The law provide for computation of total income starting the date of set-up of business. Any business other than manufacturing or large infra business can be said to have been set up on incorporation over a case of a manufacturing company which need a set-up and operational infrastructure like land building machinery materials power and people. Thus the word set up in section 3 is to be understood to have a bearing to a manufacturing entity and not to any service or trading company.
In [2018] 11 ITR-OL 620 (Bom)the Tribunal and the AO went around looking for readiness/set up of an operational infrastructure in AY 2005-06 in the case of a company incorporated to run operating car lease and car fleet management business being part of the Société Générale Group, a leading French-group. Their website reads that the company
came to India in 2005.
The duo in dismissing allowance of legitimate business expenses held that the company is not set up its business for the absence of following:
- chief operation manager
- Computer Hardware and software
- Premises
- Furniture
- operating licences/permits
- Formalisation of Capital arrangements and borrowings
- Arrangement with vehicle supplier
- Due diligence of business And financial lease study of the legal issues incident on its business, in the absence of which it is found doubtful that the business could be commenced ? So on and so forth. The order further reads that “No answers emanate from either the material on record or the assessee’s explanations, with the expenses as incurred itself revealing the state of preparedness of the company toward commencing its business. In our clear view, the company is clearly in the setting up stage. Besides, clearly, it is only the expenditure, post setup, that could be claimed as a business expenditure, while admittedly the company has claimed the entire expenditure incurred by it since inception, including as it appears expenditure on its incorporation itself, which are only, like wise, capital costs. Alternatively speaking, the implication of no incorporation expenses or the company being established on the very date of its incorporation, are both unsupported as well as bizarre propositions. No case for allowance of the assessee’s claim under section 37(1) or section 32(1), as the case may be, is accordingly made out.”
In Tribunal pressed for the following saintful but unrealistic questions in this case :
“ The only material on record is towards the appointment of MD, even though there is some doubt in its respect inasmuch as the resolution by the board of direc tors of the company confirming his appointment is dated February 17, 2007 (PB pg.12). Even so, when did the chief operation manager join ? When was the other staff, along with their names and reference to the different positions/functions they are to discharge ? When was the office premises purchased or taken on rent or hire ? What is the furniture and fixture without which the premises cannot be put to use, acquired and when ? We say so as the company’s financial state ments (PB pgs. 1624) do not reflect the same. Has the company procured the necessary hardware in terms of computer systems or has it only made some preliminary purchases thereof, i.e., in the process of setting up its infrastructure ? Has the company procured the
necessary software for operating its computer systems, even assuming the same to have been purchased in the numbers necessary to complete a transaction observing the operating guidelines ? Have the operating licences/permits, as required from the regulatory authorities, been obtained ? Whether, the firm arrangements for capital – both owned as well as borrowed (by way of lines of credit) for either operational leases or fleet management (which is its other principal business), both being highly capital incentive, been formalized ? Has the company entered into a relationship with any vehicle supplier inasmuch as, as distinct from a financial lease, the risk and reward of the ownership in the case of an operating lease tests with the lessor, so that the terms of the lease could not be agreed upon (with the customers) unless it has a complete understanding of the product, the risks associated with the ownership and management thereof, including by way of insurance, costs, applicable taxes. Why, even a financial lease or arrangement would require an arrangement/s or tie up with the vehicle supplier or manufacturer, enabling competitive offers to the customers through their preferred financial channels. Then, again, has the company undertaken study of the legal issues incident on its business, in the absence of which it is doubtful that the business could be commenced ? So on and so forth. No answers emanate from either the material on record or the assessee’s explanations, with the expenses as incurred itself revealing the state of preparedness of the company toward commencing its business. In our clear view, the company is clearly in the setting up stage. Besides, clearly, it is only the expenditure, post setup, that could be claimed as a business expenditure, while admittedly the company has claimed the entire expenditure incurred by it since inception, including as it appears expenditure on its incorporation itself, which are only, like wise, cap ital costs. Alternatively speaking, the implication of no incorporation expenses or the company being established on the very date of its incorporation, are both unsupported as well as bizarre propositions. No case for allowance of the assessee’s claim under section 37(1) or section 32(1), as the case may be, is accordingly made out.”
The company is part of the global group which already run similar business so that their appear to be little necessity to go into any greater preparation as thought of by the authorities and the Tribunal in this case. The company had appointed a managing director and also acquired few vehicle in the relevant year which is fact simplicitor to hold set up of business of fleet running.