2022 (3) TMI 462 - AT - Income Tax

Disallowing claim of loss - Setting up of business - Scope of setting up of business and actual commencement of business - whether the CIT(A) was justified in holding that the assessee has not set up its business during the year under consideration and hence, the A.O. was justified in disallowing the claim of loss? - HELD THAT - There is no dispute with regard to the fact that there could be a time gap between setting up of business and actual commencement of business . It is also settled principle that the expenses incurred after setting up of business is allowable as deduction. Hence the answer to the question as to whether the assessee has set up its business or not would depend upon the facts prevailing in each of the case. In the instant case, A.R. has shown to us that the assessee has taken a premises on rent, employed few employees, purchased certain assets. In the case of Omniglobe Information Tech India P Ltd. 2014 (9) TMI 6 - DELHI HIGH COURT the Hon'ble Delhi High Court was considering the question of setting up of business in the context of a BPO Service industry. Since the assessee is in service industry providing IT application maintenance support services its requirement of man power and electronic equipment would depend upon the nature and type of work, i.e., type of IT application, it is getting. Hence, in the instant case, the assessee could plan its further recruitment of employees, depending upon the nature and type of work it is getting, which is essential to determine the skill set required for executing the said work. The directors have stated in the Directors' report that the nature of work required to be performed under the agreement entered with its AE would require 25 employees. In the instant case, in our view, this kind of decision is taken after setting up of business but before actual commencement of operations. Accordingly, we are of the view that the Ld. CIT(A) was not justified in observing that the assessee is in the process of setting up of business, since it has not yet completed recruitment of 25 employees. We are of the view that the assessee has set up its business during the year under consideration. Accordingly, the expenses incurred by the assessee are allowable as deduction and in the case of loss, it is entitled to carry it forward. Accordingly, we reverse the order passed by Ld. CIT(A) and direct the AO allow the expenses and also carry forward of loss We are of the view that the assessee has set up its business during the year under consideration. Accordingly, the expenses incurred by the assessee are allowable as deduction and in the case of loss, it is entitled to carry it forward. Accordingly, we reverse the order passed by Ld. CIT(A) and direct the AO allow the expenses and also carry forward of loss. - Decided in favour of assessee.

Summary

Issues:
- Whether the assessee has set up its business during the assessment year under consideration.
- Whether the additional ground raised by the assessee regarding the limited scrutiny issue is admissible.

Analysis:

Issue 1: Setting up of Business
The appeal challenged the disallowance of the claim of loss by the Assessing Officer (AO) based on the contention that the business was not set up during the year under consideration. The AO observed that the assessee did not generate any revenue, signed a service agreement in November 2015, and did not commence business activities. Relying on a Supreme Court decision, the AO held that the business was not set up, leading to the disallowance of the claimed loss. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the business was not fully ready to start services. The CIT(A) referred to the company's objective to commence operations from April 1, 2015, and the recruitment of only 2 employees out of the required 25. The CIT(A) dismissed the appeal, distinguishing a Delhi High Court decision cited by the assessee. The Tribunal noted the expenses incurred by the assessee, such as office setup, employee recruitment, and asset purchases, as indicative of business setup. The Tribunal emphasized that there can be a gap between setting up and commencing business, citing relevant case law. It concluded that the assessee had set up its business during the assessment year, allowing the expenses and loss carry-forward.

Issue 2: Additional Ground on Limited Scrutiny
The assessee raised an additional ground related to the limited scrutiny issue, arguing that the AO exceeded the scope of scrutiny. The Tribunal highlighted the necessity of having all relevant facts available before raising legal issues. As the assessee had not confirmed the absence of administrative approval for converting limited scrutiny into complete scrutiny, the Tribunal deemed the additional ground raised on presumption invalid. It emphasized the importance of factual certainty in legal proceedings and rejected the additional ground.

In conclusion, the Tribunal partially allowed the appeal, reversing the CIT(A)'s decision and directing the AO to allow the expenses and loss carry-forward. The judgment clarified the distinction between setting up and commencing business, emphasizing readiness to start operations as the key factor.