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2013 (1) TMI 111 - HC - Income TaxWhen can it be said that the business commenced for the purpose of determining its tax liability? - Held that - As decided in CWT v. Rama Raju Surgical Cotton Mills Ltd 1966 (10) TMI 41 - SUPREME COURT A unit cannot be said to have been set-up unless it is ready to discharge the function for which it is being set-up. It is only when the unit has been put to such a shape that it can start functioning as a business or a manufacturing organization that it can be said that the unit has been set-up. Reasoning given by the AO in his order for the assessment year 1998-99 is clear and conclusive that heavy expenditure incurred by the assessee to create an infrastructure for facilitation of future business hence benefit of enduring nature was imposed to be derived. It accepted the assessee s contentions with regard to having commenced business with effect from 01.01.1997. It was only on the basis of such a fundamental premise that income was assessed and certain disallowances were made. In these circumstances it would be unfair for the revenue to contend for each successive assessment year that the assessee had to establish that it commenced business. The evidence on record clearly shows that substantial services were being rendered and salaries etc. were disbursed even though on reimbursement basis. The mere fact that other service charges are meager in nature would not in any way influence the decision as to whether business was commenced. Furthermore in line with the decision of this Court in ESPN Software (P.) Ltd. (2008 (3) TMI 90 - DELHI HIGH COURT) the question of date of commencement of business is one of fact. It is setting-up of business and not commencement that is to be considered. Having regard to these circumstances it is held that the findings of the Tribunal in the impugned common judgment and order are sound and do not call for interference. The question of law is accordingly answered in favour of the assessee.
Issues Involved:
1. Whether the Tribunal erred in holding that the assessment order for AY 1998-99 was conclusive on the issue of the date of commencement of the assessee's business for determining tax liability. Issue-wise Detailed Analysis: 1. Tribunal's Error on the Date of Commencement of Business: The core issue was whether the Tribunal erred in holding the assessment order for AY 1998-99 as conclusive regarding the date of commencement of the assessee's business. The assessee, incorporated on 19.12.1996, claimed business commencement from 01.07.1997. The AO, after examining income tax returns and related expenses, concluded that the heavy expenditure incurred was to kick start the business, thus of enduring nature and not allowable as revenue expenditure, allowing only 20% of the claimed expenses. 2. CIT(A) and Tribunal's Findings: The CIT(A) reversed the AO's decision, stating that the expenses were for initial business operations and were revenue in nature. The Tribunal upheld the CIT(A)'s order, stating that the expenses were genuine and did not create any capital assets or enduring benefits, thus allowing them as revenue expenditure. 3. Subsequent Years' Assessments: For subsequent years, the AO and CIT(A) disallowed the claimed losses, arguing the business had not commenced, thus treating the expenses as capital in nature. The Tribunal, however, dismissed these appeals, maintaining that the issue of business commencement was already settled for AY 1998-99. 4. Reopening of Assessment for AY 1999-2000: The authorities reopened the assessment for AY 1999-2000 due to large external commercial borrowings. The Tribunal justified the reopening but dismissed the appeal on merits, aligning with its previous reasoning. 5. Revenue's Argument: The revenue contended that there was no conclusive evidence of business activity by the assessee and that the Tribunal overlooked that the previous order for AY 1998-99 only treated the expenditure as revenue without confirming the business commencement date. 6. Assessee's Argument: The assessee argued that the AO's acceptance of business commencement for AY 1998-99 was final and could not be revisited. The Tribunal's consistent findings across years should be upheld, emphasizing that the expenses were for business operations and not capital in nature. 7. Court's Consideration: The Court considered the AO's detailed examination and acceptance of the business commencement date for AY 1998-99, which was upheld by the CIT(A) and Tribunal. It noted that fundamental issues like the date of business commencement should be settled conclusively for at least one year and not reopened repeatedly. 8. Supreme Court and High Court Precedents: The Court referred to the Supreme Court's decision in CWT v. Rama Raju Surgical Cotton Mills Ltd., which defined business commencement as being ready to discharge business functions. It also cited the Delhi High Court's ruling in CIT v. ESPN Software (P.) Ltd., which emphasized that the date of business commencement is a factual finding and should be final. Conclusion: The Court concluded that the AO's reasoning for AY 1998-99 was clear and conclusive, accepting the business commencement date as 01.01.1997. It held that it would be unfair for the revenue to challenge this in successive years. The Tribunal's findings were upheld, and the appeals were dismissed, answering the question of law in favor of the assessee and against the revenue.
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