2016 (7) TMI 679 - HC - Income Tax

Expenditure towards bank charges - revenue or capital - when did business is set up? - Held that - We are of the opinion that the view taken by the learned Tribunal treating the expenditure towards bank charges as capital expenditure does not require any interference. The fact that the assessee was already in business or that the assessee had gone in for expansion of the business by diversifying it, does not alter the situation that the hotel business was a new business undertaken by the assessee. Any expenditure incurred for that business has to be allowable in accordance with law. That eventuality cannot arise unless the business has actually been set up. Business was admittedly set up on 7th May, 2006 when it started its business, or may be on 6th May, 2006 when it was ready for starting its business. - Decided in favour of revenue

Summary

Issues:
1. Treatment of expenditure towards bank charges as capital expenditure for a new project.
2. Interpretation of when a business is considered "set up" for tax purposes.
3. Applicability of deductions under Sections 36 and 37 of the Income Tax Act.

Analysis:

1. The primary issue in the judgment revolves around the treatment of expenditure towards bank charges amounting to ?6,79,331 for a new project, specifically a restaurant cum hotel project. The Income Tax Appellate Tribunal held this expenditure to be capital expenditure, requiring capitalization for the Assessment Year 2006-07. The appellant challenged this decision, arguing that the expenditure was for expanding an existing business, not setting up a new one.

2. The court delved into the concept of when a business is considered "set up" for tax purposes, citing precedents to differentiate between commencing a business and setting up a business. It emphasized that for expenses to be deductible under Sections 36 and 37 of the Income Tax Act, the business must be established and ready to commence operations. The court noted that the critical factor is determining the actual setup of the business, which precedes the commencement of operations.

3. The appellant's reliance on judgments such as Khimji Visram and Sons (Gujarat) Private Limited vs. CIT and CIT vs. Sarabhai Management Corporation Ltd. was considered. The court clarified that the acquisition of property or the construction period cannot be equated to the completion of setting up a business. It highlighted that for expenses to be deductible, the business must be genuinely set up, and mere intentions or preparatory activities are insufficient to claim deductions.

In conclusion, the court upheld the Tribunal's decision, emphasizing that the business was considered set up only when it commenced operations on 7th May, 2006. The judgment reinforced the importance of establishing the actual setup of a business to determine the deductibility of expenses incurred. Consequently, the appeal was dismissed, ruling in favor of the revenue authorities.