Tata Realty & Infrastructure Ltd, ... vs Assessee

M/a Tata Realty & Infrastructure बनाम/ Dy. Commissioner of Income Tax - Ltd., 1(3), Vs. C/O Kalyaniwala and Mistry, (Formerly Dy. Commissioner of Army and Navi Building, Income Tax (OSD), Range -1(1), 3rd floor, Aayakar Bhavan, 148, M G Road, Fort, M.K.Road, Mumbai-400001 Mumbai-400020 (अपीलाथ /Appellant) .. ( यथ / Respondent)

थायी ले ख ा सं . /जीआइआर सं . /PAN/GIR No. :AACCT6242L

अपीलाथ ओर से / Revenue by: Shri M M Golwala and Shri Ampy Wagle यथ क ओर से/Assessee by : Shri Neil Philip

सन ु वाई क तार ख / Date of Hearing : 21.11.2014 घोषणा क तार ख /Date of Pronouncement : 9.1.2015

आदे श / O R D E R

Per B.R.BASKARAN, Accountant Member:

The appeal filed by the assessee is directed against the order dated 15.6.2011 passed by Ld CIT(A)-1, Mumbai and it relates 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/- claimed 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 period 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 advisory 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/-. The assessee declared a loss of Rs.61,01,298/- after claiming expenditure of various types. The assessing officer disallowed the claim of loss for the following reasons:-

(a) the entire expenditure was directly attributable to earning of exempt income.

(b) the assessee has entered into first MOU only on 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 consideration. Hence the assessee cannot be considered to have set up the business.

3. In the appellate proceedings, the ld CIT(A) accepted 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 assessee was incorporated by M/s Tata Sons Ltd. The decision to form the present company was taken at least six months prior to the date of incorporation of the assessee company. Accordingly, the promoter has recruited employees in various fields and has also started paying remuneration to them. Further the promoter has started incurring various expenses towards remuneration, rent, travelling, power & fuel, telephone, brokerage auditor's remuneration, professional fee, brokerage etc. The expenses incurred up to the date of incorporation was 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 2.3.2007 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 assessee, it has started the business of providing advisory services in real estate and infrastructure and such kind of business does not require any gestation period, as in the case of manufacturing industries. Accordingly, it is contended 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 started all kind of back ground works much prior to the date of incorporation as per the decision taken by the promoter company.

6. There is no dispute that the expenses incurred after the date of setting up of business is allowable as revenue expenditure. Before us, the assessee placed reliance on the decision rendered by Hon'ble Delhi High Court in the case of Carefour WC&C India Private limited Vs. DCIT (ITA No.42/2014 dated 22.09.2014). In the above said decision, the following observations made by Hon'ble jurisdictional Bombay High Court in the case of Western India Vegetable Products Ltd Vs. CIT (1954)(26 ITR 151) have been noted down:-

"The important question that has got to be considered 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 look to is section 2(11) and that section defines the 'previous year' and for the purpose of a business the previous year begins from the date of setting up of the business. Therefore, it is only after the business is set up that the previous year of that business commences and in that 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 those expenses would be incurred at a point of time when the previous years of the business would not have commenced."

The Hon'ble Delhi High Court also considered by the decision rendered by Hon'ble Gujarat High Court in the case of CIT, Gujarat Vs. M/s Saurashtra Cement and Chemical Industries Ltd (1973)(91 ITR 170) 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 incurred in the business can be claimed as permissible deduction under Section 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 commencement. 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/professional activity. For example, for manufacturing business, purchase of new material or electricity connection may be relevant point to determine setting up but in case of property dealer, the moment he puts up a chair and table, or starts talking, his business is set up."

ITA No.6380/M/2011 4 7. It can be noticed that Hon'ble 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 generating asset or income earning structure. Further it is held that the determination 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 date of setting up of business in case of consultants like property dealer.

8. The Hon'ble Delhi High Court further referred to its decision rendered in the case of Commissioner of Income tax IV vs. Samsung India Electronics Ltd (2013)(356 ITR 354)(Delhi), wherein the following finding given by the Tribunal was approved:-

"6. In view of the above, the business of the assessee 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 assessee 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 of business which was September 3, 1995, notwithstanding the fact that commercial operations started with effect from October 1, 1995. For the purpose of claiming expenditure incurred thereafter, as revenue expenditure, reliance are placed on the following decisions."

9. In the instant case, the business of the assessee was providing advisory services in real estate and infrastructure projects. We have already noticed that, for a company providing consultancy services, the date of opening of office can be considered as date of setting up of business. In 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, Secretarial 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, Architects 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 projects in the month of March, 2007 for companies like TCS, Rallis, VSNL. Tata tea (Bangalore), Tata Tea (Munnar), Delhi Development Authority, Indira Gandhi 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 of 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 said fact may not be relevant for a consultancy company. Hence, in facts prevailing in the instant case, we are of the view that the assessee should be considered 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 succeeding year should be considered as date of setting up of business is not in accordance with the settled principles discussed above. Accordingly we set aside 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 assessee, 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 the assessing officer. Accordingly, while holding that the assessee's business can be considered to have been set up on the date of incorporation and hence the expenditure incurred after that date is allowable as revenue expenditure in the facts and circumstances of this case, we restore the matter of 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 the assessee and take appropriate decision in accordance with the law. In view of the above, we are unable to agree with the view of the tax authorities that all the expenses should be considered as having been incurred for earning the exempted dividend ITA No.6380/M/2011 6

income. Accordingly, we reverse the order of Ld CIT(A) on that issue also and restore the same to the file of the AO, who directed to examine the applicability of the provisions of sec. 14A of the Act also afresh.

11. In the result, the appeal of the assessee is treated as allowed for statistical purposes.

The above order was pronounced in the open court on 9th Jan, 2015.

घोषणा खल ु े यायालय म दनांकः 9th Jan, 2015 को क गई ।

sd sd

( वजय पाल राव/VIJAY PAL RAO) (बी.आर. बा करन,/ B.R. BASKARAN) या यक सद य / Judicial Member लेखा सद य/Accountant Member

मुंबई Mumbai: 9th Jan,2015.

व. न.स./ SRL , Sr. PS

आदे श क त ल प अ े षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent. 3. आयकर आयु त(अपील) / The CIT(A)- concerned 4. आयकर आयु त / CIT concerned 5. वभागीय त न ध, आयकर अपील य अ धकरण, मंब ु ई/ DR, ITAT, Mumbai concerned 6. गाड फाईल / Guard file.

आदे शानुसार/ BY ORDER, true copy सहायक पंजीकार (Asstt. Registrar) आयकर अपील य अ धकरण, मंब ु ई /ITAT, Mumbai