Expenses incurred between the dates of commencement of business to setting up of business are allowable

Some of the relevant facts are, the assessee company was incorporated on September 19, 2007 under the Companies Act, 1956, to carry on trading activities which primarily included wholesale trading of all kinds of consumer goods durables, articles and products. The year 2008-09 was the first year of assessment. The assessee company filed an E-Return of income for the assessment year 2008-09. The appellant­assessee claimed expenses amounting to Rs.9,03,03,547/- and claimed a business loss of Rs. 8,64,07,610/- after setting off income from other sources amounting to Rs. 38,95,937/-. Show cause notice dated October 21, 2010 was issued to the assessee as to why the business loss claimed may not be disallowed. The case of the appellant-assessee was that the loss had occurred on account of expenses incurred for earning and conducting business in India. The Assessing Officer was of the view that the expenditure incurred was prior to commencement of business as it was not fully set up. Thus expenditure was not allowed as a deduction. Sections 28 to Section 43D of the Act, which relates to the computation of business income were elucidated upon. The Assessing Officer supported his conclusion considering the case of a manufacturing concern, which could be said to be set up only when it was ready for production. In case of a trader, the Assessing Officer was of the view that the distinction may not be significant once there were stocks to be sold. In other words, according to him, the manufacturing concern is said to be set up only when production gets started and in the case of the trader, when the stocks are available to be sold.

In the facts of the present case, we note that the assessee company was incorporated on September 19, 2007. Even before the incorporation, correspondence had been made with well known companies like Nestle,

Cadbury, Nivea India Pvt. Ltd., Pepsi, Coalgate, Uniliver etc. It rented out the office premises in the month of October, 2007. Bank account was opened on October 04, 2007. Employees were also appointed during the said period. TDS deduction for the said employees was also placed on record. Registration under the Shops and Establishment Act was also effected. These activities are the first stage activities which would lay foundation for placing orders for procuring the stock and storing them in a warehouse/shop followed by the third stage of marketing them. Suffice to state for a foreign entity without establishing itself under the local laws, appointing personnel, identifying the prospective manufacturers, clients etc. obtaining storage facilities followed by stock-in-trade, the business of trading cannot commence. The Tribunal missed the point, that the assessee as a prudent trader could not have made purchases without undertaking the aforesaid exercise. The said exercise was a precursor to commencement but post set up. The aforesaid activities demonstrate setting up of the business by the appellant-assessee with a commitment to commence the business. This Court in ESPN Software India P. Ltd. (supra) has held as under:-

“Since the assessee has acquired the licence on August 15, 1995, and after getting the licence, the assessee was in a position to start the business, so, under these circumstances, we have no hesitation in holding that the assessee has commenced its business on or after August 15, 1995 and we do not find any infirmity with regard to this finding in the order passed by the Tribunal.”

Nothing barred or prevented the appellant from making first purchase, after necessary legal approvals, but the fact that the appellant wanted to commence actual trading after negotiations with several parties, would not postpone the date when the business was set up.

In CIT vs. ESPN Software India Pvt. Ltd. (supra), this Court while dealing with the case where the assessee company was incorporated on August 01, 1995 and had filed its return declaring loss of Rs.3,01,78,033/- by debiting expenses of Rs.2,28,85,749/- relating to the period from August 01, 1995 to March 31, 1996 held that it is a well settled position of law that business is nothing more than a continuous course of activities and for commencement of business all the activities which go to make up the business need not be started simultaneously. As soon as the activity which is the essential activity in the course of carrying on the business is started, the business must be said to have commenced. In the said case it was held that even though incorporated on August 01, 1995, the company had acquired licence to commence its business on August 15, 1995 to distribute in India through Cable Television Systems, Satellite Master Antenna Systems and DTH etc. ESPN channels. The business is said to have commenced as it was on that day the company was in a position to start the business. Trader has to select products, negotiate with manufacturers etc. and this is an essential and important facet of the activities and business of a trader.

Similarly this Court in CIT vs. Aspentech India (F) Ltd. [2010] 187 Taxman 25 (Delhi) had agreed with the ITAT wherein the ITAT has held that for claiming any expenses under Section 37(1) of the Act what is required to be seen is whether the expenses are incurred for the purpose of business or not and such expenses are of not capital in nature and are not expressly disallowable under the other provisions of the Act. The Tribunal had also taken into consideration the fact that the assessee company has achieved turnover of Rs.4 Crores with the help of seven employees which clearly indicates that their efforts made in the year under consideration has shown fruitful result in the succeeding years. The Tribunal had also noted that the expenses have been incurred after setting up of the business. The expenses on staff salary paid by the appellant-assessee were substantial. For a trader, these expenses or deployment of employees at this scale was not necessarily in case business had not been set up.

The aforesaid activities demonstrate setting up of the business by the appellant-assessee with a commitment to commence the business.  Expenses are incurred for the purpose of business and such expenses are of not capital in nature and are not expressly disallowable under the other provisions of the Act. Moreover it was the case of the revenue that the assessee has claimed deduction of expenditure, prior to the setting up of business. Appeal of assessee is allowed.