Section 28 – For a company providing consultancy
services, the date of opening office can be considered as date of
setting up of business.
Facts :
The assessee
company was incorporated on 2-3-2007 to carry on business of providing
advisory services in the field of real estate and infrastructure
project. During the first previous year the assessee in its return of
income declared a loss of Rs. 61,01,298. The assessee company had not
received any operative income but had incurred various kinds of
expenditure from 2-3-2007 to 31-3-2007 and had earned dividend income of
Rs. 19,121. The assessee could not furnish any evidence to show that it
had rendered services during the previous year. The first MOU was
entered into on 10-8-2007.
Since the first MOU was entered into
by the assessee on 10- 8-2007, the Assessing Officer (AO) was of the
view that the assessee had not set up its business and the entire
expenditure incurred by the assessee was to earn exempt income. He
disallowed the entire expenditure of Rs. 61,01,298.
Aggrieved,
the assessee preferred an appeal to the CIT(A) who upheld the order
passed by the AO. Aggrieved, the assessee preferred an appeal to the
Tribunal.
Held:
The business of the assessee was
providing advisory services in real estate and infrastructure projects.
For a company providing consultancy services, the date of opening of
office can be considered as date of setting up of business.
The
Tribunal noted that the assessee company recruited its employees well
before the date of incorporation, which included, inter alia, a Managing
Director, a Chief Financial Officer, Human Resource personnel,
Secretarial Staff and persons well versed in Strategic Research and
Advisory and Marketing and also persons having expertise in Construction
projects, Architects etc. It also purchased computers, office
equipments, vehicles and also hired its office. The assessee had
undertaken specific projects in the month of March, 2007 for companies
like TCS, Rallis, VSNL. Tata tea (Bangalore), Tata Tea (Munnar), Delhi
Development Authority, Indira Gandhi National Centre for Arts, certain
projects in Tamil Nadu, Mass Rapid Transport System (Phase 2), Special
Economic Zones, Airports etc, which meant that the assessee had started
contacting its prospective customers in the month of March 2007 itself.
As
regards the specific observation of the tax authorities that the
assessee has failed to furnish any evidence in the form of
correspondence etc. to show that it has commenced its business
activities, the Tribunal held that the said fact may not be relevant for
a consultancy company. It held that the assessee should be considered
to have been set up its business on the date of its incorporation and
hence the expenses incurred after that date should be allowed as revenue
expenditure. The view taken by the tax authorities that the first MOU
was entered in the succeeding year should be considered as date of
setting up of business was held to be not in accordance with the settled
principles.
However, since the AO did not have occasion to
examine the expenditure claim put forth by the assessee, the Tribunal
restored the matter of examining claim of expenditure to the file of the
AO.
