TATA REALTY & INFRASTRUCTURE LTD, MUMBAI V. DCIT (OSD) RG 1(1), MUMBAI

ITA 6380/MUM/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 87819 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 3 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-01-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 21-11-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 16-09-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NEIL PHILIP
• Assessee Lawyers: M M GOLWALA; AMPY WAGLE
• Keywords: Opportunity of being heard; Earning of tax free income; Question of law; Revenue expenditure
• Section: 14A; 37

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, M UMBAI BEFORE HONBLE S/SHRI VIJAY PAL RAO (JM) , AND B.R.BASKARAN (AM) , . . , ./I.T.A. NO.6380/MUM/2011 ( / ASSESSMENT YEAR : 2007-08) M/A TATA REALTY & INFRASTRUCTURE LTD., C/O KALYANIWALA AND MISTRY, ARMY AND NAVI BUILDING, 3 RD FLOOR, 148, M G ROAD, FORT, MUMBAI-400001 / VS. DY. COMMISSIONER OF INCOME TAX - 1(3), (FORMERLY DY. COMMISSIONER OF INCOME TAX (OSD), RANGE -1(1), AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 ( / APPELLANT) .. ( / RESPONDENT) ./ ./PAN/GIR NO. :AACCT6242L ! / ASSESSEE BY: SHRI M M GOLWALA AND SHRI AMPY WAGLE ' ! / REVENUE BY: SHRI NEIL PHILIP # ' $% / DATE OF HEARING : 21.11.2014 &' ' $% /DATE OF PRONOUNCEMENT : 9.1.2015 / O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: THE APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER DATED 15.6.2011 PASSED BY LD CIT(A)-1, MUMBAI AND IT RELA TES TO THE ASSESSMENT YEAR 2007-08. THE ASSESSEE IS AGGRIEVED BY THE DECISION OF LD CIT(A) IN CONFIRMING THE DISALLOWANCE OF EXPENDITURE OF RS.61,01,298/- C LAIMED BY THE ASSESSEE. 2. THE FACTS RELATING TO THE ISSUE ARE STATED IN BRIEF. THE ASSESSEE HEREIN WAS INCORPORATED ON 02-03-2007. HENCE THE ACCOUNTING P ERIOD FOR THE ASSESSMENT YEAR UNDER CONSIDERATION WAS FROM 02-03-2007 TO 31. 3.2007. THE ASSESSEE WAS FORMED TO CARRY ON THE BUSINESS OF PROVIDING ADVISO RY SERVICES IN THE FIELD OF REAL ESTATE AND INFRASTRUCTURE PROJECT. DURING THE YEAR UNDER CONSIDERATION, THE ITA NO.6380/M/2011 2 ASSESSEE DID NOT RECEIVE ANY OPERATIVE INCOME. THE ONLY INCOME DECLARED BY THE ASSESSEE WAS DIVIDEND INCOME OF RS.19,321/-. T HE ASSESSEE DECLARED A LOSS OF RS.61,01,298/- AFTER CLAIMING EXPENDITURE O F VARIOUS TYPES. THE ASSESSING OFFICER DISALLOWED THE CLAIM OF LOSS FOR THE FOLLOWING REASONS:- (A) THE ENTIRE EXPENDITURE WAS DIRECTLY ATTRIBUTAB LE TO EARNING OF EXEMPT INCOME. (B) THE ASSESSEE HAS ENTERED INTO FIRST MOU ONLY O N 10.8.2007 AND FURTHER THE ASSESSEE HAS FAILED TO FURNISH ANY EVIDENCE TO SHOW THAT IT HAS RENDERED ANY SERVICE DURING THE YEAR UNDER CONSIDER ATION. HENCE THE ASSESSEE CANNOT BE CONSIDERED TO HAVE SET UP THE BU SINESS. 3. IN THE APPELLATE PROCEEDINGS, THE LD CIT(A) ACC EPTED THE VIEW EXPRESSED BY THE ASSESSING OFFICER. 4. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. FROM THE SUBMISSIONS MADE BY LD A.R, WE NOTICE THAT THE ASSE SSEE WAS INCORPORATED BY M/S TATA SONS LTD. THE DECISION TO FORM THE PRESEN T COMPANY WAS TAKEN AT LEAST SIX MONTHS PRIOR TO THE DATE OF INCORPORATION OF TH E ASSESSEE COMPANY. ACCORDINGLY, THE PROMOTER HAS RECRUITED EMPLOYEES I N VARIOUS FIELDS AND HAS ALSO STARTED PAYING REMUNERATION TO THEM. FURTHER THE P ROMOTER HAS STARTED INCURRING VARIOUS EXPENSES TOWARDS REMUNERATION, RENT, TRAVEL LING, POWER & FUEL, TELEPHONE, BROKERAGE AUDITORS REMUNERATION, PROFESSIONAL FEE, BROKERAGE ETC. THE EXPENSES INCURRED UP TO THE DATE OF INCORPORATION W AS CATEGORIZED AS PRE- INCORPORATION EXPENSES AND PRELIMINARY EXPENSES. IT IS AN ADMITTED FACT THAT THE ASSESSEE DID NOT CLAIM THE EXPENSES CATEGORIZED AS PRE-INCORPORATION EXPENSES AND PRELIMINARY EXPENSES AS DEDUCTION. ACCORDING TO LD A.R, THE ASSESSEE HAS CLAIMED EXPENSES INCURRED AFTER 2.3.2 007 ONLY, I.E., THE DATE OF INCORPORATION. 5. THE STAND OF THE ASSESSING OFFICER IS THAT THE ASSESSEE HAS NOT SET UP THE BUSINESS AT ALL DURING THE YEAR UNDER CONSIDERATION . THE AO HAS REACHED THIS CONCLUSION ONLY ON THE REASONING THAT THE ASSESSEE HAS ENTERED INTO FIRST MOU ONLY ON 10.8.2007. HOWEVER, ACCORDING TO THE ASSES SEE, IT HAS STARTED THE BUSINESS OF PROVIDING ADVISORY SERVICES IN REAL EST ATE AND INFRASTRUCTURE AND SUCH KIND OF BUSINESS DOES NOT REQUIRE ANY GESTATION PER IOD, AS IN THE CASE OF MANUFACTURING INDUSTRIES. ACCORDINGLY, IT IS CONTE NDED THAT THE ASSESSEE HAS SET ITA NO.6380/M/2011 3 UP ITS BUSINESS ON THE DATE OF INCORPORATION ITSELF . IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAD RECRUITED THE EMPLOYEES AND STARTE D ALL KIND OF BACK GROUND WORKS MUCH PRIOR TO THE DATE OF INCORPORATION AS PE R THE DECISION TAKEN BY THE PROMOTER COMPANY. 6. THERE IS NO DISPUTE THAT THE EXPENSES INCUR RED AFTER THE DATE OF SETTING UP OF BUSINESS IS ALLOWABLE AS REVENUE EXPENDITURE. B EFORE US, THE ASSESSEE PLACED RELIANCE ON THE DECISION RENDERED BY HONBLE DELHI HIGH COURT IN THE CASE OF CAREFOUR WC&C INDIA PRIVATE LIMITED VS. DCIT (IT A NO.42/2014 DATED 22.09.2014). IN THE ABOVE SAID DECISION, THE FOLLO WING OBSERVATIONS MADE BY HONBLE JURISDICTIONAL BOMBAY HIGH COURT IN THE CAS E OF WESTERN INDIA VEGETABLE PRODUCTS LTD VS. CIT (1954)(26 ITR 151) HAVE BEEN N OTED DOWN:- THE IMPORTANT QUESTION THAT HAS GOT TO BE CONSIDER ED IS FROM WHICH DATE ARE THE EXPENSES OF THIS BUSINESS TO BE CONSIDERED PERMISSIBLE DEDUCTIONS AND FOR THAT PURPOSE THE SECTION THAT WE HAVE TO LO OK TO IS SECTION 2(11) AND THAT SECTION DEFINES THE PREVIOUS YEAR AND FO R THE PURPOSE OF A BUSINESS THE PREVIOUS YEAR BEGINS FROM THE DATE OF SETTING U P OF THE BUSINESS. THEREFORE, IT IS ONLY AFTER THE BUSINESS IS SET UP THAT THE PREVIOUS YEAR OF THAT BUSINESS COMMENCES AND IN THA T PREVIOUS YEAR THE EXPENSES INCURRED IN THE BUSINESS CAN BE CLAIMED AS PERMISSIBLE DEDUCTIONS. ANY EXPENSES INCURRED PRIOR TO SETTING UP A BUSINESS WOULD OBVIOUSLY NOT BE PERMISSIBLE DEDUCTIONS BECAUSE THO SE EXPENSES WOULD BE INCURRED AT A POINT OF TIME WHEN THE PREVIOUS YE ARS OF THE BUSINESS WOULD NOT HAVE COMMENCED. THE HONBLE DELHI HIGH COURT ALSO CONSIDERED BY THE DECISION RENDERED BY HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT, GUJA RAT VS. M/S SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD (1973)(91 ITR 17 0) AND FINALLY HELD AS UNDER:- 11. ON A READING OF THE ABOVE REFERRED QUOTATIONS , IT IS CLEAR THAT IT IS ONLY AFTER THE BUSINESS IS SET UP, THAT THE EXPENSES INC URRED IN THE BUSINESS CAN BE CLAIMED AS PERMISSIBLE DEDUCTION UNDER SECTI ON 37 OF THE ACT. FOR COMMENCEMENT OF A BUSINESS, THERE MUST BE IN PLACE SOME INCOME GENERATING ASSET OR INCOME EARNING STRUCTURE. IN SEVERAL CASES, THERE IS A GAP OR AN INTERVAL BETWEEN SETTING UP AND COMM ENCEMENT. 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/PROF ESSIONAL ACTIVITY. FOR EXAMPLE, FOR MANUFACTURING BUSINESS, PURCHASE OF NE W MATERIAL OR ELECTRICITY CONNECTION MAY BE RELEVANT POINT TO DET ERMINE SETTING UP BUT IN CASE OF PROPERTY DEALER, THE MOMENT HE PUTS UP A CH AIR AND TABLE, OR STARTS TALKING, HIS BUSINESS IS SET UP. ITA NO.6380/M/2011 4 7. IT CAN BE NOTICED THAT HONBLE GUJARAT HIGH COURT IN THE CASE OF SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD (SUPRA) HAS HELD THAT FOR COMMENCEMENT OF BUSINESS, THERE MUST BE IN PLACE SOME INCOME GENERA TING ASSET OR INCOME EARNING STRUCTURE. FURTHER IT IS HELD THAT THE DET ERMINATION OF SETTING UP WOULD DEPEND UPON THE FACTS PREVAILING IN EACH CASE. IT IS FURTHER HELD THAT, IN CASE OF A PROPERTY DEALER, THE MOMENT HE PUTS UP A CHAIR AND TABLE OR STARTS TALKING, HIS BUSINESS IS SET UP. THUS, IT CAN BE SEEN THAT THE ACTUAL ENTERING INTO MOU OR BILLING ARE NOT RELEVANT FACTORS TO DETERMINE THE D ATE OF SETTING UP OF BUSINESS IN CASE OF CONSULTANTS LIKE PROPERTY DEALER. 8. THE HONBLE DELHI HIGH COURT FURTHER REFERR ED TO ITS DECISION RENDERED IN THE CASE OF COMMISSIONER OF INCOME TAX IV VS. SAMSUNG I NDIA ELECTRONICS LTD (2013)(356 ITR 354)(DELHI), WHEREIN THE FOLLOWING F INDING GIVEN BY THE TRIBUNAL WAS APPROVED:- 6. IN VIEW OF THE ABOVE, THE BUSINESS OF THE ASSE SSEE COULD BE SAID TO HAVE BEEN SET UP ON SEPTEMBER 3, 1995, AS PRIOR TO THIS NECESSARY AGREEMENTS HAD BEEN ENTERED INTO, KEY PERSONNEL HAD BEEN RECRUITED AND THE ASSESSEE-COMPANY HAD STARTED WORKING NECESSARY INFRASTRUCTURE LIKE OFFICE PREMISES, OFFICE EQUIPMENT ETC., AND THE ASS ESSEE COMPANY WAS READY TO COMMENCE TRADING OPERATION AS ON THE DATE OF INCORPORATION, VIZ., AUGUST 3, 1995. ACCORDINGLY, THE ASSESSING OFFICER IS DIRECTED TO ALLOW THE REVENUE EXPENDITURE INCURRED AFTER THE SETTING UP O F BUSINESS WHICH WAS SEPTEMBER 3, 1995, NOTWITHSTANDING THE FACT THAT CO MMERCIAL OPERATIONS STARTED WITH EFFECT FROM OCTOBER 1, 1995. FOR THE PURPOSE OF CLAIMING EXPENDITURE INCURRED THEREAFTER, AS REVENUE EXPENDI TURE, RELIANCE ARE PLACED ON THE FOLLOWING DECISIONS. 9. IN THE INSTANT CASE, THE BUSINESS OF THE ASS ESSEE WAS PROVIDING ADVISORY SERVICES IN REAL ESTATE AND INFRASTRUCTURE PROJECTS . WE HAVE ALREADY NOTICED THAT, FOR A COMPANY PROVIDING CONSULTANCY SERVICES, THE D ATE OF OPENING OF OFFICE CAN BE CONSIDERED AS DATE OF SETTING UP OF BUSINESS. I N THE INSTANT CASE, WE HAVE NOTICED THAT THE ASSESSEE COMPANY HAS RECRUITED ITS EMPLOYEES WELL BEFORE THE DATE OF INCORPORATION, WHICH INCLUDED, INTER ALIA, A MANAGING DIRECTOR, A CHIEF FINANCIAL OFFICER, HUMAN RESOURCE PERSONNALS, SECRE TARIAL STAFF AND PERSONS ITA NO.6380/M/2011 5 WELL VERSED IN STRATEGIC RESEARCH AND ADVISORY AND MARKETING AND ALSO PERSONS HAVING EXPERTISE IN CONSTRUCTION PROJECTS, ARCHITEC TS ETC. IT HAS ALSO PURCHASED COMPUTERS, OFFICE EQUIPMENTS, VEHICLES AND HAS ALSO HIRED ITS OFFICE. IT IS FURTHER STATED THAT THE ASSESSEE HAS UNDERTOOK SPECIFIC PRO JECTS IN THE MONTH OF MARCH, 2007 FOR COMPANIES LIKE TCS, RALLIS, VSNL. TATA TEA (BANGALORE), TATA TEA (MUNNAR), DELHI DEVELOPMENT AUTHORITY, INDIRA GANDH I NATIONAL CENTRE FOR ARTS, CERTAIN PROJECTS IN TAMILNADU, MASS RAPID TRANSPORT SYSTEM (PHASE 2), SPECIAL ECONOMIC ZONES, AIRPORTS ETC, WHICH MEANS THAT THE ASSESSEE HAS STARTED CONTACTING ITS PROSPECTIVE CUSTOMERS IN THE MONTH O F MARCH 2007 ITSELF. THE SPECIFIC OBSERVATION OF THE TAX AUTHORITIES IS THAT THE ASSESSEE HAS FAILED TO FURNISH ANY EVIDENCE IN THE FORM OF CORRESPONDENCE ETC. TO SHOW THAT IT HAS COMMENCED ITS BUSINESS ACTIVITIES. HOWEVER, THE SA ID FACT MAY NOT BE RELEVANT FOR A CONSULTANCY COMPANY. HENCE, IN FACTS PREV AILING IN THE INSTANT CASE, WE ARE OF THE VIEW THAT THE ASSESSEE SHOULD BE CONSIDE RED TO HAVE BEEN SET UP ITS BUSINESS ON THE DATE OF ITS INCORPORATION AND HENCE THE EXPENSES INCURRED AFTER THAT DATE SHOULD BE ALLOWED AS REVENUE EXPENDITURE. THE VIEW TAKEN BY THE TAX AUTHORITIES THAT THE FIRST MOU WAS ENTERED IN THE S UCCEEDING YEAR SHOULD BE CONSIDERED AS DATE OF SETTING UP OF BUSINESS IS NOT IN ACCORDANCE WITH THE SETTLED PRINCIPLES DISCUSSED ABOVE. ACCORDINGLY WE SET ASI DE THE ORDER OF LD CIT(A). 10. HOWEVER, WE NOTICE THAT THE ASSESSING OFFICER DID NOT HAVE OCCASION TO EXAMINE THE EXPENDITURE CLAIM PUT FORTH BY THE ASSE SSEE, SINCE HE HAD TREATED ALL THE EXPENSES AS PRIOR PERIOD EXPENDITURE. SINCE WE HAVE REVERSED THE VIEW TAKEN BY THE ASSESSING OFFICER, WE ARE OF THE VIEW THAT ALL THE EXPENDITURE CLAIMED BY THE ASSESSEE NEED TO BE EXAMINED AT THE END OF T HE ASSESSING OFFICER. ACCORDINGLY, WHILE HOLDING THAT THE ASSESSEES BUSI NESS CAN BE CONSIDERED TO HAVE BEEN SET UP ON THE DATE OF INCORPORATION AND H ENCE THE EXPENDITURE INCURRED AFTER THAT DATE IS ALLOWABLE AS REVENUE EX PENDITURE IN THE FACTS AND CIRCUMSTANCES OF THIS CASE, WE RESTORE THE MATTER O F EXAMINING THE EXPENDITURE CLAIM TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO EXAMINE THEM AFTER AFFORDING NECESSARY OPPORTUNITY OF BEING HEARD TO T HE ASSESSEE AND TAKE APPROPRIATE DECISION IN ACCORDANCE WITH THE LAW. I N VIEW OF THE ABOVE, WE ARE UNABLE TO AGREE WITH THE VIEW OF THE TAX AUTHORITIE S THAT ALL THE EXPENSES SHOULD BE CONSIDERED AS HAVING BEEN INCURRED FOR EARNING T HE EXEMPTED DIVIDEND ITA NO.6380/M/2011 6 INCOME. ACCORDINGLY, WE REVERSE THE ORDER OF LD CI T(A) ON THAT ISSUE ALSO AND RESTORE THE SAME TO THE FILE OF THE AO, WHO DIRECT ED TO EXAMINE THE APPLICABILITY OF THE PROVISIONS OF SEC. 14A OF THE ACT ALSO AFRES H. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS T REATED AS ALLOWED FOR STATISTICAL PURPOSES. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 9TH JAN, 2015. &' # () * + 9TH JAN, 2015 ' ' , - SD SD ( / VIJAY PAL RAO ) ( . . ,/ B.R. BASKARAN ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER ( # MUMBAI: 9TH JAN,2015. . . ./ SRL , SR. PS !'# $#%! / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. # 0$ ( ) / THE CIT(A)- CONCERNED 4. # 0$ / CIT CONCERNED 5. 6. 1, $ 2 , % 2 , ( # / DR, ITAT, MUMBAI CONCERNED ,3 4 / GUARD FILE. 5 # / BY ORDER, TRUE COPY 6 (ASSTT. REGISTRAR) % 2 , ( # /ITAT, MUMBAI