Delhi High Court

Commissioner Of Income Tax, ... vs Whirlpool Of India Ltd. on 19 August, 2009

Author: Valmiki J. Mehta

*             IN THE HIGH COURT OF DELHI AT NEW DELHI

+                                ITA No. 1073/2008

                                 Reserved on        : July 24, 2009
                                 Date of decision   : August 19, 2009
        COMMISSIONER OF INCOME TAX, DELHI-VI        ...Appellant.
                    Through: Ms. Sonia Mathur, Advocate

                    VERSUS

    WHIRLPOOL OF INDIA LTD.                    ....Respondent
                  Through: Mr. Ajay Vohra, Ms. Kavita Jha &
                             Mr. Sriram Krishna, Advocates.
CORAM:
HON'BLE MR. JUSTICE A. K. SIKRI
HON'BLE MR. JUSTICE VALMIKI J.MEHTA

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


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


     3. Whether the judgment should be reported in the Digest?          yes

    %                      JUDGMENT

VALMIKI J.MEHTA, J.

1. This appeal is against the order of the Income Tax Appellate Tribunal

(hereinafter referred to as "ITAT") dated 2.11.2007 whereby the ITAT has

deleted the disallowance of expenses prior to 1.02.1996 made by the Assessing

Officer and which was confirmed by the CIT(A), on the ground that the

assesse's business could be said to have been set up only on 1.2.1996 when the

bank account was opened and not prior thereto.

2. The facts of the case are that the assessee company was incorporated on

27.7.1995 as a financial enterprise, with its main objects according to the

memorandum of association, to carry on the business of financing of all kinds of

goods including consumer goods and consumer durables etc., to purchase or

finance all kinds of financial instruments, to finance private industrial enterprise

in India by way of loans or advances and so on. The first board meeting was

held on 12.08.1995 in which additional directors, executives and auditors were

appointed. On 4.9.1995 the company placed orders for purchase of computers

and peripherals. During the months of September and October 1995, various

key employees such as branch managers, regional managers, consumer finance

managers, company secretary and finance manager and accounts manager etc.

were appointed. On 30.10.1995, M/s. S.R. Batliboi Consultants P. Ltd. sent

their invoice to the company for recruitment charges which were paid by the

company through Kelvinator of India Ltd., another company. During the period

from 4.1.1996 to 21.1.1996 the assessee applied for approval of the Foreign

Investment Promotion Board (FIPB) for investment by Whirlpool Financial

Corporation of USA through its wholly-owned subsidiary by name Whirlpool

Financial (Mauritius) Ltd., and for the approval of the Reserve Bank of India for

receiving foreign exchange loan against future issue of equity. During the

period from November 1995 to January 1996, the assessee-company paid salary

to the staff and employees through two companies, wiz., Kelvinator of India

Ltd. and Expo Machinery Ltd. The employees incurred petty expenditure on

behalf of the company through imprest amounts sent to them through Kelvinator

of India Ltd. A Bank account was opened on 1.2.1996 in the name of the

company and thereafter the expenses were incurred from the same.

3. For the year ended 31.3.1996 the assessee-company filed its return of

income declaring a taxable income of Rs. 94,41,990/-. While examining the

return the Assessing Officer noted that the assessee had claimed expenditure on

the footing that the business had been "set up" with effect from 1.11.1995. He

took the view, disagreeing with the assessee, that the business can be said to

have "set up" only on 1.2.1996 when the bank account was opened in the

assessee's name and therefore only the expenditure incurred thereafter can be

allowed as a deduction. He accordingly disallowed the expenditure to the extent

of Rs. 12,92,557/-, being the aggregate of Rs. 6,47,557/- incurred by the

assessee and Rs. 6,45,000/- incurred by Expo Machinery Limited on behalf of

the assessee. The view taken by the Assessing Officer having been confirmed

by the CIT(A) and hence the assessee is in further appeal before us under

Section 260A of the Income Tax Act, 1961.

4. On the basis of the aforesaid, the issue which arises is when can the

assessee be said to have set up its business. Is the expression "setting up of the

business" same as "commencement of business?" The ITAT has held that the

expression "setting up of the business in the previous year" as per Section 3 of

the Income Tax is different from commencement of the business and has relied

upon the judgments of different courts including of this Court in the case of CIT

Vs. Hughes Escorts Communications Ltd., 311 ITR 253.

5. This Court in the case of Hughes Escorts Communications Ltd. (supra)

has clearly held that a business is set up though the same may not have

commenced and the expenditure incurred after the date of setting up has to be

allowed as a deduction. It was further held that the question as to when the

business is set up depends on the facts of each case and the nature of the

business and no hard and fast rule can be laid down as to when the business was

set up.

6. In view of the above, the following paragraph of the judgment of the

ITAT which exhaustively details the facts and the reasons as to why the

business is set up not on 1.2.1996 as contended by the Assessing Officer but on

1.11.1995 is reproduced below and with which we concur:

"4. It may thus be seen that the question when a business may be said to have been set up is dependent on the facts of each case and largely on the nature of the business proposed to be undertaken. Different considerations may apply depending on whether the business is that of manufacture of a product, or leading of property, or sole selling agency or financial business or it is a hospitality industry (such as a hotel) or a service industry (such as financial or marketing services). The assessee before us is a financial company authorized to advance loans for interest to facilitate customers to purchase consumer durables, though the business is not limited to advancing monies for acquiring consumer durables. We have already referred to the memorandum of association in this regard. The business is not also limited to consumers who propose to buy products of Kelvinator India Limited or Whirlpool India. In the case of a company engaged in rendering financial services, it is possible to say that the business is set up when the directors are appointed, staff such as regional and branch managers are appointed and their salaries are paid, computers are acquired and installed and the company is ready to commence business. It cannot be said that the business was set up only

when the bank account was opened on 01.02.1996 because prior thereto the company, though it did not have a bank account, was incurring the expenditure through Kelvinator India Ltd or Expo Machinery Ltd. The absence of a bank account cannot impede the setting up of the business. We may advert to the evidence in this behalf. Computers and peripherals were purchased vide order placed on HCL Hewlett Packard Ltd of Noida on 04.09.1995 and the required end-user certificate was also issued. The total cost of the purchase was Rs.29.84 lakhs (pages 21-23 of the paper book). Branch managers at Bhopal, Bhubaneswar and Pune were appointed in October 1995 (pages 37-42 of the paper book). Regional managers at Bombay, Calcutta and Gauhati were appointed during the same time (pages 43 to 48 of the paper book). Page 2 of the assessment order shows that the salaries were paid from November 1995 including allowances, bonus, gratuity and contribution to provident and other funds. The amount of such payments have also been given therein and are not reproduced here for the sake of brevity. The office rent of Rs.17500 for November and Rs.25000 each for December 1995 and January 1996 have also been paid. It is thus clear that the establishment and staff were put in place by the end of October 1995 and the company was ready to commence its business from 01.11.1995. M/s S.R.Batliboi Consultants Pvt Ltd had also submitted their bill dated 30 th October 1995 for Rs.2,91,486 for professional services rendered in connection with recruitment of 19 candidates for the post of accounts manager and incidental expenses. The fact that the foreign loan and FIPB approval for equity investment by the Whirlpool Corporation of USA were given in January, 1996 does not mean that the business was not set up before these events. These are not statutory formalities and even without the foreign loan and the equity participation of the assessee-company was in a position to carry on the business in accordance with the objects clause of its memorandum of association from November 1995 when it had its own offices, branch and regional managers and staff, computers installed and was ready to commence its activities. The expenses were incurred through Kelvinator and Expo Machinery and evidence to this effect is placed at pages 24-31 and at other pages (eg. Page 52) of the paper book. From the above evidence it is clear that the business was set up from 01.11.1995, by which date the company was ready and in a position to commence its business."

7. The counsel for the Revenue has relied upon the decision in the case of

Commissioner of Wealth Tax vs. Ramaraju Surgical Cotton Mills Ltd. to

canvass the proposition that it is only when actual business operation was

commenced, a business is set up. We feel that the decision of the Supreme

Court in Ramaraju Surgical Cotton Mills Ltd. is not applicable to the facts of

the present case because the said judgment was dealing with the provision of

Section 5(1)(xxi) of the Wealth Tax Act, 1957 along with its proviso and the

language of the main section and the proviso were wholly different. In the

proviso, the requirement was specifically of the company commencing

operations but in the main section the expression used was different viz. of

setting up of the unit. In the light of the relevant provisions, the facts of that

case and the claim of the assessee to get the benefit of a deduction, the Supreme