2018 (5) TMI 1091 - HC - Income Tax

Disallowance of business expenditure - business activity not commenced - Held that - Primarily, the assessee had carried out market survey and made certain general inquiries about source of the commodity and prospective buyers. As correctly noted by the AO, even between the letters written by the assessee to the buyer and seller and annual culmination of any transaction of sale or purchase, there was substantial time gap of over one year in almost every case and in some cases over two years. AO therefore refused to link said letters written by the assessee to the actual transaction of sale or purchase. In absence of any income generation, it was difficult to understand how the staff was paid bonus as claimed by the assessee. Tribunal further recorded that there was no evidence on record to suggest that the assessee has registered itself as a trading concern or had procured statutory licenses from the State or the local authorities. There is nothing on record to suggest that the assessee had actively solicited business and the negotiations in the parlance buyers and sellers were at advance stage or were at any concrete form. There was significant time gap in such correspondences and actual sale and purchase transaction. - Decided against assessee.

Issues:
1. Allowance of business expenditure claimed by the assessee.
2. Commencement of business activities by the assessee for the assessment year 2011-12.
3. Interpretation of prior period expenditure in relation to business activities.
4. Application of legal principles in determining the commencement of business.
5. Analysis of evidence presented to demonstrate commencement of business activities.
6. Comparison of the present case with Delhi High Court judgments on similar issues.

Analysis:
1. The primary issue in this case revolves around the allowance of business expenditure claimed by the assessee, amounting to ?19.26 lakhs for the assessment year 2011-12. The Revenue authorities and the Tribunal contended that since the assessee had not commenced its business activities during the relevant period, the claimed expenditure could not be allowed.

2. The assessee, a private limited company engaged in trading iron and steel, argued that it had indeed commenced business activities during the assessment year in question. The company claimed to have conducted market surveys, contacted customers, and initiated inquiries with suppliers to establish business operations. The assessee presented letters to prospective customers and later recorded sale and purchase transactions as evidence of business commencement.

3. However, the Assessing Officer was unconvinced by the assessee's arguments, emphasizing the lack of actual trading activity and income generation during the period. The Assessing Officer noted significant time gaps between initial correspondences with buyers and sellers and the eventual transactions, questioning the validity of the claimed expenditure on staff remuneration and bonuses.

4. Both the Commissioner of Income Tax (Appeals) and the Tribunal upheld the Assessing Officer's decision, highlighting the absence of concrete evidence supporting the commencement of business activities by the assessee. The Tribunal partially allowed a portion of the claimed expenditure related to directors' remuneration and salary, citing the necessity to maintain corporate structure.

5. The assessee contended that the Tribunal erred in assessing the nature of its activities, arguing that business commencement did not solely depend on actual sales or purchases. The assessee relied on Delhi High Court judgments to support its position, emphasizing the groundwork and active business pursuits evident in those cases.

6. Ultimately, the High Court concurred with the Revenue authorities and the Tribunal, dismissing the Tax Appeal. The Court agreed that the evidence presented by the assessee, primarily consisting of market surveys and correspondence, did not sufficiently demonstrate the commencement of business activities as claimed. The Court noted the substantial time gaps between initial inquiries and actual transactions, indicating a lack of active business engagement by the assessee. The Court also distinguished the present case from the Delhi High Court judgments based on the factual distinctions presented.

This detailed analysis of the judgment provides a comprehensive understanding of the legal issues involved and the reasoning behind the High Court's decision to dismiss the Tax Appeal.

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