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2015 (12) TMI 374 - AT - Income TaxAddition on account of preoperative expenses - CIT(A) deleted the addition - Held that - As decided in assessee s own case 2014 (12) TMI 64 - DELHI HIGH COURT none of the expenses mentioned therein are of personal in nature; and the said expenses are of revenue in nature. Even otherwise, 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. Since the assessee has claimed deduction only in relation to the expenditure of revenue in nature in the Profit and Loss Account, we find no infirmity in the reasoned order of the ld CIT(A), therefore, we confirm the finding of the ld CIT(A) on this ground and dismiss the said ground of appeal of the revenue - Decided in favour of assessee.
Issues:
Appeal against deletion of addition of preoperative expenses - Whether business was set up - Allowability of expenses incurred before business commencement. Analysis: 1. Deletion of Addition of Preoperative Expenses: The appeal concerned the deletion of an addition of preoperative expenses amounting to Rs. 22,35,42,346 by the ld. CIT(A). The Assessing Officer (AO) disallowed the expenses as the business was considered not set up during the relevant year. However, the CIT(A) held that the business was set up when exploration activities began, even before commercial production. The appellant argued that exploration is essential before production and that the expenditure was necessary for business activities. The CIT(A) noted that the appellant had accumulated exploration costs as per section 42 of the Act and allowed the deduction of routine business expenditure. The CIT(A) referenced past decisions and upheld that exploration activities constituted the commencement of business, leading to the deletion of the addition. 2. Setting Up of Business: The key issue revolved around when the business could be deemed as set up. The AO contended that business commencement required oil production, while the appellant argued that exploration activities marked the beginning of business. The CIT(A) emphasized that exploration was integral to the business, and commencement did not depend solely on production. Past decisions supported the view that exploration activities indicated business commencement. The CIT(A) highlighted that the issue of business setup had been previously decided in favor of the appellant by the ITAT and the Delhi High Court, reinforcing the decision to delete the addition. 3. Allowability of Expenses Before Business Commencement: The AO disallowed preoperative expenses, considering the business not set up. In contrast, the CIT(A) allowed the deduction of expenses incurred for exploration activities, emphasizing that such costs were essential for business operations. The CIT(A) noted that all expenses claimed were revenue in nature and eligible for deduction under section 37(1) of the Act. The CIT(A) reasoned that since the appellant had only claimed expenses related to day-to-day business operations, there was no infirmity in allowing the deduction. The CIT(A) upheld that the expenses incurred before commercial production were deductible in computing profits and gains. 4. Judicial Precedents and Decision: The CIT(A) relied on judicial precedents to support the decision that exploration activities marked the commencement of business. Past ITAT and Delhi High Court decisions in favor of the appellant reinforced the finding that exploration activities were crucial for business setup. The CIT(A) emphasized that the issue of business commencement could not be altered year after year, citing a Delhi High Court case. The CIT(A) concluded in favor of the appellant, granting relief of Rs. 22,35,42,346 by allowing the deduction of preoperative expenses. In conclusion, the appeal was dismissed, upholding the CIT(A)'s decision to delete the addition of preoperative expenses based on the commencement of exploration activities signifying the setup of the business, as supported by legal precedents and the nature of the expenses claimed by the appellant.
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