Preliminary steps for fulfillment of purpose of business| set up of business | Section 35D

1. The writ petitioner seeks the intervention of this Court to set aside an order of the Principal Commissioner of Income Tax [CIT] under Section 264 of the Income Tax Act, 1961. The petitioner is aggrieved by the assessment order made by the Assessing Officer (AO) for the assessment year (AY) 2013-2014, wherein the AO disallowed three items of expenditure claimed as deduction, i.e., depreciation, preliminary expenses, and employees’

2. The assessee/petitioner company was incorporated under the old Companies’ Act on 12.04.2012 as a joint venture company of Indian Railway Construction Company Ltd. (IRCON) and Rail Land Development Authority (RLDA); these two entities held equity shareholding in the proportion of 51% and 49%, respectively. The assessee declared loss to the tune of ₹44,70,035/-. Upon scrutiny, the AO also observed that the assessee claimed expenditure amounting to more than ₹1.92 crores, but had not claimed any business income from its activity. An amount of ₹85,83,365 shown in the P&L accounts, was held to be income from other sources. The assessee therefore preferred a revision petition filed under Section 264, which was declined.

3. The assessee in furtherance of its claim before the CIT had urged that it had, in fact, set up a business inasmuch as various preliminary steps had been taken by it which included the appointment of key personnel, preparation of draft model Development Agreement and initiation of process to tender financial and advisory services. The CIT however rejected the assessee’s claim for revision affirming the view of the AO. The relevant extract of the CIT’s revisional order, is reproduced below:–

“8. It is clear that the assessee company is providing services. As it was established by the government for specific purpose of developing old stations, merely allotment of stations for feasibility studies would not mean that it has  necessary infrastructure particularly technical and financial expertise available with it from the date itself.

In fact, the assessee company follows a model where it has  some key persons supervising on its rolls. However, the entire  major services are outsourced to consultants – technical and legal. Unless (i) the key persons of the assessee company have been appointed who can decide how to go about tendering, selecting the consultants and advisors are in place; (ii) the draft model development agreement is finalized (iii) financial and bid advisory services are appointed and (iv) at least one of the consultants for Architectural and technical feasibility studies is appointed; in my considered view; the business is not established.

As far as the certificate of commencement from the ministry of Corporate Affairs is concerned, this is given an application by the company and actual establishment of setting up of business is not a criteria for them.

Now, I will proceed to decide when the above key elements of the business were available to the assessee.

(a) Appointment of key persons on its Rolls: