2022 (6) TMI 942 - AT - Income Tax

Allowable business expenditure - Proof of Set - up of business - manufacturing activity of the assessee was part of composite business activities and the same had not commenced because the construction of building and installation of plant machinery was in progress - HELD THAT - As it could be said that business could be said to have been set-up from the date when one of the categories of business activity is started and it is not necessary that all the categories of its business activities must start either simultaneously or that the last stage must start before it can be said that the business was set-up. What is required to be seen is whether one of the essential activities for the carrying on of the business of the assessee company as a whole was or was not commenced. When a business is established and is ready to commence, then it can be said that business has been set-up. The business would be set-up when the necessary infrastructure was acquired by the assessee and the assessee started paying salaries and allowance of the experts. The assessee, in the present case, had achieved the process of establishing the business. We concur with the submissions of Ld. AR that the assessee s business was already set-up during AY 2012-13. Therefore, the business expenditure as claimed by the assessee would be allowable deductions in both the years. We order so. Accordingly, the appeals, for both the years, stands allowed. AO is directed to recompute the income in terms of our above order.

Issues Involved:
1. Condonation of delay in filing appeals.
2. Determination of whether the business of the assessee was set up during the assessment years 2012-13 and 2013-14.
3. Allowability of business expenditure.
4. Classification of income from fixed deposits and discounts.
5. Levy of interest under section 234B.
6. Initiation of penalty under section 271(1)(c).

Issue-Wise Detailed Analysis:

1. Condonation of Delay in Filing Appeals:
The appeals were delayed by 327 days. The assessee attributed the delay to restructuring within the Lebara group, which led to the departure of legal personnel. The Tribunal condoned the delay, imposing a cost of Rs. 25,000, which was duly deposited by the assessee.

2. Determination of Whether the Business Was Set Up:
The central issue was whether the business was set up during the assessment years in question. The Tribunal examined various activities undertaken by the assessee, including the acquisition of land and a partially constructed building, entering into a hotel management agreement, and appointing project managers. The Tribunal concluded that the business was set up during AY 2012-13, although it was in the pre-commencement stage. The Tribunal relied on judicial precedents to distinguish between "setting up" and "commencement" of business, emphasizing that business expenditure is allowable once the business is set up, even if actual operations have not commenced.

3. Allowability of Business Expenditure:
The Tribunal found that the business expenditure claimed by the assessee was allowable as the business was set up during AY 2012-13. This included administrative expenses, employee expenses, and interest expenses, which were considered necessary for establishing the business infrastructure.

4. Classification of Income from Fixed Deposits and Discounts:
The Assessing Officer (AO) had classified the interest income from fixed deposits and discounts as "Income from other sources" and disallowed the business expenditure, treating it as capital expenditure. The Tribunal, however, allowed the business expenditure as revenue expenditure, given that the business was set up during the relevant period.

5. Levy of Interest Under Section 234B:
The Tribunal did not provide a detailed analysis on the levy of interest under section 234B, but it was implicitly understood that the recalculation of income would affect the interest computation.

6. Initiation of Penalty Under Section 271(1)(c):
The Tribunal noted that the penalty under section 271(1)(c) was initiated due to a difference of opinion on the allowability of the expenditure. Given that the Tribunal allowed the expenditure, the basis for the penalty was undermined.

Conclusion:
The Tribunal allowed the appeals for both assessment years, directing the AO to recompute the income in accordance with its findings that the business was set up during AY 2012-13 and the business expenditure was allowable. The appeals were pronounced allowed on 08th June 2022.

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