2009 (9) TMI 928 - HC - Income Tax

Expenditure claimed against Meagre income - Disallowance of Expenditure u/s 35D - expenditure included salary paid to the employees travelling cost and administrative and other operating expenses - expenses incurred before the commencement of the business - AO had not doubted that the expenditure was in fact incurred however from the huge expenditure against minimal income only an inference was drawn that the business of the assessee had not commenced during the year as no revenue earning project had started. On this basis the expenditure was treated as pre-operative expenditure and therefore according to the AO it should have been at best be capitalized as pre-operative expenses. CIT (A) reversed the finding of the AO and which finding has been confirmed by the ITAT. ITAT has reproduced the relevant portion of the discussion contained in the order of the CIT(A) which would indicate that the assessee is in the business of development of software for various industries and as a policy decision it had decided to pursue only prestigious companies in India and for the purpose of getting orders it had recruited various skilled personnel. HELD THAT - This was clearly a wrong approach as rightly observed by the CIT(A) who opined that in an industry like software development business activities start with pursuing of the companies to get orders and all activities carried out to get such orders being incidental to the business activities would be regarded as for the purpose of business and not for setting up of the business. The CIT(A) also recorded the reasons on the basis of which it arrived at the finding that the business had in fact started. As to when the activity is deemed to be undertaken as part of business activity and the expenses incurred are to be allowed as business expenses the CIT(A) referred to and relied upon the judgment of the Gujarat High Court in the case of CIT v. Saurashtra Cement Chemical Industries Ltd. 1972 (8) TMI 19 - GUJARAT HIGH COURT and that of the Calcutta High Court in Tetron Commercial Ltd. v. CIT 2003 (1) TMI 67 - CALCUTTA HIGH COURT Referring to Saurashtra Cement Chemical Industries Ltd. s case (supra ) the CIT(A) stated that tests were laid down by the Gujarat High Court in that case to determine the commencement of business activities. Revenue submits that when the expenses were huge such expenses need to have been amortized under the provisions of section 35D. However this is clearly a misconceived and erroneous argument inasmuch as it predicates on the premise that the expenditure in question is incurred before the commencement of the business. When a finding of fact is recorded in the instant case that in the relevant assessment year business had already commenced the provisions of section 35D would not get attracted at all. We therefore find that no question of law arises and dismiss the appeal. In favour of assessee

Summary

In this judgement from the Delhi High Court, the case revolves around the assessment year 2003-04, where the respondent declared a loss of Rs. 2.48 crores. The Assessing Officer disallowed expenditures of Rs. 2.53 crores due to the meager income generated. The main issue was whether these expenses were justifiable as revenue expenditure or should be capitalized as pre-operative expenses. The Commissioner of Income-tax (Appeals) reversed the AO's decision, stating that the business had indeed commenced, as the company was actively pursuing prestigious clients. The Income-tax Appellate Tribunal upheld this decision. The Tribunal emphasized that expenses for business activities are deductible even if no immediate income is generated. The court dismissed the appeal, concluding that no question of law arose. The judgement highlights the importance of considering business context when determining the allowability of expenses.