P.M. JAGTAP, ACCOUNTANT MEMBER 
AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER

ORDER

The order of the Bench was delivered by

Smt. Asha Vijayaraghavan, Judicial Member - Both these appeals are directed against the orders of the Commissioner of Income-tax (Appeals)-9, Mumbai (Camp at Hyderabad) dated February 12, 2013 relating to the assessment years 2004-05 and 2005-06.

I.T.A. No. 551/Hyd/2013-assessment year 2004-05

2. Brief facts of the case are that the assessee-company is engaged in the business of development and sale of software. It furnished its return of income on October 31, 2004 for the assessment year 2004-05 disclosing loss of Rs. 6,64,940. The said return of income was processed under section 143(1) of the Act. Thereafter the Assessing Officer issued a notice under section 148 of the Act recording the reasons that the assessee had debited expenditure of Rs. 24,82,147 without earning any business income. The assessee had earned interest income which was assessable under the head "Income from other sources".

3. During the course of assessment proceedings under section 147 of the Act, the assessee argued that the assessee-company employed software professional and paid salaries and incurred other expenses. It was submitted that the assessee could not get any work and hence no business receipts were disclosed by the assessee during the accounting year relevant to the assessment year 2004-05. The Assessing Officer held that there was no business activity at all carried on by the assessee. The Assessing Officer further held that the assessee himself has offered interest income under the head "Income from other sources" and therefore, no expenses can be allowed under section 37 of the Act. However, the Assessing Officer allowed a sum of Rs. 3 lakhs under section 57(iii) of the Act against the interest income of Rs. 14,85,280 assessed under section 56 of the Act under the head "Income from other sources". Aggrieved, the assessee filed appeal before the Commissioner of Income-tax (Appeals). It was argued by the authorised representative for the assessee that the Assessing Officer should have allowed the entire expenditure debited to the profit and loss account, because the assessee-company was not closed. It was also submitted that the assessee-company had debited the salary and other expenditure at Rs. 24,82,147 and was waiting for work orders, but as there was no business income and no business receipts, no income was offered to tax. The Commissioner of Income-tax (Appeals) after going through the orders of the Assessing Officer upheld that reopening under section 147 of the Act was valid and held that the Assessing Officer had assumed valid jurisdiction to frame reassessment, thus confirming the action of the Assessing Officer.

4. The Commissioner of Income-tax (Appeals) further held at para 5.3.1 of his order, as follows :

"5.3.1 I have carefully and dispassionately considered the facts and circumstances of the case. For allowing expenditure under section 37 of the Act such expenditure must be paid wholly and exclusively for the purpose of the appellants business and profession and further must not be capital expenditure, personal expenditure or an allowance of the character described in sections 30 to 36 of the Act. In this case the appellant has not disclosed any business receipts and no income has been disclosed under the head 'Income from business or profession'. An expenditure can be allowed as business expenditure under section 37(1) of the Act only if the assessee has carried on the business in the year in which the expenditure is to be allowed and it is not enough that the assessee has carried on some other business during the said year. Strong reliance is placed on the following decisions :

Under the circumstances, the expenditure has correctly not been allowed by the Assessing Officer. It is further observed that the Assessing Officer has allowed estimated deduction of Rs. 3 lakhs under section 57(iii) of the Act. Having considered the rival submissions, it is decided that the ends of justice would be met if the deduction under section 57(iii) of the Act is allowed at 25 per cent. of the expenditure of Rs. 24,82,147 debited in the appellants profit and loss account. In other words, the appellant shall get deduction of expenditure of Rs. 6,20,536 instead of Rs. 3 lakhs allowed by the Assessing Officer. Therefore, the appellant will get a further relief of Rs. 3,20,536. Interest under sections 234A and 234B to be levied as per law. Grounds of appeal No. 3, 4, 5 and 6 are partly allowed."

5. Thus, the Commissioner of Income-tax (Appeals) partly allowed the assessee's appeal. Aggrieved the assessee is in appeal before us.

6. Learned counsel for the assessee Shri S. Rama Rao placed before us the background of the assessee and submitted that the assessee is in the business of development of software. The assessee in the process developed various technologies in the field of internet and software engineering i.e., the technology would increase the software productivity three fold and also can build up more complex graphical interfaces than exists today online. It also participated in various technology reviews conducted by the authorities. The Department of Navy of U.S.A. invited technology projects. The assessee participated in the said weapons PMAs and succeeded in passing the test. However, it could not get the orders for the technology developed by it. The assessee-company developed the technology and interacted with various other concerns in the world for obtaining the orders. It could not get any order for supply. However, it is carrying on the activity of research continuously and is waiting for the orders for supply of its technology.

7. It was further submitted that the assessee was in the process of research and waiting for orders which would absorb its technology and had incurred expenditure of Rs. 24,82,147 during the financial year 2003-04 and Rs. 14,52,712 for the financial year 2004-05. It also received interest of Rs. 14,85,280 for the year ended on March 31, 2004 and Rs. 16,09,512 for the financial year ended on March 31, 2005. Based on the final accounts, it filed the returns of income on October 31, 2004 and November 30, 2005 respectively for the assessment years 2004-05 and 2005-06.

8. Learned counsel pointed out that the Assessing Officer completed the assessment under section 143(3) for the assessment year 2005-06 and under section 147 for the assessment year 2004-05 and according to the Assessing Officer there was no business activity and the expenditure debited is not allowable. The Assessing Officer estimated the probable expenditure to be allowed at Rs. 3 lakhs for both the years and deducted the same from the income from other sources.

9. Learned counsel stated that he was not pressing the grounds against presumption of jurisdiction under section 148 for reopening the assessment which was confirmed as valid by the Commissioner of Income-tax (Appeals). It was submitted that the Assessing Officer was under the misconception in coming to the conclusion that, since there was no business receipts, the expenditure incurred on business is not allowable as a deduction ignoring the fact that the assessee had already commenced the business activity. It was further pointed out that the software is developed and the assessee made arrangements for selling the same in the market. The entire expenditure incurred is for the purpose of creating the stock-in-trade to be marketed or for advertising for marketing the same and is business expenditure. In this regard the assessee submitted that there are various decisions on the issue which clearly hold that for allowing expenditure there need not be any receipt from business. Learned counsel further relied on the decisions of the hon'ble Rajasthan High Court in the case of CIT v. Stones & Mineral Associated Ltd. [2002] 257 ITR 479/123 Taxman 480wherein it has been held that the business is said to have been started even when the assessee did not effect the purchases during the previous year nor had he effected the exports. The hon'ble High Court held that expenditure incurred for procuring material is allowable as business expenditure as there is a commencement of business activity.

10. The hon'ble Gujarat High Court in the case of CIT v.Saurashtra Cement & Chemical Industries Ltd. [1973] 91 ITR 170 had held that in the case of a manufacturing activity, purchase of stocks in trade would be setting up of business.

11. The hon'ble Supreme Court in the case of CIT v. Sarabhai Management Corpn. Ltd. [1991] 192 ITR 151 had held that the business is said to have been commenced when it has set up and it is not necessary that it commenced activity of purchase or sale. In the said case, the apex court observed that when the assessee acquired immovable properties for let out on lease, such business is said to have been commenced when the property is made ready for use and actual receipt of rent is not essential. The assessee herein is ready with its produce and can market any time and therefore, the assessee commenced business activity and the expenditure incurred is allowable as a deduction.

12. Learned counsel further highlighted that perusal of the profit and loss account for both years would clearly indicate that the expenditure is relatable to business activity and therefore, the same is allowable as a deduction. On the other hand, the learned Departmental representative supported the orders of the Assessing Officer and the learned Commissioner of Income-tax (Appeals).

13. We heard both parties. Reliance is placed on the decision of the Mumbai Bench of the Income-tax Appellate Tribunal in the case of Accor Radhakrishna Corporate Services (P.) Ltd. v.Jt. CIT [2007] 13 SOT 652 . In the case of Asstt. CIT v.Lafarge India Holding (P.) Ltd. [2008] 19 SOT 121 it has been held as follows :

"8. . . . we find that the hon'ble Supreme Court in the recent judgment in the case of S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) has held that expression 'for the purpose of business' occurring in various provisions is wider in scope than the expression 'for the purpose of earning income'. In view of this judgment, the opinion of the Assessing Officer that the assessee was not carrying on any business since there was no activity leading to the earning of income, becomes erroneous and unsustainable. When the assessee-company has been set up with an object of making strategic investment in the shares of companies involved in the cement business, we find that it cannot be held that the assessee is not carrying on any business. We therefore, approve the finding of the learned Commissioner of Income-tax (Appeals) to this extent."

14. Following the ratio of the abovesaid decision, we are of the opinion that the Assessing Officer has erred in rejecting the business loss of the assessee admitted in the return of income. The Assessing Officer should have appreciated that there was business activity, though there was no revenue during the previous year under consideration. Hence, in our opinion the expenditure is relatable to the business activity and the same is allowable as a deduction.

15. In the result, the appeal in I.T.A. No. 551/Hyd/2013 is allowed.

I.T.A. No. 552/Hyd/2013

16. The facts for the assessment year 2005-06 in I.T.A. No. 552/Hyd/2013 are identical to those of I.T.A. No. 551/Hyd/2013 for the assessment year 2004-05 hence the same conclusions in paragraph 13 is to be followed in this appeal before us.