SAMSARA HOSPITALITY P.LTD, MUMBAI V. ITO 1(3)(2), MUMBAI

ITA 4509/MUM/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 0304 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 1 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-08-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Assessment Year: 2009-2010
• Appeal Filed On: 30-06-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAJESH OJHADR
• Assessee Lawyers: RITURAJ GUJAR
• Keywords: Business income; Business expenditure; Question of law
• Section: 56

Judgement Text

, INCOME-TAX APPELLATE TRIBUNAL -EBENCH MUMBAI , , , BEFORE S/SHRI RAJENDRA,ACCOUNTANT MEMBER AND RAM LAL NEGI,JUDICIAL MEMBER ./I.T.A./4509/MUM/2014, /ASSESSMENT YEAR: 2009-10 SAMSARA HOSPITALITY PVT. LTD. 301, KSHMALAYA, 37 NEW MARINE LINES MUMBAI-400 020. PAN:AALCS 0153 L VS. ITO-1(3)(2) AAYAKAR BHAVAN, M.K. ROAD MUMBAI-400 020. ( /APPELLANT ) ( / RESPONDENT ) REVENUE BY: SHRI RAJESH OJHA-DR ASSESSEE BY: SHRI RITURAJ GUJAR / DATE OF HEARING: 29.05.2017 / DATE OF PRONOUNCEMENT: 04.08.2017 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) / PER RAJENDRA, AM - CHALLENGING THE ORDERS,DATED 28.03.2014,OF THE CIT( A)-2, MUMBAI THE ASSESSEE HAS FILED THE PRESENT APPEAL.ASSESSEE-COMPANY IS IN THE BUSINESS OF SETTING UP OF NEW HOTELS, INVESTMENT IN HOTEL PROJECT AND DERIVES INCOME COMPRISING OF INTE REST INCOME ON DEBENTURES AND GAIN ON REDEMPTION OF SHORT TERM MUTUAL FUND INVESTMENT. I T FILED ITS RETURN OF INCOME ON 02/09/2009 DECLARING TOTAL INCOME OF RS.3,17,333/-.THE ASSESSI NG OFFICER(AO)COMPLETED THE ASSESSMENT U/S.143(3) VIDE ORDER DATED 19/12/2011,DETERMINING THE INCOME OF THE ASSESSEE AT RS.30.63 LAKHS.AS BOTH THE GROUNDS OF APPEAL ARE INTERLINKED ,SO,FIRST WE WOULD LIKE TO NARRATE THE FACTS LEADING TO FILE THE APPEAL BEFORE US. 2. FIRST GROUND OF APPEAL IS ABOUT DISALLOWANCE OF EXP ENDITURE AMOUNTING TO RS.27.46 LAKHS. DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESSEE HAD EARNED INTEREST INCOME ON DEBENTURES AND HAD EARNED PROFIT ON SALE OF MUTUAL FUND UNITS AGGREGATING TO RS. 31.36 LAKHS. HE HELD THAT INCOME EARNED BY THE ASSE SSEE ON ACCOUNT OF INTEREST AND FROM SALE OF UNITS OF MUTUAL FUND WAS TO BE ASSESSED UNDER TH E HEAD OTHER SOURCES.HE FURTHER FOUND THAT IT HAD CLAIMED EXPENDITURE OF RS.27.46 LAKHS AGAINS T THE SAID INCOME.THE AO WAS OF THE OPINION THAT ALL THE ITEMS OF EXPENDITURE WERE OF C APITAL NATURE AND INCLUDED PRELIMINARY EXPENDITURE.THEREFORE,HE HELD THAT DEDUCTION WAS NO T ALLOWABLE AGAINST THE INCOME ASSESSABLE UNDER THE HEAD OTHER SOURCES. 4509/M/14(09-10) SAMSARA HOSPITALITY PVT.LTD. 2 3. AGGRIEVED BY THE ORDER OF THE AO,ASSESSEE PREFERRE D AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA).IT ALSO RELIED UPON CERTAIN CASE LAW S AND STATED THAT THERE WAS A DISTINCTION BETWEEN SETTING UP OF BUSINESS AND COMMENCEMENT OF BUSINESS.AFTER CONSIDERING THE ORDER OF THE AO AND SUBMISSION OF THE ASSESSEE,HE HELD THAT THE ASSESSEE HAD NOT COMMENCED ITS BUSINESS ACTIVITIES,THAT THE EXPENDITURE INCURRED B Y IT INDICATED THAT THEY WERE PRE-OPERATIVE AND PRELIMINARY IN NATURE,THAT THE EXPENSES HAD BEE N INCURRED PRIOR TO COMMENCEMENT OF BUSINESS,THAT EXPENDITURE COULD NOT BE TREATED AS R EVENUE EXPENDITURE,THAT SAME COULD NOT BE SET OFF AGAINST INCOME EARNED UNDER THE HEAD OTHER SOURCES,THAT THE ASSESSEE HAD MADE ALTERNATE CONTENTION BEFORE THE AO THAT CERTAIN PRE LIMINARY EXPENSES SUCH AS EXPENDITURE PERTAINING TO ROC FEE WAS ALLOWABLE UNDER SECTION 3 5D OF THE ACT.HE HELD THAT AS PER THE ACT DEDUCTION OF SUCH EXPENDITURE @ 1/10 TH OF SUCH EXPENDITURE WAS ALLOWABLE FOR OVER A PERIO D OF 10 YEARS,THAT THE FIRST YEAR OF SUCH DEDUCTION W OULD BE THE YEAR IN WHICH BUSINESS UNDER - TAKING WOULD COMMENCE ITS OPERATIONS,THAT THE ASSES SEE HAD NOT COMMENCED ITS BUSINESS DURING THE YEAR UNDER APPEAL,THAT CLAIM MADE BY IT HAD TO BE DEFERRED TO A LATER YEAR,THAT SIMILARLY THE EXPENDITURE INCURRED UNDER THE HEAD P ROFESSIONAL FEE WOULD ALSO BE ALLOWED IN THE YEAR OF COMMENCEMENT OF OPERATIONS.WITH REGARD TO OTHER EXPENSES LIKE MISCELLANEOUS EXPENSES,HE HELD THAT SAME WERE NOT ATTRIBUTABLE TO EARNING OF INCOME U/S.56 OF THE ACT,THAT THE EXPENDITURE INCURRED BY THE ASSESSEE WERE IN T HE NATURE OF PRE-OPERATIVE EXPENDITURE AND NOT ALLOWABLE.HE,FINALLY,UPHELD THE DISALLOWANCE MA DE BY THE AO. 4. DURING THE COURSE OF HEARING BEFORE US,THE AUTHORIS ED REPRESENTATIVE(AR)ARGUED THAT THE ASSESSEE WAS IN THE BUSINESS OF HOTELS,THAT IT WAS INCORPORATED IN THE MONTH OF JUNE 2006,THAT IT WAS A SUBSIDIARY OF COMPANY LOCATED IN CYPRUS,TH AT THE FOREIGN INVESTMENT PROMOTION BOARD(FIPB)HAD APPROVED THE PROPOSAL SUBMITTED BY I T ABOUT MAKING INVESTMENT IN HOTEL BUSINESS,THAT THE APPROVAL WAS RECEIVED IN APRIL, 2 008,THAT AFTER THE APPROVAL THE ASSESSEE MADE INVESTMENT AND STARTED ITS BUSINESS ACTIVITIES ,THAT EXPENDITURE INCURRED BY IT WAS NECESSARY FOR RUNNING ITS BUSINESS,THAT ALL THE EXP ENSES WERE OF REVENUE NATURE THAT EVEN INCOME WAS CONSIDERED ARISING OUT OF OTHER SOURCES, THAT THE PRINCIPLES OF NETTING HAD TO BE APPLIED.HE REFERRED TO PARA 4.15 OF THE STATEMENT O F FACTS AND STATED THAT ASSESSEE HAD MADE AN ALTERNATE CLAIM BEFORE THE FAA.HE REFERRED TO TH E CASE OF M/S.MULTI ACT REALITY ENTERPRISES PVT. LTD.(ITA/7274/MUM/2011,AY.2008-09 DTD.28/08/2015)PREIMUS INVESTMENT & FINANCE LTD.(171TTJ794). 4509/M/14(09-10) SAMSARA HOSPITALITY PVT.LTD. 3 THE DR STATED THAT BUSINESS HAD NOT STARTED, THE EX PENSES INCURRED BY ASSESSEE WERE OF CAPITAL NATURE,THAT THE OBJECT OF THE ASSESSEE WAS TO OPERA TE AND RUN HOTELS AND RESTAURANTS, THAT IT WAS NOT IN THE BUSINESS OF SELLING OF MUTUAL FUNDS, THA T THE BUSINESS WAS NOT READY TO START, THAT DEDUCTIONS AVAILABLE UNDER SECTION 57 ONLY WERE ALL OWABLE IN SUCH CASES. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE FIRST ISSUE TO BE DECIDED,IN THE APPEAL BEFORE US,I S WHETHER THE BUSINESS WAS SETTING UP IN THE YEAR UNDER CONSIDERATION OR NOT?THE CONCEPT OF SETT ING UP OF A BUSINESS AND A COMMENCEMENT OF A BUSINESS HAS BEEN DELIBERATED BY THE HON'BLE C OURTS OF MORE THAN ONE OCCASIONS.IN THE CASE OF SPONGE IRON INDIA LTD. THE HON'BLE ANDHRA P RADESH HIGH COURT (201 ITR 770) HAS HELD AS UNDER: THE FOLLOWING ARE THE PRINCIPLES APPLICABLE TO DET ERMINE WHETHER A BUSINESS HAS COMMENCED: (I) WHETHER A BUSINESS HAS BEEN COMMENCE D OR NOT IS A QUESTION OF FACT. HOWEVER, WHAT ACTIVITIES CONSTITUTE COMMENCEMENT O F BUSINESS IS A MIXED QUESTION OF LAW AND FACT AND IT HAS TO BE DECIDED ON THE FACTS OF E ACH CASE; (II) THERE IS A DISTINCTION BETWEEN SETTING UP OF BUSINESS AND COMMENCEMENT OF BUSINESS . A BUSINESS IS SAID TO BE SET UP WHEN IT IS READY TO COMMENCE; (III) WHERE THE BUSINESS CONS ISTS OF A CONTINUOUS COURSE OF ACTIVITIES, FOR COMMENCEMENT OF BUSINESS ALL THE ACTIVITIES WHI CH GO TO MAKE UP THE BUSINESS NEED NOT BE STARTED SIMULTANEOUSLY. AS SOON AS AN ACTIVITY WHIC H IS THE ESSENTIAL ACTIVITY IN THE COURSE OF CARRYING ON THE BUSINESS IS STARTED, THE BUSINESS M UST BE SAID TO HAVE COMMENCED. THE FOLLOWING ARE THE PRINCIPLES APPLICABLE TO DETERMIN E WHETHER A BUSINESS HAS COMMENCED: (I) WHETHER A BUSINESS HAS BEEN COMMENCED OR NOT IS A Q UESTION OF FACT. HOWEVER,WHAT ACTIVITIES CONSTITUTE COMMENCEMENT OF BUSINESS IS A MIXED QUES TION OF LAW AND FACT AND IT HAS TO BE DECIDED ON THE FACTS OF EACH CASE; (II) THERE IS A DISTINCTION BETWEEN SETTING UP OF BUSINESS AND COMMENCEMENT OF BUSINESS. A BUSINESS IS SAID TO BE SET UP WHEN IT IS READY TO COMMENCE;(III) WHERE THE BUSINESS CONSISTS OF A CONTINUOUS COURSE OF ACTIVITIES, FOR COMMENCEMENT OF BUSINESS ALL THE ACTIVITIES WHICH GO TO MAKE UP THE BUSINESS NEED NOT BE STARTED SIMULTANEOUSLY. AS SOON AS AN ACTIVITY WHICH IS THE ESSENTIAL ACTIVITY IN THE COURSE OF CARRYING ON THE BUSINESS IS STARTED, THE BUSINESS MUST BE SA ID TO HAVE COMMENCED. IN THE CASE OF FORGING & STAMP PVT. LTD. THE HON'BL E JURISDICTIONAL HIGH COURT HAS DEFINED THE PHRASE SETTING UP OF BUSINESS IN FOLLOWING MANN ER (119 ITR 616) IF A QUESTION ARISES AS TO WHETHER A PARTICULAR BU SINESS CAN BE SAID TO HAVE BEEN SET UP IN THE RELEVANT ASSESSMENT YEAR, THAT QUESTION WILL HAVE T O BE DETERMINED ON THE FACTS AND CIRCUMSTANCES APPEARING IN EACH CASE.WHEN A BUSINES S IS ESTABLISHED AND IS READY TO COMMENCE BUSINESS, THEN IT CAN BE SAID OF THAT BUSI NESS THAT IT IS SET UP. IN THE CASE OF A MANUFACTURING COMPANY, THE INSTALLATION AND ERECTIO N OF MACHINERY IS NOT SUFFICIENT BY ITSELF AND TILL SOME END PRODUCT IS OR CAN BE OBTAINED, IT CANNOT BE SAID THAT THE COMPANY IS READY TO COMMENCE PRODUCTION AND IT IS THE READINESS TO COMM ENCE PRODUCTION WHICH IS EQUIVALENT TO THE SETTING UP OF THE BUSINESS. IN THE CASE OF WESTERN INDIA VEGETABLE PRODUCTS LTD .,THE ASSESSEE-COMPANY WAS INCORPORATED ON THE 29.12.1945 WITH THE OBJECT OF RUNNING AN OIL MILL AND IT OBTAINED A CERTIFICATE OF COMMENCEMENT OF BUSINESS ON 20.04.1946.IN THE AY.19 47-48,THE AO DISALLOWED ALL THE EXPENSES INCURRED BY THE COMPANY PRIOR TO 1.11.1946 , WHICH WAS THE DATE WHEN IT PURCHASED 4509/M/14(09-10) SAMSARA HOSPITALITY PVT.LTD. 4 THE GROUNDNUT OIL MILL.THE FAA HELD THAT THE EXPENS ES INCURRED AFTER GETTING THE CERTIFICATE OF COMMENCEMENT OF THE BUSINESS SHOULD BE TREATED AS E XPENSES INCURRED FOR THE PURPOSES OF CARRYING ON THE BUSINESS IN THE YEAR OF ACCOUNT.THE TRIBUNAL,TAKING INTO CONSIDERATION THE DATE OF FIRST PURCHASE OF RAW MATERIALS AND THE DET AILS OF THE EXPENSES INCURRED BY THE COMPANY,CAME TO THE CONCLUSION THAT ALL EXPENSES IN CURRED AFTER 01.09.1946,SHOULD BE ALLOWED.DECIDING THE MATTER,THE HONBLE JURISDICTIO NAL HIGH COURT(26ITR151)HELD AS UNDER: THERE IS A CLEAR DISTINCTION BETWEEN A PERSON COMM ENCING A BUSINESS AND A PERSON SETTING UP A BUSINESS AND FOR THE PURPOSES OF THE INDIAN IN COME-TAX ACT THE SETTING UP OF THE BUSINESS AND NOT THE COMMENCEMENT OF THE BUSINESS THAT IS TO BE CONSIDERED. IT IS ONLY AFTER THE BUSINESS IS SET UP THAT THE PREVIOUS YEAR OF THAT B USINESS COMMENCES AND ANY EXPENSE INCURRED PRIOR TO THE SETTING UP OF A BUSINESS WOUL D NOT BE PERMISSIBLE DEDUCTION.WHEN A BUSINESS IS ESTABLISHED AND IS READY TO COMMENCE BU SINESS THEN IT CAN BE SAID OF THAT BUSINESS THAT IT IS SET UP; BUT BEFORE IT IS READY TO COMMEN CE BUSINESS IT IS NOT SET UP. THERE MAY HOWEVER BE AN INTERVAL BETWEEN THE SETTING UP OF TH E BUSINESS AND THE COMMENCEMENT OF THE BUSINESS AND ALL EXPENSES INCURRED DURING THAT INTE RVAL WOULD BE PERMISSIBLE DEDUCTIONSTHAT THE COMPANY ACTUALLY COMMENCED BUS INESS ONLY ON 1ST NOVEMBER, 1946, WHEN IT PURCHASED THE GROUNDNUT OIL MILL, BUT PRIOR TO THIS DATE THERE WAS A PERIOD WHEN THE BUSINESS COULD BE SAID TO HAVE BEEN SET UP AND THE COMPANY WAS READY TO COMMENCE BUSINESS AND THAT THERE WAS EVIDENCE BEFORE THE TRIBUNAL TO HOLD THAT THE ASSESSEE COMPANY SET UP ITS BUSINESS AS FROM 1ST SEPTEMBER, 1946. FACTS OF THE CASE OF CAREFOUR WC & INDIA P.LTD.(368 ITR692)WERE THAT THE ASSESSEE-COMPANY WAS INCORPORATED ON 19/09/2007.EVEN BEFORE THE INCO RPORATION,CORRESPONDENCE HAD BEEN MADE WITH WELL KNOWN COMPANIES.IT RENTED OUT OFFICE PREMISES IN THE MONTH OF OCTOBER, 2007. A BANK ACCOUNT WAS OPENED ON 4/10/2007.EMPLOY EES WERE ALSO APPOINTED DURING THAT PERIOD.TAX DEDUCTION AT SOURCE FOR THE EMPLOYEES WA S ALSO PLACED ON RECORD. REGISTRATION UNDER THE SHOPS AND ESTABLISHMENTS ACT WAS ALSO EFF ECTED.DECIDING THE MATTER,THE HONBLE DELHI HIGH COURT HELD THAT THESE ACTIVITIES WERE TH E FIRST STAGE ACTIVITIES WHICH WOULD LAY THE FOUNDATION FOR PLACING ORDERS FOR PROCURING THE STO CK AND STORING THEM IN A WAREHOUSE OR SHOP FOLLOWED BY THE THIRD STAGE OF MARKETING THEM.FOR T HE ASSESSEE,A FOREIGN ENTITY,WITHOUT ESTABLISHING ITSELF UNDER THE LOCAL LAWS,APPOINTING PERSONNEL, IDENTIFYING PROSPECTIVE MANUFAC -TURERS,CLIENTS,ETC.,OBTAINING STORAGE FACILITIES F OLLOWED BY STOCK-IN-TRADE, THE BUSINESS OF TRADING COULD NOT COMMENCE.THE EXERCISE WAS A PRECU RSOR TO COMMENCEMENT BUT POST-SET UP. THE ACTIVITIES DEMONSTRATED THE SETTING UP OF THE B USINESS BY THE ASSESSEE WITH A COMMITMENT TO COMMENCE THE BUSINESS. WE WOULD ALSO LIKE TO REFER TO THE CASE OF OMNI GLO BE INFORMATION (369 ITR 1)OF THE HONBLE DELHI HIGH COURT. IN THAT MATTER THE ASSESSEE WAS I NCORPORATED ON 19.03.2004, AS A SUBSIDIARY AS A BUSINESS PROCESS SERVICE PROVIDER.IT ENTERED I NTO AN AGREEMENT WITH ITS SISTER CONCERN,TO USE ITS PREMISES BETWEEN 8 P.M. AND 8 A. M. BETWEEN 1.04.2004 AND 30.06. 2004.SISTER 4509/M/14(09-10) SAMSARA HOSPITALITY PVT.LTD. 5 CONCERN WAS PAID ON PRO RATA BASIS FOR WATER,ELECTR ICITY, ENERGY AND POWER CONSUMPTION CHARGES.FURTHER, THE ASSESSEE HAD TO INSTALL A SEPA RATE INTERNET LINK FROM THE INTERNET SERVICE PROVIDER.IT HAD A CHOICE TO USE THE PERSONAL COMPUT ERS OF THE SISTER CONCERN OR INSTALL ITS OWN.IT PAID A SUBSTANTIAL AMOUNT AS SALARY AND WAGE S TO ITS EMPLOYEES AND CLAIMED EXEMPTION U/S.10B FOR THE PERIOD COMMENCING FROM 1.4.2004, TO 31.05.2004,CONTENDING THAT IT HAD OBTAINED APPROVAL AS A 100%EXPORT ORIENTED UNIT UND ER THE STPI SCHEME AND HAD COMMENCED OPERATIONS FROM APRIL,2004.THE AO AS WELL AS THE TR IBUNAL HELD THAT THE ASSESSEE HAD COMMENCED ITS OPERATIONS ONLY FROM 1.06.2004, I.E. , THE DATE ON WHICH THE ASSESSEE ENTERED INTO THE SERVICE AGREEMENT WITH ITS PARENT COMPAN Y. ON APPEAL THE HONBLE HIGH COURT HELD THAT THE BUSINESS OF THE ASSESSEE HAD BEEN SET UP ON 1.04.2004, AS THE ASSESSEE HAD ACQUIRED THE NECESSARY INFRASTRUCTURE FROM ITS SIST ER CONCERN, A, AND HAD ALSO STARTED MAKING PAYMENT OF SALARY AND WAGES,THAT TRAINING WAS GIVEN BY PROFESSIONAL EXPERTS UNDER THE SUPERVISION AND CONTROL OF THE ASSESSEE,THAT THE MO MENT THE OPERATIONS WERE COMMENCED, THE BUSINESS HAD BEEN SET UP.IT FURTHER HELD AS UNDER: THERE IS A DISTINCTION BETWEEN SETTING UP OF BUSI NESS AND COMMENCEMENT OF BUSINESS. THE PROVISO TO SECTION 3 OF THE INCOME-TAX ACT, 196 1, REFERS TO AND DEFINES THE TERM PREVIOUS YEAR IN RELATION TO NEWLY SET UP BUSINESS OR PROFE SSION AND NOT WITH REFERENCE TO THE DATE OF COMMENCEMENT.WHEN A BUSINESS IS ESTABLISHED AND IS READY TO COMMENCE BUSINESS THEN IT CAN BE SAID OF THAT BUSINESS THAT IT IS SET UP. BUT BEF ORE IT IS READY TO COMMENCE BUSINESS IT IS NOT SET UP. BUT THERE MAY BE AN INTERREGNUM,THERE MAY B E AN INTERVAL BETWEEN A BUSINESS WHICH IS SET UP AND A BUSINESS WHICH IS COMMENCED AND ALL EX PENSES INCURRED AFTER THE SETTING UP OF THE BUSINESS AND BEFORE THE COMMENCEMENT OF THE BUS INESS,ALL EXPENSES DURING THE INTERREGNUM,WOULD BE PERMISSIBLE DEDUCTIONS.IN ORDE R TO DETERMINE WHETHER BUSINESS HAD BEEN SET UP OR NOT, THE FACTUAL MATRIX OF THE CASE, ESPECIALLY, THE NATURE AND CHARACTER OF THE BUSINESS ACTIVITY WITH THE ACTIVITIES ACTUALLY UNDE RTAKEN MUST BE CONSIDERED.DIFFERENT CONSIDERATIONS WOULD APPLY AND THE ANSWER WOULD DEP END ON WHETHER THE BUSINESS WAS FOR MANUFACTURE OF A PRODUCT OR FOR PROVIDING SERVICES. IN THE MATTER OF FACOR POWER LIMITED(380 ITR 474), THE HONBLE DELHI HIGH COURT HAS HELD THAT THE TEST THAT IS REQUIRED TO BE EMPLOYED IS WH ETHER THE ACTIVITY WHICH IS TAKEN UP FOR SETTING UP OF THE BUSINESS AND THE FUNDS WHICH ARE GARNERED ARE INEXTRICABLY CONNECTED TO THE SETTING UP OF THE BUSINESS. FROM THE ABOVE DISCUSSION,IT IS CLEAR THAT THERE IS DIFFERENCE BETWEEN ACTUAL COMMENCEMENT OF A BUSINESS AND SETTING UP OF A BUSINESS.IT IS ON LY AFTER THE BUSINESS IS SET UP, THAT THE EXPENSES INCURRED IN THE BUSINESS CAN BE CLAIMED AS PERMISSIBLE DEDUCTION U/S.37 OF THE ACT. FOR THE COMMENCEMENT OF A BUSINESS, THERE MUST BE I N PLACE SOME INCOME-GENERATING ASSET OR INCOME-EARNING STRUCTURE.IN SOME CASES,THERE MAY A GAP OR AN INTERVAL BETWEEN SETTING UP AND COMMENCEMENT.WHEN THE BUSINESS IS SET UP IS A MIXED QUESTION OF LAW AND FACT AND DEPENDS UPON THE LINE,NATURE AND CHARACTER OF THE BUSINESS OR PROFESSIONAL ACTIVITY. FOR EXAMPLE, FOR MANUFACTURING BUSINESS,PURCHASE OF NEW MATERIAL OR ELECTRICITY CONNECTION MAY BE THE 4509/M/14(09-10) SAMSARA HOSPITALITY PVT.LTD. 6 RELEVANT POINT TO DETERMINE THE SETTING UP.BUT,IN T HE CASE OF A PROPERTY DEALER, THE MOMENT HE PUTS UP A CHAIR AND TABLE OR STARTS TALKING, HIS BU SINESS IS SET UP.THE WORD TRADE,EVEN THOUGH NOT DEFINED IN THE ACT, IS USED TO DENOTE OPERATION S OF A COMMERCIAL CHARACTER BY WHICH A TRADER PROVIDES TO A CUSTOMER FOR REWARD, SOME KIND OF GOODS OR SERVICES.IN OTHER WORDS, WHEN THE TRADER STARTS PROVIDING SUCH GOODS AND SER VICES,THE BUSINESS IS SAID TO HAVE COMMENCED BUT THE SAME MAY NOT HOLD GOOD FOR SETTIN G UP OF A BUSINESS, WHICH IS A STAGE BEFORE THE COMMENCEMENT.TO SET UP A BUSINESS, THE F OLLOWING ACTIVITIES BECOME RELEVANT: PREPARATION OF A BUSINESS PLAN ; ESTABLISHMENT OF A BUSINESS PREMISES ; RESEARCH INTO THE LIKELY MARKETS OR PROFITABILITY O F THE BUSINESS ; ACQUIRING ASSETS FOR USE IN THE BUSINESS ; REGISTRATION AS AN ENTITY AND UNDER THE LOCAL LAWS, ETC. THE LIST OF ACTIVITIES IS NOT EXHAUSTIVE AND THE FA CTS OF EACH CASE HAVE TO BE CONSIDERED. A TRADER BEFORE THE ACTUAL PURCHASE WOULD POSSIBLY IN TERACT AND NEGOTIATE WITH MANUFACTURERS, LANDLORDS, CONDUCT DUE DILIGENCE TO IDENTIFY PROSPE CTIVE CUSTOMERS, SPREAD AWARENESS, ETC. THESE ARE ALL AN INTEGRAL PART AND PARCEL OF THE BU SINESS OF A TRADER.THE ACTIVITIES CONTINUE EVEN POST-FIRST SALE/PURCHASE. WHEN THE FIRST STEPS ARE TAKEN BY A TRADER, THE BUSINESS IS SET UP, COMMENCEMENT OF PURCHASE AND THEN SALES IS POST-SET UP. 5.1. WE FIND THAT AO AND THE FAA HAD TAKEN NOTE OF EXPE NDITURE INCURRED ONLY THEY HAD DEALT WITH THE CONCEPT OF SETTING UP OF BUSINESS AND COMM ENCEMENT OF BUSINESS.WE FIND THAT AFTER GETTING APPROVAL FROM FIPB THE ASSESSEE HAD MADE DO WNSTREAM INVESTMENTS OF RS.22.3 CRORES IN A BANGALORE BASED HOSPITALITY VENTURE,THAT FOR A CQUISITION OF A PLOT OF LAND IT HAD PROVIDED RS.20 CRORES AS APPLICATION MONEY IN A JV,THAT HAD STARTED CONSULTATION AND PREPARING FEASIBILITY REPORTS.IN OUR OPINION, THE ACCRUAL OR RECEIPT OF INCOME IS NOT THE ONLY CRITERIA TO DECIDE THE TAXABILITY OF THE ASSESSEES.BUSINESS IS A COMPLEX COMMERCIAL ACTIVITY AND IT TAKES QUITE A LONG TIME TO START THE PRACTICAL OPERATIONS .THEREFORE,SUCH AN ISSUE HAS TO BE DECIDED AFTER CONSIDERING THE SURROUNDING CIRCUMSTANCES.IN THE APPEAL BEFORE US,THE AO AND THE FAA HAVE HELD THAT EXPENSES INCURRED WERE PRE-OPERATIVE PERIOD BESIDES,THE ASSESSEE IS A COMPANY AND IT HAS TO INCUR CERTAIN EXPENSES FOR FUNCTIONIN G OF CORPORATE ENTITY.AFTER CONSIDERING THE CUMULATIVE EFFECT OF ALL THESE FACTORS,WE ARE OF TH E OPINION THAT THE ASSESSEE HAD SET UP THE BUSINESS AND THAT EXPENDITURE INCURRED BY IT HAS TO BE ALLOWED AS BUSINESS EXPENDITURE EXCEPT FOR THE EXPENDITURE INCURRED ON ACCOUNT OF R OC CHARGES FOR INCREASE IN AUTHORISED CAPITAL.IN ITS LETTER TO THE AO,DTD.28.11.2011,THE ASSESSEE HAD AGREED THAT IT HAD NO OBJECTION 4509/M/14(09-10) SAMSARA HOSPITALITY PVT.LTD. 7 IF THE DISPUTED DEMAND WAS DISALLOWED.WE DIRECT THE AO TO ALLOW THE REMAINING EXPENSES. FIRST GROUND IS ALLOWED IN FAVOUR OF THE ASSESSEE,I N PART. 6. SECOND GROUND OF APPEAL IS UPHOLDING THE ASSESSMENT OF INCOME OF RS.31.36 LAKHS UNDER THE HEAD INCOME FROM OTHER SOURCES AS AGAINST BUSIN ESS INCOME CLAIMED BY THE ASSESSEE.HE HELD THAT INCOME ARISING OUT OF INTEREST ON DEBENTU RES OF CONVERTIBLE (RS. 4.70 LAKHS)AND PROFIT ON SALE OF UNITS OF MUTUAL FUND(RS.26.66 LAKHS)WERE ASSESSABLE UNDER THE HEAD OTHER SOURCES IN VIEW OF SPECIFIC PROVISIONS OF SECTION 56 OF THE ACT. CONFIRMING THE ORDER OF THE AO,THE FAA HELD THAT IN COME ARISING OUT OF INTEREST AND SALE OF UNITS OF MUTUAL FUND WERE ASSESSABLE UNDER THE HEAD OTHER SOURCES IN VIEW OF SPECIFIC PROVISIONS OF SECTION 56 OF THE ACT. 7. DURING THE COURSE OF HEARING BEFORE US,THE AR ARGUE D THAT THE AUDITORS HAD GIVEN SPECIFIC DIRECTION THE NOTES ON ACCOUNTS ABOUT THE DISPUTED AMOUNT,THAT THE ASSESSEE HAD CARRIED O N BUSINESS OF AN INVESTMENT COMPANY,THAT INCOME WAS R IGHTLY SHOWN UNDER THE HEAD INCOME FROM BUSINESS.HE REFERRED TO PAGE-3 OF THE PAPER BO OK.HE FURTHER STATED THAT EVEN INCOME WAS CONSIDERED ARISING OUT OF OTHER SOURCES PRINCIPLES OF NETTING HAD TO BE APPLIED.HE REFERRED TO PARAGRAPH 4.15 OF THE STATEMENT OF FACTS AND STATE D THAT ASSESSEE HAD MADE AN ALTERNATE CLAIM BEFORE THE FAA. THE DR STATED THAT BUSINESS HAD NOT STARTED,THE EXP ENSES INCURRED BY ASSESSEE WERE OF CAPITAL NATURE,THAT THE OBJECT OF THE ASSESSEE WAS TO OPERA TE AND RUN HOTELS AND RESTAURANTS,THAT IT WAS NOT IN THE BUSINESS OF SELLING OF MUTUAL FUNDS,THAT THE BUSINESS WAS NOT READY TO START, THAT DEDUCTIONS AVAILABLE UNDER SECTION 57 ONLY WERE ALL OWABLE IN SUCH CASES. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE COMPANY WAS INCORPORATED TO CARRY ON BUSIN ESS OF SETTING UP OF NEW HOTELS AND INVESTMENT IN HOTEL PROJECTS.IT HAD NEVER APPLIED T O RBI FOR GETTING A CERTIFICATE OF REGISTRA - TION AS NBFC.JUST BECAUSE IT SOLD SOME DEBENTURES I T CANNOT BE TREATED AN NBFC OR AN INVESTMENT COMPANY.IN OUR OPINION,ACTIVITY OF RECEI VING INTEREST INCOME OR RECEIVING SOME PROFIT ON REDEMPTION OF SHORT TERM MUTUAL FUND IN VESTMENT WAS NOT IN NATURE OF BUSINESS.IN OTHER WORDS,INCOME ARISING OUT OF ABOVE TWO ACTIVIT IES CANNOT BE TERMED BUSINESS INCOME AND THAT THE REVENUE AUTHORITIES HAVE RIGHTLY TAXED IT UNDER THE HEAD INCOME FROM OTHER SOURCES. CONFIRMING THE ORDER OF THE FAA,WE DECIDE SECOND GR OUND OF APPEAL AGAINST THE ASSESSEE.AS 4509/M/14(09-10) SAMSARA HOSPITALITY PVT.LTD. 8 FAR AS NETTING OF INTEREST IS CONCERNED,IT IS FOUND THAT THE FAA HAS NOT DEALT WITH THE ISSUE.IN OUR OPINION,EVEN IF INCOME IS TO BE ASSESSEED UNDER THE HEAD INCOME FROM OTHER SOURCES,BENEFIT OF NETTING OF INCOME CANNOT BE DENI ED TO THE ASSESSEE.AO IS DIRECTED ACCORDINGLY.SECOND GROUND OF APPEAL IS DECIDED IN F AVOUR OF THE ASSESSEE,IN PART. AS A RESULT, APPEAL FILED BY THE ASSESSEE STANDS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 4 TH AUGUST, 2017. , 2017 SD/- SD/- ( / RAM LAL NEGI ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED : 04 .0 .2017. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR E BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.