2018 (8) TMI 262 - AT - Income Tax

Disallowance of expenditure claimed since assessee was still to set up its manufacturing facility - allowable busniss expenditure - Held that - The learned Commissioner of Income-tax (Appeals) fell in error in accepting the contention of the assessee that it had set up its business. Just because learned Assessing Officer computed the income by making a disallowance on the returned loss would not entitle the assessee to claim that an expenditure otherwise not allowable under the Act has to be allowed. Expenditure claimed by the assessee was incurred prior to setting up its business. We therefore have no hesitation in setting aside the order of the learned Commissioner of Income-tax (Appeals) and restoring the order of the learned Assessing Officer. - Decided in favour of revenue

Summary

Issues Involved:
1. Whether the assessee had commenced its commercial operations.
2. Whether the expenditure claimed by the assessee was allowable.

Detailed Analysis:

1. Whether the assessee had commenced its commercial operations:

The Revenue's primary contention was that the assessee had not started its commercial operations, as it was still in the process of setting up its manufacturing facility. The Assessing Officer noted that the assessee was allotted land by SIPCOT Industrial Growth Centre and was in the process of registering and executing the lease deed. The Assessing Officer issued a show-cause notice proposing disallowance of the expenditure claimed by the assessee, arguing that the assessee had not commenced its main activity of manufacturing and selling commercial vehicles.

The assessee argued that it had commenced its research and development activity, which was one of its main objects, and had set up a research and development center. The assessee also claimed to have earned revenue from the sale of a vehicle. However, the Assessing Officer was not convinced, stating that the main revenue-generating activity of designing, manufacturing, and selling commercial vehicles had not commenced.

The Commissioner of Income-tax (Appeals) (CIT(A)) held that the assessee had commenced its activities related to design and had undertaken pre-activities essential for manufacturing. The CIT(A) noted that the assessee had sales of ?36,44,361 and other income of ?4,94,54,084, indicating the start of commercial operations.

However, the Tribunal disagreed with the CIT(A), noting that the assessee's directors' report stated that the company had not started commercial production and no revenue was generated. The Tribunal highlighted that the sale of a solitary bus, which was given free of cost, could not be construed as the start of commercial operations. The Tribunal also noted that the other income cited by the assessee did not substantiate the claim that the business was set up.

2. Whether the expenditure claimed by the assessee was allowable:

The Assessing Officer disallowed the expenditure claimed by the assessee, arguing that it was incurred prior to the commencement of commercial operations. The disallowed expenditure included operating expenses, financial expenses, and depreciation.

The CIT(A) allowed the expenditure, stating that the expenditure debited in the profit and loss account was not incurred for setting up the manufacturing facility. The CIT(A) noted that the assessee had capitalized expenses related to setting up the manufacturing facility and research and development. The CIT(A) also considered the earning of income from the activity of sourcing, which was identified as a separate line of business.

The Tribunal, however, found that the expenditure claimed by the assessee was incurred prior to setting up its business. The Tribunal noted that there was no identifiable item in the profit and loss account or capitalized expenditure to substantiate the claim of any research and development activity. The Tribunal also highlighted that the solitary sale of a bus and other income could not substantiate the claim that the business was set up.

The Tribunal referred to various judgments cited by the assessee but found that none of them supported the assessee's case. The Tribunal concluded that the CIT(A) erred in accepting the assessee's contention that it had set up its business and allowed the expenditure. The Tribunal restored the order of the Assessing Officer, disallowing the expenditure claimed by the assessee.

Conclusion:

The Tribunal allowed the appeal of the Revenue, setting aside the order of the CIT(A) and restoring the order of the Assessing Officer. The Tribunal held that the assessee had not commenced its commercial operations and the expenditure claimed was incurred prior to setting up the business, and therefore, not allowable.