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Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI V. DURGA RAO & SHRI G. MANJUNATHA
आदेश / O R D E R PER G. MANJUNATHA, ACCOUNTANT MEMBER:
This appeal filed by the Revenue is directed against the order of the learned Commissioner of Income Tax (Appeals)-1, Chennai in dated 24.05.2018 pertaining to assessment year 2012-2013.
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The Revenue has raised the following grounds that are as under:
Grounds:
1.
The order of the learned CIT(A) is contrary to law, facts and circumstances of the case. 2.1 The learned CIT(A) failed to appreciate that the expenditure incurred before the commencement of business had to be capitalized and cannot be claimed as revenue expenditure. 2.2 The learned CIT(A) failed to appreciate that the assessee had not commenced business to be eligible for the claim of expenditure for the current year. 2.3 The learned CIT(A) erred in deleting the disallowance made by the AO in respect of preliminary expenses in the absence of commencement of business. 2.4 The learned CIT(A) failed to appreciate that the pre-operative expenses can be deducted u/s. 35D only and that they are allowable to an Assessee only after the commencement of business.
3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the AO restored.
The brief facts of this case is that the Assessee is a resident domestic company in which public are not substantially interested and engaged in the business activity of development of properties and purchased land for the same. The Assessee company filed the return of income of the assessment year 2012 - 2013 on 27.09.2012 admitting a loss of Rs.2,32,989/-. The assessment was completed u/s.143(3) on 19.12.2014 accepting the returned loss. During the previous year 2011 – 2012, relevant to the assessment year 2012 – 2013, the company had - 2 - | P a g e
not commenced its operation and not admitted any income from business operation. Expenses to the tune of Rs.2,34,398/- was claimed as business expenditure and a business loss of Rs.2,32,989/- was arrived in the computation of income statement after adjustment of depreciation. As the company had not commenced its operation and had no business transactions, the expenditure incurred should have been classified as pre-operative expenses. But the Assessee has failed to disclose the above fact. As the income chargeable to tax had escaped assessment, the assessment was re-opened u/s.147 of the Income Tax Act, 1961. Notice u/s.148 of the Income Tax Act, 1961 was issued on 17.03.2017 and duly served on the Assessee on 21.03,.2017.
In response to the notice u/s.148 of the Act, the Assessee has e-filed return of income on 24.07.2017 admitting a loss of Rs.2,32,989/-.
During the course of the assessment proceedings, the Assessing Officer had noted that the company had not commenced its operation during the previous year 2011 – 2012 and has not admitted any income from business operation. The Assessing Officer further noted that the expenses to the tune of Rs.2,34,398/- is being claimed as business expenditure and a business loss of Rs.2,32,989/- is arrived in the computation of income statement after adjustment of depreciation that the company had not commenced its operations and had not business transactions, the expenditure incurred should have been classified as - 3 - | P a g e
pre-operative expenses. He further noted that mere holding of a land cannot amount to commencement of business operations. However, the Assessee has not furnished any evidences to show that the business has commenced. Even in subsequent years, no activity appears to have been taken place. Hence, he opined that when there is no business, the question of computation of business income or loss does not arise.
The Assessee has filed an appeal before the learned Commissioner of Income Tax (Appeals) as aggrieved on seeing the assessment order and submitted that the Assessing Officer erred in concluding that the expenses is allowable only upon the commencement of business, whereas Section 2(3) of the Income Tax Act, 1961 which defines the ‘previous year’ refers to the setting up of the business and uniform view of the courts has been that once the business of the Assessee has been set up, even though the same has not yet commenced, the Assessee is eligible to claim deduction of expenses.
The learned Commissioner of Income Tax (Appeals) after considering the relevant submissions of the Assessee and also by taking into consideration various evidences during the course of the appellate proceedings and based on the various decisions as in the - 4 - | P a g e
Carefour WC & C India Private Limited vs. Deputy Commissioner of Income reported in [2015] 53 Taxmann.com 289 [Delhi] and in the case of ESPN Commisioner of Income Tax, Delhi-IV, New Delhi vs. ESPN Software India (P) Limited [2009] reported in 184 Taxmann 452 (Delhi), , observed that the question as to whether the assessee’s business has been set up or not has to be decided having regard to the object of the company. The contention of the Assessee is that its objective is to develop the land and sell the same as plots. It can be concluded that in the case of the Assessee, its business can be regarded to have been set up the moment the land has been purchased and the process of developing the same into plots is in progress. It is in fact observed from the balance sheet for the year ended 31.03.2013 and 31.03.2014 that the Assessee has in fact incurred further expenses on purchase of land and the closing work is in progress figure has been continuously undergoing changes. This shows that the development activity has commenced even though no income as such has been earned by the Assessee. In view of this, the learned Commissioner of Income Tax (Appeals) has allowed the appeal.
Aggrieved by the order of the learned Commissioner of Income Tax (Appeals), the Revenue is in appeal before us. The issue that has come up for our consideration from the grounds of appeal is that whether the expenses incurred before the commencement of the - 5 - | P a g e
business has to be capitalized and cannot be claimed as revenue expenditure. The learned Departmental Representative had submitted that the expenditure incurred before the commencement of business has to be capitalized and cannot be claimed as revenue expenditure and also submits that it is a pre-operative expenditure which can be deducted u/s.35D of the Income Tax Act, 1961 only and that it is allowable to the Assessee only after the commencement of business.
On the other hand, the learned Counsel for the Assessee has relied upon the decision of the Hon’ble Delhi High Court in the case of Principal Commissioner of Income Tax-6 vs. Miele India (P) Limited reported in [2021] 127 Taxmann.com 684 (Delhi) and the decision of the Hon’ble ITAT Mumbai Bench in the case of Samsara Hospitality (P.)
Limited vs. Income-tax Officer reported in [2017] 85 Taxmann.com 36 (Mumbai – Trib.) and argued that the business of the Assessee has already been commenced and therefore various revenue expenditure was incurred for the purpose of business that has taken place should be allowed.
We have heard both the sides, perused the materials available on record and had gone through the orders of the authorities below.
It is considered that the expenditure incurred before the commencement of the business need not be capitalized as it falls - 6 - | P a g e
u/s.37(1) of the Income Tax Act, 1961 and can be claimed as business expenditure when the business of the Assessee has been set up.
In view of the above findings and by respectfully following the decisions of the C-ordinate Bench of the Tribunal, Mumbai Benches in the case Samsara Hospitality (P.) Limited vs. Income-tax Officer (supra) and the decision of the Hon’ble Delhi High Court in the case of Principal Commissioner of Income Tax-6 vs. Miele India (P) Limited (supra), it is clear that there is a difference between actual commencement of a business and setting up of a business. It is only after the business is set up, that the expenses incurred for the business can be claimed as permissible deduction u/s.37 of the Income Tax Act, 1961. For the commencement of a business, there must be in place some income- generating asset or income-earning structure. In some cases, there may be a gap or an interval between setting up and commencement. When the business is set up, it is a mixed question of law and fact and depends upon the line, nature and character of the business or professional activity. For example, for manufacturing business, purchase of new material or electricity connection may be the relevant point to determine the setting up. But, in the case of a property dealer, the moment he puts up a chair and a table or starts talking, his business is set-up. The word trade, even though not defined in the Act, is used to denote operations of a commercial character by which a trader provides to a customer for - 7 - | P a g e
reward, some kind of goods or services. In other words, when the trader starts providing such goods and services, the business is said to have commenced but the same may not hold good for setting up of a business, which is a stage before the commencement. To set up a business, the following activities become relevant: Preparation of a business plan; Establishment of a business premises; Research into the likely markets or profitability of the business; Acquiring assets for use in the business; Registration as an entity and under the local laws,etc.
The locus classicus on the question as to when a business can be said to have been set-up is the judgement of the Hon’ble Bombay High Court speaking through the Chief Justice Chagla, in the case of Western India Vegetables Products Limited Vs. Commissioner of Income Tax reported in (1954) 26 ITR 151. The Court made the following observation which is worth quoting:
“It seems to us, that the expression setting up means, as is defined in the Oxford English Dictionary, to place on foot or to establish and in contradiction to commence. The distinction is this that when a business is established and is ready to commence business then it can be said of that business that it is set up. But before it is ready to commence business it is not set up. But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deduction under section 10(2).”
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The commencement of real estate business would normally start with the acquisition of land or immoveable property. When an assessee whose business is to develop real estates, is in a position to perform certain acts towards the acquisition of land, that would clearly show that it is ready to commence business and, as a corollary, that it has already been set-up. The actual acquisition of land is the result of such efforts put in by the assessee; once the land is acquired the assessee may be said to have actually commenced its business which is that of development of real estate.
The distinction between the commencement of the business and setting up of the same has been well explained by various Hon’ble High Courts This distinction and principle has been laid down by the Hon’ble High Courts in the following cases are as under:
i. Commissioner of Income Tax Vs ESPN Software India P. Limited (2008) 301 ITR 68 (Del.); ii. Commissioner of Income Tax Vs. Samsung India Electronics Limited (2013) 356 ITR 354 (Del.); iii. Carefour Wc & C India P. Limited Vs. DCIT (2014) 368 ITR 692 (Del.); iv. Commissioner of Income Tax Vs. Dhoomketu Builder and Development P. Limited (2014) 368 ITR 680 (Del.); v. Commissioner of Income Tax Vs. Axis Private Equity Limited (Bombay High Court), 391 ITR 370; vi. Maruti Insurance Broking Private Limited Vs. Deputy Commissioner of Income Tax, 435 ITR 34.
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The Commissioner of Income Tax (Appeals) after considering the relevant facts has rightly held that the expenses claimed by the Assessee is allowable u/s.37(1) of the Income Tax Act, 1961. Thus, we do not find any merit in the case of the Revenue and accordingly, the order of the learned Commissioner of Income Tax (Appeals) is confirmed and the appeal of the Revenue in is dismissed.
Order pronounced on 25th January, 2022 in Chennai.