THE PRINCIPAL COMMISSIONER OF INCOME TAX, FARIDABAD vs. M/S DANONE (INDIA) PRIVATE LIMITED

Facts

The revenue, Principal Commissioner of Income Tax, Faridabad, appealed against an order of the Income Tax Appellate Tribunal (ITAT) dated 30.10.2019, which pertained to assessment year 2009-10. The assessee, M/s. Danone (India) Private Limited, a company providing technological and personnel support to the food processing and dairy industry, had declared Nil income after claiming losses. The Assessing Officer (AO) had disallowed a significant portion of the business expenses amounting to Rs.10,28,95,398/-. The Commissioner of Income Tax (Appeals) partly allowed the assessee's appeal, directing the AO to obtain details of expenses incurred after the business setup date of 07.07.2008 until 31.03.2009, out of the disallowed amount of Rs.8,66,73,393/-. The ITAT affirmed the CIT(A)'s order, dismissing the revenue's appeal.

Held

The Tribunal held that the expenses incurred by the assessee from 07.07.2008 till 31.03.2009 were to be allowed as revenue expenditure. The reasoning was based on the finding that the assessee had set up its business on 07.07.2008, evidenced by the recruitment of key personnel like the Sales Head. The Tribunal affirmed the CIT(A)'s direction to the Assessing Officer to obtain details of expenses amounting to Rs.8,66,73,393/- from the disallowed sum of Rs.10,28,95,398/-, pertaining to the period after the business setup date, and to allow these as deductions. The ratio decidendi is that expenses incurred for setting up and commencing business operations after the effective date of commencement are allowable as revenue expenditure. The Tribunal also noted that the revenue could not controvert the assessee's earned income of Rs.17.14 million in the subsequent financial year 2009-10. The appeal was dismissed.

Key Issues

1. Whether the Tribunal erred in holding that the expenses incurred by the assessee from 07.07.2008 till 31.03.2009 are to be allowed as revenue expenditure, considering the business was set up on 07.07.2008? (Question of mixed law and fact, turning on the interpretation of business commencement and allowability of expenses under the Income Tax Act, 1961). Assessee's contentions: The assessee argued that expenses incurred after the business setup date of 07.07.2008 were for business purposes and thus allowable. The CIT(A) and ITAT relied on the principle that once skillful personnel are deployed to carry on business, related expenditures are allowable as business expenses, citing Dhoomketu Builders & Development Pvt. Ltd. vs. Additional Commissioner of Income Tax (2012) 17 taxmann.com 36 (ITA Delhi). Revenue's contentions: The revenue's appeal was primarily against the ITAT's affirmation of the CIT(A)'s order, which allowed expenses incurred after the business setup date. The revenue did not record specific arguments against the finding that the business was set up on 07.07.2008 or against the allowability of expenses post that date, other than challenging the ITAT's decision.