2014 (1) TMI 1598 - AT - Income Tax

Ddetermination of date commencement of business - Application for admission of additional evidences under Rule 29 of the Appellate Tribunal Rules, 1963 Held that - The assessee-appellant is working on a project, the KYC project, and which would only be in pursuance to some agreement or understanding, with one or more entities, its customers - What is the critical stage or point of time when the project is or can be said to be complete, so that it is ready to be delivered or in an operable state, would need to be determined, and which can only be on the basis of hard facts and evidences - The matter is clearly factual - there has to be a matching of the expenditure with the revenue, so that the relevant costs can be set off there-against - if a particular cost has no direct bearing on the revenue, but stands incurred all the same, the same would need to be written off in the year it is incurred - The matter needs to be properly examined, which it has not been at any stage - the blame falls clearly on the assessee inasmuch as the onus to prove its case or lead evidence in its respect is only on it - the matter requires proper examination after admission of the additional evidences as being sought to be admitted, as the matter has necessarily to be decided in accordance with the law. The assessee, on whom the onus to establish its claims lie, would also be at liberty to raise any additional claim before the A.O. In view of the said decision, we do not consider it necessary to admit the assessee s additional ground, which becomes infructuous. - The matter remitted back to the AO for fresh adjudication Decided in favour of Assessee.

Issues Involved:
1. Whether the assessee's business was set up during the assessment year 2007-08.
2. The admissibility of additional evidence and additional ground for depreciation.
3. The nature and treatment of various expenses claimed by the assessee.

Issue-wise Detailed Analysis:

1. Whether the assessee's business was set up during the assessment year 2007-08:

The primary issue in this case is whether the assessee's business was set up during the assessment year 2007-08. The assessee, a subsidiary of Central Depository Services (India) Limited, was incorporated on 25.09.2006 to operate and maintain a system for creating, holding, or maintaining information, records, documents, or databases in electronic form. The assessee's maiden project was the 'Know Your Client' (KYC) project for profiling investors of Mutual Funds. The assessee filed its return of income for the year on 22.10.2007, claiming a net loss of Rs.115.58 lacs mainly due to various expenditures.

The Assessing Officer (A.O.) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the assessee was in the process of setting up its business and had not commenced it during the relevant year. The A.O. argued that the preparation of the database and other expenditures were towards setting up the business, which was not completed by the year-end. The A.O. relied on the decision of the jurisdictional High Court in Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151 (Bom.), which states that a business can be said to be set up only when it is ready to commence. Consequently, the returned loss was assessed at nil, and the receipt of Rs.80,501/- was assessed as income from other sources.

2. The admissibility of additional evidence and additional ground for depreciation:

The assessee pleaded for the admission of additional evidence under Rule 29 of the Appellate Tribunal Rules, 1963, and cited various judicial precedents to support this claim. The assessee also sought to admit an additional ground for the allowance of depreciation on the impugned expenditure of Rs.116.69 lacs if considered as capital expenditure.

The Departmental Representative (DR) opposed the admission of additional evidence, arguing that the assessee had been given adequate opportunity by the authorities below and did not claim any lack of opportunity. The DR also opposed the claim for depreciation, stating that the assessee itself claimed no defined benefits from the expenditure, referring to Accounting Standard (AS-26).

3. The nature and treatment of various expenses claimed by the assessee:

The expenses claimed by the assessee included preliminary expenses, pre-operative expenses, operating expenses, other expenses, and depreciation. The A.O. and CIT(A) held that these expenses were incurred towards setting up the business and should be capitalized. The assessee, however, argued that these expenses were revenue in nature and should be deductible.

The Tribunal observed that there was no ambiguity in the law that a business can be said to be set up only when it is ready to commence. The Tribunal found the facts of the case to be indeterminate and noted that the critical stage or point of time when the project could be said to be complete and operable needed to be determined based on hard facts and evidence. The Tribunal emphasized the need to match the expenditure with the revenue and stated that all expenditure required to set up the project in an operable state should be capitalized.

The Tribunal concluded that the matter needed to be properly examined, which had not been done at any stage. The Tribunal allowed the admission of additional evidence and remanded the matter to the A.O. for fresh adjudication. The Tribunal also noted that the first appellate authority (FAA) has co-terminus powers to remedy any gaps and breaches in the assessment or decision-making process.

Conclusion:

The Tribunal set aside the issue to the file of the A.O. for fresh adjudication and allowed the assessee's appeal for statistical purposes. The Tribunal emphasized the need for proper examination of the facts and evidence to determine whether the assessee's business was set up during the relevant year and the appropriate treatment of the various expenses claimed. The order was pronounced in the open court on August 23, 2013.

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