2012 (4) TMI 150 - HC - Income Tax

Commencement of Business - Revenue is in appeal against the judgment of the Tribunal AO disallowed the entire expenditure incurred by the assessee during the year as the business of the assessee had not yet commenced Assessee contented that the assessee has submitted the return for AY 1998-99 wherein the basic pattern of investments and operations were the same as in AY 2001-02 and the set up of the business has been accepted during the AY 1998-99, the AO thus cannot again go back and say that the business has not been set up during the year - Tribunal, by the impugned order, allowed the appeal Tax case Appeal by the Revenue Held that - if the assessee does first activity towards the attaining its main object, business shall be deemed to have been set up - the company entered into collaboration with to set up a joint venture company in which the respondent company had 26% equity share depicts that it is attaining its main objective as mentioned in MOA OF Company - AO is directed to treat all the expenses to be the revenue expenditure and allow set off of loss in accordance with law.Tax Case Appeal of revenue rejected.

Summary

Issues Involved:
1. Whether the business of the respondent assessee had commenced.
2. Whether the business expenditure for the non-commencement of business was rightly disallowed by the Assessing Officer and CIT(A).
3. Whether the Tribunal was justified in allowing the business expenditure claimed by the assessee.

Issue-wise Detailed Analysis:

1. Commencement of Business:
The primary issue revolved around whether the business of the respondent assessee, a Government company engaged in promoting and organizing minor ports in Gujarat, had commenced during the assessment year 2001-02. The Assessing Officer, relying on the Supreme Court's decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT, disallowed the expenditure incurred by the assessee, holding that the business had not yet commenced. The CIT(A) upheld this view, observing that the assessee's activities were of a pre-operative nature and did not constitute actual business activities aimed at generating regular business income.

2. Disallowance of Business Expenditure:
The Assessing Officer disallowed the entire expenditure incurred by the assessee, amounting to Rs. 19.79 lakhs, on the grounds that the business had not commenced. The CIT(A) concurred, noting that the assessee's activities during the relevant year were limited to pre-operative tasks and did not involve any actual promotion, organization, or development of ports or related infrastructure.

3. Tribunal's Justification in Allowing Business Expenditure:
The Tribunal overturned the decisions of the Assessing Officer and CIT(A), holding that the business had indeed been set up. It noted that the Revenue had accepted the setting up of the business during the assessment year 1998-99, and the pattern of investments and operations remained consistent in the subsequent years, including 2001-02. The Tribunal emphasized that once a business is set up, all expenses incurred thereafter are considered revenue expenditure. It also referenced a similar case, ACIT v. Gujarat State Road Development Corporation Ltd., where the Tribunal had taken a similar view.

Detailed Analysis:

Commencement of Business:
The Tribunal and the High Court examined the main objects of the assessee company as outlined in its Memorandum of Association, which included promoting, organizing, managing, and developing minor and major ports, shipyards, jetties, harbors, and docks. The company had entered into a joint venture with Adani Port Limited, forming Gujarat Adani Port Limited, and had invested Rs. 15 crores in this venture. The Tribunal found that these activities indicated that the business had been set up, even if actual operations had not commenced.

Disallowance of Business Expenditure:
The High Court noted that the Tribunal had correctly interpreted the law by distinguishing between the setting up and commencement of business. The Tribunal's decision was supported by the principle that once a business is set up, all subsequent expenses are revenue expenditures. The High Court cited the case of Prem Conductors Pvt. Ltd. v. CIT, which established that a company is considered to have set up its business from the date when one of its business activities starts, even if other activities have not yet commenced.

Tribunal's Justification in Allowing Business Expenditure:
The High Court upheld the Tribunal's decision, agreeing that the business had been set up and that the expenses incurred were revenue expenditures. It noted that the Tribunal had relied on substantial evidence, including the company's collaboration with Adani Port Limited and its active participation in the development of Mundra Port. The High Court also referenced the case of Commissioner of Income Tax, Gandhinagar v. Gujarat State Road Development Corporation Ltd., where similar principles were applied.

Conclusion:
The High Court dismissed the Revenue's appeals, affirming the Tribunal's decision to allow the business expenditure claimed by the assessee. The Court concluded that the business had been set up during the relevant assessment year, and the expenses incurred were rightly considered revenue expenditures. The Tribunal's findings were based on substantial evidence and consistent with established legal principles.