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Income Tax Appellate Tribunal, ‘ B’ BENCH : CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI INTURI RAMA RAO]
आदेश / O R D E R
PER INTURI RAMA RAO, ACCOUNTANT MEMBER
This is an appeal filed by the Revenue directed against the order of the Commissioner of Income Tax (Appeals)-1, Chennai (‘CIT(A)’ for short) dated 31.01.2018 for the Assessment Year (AY) 2013-2014.
The Revenue raised the following grounds of appeal:
‘’1. The order of the learned CIT(A) is contrary to laW, facts and circumstances of the case
2. The learned CIT(A) has erred in deleting the disallowance of transmission charges paid to M/s. Power Grid Corporation of India of Rs.1.43 crores despite the fact that the assessee had not commenced its business operations
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) erred in holding that construction of ‘Fast Breeder Reactor’ amounted to commencement of business and therefore the expenditure incurred by the assessee was revenue in nature
2.3 The learned CIT(A) failed to appreciate that the assessee had not started generating power/electricity and therefore could not be said to have commenced business
2.3 The learned CIT(A) erred in deleting. the disallowance made by the AO in respect of preliminary expenses claimed u/s.35D of the Act for payment of Rs.40.01 lakhs (being 1/5th of total expenditure of Rs.2 crores) incurred for incorporation of the asssessee’s business.
2.4 The learned CIT(A) failed to appreciate that deduction u/s.Sec.35D is allowable to an assessee only after the commencement of business.
2.5 The learned CIT(A) has allowed the deduction of expenses u/.35D of the Act only because she had already held that the assessee had commenced its business with the manufacturing of the Fast Breeder Reactor. Since the decision of the CIT(A) on the commencement of business has not been accepted by the Department and is being challenged, the deletion of disallowance of preliminary expenses also is not acceptable.
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 A.O. restored’’.
The brief facts of the case are as under:
The Respondent assessee namely M/s. Bharatiya Nabhikiya Vidyut Nigam Ltd is a company wholly owned Enterprise of Government of India incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of generation of electricity. During the financial year relevant to assessment year under consideration, it was under process of constructing and commissioning the first 500MWE Prototype fast breeder reactor at Kalpakkam in Tamil Nadu. The return of income for the AY 2013-14 was filed on 19.09.2013 disclosing total income of Rs.28,80,65,560/-. Against the said return of income, the assessment was completed by the Deputy Commissioner of Income Tax, Corporate Circle I (2) Chennai (hereinafter called “AO”) vide order dated 30.09.2015 passed u/s. 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) at total income of Rs.30,23,96,060/-. While doing so, the Assessing Officer disallowed transmission charge of Rs.1,43,30,501/- paid to M/s. Power Grid Corporation of India Limited on the ground that expenditure has to be capitalized and it cannot be claimed as revenue expenditure placing reliance on the decisions of Hon’ble Jurisdictional High Court in the cases of M/s. Orient Cosmetics Ltd vs DCIT, 74 ITD 135 and M/s.
Madras Fertilizers Limited vs CIT, 209 ITR 174. The Assessing Officer also disallowed preliminary expenses which are eligible for deduction u/s.35D of the Act of Rs.40,01,200/-.
.Being aggrieved, an appeal was preferred before the ld.CIT(A) who vide impugned order held that once the business has been set up, the same should be allowed as deduction as revenue expenditure by placing reliance on the decisions of Hon’ble Delhi High Court in the cases of Carrefour WC & C India Private Ltd vs. DCIT, (2015) 53 taxmann.com 289 (Delhi) and CIT vs. ESPN Software India (P) Ltd, (2009) 184 Taxman 452 (Delhi). Similarly in respect of preliminary expenditure, the ld Commissioner of Income Tax (Appeals) had allowed the preliminary expenditure under the provisions of Section 35D of the Act.
Being aggrieved, the Revenue is in appeal before us in the present appeal. The ld. Departmental Representative contended that respondent – assessee company had not commenced any business activities and therefore no expenditure can be allowed as deduction.
Similarly assessee company is not entitled for preliminary expenditure under the provisions of Section 35D of the Act.
On the other hand, the ld. Authorised Representative placed reliance on the order of the ld. Commissioner of Income Tax (Appeals).
We heard the rival submissions and perused the material on record. The issues involved in the present case relates to whether assessee had commenced business operations, set up the business which is ready to commence the business. This is a question of fact which requires to be adjudicated with reference to the stage of the setting up the plant. From the perusal of the annual report placed before us, the Statutory Auditors had clearly stated at clause 10 that company had not commenced commercial operations. Similarly from the Directors report, it is clearly mentioned that erection for construction of 500 MWe Prototype Fast Breeder Reactor is in progressing in a healthy state, despite technological challenges of first of its type sodium, cool fast reactor, the construction work has progressed well. This clearly shows that the work is still under progress. These facts would go to show that plant was not setup / ready for commencement of business operations. No doubt, it is settled position of law that when business is set up and ready to commencement of business even though there is no actual productivity, expenditure incurred in intervening period is allowed as expenditure. But in the present case, the facts enumerated above would go to show that business is not ready to commence and the question of allowing the expenditure does not arise.Similarly preliminary expenditure cannot be claimed as deduction u/s35D of the Act wholly in the year of commencement of business. In the circumstances, the ld. Commissioner of Income Tax (Appeals) had clearly fell in error in holding that expenditures is allowable as deduction. Therefore, we reverse the order of the ld. Commissioner of Income Tax (Appeals) and restore the assessment order.
In the result, the appeal filed by the Revenue is allowed.
Order pronounced on 11th day of October, 2019, at Chennai.