2018 (11) TMI 1656 - AT - Income Tax

Disallowance u/s. 37(1) - set up business - HELD THAT - To demonstrate that the business of the assessee company has been set up the assessee company has submitted the following details during the course of assessment proceedings - (a) Collector Order dtd.15.04.2011 (in Gujarati and its English Translated version) for the financial year 2011-12 ; (b) Details of the Tender floated for the purpose of infrastructure work ;(c) Details of major infrastructure works for which Letter of Intent was issued to the contactors in FY 2011-12 The assessee company has also issued Letters of Intent to various contractors in respect of carrying out work related to its business such as notice to commence work for construction, operation and maintenance of water pumping station for water supply to GIFT zone, notice to commence work for power supply arrangement for GIFT project and notice to commence work for pipe network for bore-well connection for GIFT project. The assessee has also submitted work completion certificates of these contractors. During the course of assessment year 2012-13, the assessee company has prepared its profit and loss account for the first time since its operation disclosing interest document fees, license fees, scrutiny fees and water charges and claimed deduction of various administrative office expenses. Subsequently, the assessee company has also claimed deduction of depreciation by filing revised return of income. CIT(A) has also referred the decision of Saurastra Cement and Chemical Ltd. vs. CIT 1972 (8) TMI 19 - GUJARAT HIGH COURT wherein it is held that the business would commence when the activity which is first in point of time and which must necessarily precede the other activity is started. As soon as a activity which is an essential activity in the course of carrying on the business or which in other words is a business activity is started the assessee must be held to have commenced the business. The nature of business of the asssessee company was to develop various common facilities and the material facts as elaborated in this order substantiate that the business of the assessee company was set up during the year under consideration. We observe that all these evidences clearly demonstrate that the business of the assessee had been set up during the year under consideration. Claim of depreciation - it is established that the business of the asssseee company was actually commenced in the assessment year 2012-13, therefore, the ld. CIT(A) has rightly adjudicated that the assessee company was entitled to claim deprecation on account of plant and machinery which includes office equipment and vehicle, computer, computer software and furniture, fixture used for the purpose of business. Therefore, we do not find any merit in this ground of appeal of the revenue.

Summary

Issues Involved:

1. Disallowance of ?2,40,18,801/- under Section 37(1) read with Section 3 of the Income Tax Act.
2. Disallowance of Depreciation of ?1,11,38,327/- under Section 32 read with Section 3 of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Disallowance of ?2,40,18,801/- under Section 37(1) read with Section 3 of the Income Tax Act:

The assessing officer noticed that the assessee had debited various expenses in the profit and loss account but failed to provide sufficient evidence to prove that the business was set up and ready to commence. The expenses included internal audit fees, statutory audit fees, director's sitting fees, electricity charges, rent, and other administrative expenses totaling ?2,40,18,801/-. The project report indicated that the first phase of the project was to be completed by 2016, and the assessing officer believed there was no basis to claim that the project was ready to commence business during the assessment year 2012-13. Consequently, the assessing officer treated these expenses as capital expenditure and disallowed them as revenue expenses.

The CIT(A) reversed the assessing officer's decision, stating that the business of the assessee had been set up during the year under consideration. The CIT(A) referred to various judicial precedents, including the Hon'ble Gujarat High Court's ruling in the case of Saurashtra Cement, which established that business activities need not start simultaneously and that business commences when the first activity essential to the business is started. The CIT(A) found that the assessee had obtained necessary clearances, commenced infrastructure work, and incurred expenses related to setting up the business. Therefore, the expenses were allowable under Section 37(1).

Upon appeal, the tribunal upheld the CIT(A)'s decision, agreeing that the business had been set up during the year under consideration. The tribunal noted that the assessee had undertaken various activities essential to its business, such as obtaining environmental clearances, land use approvals, and issuing work orders to contractors. The tribunal found no error in the CIT(A)'s conclusion that the expenses were allowable as revenue expenditure.

2. Disallowance of Depreciation of ?1,11,38,327/- under Section 32 read with Section 3 of the Income Tax Act:

The assessing officer disallowed the depreciation claim of ?1,11,38,327/- on the grounds that the business was not ready to commence, and therefore, the assets were not put to use during the assessment year 2012-13.

The CIT(A) allowed the claim, stating that the business had been set up and activities toward commencement were being carried out. The CIT(A) noted that the depreciation was claimed on plant and machinery, office equipment, vehicles, computers, and furniture, which were used for business purposes. The CIT(A) relied on the same judicial precedents and reasoning used to allow the revenue expenses.

The tribunal upheld the CIT(A)'s decision, agreeing that the business had commenced during the assessment year. The tribunal found that the assets were indeed used for business purposes and that the assessee was entitled to claim depreciation. The tribunal dismissed the revenue's appeal on this ground as well.

Conclusion:

In conclusion, the tribunal dismissed both grounds of appeal raised by the revenue. The tribunal upheld the CIT(A)'s decision to allow the deduction of ?2,40,18,801/- as revenue expenses and the claim of depreciation of ?1,11,38,327/-. The tribunal found that the assessee had set up its business during the assessment year 2012-13 and that the expenses and depreciation were allowable under the provisions of the Income Tax Act.