Delhi High Court

Commissioner Of Income Tax vs Samsung India Electronics Ltd. on 9 July, 2013

Author: Sanjiv Khanna

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*     IN THE HIGH COURT OF DELHI AT NEW DELHI
                                            Date of decision: 9th July, 2013
+                         ITA 131/2010


      COMMISSIONER OF INCOME TAX                 ..... Appellant
                  Through  Ms. Suruchi Aggarwal, sr. standing
                  counsel.

                          versus

      SAMSUNG INDIA ELECTRONICS LTD.              ..... Respondent
                   Through    Mr.Satyen Sethi and Mr. Arta Tarana
                   Panda, Advocates.

      CORAM:
      HON'BLE MR. JUSTICE SANJIV KHANNA
      HON'BLE MR. JUSTICE SANJEEV SACHDEVA

SANJIV KHANNA, J. (ORAL)

Revenue by this appeal under Section 260A of the Income Tax Act,

1961 (Act, for short) challenges the findings recorded by the Income Tax

Appellate Tribunal in the order dated 28th November, 2008 that the assessee

is entitled to claim and set off expenses of Rs.34,95,606/-. It is submitted

that the said expense are capital in nature as they are "Set up" expenses. The

findings recorded by the tribunal reads as under:-

"6. In view of the above, the business of the assessee could be said to have been set up on 3.9.95 as prior to this necessary agreements had been entered into, key personnel had been

recruited and the assessee company had started working necessary infra structure like office premises, office equipments etc. and the assessee company was ready to commence trading operation as on the date of incorporation viz. 3.8.95. Accordingly, A.O. is directed allow the revenue expenditure incurred after the setting up of business which was 3.9.1995, notwithstanding the fact that commercial operations started w.e.f. 1.10.1995. For the purpose of claiming expenditure incurred thereafter, as revenue expenditure, reliance are placed on the following decisions:

x x x x x x x"

2. The respondent-assessee is a joint venture company setup under the

incorporation agreement dated 28th March, 1995 between Samsung

Electronics Co. Ltd. (SEC), Korea and M/s Reasonable Computer Solutions

Private Ltd., an Indian company. Respondent-assessee was incorporated on

3rd August, 1995 and certificate of commencement of business is dated 29 th

August, 1995. Thereafter, respondent-assessee entered into technology

licence agreement dated 12th September, 1995 and started its commercial

operations on 1st October, 1995.

3. On or after 3rd August, 1995 till 30th September, 1995, the respondent-

assessee had incurred the following expenses:-

I    Recruitment & Training expenses 75,777





 ii    Rent                                 9,37,007



iv    Postage, Telephone, Telex            2,44,082

v     Insurance                            24,366

vi    Office Maintenance                   5,45,000

vii   Travelling & conveyance              12,90,138

viii Repairs & Maintenance                 24,183



x     Advertisement & Sales Promotion      2,44,427

xi    Taxes & Octroi                       -

xii   Miscellaneous expenses               1,09,632

                   Total                   34,95,606

                                                       "

4. There is no dispute about the heads mentioned above and that the

expenses were actually incurred. The stand of the Revenue is that these

expenses are pre setup expenses and they are capital in nature, therefore,

they should not be allowed under Section 37 of the Act. The Assessing

Officer in the assessment order has recorded that the expenses were incurred

before actual business operation started on 1st October, 1995 and in view of

judicial pronouncement of the Bombay High Court in Western India

Vegetables Products Ltd. Vs. CIT, (1954) 26 ITR 151 and Supreme Court in

CWT Vs. Ramaraju Surgical Cotton Mills Ltd., (1967) 63 ITR 478 (SC)

and Sarabhhai Managment Corporation Ltd. Vs. CIT, (1991) 192 ITR 151,

the same should be disallowed as expenditure. We may only note that the

Assessing Officer did not go into the factual matrix applicable to the

assessee‟s case to find out the date of setting up of business. He simply took

the date 1st October, 1995 i.e. as the date of start of the actual commercial

sale transactions as the relevant date. The CIT (Appeals) confirmed the

disallowance after referring to the principles of "setting up of a business"

and after examining the case law. He observed that the "date of

incorporation" cannot ipso facto be treated as the date of setting up of

operations as incorporation results in registration of the company but does

not necessarily enable it to commence business. Legal requirements like

registration under the sales tax etc was required and the assessee had to

prove before the Assessing Officer that commercial operations could have

been commenced before 1st October, 1995. No such fact was recorded by

the Assessing Officer.

5. We have already referred to para 6 of the order passed by the tribunal

which records the findings of facts ascertained by the tribunal. We have

also noted the heads under which expenses have been claimed. The tribunal

in the same order had examined the claim of the assesse, whether

expenditure amounting to Rs.18,56,903/- incurred by M/s Reasonable

Computer Solutions Pvt. Ltd. and reimbursed by the assesse, could be

allowed as revenue expenditure. The said claim was disallowed and the

assessee has accepted the said decision.

6. We have examined the factual findings recorded by the tribunal in

para 6. The same cannot be categorized as perverse. The tribunal before

recording the said findings examined the case law on the subject and has

referred to the contentions of the parties on the said issue which have been

recorded para 3 onwards. The assessee company was set up to carry on its

business of manufacturing and trading in consumer durables. The date of

commencement of business was certified as 9th August, 1995, though the

date of incorporation was 3rd August, 1995. Tribunal has referred to various

facts as to what was required to be done before the first actual sale invoice to

a customer was issued. It included recruitment of employees, their training

and establishment of showrooms by taking places on rent etc.

Advertisements had also been issued and in fact M/s Reasonable Computer

Solutions Private Ltd., the joint venture partner on 25th July, 1995 had

appointed M/s Mudra Diversified Limited as their Public Relations

Consultant for the period 15th August, 1995 onwards.

6. In Western India Vegetables Products Ltd v. CIT (1954) 26 ITR 151

Bombay High Court has examined the concept and noticed the difference

between "commencement" and "setting up" of a business and, inter alia,

observed as under:-

"The important question that has got to be considered is from which date are the expenses of this business to be considered permissible deductions and for that purpose the section that we have got to look to is section 2(11) and that section defines the „previous year‟ and for the purpose of a business the previous year begins from the date of setting up of the business. Therefore it is only after the business is set up that the previous year of that business commences and in that previous year the expenses incurred in the business can be claimed as permissible deductions. Any expenses incurred prior to setting up of a business would obviously not be permissible deductions because those expenses would be incurred at a point of time when the previous years of the business would not have commenced.

xxxxxx It seems to us, that the expression „setting up‟ means, as is defined in the Oxford English Dictionary, „to place on foot‟ or „to establish‟, and in contradistinction to „commence‟. The distinction is this that when a 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. But there may be an interregnum, there may be an interval between

a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deductions under section 10(2)."

7. The aforesaid distinction is relevant when we examine and refers to

the definition of „previous year‟. Following the said judgment, in the case of

CIT Vs. L.G. Electronic (India) Ltd. [2006] 282 ITR 545 (Delhi), it has

been observed that the date of setting up of business and date of

commencement of business may be two separate dates. This decision in the

case of L.G. Electronics (supra) has been followed in CIT Vs. ESPN

Software India P. Ltd., [2008] 301 ITR 368 (Delhi) wherein it has been held

that a business will "commence" with the first purchase of stock-in-trade

and the date on which the first sale is made is immaterial. Similarly, for

manufacturing, several activities in order to bring or produce finished

products have to be undertaken, but business commences when the first of

such activities is taken.