RELIANCE GEMS & JEWELS LTD, MUMBAI V. DCIT 3(3), MUMBAI

ITA 3855/MUM/2013

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 2813 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 5 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2008-2009
• Appeal Filed On: 15-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: F V IRANI
• Keywords: Question of law; Revenue expenditure; Capital expenditure
• Section: 37(1); 28

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BE NCH, MUMBAI BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH, JUDICIAL MEMBER / I .T.A. NO.3855/MUM/2013 ( / ASSESSMENT YEAR:2008-09 RELIANCE GEMS & JEWELS LTD., 9 TH FLOOR, MAKER CHAMBER IV, 222, NARIMAN POINT, MUMBAI-400 021 / VS. THE DCIT 3(3), AAYAKAR BHAVAN, MUMBAI-400 020 ./ ./ PAN/GIR NO. : AAACR 7404C ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY: SHRI F.V. IRANI / RESPONDENT BY: SHRI VIVEK ANAND OJHA / DATE OF HEARING :15.10.2015 ! / DATE OF PRONOUNCEMENT : 28.10.2015 '# / O R D E R PER N.K. BILLAIYA, AM: THIS APPEAL BY THE ASSESSEE IS PREFERRED AGAINST T HE ORDER OF THE LD. CIT(A)-7, MUMBAI DATED 19.03.2013 PERTAININ G TO ASSESSMENT YEAR 2008-09. 2. THE SOLE GRIEVANCE OF THE ASSESSEE IS THAT THE L D. CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF THE CLAIM FOR DE DUCTION U/S. 37((1) IN RESPECT OF REVENUE EXPENDITURE INCURRED DURING T HE YEAR AMOUNTING TO RS. 87,26,446/-. ITA. NO.3855/M/2013 2 3. THE ASSESSEE IS IN THE BUSINESS OF TRADING AND M ERCHANDISING OF GOODS AND SERVICES. RETURN FOR THE YEAR WAS ELECTRO NICALLY FILED ON 27.9.2008 DISCLOSING LOSS OF RS. 87,26,445/-. THE RETURN WAS SELECTED FOR SCRUTINY ASSESSMENT AND ACCORDINGLY STATUTORY N OTICES WERE ISSUED AND SERVED UPON THE ASSESSEE. 4. ON PERUSAL OF THE ANNUAL ACCOUNT, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS NOT STARTED ITS BUSINESS THER EFORE THE EXPENDITURE ARE NOT ALLOWABLE. VIDE QUESTIONNAIRE DATED 5.4.2010, THE ASSESSEE WAS CONFRONTED ON THIS ISSUE. IN ITS REPLY VIDE LETTER DATED 11.5.2010 THE ASSESSEE STATED THAT THE EXPEND ITURE IS ALLOWABLE BECAUSE THEY ARE REVENUE EXPENDITURE INCURRED WHOLL Y FOR THE PURPOSE OF BUSINESS, THEY ARE NOT PERSONAL EXPENDIT URE AND THEY ARE NOT CAPITAL EXPENDITURE AND THEREFORE ELIGIBLE FOR ALLOWANCE U/S. 37(1) OF THE ACT. 5. THE AO RUBBISHED THE CLAIM OF THE ASSESSEE AND DISALLOWED THE ENTIRE CLAIM OF EXPENDITURE. ACCORDING TO THE AO, AS PER THE INCOME TAX ACT, THE EXPENSES ARE ALLOWABLE ONLY WHE N THE BUSINESS HAS COMMENCED AS THE BUSINESS HAS NOT COMMENCED THE REFORE THE EXPENDITURE IS NOT ALLOWABLE. 6. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. C IT(A) BUT WITHOUT ANY SUCCESS. 7. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO PAGE-10 OF THE PAPER BOOK AND STATED THAT IT CON TAINS THE DETAILS OF EMPLOYEE-WISE SALARIES ALONGWITH JOB DESCRIPTION AN D DETAILS OF TAX DEDUCTED AT SOURCE. THE LD. COUNSEL FURTHER DREW OUR ATTENTION AT PAGE-12 OF THE PAPER BOOK WHICH CONTAINS DETAILS OF REVENUE EXPENSES INCURRED DURING THE YEAR, THE SAID DETAILS READ AS UNDER: ITA. NO.3855/M/2013 3 SR. NO. DESCRIPTION AMOUNT 1. SALARIES, WAGES AND BONUS 74,01,305/- 2. CONTRIBUTION TO PF, GRATUITY, ESI, PENSION SCHEME ETC. 9,11,647/- 3. EMPLOYEE WELFARE AND OTHER AMENITIES 5,27,133/- 4. TRAVELLING EXPENSES 2,02,602/- 5. PROFESSIONAL FEES 12,500/- 6. COMMUNICATION EXPENSES 1,62,987/- 7. PRINTING AND STATIONERY 696/- 8. AUDIT FEES 12,000/- 8. THE LD. COUNSEL STRONGLY SUBMITTED THAT THE SETT ING UP OF BUSINESS IS DIFFERENT FROM COMMENCEMENT OF BUSINESS AND THE EXPENDITURES ARE ALLOWABLE ON SETTING UP OF BUSINES S. THE LD. COUNSEL STRONGLY RELIED UPON THE DECISION OF THE HO NBLE HIGH COURT OF DELHI IN THE CASE OF OMNIGLOBE INFORMATION TECH INDIA PVT. LTD. VS CIT. IT IS THE SAY OF THE LD. COUNSEL THAT A BUSIN ESS IS SAID TO BE SET UP, THE MOMENT EMPLOYEES ARE RECRUITED FOR THE PURPOSE OF THE BUSINESS AND THEREFORE ANY EXPENDITURE INCURRED BY THE ASSES SEE AFTER SETTING UP OF THE BUSINESS ARE ALLOWABLE U/S. 37(1) OF THE ACT. 9. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY SUPPORTED THE FINDINGS OF THE REVENUE AUTHORITIES. IT IS THE SAY OF THE LD. DR THAT THE DECISION RELIED UPON BY THE ASSESSE E AND OTHER RELATED DECISIONS ARE ALL RELATING TO SERVICE INDUSTRIES AN D THEREFORE SAME CANNOT BE APPLIED ON THE FACTS OF THE CASE IN HAND. ITA. NO.3855/M/2013 4 10. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE RIVAL SUBMISSIONS AND HAVE CAREFULLY PERUSED THE ORDERS O F THE AUTHORITIES BELOW IN THE LIGHT OF THE DOCUMENTARY EVIDENCES BRO UGHT ON RECORD IN THE FORM OF A PAPER BOOK. 10.1. IT WOULD BE APPROPRIATE IN THIS REGARD TO REF ER TO THE PROVISO TO SEC. 3 OF THE ACT, WHICH REFERS TO AND DEFINES THE TERM, PREVIOUS YEAR IN RELATION TO NEWLY SETUP BUSINESS OR PROFESSION A ND NOT WITH REFERENCE TO THE DATE OF COMMENCEMENT. SEC. 28 OF THE ACT POSTULATES THAT PROFIT AND GAINS OF BUSINESS OR PROFESSION CAR RIED OUT AT ANY TIME DURING THE PREVIOUS YEAR, SHALL BE TAXED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. 10.2. THE UNDISPUTED FACT IS THAT THE ASSESSEE HAS RECRUITED EMPLOYEES FOR THE PURPOSE OF ITS BUSINESS AND AS PE R THE DETAILS EXHIBITED AT PAGE-10 OF THE PAPER BOOK ABOUT 16 EM PLOYEES ARE FOR THE JOB OF QUALITY ASSURANCE. THE ASSESSEE IS IN T HE BUSINESS OF MERCHANDISING OF DIAMONDS/GOLD/JEWELLERIES. UNDISP UTEDLY, THIS LINE OF BUSINESS REQUIRES EXPERTISE WHO HAVE PROFICIENCY IN UNDERSTANDING THE CARATS OF DIAMONDS AND RELATED JEWELLERY, WITHO UT SUCH RECRUITMENT, IT WOULD BE A FUTILE EXERCISE TO COMME NCE THE BUSINESS. 10.3. THE HONBLE HIGH COURT OF DELHI IN THE CASE O F OMNIGLOBE INFORMATION TECH INDIA PVT. LTD. IN INCOME TAX APPE AL NO. 257 OF 2012 HAD THE OCCASION TO CONSIDER THE FOLLOWING SUB STANTIAL QUESTION OF LAW: DID THE TRIBUNAL FALL INTO ERROR IN HOLDING THAT T HE ASSESSEE HAD SETUP ITS BUSINESS W.E.F. 1.6.2004 AND NOT W.E.F. 1.4.2004, AS HELD IN THE IMPUGNED ORDER. ITA. NO.3855/M/2013 5 10.3. IN THAT CASE, THE HONBLE HIGH COURT HAD TO CONSIDER THE FOLLOWING FACTS: THE ASSESSING OFFICER AS WELL AS THE TRIBUNAL HAV E HELD THAT THE APPELLANT ASSESSEE HAD COMMENCED ITS OPERA TIONS ONLY FROM 1.6.2004 I.E. THE DATE ON WHICH THE APPELLANT ASSESSEE ENTERED INTO SERVICE AGREEMENTWITH ITS PARENT COM PANY AND, THEREFORE, THE EXPENDITURE INCURRED BETWEEN 1.4.200 4 TO 31.5.2004 SHOULD BE CAPITALIZED. TRIBUNAL, IN ITS IMPUGNED ORDER HAD ALSO OBSERVED THAT THE APPELLANT ASSESSEE HAD E NTERED INTO A LEASE AGREEMENT AND HAD HIRED PREMISES AS ITS OFFIC E, ONLY ON 15.6.2005. COMMISSIONER OF INCOME TAX (APPEALS), H OWEVER, HAD DECIDED THE ISSUE/QUESTION IN FAVOUR OF THE RESPOND ENT ASSESSEE. 10.4. AT PARA-7 OF ITS ORDER, THE HONBLE HIGH COUR T OBSERVED THAT : AS PER THE CASE OF THE APPELLANT-ASSESSEE, EXPENSES INCURRED DURING THE MONTHS OF APRIL AND MAY, 2004, WERE ON ACCOUNT OF TRAINING GIVEN TO THE RECRUITED EMPLOYEE S. THIS IS CLER FROM THE REPLY GIVEN BY THE APPELLANT/ASSESSEE DATE D 14.11.2007. THE ISSUE WHICH ARISES IS, WHETHER THE BUSINESS HAD BEEN SETUP AS ON 1 ST APRIL, 2004 OR WAS IT SETUP ONLY ON 1 ST JUNE, 2004. THERE IS A DISTINCTION BETWEEN SETTING UP OF BUSINESS AND C OMMENCEMENT OF BUSINESS. 10.5. WHILE DECIDING THE ISSUE, THE HONBLE HIGH CO URT OF DELHI ELABORATELY DISCUSSED AND CONSIDERED THE DECISION O F THE HONBLE HIGH COURT OF BOMBAY GIVEN IN THE CASE OF WESTERN I NDIA VEGETABLE PRODUCTS LTD. VS CIT 26 ITR 151 (BOM). FURTHER RE LIANCE WAS PLACED ON THE DECISION IN THE CASE OF CIT VS E-FUNDS INTER NATIONAL INDIA (2007) 162 TAXMAN 01 (DEL) WHEREIN ALSO THE ISSUE CONSIDERED WAS WHETHER THE BUSINESS WAS SETUP THE MOMENT THE ASSES SEE EMPLOYED 30-40 EMPLOYEES. THIS CLAIM WAS ACCEPTED BY THE HO NBLE HIGH COURT OF DELHI AFTER NOTICING THAT THE ASSESSEE HAD CERTAIN INFRASTRUCTURE FACILITIES AT THE RELEVANT TIME. 10.6. ONCE AGAIN THE HONBLE HIGH COURT OF DELHI HA D AN OCCASION TO CONSIDER A SIMILAR ISSUE IN THE CASE OF CIT VS HUGH ES ESCORTS ITA. NO.3855/M/2013 6 COMMUNICATIONS LTD (2009) 311 ITR 253 (DELHI) WHERE IN THE HONBLE HIGH COURT HAS HELD THAT THE MOMENT THE ASS ESSEE PURCHASED VSAT EQUIPMENT, IT SHOULD BE SAID THAT THE BUSINESS HAS BEEN SETUP. 10.7. A SIMILAR VIEW WAS TAKEN IN THE CASE OF WHIRL POOL OF INDIA LTD 318 ITR 347 WHEREIN THE HONBLE HIGH COURT HAS OBSE RVED THAT : THE BUSINESS WAS SET UP WHEN DIRECTORS WERE APPOIN TED, STAFF, SUCH AS REGIONAL AND BRANCH MANAGERS WERE APPOINTED AND THEIR SALARIES WERE PAID. IN OTHER W ORDS, IT CAN BE SAID THAT AT THAT TIME, THE COMPANY WAS READ Y TO COMMENCE BUSINESS. 10.8. THE HONBLE HIGH COURT OF DELHI HAS CONSIDERE D THESE DECISIONS IN THE CASE OF OMNIGLOBE INFORMATION TECH INDIA PV T. LTD.(SUPRA) AND AT PAGE-18 OF ITS ORDER, THE HONBLE HIGH COURT HEL D AS UNDER: IN VIEW OF THE AFORESAID DISCUSSION, WE DO NOT TH INK THAT THE REASONING GIVEN BY THE TRIBUNAL AND THE AO SHOW S THAT THE BUSINESS OF THE APPELLANT-ASSESSEE HAD NOT BEEN SET UP. THE BUSINESS OF THE APPELLANT HAD BEEN SETUP AS THE APP ELLANT- ASSESSEE HAD ACQUIRED THE NECESSARY INFRASTRUCTURE FROM THEIR SISTER CONCERN, M/S. AGILIS, AND HAD ALSO STARTED M AKING PAYMENT OF SALARY AND WAGES. THIS TRAINING WAS GIVEN BY PR OFESSIONAL EXPERTS UNDER THE SUPERVISION AND CONTROL OF THE AP PELLANT- ASSESSEE. THE MOMENT THE SAID OPERATIONS WERE COMM ENCED, THE BUSINESS HAD BEEN SETUP AND THE SUBSEQUENT RENDERIN G OF SERVICE TO THIRD PARTIES WOULD BE AT A LATER DATE WHEN THE ACTUAL SERVICES WERE RENDERED TO THE PARENT/HOLDING COMPANY. 11. AFTER CONSIDERING THE FACTS OF THE CASE IN HA ND IN THE LIGHT OF THE DECISIONS REFERRED TO HEREINABOVE, IN OUR CONSIDERE D OPINION, UPON RECRUITMENT OF EMPLOYEES, THE FACTUM THAT EXPENDITU RE UNDER THE DIFFERENT HEADS, AS NOTICED ABOVE AT PARA-7 WAS INC URRED IS INDICATIVE THAT BUSINESS WAS SET UP. ITA. NO.3855/M/2013 7 11.1. THEREFORE IN OUR UNDERSTANDING OF THE LAW, TH E CLAIM OF THE EXPENDITURE IS ALLOWABLE. WE, ACCORDINGLY, SET ASI DE THE ORDER OF THE LD. CIT(A) AND DIRECT THE AO TO ALLOW THE CLAIM OF EXPENDITURE OF RS. 87,26,446/-. 12. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. 13. BEFORE CLOSING, THE OBJECTION OF THE LD. DR THA T THE CASES RELIED UPON RELATE TO IT SERVICE INDUSTRIES DOES NOT HOLD ANY WATER BECAUSE WHAT WE HAVE CONSIDERED IS THE UNDERLYING PRINCIP LE IN THIS DECISIONS. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH OCTOBER, 2015 SD/- SD/- (AMARJIT SINGH ) (N.K. BILLAIYA) $% ' /JUDICIAL MEMBER ' / ACCOUNTANT MEMBER & ' MUMBAI; (' DATED : 28 TH OCTOBER, 2015 . % . ./ RJ , SR. PS !' #' / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ) ( ) / THE CIT(A)- 4. ) / CIT 5. *+, %%-. , -.! , & ' / DR, ITAT, MUMBAI 6. ,/0 1 / GUARD FILE. $ / BY ORDER, * % //TRUE COPY// % / $& ' (DY./ASSTT. REGISTRAR) , & ' / ITAT, MUMBAI