The company was incorporated on 24-11-2004 under the Indian Companies Act with the authorized capital of Rs. 2,00,00,000/- being minimum capital for the company obtaining membership of stock broker. As per the object clause of memorandum of association of the assessee, the main object of the assessee was to carry on the business of stock and share broker. To carry on the business activity, it has to be registered with NSE and/ or Bombay Stock Exchange. There are certain requirements, such as, qualified persons, minimum area and the net worth etc. to be complied with for getting registered. As per the requirements, minimum two qualified persons and minimum worth of Rs. 1,00,00,000/-, besides deposit of Rs. 1,25,00,000/-, was required . To comply with this, the assessee issued capital of Rs. 1,50,00,000/- and appointed two qualified persons on the Board and applied for the membership of NSE on 25-4-2005. NSE vide its letter dated 14-6-2005 asked to complete certain formalities which were complied with. After necessary formalities were completed, NSE issued letter in the month of September 2005 for deposit of Rs. 1,27,00,000/- and the same was deposited in NSE on 8-11-2005. Finally, NSE issued membership certificate on 16-1-2006 and asked to furnish bank guarantee of Rs. 25,00,000/- to carry out activities equipment such as VSAT, servers had to be installed and the same was dispatched on 7-3-2006 by NSE.
From the above uncontroverted factual aspects it is evident that from the date of incorporation of company itself, the assessee’ s intention was to obtain the membership of stock exchange and in order to pursue that object the assessee had to comply with various legal requirements. It is true that assessee could not commence the business without registration being granted but the fact of overwhelming legal requirements to be complied with by assessee before getting the registration cannot be over looked.
The assessee’s claim is that from the date it filed application with NSE viz. 25-4-2005 it had set up its business and only the formal registration from NSE was awaited. In the backdrop of these facts the assessee’ s submission is that it was highly debatable whether the date of set up should be taken as 25-4-2005 considering the requirement to be fulfilled or only after the formal registration is granted by NSE should the business be taken as set up. The submission is that it is highly debatable issue.
We find considerable force in this submissions of the assessee because though it is true that assessee could not commence the business but a the same time it cannot be ignored that from incorporation the intention of the assessee was for obtaining NSE membership and various formalities had to be fulfilled before application for registration could be made. In this regard we may refer to the following observations of ITAT Delhi Bench in the case of Whirlpool of India Ltd. (supra) observing in para 3 as under:
“3. Section 3 of the Income Tax Act 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 and this distinction has been brought out by the Bombay High Court in Western Vegetable Products Ltd. v. CIT(1954) 26 ITR 151 (Born) by observing that when a business is established and is ready to commence business then it can be said that it has been “set up” , but before it is ready to commence business it is not “set up”. There may be an interregnum between the date of setting up of the business and the date of actual commencement of the business, under the Act all Expenses incurred after the date of setting up are allowed as a deduction under section 28. This decision has been applied by the Hon’ble Delhi High Court in its recent judgment, 17-9-2007 in ITA Nos.” 1687 and 1688 of2006 in the case of CIT v. Hughes Escort Communications Ltd. (reported at (2007) 213 CTR (Del) 45’Ed. ) (copy of the judgment filed before us) and it has been held that where the business has been set up, though the same has not been commenced, the expenditure incurred after the date of setting up has to be allowed as deduction. But the question as to when it can be said that a business is “set up” must largely depend on the facts of each case and the nature of the business. There can be no hard and fast~ rule by which it can be determined as to when the business was set up. In the judgment of the Bombay High Court cited supra, it was a case of a manufacturing concern. It was held that the business was set up when the first order of purchase of raw material was placed and not when the factory was started (at a later point of time). In CIT v. Sarabhai Sons (P) Ltd. (1973) 90 ITR 318 (Guj), the Gujarat High Court was dealing with a company established for the manufacture of scientific instruments. It was held that the purchase of land, placing of orders for machinery and raw materials were merely operations for the setting up of the business and the business was actually set up only when the machinery was installed and the factory was ready to commence business. In Prem Conductors (P) Ltd. v. CIT 1976 CTR (Guj) 324 : (1977) 108 ITR 654 (Guj), the Gujarat High Court held that even securing orders by a manufacturing concern in advance of production can amount to setting up of the business. In CIT v. Sarabhai Management Corpn. Ltd. (1991) 192 ITR 151 (SC), the Supreme Court, affirming the view of the Gujarat High Court in Sarabhai Management Corporation Ltd. v. CIT (1976) 102 ITR 25 (Guj) held that in the case of a company formed for leasing of property it could not be said that the business was not set up till the first lease took place; the earlier part of the activities, namely, engaging staff, buying the equipment and making the staff familiar with the same are all part of the business and the business can be said to be set up even earlier. A case of marine processing industry was dealt with by the Gujarat High Court in CIT v. Western India Sea Foods (P) Ltd. (1993) 199 ITR 777 (Guj). There, it was held that the act of acquiring a godown in the month of August in anticipation of the arrival of fish in the waters in the month of October was held to amount to setting up of the business. The Madras High Court was dealing with the case of a company formed for selling property time-share in CIT v. Club Resorts (P) Ltd. (2006) 287 ITR 552 (Mad). It was held that the acts of appointing staff for canvassing sales of the property timeshares, renting of office premises, etc. amounted to setting up of the business even though the construction of the property was yet to begin. A case of a hotel hospitality industry was considered again by the Gujarat High Court in Hotel Alankar v. CIT (1982) 133 ITR 866 (Cuj). While recognizing that the question whether a business is set up or not was essentially one of fact and that it would largely depend upon the facts of each case and the nature of the business; the High Court noted that in the case of a hotel (boarding and lodging house) due weight must be given to the fact that it cannot commence its activities overnight. It was pointed out that the business of boarding and lodging would necessarily comprise of variegated activities commencing from the stage of acquisition of a proper and suitable building making it more suitable for the hotel business, purchasing linen, cutlery, furniture, etc., appointing staff of managers, cooks, bearers and ultimately reaching the stage of receiving customers and that it would be de hors commercial sense to hold that one would be reaching the stage of having set up the business only when one reaches the stage of receiving customers. It was ultimately held that where there are several integrated activities to be undertaken serially, one forming the foundation for the other, it can be said that the business was ‘set up’ when the first of such activities was undertaken. It was ultimately held that the business was set up when the building was acquired and was placed at the disposal of the firm. In ITO v. M Voradarajan (1989) 34 TTJ (Mad) 247 : (1989) 30 ITD 414 (Mad), the Madras Bench of the Tribunal held in the case of a sole-selling agent that his business could be said to have been set up once he obtained the sole-selling agency and it could not be said that it was set up only when he obtained the first business.”
The question, whether a business can be said to have been set up, is dependent on the facts of each case and largely on the nature of business proposed to be undertaken. In the present case the nature of business proposed to be undertaken was such that without complying with various requirements, the assessee could not make application for registration. The application could be made to SEBI only when the assessee had fulfilled/ complied with basic conditions necessary for grant of registration. Therefore, it cannot be disputed that there can be one point of view that the business had been set up after all the necessary formalities had been fulfilled for making the assessee eligible for filing the application with SEBI. Only the permission for commencement of business was awaited. The business was ready for commencement subject to grant of registration. Therefore, in our opinion, under such circumstances it cannot be said that assessee’ s explanation of claiming expenses for the period 25-4-2005 to 15-1-2006 could be branded as mala fide. The assessee having complied with all the requirements was sanguine of getting registration and therefore treated its business as being set up from the date of making application. Further, the assessee’ s intention since beginning was to act as member of NSE also has to be given due weightage. Considering the highly debatable nature of its claim we are of the opinion that penalty is not leviable in this case. Moreover, the assessee having filed all the relevant information along with the return, it cannot be said that assessee had concealed particulars of its income to attract penalty u/s 271(1)(c). In coming to this conclusion we are fortified by the ratio of decision of Hon’ble Supreme Court in the case of Reliance Petro Products Ltd. v. CIT 322 ITR 158. In view of above discussion, the penalty levied u/s 271(1)(c) is deleted.