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Facts
The assessee, Bueno Insta Pizza Pvt. Ltd., filed an appeal against the disallowance of expenses and depreciation amounting to Rs. 81,17,541/-, incurred during the initial year of business setup. The Assessing Officer disallowed these expenses, stating that the business had not yet commenced operations and generated revenue. The assessee argued that these were necessary expenses for setting up the business and trial production.
Held
The Tribunal condoned the delay in filing the appeal, finding reasonable cause. On merits, the Tribunal acknowledged that the expenses were incurred for setting up the business and their genuineness was not disputed. However, since the evidence was not fully verified by the lower authorities, the Tribunal remitted the issue back to the Assessing Officer for re-adjudication with a focus on the practical difficulties faced by a startup.
Key Issues
Whether expenses incurred and depreciation claimed for setting up a business prior to commencement of operations are allowable?
Sections Cited
Sec. 37(1) of the Income Tax Act, 1961, Sec. 271(1)(c) of the Income Tax Act, 1961
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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
Before: SMT BEENA PILLAI & SMT RENU JAUHRI
O R D E R Per Beena Pillai, JM: Present appeal filed by the assessee is against order dated 21.03.2024 passed by Ld.CIT(A), Lucknow for Assessment Year 2016-17 on following grounds of appeal: 1. “The Ld. CIT(A) has grossly erred on facts as well as in law in confirming the disallowance of Rs.81,17,541 with respect to various expenses incurred and claimed during the relevant financial year by Bueno Insta Pizza Pvt. Ltd.; A. Y.2016-17 not appreciating the fact that the appellant had set up the business and, therefore, the expenditure claimed is allowable.
2. The Ld. CIT(A) has grossly erred on facts as well has grossly erred in confirming the disallowance of depreciation on the machinery installed and used for trial production. The appellant craves leave to add, amend, supplement, after and/or delete any of the above Grounds of Appeal.”
Brief facts of the case are as under: 2. The assessee is a company and filed its ROI for the year under consideration on 17.10.2016 declaring NIL income and loss of Rs.1,21,06746/-. Subsequently, the return was revised at a loss of Rs.81,17,541/-. The case was selected for scrutiny and notice u/s. 143(2) was issued to the assessee calling upon various details. In response to statutory notices the assessee furnished various details in respect of the loss claimed by the assessee. 2.1. The Ld.AO noted that, the assessee is in sale and distribution of pizza vending machine, packing and sale of pizza ingredients and other food vending machine and food products. It was noted that, for the year under consideration the assessee did not show any income from operation and profit on account of currency fluctuation of Rs.2.10 lakhs was claimed against which, the expenses/depreciation that led to business loss of Rs.81,17,541/-. 2.2. The Ld.AO during the course of assessment proceedings, called upon assessee to furnish response as to why the expenditure claimed by the assessee should not be disallowed as assessee did not have any business activity for the year under consideration.
Bueno Insta Pizza Pvt. Ltd.; A. Y.2016-17 The assessee in response submitted that, it was incorporated on 21.08.2015, and was engaged in the business of sale and distribution of pizza sale and distribution of pizza vending machine, packing and sale of pizza ingredients and other food vending machine and food products. It was submitted that, the year under consideration was the year of commencement of the business, and the assessee incurred various expenses in the nature of advertisement, electricity expenses, business promotion expenses, foreign travelling, brokerage expenses, foreign exchange gain/loss, repairs and maintenance expenses, etc. 2.3. It was submitted that, during the year under consideration the assessee brought pizza vending machines which is the primary asset of the business carried on by the assessee and started trial production and sampling of products as well. It is submitted that, in order to start the business activity of the assessee imports of machines from China were carried out. It was submitted that, the promoters of company visited china to meet with suppliers and machine manufacturers and the quantum of expenses towards business development was high. It was submitted that, the cost of rent and right to sell machines in India was capitalised by assessee in its books of accounts, and that, all expenses claimed in P & L A/c. are directly related to the business of the assessee and therefore were revenue in nature. 2.4. The Ld.AO after considering the submissions observed and held as under:
Bueno Insta Pizza Pvt. Ltd.; A. Y.2016-17 “3.5. The submissions of the assessee have been considered but are not found to be acceptable. For allowance of expenditure u/s. 37(1) of the Income Tax Act, 1961, the same should be in respect of a business carried on by the assessee, the profits of which are to be computed and assessed. The expenditure should have been expended wholly and exclusively for the purpose of business. Since the assessee has not yet commenced the actual business operations and has not generated any revenue/turnover during the year under consideration. the claim of expenditure under the various heads cannot be allowed as revenue matching concept, expenditure can be claimed only corresponding to income and therefore such expenditure cannot be allowed in current year since business has not commenced and no revenue is generated. In view of the same, the loss of Rs.81,17,5417- is hereby disallowed and added back. The expenditure claimed by the assessee is hereby disallowed and is capitalized. Penalty u/s. 271(1)(c) of the Income Tax Act. 1961, is hereby initiated for Fax furnishing inaccurate particulars of income.” Aggrieved by order of the Ld.AO, assessee preferred appeal before the Ld.CIT(A).
Before the Ld.CIT(A), various notices were issued to the assessee mainly during the Covid period and subsequently three notices were issued between august 2022 and February 2024. However the assessee filed no response and the Ld.CIT(A) dismissed the appeal in-limine. Aggrieved by the order of the Ld.CIT(A) assessee filed appeal before this Tribunal.
It is submitted that, the present appeal filed by the assessee is with the delay of 85 days and application seeking condonation of delay is filed by the assessee. It is submitted that, during the relevant period while the appeal was pending before the Ld.CIT(A) as well as post the impugned order having passed, the business activity of the assessee seized its operation and assessee had no dedicated staff to manage the administrative and statutory Bueno Insta Pizza Pvt. Ltd.; A. Y.2016-17 compliance. The assessee thus submitted that, this lead to not responding to the notices issued by the Ld.CIT(A). 4.1. The Ld.AR submitted that, the delay in filing the present appeal before this Tribunal was not intentional. As soon as the assessee become aware of the impugned order having passed, immediately necessary steps were taken to file appeal before this Tribunal. The Ld.AR thus prayed for the delay to be condoned. 4.2. On the contrary, the Ld.DR though objected to the application seeking condonation of delay could not controvert the filing of the assessee that cause the delay and non appearance before the Ld.CIT(A). We have perused the submissions advanced by both sides in light of records placed before us.
From the affidavit filed by the assessee, there does not arise any malafide intention on behalf of assessee for not filing the present appeals before this Tribunal. 5.1. In our view, the assessee has made out a reasonable cause for the delay that is caused in filing the present appeal before this Tribunal. Nothing to establish any contrary intention has been filed by the revenue before this Tribunal. In our opinion there is a sufficient cause for condoning the delay as observed by Hon’ble Supreme Court in case of Collector Land Acquisition Vs. Mst. Katiji & Ors., reported in (1987) 167 ITR 471 in support of his contentions. 5.2. We place reliance on following observations by Hon’ble Supreme Court in case of Collector Land Acquisition Vs. Mst. Katiji & Bueno Insta Pizza Pvt. Ltd.; A. Y.2016-17 Ors., reported in (1987) 167 ITR 471 wherein, Hon’ble Court observed as under:- “The Legislature has conferred the power to condone delay by enacting section 51 of the Limitation Act of 1963 in order to enable the courts to do substantial justice to parties by disposing of matters on de merits". The expression “sufficient cause” employed by the Legislature is adequately elastic to enable the courts to apply the law in a meaningful manner which subserves the ends of justice that being the life- purpose of the existence of the institution of courts. It is common knowledge that this court has been making a justifiably liberal approach in matters instituted in this court. But the message does not appear to have percolated down to all the other courts in the hierarchy. And such a liberal approach is adopted on principle as it is realized that :
1. 1. Ordinarily, a litigant does not stand to benefit by lodging an appeal late.
2. Refusing to condone delay can result in a meritorious matter being thrown out at the very threshold and cause of justice being defeated. As against this, when delay is condoned, the highest that can happen is that a cause would be decided on merits after hearing the parties. ......................................................1.Any appeal or any application, other than an application under any of the provisions of Order XXI of the Code of Civil Procedure, 1908, may be admitted after the prescribed period if the appellant or the applicant satisfies the court that he had sufficient cause for not preferring the appeal or making the application within such period.”
5.3. Considering the submissions by both sides and respectfully following the observation by Hon’ble Supreme Court, we find it fit to condone the delay caused in filing the present appeal as it is not attributable to the assessee.
Bueno Insta Pizza Pvt. Ltd.; A. Y.2016-17 In any event, though the procedural law pertaining to the limitation has been drafted to construe it strictly, the fact remains that, considering such technicalities will not advance the cause of justice. 5.4. We take support from the observations of Justice Krishna Iyer wherein he has quoted at various occasion while dealing with technicalities that “any interpretation that alludes substantive justice is not to be followed and that substantive justice must always prevail over procedural technicalities”. Even Hon’ble Supreme Court in case of Collector Land Acquisition Vs. Mst. Katiji & Ors., reported in (1987) 167 ITR 471 has laid down a ratio of similar principles. Respectfully following the thoughts propounded by Late Hon’ble Justice Krishna Iyer, as well as various decisions of Hon’ble Supreme Court on similar issues, we condone the delay caused in filing the present appeals before this Tribunal. Considering the above facts, the delay of 85 days in filing the present appeal for A.Y. 2016-17 stands condoned. Accordingly the application seeking condontion of delay stands allowed and the appeal stands admitted to be decided on merits.
On merits of the case the only issue contested by the assessee is on confirming the disallowance of Rs.81,70,541/- being the expenses incurred and depreciation on the machines on the ground that, business activity of the assessee had not commend.
Bueno Insta Pizza Pvt. Ltd.; A. Y.2016-17 6.1. The Ld.AR referred to various details of expenses claimed by the assessee at page 55 of the paper book, being the audited accounts for the year under consideration. It is submitted that, these expenses are incurred towards payment of salaries and wages, rental expenditure, professional fees paid, training expenses, advertisement expenses, commission and brokerage expenses, power and fuel expenses. Refereeing to page 35 of paper book the Ld.AR submitted that, there are outstanding liabilities in which advances having received from the distributors. 6.2. The Ld.AR thus submitted that, the business of the assessee already commenced as the assessee incurred sufficient expenditure in respect of the same. The Ld.AR submitted that, the assessee also participated in an exhibition and Bandra Kurla Complex between 19 to 21 January 2016 to display its machines. In support, Certificate of participation is placed at page 113A and the payment to participate in the examination is placed at page 103 of the PB. The Ld.AR further submitted that, assessee sold various pizza related products to various clients from food service agency and the invoice are placed at page 95-105 of the paper book. The Ld.AR thus submitted that, there are sufficient material leading to the conclusion that assessee started its business during the year under consideration. 6.3. He submitted that the claim of depreciation is on the machines purchased by the assessee and imported from China for trial Bueno Insta Pizza Pvt. Ltd.; A. Y.2016-17 demonstration. The Ld.AR placed reliance on the PCIT vs. L & T Ltd. Reported in (2018) 98 taxman.com 186 wherein, Hon’ble Court held that, machinery used for trial production satisfies the usage requirement for claiming depreciation. Hon'ble court emphasised that, machinery does not need to produce marketable products to qualify for depreciation and that usage in trial capacity is sufficient. 6.3.1. The Ld.AR thus submitted that the machinery purchased by the assessee was operational for trial demonstration to the potential franchises. He submitted that the usage of machinery was a preparatory business activity, essential to establish the production capabilities and to attract franchise partners. It was thus argued that the machinery was actively utilised for business purpose during the year under consider, and therefore depreciation cannot be denied on such machineries. 6.4. In respect of the expenses forming part of business loss the Ld.AR submitted that, these were incurred as a part of setting up, though before actual commencement. He submitted that, at the acquisition of the machineries and the trial use of the key machines confirms that the business was indeed setup and the expenses claimed by the assessee cannot be disallowed. The Ld.AR in support placed reliance on : i. The decision of Delhi High court in case of PCIT vs. Miele India Pvt Ltd reported in (2021) 127 taxmann.com 684 ii. The decision of Bombay High Court in case of Western India Vegetable Product Ltd. Vs CIT reported in (1954) 26 ITR 151 Bueno Insta Pizza Pvt. Ltd.; A. Y.2016-17 iii. The decision of Hon'ble Supreme Court in case of CIT vs. Birla Cootn Spinning And Waving Minerals (1971) 82 ITR 166 iv. The decision of Hon'ble Supreme Court in the case of CIT vs. Sarabahi Sons Ltd reported in (1973) 90 ITR 318. 6.5. The Ld.AR submitted that in all the above decisions the ratio rendered is that, the expenses incurred for setting up of business are allowable as revenue expenditure even though they incurred before the commencement of business. He thus prayed for the expenditure to be allowed as business loss in the hands of assessee. 6.6. On the contrary the Ld.DR placed reliance on the orders passed by the authorities below. He submitted that, admittedly the expenditure have been incurred for the purposes of business, however matching principle must be adhered to. Further he submitted that unless any income is generated by assessee out of the business activity, the expenditure cannot be allowed. We have perused the submissions advanced by both sides in light of records placed before us.
Admittedly, the genuineness of the expenditure have not been subjected to any challenge before the authorities below. The only reason for disallowance is that, there is no income against which the expenditure incurred can be considered, based on matching principles. 7.1. On a query being raised by the bench regarding the business having picked up in subsequent year, the Ld.AR submitted that the concept of pizza vending machine in India was at its neccant stage during the relevant period and that year under consideration was Bueno Insta Pizza Pvt. Ltd.; A. Y.2016-17 the first year in which the business was set up by the assessee. He submitted that assessee was trying to make place in the market of food industry however could not get much lead and purchasers for his machines. It was submitted that, the assessee had all bonafide intention to carry out the business, but due to the practical difficulties faced because of lack of knowledge and information and lack of acceptance of such technologies during relevant period, it was not successful in subsequent year. Thereafter, the Ld.AR submitted that, the assessee faced unforcing challenge during Covid pandemic, that further lead to operation difficulties post 2019. He thus submitted that, in the subsequent year the assessee instead of incurring further losses slowly discontinued the activity. 7.2. We agree with the assessee that the touchstone to claim expenses cannot be the performance of assessee in subsequent years. This year being the first year of setup, and considering the fact that assessee incurred expense for the purposes of business, genuineness of which is not questioned by the authorities below, the assessee cannot be denied carry forward of loss. However considering the fact that all the evidences and documents filed before this Tribunal has not been subjected to any verification of the authorities below. 7.3. We thus remit this issue back to the Ld.AO to consider the claim of assessee with pedantic approach. The Ld.AO may bear in mind that the purpose of Income Tax Act is to assess correct income in the hands of the assessee. While doing so, the Ld.AO Bueno Insta Pizza Pvt. Ltd.; A. Y.2016-17 should not ignore the genuine hardship faced by a startup, which otherwise would not help to accelerate the economic growth of our country. 7.4. Unless the expenditure incurred by the assessee is found to be bogus and fabricated the loss must be allowed to be carried forwarded in accordance with law. Needless to say that proper opportunity must be granted to the assessee. Accordingly the grounds raised by the assessee stands partly allowed for statistical purposes. In the result the appeal filed by the assessee stands partly allowed for statistical purposes. Order pronounced in the open court on 17-12-2024.