2005 (5) TMI 554 - AT - Income Tax

Summary

Issues:
- Disallowance of expenditure for assessment year 2001-02
- Commencement of business and deductibility of expenses

Analysis:
- The appeals were against the orders of the CIT(A) confirming the disallowance of expenditure by the Assessing Officer for the assessment year 2001-02. The disallowed amounts were Rs. 2,70,661 and Rs. 2,62,915 in the respective cases. The dispute arose as the Assessing Officer contended that the business had not commenced, hence the claimed expenses were not allowable deductions.

- Both assessees were involved in land development in Gurgaon. They filed returns declaring 'nil' income but had book profits under section 115J. The administrative expenses claimed were disallowed by the Assessing Officer, who considered that the business had not started as no land sales had occurred. The interest income declared was deemed unrelated to the business, leading to the disallowance of expenses.

- The CIT(A) upheld the Assessing Officer's decision, stating that acquiring land and obtaining licenses did not signify the commencement of business. The expenses were disallowed under section 37(1) as the business had not started. The interest income was categorized as non-business income. The assessees appealed these decisions.

- The Tribunal referred to precedents to determine the commencement of business. It was established that setting up a business, not its commencement, was crucial. The purchase of land for development was considered the start of business. The assessees had licenses, agreements with buyers, and received advances, indicating business commencement. Therefore, the deduction for administrative expenses was allowed, and the appeals were granted in favor of the assessees.

- The Tribunal emphasized that the assessees had indeed commenced their business based on the evidence presented. The licenses obtained, agreements made, and advances received supported the conclusion that the business operations had begun. Consequently, the deduction for administrative expenses was deemed allowable, and the appeals were upheld in favor of the assessees.