2012 (12) TMI 525 - AT - Income Tax

Determination of cut-off date to determine pre-operative expense AO s view is that date of commencement of business is the date of set up of business and such date is relevant to determine the nature of expenditure incurred Assessee s view is that date of set up of the business is when some consultants were appointed for advice about the feasibility Held that - As revenue expenses incurred after the setting up of business and prior to its commencement are an allowable expense. Mere appointment of consultants, in itself does not mean anything in line of business. There are host of other activities which are required to be undertaken/ performed before the business can be stated to have actually been set up line of business. - even the road show conducted for launching of the project were only promotional activities and are therefore pre-operational in nature. The date of setup of the business should be 1.1.2003 and hence all the expenses which the assessee has incurred after 1.1.2003 whether on the payment of consultants or on rent or on staff salary or all other expenses of revenue nature etc. should be allowed as deduction, as against from 7.3.2003 taken by the Assessing Officer. All expenses incurred form 1.4.2002 to 31.12.2002 should be treated as pre-operative expenses and should be capitalized on which the assessee is entitled to get depreciation at the applicable rates. - Order of CIT(A) sustained.

Summary

Issues Involved:
1. Determination of the date of setting up the business.
2. Allowability of pre-operative expenses.
3. Classification of certain expenses as capital or revenue.

Issue-wise Detailed Analysis:

1. Determination of the Date of Setting Up the Business:
The primary issue was to ascertain the correct date when the business of the assessee was set up. The assessee argued that the business was set up on 1.4.2002 when consultants were appointed. The Assessing Officer (AO) determined the date of commencement as 7.3.2003, based on the first public show. The Ld. Commissioner of Income Tax (A) held that the business was set up on 1.1.2003, considering the occupation of the cinema building, agreements with distributors, installation of telephone lines, and trial runs conducted in December 2002. The Tribunal upheld this decision, agreeing that the date of 1.1.2003 was judiciously determined after examining the various agreements and documents provided by the assessee.

2. Allowability of Pre-Operative Expenses:
The AO disallowed expenses incurred before 7.3.2003, treating them as pre-operative. The assessee contended that expenses incurred after setting up the business should be allowed as revenue expenses. The Ld. Commissioner of Income Tax (A) agreed with the assessee, stating that expenses incurred after 1.1.2003, the date of setting up the business, should be allowed as revenue expenses. Expenses incurred from 1.4.2002 to 31.12.2002 were to be treated as pre-operative and capitalized, with depreciation allowed at applicable rates. The Tribunal upheld this decision, affirming that the expenses incurred after 1.1.2003 were rightly allowed as revenue expenses.

3. Classification of Certain Expenses as Capital or Revenue:
The AO classified several expenses as capital in nature, including consultancy fees paid to Ms. Kajal Aijaz and Mr. Rajiv Sekhri, and rent for the period before 7.3.2003. The Ld. Commissioner of Income Tax (A) reclassified these expenses based on the date of setting up the business. Consultancy fees and rent incurred after 1.1.2003 were allowed as revenue expenses, while those incurred before were treated as pre-operative and capitalized. The Tribunal upheld this classification, agreeing with the Ld. Commissioner of Income Tax (A)'s approach and findings.

Conclusion:
The Tribunal dismissed both the appeals filed by the Revenue and the Assessee, upholding the decision of the Ld. Commissioner of Income Tax (A). The date of setting up the business was determined to be 1.1.2003, and expenses incurred after this date were allowed as revenue expenses. Expenses incurred before this date were treated as pre-operative and capitalized, with depreciation allowed at applicable rates. The classification of certain expenses as capital or revenue was also upheld based on this determination.