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2010 (4) TMI 769 - AT - Income TaxDisallowance - Expenditure incurred for the training of the staff etc.- Since the staff had been recruited it was not ready for rendering services as the staff had to be trained with the systems - The assessee had not taken premises on rent and therefore installation of computer therein had not been done - Therefore the assessee was not in a position to solicit custom till the end of May 2004. The advances were received from the parent company but these were used for training the personnel and paying salaries and incidental charges necessary for setting up the business - Thus in a nutshell it is held that a business is set up when it reaches a stage where it is in a position to procure business and not before. However the expenditure becomes deductible from such stage irrespective of the date of actual receipt of the business - Therefore it is held that the business had not been set up till the end of May 2004 - Accordingly the assessee is not entitled to deduction of these expenses. Higher rate of depreciation - Computers - UPS - Held thst - As per the decision of Hon ble Delhi High Court in the case of CIT v. BSES Rajdhani Power Ltd. 2010 -TMI - 78240 - DELHI HIGH COURT in which higher rate of depreciation was allowed on printers and scanners - If peripherals such as printers scanners and servers etc. form integral part of the computer system we have no hesitation in holding that UPS is also an integral part of the computer system entitled for deduction of depreciation at the rate of 60 per cent - Tribunal held that computer accessories and peripherals such as printers scanners and server etc. form an integral part of the computer system - In fact the computer accessories and peripherals cannot be used without the computer - Consequently as they are the part of the computer system they are entitled to depreciation at the higher rate of 60 per cent.
Issues Involved:
1. Deductibility of pre-commencement expenditure. 2. Rate of depreciation on UPS. Issue-wise Detailed Analysis: 1. Deductibility of Pre-commencement Expenditure: The primary issue is whether the expenditure of Rs. 59,02,448 incurred by the assessee in April and May 2004 is deductible in computing the income. The Assessing Officer (AO) contended that this expenditure was incurred before the business was set up and commenced, hence not deductible. The assessee argued that the business had commenced in April 2004, supported by evidence of employee recruitment, salary payments, and other operational expenses. The learned CIT(A) allowed the appeal of the assessee, concluding that the business was set up in April 2004 based on various evidences such as the agreement for using premises for training, recruitment of employees, and payment of related expenses. The Tribunal considered several precedents, including: - Akzo Nobel Car Refinishes India (P.) Ltd. v. Dy. CIT [2008] 25 SOT 226: The Tribunal noted that mere incorporation and appointment of directors are insufficient to conclude that the business had been set up. - CIT v. E-Funds International India [2007] 162 Taxman 1 (Delhi): The Tribunal distinguished this case by noting that the assessee had acquired infrastructure and employed personnel, which indicated business commencement. - CIT v. Club Resorts (P.) Ltd. [2006] 287 ITR 552 (Madras): The Tribunal observed that the business involved multiple stages, including setting up offices and launching publicity campaigns, which had already started. - CIT v. Whirlpool India Ltd. [2009] 318 ITR 347 (Delhi): The Tribunal upheld that the business was set up when the company was ready to commence activities by appointing key personnel and acquiring necessary infrastructure. The Tribunal concluded that the business was set up in June 2004 when the assessee was in a position to render services after training the staff and acquiring its own office. The expenses incurred before this period were not deductible as they were considered pre-commencement expenses. 2. Rate of Depreciation on UPS:The second issue pertains to the rate of depreciation applicable to UPS. The AO allowed depreciation at 25%, whereas the assessee claimed 60%. The Tribunal referred to the decision of the Hon'ble Delhi High Court in CIT v. BSES Rajdhani Power Ltd. [I.T. Appeal No. 1266 (Delhi) of 2010, dated 31-8-2010], where higher depreciation was allowed on computer peripherals such as printers and scanners. The Tribunal concluded that UPS, being an integral part of the computer system, is entitled to depreciation at the higher rate of 60%. Conclusion:In summary, the Tribunal held that the business was not set up until June 2004, and therefore, the pre-commencement expenses incurred in April and May 2004 were not deductible. However, the Tribunal allowed the higher rate of depreciation (60%) on UPS, recognizing it as an integral part of the computer system. Consequently, the appeal was partly allowed.
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