2022 (12) TMI 1158 - AT - Income Tax

Expenses incurred during the intervening period between setting up and actual business - pre-operative expenses - deductibility of the expenditure incurred between set-up business and actual commencement of business, set off of such expenses against the interest income earned on FDs made out of idle funds or not - HELD THAT - The admitted facts of the case are that in the immediate preceding previous year, the appellant company had sold its business, however, it was in the process of setting up a new business by identifying some distribution business. In the process, incurred certain revenue expenditure in the form of salary, etc other expenses. AO as well as the ld. CIT(A) simply discussed the legal principle without adverting to the material facts on record and had not really decided whether the appellant company had set-up of business and ready to commence the business or not. On perusal of the Profit Loss Account placed at Paper Book indicates that certain expenditure was incurred in connection with business which was sold were also debited to the Profit Loss Account. Therefore,AO as well as the ld. CIT(A) had failed to examine the nexus of the expenditure incurred and the new business stated to have been set-up. In these circumstances, we are of the considered opinion that the matter requires remission to the file of the AO to decide the issue in appeal with reference to the material on record whether the appellant company had set-up a new business or not. In case, on examination of the material on record,AO formed an opinion that new business had been set-up, the expenditure incurred during the interval period of setting up of a new business and its commencement of business can be allowed as deduction and can be set-off against the interest income earned on fixed deposits by the assessee assessed under head Income from the other sources . Grounds of appeal raised by the assessee stands partly allowed for statistical purposes.

Summary

Issues Involved:
Deductibility of expenditure between set-up and commencement of business, set-off against interest income earned on fixed deposits.

Analysis:
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) for the assessment year 2014-15. The appellant, a company engaged in trading PLCs, filed a return declaring income, which was assessed at a higher amount by the Assessing Officer due to not allowing business loss against interest income. The dispute arose from expenses incurred during the period between setting up a new business and commencement, set-off against interest income. The CIT(A) disallowed the set-off, considering the expenses as pre-operative. The appellant contended that these expenses should be allowed as deduction. The matter was brought before the ITAT.

The ITAT considered the legal position that expenses during the interval between setting up and commencement of business are deductible. They referred to various judicial precedents supporting this principle. The Assessing Officer and CIT(A) failed to examine the nexus between the expenditure and the new business set-up. The ITAT decided to remit the matter to the Assessing Officer for a fresh consideration based on the material on record. If it is found that the new business was set up, the expenses incurred during the interval can be allowed as a deduction and set-off against the interest income earned on fixed deposits. The appeal by the appellant was partly allowed for statistical purposes.

In conclusion, the ITAT's decision focused on the deductibility of expenses incurred during the period between setting up and commencement of a new business, emphasizing the need for a nexus between the expenditure and the business set-up. The case was remitted to the Assessing Officer for a fresh consideration to determine if the expenses can be allowed as a deduction and set-off against interest income, in line with established legal principles.