AHMAD FAREED, A.M. MUKUL SHRAWAT, J.M. 30TH JULY, 2007 26. PROPOSED ORDER OF LEARNED AM HAS BEEN CAREFULLY AND THOROUGHLY PERUSED BY ME. I HAVE DISCUSSED MATTER WITH HIM BUT REGRETTED MY INABILITY TO PERSUADE MYSELF TO AGREE WITH CON ORDER May, 2007 This appeal by assessee is directed against order of CIT(A) dt. 31st Jan., 2003 for asst. yr. 1998-99. 2 . assessee company was floated in India by Styler Daimler Puch, Austria. It was incorporated on 15th Sept., 1997. business of assessee company was to provide engineering assistance and technology to vehicle and component manufacturers. return for asst. yr. 1998-99 was filed on 28th Nov., 1998, declaring loss of Rs. 45,35, 55 6. In assessment order passed by AO under s. 143(3) on 18th Dec., 2000, total income was assessed at Rs. 3,91,780 as under : Particulars (Rs.) Loss as per statement of total (- 45,35, 55 income ) 6 Add : Income from other sources 3,91,780 49,27,336 (- 45,35, 55 Less : Disallowance ) 6 Total income 3,91,780 3 . CIT(A) confirmed AO s action and his order has been challenged by assessee in present appeal. Ground Nos. 1, 2, 4, 5, 6, and 7 "1. learned CIT(A) erred in upholding finding of learned AO that assessee had not set up its business during previous year relevant to assessment year under appeal and thereby in confirming disallowance of expenditure of Rs. 49,27,336. learned CIT(A) in this behalf erred in not appreciating facts and circumstances of case and in rejecting evidence on ground that it was mere correspondence . He also erred in not considering distinction between setting up of business and commencement of business. It is requested that assessee s contention that it had set up its business from beginning that is from incorporation may kindly be upheld and expenditure of Rs. 49,27,336 may kindly be allowed. 2. Without prejudice to ground No. 1 and assuming without admitting and alternately that business of assessee was not set up from beginning that is from incorporation, learned CIT(A) ought to have given finding from which other day during previous year, business could be considered to be set up. It is requested that on appreciation of evidence on record, Hon ble Tribunal may please give finding regarding date from which business could be said to be set up and allow expenditure accordingly. 4. Without prejudice to grounds 1 and 2, learned CIT(A) erred in confirming expenditure of Rs. 15,65,239 on exhibition and launching without appreciating facts and legal position. expenditure may kindly be held to be allowable. 5. learned CIT(A) erred in confirming finding of learned AO that income of Rs. 3,91,780 being earned prior to setting up of business, said income was not assessable as business income. It may kindly be held that said income was income from business. 6. Subject to ground Nos. 1 and 2, assessee s business loss after setting off of interest of Rs. 3,91,780 may kindly be directed to be carried forward. 7. learned CIT(A) erred in upholding levy of interest under ss. 234A, 234B and 234C. He failed to appreciate that liability to interest under ss. 234B and 234C could not arise because assessee was not liable to pay advance tax at all in terms of s. 208 r/w s. 209 and this being basic condition for levy of interest, under s. 234B/234C was not tenable on facts and in law." 4. Shri Kishore Phadke, learned Authorised Representative, reiterated arguments put forward on behalf of assessee company before AO and CIT(A). submissions made by him are summarized below : that foreign collaboration agreement was entered into between assessee and Styler Daimler Puch, Austria (SDP for short) on 16th Dec., 1997. that SDP was company, inter alia, engaged in activity of providing technical know-how in area of automotive technology. that SDP was to provide assessee company with sufficient technical and marketing information in order to enable it to successfully operate. that assessee company was incorporated with main object to own and operate automotive engineering centre in India, to undertake engineering research and technical services and to set up workshop/manufacturing facility to undertake local manufacture of products including components and parts. that SDP and assessee company agreed to carry on business in above areas in India. that by virtue of collaboration agreement dt. 16th Dec., 1997, assessee company came in possession of technical know-how and since business of assessee company was to give technical know-how to its customers, business of company should be held to have been set up and commenced on 16th Dec., 1997. that assessee was knowledge company and it was its business to supply know-how, knowledge and technology to its customers. that business of assessee company was, as per Ministry of Industry Acknowledgement No. 55 /SIA/FC/97 dt. 5th Aug., 1997, to set up wholly owned Indian subsidiary and automotive engineering and research consultancy services. that approval was given by Ministry of Industry for foreign collaboration in December, 1997. that reliance was placed on decisions in following cases : (i) Western India Vegetable Products Ltd. vs. CIT (1954) 26 ITR 151 (Bom); (ii) Sarabhai Management Corporation Ltd. vs. CIT 1975 CTR (Guj) 111 : (1976) 102 ITR 25 (Guj); (iii) Neil Automation Technology Ltd. vs. Dy. CIT (2002) 120 Taxman 205 (Mumbai)(Mag) in ITA No. 3263/Mum/1988 dt. 5th July, 2001; (iv) Chakradhari Wheels (P) Ltd. vs. ITO (2005) 96 TTJ (Del) 517; (v) CIT vs. Sarabhai Sons (P) Ltd. (1973) 90 ITR 318 (Guj); (vi) Prem Conductors (P) Ltd. vs. CIT 1976 CTR (Guj) 324 : (1977) 108 ITR 654 (Guj); (vii) Coromandel Exports (P) Ltd. vs. ITO (1984) 20 TTJ (Hyd) 503; (viii) CIT vs. Western India Sea Food (P) Ltd. (1992) 107 CTR (Guj) 106 : (1993) 199 ITR 777 (Guj). 5 . Shri V.S. Kumar, learned Departmental Representative, supported orders of AO and CIT(A). He vehemently argued saying that order of CIT(A) needed to be upheld. 6 . We have considered rival submissions in light of material available on record and precedents cited. business of assessee company was to extend consultative services and to advice its customers in area of automotive technology. return for asst. yr. 1998-99 was filed on 28th Nov., 1998 declaring loss of Rs. 45,35, 55 6. During assessment proceeding, it was noticed by AO that in P&L a/c, assessee had shown income of was noticed by AO that in P&L a/c, assessee had shown income of Rs. 3,91,780 under head Interest on bank fixed deposits and had claimed expenses of Rs. 49,26,141 under head Administrative selling expenses as under : Particulars (Rs.) Building repairs, improvement and renovation 17,92,600 Exhibition/Launch expenses 15,65,239 Travelling expenses 4,77,567 Rent 3,10,400 Advertisement 1,71,500 Expenses 1,62, 55 1 Car hire charges 1,06,307 Legal charges 96,930 Exchange rate fluctuation 91,150 Consultation charges 55 ,000 Printing & stationery 27,165 Vehicle fuel 20,243 Brokerage 20,000 Entertainment expenses 12,097 Miscellaneous 9,389 Audit fees 8,000 Interest 1,195 Total 49,27,336 7 . AO was of opinion that business of assessee was not set up during previous year relevant to asst. yr. 1998-99 and therefore aforesaid expenditure of Rs. 49,27,337 was not allowable under ss. 30 to 37 of Act. 8 . CIT(A), while upholding AO s view, inter alia, observed in his order as under : that main issue in this case was as to whether assessee company had commenced business or not or whether business was set up or not; that one of main objects of assessee was to act as consultant, adviser and to provide technical services for development/ manufacture of new products; that activities handled by managing director where in nature of meeting and discussion with different persons and to locate prospective clients who could be provided services by assessee company; that stand of assessee, that it had not only commenced business by contacting prospective customers but had also booked one consultancy assignment, was only partially correct because neither any payments have been received nor any specific agreement has been there; that assessee s aforesaid claim was based merely on certain letters including quotation for project named as overseas project-1 ; but nature of project had not been finalized; that merely receiving advance from parent company was not sufficient proof that business had commenced. 9. In order to examine assessee s claim that impugned expenses incurred during year ended 31st March, 1998 were admissible for deduction, we have to decide, precisely, as to on what point of time business of assessee company can be said to have been set up . Before proceeding further we consider it necessary to examine legal position in this regard, as laid down by Courts, in following paras. 10. We find that leading decision on this issue was of Bombay High Court in case of Western India Vegetable Products Ltd. vs. CIT (supra), which was followed in later decisions of other High Courts. In this case it was held by Bombay High Court that one must give different meaning to expression setting up from expression commenced , that for purpose of business previous year begins from date of setting up of business, that any expenditure incurred prior to setting up of business would obviously not be permissible deduction because those expenses would be incurred at point of time when previous year of business would not have commenced, that in language of s. 2(11) (s. 3 of 1961 Act) expression used is setting up of business and not commencement of business, that expression setting up means to place on foot or to establish in contradistinction to commence , that when 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 , that there may be interregnum between point of time when business is set up and point of time when business is commenced and all expenses incurred after setting up of business and before commencement of business would be permissible deduction under s. 10(2) (ss. 30 to 41 of 1961 Act). 1 1 . In s. 3 [s. 2(11) of 1922 Act] of 1961 Act expression previous year is defined as under : "3. For purposes of this Act, previous year means financial year immediately preceding assessment year : Provided that, in case of business or profession newly set up, or source of income newly coming into existence, in said financial year, previous year shall be period beginning with date of setting up of business or profession or, as case may be, date on which source of income newly comes into existence and ending with said financial year." 12. expression used in s. 3 above was set up and not commenced and therefore Bombay High Court chose this expression in contradistinction to expression commence . 13. In case of Sarabhai Management Corporation Ltd. vs. CIT (supra), Gujarat High Court, referring to provisions of s. 3 of 1961 Act and relying on decision of Bombay High Court in case of Western India Vegetable Products Ltd. (supra), held that it was only after business was set up that previous year of that business commences and any expenditure incurred prior to setting up of business would not be permissible deduction, that there may be interval between setting up of business and commencement of business and all expenses incurred during that interval would be permissible deduction. 14. question as to point of time when new business can be said to have been set up will depend upon facts of that particular case. criteria, applicable to new business involving manufacturing activity, and that engaged in providing services or in trading activity, will surely differ. expression setting up means to place on foot or to establish in contradistinction to expression commence . In case of new business engaged in trading or in service sector, no plant and machinery are to be installed, and no trial runs are necessary; and therefore different set of criteria will be required to be applied in order to determine whether such type of business had been established so as to be ready to commence business. 15. In following three cases new business involved processing of marine products, export of tobacco and distribution of computer software and development and training of software personnel, respectively. 16. In case of CIT vs. Western India Sea Food (P) Ltd. (supra) business of assessee was processing marine products and during relevant year, acquired godown where processing of marine products could start after fish became available. It was held by Gujarat High Court that it was starting point of setting up of business of processing marine products and actual arrival of fish later on could not postpone setting up of such business. expenditure claimed by assessee was allowed. In other words, expenses incurred during interval between setting up of business and commencement of business were held as allowable expenditure. 1 7 . In case of Coromandel Exports (P) Ltd. vs. ITO (supra), business of assessee company was export of tobacco. Tribunal, Hyderabad, relying, inter alia, on decision of Bombay High Court in case of Western India Vegetable Products Ltd. (supra) held in para 5 of its order as under : ".................What all is needed for setting up of said business is to secure business place or office, to provide it with furniture, etc., to have telephone to maintain office and make ready everything to start business. If no intended exporter approached assessee and got his product exported through assessee it is not fault of assessee. Ultimately, it may be his bad luck but in legal terms it cannot be said that he had not set up his business. Therefore, we are of opinion that all expenses incurred after business is being set up are excludable business expenditure." 18. In case of Neil Automation Technology Ltd. vs. Dy. CIT (supra), business of assessee was distribution of computer software and development and training of software personnel. During previous year relevant to asst. yr. 1993-94 assessee company entered into correspondence with various parties in order to make them aware of product in which assessee was to deal with expenses incurred during year were claimed which were disallowed by AO and CIT(A). Tribunal was of view that in this line of business it was essential to enter into correspondence with various parties to make them aware of products in which assessee was dealing, that writing of letters and giving quotations to various prospective customers in respect of various softwares which assessee was ready to supply was essential activity in course of carrying on business and therefore expenditure incurred by assessee during year was for purpose of business and same was allowable as business was set up during previous year and same was ready for commencement. 19. In case of Prem Conductors (P) Ltd. vs. CIT (supra), similar view was taken by Gujarat High Court. 20. It is seen from decisions in aforesaid three cases that new business, in service sector or that which is engaged in trading activity, can be said to have been set up if, inter alia, correspondence was entered into with various parties to make them aware of products in which assessee was dealing, letters had been written to various prospective customers giving them quotations in respect of various softwares which assessee was ready to supply, business place or office had been acquired. These were essential activities in course of carrying on business and therefore in these types of business such activities can be said to be determinative of question whether business had been set up and that it was ready to commence . actual receipt of order from prospective client for supply of product or services cannot postpone setting up of business. 21. We now proceed to apply legal position enunciated in above paras to facts of this case. It is seen that in present case assessee company was incorporated on 15th Sept., 1997. necessary approval was granted by Ministry of Industry, Government of India in December, 1997 for foreign collaboration. assessee entered into correspondence with Scooters India Ltd., prospective customer, as early as in July, 1997. correspondences were also had by assessee company, during year, with Mahindra & Mahindra Ltd., Kalyani Tubes and Hindustan Motors. foreign collaboration agreement between assessee company and Styler Daimler Puch, Austria was entered into on 16th Dec., 1997. assessee could have not carried on its business without this collaboration agreement. Therefore in view of facts and circumstances of case and position in law as discussed in above para we are of opinion that business of assessee company should be held to have been set up on 16th Dec., 1997. 22. Once it is held that business of assessee company was set up on 16th Dec., 1997, all expenses of revenue nature incurred on and after 16th Dec., 1997 will become admissible for deduction. In circumstances, therefore, matter is restored back to file of AO. He will examine and decide afresh assessee s claim, in respect of ground Nos. 1, 2, 4, 5, 6, and 7 as per directions given above. Ground No. 3 3. Without prejudice to grounds 1 and 2, learned CIT(A) erred in holding that expenditure of Rs. 17,92,600 incurred on leased premises by assessee to make it suitable for office purposes was in nature of capital expenditure and was thus not allowable. finding of learned CIT(A) being factually and legally untenable, expenditure may kindly be held to be allowable revenue expenditure. 23. We find that this issue is covered in favour of assessee by decision of Bombay High Court in case of CIT vs. Hede Consultancy (P) Ltd. & Anr. (2003) 180 CTR (Bom) 70 : (2002) 258 ITR 380 (Bom). In this case, Court held as under (headnotes) : "The assessee had taken godown on lease. It spent Rs. 9,20,436 for converting godown premises into office by renovating it, incurring expenses on interior decoration, which resulted in replacement of existing roof with that of cement sheets, replacement of floor with that of marble, plastering of walls and construction of bathrooms and W.C. etc. assessee claimed said expenditure of Rs. 9,20,436 as revenue expenditure. AO disallowed claim but Tribunal allowed it. On further appeal to High Court : Held, dismissing appeal, that since assets created by spending said amounts did not belong to assessee but assessee got business advantage of using modern business premises at low rent, thus saving considerable revenue expenditure for considerably long period, Tribunal was perfectly justified in coming to conclusion that expenditure should be looked upon as revenue expenditure." 24. AO will examine and decide afresh, issue raised through this ground, in light of decision of Bombay High Court in case of CIT vs. Hede Consultancy (P) Ltd. & Anr. (supra) and directions given by us in paras 21 and 22 above 25. AO will, accordingly, pass fresh order after giving adequate opportunity of being heard to assessee. 2 5 . In result appeal filed by assessee is partly allowed for statistical purposes. 30th July, 2007 2 6 . proposed order of learned AM has been carefully and thoroughly perused by me. I have discussed matter with him but regretted my inability to persuade myself to agree with conclusion arrived at. Though legal aspect of issue has been comprehensively set out by learned AM, but I want to place my own reasons which may give rise to this litigation on account of disagreement but primarily on legal principles. Accordingly, I proceed hereinbelow to place on record my dissenting views. 27. Facts as examined by me from corresponding assessment order passed under s. 143(3) dt. 18th Dec., 2000 were that appellant was stated to be engaged in rendering technical design and consultancy service in respect of vehicle components/parts in status of company. assessee company was incorporated on 15th Sept., 1997. That means accounting period for first year of start of business ended on 31st March, 1998, consequential assessment year in question is asst. yr. 1998-99. appellant is 100 per cent subsidiary of Styler Daimler Puch AG, Austria. query which was raised by AO was in respect of deduction of expenditure under head "Administrative and selling expenses" of Rs. 49,27,336 as against income declared under head "Interest on fixed deposits with bank" of Rs. 3,91,780. AO had given categorical finding that in this first year of return, there was no income declared under head "Business or profession". He (the AO) has also cited landmark decision on this question of Hon ble apex Court delivered in case of Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (1997) 141 CTR (SC) 387 : (1997) 227 ITR 172 (SC) for proposition that nature of expenditure was such which could not be allowed against "interest income" declared since so claimed expenditure was not laid or expended for purpose of business income of year under consideration (see p. 3, para 4 of assessment order). This is first plank of controversy raised from side of Revenue Department. 28. second controversy raised was whether those expenditure could be allowed being for purpose of "setting up" of business. Details of expenditure have already been placed in proposed order (supra) by my learned Brother, out of which, main two components are under heads "Building, repair, improvement and renovation" of Rs. 17,92,602 and "Exhibition/launch expenditure" of Rs. 15,65,239 and explanation tendered concisely was : (a) That "building, repair, improvement and renovation" was carried out at leased premises, thus argument of assessee was that no asset was created by spending said expenditure, therefore, to be treated as revenue expenditure. (b) That exhibition and launch expenditure was incurred at Autoexpo 98 held at Delhi in month of January 98 to be allowed as revenue expenditure. 28.1 On basis of above information, AO has formed opinion summarized below : (i) Allowability of expenditure depends whether laid out for business in existence in year of claim. (ii) expenditure incurred prior to setting up of business falls outside purview of s. 28 of IT Act. (iii) Also, expenditure incurred prior to commencement of business which is not even established, though may be in process of setting up but has not set up is also not allowable. (iv) AO has placed reliance on (a) Western India Vegetable Products (supra); Sarabhai Sons (P) Ltd. (supra). Finally, total income was computed at Rs. 3,91,380 after disallowance of alleged expenditure in question. 2 9 . first appellate authority has elaborately discussed all main issues; can be crystallized in following manner : (a) question of allowability of expenditure made during set up of business was dealt with in detail, summed up : That mere production of correspondence did not establish set up of business. That there were no employees or engineers who could impart engineering service. That appointment of general manager was merely operation prior to setting up of business. That expenditure was meant for launching of business, as admitted by assessee. That construction on leased premises was to make fit premises for occupation for business. That travelling expenditure was towards appointment of director and general manager prior to setting up of business and not connected with running of business. That activity of general manager was in nature of meeting and discussion with different persons to locate prospective clients. That there was no evidence that appellant had even received any proposal or offer to act as consultant or advisor to provide technical services during previous year. That case law cited by assessee viz. Neil Automation Technology Ltd. (supra) was held as distinguishable on facts as there was not even any booking for providing consultancy service by appellant during year. That merely receiving certain advances from parent company was not sufficient proof of commencement of business. (b) question of allowability of expenditure on renovation and furnishing of office premises was dealt with by learned CIT(A) briefly as follows : That it was not current repair, hence not allowable. That it was not current repair, hence not allowable. That in view of Ballimal Naval Kishore vs. CIT (1997) 138 CTR (SC) 284 : (1997) 224 ITR 414 (SC) it was capital in nature. That decision in case of CIT vs. Madras Auto Service (P) Ltd. (1998) 148 CTR (SC) 398 : (1998) 233 ITR 468 (SC) is distinguishable on facts mainly on ground that even business was not set up by assessee, therefore, not incurred in course of running of business. (c) question of allowability of expenditure incurred on exhibition and launch has also been dealt with summed up below : That expenditure was admittedly before setting up of business. That expenditure was named as "exhibition and launch expenditure" shows launching of business yet to set up or commence. That expenditure was not wholly verifiable, hence to be disallowed. (d) question of admissibility of such expenditure against income under head "Other sources" has been held not allowable on ground that law stood settled not to set off same. 30. What had germane from two orders of Revenue authorities are to be briefly summarized and deliberated upon in detail, so that line of action of Revenue authorities could be properly appreciated. 31. arguments of rival sides have already been considered by my learned Brother need not to be repeated again. 32. In light of above points raised hereinabove, I want to express my own opinion pointwise as follows. 32.1 first point, which is very crucial to decide issue in hand, is that undisputedly when company has been incorporated on 15th Sept., 1997 whether for purpose of allowability of certain expenditure it can be held that day as date of set up of business as prescribed in s. 3 and s. 29 of IT Act. No doubt that language of s. 3 makes it clear that in case of new business (as is case of this appellant) first accounting year must in every case commence on date of "setting up" of business. Taking pause for minute, I do agree with my learned Colleague for proposition that business is set up when it is established or set on foot. I also do agree that there may be interregnum between setting up of business and its actual commencement. That accounting year would begin on date business is set up and not when it is actually commenced. Precisely speaking all these propositions have been laid down by Hon ble Court in case of Western India Vegetable Products (supra) (ante) and naturally applies to facts of particular case if falls within four corners. Ex consequenti issue cropped up in this appeal is about claim of expenditure incurred even prior to setting up of business or alternatively what should be point of time said to be determinative of setting up of business. 32.2 At this juncture, I am unable to withhold my thoughts that whether we are on issue of "setting up of company" or "setting up of business" (underlined, italicised in print, to put emphasis). In my opinion, certificate of incorporation is nothing but symbol disclosing intention to start company under particular name and through certificate, nomenclature is assigned to corporate body; to my mind first step of ladder prior to set up of business. May I also mention here that s. 149 of Companies Act, thereafter, provides procedure of commencement of business of company. To make myself clear, I take shelter of definition of word "business" as defined in Black s Law Dictionary, i.e. "employment, occupation, profession or commercial activity engaged in for gain or livelihood. Activity or enterprise for gain, benefit, advantage or livelihood. That which habitually busies or occupies or engages time, attention, labor, and effort of persons as principal serious concern or interest or for livelihood or profit". Thus "business" is series of action to be taken by businessman in systematic manner step by step and once all preliminary requisites are completed, then it can be said to be set up of business. It can be added that simple test can be laid down that business would commence when activity which is first in point of time and which must necessarily precede other activity is started, so that wheel of commercial or professional activity started rolling. 3 2 . 3 Before I proceed to elaborate pre-requisites of set up of business, it is better to put across intention of legislature and related provision i.e. s. 28 and s. 29 of IT Act, according to which, income is to be computed in accordance with provisions contained in ss. 30 to 43D circumventing expenditure incurred prior to setting up cannot be allowed since it would fall outside ambit of accounting year prescribed under s. 3 of IT Act. Apropos s. 3 of Act, it applies only to business which is "carried on". However, on basis of tone and tenor of statute, expenditure incurred after business is set up may be allowed under ss. 30 to 37 even if it is incurred before business has actually commenced in view of judicial pronouncement that there may be interregnum between set up and commencement but concomitant with basic question elaborated ante. 33. Even before I deal with pre-requisite of set up of business, main s. 3 of Act, as reproduced by my learned Brother at para 11, is also to be dwelled upon. My humble understanding of s. 3 of Act is quote, "in case of business newly set up previous year shall be period beginning with date of setting up of business date on which source of income newly comes into existence" Quoted from s. 3 itself and formulated for clear understanding as depicted by me by skipping few in between phrases. To me term "setting up" is disjunctive and cumulative with phrase "the source of income" and should not be read separately or alternatively or even as mutually exclusively. With result, I want to give finding, as based upon established facts of this case, that for year under consideration, since admittedly there was no source of business income that came into existence in accounting year under consideration, hence beyond scope of s. 3 of Act. I am sure there is no element of doubt or difference of opinion seeing factual matrix of case in respect of this finding on facts. 34. To dwell on pre-requisite of set up of business, I will like to refer observation made by my learned Brother at para 14; that this is not case of assessee involved either in manufacturing activity or trading activity. This assessee is stated to be in service industry. So, I also endorse view expressed therein that different set of criteria will be required to be applied in respect of assessee engaged in providing services, in order to determine whether under present set of facts and circumstances either business was "set up" or "commenced" or "established". pre-requisites or criteria can be logically drawn as follows : First Render of service At what point of time such assessee is in position to render service to it s clients. Naturally when series of formalities have been completed i.e. employment of technical persons; consultation room or office; drawings/designs or related equipment; office equipment/furniture, telephones, fax and computer, all in functional stage etc. etc. Facts of case do not establish that were they functional or started operating in this accounting period ? On contrary office was under preparation and not functional. Second order in-the-offing : question is that in expectation of happening of event is it justifiable to presume that procurement of order to render consultations is definitely going to happen specially when there is no fixed time frame ? All subsequent developments do not predetermine for sure happenings of future hope of order to supply service. Third Position of employment. As in case of manufacturing and trading activity employment of labours, technicians, workers etc., is must, but in service industry employment of technical or professional person is must to carry out specified service as also capable to render service. For example, surgeon may be available to perform surgery but in absence of equipment or operation theatre, he cannot perform surgery, thus definitely not engaged in rendering medical service. Mere presence does not qualify for claim as per language of statute. Fourth Incorporation certificate It is start point of company or start point of setting up of business. Undoubtedly, by issuance of certificate incorporation of company viz-a-viz share capital, names of directors is established and most importantly name of company is designated but nothing more than that. Whether company shall positively launch its business or may fail to perform is not determinative on that occasion ? company will run thereafter or not cannot be determined at that point of time. Predictions are not welcomed in eyes of law. Such activities are primarily with ambition and hope of setting up of business. Fifth Preparatory activity versus commercial activity. This is fundamental area of distinction. Before setting up of business, certain preparation has to precede but tax laws do not cover and recognize those preparatory expenses, as discussed ante. Mere exploration of suitable place, suitable customers before setting up cannot be held that business has set up. exploration is too remote to be in proximity to start or commencement of business. Sixth Capacity to render service In terms of render of technical service, there ought to be presence of technology, designated place like office, presence of equipment, covering technological field and office requirement, so that company can authentically undertake consultation job, and effectively discharge function assigned, if any, as is claim of this assessee but failed to establish. Seventh Determinative test whether "functional". After incorporation, company takes shape so that in years to come, business can run, hence processing of taking shape cannot be equated with term "functional". 35. These criteria or pre-requisites cannot be expected to be exhaustive but illustrative because of obvious reason that question of set up of particular type of business is always question of facts which can be decided only on peculiarity of facts and circumstances of particular case; but should be within broad guidelines provided by different Hon ble Courts based upon which attempt has been made hereinabove. 36. In background of above discussion, my findings are that there is nothing on record to establish that there was existence of any tools/equipments/office machinery/presence of technology etc. etc., readily in hand to make use of them for imparting technical service. Even from schedule of fixed assets, part of balance sheet, there is no proof of existence of any of such assets. This was only preparatory stage of setting up of business going to take shape, as alleged, in years to follow. 36.1 Next, admitted sequence of events is that assessee company was incorporated on 15th Sept., 1997, thereafter collaboration agreement was executed on 16th Dec., 1997 (see p. 3 of paper book II). Next was exhibition at Delhi held in January, 1998 and incurring of travelling expenditure during these months. Side by side office, stated to be on lease, was under preparation/construction and final bill of construction was dt. 30th March, 1998 [see para 3(iii) of p. 6 of AO s order]. Once it is established fact that office was not even ready for professional use, how it can be held that profession has started. Naturally, professional has to have office to have place of discussion with his clients and from where he can impart professional skill. So, conclusion cannot be drawn that by time office was not ready, profession cannot be said to be set up in first year of business. This analogy is at par with findings of several Courts in cases of manufacturing business or trading business; where certain guidelines are laid down to determine point of time of set up of business. Mere conceiving idea or thought and thereafter undertaking journey to examine future prospects or even drawing attention of public by participating in exhibition cannot be held as set up of business emphatically if it is in first year. It is like this that every child is brought up with hope of great future potential, say potential of rendering technical service, but logic does not permit to allow education expenses as setting up of profession. test is whether he had at that point of time potential of rendering technical service immediately on approach by client. In this appeal, admittedly there were two experts available but fundamental question is whether they were in position to render technical advice in absence of proper place to sit or devoid of equipments. And also, basic query was raised that whether any technical service was rendered and for that, any bill was raised during year ending 31st March, 1998. answer was given in negative. argument was raised that having great technical knowledge those experts were in position to offer technical service but moot point is whether there was iota of evidence that they had actually provided technical service in accounting year under consideration. Sitting at home, every person has ambition to do great jobs but question is whether he has done any job in particular year resulted into income because we are dealing issue vis-a-vis IT laws which recognize expenditure as revenue in nature when there is revenue generation through spending of money. assessee has utterly failed to demonstrate that whether any contract with any client was executed or any order was received from any concern seeking technical advice. In absence of such evidence, it is illogical to hold that business was set up much less it was commenced. 3 6 . 2 One more argument was raised connected with "launching expenses" but to me distinction is obvious between launching of product belonging to running business and launch of product yet to come into existence. Such launch depict itself that it was yet to set up and said to be prior to setting up of business. 37. In light of reasons assigned hereinabove, I am of view that ground Nos. 1 and 2 are to be dismissed and since ground No. 3 is without prejudice to these two grounds, hence on account of dismissal of ground Nos. 1 and 2, this remaining ground do not survive on same reasons pro tanto. REFERENCE UNDER S. 2 55 (4) OF IT ACT, 1961 17th Aug., 2007 By virtue of provisions contained in s. 2 55 (4) of IT Act, we differ in opinion on certain points, therefore, hereby refer following question : "1. Whether on facts and circumstances of case, assessee is entitled for expenditure of Rs. 49,27,836, mainly comprising Rs. 17,92,600 expenditure under head Building, repair and renovation and Rs. 15,65,239 under head Exhibition/launch expenses disallowed being expended prior to setting up of business ?" 2. We accordingly refer this issue to Hon ble President, Tribunal, for reference to Third Member or any other order as Hon ble President deem fit. 8th April, 2008 On account of difference between learned Members of Tribunal, A-Bench, Pune, following question has been referred to me under s. 2 55 (4) of IT Act : "Whether on facts and circumstances of case, assessee is entitled for expenditure of Rs. 49,27,336, mainly comprising Rs. 17,92,600 expenditure under head Building, repair and renovation and Rs. 15,65,239 under head Exhibition/launch expenses disallowed being expended prior to setting up of business ?" 2 . facts of case are that assessee, Indian private limited company was set up as 100 per cent subsidiary of Styler Daimler Puch AG, Austria. total subscribed capital, wholly owned by above company, was shown at Rs. 3 crores. "The company was set up with aim to make available rich technical expertise to Indian industry to make it achieve higher levels of competence technology and on quality front so as to keep up with demand of international market and increasingly discerning Indian market." 2.1 company was to provide expertise in three main areas : (i) Technical design and consultancy services, (ii) Systems supplier with respect to vehicle components and parts, (iii) Sourcing of vehicle components and parts from India for global market. assessee filed return declaring loss of Rs. 45,35, 55 6 on 28th Nov., 1998. case was later taken up as scrutiny assessment. assessee had shown receipt of Rs. 3,91,780 under head "Interest on fixed deposits with banks". Against above receipt, assessee claimed expenses of Rs. 49,27,336 under head "Administrative and selling expenses". No receipt from business or profession, according to AO, was disclosed. AO, vide his letter dt. 23rd Oct., 2000, asked assessee company to file detail of expenses claimed under head "Building, repairs, improvements and renovations". He was of opinion that expenses of Rs. 17,92,600 were capital in nature. AO also requested assessee to show cause as to why exhibition and launch expenses of Rs. 15,65,239 be not disallowed as preliminary expenses in nature. Some other queries were also raised with which I am not concerned in this appeal. 2 . 2 In respect of repair, improvements and renovations, assessee explained that premises for carrying business were obtained on long lease. As lessee, assessee has not created any asset in its own name. Therefore, expenditure was claimed to be of revenue nature. In support of contention, reliance was placed on certain High Court and Supreme Court decisions. 2 . 3 In regard to exhibition and launch expenses of Rs. 15,65,239, assessee claimed that company was formed on 15th Sept., 1997. It attended exhibition in January, 1998 at Autoexpo 98 at Delhi. After commencement o f business and for purposes of business, assessee took stall and participated in exhibition to promote business interest of company and to increase its visibility in eyes of Indian automotive industry. Expenses claimed were admissible under s. 37(1). It was further claimed that assessee had commenced its business after setting up same. It was explained that Mr. Van Den Oever, managing director was available for giving technical advise to customers. When managing director was out of India, Mr. Rajeev Randive was also available to potential customers as is evident from correspondence which was placed on record. assessee placed reliance on decision of Bombay High Court in case of Western India Vegetable Products Ltd. vs. CIT (1954) 26 ITR 151 (Bom). contention of assessee is further recorded by AO as under : "1. first operating year was for period of six and half months. company commenced its activity but could not achieve any turnover during this period. During financial year operating facilities have been set up and initial contacts have been established with major players in industry and potential clients. 2. company decided to start its corporate office at Pune because of its strategic location. Accordingly, place for corporate premises was identified at Pune and interior and civil work was carried out." 2.4 AO did not agree with above contention and disallowed expenses claimed by assessee under various heads. Reasons given by him in summary for adopting above course are as under : (i) That administrative and selling expenses were incurred before business had commenced or even before it was set up. AO held that case of Western India Vegetable Products Ltd. (supra) was not applicable to facts of case. AO relied upon decision of Bombay High Court in case of CIT vs. Sarabhai Sons (P) Ltd. (1973) 90 ITR 318 (Guj). AO further recorded as under : (ii) No employees were appointed drawing any remuneration. (iii) Detail of administrative and selling expenses of Rs. 15,65,239 showed that these were launching expenses incurred for "setting up of business" not "after setting up". bill for construction on leased premises was raised on 30th March, 1998 for Rs. 15,92,600. (iv) correspondence with various customers filed by assessee in support of setting up of business would not establish that business was ready to commence as there was no employee or engineer who could impart engineering services. AO again referred to decision in case of Sarabhai Sons (P) Ltd. (supra). (v) Mere production of correspondence does not establish that business is set up. appointment of general manager by assessee was merely operation for setting up business. (vi) Other expenses claimed by assessee i.e. on travelling etc. were mainly in connection with appointment for director and general manager. 2.5 In light of above facts and decision of Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (1997) 141 CTR (SC) 387 : (1997) 227 ITR 172 (SC) and decision in case of Sarabhai Sons (P) Ltd. (supra), AO held that interest income was liable to be assessed under head "Other sources" and expenses claimed amounting to Rs. 49,27,336 were not admissible and disallowed. 2 . 6 building repairs and improvement and renovation expenses amounting to Rs. 17,92,600 were held to be disallowable as these were not relating to current repairs or revenue expenses. AO placed reliance on decision in case of Ballimal Naval Kishore vs. CIT (1997) 138 CTR (SC) 284 : (1997) 224 ITR 414 (SC). In light of above, AO computed assessee s total income at Rs. 3,91,780. 3 . assessee challenged above assessment in appeal before CIT(A) and contended that AO was wrong in not setting off of interest of Rs. 3,91,780 against loss and expenses claimed by assessee under head "Business". It was contended that assessee company had commenced business and, therefore, after setting up of business, expenses claimed were to be allowed. It was explained that business was set up when its managing director and one other officer were made available for services after incorporation of company. Above persons were in position to offer technical services as experts in automobile field. Customers had started contacting them for advise and services. There were various discussions on technical matters with customers. Travelling expenses were incurred for business purposes and not for appointment of director and general manager. Assessee placed reliance on certain correspondence carried by assessee with his customers. 3 . 1 learned CIT(A) did not find any force in appeal of assessee. He first examined case of assessee with case of Neil Automation Technology Ltd. vs. Dy. CIT (2002) 120 Taxman 205 (Mumbai)(Mag) ITA No. 3263/Mum/1988 and held same to be distinguishable on facts. learned CIT(A) examined project named, "Overseas project-1" under which parent company had advanced Rs. 62 lakhs to assessee for supply of manpower and held that it was device adopted to set up claim. It was not sufficient proof to hold that business had been commenced. He accordingly dismissed grounds 1 to 3 raised by assessee. 3 . 2 As regards claim of expenses, he held that all expenses were incurred by assessee before setting of business and were not permissible. He upheld assessment of interest income under head "Other sources" and did not allow any expenses against above receipt. entire appeal of assessee was dismissed. 4 . Being aggrieved, assessee carried matter in appeal before Tribunal. After hearing both parties, learned Members of Tribunal, A- Bench, Pune differed on question whether business was set up by assessee and whether expenses claimed under two heads mentioned in question were to be deducted. learned AM, after taking note of income assessed, grounds of appeal raised before Tribunal, noted contention of assessee as under : "4. Shri Kishore Phadke, learned Authorised Representative, reiterated arguments put forward on behalf of assessee company before AO and CIT(A). submissions made by him are summarized below : That foreign collaboration agreement was entered into between assessee and Styler Daimler Puch, Austria (SDP for short) on 16th Dec., 1997. That SDP was company, inter alia, engaged in activity of providing technical know-how in area of automotive technology. That SDP was to provide assessee company with sufficient technical and marketing information in order to enable it to successfully operate. That assessee company was incorporated with main object to own and operate automotive engineering centre in India, to undertake engineering research and technical services and to set up workshop/manufacturing facility to undertake local manufacture of products including components and parts. That SDP and assessee company agreed to carry on business in above areas in India. That by virtue of collaboration agreement dt. 16th Dec., 1997, assessee company came in possession of technical know-how and since business of assessee company was to give technical know-how to its customers, business of company should be held to have been set up and commenced on 16th Dec., 1997. That assessee was knowledge company and it was its business to supply know-how, knowledge and technology to its customers. That business of assessee company was, as per Ministry of Industry Acknowledgement No. 55 /SIA/FC/97 dt. 5th Aug., 1997, to set up wholly owned Indian subsidiary and automotive engineering and research consultancy services. That approval was given by Ministry of Industry for foreign collaboration in December, 1997. That reliance was placed on decisions in following cases : (i) Western India Vegetable Products Ltd. vs. CIT (1954) 26 ITR 151 (Bom); (ii) Sarabhai Management Corporation Ltd. vs. CIT 1975 CTR (Guj) 111 : (1976) 102 ITR 25 (Guj); (iii) Neil Automation Technology Ltd. vs. Dy. CIT (2002) 120 Taxman 205 (Mumbai)(Mag) in ITA No 3263/Mum/1988 dt. 5th July, 2001; (iv) Chakradhari Wheels (P) Ltd. vs. ITO (2005) 96 TTJ (Del) 517; (v) CIT vs. Sarabhai Sons (P) Ltd. (1973) 90 ITR 318 (Guj); (vi) Prem Conductors (P) Ltd. vs. CIT 1976 CTR (Guj) 324 : (1977) 108 ITR 654 (Guj); (vii) Coromandel Exports (P) Ltd. vs. ITO (1984) 20 TTJ (Hyd) 503; (viii) CIT vs. Western India Sea Food (P) Ltd. (1992) 107 CTR (Guj) 106 : (1993) 199 ITR 777 (Guj)." 4.1 Thereafter he noted detail of expenses claimed by assessee amounting to Rs. 49,26,141 under various heads in para 6. He noted that AO had held that business was not set up during previous year relevant to asst. yr. 1998-99. Thereafter summary of findings of CIT(A) is noted in para 8. In para 9 of proposed order, learned AM has observed whether impugned expenses incurred for year ending 31st March, 1998 were admissible deduction, was precisely required to be decided. This would require to record as on what point of time business of assessee company can be said to have been set up. For that purpose, learned AM observed that legal position, as laid down by various Courts would have to be examined. learned AM accordingly referred as first case to decision of Hon ble Bombay High Court in case of Western India Vegetable Products Ltd. (supra) and observed that in that case Court has pointed out that expression, "setting up" of business is not "commencement" of business. When business is established and is ready to commence, then it can be said of that business that it is set up . But before it is ready to commence, business is not set up and there may be interregnum period between point of time when business is set up and point of time when business is commenced and all expenses incurred after setting up of business and before commencement would be permissible deduction. 4 . 2 learned AM, thereafter referred to case of Sarabhai Management Corporation Ltd. vs. CIT 1975 CTR (Guj) 111 : (1976) 102 ITR 25 (Guj) wherein Gujarat High Court referring to provisions of s. 3 of 1961 Act and relying on decision of Bombay High Court in case of Western India Vegetable Products Ltd. (supra), laid down same proposition of law. AM thereafter observed that in case of new business, engaged in trading or in service sector, no plant or machinery are installed and no trial runs are necessary and, therefore, different set of criteria will be required to be applied in order to determine whether such type of business had been established, so as to be ready to commence business. After considering three decisions, learned AM proceeded to apply legal proposition enunciated in those decisions to facts of this case. He has observed that in present case, assessee company was incorporated on 15th Sept., 1997. Necessary approval was granted by Ministry in December, 1997 for foreign collaboration. assessee company entered into correspondence with Scooters India Ltd., prospective customer, as early as in July, 1997. company also carried correspondence with Mahindra & Mahindra Ltd., Kalyani Tubes and Hindustan Motors. foreign collaboration agreement between assessee company and its parent company was entered into on 16th Dec., 1997. 4.3 In support of above view, learned AM relied upon following decisions : (1) CIT vs. Western India Sea Food (P) Ltd. (1992) 107 CTR (Guj) 106 : (1993) 199 ITR 777 (Guj); (2) Neil Automation Technology Ltd. vs. Dy. CIT (supra) in ITA No. 3263/Mum/1988 dt. 5th July, 2001; (3) Prem Conductors (P) Ltd. vs. CIT 1976 CTR (Guj) 324 : (1977) 108 ITR 654 (Guj). 4.4 learned AM then proceeded to consider allowability of expenses of Rs. 17,92,600 incurred on construction, repair to make building suitable for office purposes. In light of decision of Hon ble Bombay High Court in case of CIT vs. Hede Consultancy (P) Ltd. & Anr. (2003) 180 CTR (Bom) 70 : (2002) 258 ITR 380 (Bom), he directed AO to examine and decide afresh issue raised through this ground and allow appropriate relief. learned AM did not examine any other contention. 5. learned JM did not agree with view taken by learned AM in proposed order. He noted that AO did not allow deduction of expenses of Rs. 49,27,336 against interest on fixed deposit of Rs. 3,91,780. He noted that AO had given categorical finding that this is first year of return and no income was declared under head "Business or profession". AO had held that expenses claimed could not be allowed under head "Interest income". According to learned JM, there were two controversies namely (i) whether expenditure claimed was not laid or expended for purposes of business in year of consideration. Secondly, whether those expenses could be allowed as business was set up in year under consideration. He thereafter noted head and basis on which expenses of Rs. 17,92,602 and Rs. 15,65,239 were claimed by assessee. Thereafter basis of disallowance given by AO in para 28.1 and by learned CIT(A) in para 29 as noted by learned JM. In para 31, learned JM observed that arguments of rival sides have already been considered by my learned Brother and need not be repeated again. Thereafter learned JM records his reasons for his dissenting opinion. These are summarized as below : (i) assessee cannot be said to have set up its business in terms of s. 3 and s. 29 of IT Act on 15th Sept., 1997 when undisputedly it was incorporated. learned JM has recorded in agreement with learned AM that business is set up when it is established or set on foot and that there may be interregnum between setting up of business and its actual commencement. He thereafter refers to distinction between "setting up of company" and "setting up of business" and observed that setting up of company is not setting up of business. He refers to definition of word "business" in Black s Law Dictionary and observed that business is series of action to be taken by businessman in systematic manner step by step and once all preliminary requisites are completed, then it can be said to be set up of business. He thereafter referred to s. 28 and s. 29 of IT Act. According to him, income is to be computed in accordance with provisions contained in ss. 30 to 43D of IT Act. Thereafter reference is made to s. 3 of IT Act. While dealing with s. 3 of IT Act relating to setting up of new business in previous year, learned Member observed that term "setting up" is disjunctive and cumulative with phrase "the source of income" and should not be read separately. Thereafter learned JM concludes as under : "With result, I want to give finding, as based upon established facts of this case, that for year under consideration, since admittedly there was no source of business income came into existence in accounting year under consideration, hence beyond scope of s. 3 of Act. I am sure there is no element of doubt or difference of opinion seeing factual matrix of case in respect of this finding on facts." 5.1 learned JM then commented on observation of learned AM in para 14 that present is not case of assessee involved in manufacturing or trading activity. assessee is stated to be in service industry. He agreed that different set of criteria will be required to be applied in order to determine whether business was set up, commenced or established. learned JM thereafter considered pre-requisite which can logically be drawn on render of service and held that facts of case do not establish that they were functional or started operating in this accounting period. 5 . 2 Second criteria applied was effect of order in offing. In conclusion of this criteria, learned JM has observed, "All subsequent developments do not predetermine for sure happenings of future hope of order to supply service". 5.3 third criteria was position of employment. learned JM has given example of surgeon who is available to perform surgery but in absence of equipment or operation theatre, cannot perform surgery, thus definitely not engaged in medical service. 5.4 fourth criteria is incorporation certificate. According to learned JM, issuance of certificate of incorporation of company is merely designation and nothing more than that. Such activities are primarily carried with ambition and hope of setting up of business. 5.5 fifth criteria according to learned JM is consideration of preparatory activities versus commercial activities. He observed that before setting up of business, certain preparation has to precede but tax laws do not cover and recognize those preparatory expenses. 5.6 sixth criteria is capacity to render service. In terms of render of technical service, there ought to be presence of technology, designate place like office, presence of equipment, covering technological field and office requirement etc. company could authentically undertake consultation job and effectively discharge function assigned, if any. 5.7 seventh criteria, which according to learned JM is determinative test, was functional. 5.8 JM further observed that abovenoted criterias were not exhaustive but illustrative because of obvious reason that question of set up of but illustrative because of obvious reason that question of set up of particular type of business is always question of fact which can be decided only on peculiar facts and circumstances of case. In background of above observations, learned JM held that there is nothing on record to establish that there was existence of any tool/equipment/office machinery/presence of technology etc. etc. ready in hand to make use of them for imparting technical service. 5.9 In ultimate analysis, learned JM observed as under for denying claim of deduction as business was not set up by assessee : "36.1 Next, admitted sequence of events are that assessee company was incorporated on 15th Sept., 1997, thereafter collaboration agreement was executed on 16th Dec., 1997 (see p. 3 of paper book II). Next was exhibition at Delhi held in January, 1998 and incurring of travelling expenditure during these months. Side by side office, stated to be on lease, was under preparation/construction and final bill of construction was dt. 30th March, 1998 [see para 3(iii) of p. 6 of AO s order]. Once it is established fact that office was not even ready for professional use, how it can be held that profession has started. Naturally, professional has to have office to have place of discussion with his clients and from where he can impart professional skill. So, conclusion cannot be drawn that by time office was not ready, profession cannot be said to be set up in first year of business. This analogy is at par with findings of several Courts in cases of manufacturing business or trading business where certain guidelines are laid down to determine point of time of set up of business. Mere conceiving idea or thought and thereafter undertaking journey to examine future prospects or even drawing attention of public by participating in exhibition cannot be held as set up of business emphatically if it is in first year. It is like this that every child is brought up with hope of great future potential, say potential of rendering technical service, but logic do not permit to allow education expenses as setting up of profession. test is whether he had at that point of time potential of rendering technical service immediately on approach by client. In this appeal, admittedly there were two experts available but fundamental question is whether they were in position to render technical advice in absence of proper place to sit or devoid of equipments. And also, basic query was raised that whether any technical service was rendered and for that, any bill was raised during year ending 31st March, 1998. answer was given in negative. argument was raised that having great technical knowledge those experts were in position to offer technical service but moot point is whether there was iota of evidence that they had actually provided technical service in accounting year under consideration. Sitting at home, every person has ambition to do great jobs but question is whether he has done any job in particular year resulted into income because we are dealing issue vis-a-vis IT laws which recognize expenditure as revenue in nature when there is revenue generation through spending of money. assessee has utterly failed to demonstrate that whether any contract with any client was executed or any order was received from any concern seeking technical advice. In absence of such evidence, it is illogical to hold that business was set up much less it was commenced. 36.2 One more argument was raised connected with launching expenses but tome distinction is obvious between launching of product belonging to running business and launch of product yet to come into existence. Such launch depicts itself that it was yet to set up and said to be prior to setting up of business." 6. On account of difference between learned Members, this matter has been referred to me under s. 2 55 (4) of IT Act. case was fixed and I have heard learned representatives of both parties. 6.1 Shri Kishore Phadke, learned counsel for assessee brought to my notice that assessee company was set up to render advisory service in automobiles. Styler Daimler Puch AG, Austria, worldwide group, is involved in research and advisory services to increase efficiency of automobiles, improvement of process of assembly and had set up Indian subsidiary. assessee company is performing highly technical job. learned counsel drew my attention to correspondence which assessee exchanged with several prospective customers. It was further submitted that assessee had place of business. It had staff like managing directors and manager to render technical advice. All conditions of setting up of business were satisfied. learned counsel drew my attention to following decisions which had explained what is set up : (i) Western India Vegetable Products Ltd. vs. CIT (supra); (ii) CWT vs. Ramaraju Surgical Cotton Mills Ltd. (1967) 63 ITR 478 (SC); (iii) Prem Conductors (P) Ltd. vs. CIT (supra). 6 . 2 learned Departmental Representative opposed above submission of learned counsel for assessee. He relied upon proposed order of learned JM. He argued that neither any receipt was shown nor there was material to establish that business was set up in relevant period. Departmental Representative further argued that expenditure on renovation of office in first year of business is clearly capital in nature. He also supported disallowance of various expenses claimed under various heads. 7. I have given careful thought to rival submissions of parties. In my considered opinion, there is no need to examine first principle relating to setting up of business. Various High Courts and Supreme Court have laid down principle as to when business can be said to be set up, although question is one of fact and would depend upon circumstances involved in particular case. In case of Western India Vegetable Products Ltd. vs. CIT (supra), Chagla Chief Justice observed as under : "When 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 set up to commence, it is not set up." 7.1 In above case, Chagla, C.J., also dealt with treatment of expenditure incurred after setting up of business but before it is commenced and observed : "But there may be interregnum, there may be interval between business which is set up and business which is commenced and all expenses incurred after setting up of business and before commencement of t h e business, all expenses during interregnum, would be permissible deductions under s. 10(2)." 7.2 In case of CWT vs. Ramaraju Surgical Cotton Mills Ltd. (supra), their Lordships of Supreme Court considered question whether factory of assessee could be said to have been set up so as to entitle assessee to exclusion of that portion of net wealth which was employed in factory. 7.3 Their Lordships observed as under : "Where erection of machinery and plant for new unit commenced from June, 1957 and construction was completed by December, 1957, unit was completed and became ready to go into business only after Act had come into force and, therefore, assessee was entitled to exemption under s. 5(1)(xxi) in respect of assets used up in setting up unit." 7.4 Their Lordships approved observations of Chagla Chief Justice in case of Western India Vegetable Products Ltd. vs. CIT (supra). 7.5 In case of CIT vs. Saurashtra Cement & Chemical Industries Ltd. (1973) 91 ITR 170 (Guj), their Lordships observed as under : "It may be that whole business was not set up when activity of quarrying leased area of land and extracting limestone was started. That would be set up only when plant and machinery was installed, manufacture of cement started and organization for sale of manufactured cement was established. But, as pointed out above, business is nothing more than continuous course of activities and all activities which go to make up business need not be started simultaneously in order that business may commence. business would commence when activity which is first in point of time and which must necessarily precede other activities is started. Take, for example, case where assessee engages in business of trader which consists of purchasing and selling goods. assessee must necessarily purchase goods in order to be able to sell them and purchase of goods must, therefore, necessarily precede their sale. Can it be said in such case that when assessee purchases goods for purpose of sale, he does not commence his business ? Is it necessary that he must start activity of selling goods before he can be said to have commenced his business ? We have to consider question as to when assessee can be said to have commenced business from common sense point of view. We have to ask ourselves question as to when businessman would regard business as being commenced ? Would he not consider business as having commenced when essential activity of that business is started ? argument of Revenue seeks to confound commencement of business with establishment of business as whole and carrying on of all activities of business. This confusion is result of loose description of business of assessee as business of manufacture and sale of cement." 7.6 Again, in case of Sarabhai Management Corporation Ltd. vs. CIT (supra), Hon ble Gujarat High Court noted above decision and observed as under : "Applying same reasoning to facts of case before us, business activities of assessee company can also be said to fall into three broad categories. first business activity is to acquire either by purchase or by any other manner immovable property so that property can be ultimately given out either on leave and licence basis or on lease to others together with appurtenant services. second category of business activity is to put these buildings and building accommodation and lands and gardens into proper shape and set up appurtenant services so that ultimately property can be given out on leave and licence basis and third business activity is actually to give out on lease or on leave and licence basis. In present case property was acquired on 28th March, 1964. Thereafter, for some time various types of alterations and additions were being carried out and activity of getting this property ready for its licensees and making it serviceable for its licensees was attended to and it is in process of making this accommodation available to intended lessees or licensees that garden staff and other staff was engaged, pieces of equipment and gadgets, etc., were acquired by purpose or otherwise, lift was installed and ultimately w.e.f. 1st May, 1965, portion of accommodation was actually given out on licence basis at fee of Rs. 27,000 accommodation was actually given out on licence basis at fee of Rs. 27,000 per month. Therefore, if we have merely to look at giving out on licence as business activity of concern, then in loose sense it can be said that company commenced its business w.e.f. 1st May, 1965, but that is not only business activity of company. business activity of company consists of three broad categories which we have pointed out above and objects clause of memorandum of association justifies such conclusion. Therefore, when company actually let out on leave and licence basis portion of these particular premises w.e.f. 1st May, 1965, earlier preceding part of its activities were also part of business activities of company, for example, engaging garden staff, kitchen staff or other staff, buying equipment and getting equipment ready, making staff, familiar with working of that equipment, etc. They are all part of business activities of company so that ultimately when licensee or lessee came to occupy premises, everything would be in shape for use of licensee or lessee, as case may be. Under these circumstances, following principle laid down by Division Bench of this Court in CIT vs. Saurashtra Cement & Chemical Industries Ltd., it must be held that it is only in loose sense that business of company can be said to be to give out on leave and licence basis residential or office accommodation together with appurtenant services. business of company was of threefold category as mentioned above after proper analysis and once that analysis is made, it is clear that from 1st Oct., 1964, company was carrying on second category of its business, namely, business activity of making residential accommodation with all appurtenant services available to intended lessees or licensees. We find from order of Tribunal that though decision of this High Court in CIT vs. Saurashtra Cement & Chemical Industries was cited, Tribunal did not think that it had any application to facts of case. We are unable to see how principles laid down in Saurashtra Cement & Chemical Industries Ltd. s case cannot be said to have any bearing on facts of present case. In our opinion, desirability of avoiding thinking in loose sense and clearly analyzing nature of business activity of assessee was essential for purpose of arriving at correct decision in this case. Under circumstances, Tribunal, in our opinion, has not applied correct tests and has consequently arrived at erroneous conclusion regarding commencement of business activity of assessee company." 7.7 aforesaid decision was confirmed by Hon ble Supreme Court in case of CIT vs. Sarabhai Management Corporation Ltd. (1992) 102 CTR (SC) 164 : (1991) 192 ITR 151 (SC). 7.8 In case of Coromandel Exports (P) Ltd. vs. ITO (1984) 20 TTJ (Hyd) 503, Hyderabad Bench of Tribunal observed as under : "17. In case of Coromandel Exports (P) Ltd. vs. ITO (1984) 20 TTJ (Hyd) 503, business of assessee company was export of tobacco. Tribunal Hyderabad, relying, inter alia, on decision of Bombay High Court in case of Western India Vegetable Products Ltd. (supra) held in para 5 of its order as under : ........ What all is needed for setting up of said business is to secure business place or office, to provide it with furniture, etc., to have telephone to maintain office and make ready everything to start business. If no intended exporter approached assessee and got his product exported through assessee it is not fault of assessee. Ultimately, it may be his bad luck but in legal terms it cannot be said that he had not set up his business. Therefore, we are of opinion that all expenses incurred after business is being set up are excludable business expenditure ." 8 . Having in mind aforesaid principle, I proceed to examine facts and circumstances of this case. In memorandum of association of assessee company, one of main objects is to act as "consultant, adviser and provide technical service for development/manufacture of new products, modification in methods/systems of manufacture, assembly, fabrication and in design, lay out of vehicles, components, parts, bodies". There are other clauses providing for acting as consultants and advisers. At p. 2 of paper book, there is detail of various activities handled by managing director Mr. Van Den Oever during his stay in India and corporate offices he visited to carry on discussion with different persons. corporate offices Mr. Van Den Oever visited are recorded to be situated at Delhi, Pune, Mumbai, Kolkata, Indore etc. names of parties include Hindustan Motors, Eicher Motors, Anand Group of Industries (Mahindra & Mahindra). Even names of persons he met are also given. assessee has also furnished detailed qualification of Shri Rajiv Randive who was general manager, marketing and had met various prospective clients. assessee also gave summary of various activities carried on by above employee. clients were shown to have contacted on tour like Eicher Motors, Hindustan Aeronautics, Hindustan Motors, Kalyani Tubes, Kinetic Pune, Mahindra & Mahindra, and Scooters India. assessee has also placed on record correspondence exchanged with various manufacturers of automobiles. In some correspondences, problem being faced b y different automobiles and how assessee can help in improving their product are also stated. 8.1 assessee during relevant year is shown to have incurred following expenses as recorded by learned AM : Particulars (Rs.) Building, repairs, improvement and renovation 17,92,600 Exhibition/Launch expenses 15,65,239 Travelling expenses 4,77,567 Rent 3,10,400 Advertisement 1,71,500 Expenses 1,62, 55 1 Car hire charges 1,06,307 Legal charges 96,930 Exchange rate fluctuation 91,150 Consultation charges 55 ,000 Printing & stationery 27,165 Vehicle & fuel 20,243 Brokerage 20,000 Entertainment expenses 12,097 Miscellaneous 9,389 Audit fees 8,000 Interest 1,195 Total 49,27,336 8.2 correctness of above facts has been verified with reference to copy of P&L a/c and balance sheet available at p. 112 of paper book. expenditure clearly showed that assessee had building on which rent of Rs. 3,10,400 was incurred. It further carried advertisement related to business it had set up and other miscellaneous expenses connected with consultative services assessee intended to provide. It is also part of record that assessee participated and took stall in "Auto fair" held in relevant period in Delhi. objective of above fair was to advance assessee s business of consultancy. 8.3 On above facts, it is difficult to hold that assessee did not set up business in relevant period. assessee had place of business; it had qualified people who could give advice on automobile industry. There is material to show that assessee contacted various clients who entered into agreement with assessee in subsequent years and paid fees for consultation. assessee, without doubt, did not show any consultancy receipt but merely because actual receipts were not shown, it cannot be said that assessee did not set up its business. In fact, business was set up and commenced when assessee was ready to give consultancy to its prospective customers. Not only that, there is material on record to show that assessee took steps to give actual consultancy to its customers. Of course, consultancy charges were received in subsequent year. But merely because no actual amount was received as charges, it cannot be said that business was not set up. 8.4 I have also considered reasoning given by learned JM in proposed order. He held that expenses claimed by assessee could not be allowed under head "Interest income". In para 28.1, he has noted reason given by AO for disallowance. In cl. (ii) of that para, he has observed : "An expenditure incurred prior to setting up of business falls outside purview of s. 28 of IT Act." expression "prior to commencement" of business is again used in cl. (iii) and two decisions quoted by AO in cl. (iv) have no application here. 9 . Now, proceeding to examine reasons given in para 29, I find that these are without any substance. What is effect of production of correspondence is to be judged with reference to type of business claimed to have been set up. general manager and managing director were quite competent to render advisory services to clients and there was no need to employ engineers or other employees for setting up business. Taking stall in auto exhibition for advancement of business has been misinterpreted as launching of business. As noted earlier, travelling expenses have been incurred by director and manager to contact various clients. Meetings and discussions with different persons to locate prospective clients is indication of setting up of business. When assessee was ready to offer advice on matters and problems indicated in correspondence with clients, it is immaterial that no fees for consultancy was received in year under consideration. [Some text of order seems to be missing here Ed.] (b) renovation of building may be capital but that does not make any difference to question involved. It is nobody s case that building was not ready for use. On consideration of detail of expenses, it is seen that apart from rent, other expenses pertaining to use of building like electricity and telephone expenses are also debited along with other administrative expenses. (c) observations made about exhibition and launch expenses are mis- stated. Auto Expo 1998 was held in January, 1998. company was set up much earlier to that. Therefore, it is wrong to say that expenditure on exhibition was incurred before setting up of business. I have already stated that word "launch" is being read out of context. If expenditures were not wholly verifiable, Revenue authorities could have disallowed part of expenses. Thus, all reasons given under cl. (c) are without any basis or supporting evidence. (d) assessee had claimed expenses as business expenses. question of claiming them under other sources did not arise. 10. Now, I consider other reasons given by learned JM in proposed order. In light of case law referred to by learned AM in his proposed order, it was not necessary for learned JM to go to first principles of ss. 3 and 29 of Act and particularly when he accepts proposition, "that business is set up when it is established or set on foot and which is stage immediately before commencement of business". Learned JM also accepts principle laid down in case of Western India Vegetable Products (supra) though citation is wrongly recorded by him. It is nobody s claim that setting up of company is setting up of business. He accepts that expenditures incurred after setting up and before commencement of business are to be allowed as deduction. After accepting legal principles, it was quite unnecessary to again go to first principle. His finding that there was no source of business income in terms of s. 3 is factually incorrect. assessee had its machinery ready to give consultancy and that was source of income. No amount was actually received and that amount was actually received next year is not very material. learned JM accepts that, "This is not case of assessee involving either any manufacturing activity or trading activity. assessee is stated to be in service industry". As stated earlier, assessee claimed that its business was that of consultancy as expert in automobile industry. so-called pre-requisites or criteria adopted for determining whether business was set up, commenced or established on facts of case are difficult to understand. criteria are discussed hereunder : (i) Learned JM has concluded that business was not functional. This finding is not supported by any fact. learned JM has not bothered to examine expenditure claimed by assessee. (ii) No consultancy order was procured in relevant period. It is true that no order was procured but assessee started efforts to procure order and in fact, procured same in subsequent years. In light of correspondence carried on by assessee and queries received by it from its prospective customer, it cannot be said that business was not set up. (iii) As per learned JM, employment of labours, technicians and workers is must in service industry. "Mere presence does not qualify for claim as per language of statute". It is difficult to understand "the language of which statute" was being considered by learned JM. As discussed earlier, assessee had qualified people to render advisory service. Why their presence was not taken sufficient for accepting setting up of business is difficult to understand. (iv) It is nobody s claim that incorporation of company was not setting up of business. (v) Learned JM says that preparatory activities do not lead to setting up of business. In his view, "Mere exploration of suitable place, suitable customers before setting up cannot be held that business has been set up". It is difficult to agree with above statement. assessee had suitable place and machinery to render advisory services and thus has claimed that business was set up. (vi) In view of learned JM, assessee ought to have technology, office, equipment, technological field so that company can authentically undertake consultation job effectively. This was not established. As per discussion in earlier paras, I find it difficult to agree with observations of learned JM. (vii) According to learned JM, functional was determinative test. According to him, process of taking shape cannot be equated with term "functional". On facts of case, assessee s business had taken shape and was rightly claimed to be set up. 11. seven criteria stated by JM do not have factual support nor any law has been cited in support of above criteria. above discussed seven criteria are again repeated in para 36.1 of proposed order. I would only like to state that assessee did not claim to have conceived idea. It had office from which advice could be given in automobile industry. All correspondences are addressed to particular address in Pune. assessee had machinery to render advice in technical field. inferences drawn by learned JM in proposed order are not possible on facts and circumstances of case. I am, therefore, unable to agree with view taken by learned JM that business was not set up by assessee in previous year. I agree with learned AM. 12. In question proposed to me, there is reference to total claim of expenditure of Rs. 49,27,336 and, thereafter, two specific expenses of Rs. 17,92,600 and Rs. 15,65,239 under heads "Building, repair and renovation" and "Exhibition/launch expenses" respectively. Even if it is held that business was set up, claim of expenditure was required to be examined separately. Total expenditure of Rs. 49,29,336 has been claimed under various heads. On question of Rs. 17,92,600 claimed as building, repair and renovation expenses, these expenses appear to me to be of capital nature and, therefore, cannot be allowed. assessee has not placed any material on record to show that repair and renovation could be treated as current repairs. decision of Supreme Court in case of CIT vs. Shrawan Kumar Agarwal (2007) 210 CTR (SC) 616 : (2007) 163 Taxman 187 (SC) also goes against assessee. Therefore, I agree with Revenue authorities that above expenditure could not be allowed. As far as expenditure of Rs. 15,65,239 on exhibition is concerned, it is clear from record that assessee had taken stall in Auto Expo 1998 at Delhi in January, 1998. All expenses were aimed to propagate assessee s business and no material is brought on record by Revenue authorities to show that expenses claimed were inadmissible. I accordingly allow these expenses. As far as balance expenses are claimed, I am not in position to hold that these expenses were incurred; no arguments were addressed nor any detail of these expenses was brought to my knowledge during course of hearing of this appeal. In these circumstances, I am unable t o allow them. These have been rightly disallowed. Therefore, on facts and circumstances of case, I agree with learned AM to extent that deduction of Rs. 15,65,239 be allowed to assessee out of expenses claimed under head Business . balance expenses claimed are to be disallowed. I agree as above with learned AM. matter is now placed before regular Bench for disposal in accordance with law. *** STYLER INDIA (P) LTD. v. JOINT COMMISSIONER OF INCOME TAX