2015 (4) TMI 983 - HC - Income Tax

Disallowance of businesses expenditure - ITAT allowed the claim - commencement of business - whether assessee has not commenced business operations during the previous year (the assessment year being 2007-08)? Held that - As decided in Western India Vegetables Products Ltd. v. CIT 1954 (3) TMI 59 - BOMBAY HIGH COURT the important question that has got to be considered is from which date are the expenses of this business to be considered permissible deductions and for that purpose the section that we have got to look to is section 2(11) and that section defines the previous year‟ and for the purpose of a business the previous year begins from the date of setting up of the business. Therefore, it is only after the business is set up that the previous year of that business commences and in that previous year the expenses incurred in the business can be claimed as permissible deductions. Any expenses incurred prior to setting up a business would obviously not be permissible deductions because those expenses would be incurred at a point of time when the previous years of the business would not have commenced. Thus the decision of the ITAT does not call for any interference - decided against revenue.

Summary

Issues:
1. Disallowance of business expenses by the Income Tax Appellate Tribunal (ITAT) due to the business not commencing operations during the previous year.

Analysis:
1. The appellant, the Revenue, challenged the ITAT's order directing the deduction of a specific amount as part of business expenses, arguing that the assessee had not started business operations during the relevant assessment year.

2. The assessee, incorporated in 2005 for out-of-home advertisement business, secured a contract in 2006 with New Delhi Municipal Corporation (NDMC) for constructing Bus Queue Shelters (BQSs). The ITAT identified three stages in operational business: setting up, post-setting up but pre-commencement, and actual commencement of business. The ITAT clarified that the business should be considered set up when activities are ready to start, not necessarily when income generation begins.

3. The ITAT found that the assessee had initiated business activities by signing contracts, making advance payments, and securing necessary facilities in the preceding year. It criticized the authorities for linking business commencement with income generation, emphasizing that setting up business precedes actual income generation.

4. The ITAT referenced prior court judgments to support its interpretation, including cases involving the commencement of business and permissible deductions. The Court concurred with the ITAT's reasoning, finding the decision reasonable and not warranting legal intervention.

5. Citing relevant legal provisions and precedents, the Court dismissed the appeal, affirming the ITAT's decision that the business was set up and had commenced in the preceding year. No substantial legal question merited further consideration.

In conclusion, the Court upheld the ITAT's ruling, emphasizing the distinction between setting up a business and the actual commencement of income-generating activities. The judgment clarified that business initiation occurs when activities are prepared to start, not necessarily when revenue is generated, and found no legal grounds to intervene in the ITAT's decision.