Huber + Suhner Electronics Pvt. Ltd., New Delhi v. DCIT, New Delhi

ITA 4973/DEL/2010 | 2005-2006
Pronouncement Date: 09-09-2011 | Result: Allowed

Appeal Details

RSA Number 497320114 RSA 2010
Assessee PAN ITACT1961S
Bench Delhi
Appeal Number ITA 4973/DEL/2010
Duration Of Justice 9 month(s) 27 day(s)
Appellant Huber + Suhner Electronics Pvt. Ltd., New Delhi
Respondent DCIT, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 09-09-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted I
Tribunal Order Date 09-09-2011
Date Of Final Hearing 28-06-2011
Next Hearing Date 28-06-2011
Assessment Year 2005-2006
Appeal Filed On 12-11-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: I NEW DELHI DELHI BENCHES: I NEW DELHI DELHI BENCHES: I NEW DELHI DELHI BENCHES: I NEW DELHI BEFORE SMT. DIVA SINGH JUDICIAL MEMBER BEFORE SMT. DIVA SINGH JUDICIAL MEMBER BEFORE SMT. DIVA SINGH JUDICIAL MEMBER BEFORE SMT. DIVA SINGH JUDICIAL MEMBER AND AND AND AND SHRI B.C.MEENA ACCOUNTANT MEMBER SHRI B.C.MEENA ACCOUNTANT MEMBER SHRI B.C.MEENA ACCOUNTANT MEMBER SHRI B.C.MEENA ACCOUNTANT MEMBER ITA NO: 4973/DEL/2010 ITA NO: 4973/DEL/2010 ITA NO: 4973/DEL/2010 ITA NO: 4973/DEL/2010 A.Y. : 2005 A.Y. : 2005 A.Y. : 2005 A.Y. : 2005- -- -2006 2006 2006 2006 M/S HUBER + SUHNER ELECTRONICS P.LTD. VS. DCIT 204-06 TOLSTOY HOUSE CIRCLE 12(1) 15 TOLSTOY MARG C.R.BDLG. NEW DELHI NEW DELHI (APPELLANT) (APPELLANT) (APPELLANT) (APPELLANT) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) APPELLANT BY APPELLANT BY APPELLANT BY APPELLANT BY : SH. RAJAN BHATIA ADV. RESPONDENT BY RESPONDENT BY RESPONDENT BY RESPONDENT BY : SH. A.K.MONGA SR.D.R. O R D E O R D E O R D E O R D E R R R R PER DIVA SINGH JUDICIAL MEMBER PER DIVA SINGH JUDICIAL MEMBER PER DIVA SINGH JUDICIAL MEMBER PER DIVA SINGH JUDICIAL MEMBER THIS IS THE APPEAL FILED BY THE ASSESSEE AGAINST THE ORD ER DATED 24.8.2010 OF CIT(A)-XI NEW DELHI FOR A.Y. 2005-06 WHEREIN THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS. 1. THAT THE ORDER OF LD.CIT(A) IS BAD BOTH IN LAW A ND ON FACTS OF THE CASE. 2. THAT THE LD.CIT(A) HAS ERRED IN UPHOLDING ASSESSMENT MADE BY LD. AO AT NIL AS AGAINST THE LOSS AS CLAIMED AT RS. 90 54 925/- BY THE APPELLANT. 3. THAT THE LD. CIT(A) HAS ERRED IN UPHOLDING THE ER RONEOUS OBSERVATION ON FACTS THAT THE APPELLANTS BUSINESS ACTIVI TY HAD NOT COMMENCED DURING THE RELEVANT PREVIOUS YEAR. 4. THAT THE LD. CIT(A) HAS ERRED IN IGNORING THE SUBM ISSIONS MADE BY THE APPELLANT THAT ITS BUSINESS WAS SET UP DURING THE RELEVANT PREVIOUS YEAR WHICH IS THE PERIOD FROM WHICH ALL EXPENSES INCURRED FOR THE BUSINESS ARE ALLOWABLE UND ER THE INCOME TAX ACT 1961. 5. THAT THE LD. CIT(A) HAS ERRED IN PLACING RELIANC E ON THE DECISION OF HONBLE HIGH COURT OF CALCUTTA IN THE CA SE OF CIT ITA 4973/DEL/2010 PAGE 2 OF 2 A.Y. 2005-06 M/S HUBER + SUHNER ELECTRONICS P.LTD. VS. TEA PRODUCING COMPANY OF INDIA 48 ITR200 NOT ATT RACTED ON FACTS OF THE APPELLANTS CASE AND IGNORING DECISION OF JURISDICTIONAL HIGH COURT OF DELHI IN THE CASE OF CIT VS. E.FUNDS INTERNATIONAL INDIA (2007) 162 TAXMAN 1 (DEL HI) AS RELIED UPON BY THE APPELLANT. 6. THE APPEAL IS WITHIN TIME AS THE ORDER OF LD CIT(A ) WAS RECEIVED ON 14 TH SEPTEMBER 2010. 2. THE RELEVANT FACTS OF THE CASE AS AVAILABLE FROM T HE ASSTT. ORDER ARE THAT THE ASSESSEE COMPANY WAS INCORPORATED TO CARRY OUT BUSINESS OF PROVIDING ELECTRICAL AND OPTICAL CONNECTIVITY IN THE FIELD OF COMMUNICATION TRANSPORTATION MEDICAL TECHNOLOGY T EST & MEASUREMENT EQUIPMENT AND OTHER INDUSTRIAL ACTIVITIES. IT HAS ALSO BEEN INCORPORATED TO CARRYOUT WHOLESALE TRADING BUL K IMPORTS WITH EXPORTS AND PROVISION OF CONSULTANCY TECHNICAL SUPPORT SERVICES AND PROVISION OF SPECIALIZED AFTER SALE SERVICES OF THE PROD UCTS SYSTEMS AND COMPONENTS. 2.1. THE ASSESSEE CLAIMED THAT IT STARTED ITS OPERATIONS O N JANUARY 3 2005 AND THAT DURING THE PREVIOUS YEAR RELEVANT TO T HE ASSESSMENT YEAR 2005-06 IT HAD JUST STARTED UP OPERATIONS AND COU LD MAKE A SALE OF ONLY RS. 6790/-. THE AO WAS OF THE VIEW THAT AGAI NST THIS SO CALLED OPERATIONAL ACTIVITY OF SALES AMOUNTING TO RS. 6790/ - THE ASSESSEE HAD CLAIMED EXPENSES AMOUNTING TO RS. 84 73 955/- AND HAD THUS DECLARED A BOOK LOSS OF RS. 84 67 165/-. AFTER MAKING THE NECESSARY ADJUSTMENTS THE ASSESSEE DECLARED A LOSS OF RS. 90 54 925/- AS PER THE INCOME TAX ACT 1961. 2.2. IN VIEW OF THE FACT THAT THE BUSINESS HAD NOT COM MENCED THE ASSESSEE WAS REQUIRED TO EXPLAIN AND JUSTIFY THE CLAIM OF VARIOUS EXPENSES. 2.3 IN RESPONSE TO THE ABOVE THE ASSESSEE SUBM ITTED ITS REPLY ITA 4973/DEL/2010 PAGE 3 OF 3 A.Y. 2005-06 M/S HUBER + SUHNER ELECTRONICS P.LTD. DATED 25.9.2007 STATING THAT ITS MAIN ACTIVITY WAS TO ENGAGE IN TRADING ACTIVITY I.E. IMPORTING COMPONENT FROM ITS PARENT CO MPANY AND UNDERTAKING MARKETING OF THE PRODUCT AND RENDERING TECHNICAL SERVICES. FOR THE YEAR UNDER CONSIDERATION IT WAS SUBMITTED THAT NO MANUFACTURING WAS ENVISAGED AND EFFORTS WERE MADE FOR OBTAINING THE ORDERS AND THE EXPENSES SO INCURRED WERE FOR MAKING SUCH EFFORT. IT WAS ALSO CONTENDED THAT CONTACT WITH THE CUSTOMERS WAS E STABLISHED AND BUSINESS OPPORTUNITIES WERE EXPLORED AS A RESULT OF T HIS SALES WERE REALIZED FROM MAY 2005 ONWARDS. 2.4. THE REPLY OF THE ASSESSEE WAS CONSIDERED TO BE UNACC EPTABLE BY THE AO FOR THE REASONS THAT DESPITE SPECIFIC OPPORTUNIT Y ONLY A GENERAL REPLY WAS GIVEN AND THAT TOO WITHOUT ANY MATERIAL E VIDENCE IN SUPPORT OF ITS CLAIM. 2.4.1 THE AO FOUND THAT THE ASSESSEE HAS NOT ENCLOSED COP Y OF ANY RELEVANT CORRESPONDENCE MADE DURING THE YEAR NOR ANY AGREEMENT EXECUTED IN THIS REGARD. NO PROJECT REPORT ALSO HAD B EEN FILED NOR THE DETAILS OF THE NATURE OF THE PURCHASES AND SALES MADE DU RING THE YEAR WERE FOUND TO HAVE BEEN FURNISHED. 2.4.2 IN THIS BACKGROUND THE AO DISBELIEVED THE ASSESSEE S REQUEST THAT ONE TRANSACTION OF PURCHASE AMOUNTING TO RS. 5823 /- THE ASSESSEE MADE A RESALE AMOUNTING TO RS. 6790/- FOR WHICH EXPE NSES AMOUNTING TO RS. 8473955/- HAD BEEN INCURRED. 2.4.3 HE FURTHER OBSERVED THAT EVEN THE EXACT DETAI LS AND NATURE OF THIS ISOLATED TRANSACTION OF PURCHASES AND RESALE HAD NOT BEEN FURNISHED. 2.4.4 HE WAS FURTHER OF THE VIEW THAT THE VERY FACTS THAT THE GOODS ITA 4973/DEL/2010 PAGE 4 OF 4 A.Y. 2005-06 M/S HUBER + SUHNER ELECTRONICS P.LTD. HAD BEEN PURCHASED FOR RESALE SHOWED THAT IT WAS ONLY A PAPER TRANSACTION UNDER WHOSE VEIL THE ASSESSEE IS TRYING TO BOO K LOSSES WHICH ARE OTHERWISE NOT ALLOWABLE. 2.4.5 THUS RELYING UPON CIT VS. TEA PRODUCING CO. OF INDIA LTD. (1963) 48 ITR 200 (CAL). IT WAS HELD THE ENTIRE LOSS C LAIMED BY THE ASSESSEE BEING PRE-COMMENCEMENT LOSS WERE TO BE DISALLOWED . 2.5 AS A RESULT OF THIS THE LOSS CLAIMED OF RS. 9054925/- BY THE ASSESSEE IN ITS RETURN WAS DISALLOWED AND THE ASSESSMENT WAS COMPLETED AT A NIL INCOME. 3. IN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY TH E ASSESSEE FILED WRITTEN SUBMISSIONS PART OF WHICH HAS BEEN INCLUDED IN T HE IMPUGNED ORDER AT PAGE 3 THE APPELLANT COMPANY WAS INCORPORATED ON 17/8/04. TH E ACTIVITIES RELATING TO MARKETING STARTED RIGHT FROM INCORPORATION. FO R PURPOSE OF TRADING THE FIRST ORDER WAS SECURED IN MARCH 2005. THE TOTAL TURNOVER FOR AY 05-06 WAS RS. 6 790/-. ALL THE RELEVANT DOCUME NTS SUPPORTING THE EXPENSES INCURRED WERE PLACED BEFORE YOU THROUGH APB-1 HOWEVER SOME OF SUCH DOCUMENTS COULD NOT BE PRODUCED/PLACED B EFORE THE LD. AO. THE SAME HAS BEEN STATED IN PARA 3.5 OF WRITTEN SUB MISSIONS DATED 20.8.10. THE TOTAL EXPENSES FOR AY 05-06 WAS RS. 9054 925/-. THE LD. AO HAS DISCUSSED IN HIS ORDER REGARDING COMMENCEMEN T OF BUSINESS BUT THE APPELLANT IS OF THE OPINION THAT THE DATE OF SETTING UP OF THE BUSINESS AS PER SEC. 4 OF IT ACT 1961 SHOULD BE THE S TARTING POINT FOR DECIDING THE ISSUE. FURTHER MORE IN TRADING BUSINESS TH E ONLY REQUIREMENT IS THE CAPACITY TO FULFILL THE ORDER RECEIVE D OR RECEIVABLE. SUCH REQUIREMENT HAS BEEN DULY FULFILLED. RELIANCE I S PLACED ON CWT V RAMA RAJU SURGICAL COTTON MILLS LTD. 63 ITR 478 (SUPRE ME COURT). THE HONBLE SUPREME COURT HELD THAT THE DECIDING FACTOR IS S ETTING UP OF THE BUSINESS AND NOT THE COMMENCEMENT. 4. CONSIDERING THESE SUBMISSIONS THE CIT(A) CONSIDERING TH E QUERIES PUT BY THE AO AND THE RESPONSES GIVEN BY THE ASSESSEE BEFO RE THE AO CONFIRMED THE ACTION OF THE AO HOLDING THAT EVEN BE FORE HIM THE ITA 4973/DEL/2010 PAGE 5 OF 5 A.Y. 2005-06 M/S HUBER + SUHNER ELECTRONICS P.LTD. ASSESSEE HAD FAILED TO ADDUCE ANY EVIDENCE TO ESTABLISH T HAT BUSINESS ACTIVITY AS PER THE MEMORANDUM OF ASSOCIATION ACTUALLY COMMENCED. HE WAS OF THE VIEW THAT IN VIEW OF ASSESSEES OWN ADMISSIO N THAT THE ENTIRE LOSS OF THE ASSESSEE IS PRE-COMMENCEMENT LOSS. THE JU DGMENT OF THE CALCUTTA HIGH COURT RELIED UPON BY THE AO WA S HELD TO BE APPLICABLE. 5. STILL AGGRIEVED ASSESSEE IS IN APPEAL BEFORE THE TRI BUNAL. 6. LD. AR SHRI RAJAN BHATIA INVITED ATTENTION TO TH E COPY OF THE MEMORANDUM OF ASSOCIATION FILED AT PAGE 52-56. SPECI FIC ATTENTION WAS INVITED TO PAGE 54 CLAUSE 2 SO AS TO CONTEND THAT T HE MAIN OBJECTS OF THE ASSESSEE WERE TO MANUFACTURE SELL IMPORT EXPORT P URCHASE DEAL AND TRADE IN EITHER ON ITS OWN OR IN ASSOCIATION WITH ANY OTHER PERSON BY WAY OF SEPARATE JOINT VENTURE(S) CONTRACT MANUFACT URING ARRANGEMENTS OR OTHERWISE WITH SUCH PERSON THE PRODUCTS COMPONENTS AND SYSTEMS PERTAINING TO ELECTRICAL AND OPTICAL CONNE CTIVITY INCLUDING THOSE THAT COULD BE DEVELOPED BY THE COMPANY BY USING AND HARNESSING ITS IN-HOUSE RESEARCH AND DEVELOPMENT. 6.1. IT WAS SUBMITTED THAT IN THE CONTEXT OF THIS CLAU SE ALTHOUGH THE MANUFACTURING ACTIVITY IN THE YEAR UNDER CONSIDERATI ON DID NOT START. THE TRADING ACTIVITY IN THE YEAR UNDER CONSIDERATION STARTED. 6.2 IT WAS STATED THAT THE ASSESSEE HAD OBTAINED A PROPER TY ON LEASE AS IS EVIDENCED FROM COPY OF THE LEASE DEED DATED 10 TH SEPTEMBER 2004 PLACED AT PAGES 81 TO 98 OF THE PAPER BOOK. ACC ORDINGLY IT WAS SAID THAT THE BUSINESS WAS SET UP FOR THE TRADING ACTIV ITY. ATTENTION WAS ALSO INVITED TO PAPER BOOK PAGE NO.100 TO 103 WHI CH IS THE LIST OF THE EMPLOYEES APPOINTED DURING THE YEAR ALONGWITH T HEIR WORK PROFILE . IT WAS SUBMITTED THAT ON ACCOUNT OF THIS THE SALARY OF ABOUT RS. 6 LAKH ITA 4973/DEL/2010 PAGE 6 OF 6 A.Y. 2005-06 M/S HUBER + SUHNER ELECTRONICS P.LTD. WAS PAID. THE EMPLOYEES IT WAS STATED WERE ONLY SALES PE RSONNEL. ATTENTION WAS ALSO INVITED TO PAGES 70 TO 71 WHICH ARE THE COPIES OF INVOICE OF EXHIBITION EXPENSES AND COPY OF INVOICE OF ADVERTISEMENT EXPENSES DATED 5 TH JANUARY AND 15 TH FEBRUARY 2005 RESPECTIVELY. 6.3. IN THE CIRCUMSTANCES IT WAS SUBMITTED THAT THE CASE OF THE ASSESSEE IS FULLY COVERED BY VIRTUE OF THE JUDGMENT OF B OMBAY HIGH COURT REPORTED IN WESTERN INDIA VEGETABLES PRODUCTS L TD. VS. CIT 26 ITR 151 (BOM.) CIT VS. RALLIWOLF LTD. REPORTED IN 121 ITR 262 (BOM) CIT VS. ESPN SOFTWARE INDIA P. LTD. REPORTED IN 301 ITR 368 (DELHI) CIT VS. E. FUNDS INTERNATIONAL INDIA REPORTED IN 162 TAXMAN 1 (DELHI) CIT VS. SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD. 91 ITR 170 (GUJ.) AND CIT VS. HUGHES ESCORTS COMMUNICATIONS LIMITED 311 ITR 253 (DELHI) 6.4. INVITING ATTENTION TO PETITION UNDER RULE 29 O F THE APPELLATE TRIBUNAL RUELS 1963 FOR ADMISSION OF ADDITIONAL EVIDEN CE IT WAS STATED REFERRING TO THE SAME THAT PROPER OPPORTUNITY WAS NOT AFFORDED BY THE AO AS IT WAS STATED THAT THE SHOW CAUSE NOTICE WAS ISSUED O N 20 TH SEPTEMBER 2007 AND CONSIDERING THE REPLY DATED 25 TH SEPTEMBER 2007 ASSESSMENT ORDER WAS PASSED ON THE VERY SAME DATE. AS SU CH IT WAS ARGUED THAT PROPER OPPORTUNITY TO ADDUCE EVIDENC E WAS NOT PROVIDED. IT WAS FURTHER SUBMITTED THAT WHEN THE APPE AL CAME FOR HEARING BEFORE CIT(APPEALS) AFTER 3 YEARS ON 20 TH AUGUST 2010 AT THAT STAGE PAPERS WHICH ARE CRUCIAL EVIDENCE TO REMOVE THE DOUBTS ENTERTAINED BY THE AO COULD NOT BE FILED AS THEY HA D BEEN MISPLACED AND THUS COULD NOT BE LOCATED. IT WAS STATED THAT THESE ARE AVAILABLE NOW AND BEING CRUCIAL MAY BE ALLOWED TO BE FILED. I T WAS STATED THAT THE DOCUMENTS RELATE TO SALE PURCHASE ETC. AND THEY SH ALL BE EVIDENCED FROM THE BALANCE SHEET AND PROFIT AND LO SS ACCOUNT ALREADY ON RECORD. THESE DOCUMENTS BEING FILED NOW GO TO FURT HER EXPLAIN IN ITA 4973/DEL/2010 PAGE 7 OF 7 A.Y. 2005-06 M/S HUBER + SUHNER ELECTRONICS P.LTD. DETAIL THE ITEMS OF SALE AND NATURE OF OTHER EXPENSES V IZ. ADVERTISEMENT AND EXHIBITION EXPENSES APPEARING IN THE PROFIT AND LOSS ACCOUNT. IT WAS STATED THAT BY FILING THESE DOCUMEN TS NOW NO FRESH CLAIM IS BEING SET UP. IT WAS FURTHER STATED THAT THE DOCUMENTS FILED ARE ABOVE SUSPICION AND COULD NOT HAVE BEEN MAN UFACTURED. THE DOCUMENTS IT WAS STATED ARE VITAL AND CONCLUSIVELY GO TO ESTABLISH THAT BUSINESS WAS NOT ONLY SET UP BUT IN FACT WA S CARRIED ON DURING THE FINANCIAL YEAR AND EXPENSES IN ISSUE AS D ISALLOWED ARE FULLY ALLOWABLE. IT WAS FURTHER SUBMITTED THAT SUB STANTIAL PREJUDICE AND MISCARRIAGE OF JUSTICE HAS RESULTED OWING TO LACK OF OPPORTUNITY AND HURRIED ASSESSMENT BY THE AO. 6.4.1 ACCORDINGLY A PRAYER WAS MADE THAT IN THE INTE REST OF SUBSTANTIAL JUSTICE THE DOCUMENTS MAY BE ALLOWED TO BE PLACED ON RECORD AND BE READ IN EVIDENCE. 7. LD. DR DID NOT OBJECT TO THE PETITION UNDER RULE 29 FOR ADMISSION OF ADDITIONAL EVIDENCE. THE CONTENTION OF THE REVEN UE WAS THAT IN VIEW OF THE FACT THAT NO EVIDENCES WERE AVAILABLE BEFORE THE CIT(A) HE WAS JUSTIFIED IN CONFIRMING THE ACTION OF THE AO. HEAVY RELIANCE WAS PLACED ON PARA 2.4 OF THE IMPUGNED ORDER WHEREIN FOR THIS SP ECIFIC REASON THE ASSESSMENT ORDER WAS CONFIRMED. IT WAS EMPHASIZED THAT THE ASSESSEE ITSELF TOOK THE STAND THAT IT WAS PRE-COMMENCEMENT LOSS AND NECESSARY EVIDENCES WERE NOT PLACED BEFORE THE AO AND THE CIT( A). 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATE RIAL AVAILABLE ON RECORD. ON A CAREFUL CONSIDERATION OF T HE SAME WE ARE OF THE VIEW THAT FIRST OF ALL IT IS NECESSARY TO CONSIDER T HE PETITION OF THE ASSESSEE FILED UNDER RULE 29 OF THE APPELLATE RULES. IT IS BORNE OUT FROM THE RECORD THAT OPPORTUNITY TO ADDUCE THE SAME WAS NOT AVAILABLE BEFORE THE AO AS SPECIFIC INFORMATION WAS CALLED FORTH BY THE AO ON 20 TH SEPTEMBER 2007 AND TAKING THE REPLY ON 25 TH SEPTEMBER 2007 THE ITA 4973/DEL/2010 PAGE 8 OF 8 A.Y. 2005-06 M/S HUBER + SUHNER ELECTRONICS P.LTD. ASSESSMENT ORDER WAS PASSED ON THE VERY SAME DATE. IT IS SEEN THAT SINCE THE AO FOUND THE ASSESSEES EXPLANATION GENERAL AND UNSUPPORTED BY DOCUMENTS SPECIFIC OPPORTUNITY COULD HA VE BEEN PROVIDED. FURTHER WE HAVE NO GOOD REASON TO DISBELIEV E THE STATEMENT MADE ON BEHALF OF THE ASSESSEE BY THE LD. AR THAT THE SA ME COULD NOT BE TRACED AT THE STAGE OF THE FIRST APPELLATE AUTHORI TY . THE NATURE OF THE EVIDENCE IT IS SEEN CANNOT BE MANUFACTURED AND I S CRUCIAL TO DECIDE THE ISSUE ON FACTS. IT IS ALSO SEEN THAT NO PREJUD ICE IS CAUSED TO THE REVENUE IF IT IS TAKEN INTO CONSIDERATION FOR THE DECIDING THE ISSUE. AS SUCH THE PETITION UNDER RULE 29 OF THE ITAT RULE IS ALLOWED AND THE FRESH EVIDENCES NAMELY INVOICE FOR PURCHASE AND BILL O F ENTRY OF THE INDIAN CUSTOMS EDI SYSTEM IMPORTS IGI NEW DELHI ; PU RCHASE ORDER EVIDENCING SALES LEDGER ACCOUNT OF PURCHASER IN THE B OOKS OF THE ASSESSEE AND ADVERTISEMENT PAGE IN SHOW DIRECTORY AS SUCH THE SAME BEING CRUCIAL EVIDENCES DESERVE TO BE ADMITTED. ORDER ED ACCORDINGLY. 8.1 HAVING THUS ADMITTED EVIDENCE FILED UNDER RULE 2 9 OF THE APPELLATE TRIBUNAL RULES WE CONSIDER IT APPROPRIATE T O CONSIDER THE CASE LAW RELIED UPON BY THE LD. AR. IT IS SEEN THAT T HE ASSESSEE HAS RELIED UPON VARIOUS CASE LAW ON THE BASIS OF WHICH IT I S CONTENDED THAT THE ISSUE IS COVERED IN ITS FAVOUR. REFERENCE HAS BEEN M ADE TO THE JUDGMENT OF THE BOMBAY HIGH COURT IN THE CASE OF WEST ERN INDIA VEGETABLE PRODUCTS LTD. VS. CIT 26 ITR 151 (BOM.) S AURASHTRA CEMENT & CHEMICAL INDUSTRIES LTD. (!973) 91 ITR 170 (GUJ.) CIT V. ESPN SOFTWARE INDIA PVT. LTD. 301 ITR 368 (DELHI) CIT V. TEA PRODUCING CO. OF INDIA LTD. 48 ITR 200 (CAL) CIT V. RALLIWOLF LT D. 121 ITR 262 (BOM.) CIT V. HUGHES ESCORTS COMMUNICATIONS LIMITED 165 TAXMAN 318 (DELHI). 8.1.1 IT IS SEEN THAT THEIR LORDSHIPS IN WESTERN INDIA VEGETABLE PRODUCTS LTD. VS. CIT (CITED SUPRA) HAVE OBSERVED THAT THERE IS A CLEAR ITA 4973/DEL/2010 PAGE 9 OF 9 A.Y. 2005-06 M/S HUBER + SUHNER ELECTRONICS P.LTD. DISTINCTION BETWEEN THE WORDS COMMENCING A BUSINESS AN D THE WORDS SETTING OF A BUSINESS AND FOR THE PURPOSES OF THE INDIAN INCOME TAX ACT THE SETTING UP OF THE BUSINESS AND NOT T HE COMMENCEMENT OF THE BUSINESS IS TO BE CONSIDERED. THEIR LORDSHIPS HELD THAT IT IS ONLY AFTER THE BUSINESS IS SET UP THAT TH E PREVIOUS YEAR OF THAT BUSINESS COMMENCES AND ANY EXPENSES INCURRED PRIOR TO SETTING UP OF A BUSINESS WOULD NOT BE PERMISSIBLE DEDUCTION. HOW EVER WHEN THE BUSINESS IS ESTABLISHED AND IS READY TO COMMENCE BUSINE SS THEN IT CAN BE SAID OF THAT THE BUSINESS IS SET UP. BUT BEFORE IT IS READY TO COMMENCE BUSINESS IT IS NOT SET UP. THEIR LORDSHIPS HAVE A LSO CONSIDERED THAT THERE MAY HOWEVER BE AN INTERVAL BET WEEN THE SETTING UP OF THE BUSINESS AND THE COMMENCEMENT OF THE BUSINESS A ND ALL EXPENSES INCURRED DURING THAT INTERVAL WOULD BE PERMI SSIBLE DEDUCTIONS. 8.1.2. RELIANCE HAS ALSO BEEN PLACED UPON CIT VS. SAU RASHTRA CEMENT & CHEMICAL INDUSTRIES LTD. REPORTED IN 91 ITR 170 (G UJ.) WHEREIN THE LORDSHIPS HAVE HELD THAT BUSINESS CONNOTES A CONTINUOUS CO URSE OF ACTIVITIES. ALL THE ACTIVITIES WHICH GO TO MAKE UP TH E BUSINESS NEED NOT BE STARTED SIMULTANEOUSLY IN ORDER THAT THE BUSINESS MAY COMMENCE. THE BUSINESS WOULD COMMENCE WHEN ACTIVITY WHICH IS FIRST IN POINT OF TIME AND WHICH MUST NECESSARILY PRECEDE OTHER ACTIVITY IS STARTED. IN THE CASE OF A COMPANY WHICH WAS FORMED IN 1956 FOR TH E MANUFACTURE AND SALE OF CEMENT AND AS PART OF ITS BUSINESS ASSESSEE OBTAI NED A MINING LEASE FOR QUARRYING LIMESTONE. THE MINING OPE RATIONS STARTED IN 1958. THE EXPENSES INCURRED FOR THE PURPOSE OF EXTR ACTION WERE CLAIMED AND IT WAS HELD THAT SINCE THE EXTRACTION OF LIMESTONE COMMENCED IN 1958 THE ASSESSEE WAS HELD TO HAVE CARRIED ON BUSINESS DURING THE RELEVANT YEAR. ITA 4973/DEL/2010 PAGE 10 OF 10 A.Y. 2005-06 M/S HUBER + SUHNER ELECTRONICS P.LTD. 8.1.3. RELIANCE HAS ALSO BEEN PLACED UPON CIT VS. ESPN SOFTWARE INDIA P. LTD. REPORTED IN 301 ITR 368 (DELHI) WHEREIN THE ASSESSEE COMPANY WHICH WAS INCORPORATED IN 1 ST AUGUST 1995 HAD ACQUIRED LICENSE ON AUGUST 15 1995 FOR DISTRIBUTION ESPN PROGRAMMING SERV ICES IN INDIA THROUGH VARIOUS SYSTEMS. THE TRIBUNALS ACTION IN UPHOLD ING THE ACTION OF THE CIT(A) WHEREIN HE HELD THAT THE BUSINESS OF TH E ASSESSEE WAS SET UP ON AUGUST 15 1995 AND THEREFORE THE ASSESSEE WAS E NTITLED TO CLAIM ALL THE EXPENDITURE INCURRED ON OR AFTER THE DATE INCLUDING DEPRECIATION ALLOWANCE. THE SAID ACTION HAS BEEN UPHE LD BY THE JURISDICTIONAL HIGH COURT. THE LORDSHIPS CONSIDERING SE CTION 3 IN THE CONTEXT OF SETTING UP OF THE BUSINESS AND COMMENCEME NT OF THE BUSINESS HELD THAT THE BUSINESS COMMENCED AS SOON AS AN ESSEN TIAL ACTIVITY OF THAT BUSINESS IS SET UP. THUS IT WAS HELD THA T THE BUSINESS COMMENCED WITH THE FIRST PURCHASE OF STOCK-IN-TRADE AN D NOT ON THE DATE OF FIRST SALE IS MADE. 8.1.4. SIMILARLY RELIANCE HAS ALSO BEEN PLACED ON CIT VS. E. FUNDS INTERNATIONAL INDIA (2007) 162 TAXMAN 1 (DELHI). A PERUSAL OF THE SAID JUDGMENT SHOW THAT THE ASSESSEE WAS INCORPORATED ON 14.7. 1997 AND WAS ENGAGED IN THE BUSINESS OF INFORMATION TECHNOLOGY SE RVICES SUCH AS SOFTWARE DEVELOPMENT / CONSULTANCY BUSINESS PROCESS MANAGEMENT ELECTRONIC BANKING SCHEMES ETC. THE ASSESSEE CLAIMED A LOSS OF ABOUT 4.4 CRORES. THE AO WAS REQUIRED THE ASSESSEE TO EXPLAIN WHY THE EXPENSES CLAIMED SHOULD NOT BE DISALLOWED AS THE ONLY RECEIPT OF THE INCOME OF THE ASSESSEE WAS ON ACCOUNT OF INTEREST WHICH WAS TAXABLE AS INCOME FROM OTHER SOURCES. THE EXPLANATION OF THE ASSESSEE WAS NOT ACCEPTED. THE AO HELD THAT THE ASSESSEE HAD NOT SUFFERED ANY LOSS DURING THE RELEVANT PREVIOUS YEAR SINCE IT HAD NOT COMMENCED ITS BUSINESS ACTIVITIES. THE CIT(A) REVERSED THE FINDING OF THE AO. AGAINST THE RELIEF GIVEN BY THE CIT(A) THE DEPARTMENT CAME IN APPEAL BEFORE THE TRIBUNAL WHO CONFIRMED THE ACTION OF THE CIT(A) HOLDING THAT THE ITA 4973/DEL/2010 PAGE 11 OF 11 A.Y. 2005-06 M/S HUBER + SUHNER ELECTRONICS P.LTD. ASSESSEE HAD EMPLOYED AS MANY AS 30 TO 40 EMPLOYEES FOR THE PURPOSES OF DEVELOPING SOFTWARE AND HAD ACQUIRED REQU ISITE INFRASTRUCTURE SUCH AS PREMISES UTILITIES ETC. DURING TH E PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR. THE ASSESSEE WAS IN THE BUSI NESS OF DEVELOPING SOFTWARE AND THAT COULD NOT BE AN OVERNIG HT EXERCISE. THE TRIBUNAL ACCORDINGLY UPHELD THE ACTION OF THE CIT(A ) IN HOLDING THAT THE ASSESSEE HAD PUT CONSISTENT EFFORTS FOR DEVELOPING THE SOFT WARE AND IT IS ONLY THEREAFTER THAT THE ASSESSEE WAS ABLE TO PROCURE SOME BUSINESS. IT WAS HELD THAT IN THESE CIRCUMSTANCES THE EXPE NSES CLAIMED COULD NOT BE DISALLOWED BECAUSE THE ASSESSEE IN THE YEAR UNDER CONSIDERATION DID NOT EARN ANY INCOME AS ALL NECESSARY STEPS TO OBTAIN BUSINESS INCLUDING EFFORTS FROM MARKETING SHOWS THAT THE ASSESSEE HAD COMMENCED BUSINESS. 8.1.5. RELIANCE HAS ALSO BEEN PLACED UPON CIT VS. R ALLIWOLF LTD. REPORTED IN 121 ITR 262 (BOM.) STATING THAT THE SAID JUDGMENT APPLIES ON ALL FOURS. A PERUSAL OF THE SAID JUDGMENT SHOWS THAT THE ASSESSEE COMPANY THEREIN WAS FORMED TO MANUFACTURE BUY DEAL AND SELL PORTABLE ELECTRICAL TOOLS AND TOOLS OF KINDS IMPLEMEN TS SPARE PARTS AND MACHINERY. CONSIDERING THE EXPRESSION SETTING UP MEANS TO PLACE ON FOOT OR TO ESTABLISH AND IS IN CONTRADISTIN CTION TO THE WORD COMMENCE. THEIR LORDSHIPS HELD THAT THE DISTINCTION IS THAT WHEN A BUSINESS IS ESTABLISHED AND IS READY TO BE COMMENCED 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. THEY ALSO CONTEMPLAT ED THAT THERE MAY BE AN INTERREGNUM 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 COM MENCEMENT OF THE BUSINESS PERTAINING TO THE INTERREGNUM PERIOD WOU LD BE PERMISSIBLE DEDUCTIONS. THE LORDSHIPS TOOK COGNIGENCE OF THE FACT THAT IN THE RELEVANT ACCOUNTING PERIOD THERE WERE NO SALE S EFFECTED OF THE ITA 4973/DEL/2010 PAGE 12 OF 12 A.Y. 2005-06 M/S HUBER + SUHNER ELECTRONICS P.LTD. SPARES BY THE ASSESSEE. HOWEVER MAKING PURCHASES WAS HELD T O HAVE RESULTED IN AN ACT BY VIRTUE OF WHICH IT COULD BE UT ILIZED EITHER FOR MANUFACTURING OF THE VARIOUS ITEMS OR FOR SALE OF SPAR ES. THE VERY FACT THAT PURCHASES WERE EFFECTED IT WAS HELD WOULD GO TO SHOW THAT THERE WAS MATERIAL ON THE BASIS ON WHICH THE TRIBUNAL COULD HAVE TAKEN THE VIEW THAT TRADING IN SPARE PARTS WAS APART OF ONE OF T HE ACTIVITIES OF THE ASSESSEE COMPANY KEEPING IN MIND THE OBJECTS FOR WHICH T HE COMPANY WAS FORMED . 8.1.6. ATTENTION HAS ALSO BEEN INVITED TO THE JUDGMEN T OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. HUGHE S ESCORTS COMMUNICATIONS LIMITED REPORTED IN 311 ITR 253 (DELH I); A PERUSAL OF THE SAID JUDGMENT SHOWS THAT THE ASSESSEE THEREIN WAS ENGA GED IN THE BUSINESS OF SATELLITE COMMUNICATION SYSTEM. THE FIRST STEP IN BUSINESS OF THE ASSESSEE WAS PURCHASE OF VSAT EQUIPMENT AND AS SOON AS THE PURCHASE ORDER FOR THE SAID EQUIPMENT WAS PLACED IT WAS HELD THAT IT COULD BE SAID THAT THE ASSESSEE HAS SET UP THE BUSI NESS AND APPLICATION OF DOT FOR LICENSE AND THE RECEIPT OF SA TALITE SIGNALS WERE HELD TO BE CONSEQUENTIAL STAGES AND ACCORDINGLY ALL EX PENSES INCURRED ON SETTING UP OF BUSINESS BUT PRIOR TO THE COMMENCEMENT OF THE BUSINESS WERE HELD AS ALLOWABLE AS REVENUE EXPENSES. 8.2. ON THE OTHER HAND IT IS SEEN THAT THE AO AND THE CIT(A) HAS TAKEN INTO CONSIDERATION THE JUDGMENT OF THE CALCUTTA HIGH COURT IN THE CASE OF CIT WEST BENGAL VS. TEA PRODUCING CO. OF INDIA L TD. WHEREIN IN REGARD TO THE AGREEMENT BETWEEN THE VENDOR AND THE ASSESSEE THEIR LORDSHIPS HELD THAT WHATEVER MAY BE THE AGREEMENT BET WEEN THE VENDOR AND THE ASSESSEE THE INCOME TAX AUTHORITIES HAVE TO LOOK TO THE PERSON WHO IS LEGALLY LIABLE U/S 10 OF THE INCOME TAX ACT 1922 I.E. THE PERSON WHO CARRIED ON THE BUSINESS AND AS THE ASSESSEE CAME INTO EXISTENCE ONLY ON 29 TH MAY 1951 ON THE DATE WHICH THE BUSINESS WAS INCORPORATED FOR THE OBJECT AMONGST OTHER FOR TAKING OVER THE TEA ITA 4973/DEL/2010 PAGE 13 OF 13 A.Y. 2005-06 M/S HUBER + SUHNER ELECTRONICS P.LTD. ESTATE AS A GOING CONCERN. AS SUCH IT COULD NOT HAVE CA RRIED ON THE BUSINESS BEFORE THAT DATE OF INCORPORATION EVEN AS AN A GENT OF THE VENDOR. IT WAS HELD THAT THE ASSESSEE CAN ONLY HAVE THE BENEFIT OF LOSS IF ANY INCURRED DURING THE PERIOD COMMENCING FROM T HE DATE OF ITS INCORPORATION TO THE END OF THE YEAR 1951. AS SUCH IT IS SEEN IN THE FACTS OF THE PRESENT CASE IT HAS NO ROLE TO PLAY. 8.3 IN THE LIGHT OF THE LEGAL POSITION AS WE HAVE DI SCUSSED ABOVE WE CONSIDER IT APPROPRIATE TO RESTORE THE ISSUE BACK TO TH E FILE OF THE AO FOR VERIFICATION ON FACTS. THE AO WILL TAKE INTO CON SIDERATION THE RELEVANT DOCUMENTS RELIED UPON BY THE ASSESSEE BEFORE CO MING TO A CONCLUSION. IT IS SEEN THAT AS PER THE AO HIMSELF AS IS EV IDENT IN PARA 2 OF HIS ORDER THE ASSESSEE IS ALSO IN THE BUSINESS OF TRADING BORNE OUT FROM THE OBJECTS CLAUSE OF THE MEMORANDUM OF ASSOCIATIO N CLAUSE 2. AS SUCH RELEVANT DOCUMENTATION IN REGARD TO THE PURCHASE NEEDS TO BE CONSIDERED. IT IS SEEN THAT ARGUMENTS IN THIS REGARD WER E MADE BEFORE THE AO HOWEVER NO DOCUMENTS WERE PLACED IN SUPPORT TH EREOF. 9. ACCORDINGLY FOR THE REASONS GIVEN HEREINABOVE IN DETAIL THE ISSUE IS RESTORED TO THE FILE OF THE AO WITH THE DIRECTION TO PASS A SPEAKING ORDER IN ACCORDANCE WITH LAW GIVING THE ASSESSEE A REASO NABLE OPPORTUNITY OF BEING HEARD. THE ASSESSEE SHALL BE AT LIB ERTY TO PLACE WHATEVER FURTHER EVIDENCE IT CONSIDERS NECESSARY TO SUPP ORT ITS CLAIM AND THE AO SHALL ENTERTAIN AND CONSIDER THE SAME. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 9 TH SEPTEMBER 2011. SD/- SD/- (B.C.MEENA) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 9 TH SEPTEMBER 2011 VEENA ITA 4973/DEL/2010 PAGE 14 OF 14 A.Y. 2005-06 M/S HUBER + SUHNER ELECTRONICS P.LTD. COPY OF THE ORDER FORWARDED TO: 1. APPELLANT; 2.RESPONDENT; 3.CIT; 4.CIT (A); 5.DR; 6.GUARD FILE BY ORDER DY. REGISTRAR