2005 (5) TMI 30 - HC - Income Tax

Definition of the expression previous year - date of setting up a business - The only issue that has been raised is with regard to deduction for expenses claimed by the assessee which was disallowed by the Assessing Officer on the ground that the assessee had not commenced its business during the assessment year. The claim of the assessee pertains to expenses incurred on travelling and conveyance rent telephone expenses brokerage maintenance and sales promotion - Assessing Officer was of the view that the business of the assessee would commence with the first purchase of stock-in-trade and since no trading activities had taken place the assessee could not request for capitalization of the expenses incurred - The definition of the expression previous year is quite clear and does not admit of any meaning which could be said to be in favour of the Revenue. A bare perusal of the section shows that there is hardly any question of law that arises in this case much less any substantial question of law relating to interpretation. There is no doubt that the date of setting up a business and the date of its commencement could be two separate dates. Section 3(1) has reference to the date of setting up the business the Commissioner of Income-tax (Appeals) and the Tribunal merely relied on the explicit language of the section to come to the conclusion that the view of the Assessing Officer was incorrect. This being the clear position we do not find any infirmity in the impugned order nor does it raise any substantial question of law

Summary

Issues:
- Deduction for expenses claimed by the assessee disallowed by the Assessing Officer as business had not commenced during the assessment year.

Analysis:
The judgment revolves around the disallowance of expenses claimed by the assessee due to the business not commencing during the assessment year. The Assessing Officer disallowed the expenses on the grounds that the assessee had not started its business operations, linking the commencement of business with the first purchase of stock-in-trade. However, the Commissioner of Income-tax (Appeals) disagreed, highlighting the distinction between commencement and setting up of business. The Commissioner noted that expenses incurred before the business was set up could still be considered for profit determination purposes.

The crux of the matter lies in the interpretation of Section 3(1) of the Income-tax Act, which defines the "previous year" for tax purposes. The section specifies that for a newly set up business, the previous year starts from the date of setting up the business. Both the Commissioner of Income-tax (Appeals) and the Tribunal emphasized this definition to support their decision in favor of the assessee. They clarified that the business's establishment date and commencement date could differ, and the expenses incurred before the business's start could be accounted for as per the law.

The High Court upheld the decisions of the lower authorities, dismissing the Revenue's appeal. The court reiterated that Section 3(1) of the Act unambiguously refers to the date of setting up the business, not the commencement date. The judgment emphasized that the statutory provision is clear, leaving no room for ambiguity favoring the Revenue's stance. The court concluded that no substantial legal question arose from the case, as the interpretation of the law was straightforward and supported by the explicit language of the relevant section.

In essence, the judgment clarifies the distinction between setting up and commencing a business for tax purposes, emphasizing that expenses incurred before the business's commencement can be considered if the business has been set up. The decision underscores the importance of adhering to statutory definitions and language in tax matters, ensuring clarity and consistency in interpreting legal provisions.