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2022 (4) TMI 336 - AT - Income TaxDisallowance of expenditure claimed under the head Business - proof of commencement of business - CIT(A) held that the appellant has not commenced business activities and that the appellant had just started preliminary work to set up power plant - plea of the assessee is that the business had already been set-up but commencement did not take place due to long gestation period - HELD THAT - Though the assessee s business had not commenced but the business had already been set-up and the assessee undertook all preliminary steps to commence the business. The gestation period, in the kind of business in which the assessee was engaged, would generally be long and it is quite natural that it would take substantial time to start the actual business operations and generate business income. Quite clearly, without necessary approvals and agreements, the assessee could have never been able to commence its business. All these documents were road-map to starting of actual business operations. Nevertheless, the business was established by procurement of land, staff etc. The assessee had recruited technical personnel for setting-up the power projects. The assessee had all the approvals, permissions in-hand and was in the process of commencing the business. The assessee had deployed technical personnel, obtained various approvals, placed purchase orders and also signed long-term Power Purchase Agreements with the clients. The signing of all these agreement would be important activity and very much integrated to the activities of the business of the assessee. AO has based his reasoning solely on the fact that assessee-company s bio-mass power plant was synchronized to grid only from 04.07.2011. Therefore, the assessee was not ready to produce the power till 04.07.2011 and hence, the business was not set-up. However, the said reasoning stresses the proposition that expenditure could not be allowed till the generation of income. The said reasoning overlooks the various vital documentary evidences furnished by the assessee in support of the fact that the business had already been set-up. We are of the considered opinion that the generation of actual business income was not an essential element to allow the business expenditure. What was required to be seen was whether the business had been set-up or not. In view of our observations in the preceding paragraphs as well as keeping in view the ratio of various judicial pronouncements as cited before us by Ld. AR during the course of hearing (preceding para-2), it could safely be said that the assessee s business had set-up during AY 2009-10 itself and therefore, the expenditure as claimed by the assessee would be allowable deductions. As decided in DAIMLER INDIA COMMERCIAL VEHICLES (P) LTD. 2019 (7) TMI 877 - MADRAS HIGH COURT merely because the manufacturing did not take place, it could not be said that the business had not been set-up. The manufacturing activity of the assessee was part of composite business activities and the same had not commenced because the construction of building and installation of plant machinery was in progress. We find that similar analogy is applicable in the present case. What is required to be seen is whether one of the essential activities for the carrying on of the business of the assessee company as a whole was or was not commenced. When a business is established and is ready to commence, then it can be said that business has been set-up. The business would be set-up when the necessary infrastructure was acquired by the assessee and the assessee started paying salaries and allowance of the experts. The assessee, in the present case, had achieved the process of establishing the business. - Decided in favour of assessee.
Issues Involved:
1. Confirmation of disallowance of business expenditure by CIT(A). 2. Determination of whether the business activities had commenced or were merely in the preliminary stages. Issue-wise Detailed Analysis: 1. Confirmation of Disallowance of Business Expenditure by CIT(A): The assessee, a corporate entity incorporated in 2006, engaged in renewable energy, filed appeals for AY 2009-10 and 2010-11 against the CIT(A)'s order dated 31.03.2017, which confirmed the disallowance of ?3,37,82,447/- claimed as business expenditure. The CIT(A) held that the assessee had not commenced business activities and was only in the preliminary stages of setting up a power plant. The assessee argued that the business had been set-up and relied on several judicial precedents, including the Hon’ble Delhi High Court in Pr. CIT V/s Miele India Private Ltd., and the Hon’ble Madras High Court in Daimler India Commercial Vehicles (P) Ltd. V/s DCIT. The Tribunal examined the documents and submissions, concluding that the business expenditure should be allowable if the business was set-up, even if no business income was earned during the year. 2. Determination of Whether the Business Activities Had Commenced or Were Merely in the Preliminary Stages: The Tribunal analyzed whether the business was set-up or merely in preliminary stages. The assessee presented various documents, including purchase orders, approvals, and agreements, to establish that the business was ready to commence. The Tribunal referred to the decision of the Hon’ble Bombay High Court in Western India Vegetable Products v. CIT, which distinguished between setting-up and commencement of business, emphasizing that expenses incurred after setting-up but before commencement are deductible. The Tribunal found that the assessee had acquired land, hired staff, and obtained necessary approvals, indicating that the business was set-up. The Tribunal also noted that the assessee had entered into significant agreements and received approvals for power plant projects, supporting the claim that the business was ready to commence. Assessment Proceedings: The AO disallowed the claimed expenses, concluding that the business had not commenced, and assessed the income as 'income from other sources'. The AO's reasoning was based on the synchronization of the biomass power plant to the grid only from 04.07.2011, indicating that the business was not ready to produce power until then. Appellate Proceedings: During the appellate proceedings, the assessee provided documentary evidence to establish that the business was set-up and operations were underway. The CIT(A) rejected the plea, maintaining that the activities presented were preliminary and did not constitute commencement of business. Tribunal's Findings and Adjudication: The Tribunal, after reviewing the material facts and judicial precedents, concluded that the business was set-up during AY 2009-10. The Tribunal emphasized that the setting-up of business involves establishing and being ready to commence operations, even if actual business income is not generated immediately. The Tribunal noted that the assessee had undertaken substantial steps, including acquiring land, hiring staff, and obtaining necessary approvals, which demonstrated that the business was set-up. Consequently, the Tribunal allowed the business expenditure claimed by the assessee for both AY 2009-10 and 2010-11, overturning the disallowance by the lower authorities. Conclusion: The appeals were allowed, with the Tribunal holding that the assessee's business was set-up during AY 2009-10, making the claimed business expenditure deductible. The order was pronounced on 01st April, 2022.
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