By TIOL News Service

MUMBAI, NOV 27, 2018: THE ISSUE BEFORE THE TRIBUNAL IS - Whether "setting up of business" but not "commencement of business" is relevant under Income tax Act, for purpose of ascertaining allowability of business expenditure. YES is the answer.

Facts of the case:

The assessee is an Asset Management Company formed to manage the mutual fund schemes of AIG Global Investment Group Mutual fund in accordance with the Investment Management Agreement entered into between the assessee and AIG Trustee Company (India) Private Limited. For the year under consideration, the assessee company filed its return returning a net loss of Rs.6,78,64,993/-. During the course of assessment, the AO observed that during the previous year the assessee was not engaged in any business as appearing from the copies of accounts filed during the course of hearing. Accordingly, the assessee was asked to submit explanation as to allowability of expenses of Rs.12,71,38,147/- not related to any business activity during the previous year. After considering assessee’s reply, AO held that the claim of assesseee as to allowance of deduction of expenditure subsequent to the date of entering into Investment Management Agreement was not acceptable on the ground that only entering into Investment Management Agreement did not confer the assessee to expend without getting any corresponding reimbursement as per agreement. In fact, though there was reflection of expenses in the accounts, there was no reimbursement of the same or even, no effect was made for reimbursement of expenses as appearing from the accounts. In the light of same, the assessed claim for expenditure of Rs.12,71,38,147/- was disallowed and added back to the total income of assessee on the ground that no business activity was started by the assessee. On appeal, the CIT(A) confirmed the action of AO.

Tribunal held that,

++ it is observed that the AO has failed to appreciate the business of the mutual fund industry and disallowed the expenses. The assessee is an Asset Management Company established under the SEBI Regulations, 1996. The assessee is incorporated to manage the schemes of the Fund in accordance with the provisions of the IMA. The business activities that assessee company can carry as an Asset Management Company is regulated by the said Regulations. The SEBI Regulations require the AMC to-carry on various activities which include right from launching of the scheme, managing the funds, compliance with the Regulations, providing quarterly reports, maintenance of books of accounts, issue of unit certificates or statement of account, etc. It is also observed that the expenses incurred by the assessee are its routine expenses incurred in conduct of its business of Asset Management Company. It could not have carried on its business of Asset Management Company without entering into t Investment Management Agreement. Accordingly, AO was not correct in holding that entering into agreement did not confer upon the assessee to expand without getting any corresponding reimbursement of expenses. From the record, it is also found that the accounts and schedules thereto are prepared as per companies Act, 1956 and in accordance with the Accounting Standards issued by the ICA/i;

++ in view of the judicial pronouncements, it is observed that there is a distinction between setting up of the business and the commencement of the business. What is relevant under the Income-tax Act, is the setting up of the business and not the commencement of the business. Accordingly, it is "setting up" of the business and not the commencement" of the business that is to be considered. A business is commenced as soon as an essential activity of the business is started. Thus, a business commences with first purchase of stock-in-trade, the date when the first sale is made is not material in that respect. Similarly, a manufacturer has to undertake several activities in order to bring to produce finished goods and he commences his business as soon as he undertakes the first of such activities. The expression "setting up" means "to place on foot" or "to establish" in contradistinction to the expression "commence". In the case of a new business engaged in trading or in the service sector, no plant and machinery are to be installed, and no trial runs are necessary; and therefore a different set of criteria will be required to be applied in order to determine whether such a type of business had been established so as to be ready to "commence" business. The actual receipt of an order from a prospective client for supply of product or services cannot postpone the "setting up" of the business;

++ in the instant case, assessee is engaged in the business of asset management positively and in case of service industry, the criteria for determining when the business can be said to have been set up will differ and would be based on the facts of each case. In the instant case, assessee company has been incorporated to manage the assets of the mutual funds and it is incorporated with the said object. Upon its incorporation, it took various steps to commence its business such as hiring of people application to SEBI, organizing for space etc, and this amounted to setting up business and the entire expenses ought to be allowed. In any case, to acting as an AMC for the fund, it is necessary for it enter into an Investment Management Agreement with the Trustee Company, which was entered into on December 15, 2006. The assessee there on started the process of launch of the fund. The assessee successfully launch the first fund in May, 2007. As stated earlier, it has already started its activities for launching of fund. In view of the same, this Tribunal holds that the AO was not justified in not accepting the claim of assessee that its business activities are commenced from the date of its incorporation. Accordingly, the AO is directed to verify the expenses alleged to incur wholly and exclusively for the purpose of the business to allow the same as per law.

(See 2018-TIOL-2248-ITAT-MUM)