2015 (10) TMI 1873 - AT - Income Tax

Allowance of pre-operative expenses against the income from other sources - setting up off business losses against the income under the head income from other sources - Held that - The Assessing Officer had not determined the business losses by holding that the respondent assessee company had not commenced his business operations and he doubted the trading activities carried on by the assessee company on the ground that the trading activity allegedly had been carried as a sham since the sales were made prior to the purchase of beer. From the order of learned CIT(A), it is clear that though he accepted in principle that the respondent assessee company commenced the business operations and allowed the set off the loss so incurred against the income from other sources but he failed to examine the relevancy of the expenditure claimed on the trading account. Therefore, we restore the matter to the file of the Assessing Officer with the direction that if the expenditure claimed is directly relatable to the trading activity, the same may be allowed as a business loss which can be set off against the income from other sources. With these directions, the appeal filed by the Revenue is partly allowed for statistical purposes.

Summary

Issues:
1. Allowance of pre-operative expenses against income from other sources.
2. Validity of business losses set off against income from other sources.

Analysis:
1. The appeal was filed by the Revenue challenging the order of the CIT(A) for the assessment year 2008-09. The respondent company, engaged in manufacturing and trading of alcoholic beverages, claimed expenses related to setting up a manufacturing plant and trading activities. The Assessing Officer disallowed expenses and taxed interest income from bank deposits. The CIT(A) allowed the appeal, stating that expenses directly linked to manufacturing were capitalized, while others were for business purposes. The High Sea Sales transaction was scrutinized, and the CIT(A) found no reason to treat the business expenses as capital in nature. The appeal was allowed, and the business loss set off against income from other sources was permitted.

2. The Revenue contended that the respondent's claim was bogus, as sales allegedly preceded purchases, making the transactions sham. The authorized representative argued purchases were made before sales, supporting the CIT(A)'s order. The Tribunal noted no dispute on taxing interest income but disagreed on setting off business losses. The Assessing Officer had not properly determined business losses, doubting the legitimacy of trading activities. The Tribunal directed a re-examination of claimed expenditures related to trading activities, allowing them as business losses if directly linked. The appeal by the Revenue was partly allowed for statistical purposes.

In conclusion, the Tribunal upheld the CIT(A)'s decision to allow pre-operative expenses against income from other sources and directed a re-evaluation of business losses set off against income from other sources. The judgment clarified the treatment of expenses related to manufacturing and trading activities, emphasizing the need for a direct link between claimed expenditures and business operations for set off purposes.