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2018 (9) TMI 621 - AT - Income TaxExpenses allowability when the business has not been set up - whether the business to be assumed to be set-up notwithstanding the fact that the actual commencement of the business has not taken place? - Held that - It is undisputed fact that the assessee has not reflected any major income from business activities during the impugned AY except Income from Deputation for ₹ 5.39 Lacs. However, the earning of the business income, in our opinion, was not a sine qua non to enable the assessee to claim the business expenditure as per statutory provisions provided other conditions as envisaged by law were fulfilled by the assessee. Upon perusal of nature of expenses incurred by the assessee, we find that the out of total expenditure of ₹ 14.67 Crores, the major expenses pertains to staff expenses for ₹ 4.85 Crores, sales, administration & other expenses for ₹ 7.28 Crores and amortization of intangible assets for ₹ 1.65 Crores which demonstrate that the assessee had already recruited employees during the impugned AY and incurred various administrative and sale expenditure. As rightly noted by Ld. CIT(A), the assessee had participated in three bids during the impugned AY, out of which one bid was successful which is not disputed by the revenue. The aforesaid factor raises a strong pointer in assessee s favor that the assessee was ready with all the necessary infrastructure to deliver the proposed goods / services to the prospective customers. Another noteworthy factor is that this is not the first year of assessee s existence since the documents on record reveal that the assessee had filed return of income for immediately preceding AY 2008-09 also wherein it has, on identical factual matrix, claimed business expenditure in that year and carried forward business losses to the extent of ₹ 5.06 Crores, which has not been disputed by the revenue at any point of time so far. - decided in favour of assessee.
Issues Involved:
1. Allowability of business expenses when the business has not been set up. 2. Disallowance under Section 14A of the Income Tax Act. Detailed Analysis: Issue 1: Allowability of Business Expenses The Revenue contested the order of the Commissioner of Income-Tax (Appeals) [CIT(A)] allowing expenses of ?14,67,24,757/- on the grounds that the business had not been set up. The Assessing Officer (AO) had disallowed these expenses, arguing that the assessee had not started earning income from business activities and, therefore, the expenses could not be treated as business expenditure. The CIT(A) examined Section 3 of the Income Tax Act, which defines "Previous Year" and includes provisions for businesses newly set up. The CIT(A) referred to the Supreme Court's interpretation in CWT vs. Ramaraju Surgical Cotton Mills Ltd., which stated that a business is considered set up when it is ready to discharge the functions for which it is established. The CIT(A) found that the assessee had participated in bidding processes and had been awarded contracts, indicating that the business was set up and ready to function. The CIT(A) also referenced the Karnataka High Court decision in CIT & Anr. VS MFAR Construction Ltd., which held that expenses integral to the business, such as bidding and obtaining contracts, signify the commencement of business. Thus, the CIT(A) allowed the business expenditure, concluding that the assessee's activities met the criteria for being considered set up. Upon appeal, the Tribunal upheld the CIT(A)'s decision, noting that the assessee had incurred significant expenses related to staff, sales, administration, and amortization of intangible assets, indicating readiness to commence business. The Tribunal also observed that the assessee had filed a return for the previous year, claiming business expenditure and carrying forward losses, which had not been disputed by the Revenue. The Tribunal cited various judicial pronouncements, including the Bombay High Court's decision in Western Indian Vegetables Products Ltd. v. CIT, which distinguished between setting up and commencement of business. The Tribunal concluded that the assessee had set up its business by participating in bids and obtaining contracts, even if actual business income had not yet been earned. Therefore, the Tribunal found no infirmity in the CIT(A)'s order allowing the business expenses. Issue 2: Disallowance under Section 14A The AO had disallowed ?14.13 Lacs under Section 14A, applying Rule 8D, which includes interest and expense disallowance. The CIT(A) deleted this disallowance, noting that the assessee's Share Capital of ?50 Crores exceeded the investments of ?23.02 Crores, and thus, no interest disallowance was warranted, referencing the Bombay High Court's judgments in CIT Vs. Reliance Utilities Power Ltd. and CIT Vs. HDFC Bank. The Tribunal upheld the CIT(A)'s decision, observing that the assessee had made a suo-moto disallowance of ?2.51 Lacs, computed at 0.5% of average investments yielding exempt income, aligning with the Delhi Tribunal's decision in ACIT Vs. Vireet Investment (P.) Ltd. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal on this ground. Conclusion: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s orders on both issues. The business expenses were allowed, as the business was considered set up, and the disallowance under Section 14A was deleted based on the assessee's sufficient own funds and appropriate suo-moto disallowance.
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