2019 (7) TMI 877 - HC - Income Tax

Maintainability of the appeal u/s 260A - impact of pendency of rectification before Tribunal - HELD THAT - To be noted that the power under Section 254(2) of the Act is a power given to rectify errors. The scope of the said power is no longer res integra and by now, is well settled. The present appeal is u/s 260A of the Act wherein, the Court on being prima facie satisfied that there are substantial questions of law to be decided, has admitted the appeal, vide order dated 21.12.2018. In such circumstances, the pendency of a petition for rectification u/s 254(2) can have no impact on this appeal. Accordingly, we hold that this appeal is maintainable. Power of Tribunal for enhancement - AO disallowed of operating expenses, financial expenses and depreciation for the reason that the commercial operation of manufacture and sale of commercial vehicles has not been commenced - CIT(A) held the claim of assessee for set of business as it had already commenced activities relating to design and also the pre-activities essential for commencement of manufacture - HELD THAT - The AO at no point of time, disputed the date on which the business of the assessee was set up. The only dispute raised by the AO was that the assessee has not commenced its commercial activity, viz., manufacture and sale of vehicles. Thus, the Tribunal proceeded on basis, which is prejudicial to the assessee in the sense what was not the subject matter of dispute before the AO has been raised by the Tribunal for the first time. In other words, the benefit which accrued to the assessee not only in the assessment year under consideration, but also the earlier assessment year 2009-10 has been taken away by the Tribunal. The question is whether this can be done. The definite answer to this question is an emphatic no. Tribunal committed an error in venturing into an issue which was never an issue before the AO and unsettling the date on which the business of the assessee was set up and as the Tribunal has no jurisdiction to do so and the said finding has necessarily to be set aside. Set up of business by appellant or not - HELD THAT - We fully endorse the view taken by the CIT(A) in holding that the assessee had commenced, performed activities relating to designing of commercial vehicles and related products R D, buying and selling of parts and in the process of construction of factory building for manufacture of commercial vehicles. Thus, the test laid down in the aforementioned decisions if applied to the facts of the case, we have no hesitation to hold that the business of the assessee had been set up in the previous assessment year for which the assessment had been completed by the Assessing Officer. Therefore, the Tribunal erred in holding that merely because the manufacturing and sale of the vehicle did not take place, the business of the assessee has not been set up. The manufacturing activity of the assessee is a part of the composite business activities of the assessee and this was not commenced because, the construction of the building and installation of plant and machinery was in progress. Disallowance of expenses under the head operating expenses, financial expenses and depreciation - assessee not yet started commercial operations - meaning of composite business and allowability of expenses - HELD THAT - A new line of business was also treated to be a composite business when it is established that there is a unity of control and management and common fund apart from other features. The unity of control, management, etc., of the assessee in respect of each of its activity has not been disputed by the Revenue. In such circumstances, the assessee on showing that it has commenced several of its activities in the bunch of activities for which it was incorporated would definitely qualify for deduction of the expenditure incurred by it under the head operating expenses, financial expenses and depreciation. AO committed an error in disallowing the expenses. The Tribunal went on to decide an issue which was never disputed by the Assessing Officer, viz., as to whether the business of the assessee was set up or not. As held by us earlier, the Tribunal cannot take away the benefit given to the assessee by the AO and therefore, the order of the Tribunal is without jurisdiction - Decided in favour of the assessee.

Issues Involved:
1. Jurisdiction of the Tribunal regarding the "setting up" of business.
2. Commencement of business activities and their recognition for tax purposes.
3. Allowability of expenses incurred before the commencement of commercial operations.
4. Consistency in the assessment of business setup dates across different assessment years.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Tribunal regarding the "setting up" of business:
The Tribunal erred in law by exceeding its jurisdiction in holding that the business of the appellant was not set up, which was not even the case of the Assessing Officer. The Assessing Officer did not dispute the date on which the business was set up and had accepted the computation of income under the head “profits and gains of business or profession.” The Tribunal cannot take away the benefit granted by the Assessing Officer, as established in the decisions of Mcorp Global (P.) Ltd. vs. CIT and Hukumchand Mills Ltd. vs. CIT.

2. Commencement of business activities and their recognition for tax purposes:
The business of the assessee was considered set up as it had commenced various activities related to its objectives, such as design and development of commercial vehicles, R&D activities, sourcing components, and constructing a manufacturing facility. The CIT(A) found that these activities were part of the composite business and had already commenced in the assessment year 2009-10. The Tribunal's decision to reverse this finding was incorrect as it did not consider the substantial activities already undertaken by the assessee.

3. Allowability of expenses incurred before the commencement of commercial operations:
The expenses related to operating, financial, and depreciation were allowable as business expenditure. The CIT(A) noted that the expenses debited to the P&L account were not related to the construction of the manufacturing facility, which was capitalized under "capital work in progress." The Tribunal's decision to disallow these expenses was based on an incorrect interpretation of the commencement of business activities. The business can be said to have been set up when it is ready to discharge its functions, even if the actual commencement of revenue-generating activities has not occurred, as supported by the decisions in Western India Vegetable Products Ltd. vs. CIT and Prem Conductors (P.) Ltd. vs. CIT.

4. Consistency in the assessment of business setup dates across different assessment years:
The date of setting up the business, which was accepted in the assessment year 2009-10, cannot be changed in a later year. The Tribunal's decision to unsettle this date was incorrect and against the principles of consistency in tax assessments. The decision in Shasun Chemicals & Drugs Ltd. vs. CIT supports the principle that the date of setting up a business, once accepted, should remain consistent across different assessment years.

Conclusion:
The appeal is allowed, and the substantial questions of law are answered in favor of the assessee. The Tribunal's decision to disallow the expenses and dispute the setting up of the business was incorrect and beyond its jurisdiction. The expenses incurred by the assessee were allowable as business expenditure, and the business was considered set up based on the substantial activities undertaken, even if commercial production had not commenced.

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