M/s. GNG Stock Holdings Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 913/DEL/2011

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3416 (ITAT-DELHI)
• Duration Of Justice: 5 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-07-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 14-07-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 17-02-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SM MATHUR
• Keywords: Business expenditure; Opportunity of being heard; Futures and options
• Section: 143(3); 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH `C: NEW DELHI BEFORE SHRI C.L.SETHI, JUDICIAL MEMBER AND SHRI K.G. BANSAL, ACCOUNTANT MEMBER I.T. A. NO.913/DEL/2011 ASSESSMENT YEAR : 2005-06 M/S. GNG STOCK HOLDINGS PVT. LTD., DY. COMMIS SIONER OF INCOME-TAX, Y-12, LOHA MANDI, NARAINA, VS. CIRCLE 12( 1), NEW DELHI. NEW DELHI. PAN: AACCG2166L (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI S.M. MATHUR, CA. RESPONDENT BY: NONE. O R D E R PER C.L. SETHI, JUDICIAL MEMBER: THE ASSESSEE IS IN APPEAL AGAINST THE ORDER DATED 2 2.12.2010 OF THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) PASSED IN THE MATTER OF AN ASSESSMENT MADE BY THE ASSESSING OFFICER UNDER SEC. 143(3) OF THE INCOME- TAX ACT, 1961 (THE ACT), FOR THE ASSESSMENT YEAR 20 05-06. 2. THE ONLY ISSUE RAISED IN THIS APPEAL IS WITH REG ARD TO THE DISALLOWANCE OF ASSESSEES CLAIM OF EXPENSES OF RS.2,15,145/- MA DE BY THE ASSESSING OFFICER ON THE GROUND THAT THE BUSINESS HAD NOT BEE N COMMENCED DURING THE YEAR UNDER CONSIDERATION. 2 3. THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME DECLARING TOTAL LOSS OF RS.35,289/- ON 30.10.2005. THE CASE WAS SELECTED F OR SCRUTINY AND NOTICE U/S 143(2) WAS ISSUED ON 11.09.2006. THE ASSESSEE S AUTHORIZED REPRESENTATIVE APPEARED BEFORE THE AO FROM TIME TO TIME AND SUBMITTED REQUISITE DETAILS BEFORE THE AO. THE ASSESSEE HAS DECLARED INTEREST INCOME FROM FDRS. THE AO HAS NOTED THAT THE ASSESSEE COMP ANY DURING THE YEAR HAS NOT DONE ANY BUSINESS ACTIVITY AS IS CLEAR FROM THE PROFIT AND LOSS ACCOUNT. THE AO FURTHER STATED THAT THERE WERE NO PURCHASES, INVENTORY AND SALES DURING THE YEAR EXCEPT INTEREST INCOME EARNED FROM FDRS. THE AO, THEREFORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHEN THE BUSINESS OF THE ASSESSEE HAD NOT COMMENCED, WHY THE EXPENSE SHOULD NOT BE DISALLOWED. IN REPLY THERETO, THE ASSESSEE VIDE ITS LETTER SUBMITT ED ON 5.09.2007 STATED THAT THE ASSESSEE COMPANY WAS INCORPORATED WITH THE MAIN OBJECT OF ACTING AS TRADING AND CLEARING MEMBER OF THE WHOLESALE DEBT M ARKET, CAPITAL MARKET AND FUTURE AND OPTION SEGMENT OF ANY STOCK EXCHANGE OR ASSOCIATION FORMED FOR ORGANIZED TRADING IN INDIA. THE ASSESSEE FURTH ER SUBMITTED THAT TO ACHIEVE ITS OBJECT, THE ASSESSEE HAD FILED APPLICAT ION FOR TRADING AND CLEARING MEMBERSHIP OF THE CAPITAL MARKET AND FUTURES AND OP TIONS SEGMENT OF THE NATIONAL STOCK EXCHANGE AND ALSO GIVEN SECURITY DEP OSIT AND COLLATERAL SECURITY TO NSE ALONG WITH REQUISITE FEES. IT WAS THUS, SUBMITTED BY THE 3 ASSESSEE THAT BUSINESS ACTIVITIES HAD COMMENCED DUR ING THE YEAR UNDER CONSIDERATION. 4. AFTER CONSIDERING THE ASSESSEES SUBMISSIONS, TH E AO FOUND THE SAME TO BE UNACCEPTABLE BY OBSERVING THAT THE BUSINESS E XPENSES CAN BE ALLOWED ONLY IF ANY BUSINESS ACTIVITY IS CARRIED OUT BY THE ASSESSEE AND SINCE NO BUSINESS ACTIVITY HAS BEEN CARRIED OUT BY THE ASSES SEE, THE EXPENSES CLAIMED PRIOR TO COMMENCEMENT OF BUSINESS ACTIVITY COULD NO T BE ALLOWED. THE AO FURTHER STATED THAT THE SECURING OF MEMBERSHIP OF T HE NSE AND PAYMENT OF REQUIRED DEPOSITS AND FEE CAN ONLY BE TERMED AS THE STEPPING STONES TOWARDS THE SETTING UP OF THE BUSINESS. THE AOS OBSERVATI ONS IN THIS REGARD ARE AS UNDER:- 4. THE SUBMISSIONS MADE BY THE ASSESSEE HAVE BEEN DULY CONSIDERED AND FOUND UNACCEPTABLE. AS PER THE PROV ISIONS OF THE ACT, BUSINESS EXPENSES CAN BE ALLOWED ONLY IF A NY BUSINESS ACTIVITY IS CARRIED OUT BY THE ASSESSEE. IN THE IN STANT CASE, THE PERUSAL OF THE P&L A/C REVEALS THAT NO BUSINESS ACT IVITY AS SUCH HAS BEEN CARRIED OUT BY THE ASSESSEE. THE SECURING OF MEMBERSHIP OF THE NSE AND PAYMENT OF REQUIRED DEPOS ITS AND FEE CAN ONLY BE TERMED AS THE STEPPING-STONES TOWAR DS THE SETTING UP OF THE BUSINESS. WITHOUT SECURING THE M EMBERSHIP OF THE RELEVANT STOCK EXCHANGE, THE BUSINESS ACTIVITIE S OF THE ASSESSEE CAN IN ANY CASE NOT COMMENCE. THE CLAIM O F EXPENSES UNDER SECTION 37(1) OF THE INCOME TAX ACT, 1961 CAN ONLY BE ALLOWED IF THE EXPENSES HAVE BEEN LAID OUT OR EXPEN DED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR PROF ESSION CARRIED DURING THE YEAR. MERE INCORPORATION OF THE COMPANY CANNOT BE SAID TO BE THE COMMENCEMENT OF BUSINESS. FURTHER, MERELY BY ACQUIRING THE MEMBERSHIP OF THE STOCK EXC HANGE, THE ASSESSEE CANNOT SAY THAT ITS BUSINESS AHS COMMENCED . BUSINESS 4 CAN ONLY BE SAID TO COMMENCE WHEN THE ACTUAL TRADIN G ACTIVITIES BEGIN WHICH IS NOT THE CASE WITH THE ASSESSEE. NON E OF THE ACTIVITIES FOR WHICH THE COMPANY HAS BEEN INCORPORA TED, HAVE BEEN CARRIED OUT BY THE ASSESSEE DURING THE RELEVAN T YEAR AND THE ONLY INCOME WHICH IT HAS DERIVED IS BY WAY OF I NTEREST INCOME. THEREFORE, THE EXPENSES DEBITED TO THE P & L A/C AMOUNTING TO RS.215145/- CANNOT BE ALLOWED UNDER SE CTION 37(1) AND ARE ADDED BACK TO THE INCOME OF THE ASSES SEE. SINCE I AM SATISFIED THAT THE ASSESSEE HAS FURNISHED INACCU RATE PARTICULARS OF ITS INCOME, PENALTY PROCEEDINGS UNDE R SECTION 271(10( C) ARE BEING INITIATED SEPARATELY. 5. BEING AGGRIEVED, THE ASSESSEE PREFERRED AN APPEA L BEFORE THE LEARNED CIT(A). 6. AFTER CONSIDERING THE ASSESSEES SUBMISSIONS AND AOS ORDER, THE CIT(A) CONFIRMED THE AOS ORDER BY OBSERVING THAT T HOUGH THE APPELLANT COMPANY WAS INCORPORATED ON 6.09.2004, THE REGISTRA TION WAS GRANTED BY THE NATIONAL STOCK EXCHANGE ON 27.02.2005 AND BY SEBI O N 18.05.2005. THE LEARNED CIT(A) FURTHER STATED THAT ACTUAL TRADING A CTIVITIES COULD BE STARTED ONLY AFTER 18.05.2005 WHEN REGISTRATION WAS GRANTED BY SEBI. THE LEARNED CIT(A) REJECTED THE ASSESSEES CONTENTION THAT THE BUSINESS HAS COMMENCED ON THE DATE OF INCORPORATION. THE LEARNED CIT(A) R ELIED UPON THE FOLLOWING DECISIONS:- (1) TETRON COMMERCIAL LTD. VS. CIT, 261 ITR 422; (2) CIT VS. SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD., 91 ITR 170 (GUJ.); & (3) SARABHAI MANAGEMENT CORPORATION LTD., 102 ITR 25. 7. HENCE, THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 5 8. THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITT ED THAT THE ASSESSEE COMPANY WAS INCORPORATED AS A PRIVATE LIMITED COMPA NY ON 6 TH SEPTEMBER, 2004 TO CARRY ON THE MAIN BUSINESS OF ACTING AS TRA DING MEMBERS AND CLEARING MEMBERS OF THE WHOLESALE DEBT MARKET, CAPI TAL MARKET AND FUTURES AND OPTIONS SEGMENTS OF ANY STOCK EXCHANGE OR ASSOC IATION FORMED FOR ORGANIZED TRADING IN INDIA OR ELSEWHERE TO MAKE ARR ANGEMENTS WITH MEMBERS OF OTHER EXCHANGE IN SUCH MANNER SUBJECT TO APPROVA L OF SEBI AND OTHER CONCERNED AUTHORITIES WHERE REQUIRED. HE FURTHER S UBMITTED THAT THESE ACTIVITIES WERE FURTHER BE EXPENDED TO ACT AS STOCK AND SHARE BROKER, TO ACT AS UNDERWRITERS, BROKERS TO THE ISSUE OF SECURITIES AN D DEALERS IN SECURITIES ETC. ETC. HE, THEREFORE, STATED THAT SINCE THE ASSESSEE COMPANY WAS INCORPORATED AS A PRIVATE LIMITED COMPANY BEING DULY APPROVED BY THE REGISTRAR OF COMPANIES ON 6 TH SEPTEMBER, 2004, THE ASSESSEE COMPANY HAD BEEN SET UP ON 6 TH SEPTEMBER, 2004 ITSELF. HE FURTHER SUBMITTED THAT THE ASSESSEE HAD APPLIED ON 12.10.2004 FOR GETTING TRADING MEMBERSHI P OF BOTH CAPITAL MARKET AND FUTURES AND OPTIONS SEGMENTS WITH NATIONAL STOC K EXCHANGE WHICH WAS GRANTED ON 27.02.2005 BY NATIONAL STOCK EXCHANGE. HE FURTHER POINTED OUT THAT THE COMPANY HAD ALSO SIMULTANEOUSLY APPLIED FO R SEBI REGISTRATION WHICH WAS ALSO GRANTED TO THE ASSESSEE COMPANY ON 1 8 TH MAY, 2005. IN THE LIGHT OF THESE FACTS, HE SUBMITTED THAT THE BUSINES S OF THE ASSESSEE COMPANY 6 HAD ACTUALLY BEEN SET UP ON 6 TH DECEMBER, 2004 WHEN IT WAS INCORPORATED AS PRIVATE LIMITED AND THE FIRST BUSINESS ACTIVITY OF THE ASSESSEE COMPANY HAD COMMENCED WHEN IT HAD APPLIED FOR REGISTRATION WITH NATIONAL STOCK EXCHANGE ON 12.10.2004. HE, THEREFORE, SUBMITTED T HAT ALL THE EXPENDITURE INCURRED BY THE ASSESSEE ON OR AFTER 6 TH SEPTEMBER, 2004, FOR THE PURPOSE OF BUSINESS ARE ALLOWABLE EXPENSES UNDER SEC. 37(1) OF THE ACT. THE LEARNED COUNSEL FOR THE ASSESSEE HAS RELIED UPON VARIOUS DE CISIONS, WHICH SHALL BE DISCUSSED BY US HEREINAFTER. 9. THE LEARNED DR ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW TO CONTEND THAT THE ASSESSEES BU SINESS CAN BE SAID TO HAVE BEEN SET UP ONLY ON 27.05.2005 WHEN REGISTRATION WA S GRANTED SEBI TO THE ASSESSEE COMPANY. HE, THEREFORE, SUBMITTED THAT TH E EXPENSES INCURRED PRIOR TO 27.05.2005 ARE NOT ALLOWABLE DEDUCTION WITHIN TH E MEANING OF SEC. 37 OF THE ACT. 10. WE HAVE HEARD BOTH THE PARTIES AND HAVE CAREFUL LY PERUSED THE ORDERS OF THE AUTHORITIES BELOW. 11. IT IS NOT IN DISPUTE THAT THE ASSESSEE COMPANY WAS INCORPORATED AS A PRIVATE LIMITED COMPANY UNDER THE COMPANIES ACT, 19 56 ON 6.09.2004 TO CARRY ON THE BUSINESS SUBJECT TO THE APPROVAL OF SE BI AND OTHER CONCERNED AUTHORITIES TO ACT AS A TRADING MEMBER AND CLEARING MEMBER OF THE WHOLESALE 7 DEBT MARKET, CAPITAL MARKET AND FUTURES AND OPTIONS SEGMENTS OF ANY STOCK EXCHANGE. THE ASSESSEE COMPANY MADE AN APPLICATION FOR REGISTRATION DATED 12.10.2004, BEFORE THE NATIONAL STOCK EXCHANGE OF I NDIA LTD. FOR TRADING MEMBERSHIP OF CAPITAL MARKET AND FUTURE OPTIONS, WH ICH APPLICATION WAS SUBMITTED ON 15.10.2004. THE ASSESSEE COMPANY THEN MADE ANOTHER APPLICATION DATED 10.11.2004 BEFORE THE NATIONAL ST OCK EXCHANGE OF INDIA LTD. FOR TRADING/CLEARING MEMBERSHIP OF CAPITAL AND FUTURE AND OPTION SEGMENTS. IN COMPLIANCE TO THE ABOVE TWO APPLICATI ONS, INTERVIEW FOR MEMBERSHIP WAS FIXED BY THE NATIONAL STOCK EXCHANGE ON 24 TH NOVEMBER, 2004 AT MUMBAI. THEREAFTER NATIONAL STOCK EXCHANGE VIDE LETTER DATED 24 TH DECEMBER, 2004, INTIMATED THE ASSESSEE THAT THE EXC HANGE HAD ADMITTED THE ASSESSEE AS A TRADING MEMBER ON BOTH CAPITAL MARKET SEGMENT AND THE FUTURES AND OPTIONS SEGMENTS AS ON DECEMBER 6, 2004 ON A PR OVISIONAL BASIS SUBJECT TO FULFILLMENT OF CERTAIN SPECIFIED CONDITIONS ON O R BEFORE MARCH 24, 2005. IN THIS LETTER DATED DECEMBER 24, 2005, THE ASSESSE E WAS ADVISED TO COMPLY WITH ALL THE REQUIREMENTS MENTIONED THEREIN AND COM PLETE ALL OTHER FORMALITIES INCLUDING REMITTANCE OF THE FEES/DEPOSI TS MENTIONED IN THE DEMAND ADVICE ENCLOSED THEREWITH. IT WAS ALSO STAT ED IN THE SAID LETTER THAT THE EXCHANGE HAS RESERVED ITS RIGHT TO GRANT EXTENS ION/WITHDRAW TRADING MEMBERSHIP SO GRANTED TO THE ASSESSEE ON PROVISIONA L BASIS IN THE EVENT OF 8 ASSESSEES FAILURE TO FULFILL ANY OF THE CONDITIONS WITHIN THE TIME STIPULATED. IT WAS ALSO STATED THEREIN THAT THE EXCHANGE WOULD FORWARD ASSESSEES APPLICATION TO SEBI FOR REGISTRATION OF CAPITAL MAR KET SEGMENT AND THE FUTURES AND OPTIONS SEGMENT SOON AFTER THE ASSESSEE MADE THE NECESSARY PAYMENTS AND ALL OTHER RELEVANT PAYMENTS TO NATIONA L STOCK EXCHANGE. IT WAS ALSO STATED THAT THE ASSESSEE SHALL BE ENABLE O N THE NEAT SYSTEM AND ALLOWED TRADE IN THE RESPECTIVE SEGMENT ONLY AFTER RECEIPT OF CERTIFICATE FROM SEBI AND INSTALLATION OF THE CONNECTIVITY SYSTEM. THE ASSESSEE WAS ALSO ASKED TO FULFILL ALL THE CONDITIONS THAT MAY BE STI PULATED BY THE SEBI FOR ENABLEMENT ON THE TRADING SYSTEM OF THE RESPECTIVE SEGMENTS ETC. THE AMOUNT STATED IN THE DEMAND ADVICE RAISED BY THE NA TIONAL STOCK EXCHANGE WAS REQUIRED TO BE PAID ON OR BEFORE 24.03.2005. T HE ASSESSEE WAS ALSO ADMITTED AS A CLEARING MEMBER ON THE CAPITAL MARKET SEGMENT AS ON DECEMBER 16, 2004 ON PROVISIONAL BASIS SUBJECT TO F ULFILLMENT OF CERTAIN CONDITIONS ON OR BEFORE MARCH 24, 2005, VIDE LETTER DATED 24 TH DECEMBER, 2004 OF NATIONAL SECURITIES CLEARING CORPORATION LT D. 12. THE ASSESSEE VIDE LETTER DATED 28.02.2005 INTIM ATED THE NATIONAL STOCK EXCHANGE OF INDIA LTD. THAT THE VARIOUS CONDI TIONS MENTIONED IN THE REGISTRATION LETTER ON PROVISIONAL BASIS HAVE BEEN COMPLIED WITH AND NECESSARY DOCUMENTS IN SUPPORT THEREOF WERE FURNISH ED. THEREAFTER, NATIONAL 9 STOCK EXCHANGE OF INDIA LTD. ISSUED A CERTIFICATE O F REGISTRATION FOR THE CASH MARKET SEGMENT VIDE LETTER DATED MAY 27, 2005. SEB I ALSO REGISTERED THE ASSESSEE AS A TRADING MEMBER ON DERIVATIVE SEGMENT VIDE CERTIFICATE DATED MAY 18, 2005. THE FIRST TRANSACTION AS A BROKER WA S CARRIED OUT BY THE ASSESSEE COMPANY ON 13.07.2005. 13. IN THE CASE OF CIT VS. SAURASHTRA CEMENT AND CH EMICAL INDS., 91 ITR 170 (GUJ.), THE HONBLE GUJARAT HIGH COURT HAS LAID DOWN THE FOLLOWING TEST IN ORDER TO DETERMINE THE COMMENCEMENT OF BUSINESS ACTIVITIES THE HONBLE GUJARAT HIGH COURT HAS HELD THAT A BUSI NESS ACTIVITY CONSISTS OF THREE STAGES. THE FIRST STAGE RELATES TO THE ACTIV ITY NECESSARY FOR THE PURPOSE OF ACQUIRING OF RAW-MATERIAL AND ESTABLISHMENT OF P LANT AND MACHINERY AND THE SECOND ACTIVITY COMPRISES THE PROCESSING AND MA NUFACTURING BY USING THE RAW MATERIAL AND THE PLANTS AND MACHINERY SET UP FO R THE PURPOSE AND THE THIRD CATEGORY CONSISTED OF THE MARKETING THEREOF. THE FIRST IN POINT OF TIME LAYS THE FOUNDATION FOR THE THIRD ACTIVITY. THEREF ORE, THE EXPENDITURE INCURRED FOR CARRYING ON ANY OF THESE ACTIVITIES IN CLUDING THE FIRST ACTIVITY IS ALSO DEDUCTIBLE IN COMPUTING THE PROFIT AND GAINS O F THE BUSINESS IN THE RELEVANT YEAR WHEN THE ACTIVITY IS UNDERTAKEN. 14. IN THE CASE OF SARABHAI MANAGEMENT CORP. LTD. V S. CIT, 102 ITR 25, THE HONBLE GUJARAT HIGH COURT HAS HELD THAT THE BU SINESS COMMENCES WITH 10 THE FIRST ACTIVITY FOR ACQUIRING BY PURCHASE OR OTH ERWISE IMMOVABLE PROPERTY. THERE MAY BE AN INTERVAL BETWEEN THE SETTING UP OF THE BUSINESS AND THE COMMENCEMENT OF THE BUSINESS. ALL EXPENSES INCURRE D DURING THAT INTERVAL ARE ALSO PERMISSIBLE FOR DEDUCTION. 15. THE DECISION OF HONBLE GUJARAT HIGH COURT IN T HE CASE OF SARABHAI MANAGEMENT CORP. LTD. (SUPRA) HAS BEEN AFFIRMED BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. SARABHAI MANAGEMENT CO RP. LTD. (1991) 192 ITR 151 (SC), WHERE THE HONBLE SUPREME COURT WENT A STEP AHEAD THAT EVEN THE ACTIVITIES AT A PREPARATORY STAGE ARE ALSO ADMISSIBLE. 16. IN THE CASE OF CIT VS. WHIRLPOOL OF INDIA LTD. (2009) 318 ITR 347 (DELHI), THE ASSESSEE COMPANY WAS INCORPORATED ON J ULY 27, 1995 AS A FINANCIAL ENTERPRISE. THE FIRST BOARD MEETING WAS HELD ON AUGUST 12, 1995. ON SEPTEMBER 4, 1995, THE COMPANY PLACED ORDERS FOR PURCHASE OF COMPUTERS AND PERIPHERALS. DURING THE MONTHS OF SE PTEMBER AND OCTOBER, 1995, VARIOUS KEY EMPLOYEES WERE APPOINTED. DURING THE PERIOD FROM NOVEMBER 1995 TO JANUARY, 1996, THE ASSESSEE PAID S ALARY TO THE STAFF AND EMPLOYEES THROUGH TWO COMPANIES. A BANK ACCOUNT WA S OPENED ON FEBRUARY 1, 1996, IN THE NAME OF THE COMPANY AND TH EREAFTER THE EXPENSES WERE INCURRED FROM THE SAME. IN THE RETURN, THE AS SESSEE CLAIMED THAT THE BUSINESS HAD BEEN SET UP WITH EFFECT FROM NOVEMBER 1, 1995. HOWEVER, THE 11 AO TOOK THE VIEW THAT THE BUSINESS COULD BE SET TO HAVE BEEN SET UP ONLY ON FEBRUARY 1, 1996 WHEN THE BANK ACCOUNT WAS OPENED I N THE ASSESSEES NAME AND THEREFORE, ONLY THE EXPENDITURE INCURRED THEREA FTER COULD BE ALLOWED AS A DEDUCTION. THE AOS VIEW WAS CONFIRMED BY THE LEAR NED CIT(A). THE TRIBUNAL HELD THAT THE EXPRESSION SETTING UP OF TH E BUSINESS IN THE PREVIOUS YEAR AS PER SEC. 3 OF THE INCOME-TAX ACT. 1961, WA S DIFFERENT FROM COMMENCEMENT OF THE BUSINESS, AND IN THE CASE OF A COMPANY ENGAGED IN RENDERING FINANCIAL SERVICES, IT WAS POSSIBLE TO SA Y THAT THE BUSINESS WAS SET UP WHEN THE DIRECTORS WERE APPOINTED, SUCH AS REGIO NAL AND BRANCH MANAGERS WERE APPOINTED, AND THEIR SALARIES WERE PAID, COMPU TERS WERE ACQUIRED AND INSTALLED AND THE COMPANY WAS READY TO COMMENCE BUS INESS. THE TRIBUNAL FURTHER HELD THAT IT COULD NOT BE SAID THAT THE BUS INESS WAS SET UP ONLY WHEN THE BANK ACCOUNT WAS OPENED ON FEBRUARY 1, 1996. T HE APPEAL FILED BY THE DEPARTMENT AGAINST THE TRIBUNALS ORDER WAS DISMISS ED BY THE HONBLE HIGH COURT BY HOLDING THAT THE QUESTION AS TO WHEN THE B USINESS WAS SET UP DEPENDS ON THE FACTS OF EACH CASE AND THE NATURE OF THE BUSINESS AND NO HARD AND FAST RULE COULD BE LAID DOWN AS TO WHEN THE BUS INESS WAS SET UP. THE HONBLE HIGH COURT OBSERVED THAT THE ORDER OF THE T RIBUNAL EXHAUSTIVELY DETAILED THE FACTS AND THE REASONS AS TO WHY THE BU SINESS WAS SET UP NOT ON FEBRUARY 1, 1996 AS CONTENDED BY THE AO BUT ON NOVE MBER 1, 1995. FROM 12 THIS DECISION, IT IS THUS CLEAR THAT THE BUSINESS O F THE ASSESSEE CANNOT BE SAID TO HAVE BEEN SET UP ON THE DATE WHEN THE COMPANY WA S INCORPORATED UNDER THE COMPANIES ACT. THERE MUST BE SOME ACTIVITY UND ERTAKEN BY THE ASSESSEE FOR THE PURPOSE OF COMMENCING ITS BUSINESS AND MERE REGISTRATION UNDER COMPANIES ACT, IS NOT ENOUGH TO HOLD THAT THE BUSIN ESS HAS ACTUALLY BEEN SET UP WITHIN THE MEANING OF SEC. 3 OF THE INCOME-TAX A CT, 1961. 17. IN THE CASE OF CIT VS. HUGHES ESCORTS COMMUNICA TIONS LTD. (2009) 311 ITR 253 (DELHI), IT HAS BEEN HELD BY THE HONBL E DELHI HIGH COURT THAT THERE IS A DISTINCTION BETWEEN THE SETTING UP AND C OMMENCEMENT OF A BUSINESS, AND WHEN A BUSINESS IS ESTABLISHED AND IS READY TO COMMENCE BUSINESS, THEN IT CAN BE SAID OF THAT BUSINESS THAT IT IS SET UP. BUT BEFORE IT IS READY TO COMMENCE BUSINESS, IT IS NOT SET UP. BUT THERE MAY BE AN INTERREGNUM. THERE MAY BE AN INTERVAL BETWEEN A BUS INESS WHICH IS SET UP AND A BUSINESS WHICH IS COMMENCED, AND ALL EXPENSES INCURRED DURING THE INTERREGNUM AFTER THE SETTING UP OF THE BUSINESS AN D BEFORE THE COMMENCEMENT OF THE BUSINESS, ALL EXPENSES WOULD BE PERMISSIBLE DEDUCTIONS. IN THIS CASE, THE ASSESSEE CARRIED ON THE BUSINESS OF SATELLITE BUSINESS COMMUNICATIONS FOR WHICH A VERY SMALL APER TURE TERMINAL VSAT EQUIPMENT IS USED. THE ASSESSEE PLACED THE PURCHAS E ORDER FOR THE PURCHASE OF VSAT EQUIPMENT ON JULY 28, 1994. VSAT EQUIPMENT CAN BE USED ONLY 13 AFTER ESTABLISHING, MAINTAINING AND USING THE COMMU NICATION FACILITIES ON A LICENCE FROM THE DEPARTMENT OF TELECOMMUNICATIONS. THE ASSESSEE MADE AN APPLICATION TO THE DEPARTMENT OF TELECOMMUNICATIONS FOR GRANT OF SUCH LICENCE. ON AUGUST 3, 1994, A LICENCE AGREEMENT WA S ENTERED INTO BETWEEN THE ASSESSEE AND THE DEPARTMENT OF TELECOMMUNICATIO NS. IN THE LIGHT OF THESE FACTS, IT WAS HELD THAT THE BUSINESS WAS SET UP WHEN THE ORDER FOR PURCHASE OF VSAT EQUIPMENT WAS PLACED AND THE APPLI CATION TO THE DEPARTMENT OF TELECOMMUNICATION FOR LICENCE AND REC EIPT OF SATELLITE SIGNALS WERE THE CONSEQUENT STAGES. 18. IN VIEW OF THESE AFORESAID DECISIONS, IT IS THU S CLEAR THAT THE EXPENSES INCURRED BY THE ASSESSEE AFTER SETTING UP OF THE BU SINESS CAN BE SAID TO BE INCURRED UNDER THE NORMAL CIRCUMSTANCES OF THE BUSI NESS ACTIVITY. 19. THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. HUGHES ESCORTS COMMUNICATIONS LTD. (SUPRA) HAS CONSIDERED THE DECI SION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF WESTERN INDIA VEGE TABLE PRODUCTS LTD. VS. CIT (1954) 26 ITR 151, WHERE THE HONBLE BOMBAY HIGH COURT HAS EXPLAINED THE DISTINCTION BETWEEN THE CONCEPTS OF C OMMENCEMENT AND SETTING UP OF A BUSINESS BY HOLDING AS UNDER:- IT SEEMS TO US, THAT THE EXPRESSION `SETTING UP M EANS, AS IS DEFINED IN THE OXFORD ENGLISH DICTIONARY, `TO PL ACE ON FOOT OR `TO ESTABLISH, AND IN CONTRADICTION TO `COMMENC E. THE DISTINCTION IS THIS THAT WHEN A BUSINESS IS ESTABLI SHED AND IS 14 READY TO COMMENCE BUSINESS THEN IT CAN BE SAID OF T HAT BUSINESS THAT IT IS SET UP. BUT BEFORE IT IS READY TO COMME NCE BUSINESS IT IS NOT SET UP. BUT THERE MAY BE AN INTERREGNUM, TH ERE MAY BE AN INTERVAL BETWEEN A BUSINESS WHICH IS SET UP AND A BUSINESS WHICH IS COMMENCED AND ALL EXPENSES INCURRED AFTER THE SETTING UP OF THE BUSINESS AND BEFORE THE COMMENCEMENT OF T HE BUSINESS, ALL EXPENSES DURING THE INTERREGNUM, WOUL D BE PERMISSIBLE DEDUCTIONS UNDER SECTION 10(2). 20. FROM THESE DECISIONS, IT IS CLEAR THAT WHEN A B USINESS IS ESTABLISHED AND IS READY TO COMMENCE BUSINESS, THEN IT CAN BE S AID OF THAT BUSINESS THAT IT IS SET UP. BUT BEFORE IT IS READY TO COMMENCE BUSI NESS, IT IS NOT SET UP. IN OTHER WORDS, A BUSINESS CANNOT BE SAID TO BE SET UP BEFORE IT IS READY TO COMMENCE. THE ACTUAL COMMENCEMENT OF THE BUSINESS MAY HAVE SOME INTERVAL FROM THE DATE WHEN THE BUSINESS WAS SET UP , BUT IN ORDER TO HOLD THAT THE BUSINESS IS SET UP, IT IS TO BE SEEN AS TO WHET HER IT WAS READY TO COMMENCE THOUGH ACTUAL COMMENCEMENT MIGHT NOT HAVE BEEN TAKEN PLACE. 21. IT IS ONLY AFTER THE DATE OF SETTING UP OF THE BUSINESS THAT THE PREVIOUS YEAR OF THE NEWLY SET UP BUSINESS WOULD COMMENCE, A ND THE EXPENSES INCURRED PRIOR TO THE DATE OF SETTING UP OF BUSINES S COULD NOT BE TAKEN INTO ACCOUNT FOR THE PURPOSES OF DETERMINING THE PROFITS OF A NEWLY SET UP BUSINESS. 22. WE, THEREFORE, HAVE TO DETERMINE AS TO WHEN, IN THE PRESENT CASE, THE ASSESSEE WAS READY TO COMMENCE BUSINESS SO AS TO SA Y THAT THE ASSESSEES BUSINESS HAD ACTUALLY BEEN SET UP. IN THE PRESENT CASE, THE ASSESSEE SHALL BE 15 ENTITLED TO ADMISSIBLE BUSINESS EXPENSES FROM THE D AY WHEN THE ASSESSEES BUSINESS COULD BE SAID TO HAVE BEEN SET UP I.E. FRO M THE DAY WHEN THE BUSINESS WAS READY TO COMMENCE AND NOT FROM THE DAT E OF ACTUAL COMMENCEMENT OF THE BUSINESS. 23. THE ASSESSEES CONTENTION THAT THE ASSESSEES B USINESS TO ACT AS A TRADING MEMBER AND CLEARING MEMBER OF THE WHOLESALE DEBT MARKET, CAPITAL MARKET AND FUTURES AND OPTIONS SEGMENTS OF ANY STOC K EXCHANGE HAD ACTUALLY BEEN SET UP AS SOON AS THE ASSESSEE COMPAN Y WAS REGISTERED AS A PRIVATE LIMITED COMPANY UNDER THE COMPANIES ACT, 19 56, IS FOUND TO BE OF WITHOUT ANY MERIT INASMUCH AS MERE INCORPORATION OF A COMPANY UNDER THE COMPANIES ACT CANNOT BE A SOLE FACTOR TO ESTABLISH THAT THE COMPANY HAS SET UP ITS BUSINESS ON THE DAY OF REGISTRATION ITSELF. THE MERE REGISTRATION OF THE ASSESSEE COMPANY UNDER THE COMPANIES ACT, CANNOT BE SAID TO BE THE FIRST STAGE RELATING TO THE ACTIVITY OF ACTING AS TRADING MEMBERS AND CLEARING MEMBERS OF THE WHOLESALE DEBT MARKET, CAPITAL MARKE T AND FUTURES AND OPTIONS SEGMENTS OF ANY STOCK EXCHANGE. THE CRITER IA LAID DOWN BY THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. S AURASHTRA CEMENT & CHEMICAL INDS. LTD. (SUPRA) AND IN THE CASE OF SARA BHAI MANAGEMENT CORP. LTD. VS. CIT (SUPRA) DOES NOT SUPPORT THIS CONTENTI ON OF THE ASSESSEE THAT THE ASSESSEES BUSINESS HAD ACTUALLY BEEN SET UP MERELY FOR THE REASON THAT THE 16 ASSESSEE COMPANY WAS REGISTERED AS A PRIVATE LIMITE D COMPANY UNDER THE COMPANIES ACT. IT IS NOT IN DISPUTE THAT THE ASSES SEE MADE APPLICATION FOR REGISTRATION BEFORE THE NATIONAL STOCK EXCHANGE OF INDIA LTD. FOR TRADING MEMBERSHIP OF CAPITAL AND FUTURE OPTIONS SEGMENTS O N 15.10.2004 BY PAYING APPLICATION FEE OF RS.10,000/- VIDE DEMAND DRAFT DA TED 12.10.2004 PAYABLE AT MUMBAI. IN ORDER TO COMMENCE THE BUSINESS OF AC TING AS TRADING MEMBERSHIP OF CAPITAL MARKET AND FUTURES OPTIONS SE GMENTS, IT WAS NECESSARY ON THE PART OF THE ASSESSEE TO GET REQUISITE REGIST RATION FROM THE STOCK EXCHANGE. THE ASSESSEES APPLICATION FOR REGISTRAT ION WAS ALLOWED ON PROVISIONAL BASIS ON AND FROM DECEMBER 6, 2004. TH EREAFTER, THE ASSESSEE ALSO MADE APPLICATIONS BEFORE SEBI AS WELL AS NATIO NAL SECURITIES CLEARING CORPORATION LTD. BY PAYING NECESSARY FEES AND COMPL YING WITH ALL THE REQUIREMENTS. IN THIS CASE, THE FIRST STAGE RELATE S TO THE ACTIVITY OF ACTING AS TRADING MEMBERS AND CLEARING MEMBER OF THE WHOLESAL E DEBT MARKET, CAPITAL MARKET AND FUTURES AND OPTIONS SEGMENTS OF ANY STOC K EXCHANGE WAS TO GET REGISTRATION FROM THE STOCK EXCHANGE. IT IS WELL S ETTLED THAT ALL THE EXPENSES INCURRED AFTER THE BUSINESS HAD BEEN SET UP ARE ALL OWABLE AS BUSINESS DEDUCTION U/S 37 OF THE ACT. THERE MAY BE INTERVAL BETWEEN THE SETTING UP OF THE BUSINESS AND THE ACTUAL COMMENCEMENT OF THE BUS INESS BUT ALL THE EXPENSES INCURRED DURING THE INTERVAL OF SETTING UP OF THE BUSINESS AND THE 17 COMMENCEMENT OF THE BUSINESS ARE ALSO PERMISSIBLE F OR DEDUCTION AS SO HELD IN THE ABOVE REFERRED DECISIONS. HAVING REGARD TO THE NATURE OF THE ASSESSEES BUSINESS OF ACTING AS A TRADING MEMBER A ND CLEARING MEMBER OF THE WHOLESALE DEBT MARKET ETC., IT CAN BE SAID THAT ASSESSEES BUSINESS WAS SET UP AS SOON AS THE ASSESSEE GOT REGISTRATION BY THE NATIONAL STOCK EXCHANGE FOR TRADING MEMBERSHIP OF CAPITAL MARKET AND FUTURE S OPTIONS SEGMENTS INASMUCH AS THE ASSESSEES BUSINESS WAS READY TO CO MMENCE ON THE DAY WHEN THE ASSESSEE GOT PROVISIONAL REGISTRATION FROM THE NATIONAL STOCK EXCHANGE. WE ARE, THEREFORE, OF THE CONSIDERED VIEW THAT THE EXPENSES INCURRED ON OR AFTER 06.12.2004 ARE PERMISSIBLE FOR DEDUCTION AS BUSINESS EXPENSES AND IN ORDER TO ALLOW THESE EXPENSES AS AD MISSIBLE DEDUCTION, IT IS NOT NECESSARY THAT THE ASSESSEE SHOULD HAVE EARNED SOME INCOME OUT OF SUCH ACTIVITY OR ALL THE THREE STAGES REFERRED TO BY THE HONBLE GUJARAT HIGH COURT IN THE ABOVE REFERRED DECISION SHOULD HAVE BEEN COM PLETED. IT IS ENOUGH THAT THE FIRST STAGE OF THE BUSINESS HAD STARTED IN ORDE R TO CLAIM THE BUSINESS EXPENSES AS ADMISSIBLE DEDUCTION. WE, THEREFORE, H OLD THAT THE ASSESSEE IS ENTITLED TO A DEDUCTION OF ADMISSIBLE BUSINESS EXPE NSES INCURRED BY IT ON OR AFTER 06.12.2004 WHEN THE BUSINESS CAN BE SAID TO H AVE BEEN SET UP BY THE ASSESSEE. WE, THEREFORE, DIRECT THE ASSESSING OFFI CER TO QUANTIFY THE AMOUNT OF EXPENSES IN THE LIGHT OF OUR DECISION ABOVE AND ALLOW THE SAME AS PER LAW 18 AFTER EXAMINING AND VERIFYING THE GENUINENESS OF TH E EXPENSES AND THEIR ADMISSIBILITY UNDER THE PROVISIONS OF INCOME-TAX AC T. THE AO SHALL PROVIDE REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE WHILE QUANTIFYING THE AMOUNT OF BUSINESS EXPENSES INCURRED BY THE ASSESSE E ON OR AFTER 15.10.2004. WE ORDER ACCORDINGLY. 24. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED IN THE MANNER AS INDICATED ABOVE. 25. THIS DECISION IS PRONOUNCED IN THE OPEN COURT O N 22 ND JULY, 2011. SD/- SD/- (K.G. BANSAL) (C.L. SETHI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 22 ND JULY, 2011. COPY OF THE ORDER FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR BY ORDER *MG DEPUTY REGISTRAR, ITAT.