Elan Equity Services Pvt. Ltd., Delhi V. ITO, New Delhi

ITA 5135/DEL/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 81533 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 10 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-08-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 08-07-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 03-10-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHALINI VERMA
• Keywords: Depreciation; Business expenditure; Transactions in derivatives; Wrong claim; Difference of opinion; Unabsorbed depreciation; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH G NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI C.M. GARG : JUDICIAL MEMBER ITA NO. 5135/DEL/2012 ASSTT. YR: 2005-06 ELAN EQUITY SERVICES PVT. LTD., VS. ITO WARD-11(1) , 24, MEDHA APARTMENTS, NEW DELHI. MAYUR VIHAR-1, DELHI. PAN: AABCE 4021 F ( APPELLANT ) ( RESPONDENT ) APPELLANT BY : SHRI SANJAY GUPTA CA RESPONDENT BY : SMT. SHALINI VERMA SR. DR DATE OF HEARING : 08-07-2014 DATE OF ORDER : 14-08-2014. O R D E R PER S.V. MEHROTRA, A.M: : THIS APPEAL, BY THE ASSESSEE, IS DIRECTED AGAINST O RDER DATED 13-07- 2012 PASSED BY THE CIT(A)-XIII, NEW DELHI IN APPEA L NO. 55/11-12, CONFIRMING THE PENALTY LEVIED U/S 271(1)(C) OF THE I.T. ACT RELATING TO A.Y. 2005-06. 2. BRIEF FACTS OF THE CASE ARE THAT ASSESSEE, A R EGISTERED BROKER OF NSE, HAD FILED ITS RETURN OF INCOME DECLARING LOSS OF RS . 8,61,703/-. BESIDES THIS, THE ASSESSEE COMPANY ALSO CLAIMED CARRY FORWARD OF UNABSORBED DEPRECIATION OF RS. 5,95,522/-. THE ASSESSING OFFICER NOTICED TH AT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAD NO BUSINESS ACTIVITY AND THEREFORE HE REQUIRED ITA 5135/DEL/2012 ELAN EQUITY SERVICES PVT. LTD. 2 THE ASSESSEE TO EXPLAIN AS TO WHY THE INTEREST EAR NED SHOULD TO BE ASSESSED AS INCOME FROM OTHER SOURCES AND OTHER EXPENSES CLAIME D SHOULD NOT BE DISALLOWED. 2.1. THE ASSESSEES RESPONSE, AS NOTED BY ASSESSING OFFICER, WAS AS UNDER: THE ASSESSEE IS A REGISTERED BROKER OF NSE AND THE MEMBERSHIP OF THE NSE WAS OBTAINED IN THE YEAR FEBR UARY 2006. THE ASSESSEE HAS PERFORMED TRIAL RUN IN THE M ARCH 2006 ITSELF, AS TRADING IS TOTALLY LINKED WITH THE CONNE CTIVITY OF THE NETWORK. THE FIRST TRADING WAS STARTED ON 03-4-2006 (MONDAY) AS 1 ST & 2 ND APRIL BEING HOLIDAY. FURTHER, VIDE LETTER DATED 31-10-2008 THE ASSESSEE COMPANY, STATED THAT AFTER GETTING THE NSE CERTIFICATE ITS B USINESS WAS SET UP AND READY TO COMMENCE. THUS, THE BUSINESS HAD CO MMENCED DURING THE YEAR UNDER CONSIDERATION. THE ASSESSEE B EING A SHARE BROKER OF NSE AND AHS TO OBTAIN CERTIFICATE F ROM THE NSE WHICH WAS OBTAINED BY THE ASSESSEE ON 16-01-2006. S INCE THE ASSESSEE HAS COMPLETED ALL THE FORMALITIES FOR CARR YING BUSINESS BUT COULD NOT DO ANY BUSINESS AS NON AVAILABILITY O F PROSPECTIVE CLIENTS. 2.2. CONSIDERING THE ABOVE REPLY, THE ASSESSING OFF ICER CONCLUDED THAT ASSESSEE COMPANY DID NOT COMMENCE BUSINESS DURING T HE YEAR UNDER CONSIDERATION. HE OBSERVED THAT PROCESS OF SETTING UP OF BUSINESS CANNOT BE HELD AS COMMENCEMENT OF BUSINESS. HE CONCLUDED THAT BUSINESS OF THE ASSESSEE COMPANY COMMENCED FROM THE FIRST WORKING D AY OF NEXT ASSESSMENT YEAR I.E. 3-4-2006. HE ACCORDINGLY TAXED THE INTEREST INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. 2.3. AS REGARDS THE EXPENSES CLAIMED BY THE ASSESSE E OUT OF ROC FEES OF RS. 11,000/-, THE ASSESSING OFFICER OBSERVED AS UND ER: ITA 5135/DEL/2012 ELAN EQUITY SERVICES PVT. LTD. 3 THE ASSESSEE COMPANY HAS CLAIMED ROC FEES OF RS. 1 1,000/-. THE ASSESSEE COMPANY RAISED SHARE CAPITAL DURING TH E YEAR UNDER CONSIDERATION FOR WHICH INCURRED EXPENSES TO PAY TO ROC. NORMAL EXPENSES OF RS. 1,500/- ARE ALLOWED AND BALANCE AMOUNT IS DISALLOWED AS CAPITAL EXPENDITURE. FURTHER, IN EARLIER YEAR, I.E. YEAR OF FORMATION OF COMPANY, THE ASSESSEE COMPANY HAD SUBSCRIBED CAPITAL OF RS. 1,0 0,000/- ON WHICH IT IS ENTITLED TO EXPENSES OF RS. 5,000/- UND ER SECTION 35D OF THE ACT AND THESE EXPENSES ARE TO BE AMORTIZED I N FIVE INSTALMENTS OF RS. 1,000/- EACH. THUS, EXPENSES OF RS. 1,000/- ARE ALLOWED AND BALANCE AMOUNT IS DISALLOWED AS CAP ITAL EXPENDITURE. 2.4. THE ASSESSING OFFICER COMPUTED ASSESSEES INCO ME AS UNDER: INTEREST INCOME AS DISCUSSED RS. 2,84,694/- LESS: FILING FEE AS DISCUSSED ABOVE 1,500 PRELIMINARY EXPENSES DO- 1,000 AUDIT FEE 11,000 RS. 13,500/- INCOME FROM OTHER SOURCES ASSESSED RS. 2,71,194 /- 2..5. ASSESSING OFFICER, ACCORDINGLY, INITIATED PEN ALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT. 2.6. IN THE PENALTY ORDER, THE ASSESSING OFFICER OB SERVED THAT ASSESSEE FILED A VERY CRYPTIC REPLY AND STATED THAT IT HAD PRODUCE D ALL THE RELEVANT INFORMATION AND THERE WAS NO CONCEALMENT OF FACTS A ND IT WAS FURTHER STATED THAT THE ADDITIONS WERE MADE DUE TO DIFFERENCE OF O PINION REGARDING DATE OF COMMENCEMENT OF BUSINESS. THE ASSESSEE HAD RELIED O N THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF RELIANCE PETRO PRODUCTS PVT. LTD. 189 ITR 322. 2.7. THE ASSESSING OFFICER LEVIED PENALTY OF RS. 4, 31,126/- FOR THE FOLLOWING REASONS: ITA 5135/DEL/2012 ELAN EQUITY SERVICES PVT. LTD. 4 (I) THE ASSESSEE CLAIMED ENTIRE EXPENSES AND DEPRECIATI ON FOR THE COMPLETE YEAR BEFORE SETTING UP OF ITS BUSINESS, WH ICH IS COMPLETELY AGAINST THE PROVISIONS OF LAW AND BASIC PRINCIPLE OF ACCOUNTANCY. (II) CIT(A) HAD HELD THAT DATE OF GRANT OF CERTIFICATE O F REGISTRATION, AS GRANTED BY NSE, SHOULD BE TAKEN AS DATE OF SETTING UP OF BUSINESS AS TO CARRY ON THE BUSINESS OF STOCK AND SHARE BROK ING. WITHOUT THE GRANT OF CERTIFICATE OF REGISTRATION BY NSE, BUSINE SS REGARDING STOCK AND SHARE BROKING CANNOT BE SAID TO BE SET UP. THER E CANNOT BE ANY DIFFERENCE OF OPINION AS REGARDS THE DATE OF COMMEN CEMENT OF BUSINESS. (III) THERE IS NO DISCLOSURE IN THE NOTES ON ACCOUNT OR I N THE AUDIT REPORT REGARDING THE SET UP/ COMMENCEMENT OF BUSINESS DURI NG THE YEAR UNDER CONSIDERATION. (IV) IT IS A CASE OF WRONG DEDUCTION OF THE CLAIM AS MA DE BY THE ASSESSEE AND THEREFORE IN VIEW OF THE DECISION OF H ONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. ESCORTS FINANCE L TD. 183 TAXMAN 453, PENALTY U/S 271(1)(C) IS LEVIABLE. (V) THE ASSESSEE HAS NOT BEEN ABLE TO SUBSTANTIATE ITS CLAIMED MADE DURING THE ASSESSMENT PROCEEDINGS, HENCE AS WELL AS IN THE APPELLATE PROCEEDINGS. 2.8. BEFORE LD. CIT(A), THE ASSESSEE SUBMITTED THAT IT HAD NOT CONCEALED ANY INCOME AS THERE WAS NO ITEM OF RECEIPT WHICH WA S SUPPRESSED. THE ASSESSEE HAD FURNISHED ALL THE PARTICULARS WHICH WE RE REQUIRED TO BE SUBMITTED IN THIS CASE. THE ASSESSEE FURTHER POINTE D OUT THAT ADDITIONS WERE MADE PURELY ON DIFFERENCE OF OPINION ON THE ISSUE OF COMMENCEMENT OF THE BUSINESS. THE ASSESSEE FURTHER REFERRED TO THE DECI SION OF LD. CIT(A) WHEREIN ITA 5135/DEL/2012 ELAN EQUITY SERVICES PVT. LTD. 5 HE HAD NEITHER AGREED WITH THE CONCLUSION OF ASSESS ING OFFICER IN TAKING THE DATE OF COMMENCEMENT OF BUSINESS AS 3-4-2006, NOR A GREED WITH THE ASSESSEE TAKING THE DATE OF SETTING UP OF BUSINESS ON 25-4-2005 ( THE DATE ON WHICH APPLICATION FOR THE MEMBERSHIP WAS SUBMITTED) . ON THE CONTRARY, HE HELD THAT THE DATE WHEN CERTIFICATE OF REGISTRATION AS GRANTED BY NSE SHOULD BE TAKEN AS DATE OF SETTING UP OF BUSINESS IN THE C ASE OF THE BUSINESS OF THE ASSESSEE. THUS, THE ASSESSEE SUBMITTED THAT IT WAS MERELY A CASE OF DIFFERENCE OF OPINION AND, THEREFORE, NO PENALTY CAN BE LEVIED . THE ASSESSEE RELYING ON THE DECISION IN THE CASE OF RELIANCE PETRO PRODUCTS (SUPRA), POINTED OUT THAT AS IN THE SAID DECISION, IN THE PRESENT CASE ALSO T HE DETAILS OF THE EXPLANATION FILED BY THE ASSESSEE WERE NOT FOUND TO BE INACCUR ATE BUT ONLY THE ASSESSING OFFICER OBSERVED THAT ASSESSEE HAD ADVANCED A WRONG CLAIM/ DEDUCTION. THE ASSESSEE FURTHER POINTED OUT THAT, IN ANY VIEW OF T HE MATTER, THE ASSESSING OFFICER HAD WRONGLY CALCULATED PENALTY AMOUNT BECAU SE DEPRECIATION WAS ALLOWABLE AS PER THE ACT, SINCE DATE OF COMMENCEMEN T OF THE BUSINESS HAD BEEN TAKEN AS 16-1-2006. 2.9. LD. CIT(A) DID NOT ACCEPT THE ASSESSEES CONTE NTION FOR THE FOLLOWING REASONS: (I) THE ASSESSEE IS A REGISTERED SHARE BROKER OF NATION AL STOCK EXCHANGE. (II) THE DATE OF SETTING UP OF THE BUSINESS WILL BE THE DATE ON WHICH REGISTRATION WAS GRANTED BY NSE TO THE ASSESSEE FOR CONDUCTING SHARE BROKING BUSINESS. (III) THE REGISTRATION BY NSE WAS NOT GRANTED DURING THE YEAR, THEREFORE, BUSINESS OF STOCK AND SHARE TRADING CANNOT BE SAID TO BE SET UP DURING THE YEAR. THEREFORE, THE ARGUMENT OF THE ASS ESSEE THAT THE ITA 5135/DEL/2012 ELAN EQUITY SERVICES PVT. LTD. 6 ADDITIONS WERE MADE BASED ON DIFFERENCE OF OPINION REGARDING THE DATE OF COMMENCEMENT OF BUSINESS, CANNOT BE ACCEPTE D. (IV) THE ASSESSEE HAD NOT MENTIONED IN THE NOTES OR IN T HE AUDIT REPORT REGARDING SETTING UP OR COMMENCEMENT OF BUSINESS. T HEREFORE, THERE WAS NO FULL AND COMPLETE DISCLOSURE ALSO. (V) THE CLAIM MADE BY THE ASSESSEE WAS EX FACIE BOGUS, WHICH WAS NOT SUSTAINABLE AT ALL. 2.10. LD. CIT(A), INTER ALIA, REFERRED TO THE DECIS ION IN THE CASE OF CIT VS. ZOOM COMMUNICATION PVT. LTD., WHEREIN HONBLE DELHI HIGH COURT HAS HELD THAT IF ASSESSEE MADE A CLAIM, WHICH IS NOT ON LY INCORRECT IN LAW BUT IS ALSO WHOLLY WITHOUT ANY BASIS AND EXPLANATION FURNI SHED BY HIM FOR MAKING SUCH A CLAIM IS NOT FOUND TO BE BONA FIDE, EXPLANAT ION 1 TO SECTION 271(1)(C) WOULD COME INTO PLAY AND ASSESSEE WILL BE LIABLE TO PENALTY. 3. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT ASSE SSEE HAD APPLIED TO NSE ON 25-4-2005 WHICH DATE WAS TREATED AS THE DATE OF SETTING UP OF BUSINESS AND THE EXPENSES INCURRED THEREAFTER WERE CLAIMED AS BUSINESS EXPENSES. THE ASSESSING OFFICER, HOWEVER, TOOK THE DATE OF FIRST DEALING ON THE STOCK EXCHANGE, WHICH WAS 3-4-2006 AS THE DATE OF COMMENCEMENT OF ASSESSEES BUSINESS. HE, THEREFORE, HAD DISALLOWED THE ENTIRE EXPENSES CLAIMED BY ASSESSEE. LD. CIT(A) TOOK THE DATE OF GR ANT OF REGISTRATION BY NSE VIZ. 16-1-2006 AS THE DATE OF SETTING UP OF BUS INESS AND ALLOWED THE EXPENSE THEREAFTER. THE ENTIRE DISPUTE IS IN REGARD TO THE CLAIM OF EXPENSES MADE FOR THE PERIOD 25-4-2005 TO 16-1-2006. 3.1. LD. COUNSEL REFERRED TO PAGE 33 & 34 OF THE PB , WHEREIN APPLICATION FOR OBTAINING MEMBERSHIP FOR CAPITAL MARKET AND FUT URE AND OPTION SEGMENT ITA 5135/DEL/2012 ELAN EQUITY SERVICES PVT. LTD. 7 WITH NSE DATED 25-4-2005 IS CONTAINED. ALONG WITH T HE APPLICATION VARIOUS ANNEXURES WERE FILED AND THE DETAILS OF DIRECTORS A ND DEALERS WITH SUPPORTING DOCUMENTS WERE FURNISHED. THE BALANCE-SHEET OF 31-3 -2005 WITH AUDITORS REPORT WAS ALSO FILED. THE REFERENCE LETTER FROM H DFC BANK WAS ALSO FURNISHED. THE ASSESSEE HAD GIVEN ALL THE DETAILS O F ITS OFFICE PREMISES ETC. AS PER THE REQUIREMENT OF SEBI. THE SEBI VIDE ITS LETT ER DATED 16-1-2006 CONTAINED AT PAGES 35 & 36 OF THE PB, GRANTED THE R EGISTRATION AS A STOCK BROKER TO THE ASSESSEE COMPANY AND, THEREAFTER, THE ASSESSEE BECAME ELIGIBLE TO TRADE ON STOCK EXCHANGE. 3.2. WITH THE BACKGROUND OF THESE FACTS, LD. COUNSE L SUBMITTED THAT THE CLAIM OF ASSESSEE IN RESPECT OF VARIOUS EXPENSES CL AIMED FOR THE PERIOD FROM 25-4-2005 TO 15-1-2006 COULD NOT BE SAID TO BE A MA LA FIDE CLAIM BECAUSE ASSESSEE HAD COMPLIED WITH ALL THE REQUIREMENTS FOR OBTAINING THE MEMBERSHIP OF NSE ON 25-4-2005. THEREFORE, THE ASSE SSEES BUSINESS HAD BEEN SET UP AND ONLY THE COMMENCEMENT OF BUSINESS WAS AWAITED WHICH ALSO BECAME CLEAR ON 16-1-2006. 3.3. LD. COUNSEL REFERRED TO THE DECISION OF THE IT AT IN THE CASE OF WHIRLPOOL OF INDIA LTD. V. JCIT 114 TTJ 211 AND POI NTED OUT THAT IN THIS CASE ASSESSEE HAD, BY PLACING ALL THE FACTS BEFORE ASSESSING OFFICER, TAKEN THE POSITION THAT THE BUSINESS WAS SET UP ON 1-11-1995 WITH WHICH ASSESSING OFFICER DID NOT AGREE. THIS DOES NOT AMOUNT TO FURN ISHING OF ANY INACCURATE PARTICULARS OF INCOME. IN THIS CASE THE COMPANY WAS ENGAGED IN RENDERING FINANCIAL SERVICES AND THE TRIBUNAL CONCLUDED THAT IT WAS POSSIBLE TO SAY THAT THE BUSINESS WAS SET UP WHEN THE DIRECTORS ARE APPO INTED; STAFF, SUCH AS, REGIONAL AND BRANCH MANAGERS ARE APPOINTED AND THEI R SALARIES WERE PAID; ITA 5135/DEL/2012 ELAN EQUITY SERVICES PVT. LTD. 8 COMPUTERS ARE ACQUIRED AND INSTALLED AND THE COMPAN Y IS READY TO COMMENCE BUSINESS. IT WAS HELD THAT IT CANNOT BE SAID THAT B USINESS WAS SET UP ONLY WHEN THE BANK ACCOUNT WAS OPENED ON 1-2-1996 BECAUS E PRIOR THERETO THE COMPANY, THOUGH IT DID NOT HAVE A BANK ACCOUNT, WAS INCURRING THE EXPENDITURE THROUGH K. INDIA LTD. OR E MACHINERY LT D. THE TRIBUNAL HAD, INTER ALIA, OBSERVED AS UNDER: THE ASSESSEE IS A FINANCIAL COMPANY AUTHORIZED TO ADVANCE LOANS FOR INTEREST TO FACILITATE CUSTOMERS TO PURCH ASE CONSUMER DURABLES, THOUGH THE BUSINESS IS NOT LIMITED TO ADV ANCING MONIES FOR ACQUIRING CONSUMER DURABLES. IN THE CASE OF A COMPANY ENGAGED IN RENDERING FINANCIAL SERVICES, IT IS POSSIBLE TO SAY THAT THE BUSINESS IS SET UP WHEN THE DIRECTO RS ARE APPOINTED, STAFF SUCH AS REGIONAL AND BRANCH MANAGE RS ARE APPOINTED AND THEIR SALARIES ARE PAID, COMPUTERS A RE ACQUIRED AND INSTALLED AND THE COMPANY IS READY TO COMMENCE BUSINESS. 3.4. THE ASSESSEE IN ITS WRITTEN SUBMISSIONS MADE B EFORE THE LD. CIT(A), AS CONTAINED AT PAGE 25 ONWARDS OF THE PB, INTER ALIA, HAS SUBMITTED AS UNDER: AS PER OBJECT CLAUSE OF THE MEMORANDUM OF ASSOCIAT ION OF THE ASSESSEE, THE MAIN OBJECT OF THE ASSESSEE WAS TO CARRYON THE BUSINESS OF STOCK AND SHARE BROKING. THE COMPANY WAS INCORPORATED ON 24.1 1.2004 UNDER THE INDIAN COMPANIES ACT, 1956 WITH AUTHORIZED CAPITAL OF RS. 200 LACS BEING MINIMUM CAPITAL FOR THE COMPANIES OBTAINING M EMBERSHIP OF STOCK BROKER. TO CARRY ON THE BUSINESS ACTIVITIES IT HAS TO BE REGISTERED WITH NATIONAL STOCK EXCHANGE (NSE) AND/OR BOMBAY STOCK E XCHANGE. THE ASSESSEE DECIDED TO GET REGISTERED WITH NSE. THERE ARE CERTAIN REQUIREMENTS SUCH AS QUALIFIED PERSONS, MINIMUM ARE A AND THE NET WORTH ETC TO BE COMPLIED WITH FOR GETTING REGISTERED. AS PER THE REQUIREMENT OF MINIMUM TWO QUALIFIED PERSONS AND MINIMUM NET WORTH OF RS. 100 LACS BESIDES DEPOSIT OF RS 125 LACS. THE ASSESSEE ISSUED CAPITAL OF RS. 150 LACS AND APPOINTED TWO QUALIFIED PERSONS ON THE BOARD AN D APPLIED FOR THE MEMBERSHIP OF NSE ON 25.04.2005. NSE VIDE ITS LETTE R DATED 14.06.2005 ASKED TO COMPLETE CERTAIN FORMALITIES WHICH WERE CO MPLIED WITH. AFTER INTERVIEWING AND THE NECESSARY FORMALITIES ISSUED L ETTER IN THE MONTH OF SEP, 2005 FOR DEPOSIT OF RS 127 LACS AND THE SAME W AS DEPOSITED IN NSE ITA 5135/DEL/2012 ELAN EQUITY SERVICES PVT. LTD. 9 ON 08.11.2005. FINALLY NSE ISSUED MEMBERSHIP CERTIF ICATE ON 16.01.2006 AND ASKED TO FURNISH BANK GUARANTEE OF RS 25.00 LAC S. TO CARRY OUT ACTIVITIES EQUIPMENT SUCH AS VSAT, SERVERS HAS TO B E INSTALLED AND THE SAME WAS DISPATCHED ON 07.03.2006 BY NSE. THE ASSES SEE HAS CLAIMED REVENUE EXPENDITURE OF RS 1146396.88 WHICH WAS INCU RRED AFTER APPLYING FOR THE MEMBERSHIP I.E AFTER SETTING UP OF THE BUSI NESS. THE ABOVE SIGNIFICANCE OF DATES CAN BE SUMMARIZED AS FOLLOWS: S.NO. PARTICULARS DATES 1. INCORPORATION OF THE COMPANY 24-11-2004 2. APPLICATION FOR EMPANELMENT WITH NSE 25-04-2005 3. LETTER FOR FURTHER FORMALITIES 14-06-2005 4. LETTER FOR INTERVIEW 05-08-2005 5. DEMAND ADVISE 02-09-2005 6. SEBI REGISTRATION 28-10-2005 7. RECEIPT OF DEPOSIT OF RS. 127 LACS 08-11-2005 8. CERTIFICATE OF REGISTRATION 16-01-2006 9. SEBI REGISTRATION FOR CAPITAL MARKET 20-01-2006 10. SEBI REGISTRATION FOR FUTURE & OPINION 24-01-2 006 11. DEPOSIT OF BANK GUARANTEE 07-02-2006 12. ACTIVATION OF VSAT 21-02-2006 13. DISPATCH OF VSAT 07-03-2006 14. ENABLEMENT FOR TRADING IN F&O SEGMENT 14-03-2006 15. FIRST TRANSACTION 03-04-2006 DICTIONARY MEANING OF SETTING UP IS CREATION, FOUNDATION, ES TABLISHMENT, DEVELOPMENT, PRODUCTION, INSTITUTION, CONSTITUTION, FORM ATION, INCEPTION, ORIGINATION . FURTHER FORMATION MEANS THE ACT OR PROCESS OF FORMING SOMETHI NG OR OF TAKING FORM. BY GOING THROUGH THE DICTIONARY MEANING SETTING UP MEANS TO ACT OR PROCESS OF FORMING. THE ASSESSEE HAS STARTED PROCESS OF OBTAINING MEMBERSHI P OF THE EXCHANGE ON 25.04.2005 THE DATE ON WHICH APPLICATION WAS SUBMITTED. 4. LD. DR SUBMITTED THAT MERE FILING OF AN APPLICAT ION WITH THE SEBI FOR GRANT OF MEMBERSHIP CANNOT BE TAKEN TO BE THE DATE FOR SETTING UP OF BUSINESS BECAUSE BY MERE FILING OF THE APPLICATION WITH THE SEBI IT CANNOT BE HELD THAT THE ASSESSEE WAS READY TO COMMENCE BUSINESS. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAV E PERUSED THE RECORD OF THE CASE. THE COMPANY WAS INCORPORATED ON 24-11- 2004 UNDER THE INDIAN ITA 5135/DEL/2012 ELAN EQUITY SERVICES PVT. LTD. 10 COMPANIES ACT WITH THE AUTHORIZED CAPITAL OF RS. 2, 00,00,000/- BEING MINIMUM CAPITAL FOR THE COMPANY OBTAINING MEMBERSHI P OF STOCK BROKER. AS PER THE OBJECT CLAUSE OF MEMORANDUM OF ASSOCIATION OF THE ASSESSEE, THE MAIN OBJECT OF THE ASSESSEE WAS TO CARRY ON THE BUS INESS OF STOCK AND SHARE BROKER. TO CARRY ON THE BUSINESS ACTIVITY, IT HAS T O BE REGISTERED WITH NSE AND/ OR BOMBAY STOCK EXCHANGE. THERE ARE CERTAIN RE QUIREMENTS, SUCH AS, QUALIFIED PERSONS, MINIMUM AREA AND THE NET WORTH E TC. TO BE COMPLIED WITH FOR GETTING REGISTERED. AS PER THE REQUIREMENTS, MINIMUM TWO QUALIFIED PERSONS AND MINIMUM WORTH OF RS. 1,00,00,000/-, BE SIDES DEPOSIT OF RS. 1,25,00,000/-, WAS REQUIRED . TO COMPLY WITH THIS, THE ASSESSEE ISSUED CAPITAL OF RS. 1,50,00,000/- AND APPOINTED TWO QUALIFIED PE RSONS ON THE BOARD AND APPLIED FOR THE MEMBERSHIP OF NSE ON 25-4-2005. NSE VIDE ITS LETTER DATED 14-6-2005 ASKED TO COMPLETE CERTAIN FORMALITIES WH ICH WERE COMPLIED WITH. AFTER NECESSARY FORMALITIES WERE COMPLETED, NSE ISS UED LETTER IN THE MONTH OF SEPTEMBER 2005 FOR DEPOSIT OF RS. 1,27,00,000/- AND THE SAME WAS DEPOSITED IN NSE ON 8-11-2005. FINALLY, NSE ISSUED MEMBERSHIP CERTIFICATE ON 16-1-2006 AND ASKED TO FURNISH BANK GUARANTEE O F RS. 25,00,000/- TO CARRY OUT ACTIVITIES EQUIPMENT SUCH AS VSAT, SERVE RS HAD TO BE INSTALLED AND THE SAME WAS DISPATCHED ON 7-3-2006 BY NSE. 5.1. FROM THE ABOVE UNCONTROVERTED FACTUAL ASPECTS IT IS EVIDENT THAT FROM THE DATE OF INCORPORATION OF COMPANY ITSELF, THE AS SESSEES INTENTION WAS TO OBTAIN THE MEMBERSHIP OF STOCK EXCHANGE AND IN ORDE R TO PURSUE THAT OBJECT THE ASSESSEE HAD TO COMPLY WITH VARIOUS LEGAL REQUI REMENTS. IT IS TRUE THAT ASSESSEE COULD NOT COMMENCE THE BUSINESS WITHOUT RE GISTRATION BEING GRANTED BUT THE FACT OF OVERWHELMING LEGAL REQUIREMENTS TO BE COMPLIED WITH BY ASSESSEE BEFORE GETTING THE REGISTRATION CANNOT BE OVER LOOKED. ITA 5135/DEL/2012 ELAN EQUITY SERVICES PVT. LTD. 11 5.2. THE ASSESSEES CLAIM IS THAT FROM THE DATE IT FILED APPLICATION WITH NSE VIZ. 25-4-2005 IT HAD SET UP ITS BUSINESS AND O NLY THE FORMAL REGISTRATION FROM NSE WAS AWAITED. IN THE BACKDROP OF THESE FACTS THE ASSESSEES SUBMISSION IS THAT IT WAS HIGHLY DEBATAB LE WHETHER THE DATE OF SET UP SHOULD BE TAKEN AS 25-4-2005 CONSIDERING THE REQ UIREMENT TO BE FULFILLED OR ONLY AFTER THE FORMAL REGISTRATION IS GRANTED BY NSE SHOULD THE BUSINESS BE TAKEN AS SET UP. THE SUBMISSION IS THAT IT IS HI GHLY DEBATABLE ISSUE. 5.3. WE FIND CONSIDERABLE FORCE IN THIS SUBMISSION S OF THE ASSESSEE BECAUSE THOUGH IT IS TRUE THAT ASSESSEE COULD NOT C OMMENCE THE BUSINESS BUT A THE SAME TIME IT CANNOT BE IGNORED THAT FROM INCO RPORATION THE INTENTION OF THE ASSESSEE WAS FOR OBTAINING NSE MEMBERSHIP AND V ARIOUS FORMALITIES HAD TO BE FULFILLED BEFORE APPLICATION FOR REGISTRATION COULD BE MADE. IN THIS REGARD WE MAY REFER TO THE FOLLOWING OBSERVATIONS O F ITAT DELHI BENCH IN THE CASE OF WHIRLPOOL OF INDIA LTD. (SUPRA) OBSERVI NG IN PARA 3 AS UNDER: 3. SECTION 3 OF THE INCOME TAX ACT DEFINES 'PREVI OUS YEAR' AND IT SAYS THAT THE FIRST PREVIOUS YEAR COMMENCES FROM T HE DATE OF 'SETTING UP OF THE BUSINESS'. IT IS WELL-SETTLED THAT THERE IS A DIFFERENCE BETWEEN THE DATE OF SETTING UP OF A BUSINESS AND THE DATE OF CO MMENCEMENT OF THE BUSINESS AND THIS DISTINCTION HAS BEEN BROUGHT OUT BY THE BOMBAY HIGH COURT IN WESTERN VEGETABLE PRODUCTS LTD. V. CIT(195 4) 26 ITR 151 (BORN) BY OBSERVING THAT WHEN A BUSINESS IS ESTABLI SHED AND IS READY TO COMMENCE BUSINESS THEN IT CAN BE SAID THAT IT HAS B EEN 'SET UP' , BUT BEFORE IT IS READY TO COMMENCE BUSINESS IT IS NOT 'SET UP' . THERE MAY BE AN INTERREGNUM BETWEEN THE DATE OF SETTING UP OF THE B USINESS AND THE DATE OF ACTUAL COMMENCEMENT OF THE BUSINESS, UNDER THE ACT ALL EXPENSES INCURRED AFTER THE DATE OF SETTING UP ARE ALLOWED AS A DEDUC TION UNDER SECTION 28. THIS DECISION HAS BEEN APPLIED BY THE HON'BLE DELHI HIGH COURT IN ITS RECENT JUDGMENT, 17-9-2007 IN ITA NOS.' 1687 AND 16 88 OF2006 IN THE CASE OF CIT V. HUGHES ESCORT COMMUNICATIONS LTD. (R EPORTED AT (2007) 213 CTR (DEL) 45'ED. ) (COPY OF THE JUDGMENT FILED BEFORE US) AND IT HAS BEEN HELD THAT WHERE THE BUSINESS HAS BEEN SET UP, THOUGH THE SAME HAS NOT BEEN COMMENCED, THE EXPENDITURE INCURRED AFTER THE DATE OF SETTING UP HAS ITA 5135/DEL/2012 ELAN EQUITY SERVICES PVT. LTD. 12 TO BE ALLOWED AS DEDUCTION. BUT THE QUESTION AS TO WHEN IT CAN BE SAID THAT A BUSINESS IS 'SET UP' MUST LARGELY DEPEND ON THE F ACTS OF EACH CASE AND THE NATURE OF THE BUSINESS. THERE CAN BE NO HARD AND FA ST~ RULE BY WHICH IT CAN BE DETERMINED AS TO WHEN THE BUSINESS WAS SET UP. I N THE JUDGMENT OF THE BOMBAY HIGH COURT CITED SUPRA, IT WAS A CASE OF A M ANUFACTURING CONCERN. IT WAS HELD THAT THE BUSINESS WAS SET UP WHEN THE F IRST ORDER OF PURCHASE OF RAW MATERIAL WAS PLACED AND NOT WHEN THE FACTORY WA S STARTED (AT A LATER POINT OF TIME). IN CIT V. SARABHAI SONS (P) LTD. (1 973) 90 ITR 318 (GUJ), THE GUJARAT HIGH COURT WAS DEALING WITH A COMPANY E STABLISHED FOR THE MANUFACTURE OF SCIENTIFIC INSTRUMENTS. IT WAS HELD THAT THE PURCHASE OF LAND, PLACING OF ORDERS FOR MACHINERY AND RAW MATER IALS WERE MERELY OPERATIONS FOR THE SETTING UP OF THE BUSINESS AND T HE BUSINESS WAS ACTUALLY SET UP ONLY WHEN THE MACHINERY WAS INSTALLED AND TH E FACTORY WAS READY TO COMMENCE BUSINESS. IN PREM CONDUCTORS (P) LTD. V. C IT 1976 CTR (GUJ) 324 : (1977) 108 ITR 654 (GUJ), THE GUJARAT HIGH CO URT HELD THAT EVEN SECURING ORDERS BY A MANUFACTURING CONCERN IN ADVAN CE OF PRODUCTION CAN AMOUNT TO SETTING UP OF THE BUSINESS. IN CIT V. SAR ABHAI MANAGEMENT CORPN. LTD. (1991) 192 ITR 151 (SC), THE SUPREME CO URT, AFFIRMING THE VIEW OF THE GUJARAT HIGH COURT IN SARABHAI MANAGEME NT CORPORATION LTD. V. CIT (1976) 102 ITR 25 (GUJ) HELD THAT IN THE CAS E OF A COMPANY FORMED FOR LEASING OF PROPERTY IT COULD NOT BE SAID THAT T HE BUSINESS WAS NOT SET UP TILL THE FIRST LEASE TOOK PLACE; THE EARLIER PART O F THE ACTIVITIES, NAMELY, ENGAGING STAFF, BUYING THE EQUIPMENT AND MAKING THE STAFF FAMILIAR WITH THE SAME ARE ALL PART OF THE BUSINESS AND THE BUSIN ESS CAN BE SAID TO BE SET UP EVEN EARLIER. A CASE OF MARINE PROCESSING INDUST RY WAS DEALT WITH BY THE GUJARAT HIGH COURT IN CIT V. WESTERN INDIA SEA FOODS (P) LTD. (1993) 199 ITR 777 (GUJ). THERE, IT WAS HELD THAT THE ACT OF ACQUIRING A GODOWN IN THE MONTH OF AUGUST IN ANTICIPATION OF THE ARRIV AL OF FISH IN THE WATERS IN THE MONTH OF OCTOBER WAS HELD TO AMOUNT TO SETTING UP OF THE BUSINESS. THE MADRAS HIGH COURT WAS DEALING WITH THE CASE OF A COMPANY FORMED FOR SELLING PROPERTY TIME-SHARE IN CIT V. CLUB RESO RTS (P) LTD. (2006) 287 ITR 552 (MAD). IT WAS HELD THAT THE ACTS OF APPOINT ING STAFF FOR CANVASSING SALES OF THE PROPERTY TIMESHARES, RENTING OF OFFICE PREMISES, ETC. AMOUNTED TO SETTING UP OF THE BUSINESS EVEN THOUGH THE CONST RUCTION OF THE PROPERTY WAS YET TO BEGIN. A CASE OF A HOTEL HOSPITALITY IND USTRY WAS CONSIDERED AGAIN BY THE GUJARAT HIGH COURT IN HOTEL ALANKAR V. CIT (1982) 133 ITR 866 (CUJ). WHILE RECOGNIZING THAT THE QUESTION WHET HER A BUSINESS IS SET UP OR NOT WAS ESSENTIALLY ONE OF FACT AND THAT IT WOUL D LARGELY DEPEND UPON THE FACTS OF EACH CASE AND THE NATURE OF THE BUSINE SS; THE HIGH COURT NOTED THAT IN THE CASE OF A HOTEL (BOARDING AND LODGING H OUSE) DUE WEIGHT MUST BE GIVEN TO THE FACT THAT IT CANNOT COMMENCE ITS AC TIVITIES OVERNIGHT. IT WAS POINTED OUT THAT THE BUSINESS OF BOARDING AND LODGI NG WOULD NECESSARILY COMPRISE OF VARIEGATED ACTIVITIES COMMENCING FROM T HE STAGE OF ACQUISITION OF A PROPER AND SUITABLE BUILDING MAKIN G IT MORE SUITABLE FOR THE HOTEL BUSINESS, PURCHASING LINEN, CUTLERY, FURN ITURE, ETC., APPOINTING STAFF OF MANAGERS, COOKS, BEARERS AND ULTIMATELY RE ACHING THE STAGE OF ITA 5135/DEL/2012 ELAN EQUITY SERVICES PVT. LTD. 13 RECEIVING CUSTOMERS AND THAT IT WOULD BE DE HORS CO MMERCIAL SENSE TO HOLD THAT ONE WOULD BE REACHING THE STAGE OF HAVING SET UP THE BUSINESS ONLY WHEN ONE REACHES THE STAGE OF RECEIVING CUSTOMERS. IT WAS ULTIMATELY HELD THAT WHERE THERE ARE SEVERAL INTEGRATED ACTIVITIES TO BE UNDERTAKEN SERIALLY, ONE FORMING THE FOUNDATION FOR THE OTHER, IT CAN BE SAID THAT THE BUSINESS WAS 'SET UP' WHEN THE FIRST OF SUCH ACTIVITIES WAS UNDERTAKEN. IT WAS ULTIMATELY HELD THAT THE BUSINESS WAS SET UP WHEN T HE BUILDING WAS ACQUIRED AND WAS PLACED AT THE DISPOSAL OF THE FIRM . IN ITO V. M VORADARAJAN (1989) 34 TTJ (MAD) 247 : (1989) 30 ITD 414 (MAD), THE MADRAS BENCH OF THE TRIBUNAL HELD IN THE CASE OF A SOLE-SELLING AGENT THAT HIS BUSINESS COULD BE SAID TO HAVE BEEN SET UP ONCE HE OBTAINED THE SOLE- SELLING AGENCY AND IT COULD NOT BE SAID THAT IT WAS SET UP ONLY WHEN HE OBTAINED THE FIRST BUSINESS. 5.4. THE QUESTION, WHETHER A BUSINESS CAN BE SAID T O HAVE BEEN SET UP, IS DEPENDENT ON THE FACTS OF EACH CASE AND LARGELY ON THE NATURE OF BUSINESS PROPOSED TO BE UNDERTAKEN. IN THE PRESENT CASE THE NATURE OF BUSINESS PROPOSED TO BE UNDERTAKEN WAS SUCH THAT WITHOUT COM PLYING WITH VARIOUS REQUIREMENTS, THE ASSESSEE COULD NOT MAKE APPLICATI ON FOR REGISTRATION. THE APPLICATION COULD BE MADE TO SEBI ONLY WHEN THE ASS ESSEE HAD FULFILLED/ COMPLIED WITH BASIC CONDITIONS NECESSARY FOR GRANT OF REGISTRATION. THEREFORE, IT CANNOT BE DISPUTED THAT THERE CAN BE ONE POINT OF VIEW THAT THE BUSINESS HAD BEEN SET UP AFTER ALL THE NECESSARY FO RMALITIES HAD BEEN FULFILLED FOR MAKING THE ASSESSEE ELIGIBLE FOR FILING THE APP LICATION WITH SEBI. ONLY THE PERMISSION FOR COMMENCEMENT OF BUSINESS WAS AWA ITED. THE BUSINESS WAS READY FOR COMMENCEMENT SUBJECT TO GRANT OF REGI STRATION. THEREFORE, IN OUR OPINION, UNDER SUCH CIRCUMSTANCES IT CANNOT BE SAID THAT ASSESSEES EXPLANATION OF CLAIMING EXPENSES FOR THE PERIOD 25- 4-2005 TO 15-1-2006 COULD BE BRANDED AS MALA FIDE. THE ASSESSEE HAVING COMPLIED WITH ALL THE REQUIREMENTS WAS SANGUINE OF GETTING REGISTRATION A ND THEREFORE TREATED ITS BUSINESS AS BEING SET UP FROM THE DATE OF MAKING AP PLICATION. FURTHER, THE ASSESSEES INTENTION SINCE BEGINNING WAS TO ACT AS MEMBER OF NSE ALSO HAS ITA 5135/DEL/2012 ELAN EQUITY SERVICES PVT. LTD. 14 TO BE GIVEN DUE WEIGHTAGE. CONSIDERING THE HIGHLY D EBATABLE NATURE OF ITS CLAIM WE ARE OF THE OPINION THAT PENALTY IS NOT LE VIABLE IN THIS CASE. MOREOVER, THE ASSESSEE HAVING FILED ALL THE RELEVAN T INFORMATION ALONG WITH THE RETURN, IT CANNOT BE SAID THAT ASSESSEE HAD CON CEALED PARTICULARS OF ITS INCOME TO ATTRACT PENALTY U/S 271(1)(C). IN COMING TO THIS CONCLUSION WE ARE FORTIFIED BY THE RATIO OF DECISION OF HONBLE SUPRE ME COURT IN THE CASE OF RELIANCE PETRO PRODUCTS LTD. V. CIT 322 ITR 158. IN VIEW OF ABOVE DISCUSSION, THE PENALTY LEVIED U/S 271(1)(C) IS DEL ETED. 6. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 14-08-2014. SD/- SD/- ( C.M. GARG ) ( S.V. MEHROTRA ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED:14-08-2014. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR