2014 (11) TMI 1144 - AT - Income Tax

Disallowance of business expenses - assessee had not commenced its business during the relevant accounting period - whether the most of work done during the year is capital work in progress for acquiring fixed assets? - Held that - On the ground that the assessee has obtained approval of the said special economic zone from the Ministry of Commerce and as the assessee entered into an agreement with TCS for the lease of the SEZ area, is proof of the facts that the assessee has set up his business, the first appellate authority directed the AO to allow the revenue expenditure incurred by the assessee. We find no infirmity in this order of the first appellate authority. - Decided against revenue

Summary

Issues involved:
Appeal against disallowance of business expenses for a company engaged in SEZ project for assessment year 2009-10.

Analysis:
The appeal was filed by the revenue against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance of expenses claimed by the assessee company engaged in an SEZ project. The company had declared a loss in its income tax return for the relevant year. The Assessing Officer disallowed the expenses on the grounds that the company had not commenced its business during the accounting period. However, the company argued before the first appellate authority that it had indeed started its SEZ business by recruiting staff, obtaining bank loans, purchasing land, and receiving necessary approvals. The first appellate authority agreed with the company's contention and granted relief. Additionally, it held that if the company had not commenced its business, the interest received on fixed deposits should be set off against pre-operative expenses.

The revenue appealed against the decision on the grounds that the company had not commenced its business during the relevant period and most of the work done was related to acquiring fixed assets. During the hearing, the revenue and the assessee presented their arguments. The Tribunal, after considering the facts and records, held that the expenses claimed by the assessee were revenue expenses related to business promotion, office maintenance, traveling, and salaries. The Tribunal noted that the company had purchased land, started development, obtained necessary approvals, and engaged in promotional activities. The Ministry of Commerce had approved the SEZ, and the Government of India had notified it as an IT and ITES SEZ. The Tribunal observed that the expenses not directly linked to construction were revenue expenses and should be allowed. The Tribunal cited precedents to support its decision, including judgments from the High Courts.

The Tribunal highlighted that the first appellate authority had correctly assessed the situation where the company had set up its business based on the systematic business activities it had undertaken, such as staff recruitment and commercial agreements. The Tribunal referred to the Delhi High Court's decision in a similar case to support its conclusion. Ultimately, the Tribunal found that the company had indeed set up its business, as evidenced by the approval of the SEZ and the agreement with Tata Consultancy Services. Therefore, the Tribunal dismissed the revenue's appeal and upheld the first appellate authority's decision to allow the revenue expenditure incurred by the company.