Facts of the Case

The appeal was filed by the Revenue under Section 260A against the order of the Income Tax Appellate Tribunal concerning Assessment Year 2008–09.

The respondent-assessee, M/s Bharti Ventures Ltd., filed its return declaring a loss of ₹7.06 crores. The Assessing Officer disallowed the entire business expenditure on the ground that the assessee had not commenced business activity during the relevant assessment year, as there were no fixed assets, no receipts, and no direct operational activities.

The assessee contended that its main object, as per the Memorandum of Association, was to undertake and promote businesses including telecom services, call centres, IT infrastructure, and other ventures. It had made investments in subsidiary companies engaged in such businesses, which constituted carrying on business activities.

Issues Involved

  1. Whether the assessee can be said to have “set up” its business when it has not directly commenced operations but has invested in subsidiaries engaged in its main objects.
  2. Whether business expenditure is allowable when business is carried out through investments in subsidiary companies.

Petitioner’s Arguments (Revenue)

  • The assessee had not commenced any business activity during the relevant assessment year.
  • There were no fixed assets, receipts, or operational activities.
  • Therefore, the business could not be considered as “set up,” and expenses were not allowable.

Respondent’s Arguments (Assessee)

  • The company was established to carry out specified business activities as per its Memorandum of Association.
  • Investments were made in subsidiary companies engaged in the same line of business.
  • Such investments constituted business activity and demonstrated that the business had been set up.
  • Reliance was placed on judicial precedent including S.A. Builders Ltd. vs. Commissioner of Income Tax (Appeals) (2007) 288 ITR 1 (SC).

Court’s Findings / Order

  • The Court upheld the findings of the Commissioner of Income Tax (Appeals) and the Tribunal.
  • It was held that:
    • There is no requirement that the assessee must directly carry out business operations.
    • Business can be conducted through subsidiary companies engaged in the same line of activity.
    • Investments in subsidiaries aligned with the objects of the company constitute business activity.
  • The Court noted that similar business activity had been accepted by the Department in subsequent assessment years under Section 143(3).
  • Accordingly, the appeal of the Revenue was dismissed.

Important Clarification

  • The concept of “setting up of business” does not mandate direct operational activity.
  • Strategic investments in subsidiaries carrying out the core business objectives are sufficient to establish that business has been set up.
  • Expenses incurred post such setup are allowable as business expenditure.

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2018:DHC:7864-DB/AJB13122018ITA6112018.pdf

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