2023 (6) TMI 273 - AT - Income Tax

Disallowance of the pre operative expenses - assessee being a limited liability partnership firm incorporated on 08.12.2017 for which the trading operation commenced from 01.01.2018 - assessee is said to have carried out its business only for 3 months and had filed its return of income declaring loss during the impugned year - HELD THAT - No deviation in the business carried out by the assessee firm which is akin to that of the earlier firms which name has been changed to that of the assessee s. The lower authorities have not disputed the fact that there was no change in the business subsequent to the name change. The impugned expenses claimed by the assessee pertains to the business expenses and not the preoperative expenses alleged by the lower authorities. As decided in case of Maruti Insurance Pvt. Ltd. 2021 (4) TMI 875 - DELHI HIGH COURT wherein it was held that the expenses incurred when the entity is ready to do business and when business is conducted cannot be capitalized as in the present case. The present case in hand is in a better footing than the above mentioned case where the business was carried on much prior to the impugned year and there was only a name change subsequently. No justification in holding the impugned expenses as per operative expenses - delete the impugned addition - Ground of assessee allowed. Disallowance of interest paid on late payment - A.O. had disallowed the interest paid on late payment of TDS debited in the profit and loss account - HELD THAT - CIT(A) correctly confirmed the said disallowance by relying on the decision of Chennai Properties Investments Ltd. 1998 (4) TMI 89 - MADRAS HIGH COURT which held that the disallowance of interest expenditure paid u/s. 201(1A) of the Act on late payment of TDS is penal in nature and not compensatory - CIT(A) further held that the same is not business expenditure and cannot be termed as compensatory in nature as alleged by the assessee. Decided against assessee.

Summary

Issues:
The appeal challenges the order of the Commissioner of Income Tax (Appeals) related to the Assessment Year 2018-19, specifically contesting the assessment order under section 143(3) of the Income Tax Act and the disallowance of operative expenses and interest paid on late TDS amount.

Disallowed Pre-operative Expenses:
The dispute revolves around the disallowance of pre-operative expenses totaling Rs.15,29,595. The Assessing Officer disallowed these expenses as they were incurred before the operation of the assessee firm, considering them not to be 'business expenses'. The Commissioner of Income Tax (Appeals) upheld this disallowance, citing precedents that expenses before the operation of a company are 'pre-operative expenses' and not 'business expenses'. However, the Authorized Representative argued that the expenses were 'revenue expenses' and not 'preoperative expenses', referencing a decision that contradicted the Commissioner's stance. The Tribunal found that the expenses were indeed 'business expenses' and not 'preoperative expenses', as there was no change in the business conducted by the firm after the name change. Relying on a relevant court decision, the Tribunal deleted the disallowed amount of Rs.15,29,595.

Interest Paid on Late Payment Disallowance:
Another point of contention was the disallowance of interest paid on late TDS payment amounting to Rs.12,980. The Assessing Officer disallowed this interest, considering it penal rather than compensatory. The Commissioner of Income Tax (Appeals) supported this disallowance, citing a court decision that deemed such interest as penal and not compensatory. The Tribunal, in line with the court decision, upheld the disallowance of this interest payment, dismissing the appeal on this ground.

Conclusion:
The Tribunal partially allowed the appeal, specifically overturning the disallowance of pre-operative expenses but upholding the disallowance of interest paid on late TDS payment. The decision was pronounced on 30.05.2023.