2019 (11) TMI 512 - AT - Income Tax

Disallowance of expenses - no business activity was conducted during the year under consideration and the assessee company has not furnished any substantial evidence to show that the travel expenses were actually incurred for travelling made for business purposes - HELD THAT - Since the assessee in the instant case has started deploying the skillful personnel and has covered the last mile of its preparedness on 07.07.2008 when the sales head Shri Sanjay Sharma was appointed, therefore, we do not find any infirmity in the order of the CIT(A) in holding that the assessee has set up its business on 07.07.2008 and, therefore, is entitled to claim the expenses as a revenue expenditure for the period from 07.07.2008 till 31.03.2009 subject to verification of the details by the AO. The submission the assessee has earned income of ₹ 17.14 million in the subsequent F.Y. 2009-10 could not be controverted by the ld. DR. No infirmity in the order of the CIT(A) in holding that the assessee has started its business operation on the date of recruitment of sales head on 07.07.2008 and directing the AO to obtain the details of expenses of ₹ 8,66,73,393/- out of the expenses disallowed of ₹ 10,28,95,398/- pertaining to the period from 07.07.2008 till 31.03.2009 and allow the same as deduction in the year under consideration. The grounds raised by the Revenue are accordingly dismissed.

Summary

Issues:
1. Disallowance of business expenses due to lack of business activity.
2. Determination of the start of business operations and allowance of expenses.

Analysis:
1. The Assessing Officer disallowed business expenses claimed by the assessee due to the absence of any commercial activities during the relevant year. The expenses included employee costs, legal expenses, travel expenses, and others. The Assessing Officer restricted the expenses to only those necessary for monitoring corporate existence, disallowing a significant portion of the claimed expenses.

2. The assessee argued before the CIT(A) that it had set up its business during the assessment year by appointing key personnel and undertaking various activities to fulfill its business objectives. The CIT(A) noted the recruitment of a sales head as a crucial step in starting business operations. Relying on precedents, the CIT(A) directed the Assessing Officer to allow expenses incurred after the business setup date, considering them as legitimate business expenses.

3. The Revenue appealed the CIT(A)'s decision, challenging the determination of the business start date and the allowance of expenses incurred post that date. The Revenue contended that the assessee failed to provide concrete evidence of business setup during the year under consideration, disputing the CIT(A)'s decision.

4. The Tribunal analyzed the arguments of both parties, emphasizing the definition of 'business' and the concept of business setup. Referring to relevant legal provisions and precedents, the Tribunal upheld the CIT(A)'s decision. It concluded that the recruitment of key personnel and the subsequent revenue generation indicated the establishment of business operations. Therefore, it dismissed the Revenue's appeal and upheld the allowance of expenses incurred post the business setup date.

5. The Tribunal's decision highlighted the importance of demonstrating business setup and the continuous nature of business activities to claim legitimate business expenses. The judgment underscored the significance of key personnel recruitment and operational preparedness in determining the start of business operations and the eligibility of expenses for deduction.

This detailed analysis of the judgment showcases the legal intricacies involved in determining business setup, the legitimacy of claimed expenses, and the Tribunal's interpretation of relevant legal provisions and precedents.