2014 (2) TMI 892 - AT - Income Tax

Deletion on account of pre-operative expenses Business not commenced Held that - The business would commence when the activity which is first in point of time and which must necessarily precedes the other activities is started - Relying upon CIT Vs. Saurashtra Cement and Chemical Industries ltd. 1972 (8) TMI 19 - GUJARAT High Court - one of the essential activity namely license/ right to explore the blocks has been granted and exploration of blocks has already been started without which no production can take place - business had commenced at the stage when licence to explore the respective blocks was granted by the Govt. of India to assessee company. The CIT(A) has rightly made a finding that the assessee have commenced its business, when the appellant has carried the first activity being assignment of the right to explore the block awarded in the New Exploration and Licensing Policy (NELP) and commencement of exploration activities thereafter incurred an expense of more than Rs. 258 crores - None of the expenses mentioned are of personal in nature and the expenses are of revenue in nature - the assessee has capitalized all the exploration cost and the same have been reflected as capital work for progress in the balance-sheet - The assessee has only claimed deduction of the expenses which have been incurred for day to day operation of the business which are eligible for deduction u/s 37(1) of the Act thus, there is no infirmity in the order of the CIT(A) Decided against Revenue. Deletion made u/s 35D of the Act - Expenses incurred for increasing the authorized share capital Held that - The assessee company has commenced its business and already commenced exploration activities on the blocks awarded to it in the relevant Assessment Year as in the preceding years too the said claim of the assessee company was allowed by the Assessing Officer - there is no material on record to suggest or support any change in the character or nature of the said expense incurred by the assessee company there is no infirmity in the order of the CIT(A) directing the Assessing Officer to allow the deduction u/s 35D of the Act in respect of expenses incurred for increasing the authorized share capital Decided against Revenue.

Summary

Issues Involved:
1. Deletion of addition of Rs. 1,69,72,374/- on account of pre-operative expenses.
2. Deletion of addition of Rs. 2,90,854/- made under section 35D for expenses incurred for increasing the authorized share capital.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 1,69,72,374/- on Account of Pre-operative Expenses:

The Revenue challenged the deletion of Rs. 1,69,72,374/- as pre-operative expenses, arguing that the assessee had not commenced its business during the relevant year. The appellant, a private limited company engaged in the exploration and production of oil and gas, filed its return declaring NIL income after setting off brought forward losses and depreciation. The return was processed under section 143(1) and later scrutinized under section 143(3), resulting in a total income determination of Rs. 1,53,49,579/- after disallowing preoperative expenses and ROC fees.

The Revenue contended that the business had not commenced as the company was only in the preliminary exploration stage. The assessee countered, citing prior years' assessments where similar expenses were allowed, arguing for consistency in tax treatment.

The Tribunal upheld the CIT(A)'s decision, emphasizing that business activities in the exploration sector include stages of exploration, development, and production. The commencement of any of these stages signifies the start of business operations. The Tribunal referenced the Supreme Court and High Court judgments affirming that the business commences with the first essential activity, in this case, the granting of exploration licenses. Consequently, the expenses incurred post-commencement of business were deemed allowable as business expenditure, leading to the dismissal of the Revenue's appeal on this ground.

2. Deletion of Addition of Rs. 2,90,854/- Made Under Section 35D for Expenses Incurred for Increasing the Authorized Share Capital:

The Revenue also contested the deletion of Rs. 2,90,854/- incurred for increasing the authorized share capital, disallowed under section 35D. The Assessing Officer had disallowed this expense, considering it capital in nature and arguing that the business had not commenced.

The assessee argued that similar expenses were allowed in previous years' assessments, advocating for consistency. The Tribunal noted that the business had indeed commenced, as established in the previous issue, and that there was no change in the nature of the expenses. Thus, the CIT(A)'s decision to allow the deduction under section 35D was upheld.

General Grounds:

The general grounds raised by the Revenue were dismissed as they were deemed to be general in nature.

Conclusion:

The Tribunal dismissed the Revenue's appeal and confirmed the CIT(A)'s order, allowing the deductions for pre-operative expenses and expenses incurred for increasing the authorized share capital. The decision was pronounced in the open court on 14.01.2014.