2022 (1) TMI 145 - AT - Income Tax

Business expenditure u/s 37 - whether the assessee is entitled for pre-operative administrative expenses preliminary expenses financial expenses and depreciation or not? - HELD THAT - The assessee is a Special Purpose Vehicle company formed and registered in India as a Public Limited Company engage in business of sourcing of rough diamonds globally. The assessee is to carry out its business as per MOA for procuring cleaving sawing cutting polishing processing manufacturing sorting grading buying selling handling supplying transporting distributing warehousing trading auctioning tendering bidding importing exporting marketing or otherwise dealing or disposing any diamonds sapphire ruby topaz garnet emerald pearl precious or semiprecious or natural stones aquatic marine or other such articles gold silver platinum titanium bullion or any other precious / semi-precious metals or alloys thereof in any form whatsoever and jewelleries ornaments articles decorative and art materials goods or things made of all or any of such things or a combination thereof and to act as broker auctioneer importer exporter distributor agent wholesaler merchant goldsmith silversmith jewellers manufacturer polishers processors in relation to all or any of the above and to take up all such incidental acts and things necessary for attainment of the above objects. In pursuance of its object the assessee incurred various expenses. We find that nature of expenses was not examined. The AO disallowed the expenses by taking view that business of assessee was not setup during the year under consideration. CIT(A) confirmed the action of AO on similar lines. CIT(A) also confirmed the disallowance of additional ground that the expenses were incurred by assessee for illegal business. We may note that we have already held that invocation of explanation to section 37 is uncalled for as the assessee has not made any expenses for purchase of diamonds rather entire expenses are in the nature of preoperative business expenses. The various expenses incurred by the assessee are not at all prohibited by law. All expenses were incurred in anticipation of business. It is a settled law that the AO cannot sit in the chair of businessmen so as to decide what activities are essential in the business should be activities are to be carried out by the businessmen. It has been held so by Hon ble Apex Court in S.A. Builders 2006 (12) TMI 82 - SUPREME COURT Hon ble High Court in CIT Vs Sardar Sarovar Narmada Nigam Limited 2013 (10) TMI 162 - GUJARAT HIGH COURT while considering the question of law whether Special Bench of Tribunal is right in holding that assessee s business had setup w.e.f. 21.02.2001 which is to flow drinking water as a construction work of canal project was still under progress. The Hon ble High Court while referring its earlier decision in CIT Vs Sarabhai Sons (P.) Ltd. 1972 (7) TMI 7 - GUJARAT HIGH COURT and in CIT Vs Saurashtra Cement and Chemicals Industry 1972 (8) TMI 19 - GUJARAT HIGH COURT held that when business can be said to have been setup the Court observed that when each one of the activities essential and vital and combined together constitute business of the assessee and things being a continuous process all activities which go to make a business need not be started simultaneously of entire term business without proceeding other activities no fault can be found. On the finding of the Tribunal it held the businesses have to be setup without same being commenced and ultimately dismissed the appeal of the Revenue. Disallowance of expenses incurred by assessee on various preoperative expenses is not justified. Hence we direct the AO to allow the entire business expenditure claimed by the assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of business expenditure.
2. Alleged illegal business activities.
3. Netting off interest income against interest or other expenditure.
4. Breach of Principles of Natural Justice.
5. Levy of interest under section 234A/B/C/D.
6. Initiation of penalty under section 271(1)(c).

Detailed Analysis:

1. Disallowance of Business Expenditure:
The assessee, a company engaged in sourcing rough diamonds, filed a return declaring a loss and claimed various business expenditures. The AO disallowed Rs. 1.03 crore in expenses, arguing the business was not set up during the relevant financial year as there were no business receipts or transactions. The CIT(A) upheld the AO's decision, noting the company was incorporated in November 2010 and did not engage in any sales or purchases. The Tribunal, however, found that the assessee had undertaken various preoperative activities essential for setting up the business, such as opening a bank account, attending seminars, and executing an MoU with Zimbabwe Mines. The Tribunal held that these activities constituted setting up the business and allowed the expenses.

2. Alleged Illegal Business Activities:
The CIT(A) also disallowed the expenses on the grounds that the business activities were illegal due to an embargo on Zimbabwe diamonds. The Tribunal rejected this view, noting that the expenses were for preoperative activities and not for purchasing diamonds. The Tribunal emphasized that the nature of the expenses was not illegal and thus, the explanation to section 37 was inapplicable.

3. Netting Off Interest Income Against Interest or Other Expenditure:
The assessee argued that if the business was not considered set up, the interest income should be netted against the interest or other expenses. However, since the Tribunal allowed the business expenditure, this issue became academic and was not adjudicated.

4. Breach of Principles of Natural Justice:
The assessee contended that the lower authorities did not properly appreciate the facts and ignored various submissions and explanations. The Tribunal implicitly addressed this by thoroughly considering the assessee's activities and submissions, ultimately ruling in favor of the assessee.

5. Levy of Interest Under Section 234A/B/C/D:
The Tribunal noted that the levy of interest under these sections is consequential to the main issue and thus did not require specific adjudication.

6. Initiation of Penalty Under Section 271(1)(c):
The Tribunal dismissed this ground as premature since it relates to the initiation of penalty proceedings, which are separate from the current appeal.

Conclusion:
The Tribunal allowed the appeal, directing the AO to allow the entire business expenditure claimed by the assessee. The Tribunal found that the business was indeed set up during the relevant year and that the expenses incurred were legitimate and not prohibited by law. The other grounds raised by the assessee were either deemed academic or dismissed as premature.