Case Law Details
E-Land Systems Pvt. Ltd. Vs ITO (ITAT Bangalore)
There is no dispute with regard to the fact that there could be a time gap between “setting up of business” and actual “commencement of business”. It is also settled principle that the expenses incurred after setting up of business is allowable as deduction. We may gainfully take support from the following observations made by Hon’ble Bombay High Court in the case of Western India Vegetable Products Ltd vs. CIT (1954)(26 ITR 151)(Bom):-
“It seems to us, that the expression “Setting up” means, as is defined in the Oxford English Dictionary, “to place on foot” or “to establish”, and in contradistinction to “commence”. The distinction is this that 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 a interregnum, there 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 the business, all expenses during the interregnum, would be permissible deduction under sec. 10(2).”
For determining the question as to whether the assessee has “set up” its business or not, in our considered view, what is required to be seen is whether the assessee is ready to commence its business. As rightly pointed out by Ld CIT(A) that the essential man power is the heart and soul of ITES service Industry. Since the assessee is in service industry providing IT application maintenance support services its requirement of man power and electronic equipment would depend upon the nature and type of work, i.e., type of IT application, it is getting. Hence, in the instant case, the assessee could plan its further recruitment of employees, depending upon the nature and type of work it is getting, which is essential to determine the skill set required for executing the said work.
We notice that the Ld CIT(A) has referred to the service agreement entered in the succeeding year by the assessee, wherein the management has visualized requirement of 25 technical employees. Since the assessee has not recruited that much number of employees, the Ld CIT(A) has taken the view that the assessee is still in the process of setting up of business. In our view, the directors have stated in the Directors’ report that the nature of work required to be performed under the agreement entered with its AE would require 25 employees. In the instant case, in our view, this kind of decision is taken after setting up of business but before actual commencement of operations. Accordingly, we are of the view that the Ld CIT(A) was not justified in observing that the assessee is in the process of setting up of business, since it has not yet completed recruitment of 25 employees.
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