2014 (4) TMI 999 - AT - Income Tax

Disallowance of loss claimed under Chapter IV-D of the Act Company only at setting up stage - Whether the assessee company can be said to have set up its business during the relevant year and, if so, when Held that - The company claims to have appointed MD as well as Chief Operations Manager, putting the infrastructure in place by acquiring office premises, staff, furniture and fittings, etc. - No grant of any operational lease by the year end should not be of any consequence - if the infrastructure has indeed been set up and the company is in position or is ready to grant operational leases, which is to comprise its principal business and that toward the commencement of which line of business efforts were made, it can be said to have set up its business - the assessee s case is wholly unsubstantiated - The only material on record is toward the appointment of MD, even though there is some doubt in its respect inasmuch as the resolution by the Board of Directors of the company confirming his appointment is dated 17.02.2007. No proper answers emanate from either the material on record or the assessee s explanations, with the expenses as incurred itself revealing the state of preparedness of the company toward commencing its business can be taken out - the company is clearly in the setting up stage - it is only the expenditure, post set-up, that could be claimed as a business expenditure, while the company has claimed the entire expenditure incurred by it since inception, including as it appears expenditure on its incorporation itself, which are only capital costs - No case for allowance of the assessee s claim u/s. 37(1) or section 32(1) is made out Decided against Assessee.

Summary

Issues:
1. Disallowance of claimed loss under Chapter IV-D of the Income Tax Act, 1961.

Analysis:
The judgment by the Appellate Tribunal ITAT Mumbai revolves around the issue of the maintainability of the disallowance of a loss claimed by the assessee under Chapter IV-D of the Income Tax Act, 1961. The assessee, a company incorporated to operate carriers and provide vehicle-related services, claimed business loss and depreciation in its return of income for the assessment year 2005-06. However, the claim was disallowed as the business activity had not commenced during the year, and the expenses incurred were not allowable. The Tribunal reviewed various legal precedents, including decisions by the courts, to determine the criteria for a business being considered "set up" and ready to commence operations. It was established that expenses incurred before the business is set up are not deductible. The Tribunal emphasized that the company must be in a position to discharge its functions and have the necessary infrastructure in place to be considered set up. In this case, the company's claim was found to be unsubstantiated, lacking evidence of essential operational preparations such as staff appointments, office premises acquisition, and regulatory compliance. The Tribunal concluded that the company was still in the setting-up stage and therefore, the claimed expenses were not allowable as business expenditure. The appeal by the assessee was dismissed based on the lack of substantiated evidence supporting the claim. The judgment highlights the importance of factual and functional analysis in determining the allowability of business expenses under the Income Tax Act.

In summary, the Tribunal's decision focused on the distinction between setting up a business and commencing business operations, emphasizing the need for a company to be fully prepared and operational before claiming expenses as business deductions. The judgment underscored the significance of providing concrete evidence of operational readiness and compliance with regulatory requirements to support claims for business losses and depreciation. The lack of substantiated evidence led to the dismissal of the assessee's appeal, highlighting the importance of factual substantiation in tax-related matters.