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2021 (10) TMI 907 - AT - Income TaxReceipt pertaining to the rights of distribution - Unsecured loan or business receipts - whether the receipt received by the assessee as advance can be treated as business receipt u/s 28(i) of the Act or not ? - HELD THAT - As the assessee has not undertaken any business activity and he has received only advance for setting off of losses for future years, which commence w.e.f. 01/04/2016, but, no commercial activity has been started, which is clear from the audited financial statements. Therefore, the agreement in this regard for treating it as a revenue income cannot arise. Accordingly, we observe that the advance received is not a revenue in nature for the year under consideration. As decided in SIDDHESHWAR SAHAKARI SAKHAR KARKHANA LTD., COMMISSIONER OF INCOME TAX 2004 (9) TMI 6 - SUPREME COURT amounts collected by the respondent-societies towards the Cane Development Fund and was allowed, the amount collected towards the Cane Development Fund would be treated as the income of the assessee and any claim for deduction would be entertained and decided by the Tribunal. - We find substance in the submissions made by the ld. AR of the assessee and accordingly, we direct the AO to delete the addition made on this count. Thus, the grounds raised by the assessee on this issue are allowed Disallowance of expenditure u/s 37(1) - administrative expenses and payment of salaries - assessee submitted that the expenditure was incurred for the purpose of business, and it is allowable as business expenditure if it is incurred on the ground of commercial expediency - HELD THAT - It is only after the business is set up that the expenses incurred in the business can be claimed as permissible deduction under Section 37 of IT Act. For commencement of a business, there must be some income generating asset or income earning structure. In the case on hand, the assessee is incurring capital expenditure and till date of FY ending, the assessee has not commenced its commercial operations. As per the balance sheet filed by the assessee, the assessee is incurring capital expenditure, therefore, factory maintenance and repair maintenance expenditure do not arise. The assessee failed to establish that expenditures incurred under Sl. No. 3, 4 5 are not directly relating to the installation of the project. The assessee has incurred R D expenditure earlier, which has been capitalized and, therefore, this expenditure cannot be treated as revenue expenditure since the assessee has not yet started commercial production. In view of the above observations and considering the totality of the facts of the case, this ground of the assessee is partly allowed.
Issues Involved:
1. Addition of ?22,50,00,000/- as business income under Section 28(i) of the Income Tax Act. 2. Disallowance of ?42,52,628/- as business expenditure. Issue-wise Detailed Analysis: 1. Addition of ?22,50,00,000/- as Business Income under Section 28(i): The assessee company, engaged in manufacturing drugs and pharmaceuticals, entered into a marketing agreement with Boehringer Ingelheim India Pvt. Ltd. (BIIPL) for the global exclusive distribution rights of its products. The company received a non-refundable amount of ?22.50 crores from BIIPL. The AO treated this amount as business income under Section 28(i) of the Income Tax Act, 1961, arguing that the receipt was a business transaction and should be taxed as such. The AO issued a show-cause notice to the assessee, who responded by stating that the amount was received to compensate for future losses and should not be treated as income for the current assessment year. The AO rejected this explanation, considering it a colorable device to evade tax. The CIT(A) upheld the AO's decision, stating that the amount received was for assigning distribution rights, which is a business activity, and thus taxable as business income. The CIT(A) noted that the agreement between the assessee and BIIPL did not link the amount to future losses or pricing of the product. Instead, it was a consideration for the distribution rights, making it taxable under Section 28(i). Upon appeal to the ITAT, the assessee reiterated that the amount was an advance for future services and should not be treated as income for the current year. The ITAT considered the rival submissions and the material on record. It concluded that the business had not commenced commercial activities, and the receipt was an advance for future services. The ITAT relied on various judgments, including Siddheshwar Sahakari Sakhar Karkhana Ltd., where the Supreme Court held that certain receipts linked to trading activities but meant to be held as deposits are not taxable as income. The ITAT directed the AO to delete the addition of ?22.50 crores, allowing the assessee's grounds on this issue. 2. Disallowance of ?42,52,628/- as Business Expenditure:The AO observed that the assessee had claimed an expenditure of ?42,52,628/- in its Profit and Loss account, despite not having commenced business operations. The AO issued a show-cause notice, proposing to disallow this expenditure, as the project was still in the work-in-progress stage, and the expenditure should have been capitalized. The assessee responded, requesting the dropping of the proceedings. The CIT(A) confirmed the AO's decision, stating that the assessee had not commenced commercial production, and the project was still under work-in-progress. The CIT(A) held that the expenses, though of revenue nature, should be capitalized until the actual commencement of business. The CIT(A) cited various judgments, including the Supreme Court's ruling in CWT Vs. Rama Raju Surgical Cotton Mills Ltd., which stated that a unit cannot be said to have been set up unless it is ready to discharge its functions. Before the ITAT, the assessee argued that the expenditure was incurred for business purposes and should be allowed under Section 37 of the Income Tax Act. The ITAT considered the rival submissions and the material on record. It noted that there is a distinction between setting up and commencement of business, and expenses incurred during the interval between these stages are deductible under Section 37. The ITAT observed that certain expenses, such as staff salaries, welfare expenses, and administrative expenses, were revenue in nature and should be allowed. However, expenses related to factory maintenance, repairs, and R&D were capital in nature and should be capitalized. The ITAT partly allowed the assessee's ground, granting relief of ?25,20,991/-. Conclusion:The ITAT directed the AO to delete the addition of ?22.50 crores as business income and partly allowed the deduction of ?42,52,628/- as business expenditure, granting relief of ?25,20,991/-. The appeal was partly allowed in favor of the assessee. Pronounced in the open court on 5th October, 2021.
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