[2008] 19 SOT 593 (DELHI)

In the ITAT Delhi Bench ‘B’

Whirlpool of India Ltd.

v.

Joint Commissioner of Income-tax, Spl. Range 5, New Delhi

R.V. Easwar, Vice President

And R.C. Sharma, Accountant Member

IT Appeal Nos. 2840 (Delhi) of 1999 and 3272 (Delhi) of 2001

[Assessment year 1996-97]

November 2, 2007

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowable as - Assessment year 1996-97 - Whether there is difference between date of setting up of business and date of commencement of business and all expenses incurred after date of setting up are allowable as a deduction under section 28 - Held, yes - Whether when a business may be said to have been set up is dependent on facts of each case and largely on nature of business proposed to be undertaken - Held, yes - Whether in case of a company rendering financial services business can be said to have been set up when directors are appointed, staff such as regional and branch managers are appointed and their salaries are paid, computers are acquired and installed and company is ready to commence business - Held, yes - Assessee-company was incorporated on 27-7-1995 as a financial enterprise - For relevant assessment year, assessee claimed deduction of certain expenditure on footing that business had been ‘set up’ with effect from 1-11-1995 - Assessing Officer disagreed with assessee and held that business could be said to have been ‘set up’ only on 1-2-1996, when bank account was opened in assessee’s name and, therefore, only expenditure incurred thereafter could be allowed as a deduction - He, accordingly, disallowed expenditure to some extent - Whether since establishment and staff were put in place by end of October, 1995 and assessee was ready to commence its business from 1-11-1995, it was clear that assessee had ‘set up’ its business on 1-11-1995 and not on 1-2-1996, as claimed by Assessing Officer - Held, yes - Whether, therefore, disallowance of expenditure made by Assessing Officer was not justified and liable to be deleted - Held, yes

Facts

The assessee-company was incorporated on 27-7-1995, as a financial enterprise. The first board meeting of the assessee-company was held on 12-8-1995, in which additional directors, executives and auditors were appointed. On 4-9-1995, the assessee placed orders on one ‘H’ for purchase of computers and peripherals. During the months of September and October 1995, various key employees, such as, branch managers, regional managers, consumer finance managers, company secretary and finance manager and accounts manager, etc., were appointed by the assessee. On 30-10-1995, one ‘S’ sent its invoice to the assessee for recruitment charges, which were paid by the assessee through an other company Kelvinator of India Ltd. (K). During the period from 4-1-1996 to 21-1-1996, the assessee applied for approval of the Foreign Investment Promotion Board (FIPB) for investment by one ‘W’ of USA, and for the approval of the Reserve Bank of India for receiving foreign exchange loan against future issue of equity. During the period from November 1995 to January 1996, the assessee-company paid salary to the staff and employees through two companies, viz., ‘K’ and ‘E’. The employees incurred petty expenditure on behalf of the assessee through imprest amounts sent to them through ‘K’. A bank account was opened on 1-2-1996, in the name of the assessee and thereafter the expenses were incurred from the same. For the relevant assessment year, the assessee claimed deduction of certain expenditure on the footing that the business had been ‘set up’ with effect from 1-11-1995. The Assessing Officer disagreed with the assessee and held that the business could be said to have been ‘set up’ only on 1-2-1996 when the bank account was opened in the assessee’s name and, therefore, only the expenditure incurred thereafter could be allowed as a deduction. He, accordingly, disallowed the expenditure to some extent. On appeal, the Commissioner (Appeals) confirmed the impugned order.

On second appeal :

Held

Section 3 defines previous year and it says that the first previous year commences from the date of setting up of the business. It is well-settled that there is a difference between the date of setting up of a business and the date of commencement of the business. There may be an interregnum between the date of setting up of the business and the date of actual commencement of the business, but under the Act all expenses incurred after the date of setting up are allowed as a deduction under section 28. [Para 3]

It is well-settled that the question when a business may be said to have been set up is dependent on the facts of each case and largely on the nature of the business proposed to be undertaken. The assessee was a financial company authorised to advance loans for interest to facilitate customers to purchase consumer durables, though the business was not limited to advancing monies for acquiring consumer durables. The business was not also limited to consumers who proposed to buy products of ‘K’. In the case of a company engaged in rendering financial services, it is possible to say that the business is set up when the directors are appointed, staff such as regional and branch managers are appointed and their salaries are paid, computers are acquired and installed and the company is ready to commence business. It could not be said that the assessee’s business was set up only when the bank account was opened on 1-2-1996 because prior thereto the assessee, though it did not have a bank account, was incurring the expenditure through ‘K’ or ‘E’. The absence of a bank account could not impede the setting up of the business. The computers and peripherals were purchased vide order placed on ‘H’ on 4-9-1995 and the required end-user certificate was also issued. The total cost of the purchase was Rs. 29.84 lakhs. Branch managers were appointed in October 1995. Regional managers were appointed during the same time. The assessment order showed that the salaries were paid from November 1995 including allowances, bonus, gratuity and contribution to provident and other funds. The office rent for November and December 1995 and January 1996 had also been paid. It was, thus, clear that the establishment and staff were put in place by the end of October 1995 and the assessee was ready to commence its business from 1-11-1995. ‘S’ had also submitted its bill dated 30-10-1995 for Rs. 2,91,486 for professional services rendered in connection with recruitment of 19 candidates for the post of accounts manager and incidental expenses. The fact that the foreign loan and FIPB approval for equity investment by ‘W’ of USA were given in January 1996 did not mean that the business was not set up before these events. These were not statutory formalities and even without the foreign loan and the equity participation, the assessee-company was in a position to carry on the business in accordance with the objects clause of its memorandum of association from November 1995 when it had its own offices, branch and regional managers and staff, computers installed and was ready to commence its activities. [Para 4]

Therefore, the assessee had set up its business on 1-11-1995 and not on 1-2-1996 as claimed by the income-tax authorities. Therefore, the disallowance of the expenditure made on this basis was not justified and was liable to be deleted. [Para 5]

Editor’s note

(i) Where the last day to deposit the employees’ contribution to the provident fund, fell on sunday on which day the provident fund office remained closed, in such circumstances, assessee was justified in depositing the contribution of next day and, same had to be considered within time in lieu of section 10 of General Clauses Act, 1897.

(ii) Where the Tribunal in quantum appeal had upheld the assessee’s claim that it had set up the business on 1-11-1995, levy of penalty upon the assessee on the ground that the assessee knowingly and deliberately claimed the pre-set up expenses which were not allowable as deduction, was not justified.