METROPOLITAN OIL AND GAS PVT. LTD., NEW DELHI V. DCIT, CIRCLE- 16(2), NEW DELHI

ITA 7278/DEL/2018

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 5161 (ITAT-DELHI)
• Duration Of Justice: 11 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-10-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Assessment Year: 2014-2015
• Appeal Filed On: 15-11-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S L ANURAGI
• Keywords: Business expenditure
• Section: 143(3); 37

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL, DELHI BENCH F+SMC, NEW DELHI BEFORE : SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO. 7278/DEL/2018 ASSESSMENT YEAR: 2014-15 METROPOLITAN OIL AND GAS PVT. LTD., 21, BASANT LOK COMPLEX, VASANT VIHAR, NEW DELHI. PAN AAICM1817A (APPELLANT) VS. DCIT, CIRCLE 16 ( 2 ), NEW DELHI (RESPONDENT) APPELLANT BY SH. AMAR JEET SINGH, CA RESPONDENT BY SH. S .L. ANURAGI, SR. DR ORDER PER AMIT SHUKLA, J.M.: THE AFORESAID APPEAL HAS BEEN FILED BY THE ASSESSE E AGAINST THE IMPUGNED ORDER DATED 28.08.2018 PASSED BY THE CIT(A )-6,NEW DELHI FOR THE QUANTUM OF ASSESSMENT PASSED U/S. 143(3) FOR ASSESS MENT YEAR 2014-15. 2. TWO EFFECTIVE GROUNDS RAISED BY THE ASSESSEE REA D AS UNDER : 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED BOTH ON FACTS AND IN LAW IN CONFIRMING THE ACTION OF LEA RNED ASSESSING OFFICER IN DISALLOWING EARLIER YEAR LOSS OF RS.1,80,689/- U/S. 70 OF IT ACT, 1961. DATE OF HEARING 2 3 .07.2019 DATE OF PRONOUNCEMENT 16.10.19 ITA NO. 7278/DEL/2018 2 3. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) H AS ERRED BOTH ON FACTS AND IN LAW IN CONFIRMING THE ACTION OF LEA RNED ASSESSING OFFICER IN DISALLOWING BUSINESS EXPENDITURE INCURRED DURING TH E RELEVANT PREVIOUS YEAR AMOUNTING TO RS.98,13,288/- ON THE GROUND THAT THE SAME HAS BEEN INCURRED BEFORE SETTING UP OF THE BUSINESS IGNORING THE EXPLANATION OF THE APPELLANT AS WELL AS CIRCUMSTANCES WHICH EXIST DURI NG THE YEAR UNDER CONSIDERATION AND OTHER FACTS ON RECORDS THEREBY WR ONGLY APPLIED THE PROVISIONS OF SECTION 37 OF THE ACT. 3. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE SUB MITTED THAT GROUND NO. 2 IS NOT PRESSED. ACCORDINGLY, THE SAME IS DISMISSED AS NOT PRESSED. 4. THE BRIEF FACTS QUA THE ISSUE RELATING TO DISALL OWANCE OF EXPENDITURE OF RS.98,13,288/- ARE THAT THE ASSESSEE COMPANY WAS IN CORPORATED ON 14.09.2012 FOR CARRYING ON THE BUSINESS OF EXPLORAT ION, PROCESSING AND TRADING OF CRUDE OIL. THE MAIN OBJECTS OF THE COMPANY WERE AS UNDER : A). TO CARRY ON THE BUSINESS OF EXPLORATION OF OIL AND NATURAL GAS, TO SET UP REFINERIES, TO SET UP BOTH UPSTREAM AND DOWNSTREAM PETROLEUM PROJECTS IN INDIA AND ABROAD. B). TO ACQUIRE DRILLING RIGS BOTH BY HIRING OR MANU FACTURE FOR OFF-SHORE AND ON- SHORE DRILLINGS AND TO ACQUIRE AND HIRE SHIPS AND T ANKERS FOR TRANSPORTATION. C). TO CARRY ON THE BUSINESS OF PURCHASE AND SALE O F PETROLEUM, PRODUCTS, TO ACT AS DEALERS AND DISTRIBUTORS FOR PETROLEUM COMPANIES AND SET UP DELIVERY OUTLETS FOR DISTRIBUTION OF GAS THROUGH PIPELINES AND SET UP DE LIVERY STATIONS FOR ALL KINDS OF PETROLEUM PRODUCTS. 5. THE ASSESSEE FILED RETURN OF INCOME ON 16.09.201 4 DECLARING TOTAL LOSS OF RS.72,90,702/-. THE LD. ASSESSING OFFICER ASKED THE ASSESSEE TO GIVE THE DETAILS OF COMMENCEMENT OF BUSINESS AND WHETHER ANY BUSINES S ACTIVITY HAS BEEN CARRIED OUT AND WHY THE EXPENSES CLAIMED SHOULD NOT BE DISALLOWED. IN ITA NO. 7278/DEL/2018 3 RESPONSE, THE ASSESSEE SUBMITTED THAT IT HAD PARTIC IPATED IN THE BID PROCESS OF GOVERNMENT OF NAGALAND ON 5 TH JANURAY, 2013 FOR PETROLEUM OPERATIONS IN THE STATE OF NAGALAND AS PART OF NAGALAND PETROLEUM AND NATURAL GAS RULES & REGULATIONS. THE ASSESSEE HAD WON THE BIDS FOR TWO BLOCKS, NAMELY WOKHA AND PEREN ZONES, WHICH WAS COMMUNICATED BY LETTER O F INTENT DATED 04.09.2013. BEFORE THE ALLOTMENT OF PERMIT, THE COM PANY ANALYSED ALL THE RELEVANT DATA, WHICH WERE AVAILABLE, SO THAT OIL PR ODUCTION CAN BE STARTED WITHIN TEN MONTHS FROM THE COMMENCEMENT OF THE WORK AS PER COMMITMENT IN THE BID. THE WOKHA BLOCK ALREADY HAD MORE THAN 2 0 PRODUCTION WELLS DRILLED BY THE PREVIOUS COMPANY AND AVAILABLE FOR O IL PRODUCTION. IT WAS FURTHER EXPLAINED THAT FOR THIS KIND OF BUSINESS, L OT OF TIME IS TAKEN FOR DRILLING OF NEW WELLS. THOUGH THE PERMIT WAS RECEIVED ON 28. 02.2014, HOWEVER, THE COMPANY WAS IN ACTIVE BUSINESS IN F.Y. 2013-14 AND SINCE THE TOTAL PERIOD AVAILABLE DURING THIS YEAR WAS ONLY A MONTH, THEREF ORE, NO SALE COULD BE EFFECTED IN SUCH A SHORT PERIOD. IT WAS FURTHER EXP LAINED THAT THE ASSESSEE HAS INCURRED EMPLOYEES BENEFIT EXPENSES TO THE EXTENT O F RS.56.86 LAKHS WHILE THE OTHER EXPENDITURE WAS RS.40.74 LAKHS, FOR WHICH THE DETAILS WERE FURNISHED. IT WAS ALSO POINTED OUT THAT THE ASSESSEE COMPANY WAS ON JOB BUT IT HAD TO FACE CERTAIN LEGAL HURDLES WHEN LOCAL PERSONS HAD DRAGGE D THE ASSESSEE INTO LITIGATION BEFORE THE HONBLE GAUHATI HIGH COURT AN D THE WORK OF THE ASSESSEE HAD SUFFERED. THUS, IT CANNOT BE SAID THAT NO BUSIN ESS ACTIVITY HAD BEEN CARRIED OUT AND IN ANY WAY, THE BUSINESS HAD COMMENCED MUCH BEFORE IN THE RELEVANT FINANCIAL YEAR. IN SUPPORT, VARIOUS JUDICIAL PRONOU NCEMENTS WERE ALSO CITED. 6. THE LD. ASSESSING OFFICER FROM THE DETAILS AND S UBMISSIONS FILED BEFORE HIM OBSERVED THAT THE ASSESSEE HAD RECEIVED THE PER MIT TO EXPLORE OIL ONLY IN ITA NO. 7278/DEL/2018 4 FEBRUARY, 2014 AND THUS, THERE WAS NO EXPLORATION D ONE TILL 31.03.2014. THE EXPENSES HAVE BEEN INCURRED BY THE ASSESSEE FROM 31 .07.2013 ONWARDS MUCH BEFORE THE RECEIPT OF PERMIT BY THE COMPANY. HE HEL D THAT THE ASSESSEE MAY BECOME ENTITLED TO CLAIM EXPENSES PROVIDED THE EXPE NSES ARE INCURRED IN THE BUSINESS AFTER THE DATE OF SET-UP AND ANY SUCH EXPE NDITURE PRIOR TO SETTING UP OF THE BUSINESS IS NOT ALLOWABLE. ACCORDINGLY, HE DISALLOWED THE EXPENSES HOLDING THAT THE IMPUGNED EXPENDITURE INCURRED BY T HE ASSESSEE WERE NOT FOR CARRYING ON THE BUSINESS BUT FOR SETTING UP OF THE BUSINESS AND THERE IS NO EVIDENCE FOR ANY COMMERCIAL PRODUCTION/EXPLORATION FOR A.Y. 2014-15. 7. THE LD. CIT(A) CONFIRMED THE SAID FINDING OF THE ASSESSING OFFICER HOLDING THAT BUSINESS HAS ACTUALLY NOT COMMENCED AN D THE ENTIRE CIVIL ASSETS ARE IN THE FORM OF PERMIT FEE, AGAINST WHICH IT HAS BEEN MENTIONED THAT THE SAME WILL BE AMORTIZED AFTER COMMENCEMENT OF PRODUC TION WHICH IS MENTIONED AT NOTE NO. 8 OF THE FINANCIAL STATEMENT. THIS ITSELF GOES TO PROVE THAT THE PRODUCTION HAD NOT COMMENCED IN THE RELEVA NT FINANCIAL YEAR. 8. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE SUBM ITTED THAT THERE IS DISTINCTION BETWEEN SETTING UP OF THE BUSINESS AND COMMENCEMENT OF COMMERCIAL OPERATIONS AND IT IS NOT NECESSARY THAT THE BUSINESS IS SAID TO BE SET-UP ONLY WHEN COMMERCIAL OPERATIONS STARTS. IN S UPPORT, HE RELIED UPON THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT IN TH E CASE OF CIT V. LG ELECTRONICS (INDIA) LTD. (2005) 149 TAXMANN 166. HE ALSO GAVE A BRIEF NOTE OF BUSINESS EVENTS HAPPENED IN THE LAST PREVIOUS YEAR, I.E., F.Y. 2012-13 AND IN THE RELEVANT PREVIOUS YEAR, I.E., F.Y. 2013-14 WHIC H ARE AS UNDER : ITA NO. 7278/DEL/2018 5 APPELLANT TOOK PARTICIPATION IN THE BID PROCESS OF GOVERNMENT OF NAGALAND ON 5 TH JAN. 2013 FOR PETROLEUM OPERATIONS IN THE STATE OF NAGALAND AS PART OF NAGALAND PETROLEUM AND NATURAL GAS RULES & REGULATIONS; RS.4.6 CR. HAS BEEN INFUSED IN THE BUSINESS IN THE FORM OF SHARE CAPITAL DURING DECEMBER 2012 TO MARCH, 2013. ACCORDINGLY, O PPORTUNITY COST SURRENDERED FOR THIS FUND FROM THE DATE OF INFUSION OF THE FUND IN THE BUSINESS. THE COMPANY WINS THE BID FOR TWO BLOCKS, NAMELY, WO KHA AND PEREN ZONES, WHICH HAS BEEN COMMUNICATED BY LOI DATED 4 TH SEPT., 2013. TENDER FEE OF RS. 4 CR HAS BEEN PAID ON 17 TH SEPTEMBER 2013. RS. 0.80 CR. HAS BEEN INFUSED IN THE FORM OF BORROW ING FUND FROM DECEMBER, 2013 TO MARCH, 2014 PERMIT WAS RECEIVED FOR WOKHA AND PEREN ZONES ON 28 .02.2014. THUS, HERE IN THIS CASE, MERE REFERRING TO THE LAST EVENT OF ALLOTMENT OF PERMIT CANNOT BE A CONCLUSIVE FACTOR, ALBEIT THE ALLOTMENT OF PERMIT IS FIRST STAGE OF COMMENCEMENT OF BUSINESS AFTER WHICH EXPLORATION WO RK COULD BE STARTED. UNDER THE LAW, THE COMMENCEMENT OF BUSINESS IS NOT THE REQUIREMENT AND WHAT IS DEFINED IN SECTION 3 OF THE INCOME TAX ACT IS THAT THE BUSINESS MUST HAVE BEEN SET UP TO CLAIM ANY EXPENDITURE. IN THE C ASE OF THE ASSESSEE, THE GROUP OF QUALIFIED PROMOTERS AND DIRECTORS CAME TOG ETHER TO MAKE BID, THEN THEY ARRANGED THE FUND AMOUNTING TO RS.4.6 CRORES A ND ALSO ENGAGED QUALIFIED STAFF HAVING SPECIALIZED KNOWLEDGE IN THE FIELD OF OIL AND GAS EXPLORATION BUSINESS. THIS ALL PROVES THAT THE ASSESSEE NEEDED TO HAVE REQUIRED ITA NO. 7278/DEL/2018 6 INFRASTRUCTURE TO WIN THE BID AND BASED ON THAT, PE RMIT FOR EXPLORATION OF TWO ZONES WERE ALLOTTED. LASTLY, HE RELIED ON ANOTHER J UDGMENT OF JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. DHOOMKETU BUILDER S & DEVELOPMENT (P) LTD. (2013) 34 TAXMANN.COM 18. 9. ON THE OTHER HAND, THE LD. DR STRONGLY RELIED UP ON THE ORDER OF THE LD. CIT(A) AND SUBMITTED THAT FOR CLAIMING EXPENDITURE U/S. 37, IT IS NECESSARY TO PROVE THAT THE SAME HAVE BEEN INCURRED FOR THE PURP OSE OF BUSINESS AND WHEN BUSINESS ITSELF IS NOT STARTED, THEN NO EXPENDITURE CAN BE ALLOWED. AT THE BEST, THEY CAN BE TREATED AS PRE-OPERATIVE EXPENDITURE. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PE RUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDER AS WELL AS THE MATERIAL REFERRED TO BEFORE US. FROM THE FACTS, AS NARRATED ABOVE, IT IS SEEN THAT THE ASSESSEE COMPANY WAS INCORPORATED ON 14.09.2012 FOR THE PURPOSE OF C ARRYING ON THE BUSINESS OF EXPLORATION, PROCESSING AND TRADING OF CRUDE OIL . IT HAD PARTICIPATED IN THE BID PROCESS OF GOVERNMENT OF NAGALAND ON 5 TH JANUARY, 2013 FOR PETROLEUM OPERATIONS IN THE STATE OF NAGALAND AND INFUSED FUN DS IN THE FORM OF SHARE CAPITAL. ALL THE EVENTS HAPPENED IN F.Y. 2012-13, W HICH HAVE BEEN INCORPORATED IN THE FOREGOING PARA. DURING THE RELE VANT FINANCIAL YEAR, THE ASSESSEE HAD WON THE BID FOR TWO BLOCKS, NAMELY WOK HA AND PEREN ZONES, FOR WHICH THE LETTER OF INTENT WAS COMMUNICATED ON 04.0 9.2013 AND TENDER FEE OF RS.4 CR. WAS PAID ON 17.09.2013. THEREAFTER, FURTHE R FUNDS HAVE BEEN INFUSED BY THE ASSESSEE. THE ASSESSEE RECEIVED THE PERMIT F OR EXPLORATION AND DIGGING OF WELLS IN THE TWO ZONES ON 28.02.2014. ITA NO. 7278/DEL/2018 7 11. WHAT IS REQUIRED TO BE SEEN IN TERMS OF SECTION 3 OF THE ACT, WHICH DEFINES PREVIOUS YEAR, IS THAT, THE PREVIOUS YEAR S HALL BE THE PERIOD BEGINNING WITH THE DATE OF SETTING UP OF THE BUSINESS OR PROF ESSION OR THE DATE ON WHICH THE SOURCE OF INCOME NEWLY COMES INTO EXISTENCE AND ENDING WITH THE SAID FINANCIAL YEAR. THUS, THE REQUIREMENT OF LAW IS THA T THE BUSINESS MUST HAVE BEEN SET UP. THE REVENUES CLAIM IS THAT SINCE FINA L PERMIT OF ALLOTMENT OF TENDER HAPPENED IN FEB. 2014 AND TILL THE LAST DATE OF FINANCIAL YEAR, NO OPERATIONS WERE CARRIED OUT AND THEREFORE, THE BUSI NESS HAS NOT COMMENCED AND ACCORDINGLY, THE EXPENDITURE INCURRED BY THE AS SESSEE CANNOT BE ALLOWED. IN OUR OPINION, BIDDING FOR ANY TENDER REQUIRES LOT OF PREPARATORY STAGES AND SETTING UP OF INFRASTRUCTURE AND HUMAN RESOURCES. I T HAS BEEN STATED BY THE ASSESSEE THAT ALONG WITH PROMOTERS AND DIRECTORS, T HE ASSESSEE HAS ENGAGED QUALIFIED STAFF HAVING SPECIALIZED KNOWLEDGE IN THE FIELD OF OIL AND GAS EXPLORATION AND HAD INCURRED MAJOR PORTION OF THE E XPENDITURE ON THE SALARIES OF THE EMPLOYEES. THE FINAL ALLOTMENT OF THE TENDER IS ONLY THE OUTCOME OF THE VARIOUS PROCESSES AND FUNDS INFUSED AND THEREFORE, IT CANNOT BE HELD THAT THE BUSINESS OF THE ASSESSEE HAD NOT SET UP. THE BUSINE SS IS SAID TO BE SET UP WHEN ALL THE ACTIVITIES IN THE BASKET OF VARIOUS ACTIVIT IES HAD COMMENCED AND THERE IS CLEARLY A DISTINCTION BETWEEN THE SETTING UP OF A B USINESS AND COMMENCEMENT OF COMMERCIAL OPERATIONS AND EARNING OF REVENUE. F ROM THE PERUSAL OF PROFIT AND LOSS ACCOUNT, IT IS SEEN THAT APART FROM MAJOR EXPENDITURE ON SALARY/ WAGES, THERE ARE STAFF BENEFIT EXPENSES AMOUNTING T O RS.56,86,833/- AND OTHER EXPENDITURE MAINLY RELATING TO TRAVELING AND CONVEY ANCE, LEGAL AND PROFESSIONAL CHARGES, REPAIR & MAINTENANCE OF BUILD ING, CONTRACTOR AND SECURITY SERVICES, POWER AND FUEL, AUDITORS REMUNE RATION ETC. THESE ITA NO. 7278/DEL/2018 8 EXPENDITURES ARE INEXTRICABLY LINKED WITH THE BUSIN ESS WHICH, AS WE FIND, ASSESSEE-COMPANY HAD SET-UP DURING THE RELEVANT FIN ANCIAL YEAR ITSELF. ACCORDINGLY, IT CANNOT BE HELD THAT THE BUSINESS OF THE ASSESSEE HAD NOT SET UP DURING THE FINANCIAL YEAR. HONBLE JURISDICTIONAL H IGH COURT IN THE CASE OF CIT VS. LG ELECTRONICS (INDIA) LTD. (SUPRA) HAD UPHELD THE PROPOSITION THAT THERE IS DISTINCTION BETWEEN THE COMMENCEMENT OF BUSINESS AN D SETTING UP OF THE BUSINESS AND THE TWO DATES NEED NOT NECESSARILY CLU BBED, BECAUSE SECTION 3 OF THE ACT REFERS TO THE DATE OF SETTING UP OF BUSINES S AND THEREAFTER THE PREVIOUS YEAR OF NEWLY SET-UP BUSINESS WOULD COMMENCE. THERE FORE, THE EXPENDITURE INCURRED PRIOR THERETO CAN BE TAKEN INTO ACCOUNT FO R THE PURPOSE OF NEWLY SET UP BUSINESS. ACCORDINGLY, WE HOLD THAT THE EXPENDIT URE AGGREGATING TO RS.98,13,288/- IS AN ALLOWABLE EXPENDITURE AS ASSES SEES BUSINESS HAD SET UP AND THEREFORE, THE DISALLOWANCE MADE BY THE ASSESSI NG OFFICER AND AS CONFIRMED BY THE LD. CIT(A) IS DIRECTED TO BE DELET ED. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 16 TH OCT., 2019. SD/- SD/- (PRASHANT MAHARISHI) ( AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 16 TH OCT., 2019 *AKS* COPY OF ORDER FORWARDED TO: (1) THE APPELLANT (2) THE RESPONDENT (3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES, NEW DELHI