Per Asha Vijayaraghavan, J.M. Both these appeals are directed against the orders of the CIT(A)-9, Mumbai (Camp at Hyderabad) dated 12.02.2013 relating to A.Ys 2004-05 & 2005-06. ITA No.551/Hyd/2013- A.Y 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 31.10.2004 for A.Y 2004-05 disclosing loss of Rs.6,64,940/-. The said return of income was processed u/s 143(1) of the Act. Thereafter the AO issued a notice u/s 148 of the Act recording the reasons that the assessee had debited expenditure of Rs.24,82,147/- without earning any ITA Nos. 551 & 552 of 2013 SPPS Systems Private Ltd Hyderabad. Page 2 of 8 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 u/s 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 A.Y 2004-05. The AO held that there was no business activity at all carried on by the assessee. The AO further held that the assessee himself has offered interest income under the head income from other sources and therefore, no expenses can be allowed u/s 37 of the Act. However, the AO allowed a sum of Rs.3.00 lakhs u/s 57(iii) of the Act against the interest income of Rs.14,85,280/- assessed u/s 56 of the Act under the head income from other sources. Aggrieved, the assessee filed appeal before the CIT (A). It was argued by the Authorised Representative for the assessee that the AO should have allowed the entire expenditure debited to the P&L a/c, because the assessee company was not closed. It was also submited 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 CIT (A) after going through the orders of the AO upheld that reopening u/s 147 of the Act was valid and held that the AO had assumed valid jurisdiction to frame reassessment, thus confirming the action of the AO. ITA Nos. 551 & 552 of 2013 SPPS Systems Private Ltd Hyderabad. Page 3 of 8

4. The CIT (A) 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 u/s 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 u/s 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: (i) CIT vs. Gemini Cashew Sales Corporation (1967) 65 ITR 643 , 650 (SC) (ii) Grain Chamber Ltd vs. CIT (1962) 46 ITR 217 (All) (iii) Ram Chandra Munna Lal vs. CIT (1949) 17 ITR 394 (East Punj) Under the circumstances, the expenditure has correctly not been allowed by the AO. It is further observed that the AO has allowed estimated deduction of Rs.3 lacs u/s 57(iii) of the Act. Having considered the rival submissions, it is decided that the ends of justice would be met if the deduction u/s 57(iii) of the Act is allowed at 25% of the expenditure of Rs.24,82,147/- debited in the appellants P&L a/c. In other words, the appellant shall get deduction of expenditure of Rs.6,20,536/- instead of Rs.3 lacs allowed by the AO. Therefore, the appellant will get a further relief of Rs.3,20,536/-. Interest u/s 234A and 234B to be levied as per law. Grounds of appeal No.3,4,5 & 6 are partly allowed. ITA Nos. 551 & 552 of 2013 SPPS Systems Private Ltd Hyderabad. Page 4 of 8

5. Thus, the CIT (A) partly allowed the assessees appeal. Aggrieved the assessee is in appeal before us.

6. The ld 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 USA 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 31.3.2004 and Rs.16,09,512/- for the financial year ended on 31.3.2005. Based ITA Nos. 551 & 552 of 2013 SPPS Systems Private Ltd Hyderabad. Page 5 of 8 on the final accounts, it filed the returns of income on

31.10.2004 and 30.11.2005 respectively for the A.Ys 2004-05 and 2005-06.

8. The ld Counsel pointed out that the AO completed the assessment u/s 143(3) for the A.Y 2005-06 and u/s 147 for the A.Y 2004-05 and according to the AO there was no business activity and the expenditure debited is not allowable. The AO estimated the probable expenditure to be allowed at Rs.3.00 lakhs for both the years and deducted the same from the income from other sources.

9. The ld Counsel stated that he was not pressing the grounds against presumption of jurisdiction u/s 148 for reopening the assessment which was confirmed as valid by the CIT (A). It was submitted that the AO 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. The ld Counsel further relied on the decisions of the Honble Rajasthan ITA Nos. 551 & 552 of 2013 SPPS Systems Private Ltd Hyderabad. Page 6 of 8 High Court in the case of CIT vs. Stones and Mineral Associated Ltd reported in 257 ITR 479 wherein 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 Honble High Court held that expenditure incurred for procuring material is allowable as business expenditure as there is a commencement of business activity.

10. The Honble Gujarat High Court in the case of CIT vs. Saurastra Cement and Chemical Industries reported in 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 Honble Supreme Court in the case of CIT vs. Sarabai Management Corporation Ltd reported in 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. ITA Nos. 551 & 552 of 2013 SPPS Systems Private Ltd Hyderabad. Page 7 of 8

12. The ld Counsel further highlighted that perusal of the P&L a/c for both the 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 ld DR supported the orders of the AO and the ld CIT (A).

13. We heard both the parties. Reliance is placed on the decision of the Mumbai Bench of ITAT in the case of Accor Radhakrishna Corporate Services (P) Ltd vs. JCIT reported in 13 SOT 652. In the case of ACIT vs. Lafarge India Holding Pvt. Ltd reported in 19 SOT 121 it has been held as follows: 8. We find that the Honble Supreme Court in the recent judgment in the case of S.A. Builders Ltd v. CIT (2007) 288 ITR 1 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 AO 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 ld CIT (A) to this extent. Following the ratio of above said decision, we are of the opinion that the AO has erred in rejecting the business loss of assessee admitted in the return of income. The AO should have appreciated that there was business activity, though there was no revenue during the previous year under consideration. Hence, ITA Nos. 551 & 552 of 2013 SPPS Systems Private Ltd Hyderabad. Page 8 of 8 in our opinion the expenditure is relatable to the business activity and the same is allowable as a deduction.

14. In the result appeal in ITA No.551/Hyd/2013 is allowed. ITA No.552/Hyd/2013

15. The facts for the A.Y 2005-06 in ITA No.552/Hyd/2013 are identical to those of ITA No.551/Hyd/2013 for the A.Y 2004-05 hence the same conclusions in Para 13 is to be followed in this appeal before us.

16. In the result, both the appeals are partly allowed. Order pronounced in the Open Court on 9 th January, 2015. Sd/- Sd/- (P.M. Jagtap) (Asha Vijayaraghavan) Accountant Member Judicial Member Hyderabad, dated 9 th January, 2015. Vnodan/sps Copy to:

1. Shri S. Rama Rao, Advocate, Flat No.102, Shriyas Elegance, H.No.3-6-643, St. No.9, Himayatnagar, Hyderabad 500029

2. Dy. Commissioner of Income Tax, Circle-3(2) Hyderabad

3. The CIT(A) IV Hyderabad

4. The CIT Hyderabad

5. The DR, ITAT, Hyderabad

6. Guard File By Order