Commissioner of Income Tax, Delhi-VI v. Whirlpool of India Ltd.

1. Whether the Reporters of local papers may be allowed to see the judgment?

2. To be referred to the Reporter or not? yes

3. Whether the judgment should be reported in the Digest? yes % JUDGMENT VALMIKI J.MEHTA, J.

1. This appeal is against the order of the Income Tax Appellate Tribunal (hereinafter referred to as “ITAT”) dated 2.11.2007 whereby the ITAT has deleted the disallowance of expenses prior to 1.02.1996 made by the Assessing Officer and which was confirmed by the CIT(A), on the ground that the assesse’s business could be said to have been set up only on 1.2.1996 when the bank account was opened and not prior thereto. 2009:DHC:3338-DB

2. The facts of the case are that the assessee company was incorporated on 27.7.1995 as a financial enterprise, with its main objects according to the memorandum of association, to carry on the business of financing of all kinds of goods including consumer goods and consumer durables etc., to purchase or finance all kinds of financial instruments, to finance private industrial enterprise in India by way of loans or advances and so on. The first board meeting was held on 12.08.1995 in which additional directors, executives and auditors were appointed. On 4.9.1995 the company placed orders 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. On 30.10.1995, M/s. S.R. Batliboi Consultants P. Ltd. sent their invoice to the company for recruitment charges which were paid by the company through Kelvinator of India Ltd., another company. 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 Whirlpool Financial Corporation of USA through its wholly-owned subsidiary by name Whirlpool Financial (Mauritius) Ltd., 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, wiz., Kelvinator of India Ltd. and Expo Machinery Ltd. The employees incurred petty expenditure on behalf of the company through imprest amounts sent to them through Kelvinator of India Ltd. A Bank account was opened on 1.2.1996 in the name of the company and thereafter the expenses were incurred from the same.

3. For the year ended 31.3.1996 the assessee-company filed its return of income declaring a taxable income of Rs. 94,41,990/-. While examining the return the Assessing Officer noted that the assessee had claimed expenditure on the footing that the business had been “set up” with effect from 1.11.1995. He took the view, disagreeing with the assessee, that the business can be said to have “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 can be allowed as a deduction. He accordingly disallowed the expenditure to the extent of Rs. 12,92,557/-, being the aggregate of Rs. 6,47,557/- incurred by the assessee and Rs. 6,45,000/- incurred by Expo Machinery Limited on behalf of the assessee. The view taken by the Assessing Officer having been confirmed by the CIT(A) and hence the assessee is in further appeal before us under Section 260A of the Income Tax Act, 1961.

4. On the basis of the aforesaid, the issue which arises is when can the assessee be said to have set up its business. Is the expression “setting up of the business” same as “commencement of business?” The ITAT has held that the expression “setting up of the business in the previous year” as per Section 3 of the Income Tax is different from commencement of the business and has relied upon the judgments of different courts including of this Court in the case of CIT Vs. Hughes Escorts Communications Ltd., 311 ITR 253.

5. This Court in the case of Hughes Escorts Communications Ltd. (supra) has clearly held that a business is set up though the same may not have commenced and the expenditure incurred after the date of setting up has to be allowed as a deduction. It was further held that the question as to when the business is set up depends on the facts of each case and the nature of the business and no hard and fast rule can be laid down as to when the business was set up.

6. In view of the above, the following paragraph of the judgment of the ITAT which exhaustively details the facts and the reasons as to why the business is set up not on 1.2.1996 as contended by the Assessing Officer but on 1.11.1995 is reproduced below and with which we concur:

7. The counsel for the Revenue has relied upon the decision in the case of Commissioner of Wealth Tax vs. Ramaraju Surgical Cotton Mills Ltd. to canvass the proposition that it is only when actual business operation was commenced, a business is set up. We feel that the decision of the Supreme Court in Ramaraju Surgical Cotton Mills Ltd. is not applicable to the facts of the present case because the said judgment was dealing with the provision of Section 5(1)(xxi) of the Wealth Tax Act, 1957 along with its proviso and the language of the main section and the proviso were wholly different. In the proviso, the requirement was specifically of the company commencing operations but in the main section the expression used was different viz. of setting up of the unit. In the light of the relevant provisions, the facts of that case and the claim of the assessee to get the benefit of a deduction, the Supreme Court interpreted the provisions applicable to mean that actual commencement of business was necessary. The facts of the present case are however more in line with the decision of this Court in the case of Hughes Escorts Communications Ltd.

8. Accordingly, no substantial question of law arises. The appeal is dismissed.

VALMIKI J.MEHTA, J A.K. SIKRI, J August 19, 2009 dkg