DEPUTY COMMISSIONER OF INCOME TAX 1(1)(2), MUMBAI V. HDFC EDUCATION AND DEVELOPMENT SERVICE PRIVATE LIMITED, MUMBAI

ITA 4465/MUM/2017

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 4277 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-03-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Assessment Year: 2012-2013
• Appeal Filed On: 16-06-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M RAJAN LD
• Assessee Lawyers: MADHUR AGGARWAL LD
• Keywords: Business expenditure; Revenue expenditure; TDS
• Section: 143(3); 40(a)(ia)

Judgement Text

1 ITA NO.4465/MUM/2017 M/S. HDFC EDUCATION & DEVELOPMENT SERVICES PRIVATE LIMITED ASSESSMENT YEAR-2012-13 IN THE INCOME TAX APPELLATE TRIBUNAL H BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, JM AND SHRI MANOJ KUMAR AGGARWAL, AM ./ I.T.A. NO.4465/MUM/2017 ( / ASSESSMENT YEAR: 2012-13) DY . COMMISSIONER OF INCOME TAX - 1(1)(2) 579, AAYKAR BHAVAN M.K. ROAD MUMBAI-400 020. / VS. M/S. HDFC EDUCATION & DEVELOPMENT SERVICES PRIVATE LIMITED RAMON HOUSE, H.T. PAREKH MARG BACKBAY RECLAMATION MUMBAI-400 020. ! ./ ./PAN/GIR NO. AACCH-7833-D ( /APPELLANT ) : ( / RESPONDENT ) / APPELLANT BY : M.RAJAN- LD. DR / RESPONDENT BY : MADHUR AGGARWAL- LD.AR / DATE OF HEARING : 05/03/2019 / DATE OF PRONOUNCEMENT : 13/03/2019 / O R D E R PER MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER):- 1. AFORESAID APPEAL BY REVENUE FOR ASSESSMENT YEAR [IN SHORT REFERRED TO AS AY] 2012-13 CONTEST THE ORDER OF LD. COMMISSIO NER OF INCOME-TAX 2 ITA NO.4465/MUM/2017 M/S. HDFC EDUCATION & DEVELOPMENT SERVICES PRIVATE LIMITED ASSESSMENT YEAR-2012-13 (APPEALS)-2, MUMBAI, [IN SHORT REFERRED TO AS CIT( A)], APPEAL NO. CIT(A)- 2/IT-133/2015-16 DATED 23/03/2017 ON FOLLOWING EFFECTIVE GROUNDS OF APPEAL: - 1. 'WHETHER ON THE FACTS AND CIRCUMSTANCE OF THE CA SE AND IN LAW, THE LD. CIT(A) WAS RIGHT IN DELETING THE DISALLOWANCE RS. 1 ,58,88,554/-DISALLOWED AS PRE-OPERATIVE EXPENSE,' 2. 'WHETHER ON THE FACTS AND CIRCUMSTANCE OF THE CA SE AND IN LAW, THE LD.CIT(A) WAS RIGHT IN HOLDING THAT ASSESSEE WAS RE ADY TO COMMENCE ITS BUSINESS ON DATE OF INCORPORATION ITSELF I.E. 17/11 /2011 WHEN THE FIRST BOARD MEETING HELD ON 21/11/2011 RESULTED ONLY IN A PPOINTMENT OF CHAIRMAN & DIRECTORS, AND DISCUSSION ON DETAILS OF REGISTERED OFFICE AND THEREBY POINTED TO THE FACT THAT THE ASSESSEE WAS N OT IN A POSITION TO COMMENCE ANY BUSINESS ACTIVITY AT THAT POINT OF TIM E RESULTING IN FIRST INVOICE BEING RAISED ONLY BY 20/02/2012.' 3. 'WHETHER ON THE FACTS AND CIRCUMSTANCE OF THE CA SE AND IN LAW, THE LD.CIT(A) WAS RIGHT IN DELETING THE DISALLOWANCE OF RS. 11,29,500/- MADE U/S 40(A)(IA)FOR NON-DEDUCTION OF TDS ON PROFESSIONAL F EES U/S 194 J.' 2.1 THE ASSESSMENT FOR IMPUGNED AY WAS FRAMED BY LD . DEPUTY COMMISSIONER OF INCOME TAX-CIRCLE-1(1)(2), MUMBAI [ AO] U/S 143(3) ON 24/03/2015 WHEREIN THE LOSS OF RS.212.68 LACS DECLA RED BY THE ASSESSEE VIDE RETURN OF INCOME FILED ON 27/09/2012 WAS REDUC ED TO RS.42.50 LACS. AS EVIDENT FROM GROUNDS OF APPEAL, THE FOLLOWING QUANT UM ADDITIONS / DISALLOWANCES ARE THE SUBJECT MATTER OF PRESENT APP EAL BEFORE US: - NO. NATURE OF ADDITION AMOUNT RS. (ROUNDED OFF) 1. PRE-OPERATIVE EXPENSES RS.158.88 LACS 2. DISALLOWANCE U/S 40(A)(IA) RS.11.29 LACS 2.2 FACTS QUA ADDITION OF PRE-OPERATIVE EXPENSES ARE THAT DURING ASSESSMENT PROCEEDINGS, IT TRANSPIRED THAT THE ASSE SSEE WAS INCORPORATED DURING THE IMPUGNED AY I.E. ON 17/11/2011 AND RAISE D FIRST INVOICE ON 3 ITA NO.4465/MUM/2017 M/S. HDFC EDUCATION & DEVELOPMENT SERVICES PRIVATE LIMITED ASSESSMENT YEAR-2012-13 20/01/2012. THE ASSESSEE WAS PROMOTED BY HDFC WHO HAS INCURRED PRE- INCORPORATION AS WELL AS POST-INCORPORATION EXPENSES ON BEHALF OF THE ASSESSEE, WHICH HAS SUBSEQUENTLY BEEN REIMBURSED BY THE ASSESSEE. THE DISPUTE ARISES IN VIEW OF THE FACT THAT AS PER ASSE SSEES SUBMISSIONS, THE BUSINESS WAS COMMENCED FROM 17/11/2011 I.E. FROM TH E DATE OF INCORPORATION WHEREAS AS PER LD. AO, THE DATE OF CO MMENCEMENT WAS TO BE RECKONED FROM 20/01/2012 I.E. WHEN THE FIRST INVOIC E WAS RAISED BY THE ASSESSEE. THE DIFFERENCE ASSUMES IMPORTANCE IN VIEW OF THE FACT THAT THE EXPENDITURE INCURRED BEFORE COMMENCEMENT OF BUSINES S WERE TO BE CONSIDERED AS PRE-OPERATIVE EXPENSES AND COULD NOT BE ALLOWED AS REVENUE EXPENDITURE. THE LD. AO, ACCEPTING THE DATE OF FIRS T INVOICE AS COMMENCEMENT OF BUSINESS, OPINED THAT THE EXPENDITU RE INCURRED FROM THE DATE OF INCORPORATION TO THE DATE OF FIRST INVOICE COULD NOT BE CONSIDERED AS BUSINESS EXPENSES SINCE THE ASSESSEE WAS ONLY EXPLO RING THE BUSINESS OPPORTUNITIES DURING THAT PERIOD. THEREFORE, ALL SU CH EXPENDITURE WAS TO BE CONSIDERED AS PRE-OPERATIVE EXPENDITURE, BEING CAPI TAL IN NATURE AND THEREFORE, NOT ALLOWABLE AS REVENUE EXPENDITURE. 2.3 THE SECOND DISALLOWANCE STEM FROM REIMBURSEMENT OF EXPENSES BY THE ASSESSEE TO HDFC WHO INCURRED VARIOUS EXPENSES ON BEHALF OF THE ASSESSEE. AS PER ASSESSEES SUBMISSIONS, APPROPRIAT E TAX AT SOURCE [TDS] WAS ALREADY DEDUCTED BY HDFC WHILE MAKING THE PAYMENTS TO VARIOUS PAYEE AND THEREFORE, THE SAME WAS NOT TO BE DEDUCTE D AGAIN BY THE ASSESSEE WHILE REIMBURSING THE SAME TO THE HDFC . THE EXPENSES POST 20/01/2012 AND REIMBURSED BY THE ASSESSEE AMOUNTED TO RS.11.29 LACS 4 ITA NO.4465/MUM/2017 M/S. HDFC EDUCATION & DEVELOPMENT SERVICES PRIVATE LIMITED ASSESSMENT YEAR-2012-13 WHICH WERE DISALLOWED BY LD. AO U/S 40(A)(IA) AFTER REJECTING ASSESSEES SUBMISSIONS. 3. THE LD. CIT(A) NOTED THAT FOR ALLOWABILITY OF EX PENSES UNDER INCOME TAX ACT, THE RELEVANT DATE WOULD BE DATE ON WHICH T HE BUSINESS OF THE ASSESSEE COULD BE SAID TO HAVE BEEN SET UP I.E. REA DY TO COMMENCE BUSINESS AS AGAINST THE DATE ON WHICH THE BUSINESS WAS ACTUALLY COMMENCED AND THERE WAS SUBTLE DIFFERENCE BETWEEN S ETTING UP AND COMMENCEMENT OF BUSINESS SINCE THE FORMER SIGNIFIES THAT THE BUSINESS HAS CROSSED THE MILESTONE THAT MARKS THE ENTRY OF THE B USINESS INTO THE TERRITORY OF TAXATION UNDER THE DOMESTIC TAX LAWS. THEREFORE, AS PER THE SETTLED PRINCIPLES, THE SET-UP OF BUSINESS WOULD BE THE REL EVANT DATE TO ASCERTAIN THE NATURE OF EXPENDITURE REGARDLESS OF THE FACTUM OF ACTUAL COMMENCEMENT OF BUSINESS. FURTHER, THE BUSINESS COULD BE SAID TO HAVE BEEN SET UP WHEN THE FIRST STEP TOWARDS INITIATING OPERATIONS HAS BE EN UNDERTAKEN BY THE ASSESSEE. RELIANCE WAS PLACED, INTER-ALIA, ON THE DECISION OF HONBLE BOMBAY HIGH COURT RENDERED IN WESTERN INDIA VEGETABLE PRODUCTS LTD. VS CIT [1954 26 ITR 151] WHILE ARRIVING AT THE SAID CO NCLUSION. THE RATIO OF FOLLOWING DECISIONS WAS ALSO NOTED: - NO. TITLE RENDERED BY CITATION 1. CIT VS ESPN SOFTWARE INDIA P. LTD. HONBLE DELHI HIGH COURT 301 ITR 368 2. CIT VS RALLIWOLF LTD. HONBLE BOMBAY HIGH COURT 121 ITR 262 3. CIT VS SAURASHTRA CEMENT & CHEMICALS IND. LTD. HONBLE GUJARAT HIGH COURT 91 ITR 170 4. OMNIGLOBE INFORMATION TECH INDIA P LTD VS CIT HONBLE DELHI HIGH COURT ITA NO 257 OF 2012 5. STYLER LTD P LTD. VS JCIT PUNE TRIBUNAL 113 ITD 55 5 ITA NO.4465/MUM/2017 M/S. HDFC EDUCATION & DEVELOPMENT SERVICES PRIVATE LIMITED ASSESSMENT YEAR-2012-13 THE OBJECT OF THE ASSESSEE AS CONTAINED IN THE MEMORANDUM OF ASSOCIATION WERE ALSO APPRECIATED QUA THE ACTIVITIES CARRIED OUT BY THE ASSESSEE AFTER IT S INCORPORATION WHEREIN IT TRANSPIRED THAT THE REQUIS ITE LICENSES FROM BMC WAS IN PLACE, PROFESSIONALS WERE ALREADY HIRED TO CARRY OUT THE OBJECTS, BUSINESS PLANS WERE DRAWN UP, FIRST BOARD MEETING WAS HELD T O TAKE IMPORTANT DECISIONS AND REGISTRATION UNDER EPF WAS ALREADY OB TAINED BY THE ASSESSEE. FINALLY, THE MATTER WAS CONCLUDED IN ASSE SSEES FAVOR BY MAKING FOLLOWING OBSERVATIONS: - HAVING REGARD TO THE FACTUAL SUBMISSIONS OF THE APP ELLANT AS NOTED ABOVE, THE NATURE OF EDUCATION INDUSTRY AND NATURE OF BUSINESS OF THE AP PELLANT AND JUDICIAL PRECEDENTS ELABORATED ABOVE AND AFTER CONSIDERING HONBLE BOMB AY HIGH COURT DECISION IN THE CASE OF CIT VS RALLIWOLF LTD (1980) 121 ITR 262 (BOM) AN D ALSO HAVING REGARD TO THE PRE- INCORPORATION BACKGROUND WORK CARRIED OUT BY HDFC L TD., IT IS CLEAR THAT THE APPELLANT WAS READY TO COMMENCE ITS BUSINESS ON THE DATE OF I NCORPORATION ITSELF VIZ. 17 NOVEMBER, 2011 I.E. THE BUSINESS OF THE APPELLANT W AS SET UP ON THAT DATE. THEREFORE, ALL THE EXPENSES INCURRED BY THE APPELLANT POST INC ORPORATION ARE ALLOWABLE AS AGAINST THE EXPENSES ALLOWED BY THE AO AFTER THE DATE OF RA ISING OF FIRST INVOICE. THE DISALLOWANCE MADE BY THE AO OF RS.1,58,88,554 IS DE LETED. THIS GROUND OF APPEAL IS ALLOWED. AGGRIEVED, THE REVENUE IS IN FURTHER APPEAL BEFORE US. 4. AFTER CAREFUL CONSIDERATION OF IMPUGNED ORDER AN D SUBMISSIONS MADE BY RESPECTIVE REPRESENTATIVES, THE UNDISPUTED FACT THAT EMERGES IS THAT THE ASSESSEE HAD ALREADY TAKEN EFFECTIVE STEP POST INCO RPORATION TO SET-UP ITS BUSINESS. THE NECESSARY APPROVALS REQUIRED TO CARRY OUT THE BUSINESS WAS ALREADY IN PLACE, THE BUSINESS PLANS WERE DRAWN UP AND THE PROFESSIONALS WERE HIRED TO CARRY OUT THE BUSINESS OBJECTIVES. TH E IMPORTANT DECISIONS TO SET-UP THE BUSINESS WAS ALREADY TAKEN BY THE BOARD OF DIRECTORS. THEREFORE, THE ACTION OF LD. AO IN TREATING THE COMMENCEMENT O F BUSINESS FROM THE 6 ITA NO.4465/MUM/2017 M/S. HDFC EDUCATION & DEVELOPMENT SERVICES PRIVATE LIMITED ASSESSMENT YEAR-2012-13 DATE OF FIRST INVOICE COULD NOT BE SUSTAINED AND TH EREFORE, NO INFIRMITY COULD BE FOUND IN THE IMPUGNED ORDER. NO CONTRARY DECISIO NS HAVE BEEN PLACED ON RECORD TO CONTROVERT THE BINDING JUDICIAL PRECED ENTS AS RELIED UPON BY FIRST APPELLATE AUTHORITY. HENCE, THIS GROUND STANDS DISM ISSED. 5. SO FAR AS THE DISALLOWANCE U/S 40(A)(IA) FOR RS. 11.29 LACS IS CONCERNED, IT HAS BEEN NOTED IN THE IMPUGNED ORDER THAT THE AMOUNTS WERE REIMBURSED BY THE ASSESSEE TO HDFC WITHOUT ANY MARK-UP AND SECONDLY, HDFC HAS DEDUCTED APPROPRIATE TAX AT SOURCE WHILE MAKING THESE PAYMENTS ON BEHALF OF THE ASSESSEE. THE DISALLOWANC E HAS BEEN DELETED ON THE STRENGTH OF CERTAIN DECISIONS OF THIS TRIBUN AL. THE REVENUE IS UNABLE TO CONTROVERT THIS FACTUAL MATRIX. THIS BEING THE C ASE, NO INFIRMITY COULD BE FOUND IN THE IMPUGNED ORDER. 6. RESULTANTLY, THE APPEAL STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH MARCH, 2019. SD/- SD/- (SAKTIJIT DEY) (MANOJ KUMAR AGGARWAL) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 13/03/2019 SR.PS:-JAISY VARGHESE ! '! / COPY OF THE ORDER FORWARDED TO : 1. !% / THE APPELLANT 2. &'!% / THE RESPONDENT 7 ITA NO.4465/MUM/2017 M/S. HDFC EDUCATION & DEVELOPMENT SERVICES PRIVATE LIMITED ASSESSMENT YEAR-2012-13 3. ( ) / THE CIT(A) 4. / CIT CONCERNED 5. ( )& * , * , / DR, ITAT, MUMBAI 6. ) ,-. / GUARD FILE / BY ORDER, / (DY./ASSTT.REGISTRAR) , / ITAT, MUMBAI