Cit v. Rio Tinto India Pvt Ltd

order.

¶18This Court notices the decision in Investment Ltd. V. CIT 1970

(77) ITR 533; that indicates that the findings in regard to the nature and character of investment for one year is good and cogent evidence for later assessment years. The revenue's arguments, seen from one perspective, appear to be sound and persuasive. There can be no absolute proposition that a question once decided is conclusive as regards the assessee and the revenue. However, certain fundamental questions or issues need to be finally settled in one year, and cannot be Page 11

reopened having regard to their nature. One such is the date of commencement of the business.

¶19In a previous decision of this Court, i.e., Commissioner of Income Tax v. ESPN Software (P) Ltd. 2008 (301) ITR 368 (Del), the question which arose for decision was the date from which the assessee could be said to have started its business. The Court, after noticing the definition of previous order under Section 3 held that "it is setting-up of business and not commencement that is to be considered." It further observed: "a business is commenced as soon as an essential activity of that business is started. Thus, a business commenced when the purchase of stock and trade, the date when the sale is made is not material in that respect."

¶20This Court also followed the previous ruling of the Gujarat High Court in CIT v. Saurastra Cement and Chemical Industries Ltd. 1973 (91) ITR 170. The Court further held importantly that "a finding regarding the date when the business was set-up is a finding of fact.".

¶21This Court is of the opinion that reasoning given by the AO in his order for the assessment year 1998-99 is clear and conclusive. It accepted the assessee's contentions with regard to having commenced business with effect from 01.01.1997. It was only on the basis of such a fundamental premise that income was assessed and certain disallowances were made. In these circumstances, it would be unfair for the revenue to contend for each successive assessment year that the assessee had to establish that it "commenced business." The evidence on record clearly shows that substantial services were being rendered and salaries etc. were disbursed even though on reimbursement basis. Page 12

The mere fact that other service charges are meagre in nature would not, in any way, influence the decision as to whether business was commenced. Furthermore, in line with the decision of this Court in ESPN (supra) the question of date of commencement of business is one of fact. Having regard to these circumstances, it is held that the findings of the Tribunal in the impugned common judgment and order are sound and do not call for interference. The question of law is accordingly answered in favour of the assessee and against the revenue. The appeals are consequently dismissed.

S. RAVINDRA BHAT (JUDGE)

5th October, 2012

R.V. EASWAR (JUDGE)

Page 1 IN THE HIGH COURT OF DELHI AT NEW DELHI RESERVED ON: 19.09.2012 PRONOUNCED ON: 05.10.2012 ITA Nos. 817/2011, 819/2011, 822/2011, 899/2011 & 900/2011 CIT .... Appellant Through: Ms. Rashmi Chopra, Sr. Standing Counsel. versus RIO TINTO INDIA PVT. LTD. ..... Respondent Through: Mr. Nageshwar Rao & Ms. Sayaree Basu Mallik, Advocates. CORAM: MR. JUSTICE S. RAVINDRA BHAT MR. JUSTICE R.V. EASWAR MR. JUSTICE S.RAVINDRA BHAT % 1. The present common judgment will dispose of five appeals. The following common question of law arises for consideration: "Did the Tribunal fall into error in holding that the assessment order for AY 1998-99 was conclusive on the issue of date of commencement of the assesse's business for the purpose of determining its tax liability." 2. The brief facts necessary to decide the case are that the assessee was incorporated on 19.12.1996 to provide technical services for and give technological support to the Indian mining industry. It claimed commencement of business with effect from 01.07.1997. Upon Page 2 examination of its income tax returns, the AO directed certain queries with regard to the income and expenditure claimed by it. In reply, by its letter dated 24.01.2001, the assessee claimed that it commenced business on 01.07.1997 and that its Bangalore office was functional in April 1997 for which capital was received in that year. It further stated that in July 1997, personnel were recruited and that discussions with clients for rendering consultancy services were initiated prior to July 1997. It was also seeking opportunities to provide services for mining and related projects in India. The assessee claimed as expenditure, incurred under several heads – travel and conveyance, consultancy expenses, salary, wages, bonus, postage, telephone and telex, business promotional expenses and rent. It claimed that being a service provider, it needed good infrastructure and personnel with expertise in the field. Consequently, it had to make its presence felt in the market and expenses were mainly incurred for business promotion purposes during that year. The assessee entered into a contract with CIDCO and filed a copy of the same and also mentioned about another contract with RIO TINTO Orissa limited w.e.f. 01.06.1996. 3. The AO, by his order dated 01.02.2001, confirmed the assessment for the concerned Assessment year 1998-99 after considering the assessee's expenses. The AO concluded as follows: "5.2 The submissions of the assessee were considered. The assessee itself had submitted that such a heavy expenditure was incurred as the year under consideration is the first year of operations of the assessee and that the company had to prove in the market that it had sufficient infrastructure to provide services. From the reply of the assessee, it is inferred that such expenditure was incurred Page 3 primary to kick start the business, hence, benefit of enduring nature was likely to be obtained. Therefore, such expenditure cannot be allowed as a revenue expenditure as such expenditure has been incurred by the assessee to create an infrastructure for facilitation of future business, hence, benefit of enduring nature was imposed to be derived. However, it cannot be denied that some expenses would be required under the stated heads for running the day-to-day business of the company. Therefore, 20% of these sums of (total Rs.3,77,15,537/-) i.e. Rs.5,43,707/- is allowed while computing the total income of the assessee company. The balance amount of Rs.3,01,74,830/- is disallowed as expenses of capital nature." 4. The assessee carried the matter in appeal to the CIT(Appeals), who accepted its contentions and held that the individual items of expenses though substantial were incurred on business operations at the initial stage and were, therefore, revenue in nature. The reasoning of the appellate commissioner is found in the following extract of his order, allowing the assessee's appeal: "......Substantial expenses have bee