INDIVISON INVESTMENT ADVISORS LTD ( NOW KNOWN AS FUTURE CAPITAL INVESMENT ADVISORS LTD), MUMBAI V. ASST CIT CIR 6(1), MUMBAI

ITA 6955/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8744 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 20-09-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 06-10-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: FIROZE B ANDHAYARUJILA
• Assessee Lawyers: P K SHUKLA
• Keywords: Business expenditure
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH I , MUMBAI BEFORE SHRI DINESH KUMAR AGARWAL, JUDICIAL MEMBER AND SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER ITA NO.6955/MUM/2010 ASSESSMENT YEAR : 2006-07 INDIVISION INVESTMENT ADVISORS LTD. (NOW KNOWN AS FUTURE CAPITAL INVESTMENT ADVISORS LIMITED) FCH HOUSE, PENINSULA CORPORATE PARK GANPATRAO KADAM MARG, LOWER PAREL MUMBAI-400 013. PAN NO. AABCI 4445 D ASSTT. COMMISSIONER OF INCOME TAX -6(1) MUMBAI. (APPELLANT) VS. (RESPONDENT) APPELLANT BY : SHRI FIROZE B. ANDHAYARUJILA RESPONDENT BY : SHRI P.K. SHUKLA DATE OF HEARING : 20.9.2012 DATE OF PRONOUNCEMENT : 26.9.2012 O R D E R PER RAJENDRA SINGH, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER D ATED 25.6.2010 OF CIT(A) FOR THE ASSESSMENT YEAR 2006-07. TH E ASSESSEE IN THIS APPEAL HAS RAISED DISPUTES ON TWO DIFFERENT GROU NDS WHICH RELATE TO LACK OF ADEQUATE OPPORTUNITY OF HEARING AND DISAL LOWANCE OF LOSS OF RS.2,62,29,463/-. ITA NO.6955.M.10 A.Y.06-07 2 2. WE FIRST TAKE UP THE DISPUTE RELATING TO LACK OF AD EQUATE OPPORTUNITY BY THE AO. THE AO IN THE ASSESSMENT ORDER H AD DISALLOWED CLAIM OF EXPENSES OF RS.2,62,29,463/-. ASSESSEE RAISED THE G ROUND BEFORE CIT(A) THAT AO HAD PASSED THE ORDER WITHOUT PR OVIDING PROPER OPPORTUNITY OF HEARING TO THE ASSESSEE. THE AO HAD ASKED THE ASSESSEE TO EXPLAIN AS TO WHY EXPENSES SHOULD NOT BE DISALL OWED AS THERE WAS NO INCOME EARNED AND BUSINESS HAD NOT COMMENCED. THE ASSESSEE HAD FILED DETAILED SUBMISSIONS VIDE LETTER DATED 20.11.2008 AND AFTER CONSIDERING THE SAME THE AO HELD THAT THE COM MENCEMENT OF BUSINESS WAS NOT THE QUESTION. HE DISALLOWED THE EXPENSES HO LDING THAT THE SAME WERE NOT ALLOWABLE UNDER SECTION 30 TO 3 7 OF THE INCOME TAX ACT, 1961. IT WAS SUBMITTED THAT THE AO BEFORE DI SALLOWING THE CLAIM SHOULD HAVE GIVEN OPPORTUNITY TO THE ASSESSEE TO EX PLAIN AS TO WHY EXPENSES WERE NOT ALLOWABLE UNDER SECTION 30-37. IT WAS ACCORDINGLY URGED THAT THE ORDER SHOULD BE SET ASIDE. IT WAS ALSO SUBMITTED THAT THE CASE WAS SELECTED FOR SCRUTINY VIDE NOTI CE DATED 26.8.2008 AND ASSESSMENT ORDER PASSED ON 3.12.2008. 2.1 CIT(A), HOWEVER, DID NOT ACCEPT THE CONTENTIONS RA ISED. IT WAS OBSERVED BY HIM THAT THE AO IN THE ASSESSMENT ORDER HAD DULY NOTED THAT IN RESPONSE TO NOTICE ISSUED SHRI VIKRAM BOHRA ALON G WITH FINANCE CONTROLLER AND ASTT. MANAGER HAD APPEARED FROM TIME TO TIME BEFORE HIM AND EXPLAINED THE CASE. IT WAS THEREFORE CLEAR THA T SUFFICIENT ITA NO.6955.M.10 A.Y.06-07 3 OPPORTUNITY WAS GIVEN TO THE ASSESSEE. CIT(A), THEREFOR E DISMISSED THE GROUND RAISED AGGRIEVED BY WHICH ASSESSEE HAS FILED TH E APPEAL BEFORE THE TRIBUNAL. 2.2 WE HAVE HEARD BOTH PARTIES. THE LD. AR REITERATE D THE SUBMISSIONS MADE BEFORE CIT(A) WHEREAS THE LD. DR SUBMIT TED THAT THE AO HAD PROVIDED OPPORTUNITY OF HEARING BEFORE P ASSING THE ORDER. 2.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MATTE R CAREFULLY. WE FIND THAT THE AO IN PARA-4 HAS DULY RECO RDED THAT THE ASSESSEE WAS ASKED TO FILE REPLY JUSTIFYING BUSINESS EXPENDIT URE, THEREFORE, IT CAN NOT BE SAID THAT THE ASSESSEE HAD NOT B EEN ALLOWED OPPORTUNITY TO EXPLAIN THE ALLOWABILITY OF EXPENSES U NDER SECTION 30-37 OF THE ACT. THE ASSESSEE HAD FILED DETAILED SUBMISSION VID E LETTER DATED 20.11.2008 AND REPRESENTATIVE OF THE ASSESSEE HAD ALSO A PPEARED BEFORE AO FROM TIME TO TIME TO EXPLAIN THE MATTER. THE AO HAD PASSED THE ORDER AFTER CONSIDERING DETAILED SUBMISSIONS AND AFT ER HEARING THE ASSESSEE. IT CAN NOT, THEREFORE BE SAID THAT THE ASSESSEE HAD NOT BEEN PROVIDED A PROPER OPPORTUNITY OF HEARING BY THE AO. WE, THEREFORE SEE NO INFIRMITY IN THE ORDER OF THE CIT(A) DISMISSING TH E GROUND RAISED BY THE ASSESSEE AND THE SAME IS UPHELD. 3. THE SECOND DISPUTE IS REGARDING ALLOWABILITY OF BUSI NESS LOSS OF RS.2,62,29,465/-. THE AO DURING THE ASSESSMENT PROCEEDING S NOTED ITA NO.6955.M.10 A.Y.06-07 4 THAT ASSESSEE WAS ENGAGED IN THE BUSINESS OF ASSET MANAGEMENT COMPANY AND HAD DECLARED NET LOSS FROM BUSINESS IN THE VE RY FIRST YEAR OF OPERATION. THE AO THEREFORE ASKED THE ASSESSEE TO GIV E JUSTIFICATION REGARDING ALLOWABILITY OF BUSINESS EXPENSES. THE ASSESSEE F ILED DETAILED SUBMISSIONS VIDE LETTER DATED 20.11.2008 IN WHICH IT WAS SUBMITTED THAT THE MAIN OBJECT OF THE ASSESSEE COMPANY WAS TO PROVI DE FINANCE, INVESTMENT ADVISORY SERVICES AND MANAGEMENT AND FACILITAT ION SERVICES INCLUDING IDENTIFICATION OF INVESTMENT OPPORTUNITIES, CONDUCTING ANALYSIS AND ASSESSMENT PROVIDING INVESTMENT RECOMMENDATI ONS AND CONSULTANCY SERVICES. IT WAS ALSO SUBMITTED THAT THE ASSESSEE WAS RECEIVING ADVISORY FEES ON COST + 20% BASIS. THE ASSESSEE FURTHER EXPLAINED THAT THE ASSESSEE COMPANY HAD OBTAINED CERTIFI CATE OF COMMENCEMENT DATED 21.11.2005 FROM REGISTRAR OF COMPANI ES AND SUFFICIENT CAPITAL WAS INFUSED IN THE COMPANY. THE ASSESSEE COMPANY HAD ALSO TAKEN PREMISES ON LEASE FROM WHERE IT WAS OPERA TING AND HAD APPOINTED VARIOUS EMPLOYEES TO CARRY ON ADVISORY ACTIVIT IES. THE COMPANY HAD ALSO TAKEN UP ACTIVE NEGOTIATIONS WITH VARI OUS CLIENTS TO CONCLUDE ADVISORY CONTRACTS. IT WAS ARGUED THAT FOR ALLOW ABILITY OF EXPENSES, COMMENCEMENT OF BUSINESS WAS NOT NECESSARY AND WHA T WAS REQUIRED WAS THAT BUSINESS SHOULD HAVE BEEN SET UP W HICH MEANT THAT THE COMPANY WAS READY TO PROVIDE THE SERVICES. THE ASSESSEE PLACED RELIANCE ON THE JUDGMENT OF HON'BLE HIGH COURT O F BOMBAY IN ITA NO.6955.M.10 A.Y.06-07 5 THE CASE OF WESTERN INDIA VEGETABLE PRODUCTS LTD. VS. CIT (26 ITR 151) IN WHICH IT WAS HELD THAT WHEN THE BUSINESS WAS ESTAB LISHED AND WAS READY TO COMMENCE BUSINESS, THE BUSINESS HAS TO BE TAKEN AS SET UP AND EXPENSES HAVE TO BE ALLOWED. THE ASSESSEE ALSO REF ERRED TO SEVERAL OTHER JUDGMENTS. 3.1 THE AO AFTER CONSIDERING SUBMISSIONS OF THE ASSESSEE OB SERVED THAT COMMENCEMENT OF BUSINESS WAS NOT THE QUESTION. THE QU ESTION AS PER AO WAS WHETHER EXPENSES WERE INCURRED FOR THE PURPO SE OF BUSINESS. THE AO FURTHER OBSERVED THAT THE ASSESSEE HAD NO T PRODUCED A SINGLE AGREEMENT WITH ANY CLIENT FOR PROVIDING SERV ICES. THE EXPENSES WERE, THEREFORE OF THE NATURE OF PRIOR PERIO D EXPENSES. THE AO ALSO REFERRED TO GUIDELINES ISSUED BY ICAI IN AS-9 F OR REVENUE RECOGNITION AS PER WHICH REVENUE SHOULD BE RECOGNIZED W HEN THERE IS NO UNCERTAINTY IN REALIZATION OF CONSIDERATION. THEREF ORE, THERE BEING NO AGREEMENT WITH ANY PARTY, IT COULD NOT BE SAID THA T THERE WAS CERTAINTY IN REALIZATION OF CONSIDERATION. THE AO FURT HER OBSERVED THAT THE AMOUNTS SPENT BY THE ASSESSEE WERE ON BEHALF OF THE CL IENTS WHICH WERE REIMBURSED. THE ASSESSEE HAD ALSO NOT PROVIDED DETA ILS OF TRAVEL EXPENSES IN THE PRESCRIBED FORMAT. THE AO, THEREFORE, D ISALLOWED THE ENTIRE CLAIM OF LOSS OF RS.2,62,29,463/-. ITA NO.6955.M.10 A.Y.06-07 6 3.2 THE ASSESSEE DISPUTED THE DECISION OF AO AND SUBMITTED BEFORE CIT(A) THAT THE AO WAS NOT JUSTIFIED IN TREATING EXPE NDITURE AS PRE- OPERATIVE EXPENDITURE AS HE HAD HIMSELF OBSERVED THAT THE COMMENCEMENT OF BUSINESS WAS NOT IN DOUBT. IT WAS ALSO SUBM ITTED THAT THE ASSESSEE HAD NOT INCURRED ANY EXPENDITURE ON BEHALF OF CLIENT. THE ASSESSEE HAD INCURRED ALL EXPENSES ON ITS OWN ACCOUNT AND CLIENTS WERE BILLED ON COST +20% BASIS. THE ASSESSEE HAD INCURRED EXPENSES TO GENERATE REVENUE FOR ITSELF AND NOT FOR CLIENTS. THEREFORE IT WAS NOT CORRECT TO STATE THAT EXPENSES HAD BEEN INCURRED ON BEHAL F OF CLIENTS. IT WAS ALSO SUBMITTED THAT THE ASSESSEE HAD ACTUALLY ENTERE D INTO AGREEMENT WITH CLIENTS IN THE SUBSEQUENT YEAR AND IT HAD BEEN TAXED IN THAT YEAR. IT WAS ALSO SUBMITTED THAT DURING THE RE LEVANT ASSESSMENT YEAR THE ASSESSEE HAD INCURRED EXPENSES WHICH RELAT ED TO SALARY AND ALLOWANCE, TRAVELLING AND CONVEYANCE, BUSINE SS MEETING EXPENSES, RENT, MEMBERSHIP AND SUBSCRIPTION, AND TELEPHON E EXPENSES. THESE WERE CLEARLY OF THE NATURE OF REVENUE A ND WERE ALLOWABLE. CIT(A) HOWEVER WAS NOT SATISFIED BY THE EXP LANATION GIVE. IT WAS OBSERVED BY HIM THAT THE ASSESSEE HAD NOT ENTERED INT O ANY CONTRACT WITH ANY CLIENT DURING THE YEAR FOR RENDERING SERVICES. THEREFORE, AO WAS JUSTIFIED IN COMING TO THE CONCLUSION THAT THE EXPENDITURE WAS EITHER PER-OPERATIVE EXPENDITURE OR EXPENDITURE INCURRED ON BEHALF OF THE EMPLOYEES OR FOR THE CLIENT . SUCH EXPENDITURE ITA NO.6955.M.10 A.Y.06-07 7 WAS NOT ALLOWABLE AS DEDUCTION. CIT(A) FURTHER OBSERVED THAT THE ASSESSEE HAD PAID SALARY OF RS.1,60,77,053/- WHICH CAME TO AROUND RS.40.00 LACS PER MONTH WHICH WAS QUITE ABNORMAL. THE ASSE SSEE HAD ALSO NOT GIVEN DETAILS OF TRAVELING EXPENSES CALLED FOR BY THE AO IN THE PRESCRIBED FORMAT. CIT(A) THEREFORE, CONFIRMED THE ORD ER OF AO DISALLOWING THE CLAIM OF LOSS OF RS.2,62,29,463/-. AGGRI EVED BY THE SAID DECISION, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBU NAL. 3.3 BEFORE US, THE LD. AR REITERATED THE SUBMISSIONS MA DE BEFORE LOWER AUTHORITIES THAT BUSINESS OF THE ASSESSEE HAD BEEN SE T UP DURING THE YEAR AS THE ASSESSEE WAS READY TO PROVIDE SERVICES. IT WAS NOT NECESSARY THAT THE ASSESSEE SHOULD HAVE ACTUALLY COMMENCED BUSINESS. IT WAS ARGUED THAT THE EXPENSES INCURRED AFTER SET UP OF THE BUSINESS WHICH ARE OF THE NATURE OF THE REVENUE HAVE TO BE ALLOWED AS DEDUCTION EVEN IF THE BUSINESS MAY NOT HAVE ACTUALLY COM MENCED. IN SUPPORT OF THE SAID PROPOSITION, THE LD. AR PLACED RELI ANCE ON THE FOLLOWING JUDGMENTS:- 1) 26 ITR 151 (BOM.) IN THE CASE OF WESTERN INDIA VEGETAB LE PRODUCTS LTD. VS. CIT; 2) 192 ITR 151 (SC) IN THE CASE OF CIT VS. SARABHAI MANAGEMENT CORPORATION LTD.; 3) 199 ITR 777 (GUJ.) IN THE CASE OF CIT VS. WESTERN INDI A SEAFOOD PVT. LTD.; 4) 162 TAXMANN 1(DEL.) IN THE CASE OF CIT VS. E-FUNDS INTERNATIONAL INDIA AND 5) 116 TTJ 333 (TM)(ITAT-PUNE) IN THE CASE OF STYLER IND IA PVT. LTD. VS. JCIT . ITA NO.6955.M.10 A.Y.06-07 8 3.3.1 IT WAS ACCORDINGLY ARGUED THAT BUSINESS HAD BEEN SET UP AND AO HAD ALSO ACCEPTED THAT COMMENCEMENT OF BUSINESS WAS N OT THE QUESTION AND THEREFORE CLAIM OF EXPENSES SHOULD BE A LLOWED. 3.4 THE LD. DR ON THE OTHER HAND STRONGLY SUPPORTED THE ORDERS OF AUTHORITIES BELOW AND ARGUED THAT THE ASSESSEE HAD FAILE D TO SIGN A SINGLE CONTRACT DURING THE YEAR FOR PROVIDING SERVICES. THE CLAIM OF EXPENSES THEREFORE FOR THE YEAR COULD NOT BE ALLOWED. THE LD. DR ALSO POINTED OUT THAT THE ASSESSEE IN THE SUBSEQUENT YEAR HAD ALSO BILLED THE CLIENT ON THE BASIS OF COST + 20% EVEN IN RESPECT OF EXPENSES INCURRED IN THIS YEAR AND THEREFORE, THIS COULD LEAD TO CLAIM OF DOUBLE DEDUCTION OF EXPENSES IN CASE EXPENSES ARE ALLOWED THIS Y EAR. 3.5 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ALLOWABI LITY OF EXPENSES BY THE ASSESSEE IN THE YEAR OF INCORPORATION WHEN THE ASSE SSEE HAD NOT EARNED ANY REVENUE. THE ASSESSEE COMPANY HAD BEEN INCORPORATED ON 20.11.2005 FOR RENDERING FINANCIAL A ND INVESTMENT ADVISORY SERVICES TO CLIENTS. THE ASSESSEE DURING THE YEAR H AD INCURRED SUBSTANTIAL EXPENSES ON ACCOUNT OF SALARY, TRAVELLING, BU SINESS MEETING, RENT, MEMBERSHIP AND SUBSCRIPTION FEES AND TELE PHONE EXPENSES. THE ISSUE IS WHETHER THESE EXPENSES CAN BE ALLOWED WHEN THE ASSESSEE HAD NOT SIGNED ANY CONTRACT DURING THIS YEAR F OR PROVIDING ITA NO.6955.M.10 A.Y.06-07 9 ANY SERVICES TO ITS CLIENTS. IT IS A SETTLED LEGAL POSITION THAT FOR ALLOWABILITY OF EXPENSES WHICH ARE REVENUE IN NATURE I T IS NOT NECESSARY THAT THE BUSINESS SHOULD HAVE ACTUALLY COMMENCED. WHAT I S IMPORTANT IS THAT THE BUSINESS SHOULD HAVE BEEN SET UP WHICH MEANS THE ASSESSEE SHOULD BE READY TO COMMENCE BUSINESS. THE EXPENSES WH ICH ARE REVENUE IN NATURE NOT BEING PERSONAL EXPENSES AND WHICH ARE GENUINE BUSINESS EXPENSES INCURRED AFTER THE DATE OF SETT ING UP OF BUSINESS HAVE TO BE ALLOWED. THE EXPENSES INCURRED PRIOR TO SETTING UP OF THE BUSINESS WOULD NOT BE PERMISSIBLE DEDUCTION. THI S VIEW IS SUPPORTED BY THE JUDGMENT OF HON'BLE HIGH COURT OF BOM BAY IN THE CASE OF WESTERN INDIA VEGETABLE PRODUCTS LTD. VS. CIT (S UPRA), AND IN SEVERAL OTHER JUDGMENTS WHICH HAVE BEEN RELIED UPON BY THE LD. AR. HOWEVER, WE FIND THAT NO FINDING ON THE DATE OF SETTI NG UP OF THE BUSINESS HAS BEEN GIVEN BY THE CIT(A) OR THE AO. SUCH FI NDING HAS TO BE GIVEN AFTER DETAILED EXAMINATION, OF INFRASTRUCTUR E AVAILABLE DURING THE YEAR FOR RENDERING SERVICES, APPOINTMENT OF EMPLOY EES ETC. IN THE ABSENCE OF ANY FINDING ON THE DATE OF SETTING UP OF TH E BUSINESS, IT IS NOT POSSIBLE TO DECIDE THE ALLOWABILITY OF EXPENSES OR T O THE EXTENT THESE EXPENSES CAN BE ALLOWED. IN OUR VIEW MATTER REQUI RES FRESH EXAMINATION AT THE LEVEL OF CIT(A). WE, THEREFORE, SET ASIDE THE ORDER OF CIT(A) AND RESTORE THE MATTER BACK TO HIM FOR PASSI NG A FRESH ORDER AFTER EXAMINATION IN THE LIGHT OF OBSERVATIONS MADE I N THIS ORDER IF ITA NO.6955.M.10 A.Y.06-07 10 NECESSARY BY REMANDING THE MATTER TO AO AND AFTER ALLO WING OPPORTUNITY OF HEARING TO THE ASSESSEE. 4. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED FOR ST ATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 26.9.2012 SD/- SD/- (DINESH KUMAR AGARWAL) JUDICIAL MEMBER (RAJENDRA SINGH) ACCOUNTANT MEMBER MUMBAI, DATED: 26.9. 2012. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.