MAHINDRA RETAIL P. LTD, MUMBAI V. ASST CIT RG 6(3), MUMBAI

ITA 7045/MUM/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 2594 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-07-2016
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 01-04-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 03-12-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Business expenditure; Revenue expenditure

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUM BAI . . , , !' #$, % , & BEFORE SHRI R.C.SHARMA, AM AND SHRI AMARJIT SINGH, JM / I.T.A. NO.7045 /MUM/2013 ( %' ( / ASSESSMENT YEAR: 2008-09) MAHINDRA RETAIL PRIVATE LIMITED 5 TH , MAHINDRA TOWERS, P.K.KURNE CHOWK, MUMBAI - 400018 ' / VS. ASSTT. COMMISSIONER OF INCOME TAX RANGE 6(2) ROOM NO.522, AAYKAR BHAVAN, MUMBAI ./ ./ PAN/GIR NO. : AAFCM2868L ( / APPELLANT ) .. ( / RESPONDENT ) / DATE OF HEARING: 01.04.2016 !' /DATE OF PRONOUNCEMENT: 13.07.2016 #$ / O R D E R PER AMARJIT SINGH, JM: THE ASSESSEE HAS FILED THE PRESENT APPEAL AGAINST T HE ORDER DATED 12.09.2013 PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS) 12, MUMBAI [HEREINAFTER REFERRED TO AS THE CIT(A)] R ELEVANT TO THE A.Y.2008-09. ASSESSEE BY: SHRI KARTHIK NATARAJAN DEPARTMENT BY: SHRI N. P. SINGH ITA NO.7045/M/2013 A.Y. 2008-09 2 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING THAT TH E BUSINESS HAD NOT COMMENCED AND FURTHER ERRED IN CONFIRMING DISALLOWANCE OF ENTIRE EXPENDITURE OF RS.10,89,22,383 WITHOUT APPRECIATING THAT THE SAID EXPENDITURE WAS INCURRED AFTER SETTING UP OF THE BU SINESS IN RETAIL SPACE. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E FILED HIS RETURN OF INCOME ON 30.09.2008 DECLARING TOTAL LOSS TO THE TUNE OF RS.10,89,22,383/-. THE CASE WAS SELECTED FOR SCRUT INY AND NOTICE U/S.143(2) INCOME TAX ACT, 1961 (IN SHORT THE ACT ) WAS ISSUED ON 17.09.2009 WHICH WAS DULY SERVED UPON THE ASSESSEE . THEREAFTER NOTICE U/S.142(1) OF THE ACT ALONG WITH QUESTIONNAI RE WAS ISSUED ON 08.07.2010 WHICH WAS ALSO SERVED UPON THE ASSESSEE. ON VERIFICATION OF PROFIT & LOSS ACCOUNT, IT WAS SEEN THAT THE ASSE SSEE DID NOT SHOW ANY RECEIPTS. THERE WAS NOT CREDIT ENTRY IN THE PR OFIT & LOSS ACCOUNT OF THE ASSESSEE FOR THE YEAR ENDING ON 31.03.2008 A ND THERE WAS NO RECEIPT SHOWN UNDER ANY HEAD. THE ASSESSEE COMPANY HAS NOT MADE ANY SALES I.E. HAS NOT COMMENCED ITS BUSINESS OPERA TIONS. THEREFORE, THE ASSESSEE WAS CALLED UPON TO SHOW CAUSE AS TO WH Y THE EXPENSES CLAIMED DURING THE YEAR UNDER CONSIDERATION SHOULD NOT BE DISALLOWED. SINCE THE ASSESSEE COMPANY HAS NOT COMM ENCED ITS BUSINESS OPERATIONS AND THE ENTIRE EXPENSES DEBITED IN THE P & L ACCOUNT BE TREATED AS PRE-COMMENCEMENT EXPENSES. TH EREAFTER THE ITA NO.7045/M/2013 A.Y. 2008-09 3 EXPENDITURE WERE TREATED AS PRE COMMENCED BUSINESS. THEREAFTER THE ASSESSEE FILED AN APPEAL BEFORE CIT(A) WHO CONFIRM ED THE SAME, THEREFORE THE ASSESSEE IS BEFORE US. ISSUE NO.1:- 4. WE HAVE HEARD THE ARGUMENTS ADVANCED BY THE LEAR NED REPRESENTATIVE OF THE PARTIES AND PERUSED THE RECOR D. LEARNED REPRESENTATIVE OF THE ASSESSEE HAS ARGUED THAT WHIL E DECIDING THE ISSUE IN QUESTION ASSESSING OFFICER DID NOT GO THROUGH T HE OBJECT OF THE COMPANY AND ALSO DID NOT GIVE FINDING IN CONNECTION WITH THE ESTABLISHMENT OF THE ASSESSEE COMPANY AND THE BUSIN ESS WAS SET UP IN THE FIRST YEAR AND THEREAFTER THE ASSESSEE COMPANY STARTED TO RUN ITS BUSINESS IN THE NEXT YEAR THEREFORE IN THE SAID CIR CUMSTANCES THE ORDER PASSED BY THE CIT(A) IS WRONG AGAINST LAW AND FACTS AND IS LIABLE TO BE SET ASIDE. IT IS ALSO ARGUED THAT THE ASSESSING OF FICER DID NOT CONSIDER THE NATURE AND PURPOSE OF THE EXPENDITURE OF THE B USINESS WHICH ARE REVENUE IN NATURE, THEREFORE THE ASSESSING OFFICER HAS WRONGLY ARRIVED AT THIS CONCLUSION THAT THE EXPENDITURE IS CAPITAL IN NATURE AND THE ASSESSED THE INCOME AS NIL, THEREFORE THE OBSERVAT ION OF THE ASSESSING OFFICER WHICH HAS BEEN CONFIRMED BY THE ORDER OF C IT(A) IN QUESTION IS WRONG AGAINST LAW AND FACTS AND IS LIABLE TO BE SET ASIDE. IT IS ALSO ARGUED THAT THE ASSESSEE COMPANY HAD INCURRED ALL T HESE EXPENSES IN CONNECTION WITH BUSINESS ACTIVITIES AND ALSO PLANNE D TO VENTURE INTO EMERGING MODERN RETAIL SPACE WITH SPECIALIZED RETAI L STORES ACROSS THE ITA NO.7045/M/2013 A.Y. 2008-09 4 COUNTRY. IT IS ALSO ARGUED THAT ASSESSEE COMPANY E STABLISHED THE BUSINESS DURING THE FIRST YEAR AND IN THE SECOND YE AR THE ASSESSEE COMPANY CARRIED OUT CERTAIN ACTIVITIES SUCH AS APPO INTMENT OF CONSULTANTS, EMPLOYEES, LOCATING THE PREMISES ETC. AND THE ASSESSEE COMPANY INCURRED THE EXPENSES FOR THE BUSINESS ACTI VITIES WHICH IS LIABLE TO BE ALLOWABLE AS BUSINESS EXPENDITURE, THE REFORE THE ORDER OF THE CIT(A) ON THIS POINT IS WRONG AND IS LIABLE TO BE SET ASIDE. IN SUPPORT OF HIS CONTENTION THE LEARNED REPRESENTATIV E OF THE ASSESSEE HAS PLACED RELIANCE UPON THE LAW SETTLED IN INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH IN CASE OF TATA REALTY & INF RASTRUCTURE LTD., IN ITA NO.6380/MUM/2011. THE DEPARTMENTAL REPRESEN TATIVE OF THE DEPARTMENT HAS STRONGLY RELIED UPON THE ORDER PASSE D BY THE CIT(A). BEFORE GOING FURTHER IT IS NECESSARY TO RECORD THE EVENTS OF THE COMPANY ON RECORD. 1. THE COMPANY WAS INCORPORATED IN 3 RD SEPTEMBER 2007. 2. THE FIRST MEETING OF BOARD OF DIRECTORS WAS HELD ON 21 ST SEPTEMBER 2007 WHEREIN THE FOLLOWING DECISIONS WERE TAKEN: OPEN BANK ACCOUNT APPOINT FIRST AUDITORS AUTHORITY FOR OBTAINING STATUTORY PERMISSIONS AND COMPLETE FORMALITIES SUCH AS PAN/TAN. APPOINTMENT OF FIRST DIRECTORS APPOINTMENT OF MANAGING DIRECTOR ITA NO.7045/M/2013 A.Y. 2008-09 5 3. THE COMPANY ENTERED INTO THE CONSULTANCY AGREEME NT WITH M/S.TECHNOPAK ADVISORS PVT. LTD. FOR RETAIL ADVISORY AND BUSINESS PLANNING AND IMPLEMENTATION ASSISTANCE. 4. THE SECOND MEETING OF BOARD WAS HELD ON 27 TH NOVEMBER 2007 WHEREIN THE FOLLOWING MATTER HAS BEEN DECIDED: APPROVED THEME OF SPECIALIZED STORES FOR MOTHERS AND KIDS DETAILS OF STORES TO BE OPENED ESTIMATED INVESTMENTS / PROJECTIONS 5. THE COMPANY ENTERED INTO THE CONSULTANCY AGREEME NT WITH M/S. VERTABRAND MANAGEMENT CONSULTING PVT. LTD . FOR BRAND AND MARKETING STRATEGY DEVELOPMENT ON 31 ST JANUARY 2008. 5. HOWEVER THE ASSESSEE HAS ALSO GIVEN THE DETAILS OF HIS BUSINESS WHICH IS HEREBY MENTIONED BELOW:- MAHINDRA RETAIL PRIVATE LIMITED WAS INCORPORATED O N 3' SEPTEMBER, 2007 UNDER COMPANIES ACT OF INDIA, 1956 WITH THE OBJECTIVE TO ESTABLISH RETAIL STORES IN THE MOT HER & CHILD SEGMENT AND TO PROVIDE THE BEST OF PRODUCTS A ND SERVICES TO PREGNANT WOMEN /YOUNG MOTHERS, INFANTS AND CHILD REN UP TO THE AGE OF 9 YEARS OF AGE. THE COMPANY LOCATED ITS CORPORATE AND ADMINISTRATIV E ITA NO.7045/M/2013 A.Y. 2008-09 6 OFFICE IN BANGALORE TO ENSURE ACCESS TO BETTER AND AFFORDABLE AND ADEQUATE RETAIL MANPOWER FOR THIS PU RPOSE, MAHINDRA RETAIL PRIVATE LIMITED LEASE A PROPERTY SI TUATED AT 16512, 1 MAIN ROAD, KRISHNA RAJU LAYOUT, DORAI SAM PALYA, BANNERGHATTA ROAD, BANGALORE 560 076 FOR A P ERIOD OF 5 YEARS AT MONTHLY RENTAL OF 8,50,000/- PLUS SERVIC E TAX (W.E.F 01.04.08) BY PAYING A SECURITY DEPOSIT AMOUN T OF 1,02,00,0001- IN FEBRUARY, 2008 (AGREEMENT ENCLOSED - ANNEXURE 1) IN THE INTERIM AS THE PROPERTY WAS STIL L UNDER DEVELOPMENT COMPANY RENTED SPACE IN MAHINDRA & MAHINDRA LTD PREMISES IN BANGALORE PAYING A RENT OF 3,04,6431- THE COMPANY MOVED TO NEW OFFICE IN SEP/E MBER, 2008 DURING F.Y 2007-08 COMPANY CONCENTRATED ON MARKET RESEARCH, ESTABLISHING OF ORGANIZATION AND INFRASTR UCTURE, AND PREPARATION OF BUSINESS PLAN IN ORDER TO ACHIEV E THESE, COMPANY APPOINTED VARIOUS CONSULTANTS HAVING EXTENSIVE EXPERIENCE IN RETAIL SECTOR THE MAJOR EXP ENSES DURING THE YEAR WERE TOWARDS EMPLOYEE COST, TRAVEL AND CONSULTANCY SERVICES INCURRED TO SET UP THE BUSINES S. AS THE MAHINDRA RETAIL PRIVATE LIMITED WAS NEW TO R ETAIL AND THE CONCEPT WAS NEW TO THE INDIAN MARKET, M,'S TECH NOPARK ADVISORS PVT. LTD. WAS APPROACHED TO THE ADVISE ON STORE SET ITA NO.7045/M/2013 A.Y. 2008-09 7 UP AND PROVIDE PROJECT IMPLEMENTATION (COMPLETE END TO END SOLUTIONS FOR PROJECT IMPLEMENTATION) - FROM CONCEPTUALIZATION OF THE EXECUTION OF THE PROJECT T O THE EXECUTION OF THE PROJECT, WORKING IN TANDEM WITH TH E VARIOUS STAKE HOLDER AND PARTICIPATING IN ALL THE K EY ELEMENTS OF IMPLEMENTATION. THIS INCLUDED BUSINES S IN MODELING, STRATEGY FORMULATION & PREPARATION FOR IMPLEMENTATION, LAUNCH AND ELEVATION. M/S TECHNIOPARK ADVISORS PVT. LTD. ARE SPECIALIZED IN RETAIL ADVISORY SERVICES AND PROVIDE SERVICES TO MAJOR RE TAILERS IN INDIA IN AREAS OF RETAIL STORES BUSINESS ADVISOR Y AND RETAIL PROJECT IMPLEMENTATION ASSISTANCE. THE TOTAL COST A GREED WAS 15 CRORES PLUS SERVICE TAX M/S VERTE BRAND MANAGEMENT CONSULTING PVT LTD SPECIALIZES IN BRAND MANAGEMENT FOR CORPORATE AND WERE APPOINTED AS OUTSOURCED BRAND STRATEGY AND MARKETING DEVELOPMENT PARTNERS FOR THE COMPANY AT A TOTAL COST OF 5 LACS PER MONTH PLUS TA X PLUS ADDITIONAL OPERATING COSTS FOR A PERIOD OF 1 YEAR C OMMENCING FROM FEBRUARY 08. THEIR SCOPE INCLUDED DEVELOPING THE BRAND POSITIONI NG OF MRPL AND ITS UNIQUE VALUE PROPOSITION. THIS INCLUDE D WORKING WITH THE COMMUNICATION PARTNERS AS CHOSEN B Y THE COMPANY SUCH AS ADVERTISING AGENCIES, RETAIL DESIGN FIRMS, ITA NO.7045/M/2013 A.Y. 2008-09 8 PR FIRMS, ETC. TO CREATE MOTHER BRAND AND SUB BRAND NAMES, BRAND DESIGNS & LOGOS, BRAND MANUALS IN ELECTRONIC AND HARD COPY FORMAT, ADVERTISING TEMPLATES AND PACKAGI NG RESULTING INTO ALLOW EFFECTIVE COMMUNICATION TO ITS TARGET AUDIENCE. M/S DRSHTI STRATEGIC RESEARCH SERVICES PVT. LTD., I S AN INTEGRATED MARKET RESEARCH COMPANY PROVIDING HIGH Q UALITY INPUTS FOR EFFECTIVE MARKET DECISIONS. THEY WERE AP POINTED FOR CONDUCTING RESEARCH ON DEVELOPING RETAIL EXPERI ENCE FOR MOTHERS & CHILDREN ACROSS NATION AS A SUPPORT F OR M/S VERTEBRAND MANAGEMENT CONSULTING PVT LTD. TO TAKE I NFORMED BRAND MANAGEMENT DECISIONS. MRPL WAS ENTERING INTO SPECIALTY LIFESTYLE RETAILIN G FORMAT CATERING TO SPECIFIC SEGMENT OF THE SOCIETY AND HENCE NEEDED ITS STORES TO BE STATE OF THE ART AND APPEALING TO ITS TARGET AUDIENCE HENCE, M/S DALZIEL & POW DES IGN CONSULTANTS LTD., UK BASED CONSULTANTS SPECIALIZING IN RETAIL STORE DESIGN AND LAYOUT WERE APPOINTED TO DEVELOP AND DESIGN THE RETAIL STORE LAYOUT AND INTERIORS FO R MRPL. 6. NOW BEFORE GOING FURTHER IT IS TO BE SEEN WHAT I S THE OBJECT OF THE COMPANY. THE OBJECT OF THE COMPANY IS TO ESTAB LISH THE RETAIL STORES IN THE MOTHER AND CHILD SEGMENT AND TO PROVI DE THE BEST OF PRODUCTS AND SERVICES TO THE PREGNANT WOMEN / YOUNG MOTHERS, INFANTS ITA NO.7045/M/2013 A.Y. 2008-09 9 AND CHILDREN UP TO THE AGE OF 9 YEARS. THE CHRONIC ALLY EVENTS WHICH HAS BEEN MENTIONED ABOVE NOWHERE SPEAKS THAT THE AS SESSEE HAS STARTED ITS BUSINESS FROM THE VERY BEGINNING I.E. A FTER THE INCORPORATION OF THE COMPANY. T HE ASSESSEE ITSELF ADMITS THAT THE COMPANY HAS LOCATED ITS OFFICE AT BANGALORE AND FOR ITS BUS INESS THE ASSESSEE HAS LEASED THE PROPERTY FOR PERIOD OF FIVE YEARS W. E.F 1 4 2008 I.E, AFTER 31.3.2008. THE ASSESSEE FURTHER STATES THAT, SINCE THE PROPERTY WAS STILL UNDER DEVELOPMENT, THE ASSESSEE RENTED THE SPACE IN MAHINDRA & MAHINDRA LIMITED AND MOVED TO T HE NEW OFFICE IN SEPTEMBER, 2008. THIS REPLY OF THE ASSESS EE CLEARLY SHOWS THAT THE ASSESSEE HAS NOT CARRIED OUT ANY ACT IVITY FROM THE COMPANY OFFICE AS THEY HAVE SHIFTED TO THE SAME IN SEPTEMBER, 2008. THE ASSESSEE TOOK ANOTHER PREMISE FOR ITS BUSINESS ACTIVITY. THIS FACT DOES NOT PROVE THAT TH E ASSESSEE COMMENCED ITS BUSINESS ACTIVITY DURING THE YEAR UND ER CONSIDERATION. THE ASSESSEE FURTHER STATES THAT THE RETAIL CONCEPT WAS ALSO NEW TO THE INDIAN MARKET AND ACCORDINGLY THE ASSESS EE APPROACHED AT CONSULTANT FOR ADVICE ON STORE SET UP AND ON PROJECT IMPLEMENTATION WHICH INCLUDED BUSINESS MODE LING STRATEGY FORMULATION AND PREPARATION FOR IMPLEMENTA TION. THE ASSESSEE FURTHER STATES THAT M/S TECHNOPARK ADVISOR S PVT. LTD. ARE SPECIALIZED IN RETAIL ADVISORY SERVICES. FROM T HIS REPLY IT CAN BE SEEN THAT THESE EXPENSES ARE PRE-OPERATIVE I N NATURE. THE ASSESSEE INCURRED THESE EXPENSES FOR THE MARKET RESEARCH. ITA NO.7045/M/2013 A.Y. 2008-09 10 THE MARKET RESEARCH IS DONE PRIOR TO THE COMMENCEME NT OF BUSINESS. EVEN IF IT IS INCURRED DURING THE COURSE OF ITS REGULAR BUSINESS IT CANNOT BE AT ALL TREATED AS REV ENUE EXPENDITURE. ACCORDINGLY, THIS SHOULD NOT HAVE BEEN CLAIMED BY THE ASSESSEE AS REVENUE EXPENDITURE. THE ASSESSE E MADE THE PAYMENT TO EXPLORE THE BUSINESS OF THE RETAIL IN THE COUNTR Y. THE PAYMENT IS IN NATURE OF CONSULTANCY OR TECHNICAL FEES. THERE IS NO SALE DURING THE YEAR ONLY RESEARCH WAS GOING ON. THE PROFIT AND LO SS ACCOUNT OF THE ASSESSEE SPEAKS ABOUT THE 90% CONSULTANCY CHARGES A ND DEPUTATION CHARGES IN CONNECTION WITH THE MARKET RESEARCH. TH ESE ARE EFFORTS TO ESTABLISH THE BUSINESS. THE SERVICES OF THE M/S. V ERTABRAND MANAGEMENT CONSULTING PVT. LTD. WAS FOR MARKETING A ND BRAND DEVELOPMENT OF THE ASSESSEE WHICH IS PRE-COMMENCEME NT IN NATURE. THE EXPENSES ARE IN CONNECTION WITH THE MARKET RESE ARCH THERE IS NO SALE OR RECEIPT IN CONNECTION WITH THE BUSINESS PUR POSE. HERE KEEPING IN MIND OF THE OBJECT OF THE COMPANY, WE ARE OF THE VIEW THAT THE ASSESSEE DID NOT COMMENCE HIS BUSINESS. SO FAR AS THE LAW RELIED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CAREFOU R WC&C INDIA PRIVATE LIMITED VS. DCIT (ITA NO.42/2014 DATED 22.0 9.2014) AND HONBLE JURISDICTIONAL BOMBAY HIGH COURT IN THE CAS E OF WESTERN INDIA VEGETABLE PRODUCTS LTD. VS. CIT (1954) (26 IT R 151) ARE CONCERNED THESE ARE HAVING NON-IDENTICAL FACTS WHER EIN THE COMPANY HAS STARTED ITS BUSINESS AFTER THE INCORPORATION OF THE COMPANY. THE ACTIVITIES OF RECRUITMENT HAS BEEN STARTED WHEREAS IN THE INSTANT CASE ITA NO.7045/M/2013 A.Y. 2008-09 11 THERE WAS NOTHING ON RECORD WITH REGARD TO THE WORK ING OF THE COMPANY IN PURSUANCE OF ITS OBJECT AT THE VERY TIME OF INITIALIZATION OF THE COMPANY, THEREFORE IN VIEW OF THE SAID CIRCUMST ANCES WE ARE OF THE VIEW THAT CIT(A) HAS DECIDED THESE ISSUES JUDICIOUS LY AND CORRECTLY WHICH DOES NOT REQUIRE TO BE INTERFERE WITH AT THIS APPELLATE STAGE. ACCORDINGLY THIS ISSUE IS DECIDED IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS HEREBY DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH JULY , 2016. SD/- SD/- (R.C.SHARMA) (AMARJIT SINGH) # / ACCOUNTANT MEMBER %& # /JUDICIAL MEMBER ' ( MUMBAI; )# DATED : 13 TH JULY, 2016 MP MP MP MP * +%'#, -,(' / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. * ( ) / THE CIT(A)- 4. * / CIT 5. -./ &&01 , 01' , ' ( / DR, ITAT, MUMBAI 6. /34 5 / GUARD FILE. ' / BY ORDER, - & //TRUE COPY// ./$ ! /(DY./ASSTT. REGISTRAR) , ' ( / ITAT, MUMBAI