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2013 (7) TMI 335 - HC - Income TaxSet Off u/s 37 - Capital expenditure versus revenue expenditure - date of Commencement of business - Held that - in the case of CIT Vs. L.G. Electronic (India) Ltd. 2005 (5) TMI 30 - DELHI High Court , it has been observed that the date of setting up of business and date of commencement of business may be two separate dates. This decision in the case of L.G. Electronics (supra) has been followed in CIT Vs. ESPN Software India P. Ltd., 2008 (3) TMI 90 - DELHI HIGH COURT wherein it has been held that a business will commence with the first purchase of stock-in-trade and the date on which the first sale is made is immaterial. Similarly, for manufacturing, several activities in order to bring or produce finished products have to be undertaken, but business commences when the first of such activities is taken. Assessing Officer and the first appellate authority did not specifically go into the factual matrix relating to and to ascertain the date of setting up of business, though order of the first appellate authority is more detailed and elaborate - Decided against Revenue with cost of ₹ 10,000/-
Issues:
1. Whether the expenses claimed by the assessee are revenue or capital in nature. Analysis: The Revenue challenged the findings of the Income Tax Appellate Tribunal regarding the assessee's entitlement to claim and set off expenses of Rs.34,95,606. The Revenue argued that the expenses were capital in nature as they were "set up" expenses. The Tribunal directed the Assessing Officer to allow the revenue expenditure incurred after the setting up of the business, which was determined to be on 3rd September, 1995, despite the fact that commercial operations started on 1st October, 1995. The Respondent-assessee, a joint venture company, was incorporated on 3rd August, 1995, and started its commercial operations on 1st October, 1995. The expenses in question were incurred between 3rd August, 1995, and 30th September, 1995. The Revenue contended that these pre-setup expenses were capital in nature and should not be allowed under Section 37 of the Income Tax Act. The Assessing Officer and the CIT (Appeals) disallowed the expenses, citing judicial pronouncements. However, the High Court noted that the Assessing Officer did not delve into the factual matrix to determine the actual date of setting up of the business. The CIT (Appeals) observed that the date of incorporation does not necessarily indicate the date of setting up operations. The Tribunal's findings, based on factual examination, were deemed non-perverse. The Tribunal considered various factors, such as recruitment, training, establishment of showrooms, and advertisements, to ascertain the date of setting up of the business. The High Court referenced the distinction between "commencement" and "setting up" of a business as discussed in the Bombay High Court case of Western India Vegetables Products Ltd. v. CIT. The Court highlighted that expenses incurred after the setting up of the business but before the commencement of business are permissible deductions. Relying on precedents, the High Court emphasized that the date of setting up of business and commencement of business could be separate. The decision of the Tribunal was upheld, emphasizing the importance of factual findings. The High Court dismissed the appeal, stating that no substantial question of law arose, and the Revenue could not succeed based on the factual findings of the Tribunal.
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