2016 (2) TMI 341 - AT - Income Tax

Disallowance of office expenses - commencement of business - whether what is required to start is business as only setting up of the infrastructure and appointment of the directors and managers as well as other staff? - Held that - The assessee has already appointed its directors and the employees and also installed the requisite infrastructure for the purpose of carrying out the business activity of investment by procuring funds from its parent company and investing the same in the Indian group companies. Hence the assessee has already completed all the requisite acquisition and installation of facilities then the business of investment was set up by the assessee though it was commenced later on when the assessee has actually invested in the group of companies on 14.12.2011. It is a case of service/ investment company and not manufacturing or other production activity where a manufacturing facilities is required to be constructed prior to that the business cannot said to be set up. In view of the above facts and circumstances as well as the judgement of the Hon ble High Court I am of the considered view that the assessee has set up its business at the beginning of the financial year under consideration as the assessee was not require to do anything more whatever already completed for start of the business. Accordingly the claim of expenses is allowable claim. The orders of the authorities below are set aside and the claim of the assessee is allowed. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of legal and professional expenses.
2. Disallowance of salary expenses.
3. Disallowance of software expenses.
4. Validity of the order passed by the AO u/s 143(3) of the IT Act, 1961.
5. Non-acceptance of assessee's submissions during appeal proceedings.
6. Disallowance of excessive and ad hoc expenses.
7. Non-allowance of depreciation on disallowed expenses.
8. Overall validity of the CIT(A)'s order.

Detailed Analysis:

1. Disallowance of Legal and Professional Expenses:
The assessee contended that the legal and professional expenses of Rs. 1,83,090/- were statutory requirements for running the company, including statutory audit and RBI compliance. The AO disallowed these expenses, treating them as capital in nature, as the assessee had not commenced any business activity during the year. The Tribunal, referencing the case of CIT Vs. Whirlpool India Ltd., concluded that the business was set up when the necessary infrastructure and approvals were in place, even if business activities had not commenced. Therefore, these expenses were deemed allowable.

2. Disallowance of Salary Expenses:
The assessee claimed salary expenses of Rs. 1,31,158/- for marketing activities, with TDS duly deducted. The AO disallowed these expenses, treating them as capital in nature due to the absence of business activities. The Tribunal held that since the business was set up, these expenses were necessary for the company's operations and thus allowable.

3. Disallowance of Software Expenses:
The assessee incurred software expenses of Rs. 1,59,455/- for maintaining the communication system, essential for its operations. The AO disallowed these expenses, considering them capital in nature. The Tribunal found that the software was crucial for the company's communication with its parent company and thus an allowable expense.

4. Validity of the Order Passed by the AO u/s 143(3) of the IT Act, 1961:
The assessee argued that the AO's order was bad in law. The Tribunal did not find merit in this argument, as the primary issue was the nature of the expenses and whether the business had been set up. Since the Tribunal concluded that the business was set up, the focus remained on the allowability of expenses rather than the procedural validity of the AO's order.

5. Non-Acceptance of Assessee's Submissions During Appeal Proceedings:
The assessee claimed that the CIT(A) erred by not accepting its submissions. The Tribunal reviewed the submissions and found them consistent with the requirements for setting up the business. Thus, the Tribunal allowed the expenses, indirectly addressing the issue of non-acceptance by the CIT(A).

6. Disallowance of Excessive and Ad Hoc Expenses:
The AO allowed only Rs. 20,000/- out of the claimed expenses of Rs. 4,74,527/-, disallowing the remaining amount as excessive and ad hoc. The Tribunal, however, found that the expenses were necessary for setting up the business and thus allowable.

7. Non-Allowance of Depreciation on Disallowed Expenses:
The assessee argued that if the expenses were treated as capital in nature, depreciation should be allowed. The Tribunal's decision to allow the expenses as revenue in nature rendered this issue moot.

8. Overall Validity of the CIT(A)'s Order:
The assessee argued that the CIT(A)'s order was bad in law and against the facts. The Tribunal, by allowing the expenses and setting aside the CIT(A)'s order, effectively addressed this issue.

Conclusion:
The Tribunal concluded that the business was set up at the beginning of the financial year under consideration as the requisite infrastructure and approvals were in place. Therefore, the expenses incurred were allowable. The appeal of the assessee was allowed, and the orders of the lower authorities were set aside.