN BE SAID TO HAVE BEEN SET UP. WHILE APPLYING THE RATIO OF THIS CASE, IT CAN BE SAID THAT THE ASSESSEE COMP ANY COMMENCED ITS BUSINESS IN JUNE, 2004 WHEN IT GOT INTO THE POSITION OF RENDERING SERVICE AFTER TRAINING THE STAFF, ACQUIRING ITS OWN OFFICE AND ENTERING INTO AGREEM ENT WITH THE PARENT COMPANY. HOWEVER, IT HAS ALSO TO BE ASCERTAINED AS TO W HEN IT SET UP THE BUSINESS. THE FACTS OF THE CASE OF CLUB RESORTS (P) LIMITED ARE DI STINGUISHABLE AS THE ACTIVITY WAS TOTALLY DIFFERENT. HOWEVER, IT HAS BEEN HELD THAT TH E FIRST STAGE IS THE SETTING UP OF ONE OR MORE OPERATING OFFICES FROM WHICH THE SALES PERS ONNEL WERE SENT TO SOLICIT CONSUMERS, WHICH HAD ALREADY STARTED. THE SECOND STAGE W AS THE MASSIVE PUBLICITY CAMPAIGN, WHICH HAD ALREADY BEEN STARTED. THE ASSESSEE HA D ALSO ACQUIRED LAND AND STARTED CONSTRUCTION. THEREFORE, BOTH THE AUTHORITI ES BELOW HAD GIVEN CONCURRENT FINDING THAT THE ASSESSEE HAD COMMENCED BUSINESS . THEREFORE, THE FIRST STAGE OF SETTING OF THE BUSINESS IS TO SET UP ONE OR MORE OPERATING OFFICES FROM WHICH SALES PERSONNEL CAN BE SENT TO SOLICIT CUSTOMERS. THE ASS ESSEE IN THIS CASE, HIRED THE 3465-2009-OGTI 14 OFFICE ON 15.06.2004. PRIOR TO THAT, THERE WAS AN AGR EEMENT WITH A SISTER CONCERN TO USE ITS PREMISES FOR TRAINING. HOWEVER, THE AGREEMENT I S NOT ON RECORD OF THE TRIBUNAL AND, THEREFORE, WE ARE NOT IN A POSITION TO GIV E A FINDING WHETHER THE ASSESSEE WAS PERMITTED TO CARRY OUT ITS BUSINESS FROM TH OSE PREMISES. IN ANY CASE, THE EQUIPMENT WAS TO BE INSTALLED IN THE RENTED PREMISES AND, THEREFORE, IT CANNOT BE SAID THAT IT WAS IN POSSESSION OF PREMISES FROM WHIC H THE BUSINESS COULD BE SOLICITED. 4.6 IN THE CASE OF BHARTI CELLULAR LIMITED IN I.T.A. NO .1737 AND 1738/D/02 DATED 31.07.2008, THE TRIBUNAL MENTIONED THAT THE ASSESS EE ACQUIRED LICENSE IN THE MONTH OF NOVEMBER, 1994 AND, THEREAFTER IT WAS IN A POSI TION TO START BUSINESS. FOR THIS PURPOSE, WHAT IS TO BE CONSIDERED IS WHETHER ESSENTIAL ACTIVITY IN THE COURSE OF CARRYING ON THE BUSINESS HAS STARTED. THIS DECISION WA S UPHELD BY THE HONBLE DELHI HIGH COURT BY MENTIONING THAT THERE IS NO PERVERSITY IN THE FINDINGS OF THE TRIBUNAL. THE SLP AGAINST THIS ORDER WAS ALSO DISMISSED BY THE HON BLE SUPREME COURT. 4.7 WHEN WE LOOK TO THE FACTS OF OUR CASE, IT IS CLEAR T HAT ALTHOUGH THE STAFF HAD BEEN RECRUITED, IT WAS NOT READY FOR RENDERING SERVICES AS T HE STAFF HAD TO BE TRAINED WITH THE SYSTEMS. THE ASSESSEE HAD NOT TAKEN PREMISES ON R ENT AND, THEREFORE, INSTALLATION OF COMPUTER THEREIN HAD NOT BEEN DONE. THER EFORE, THE ASSESSEE WAS NOT IN A POSITION TO SOLICIT CUSTOM TILL THE END OF M AY, 2004. THE ADVANCES WERE RECEIVED FROM THE PARENT COMPANY BUT THESE WERE USED FOR TRAI NING THE PERSONNEL AND PAYING SALARIES AND INCIDENTAL CHARGES, NECESSARY FO R SETTING UP THE BUSINESS. 3465-2009-OGTI 15 THUS, IN A NUTSHELL, IT IS HELD THAT A BUSINESS IS SET UP WHEN IT REACHES A STAGE WHERE IT IS IN A POSITION TO PROCURE BUSINESS AND NOT BEFORE. H OWEVER, THE EXPENDITURE BECOMES DEDUCTIBLE FROM SUCH STAGE IRRESPECTIVE OF THE DATE O F ACTUAL RECEIPT OF THE BUSINESS. THEREFORE, IT IS HELD THAT THE BUSINESS HAD NOT BEEN SET UP TILL THE END OF MAY, 2004. ACCORDINGLY, THE ASSESSEE IS NOT ENTITLED TO DEDUCTION OF THESE EXPENSES. IT IS HELD ACCORDINGLY. 5. THE OTHER GROUND IS REGARDING RATE OF DEPRECIATION OF UPS. FOR THIS PURPOSE, THE LEARNED COUNSEL RELIED ON THE DECISION OF HONBLE DELHI H IGH COURT IN THE CASE OF CIT VS. BSES RAJDHANI POWER LIMITED IN I.T.A. NO.1266/D /2010 DATED 31.08.2010, IN WHICH HIGHER RATE OF DEPRECIATION WAS ALLOWED ON PRIN TERS AND SCANNERS. IF PERIPHERALS SUCH AS PRINTERS, SCANNERS AND SERVERS ETC. FO RM INTEGRAL PART OF THE COMPUTER SYSTEM, WE HAVE NO HESITATION IN HOLDING THAT U PS IS ALSO AN INTEGRAL PART OF THE COMPUTER SYSTEM, ENTITLED FOR DEDUCTION OF DEPRECIAT ION @60%. FOR THE SAKE OF READY REFERENCE, THE RELEVANT PORTION OF THE AFORESAID JU DGMENT IS REPRODUCED BELOW:- WE ARE IN AGREEMENT WITH THE VIEW OF THE TRIBUNAL THAT COM PUTER ACCESSORIES AND PERIPHERALS SUCH AS, PRINTERS, SCANNERS A ND SERVER ETC. FORM AN INTEGRAL PART OF THE COMPUTER SYSTEM. IN FACT, THE COMPUTER ACCESSORIES AND PERIPHERALS CANNOT BE USED WITHOU T THE COMPUTER. CONSEQUENTLY, AS THEY ARE THE PART OF THE COM PUTER SYSTEM, THEY ARE ENTITLED TO DEPRECIATION AT THE HIGHER R ATE OF 60%. 6. IN RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 29-04-2010. 3465-2009-OGTI 16 SD/- SD/- ( I.P. BANSAL ) ( K.G. BANSAL ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED :29-04-2011 NS : COPY FORWARDED TO : - 1. INCOME TAX OFFICER, WARD 13(4), NEW DELHI. 2. M/S OMNI GLOBEINFORAMTION TECHNOLOGIES INDIA (P) LTD., E-11, RAJOURI GARDEN, NEW DELHI. 3. CIT 4. CIT(A) 5. DR, ITAT TRUE COPY DY. REGISTRAR