2006 (2) TMI 141 - HC - Income Tax

Expenditure u/s 37 commencement of business - the authorities below had given a finding that the assessee had commenced the business. For the purpose of development of the projects of construction, the assessee had to necessarily maintain regular staff members, on which it had been incurring expenses. The office expenses that had been incurred were clearly of revenue nature. Considering the reasons recorded by the Tribunal and based on the valid materials and evidences, the same does not suffer from any legal infirmity. Tribunal was right in holding that the expenses claimed by the assessee could be allowed, even at the stage of development of the projects - Tribunal was right in allowing business expenditure

Summary

Issues:
1. Allowability of expenses claimed by the assessee during the development stage of projects.
2. Allowability of business expenditure prior to the actual commencement of business.

Analysis:

Issue 1:
The court addressed the first issue of whether the Tribunal was correct in allowing the expenses claimed by the assessee during the development stage of projects. The assessee, a company promoting time share units, had claimed expenses during the assessment years 1992-93 and 1994-95. The Assessing Officer initially rejected the claim of loss, stating that the assessee had not engaged in any business activity. However, the Commissioner of Income-tax (Appeals) accepted the contention of the assessee, leading to an appeal by the Revenue to the Income-tax Appellate Tribunal. The Tribunal upheld the decision of the Commissioner of Income-tax (Appeals). The court noted that the completion of construction was not necessarily an indicator of the commencement of the company's business. The assessee had already taken steps such as setting up operating offices and launching publicity campaigns, indicating the commencement of business. The court found that the expenses incurred by the assessee were of revenue nature and were necessary for the development of the projects. Based on valid materials and evidence, the court concluded that the Tribunal's decision did not have any legal infirmity. Therefore, the court ruled in favor of the assessee on this issue.

Issue 2:
The second issue involved the allowability of business expenditure prior to the actual commencement of business. The Revenue argued that since the assessee had not offered any receipts towards sales and had not commenced business based on its return, the expenses claimed should not be allowed. However, the court emphasized that the assessee had taken significant steps towards commencing business, such as setting up offices, launching publicity campaigns, and starting construction. The court agreed with the lower authorities that the assessee had indeed commenced business activities. The expenses incurred by the assessee were considered necessary for the development of the projects, and the court found no legal flaw in the Tribunal's decision to allow these expenses. Therefore, the court ruled in favor of the assessee on this issue as well.

In conclusion, the High Court of Madras dismissed the appeals filed by the Revenue under section 260A of the Income-tax Act, 1961, against the order of the Income-tax Appellate Tribunal. The court upheld the Tribunal's decision to allow the expenses claimed by the assessee during the development stage of projects and prior to the actual commencement of business. The court found that the assessee had taken substantial steps towards commencing business activities, justifying the allowance of the expenses.