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2024 (6) TMI 572 - AT - Income TaxDisallowance of expenditure incurred during set-up of business - expenses incurred up to the date of commercial production disallowed - assessee deducted amount which were termed as Powertrain expenses prior to capitalization - assessee stated that it carried out trial run during September, 2009 and commenced commercial production on 05-02- 2010 - AO opined that the business could be said to have commenced only from the day from which the assessee begins commercial production - HELD THAT - There is difference between setup of business and commencement of business. Once the business is setup though the same has not actually commenced by generation of revenue, the expenditure incurred after setup of the business would be allowable to the assessee. The term previous year as defined in Section 3 of the Act would mean the financial year immediately preceding the assessment year. However, in the case of newly set-up business, the previous year shall be the period beginning with the date of setting-up of the business. Accordingly, till the time the business is set-up, all the expenses, even if revenue in nature, would have to be capitalized which is the stand of lower authorities in the present case. As a natural corollary, if the business is set-up, the expenditure would be allowable notwithstanding the fact that no business income was earned by the assessee during the year. The gestation period, in the kind of business in which the assessee was engaged, would generally be long and it is quite natural that it would take substantial time to start the actual business operations and generate business income. Quite clearly, without testing trail run production, the assessee could have never been able to commence its business. We are of the considered opinion that the generation of actual business income was not an essential element to allow the business expenditure. What was required to be seen was whether the business had been set-up or not. We would hold that the assessee was correct in adopting setup date as 01-10-2009 and therefore, the revenue expenditure claimed under powertrain segment post 01-10-2009 would be allowable to the assessee subject to the verification of the fact that in subsequent years, the assessee has neither claimed the same as revenue expenditure not claimed depreciation on the same. AO would verify necessary computations accordingly. The assessee is directed to furnish requisite details. The corresponding grounds stands allowed for statistical purposes. Depreciation Disallowance - assessee claimed depreciation for full year though it started commercial production only from 05-02-2010 - HELD THAT - Since we have already concurred with the stand of the assessee that the date of setup of business was to be considered as 01-10-2009, the depreciation claimed by the assessee would be allowable on the basis of assets put to use. The additional depreciation has been denied for want of documentary evidences. Therefore, this issue stands restored back to Ld. AO for fresh consideration by accepting date of setup of business as 01-10-2009 Disallowance u/s 43B/36 - bonus Remained unpaid - assessee submitted that the same was variable pay and part of CTC of employees, but AO rejected the explanation and disallowed the same - HELD THAT - We are of the considered opinion that 36(1)(ii) refers to any sum paid to an employee as bonus for services or commissions for services rendered where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission. The simple test, as per settled legal principle is that had the bonus or commission not been paid, it would have added to the profits or dividend of the company. Thus, the deduction is permissible if the sum paid is bonus or commission for services rendered. In the present case, bonus is payable to employees who have rendered services to the assessee and the same form part of CTC of employees. Therefore, impugned disallowance, in our considered opinion, is not sustainable. The impugned disallowance, therefore, stand deleted. Addition on account of Short-Term Capital Gains - assessee earned profit on sale of investments and assessee offered the same as income from other sources instead of under the head capital gains - HELD THAT - The gains in the books were computed on weighted average cost method. It was also submitted that mutual funds were in dematerialized form and in such a case, the distinct trail linking every unit to a certificate and its unique distinctive number linking it to subsequent sale would not be available. The same was stated to be in accordance with CBDT Circular No.704 dated 28-04-1995. However, Ld. CIT(A) rejected the arguments of the assessee and upheld the addition. We find that the gains on sale of mutual funds have been offered to tax by the assessee under income from other sources and therefore, the assessee is precluded to take benefit of cited circular of CBDT. The assessee, in books of accounts, has followed particular methodology to compute the gains. In our opinion, the same gains should have been offered by the assessee to tax. Therefore, we see no reason to interfere in the impugned order, on this issue. The corresponding grounds stand dismissed.
Issues Involved:
1. Disallowance of expenditure incurred during set-up of business. 2. Depreciation Disallowance. 3. Disallowance u/s 43B. 4. Addition on account of Short-Term Capital Gains. Summary: 1. Disallowance of expenditure incurred during set-up of business: The assessee claimed expenses related to the setup of its powertrain business, arguing that the business was set up on 01-10-2009, though commercial production began on 05-02-2010. The AO disallowed these expenses, stating that the business commenced only with commercial production. The CIT(A) upheld this view but allowed depreciation on such expenditure. The Tribunal held that the business was set up on 01-10-2009, making the expenses post this date allowable. The AO is directed to verify and allow these expenses if they relate to the service segment and are revenue in nature. 2. Depreciation Disallowance: The AO disallowed a portion of the depreciation claimed by the assessee, stating that the assets were not put to use for the entire year. The CIT(A) upheld this disallowance due to the lack of documentary evidence. The Tribunal restored the issue to the AO for fresh consideration, accepting the setup date as 01-10-2009 and directing the assessee to furnish the requisite details. 3. Disallowance u/s 43B: The AO disallowed a payment of Rs. 277.83 Lacs, treating it as unpaid bonus. The assessee argued that it was variable pay forming part of the CTC of employees. The CIT(A) confirmed the disallowance. The Tribunal held that the payment was part of the CTC and not bonus u/s 36(1)(ii), thus deleting the disallowance. 4. Addition on account of Short-Term Capital Gains: The AO added Rs. 111.31 Lacs as short-term capital gains, noting a discrepancy in the gains reported by the assessee. The CIT(A) upheld this addition. The Tribunal found that the gains on mutual funds were offered under "income from other sources," and the methodology used in the books should have been followed for tax purposes. The addition was upheld, and the corresponding grounds were dismissed. Conclusion: The appeal is partly allowed. Order pronounced on 3rd June, 2024.
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