2014 (12) TMI 64 - HC - Income Tax

Expenses treated as pre-operative expenses and disallowed - Business of assessee set up or not Held that - CIT(A) rightly deleted the Disallowance after observing that the business of the assessee had been set up and the expenditure incurred was business expenditure - the assessee had explained and asserted that the business of the assessee had in fact commenced because they had started oil exploration operations - it is not a case where the business had merely been set up, but a case where the actual operations had commenced - oil exploration itself was one of the business activities undertaken by the assessee - oil production would be the second stage of business activity, but this would not undo the commercial and business activities relating to oil exploration relying upon CIT versus Sponge Iron India Ltd. 1992 (10) TMI 67 - ANDHRA PRADESH High Court - for commencement of business all activities which go on to make business need not be started simultaneously. As soon as an activity which is an essential activity in the course of carrying on the business is started, the business must be said to have commenced - revenue would be generated once the oil production commenced had capitalised the expenditure on oil exploration cost and the same was reflected as capital work in progress in the balance sheet the assessee had themselves added back the Registrar of Companies filing fee and had applied/claimed the expense u/s 35D - The depreciation had also been added back by the assessee - This factual position was ignored in the assessment order, without any explanation - other expenditure was not directly relatable and having nexus with the oil exploration costs AO had also disallowed ₹ 2,90,854/- u/s 35D of the Act being expenses relating to increase in the authorised capital - once it was held that the business had been set up or rather the business had commenced, the addition made by the AO disallowing the claim u/s 35D of the Act has to be rejected Decided against revenue.

Summary

Issues:
1. Disallowance of business expenditure for Assessment Year 2008-09.
2. Disagreement on whether the business of the assessee had been set up.
3. Disallowance of expenses claimed as revenue deduction.
4. Disallowance under Section 35D of the Act for expenses related to increase in authorized capital.

Analysis:
1. The High Court examined the appeal by the Revenue challenging the order passed by the Income Tax Appellate Tribunal for Assessment Year 2008-09. The Assessing Officer disallowed expenditure of &8377; 1,69,72,374, treating it as pre-operative expenses, and enhanced the returned income. The Commissioner of Income Tax (Appeals) and the Tribunal held that the business of the assessee had been set up, and the expenditure was justified as business expenditure.

2. The respondent-assessee, engaged in oil and gas exploration, had commenced business activities and had acquired necessary licenses and approvals. The Assessing Officer's argument that business had not been set up until oil production started was deemed fallacious. The High Court cited precedents emphasizing that the commencement of business does not require all activities to start simultaneously. The respondent had capitalized oil exploration costs, reflecting prudent financial management.

3. The expenditure claimed as a revenue deduction was detailed under various heads, including operating expenses, finance charges, and depreciation. The High Court noted that certain expenses were disallowed without valid reasons, such as the filing fee added back by the assessee and depreciation expenses. The disallowance under Section 35D of the Act for expenses related to an increase in authorized capital was also rejected.

4. The Assessing Officer's decision to disallow expenses under Section 35D of the Act was overturned based on the finding that the business had been set up. The appeal was dismissed, and the Commissioner of Income Tax was directed to pay costs to the Prime Minister's Relief Fund due to the misconceived nature of the appeal.