2014 (7) TMI 640 - AT - Income Tax

Expenses related to raw material Commencement of Business or not Capital expenses or not Held that - the performance of any activity of business would lead to commencement of business and the business would be held to be set up - The carrying on the first activity is the integral part to the carrying on the business leads up to setting up of or commencement of business - From the facts of the assessee's case, the main business activity being production of sponge iron, the procurement/purchase of raw material being coal and iron ore is thus very much a business activity. Working capital employment means that the working of the business has started and that means when no doubt that business has commenced its working - the nature of the expenses incurred i.e. interest on working capital, upfront free and insurance and other charges are in the nature of revenue expenditure Decided in favour of Assessee. Carry forward of business loss Assessment u/s 153A - Non filing of return u/s 139(1) Held that - the assessee is not supposed to file its return of income u/s 139(1) of the Act because he statutorily required to file return of its income in response to notice u/s. 153A of the Act and he has done accordingly and make claim of loss - Neither the AO nor CIT(A) has doubted the genuineness of claim of loss rather on technical issue that it has not claimed the loss in the return of income to be filed u/s. 139(1) of the Act, disallowed the loss - the claim of loss of assessee is allowed decided in favour of Assessee. Reduction of income Already offered to tax Held that - The assessee rightly stated that three amounts totalling to ₹ 12,37,178/having been already subjected to tax, a sum of ₹ 64,53,786/standing on the debit side of P&L Account under the head 'Pre-commissioning Revenue Expenses' should be increased to ₹ 76,90,964/during the relevant assessment year - the plea of assessee is genuine and accordingly, the matter is remitted back to the AO Decided in favour of Assessee.

Summary

Issues Involved:
1. Disallowance of expenses as capital expenditure.
2. Disallowance of carry forward of business loss due to belated return.
3. Treatment of a receipt as income.
4. Double taxation of income already offered in previous years.

Detailed Analysis:

1. Disallowance of Expenses as Capital Expenditure:
The first issue pertains to the disallowance of expenses amounting to Rs. 64,53,786, which were related to the procurement of raw materials before the commencement of commercial production. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated these expenses as capital expenditure, asserting that they were incurred before the business was set up. The Tribunal, however, referred to the Supreme Court's decision in CWT Vs. Ramaraju Surgical & Cotton Mills Ltd. and the Bombay High Court's decision in Western India Vegetable Products Ltd. Vs. CIT, emphasizing the distinction between "setting up" and "commencement" of business. The Tribunal concluded that the procurement of raw materials is a business activity and thus, the expenses should be considered as revenue expenditure. Consequently, the disallowance was reversed, and the AO was directed to allow the expenses.

2. Disallowance of Carry Forward of Business Loss:
The second issue involves the disallowance of carry forward of business loss amounting to Rs. 2,65,26,210 due to the belated filing of the return. The AO and CIT(A) disallowed the loss on the ground that the return was filed after the due date under section 139(1) of the Income-tax Act. The Tribunal, however, noted that a search had taken place on 20.09.2007, and the due date for filing the return for AY 2007-08 was 31.10.2007. According to the second proviso to section 153A(1), assessment or reassessment proceedings pending on the date of the search shall abate, and fresh assessment can be done under section 153A. The Tribunal held that the assessee was not required to file the return under section 139(1) due to the search and was entitled to file the return under section 153A. Therefore, the disallowance of the carry forward of the business loss was reversed.

3. Treatment of a Receipt as Income:
The third issue concerns the treatment of a receipt of Rs. 96,972 as income. The assessee did not press this ground during the hearing, and hence, it was dismissed.

4. Double Taxation of Income Already Offered in Previous Years:
The fourth issue involves the addition of Rs. 12,37,178, which was already offered to tax in the assessment years 2005-06, 2006-07, and 2007-08, leading to double taxation. The Tribunal noted that the amounts were already subjected to tax and should be adjusted against the expenses. The Tribunal remitted the issue back to the AO for fresh adjudication to ensure proper computation of income, thus allowing the ground for statistical purposes.

Conclusion:
The appeal was partly allowed for statistical purposes, with significant relief granted on the issues of disallowance of expenses as capital expenditure and carry forward of business loss. The issue of double taxation was remitted back to the AO for fresh adjudication.