2009 (2) TMI 236 - AT - Income Tax

Disallowance of expenditure - pre-demerger expenses - When the business of the assessee company can be said to be set up - assessee company was incorporated on 24th April 2001 - assessee claimed that the business could be said to have commenced right from the date of incorporation of the company and thus all the expenditure incurred after the date of incorporation was allowable expenditure - AO noted that the assessee was able to start its business only after the order of the Hon ble Bombay High Court which allowed the assessee to commence its business from 1st Jan. 2002 - claim of the assessee that there was a difference between set up and commencement of business and all the expenses incurred after the set up of the business were allowable as revenue expenditure was rejected by the AO HELD THAT - The crucial date for the setting up of the business is the date on which the Hon ble Bombay High Court had accorded approval to the scheme of arrangement agreed upon between the assessee and the AFL Ltd. Without the approval of the Hon ble Court to the scheme of arrangement agreed upon the said scheme could not be acted upon nor the permissions thereafter be obtained. Drawing strength from the ratio laid down by the Hon ble Bombay and Delhi High Courts in the cases decided in Western India Vegetable Products Ltd. vs. CIT 1954 (3) TMI 59 - BOMBAY HIGH COURT CIT vs. Western India Seafood (P) Ltd. 1981 (2) TMI 46 - GUJARAT HIGH COURT Hotel Alankar vs. CIT 1981 (2) TMI 46 - GUJARAT HIGH COURT and CIT vs. ESPN Software India (P) Ltd. 2008 (3) TMI 90 - DELHI HIGH COURT we are of the view that after the approval of scheme of arrangement by the Hon ble Court on 2nd Nov. 2001 the assessee was ready to commence business and it could be said that the business has been set up though the appointed date of starting the operations of the business is from 1st Jan. 2002. The business in the case of the assessee commences from 1st Jan. 2002. As the date of setting up of business and date of commencement of business are distinct the expenses incurred after the setting up of the business are deductible as revenue expenditure as held by the Hon ble Delhi High Court in CIT vs. ESPN Software India (P) Ltd. Respectfully following the ratio laid down by the Hon ble Delhi High Court in CIT vs. ESPN Software India (P) Ltd. we direct the AO to allow the expenditure incurred after the setting up of the business i.e. after 2nd Nov. 2001 as revenue expenditure though in the case of the assessee the commencement of business takes effect from 1st Jan. 2002. The grounds of appeal Nos. 1 and 2 raised by the assessee are thus allowed.

Issues Involved:
1. Disallowance of expenditure on the grounds that the business was not set up upon incorporation.
2. Levying of interest under sections 234B and 234C of the Income Tax Act.
3. Disallowance of excess depreciation claimed on motor cars.
4. Total disallowance of expenditure of Rs. 85 lakhs.

Detailed Analysis:

Issue 1: Disallowance of Expenditure on Grounds that Business was Not Set Up Upon Incorporation
The primary issue raised by the assessee was the disallowance of Rs. 66,23,100 in business expenditure, with the Revenue arguing that the business was not set up upon incorporation. The assessee, engaged in international courier services, was incorporated on 24th April 2001 and incurred Rs. 85 lakhs in expenses before commencing business. The AO disallowed these expenses, noting that the business only commenced on 1st Jan 2002, following the Bombay High Court's order approving the demerger. The AO referenced Section 35D of the IT Act, which allows pre-commencement expenses only under specific conditions not met by the assessee. The CIT(A) upheld this view, restricting the disallowance to Rs. 66,23,100 for expenses incurred before 1st Jan 2002 while allowing Rs. 19,51,120 for post-demerger expenses.

The Tribunal examined various judicial precedents distinguishing between the setting up and commencement of business. It concluded that the business was set up on 2nd Nov 2001, when the Bombay High Court approved the demerger, making the expenses incurred after this date deductible as revenue expenditure. Therefore, the Tribunal allowed the assessee's appeal on this ground.

Issue 2: Levying of Interest Under Sections 234B and 234C of the IT Act
The assessee also contested the levy of interest under sections 234B and 234C. The CIT(A) noted that after rectification, no interest was charged under these sections, thus dismissing the assessee's grounds. The Tribunal found no infirmity in this decision and upheld the dismissal of these grounds.

Issue 3: Disallowance of Excess Depreciation Claimed on Motor Cars
The Revenue challenged the CIT(A)'s decision to delete the disallowance of excess depreciation on motor cars. The assessee had claimed 50% depreciation, arguing that the cars were commercial vehicles under the IT Rules and Motor Vehicles Act. The AO allowed only 20% depreciation, considering them non-commercial vehicles.

The Tribunal referred to previous cases, including Dy. CIT vs. Aramex India (P) Ltd., which distinguished between business use and commercial use of vehicles. It concluded that the motor cars were used for business purposes and not let out for commercial use, thus justifying the AO's 20% depreciation rate. The Tribunal reversed the CIT(A)'s order and restored the AO's decision.

Issue 4: Total Disallowance of Expenditure of Rs. 85 Lakhs
The Revenue also appealed against the CIT(A)'s partial allowance of the Rs. 85 lakhs expenditure. Given the Tribunal's decision on the first issue, it partially allowed the Revenue's appeal, aligning with its conclusions on the setting up and commencement of business.

Conclusion:
The Tribunal partly allowed both the assessee's and the Revenue's appeals, providing a nuanced resolution based on the distinction between setting up and commencing business, and the appropriate depreciation rates for business-use vehicles.

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