ACIT, CHENNAI vs. GUMHO NT INDIA AUTO PARTS PRIVATE LTD., THIRUVALLUR

आदेश / O R D E R PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:

This is an appeal filed by the Revenue against the Order dated 17.03.2016 of Commissioner of Income Tax (Appeals)-6, Chennai, in for the AY 2010-11 and raised the following grounds: & CO No.167/Mds/2016 :- 2 -:

2.1 The CIT(A) ought not to have deleted the disallowance of business loss in the absence of the assessee offering any income during the previous year.

2.2 The CIT(A) ought to have appreciated that as per Section 3 of the Act wherein the previous year has been defined that,

“Previous year” means the financial year immediately preceding the assessment year:

Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year.

2.3 The CIT(A) ought to have appreciated that the depreciation which was disallowed by the AO in the absence of any evidence to substantiate the installation of the plant and machinery has not been pressed by the assessee before the CIT(A), which doubts the commencement of any business activity.

2.0 All the grounds of the appeal are related to the disallowance of Rs.53,64,653/- in respect of the expenses debited to the Profit & Loss A/c.

The Assessing Officer (in short ‘AO’) disallowed the above expenses as per the discussion made in the Assessment Order in Para No.1.1 & 1.2 which are extracted as under:

1.1 During the course of hearing, the Authorized Representative of the assessee company furnished the financial statements of the assessee company. On a perusal of the profit and loss account forming part of the financial statements, it is seen that the assessee company had shown “sales” and “other income” as Nil. However, it has claimed expenditure towards purchases, employee payments, administrative expenses, financial expenses and depreciation to the extent of Rs.75,01,127.50.

1.2 The assessee company has been incorporated on 08.06.2009 and is in its initial years of operation. The assessee company has commenced its business operation during the year as is evident from the fact the assessee company has claimed depreciation of Rs.1,86,400.89 during the year. As per Section 145 of the Income tax Act, 1961 the assessee company is required to follow a method of accounting as per which income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. It is seen that the assessee company has been following mercantile system of accounting. In view of this, when the assessee has incurred any expenditure, the relevant income has to be offered for taxation. The assessee company is required to follow matching concept in recognition of Revenue. Since the assessee company has not offered to tax the income earned during the year, the expenditure claimed by the assessee has to be disallowed. The expenditure of Rs.3,30,000/- related to RoC fees has been disallowed separately. Hence, the amount of & CO No.167/Mds/2016 :- 3 -: expenditure to the extent of Rs.53,64,653/- [excluding the value of closing stock of Rs.18,06,474/- and RoC fees of Rs.3,30,000/-] is disallowed and added back to the total income of the assessee company.

3.0 Aggrieved by the Order of the Learned Commissioner of Income Tax (Appeals) (in short ‘Ld.CIT(A)’)’s, the assessee went on appeal before the Ld.CIT(A) and the Ld.CIT(A) allowed the assessee’s appeal. The Ld.CIT(A) in his order observed that the AO himself has recorded that the assesse has commenced the business operations during the year. Further, Ld.CIT(A) also observed that the AO has not given any finding that any expenditure claimed is not genuine or inflated. The Ld.CIT(A) relied on decision of the Hon’ble Supreme Court in the case of CIT v. Sarabhai Management Corporation Ltd. MANU/SC/0667/1991 reported in 192 ITR 151 (SC) and allowed the assessee’s appeal.

4.0 Aggrieved by the Order of the Ld.CIT(A)’s, the Revenue filed appeal before this Tribunal.

During the year, Learned Departmental Representative (in short ‘Ld.DR’) argued that the assesse has not commenced the business and admitted only other income. There were no sales during the year. The assessee is a manufacturer of auto parts and there were no sales during the year which indicates that the assessee has not commenced the production activity. This argument is substantiated by disallowance of depreciation relating to the plant and machinery which was accepted by the assesse. In the absence of business income, the disallowance of depreciation and no matching Revenue shows that the assessee has not & CO No.167/Mds/2016 :- 4 -: commenced the business and the AO has rightly disallowed the expenditure of Rs.53,64,653/- debited to the Profit & Loss A/c.

5.0 On the other hand, the Ld.AR argued that the assesse has commenced his business and completed the trial run of production. The fact that the assesse has commenced business operations was admitted by the AO in the Assessment Order. The assesse filed revised return of income claiming depreciation on plant and machinery but not pressed on the grounds before the Ld.CIT(A), since the assessee is entitled for depreciation from the next AY and there was no loss to the assesse.

According to the Ld.AR, the AO has committed an error in disallowing the business expenditure.

6.0 We heard the rival submissions and perused the material placed on record.

We have gone through the Profit & Loss A/c and as per the Profit & Loss A/c, though there was no sales, the assesse has admitted the closing stock purchased during the year. The AO disallowed employee payments, administrative expenses and financial expenses amounting to Rs.53,64,653/- but accepted the purchases made by the assesse. Once, the purchases are made which goes to stock in trade, the business operations deemed to have been commenced. The AO did not furnish the reason for disallowance of employee payments, administrative expenses and financial expenses and the depreciation. The assessee explained that & CO No.167/Mds/2016 :- 5 -: the trial run has already completed in this case and the trading and Profit & Loss A/c shows that the business operations have been commenced.

The AO accepted in the Assessment Order that the business operations have been commenced. Whether there is a trading receipt or not, once the business operations have been commenced, all the expenses relating to the business debited to the Profit & Loss A/c required to be allowed in the assessment. At the cost of repetition, it was held by the Hon’ble Gujrat High Court in the case of Sarabhai Management Corporation Ltd., the first stage of business activity is acquiring the raw material and establishment of plant and machinery. In the assessee’s case, the assessee has already acquired raw material and established the plant and machinery which was not disputed by the AO. The assessee has already commenced the business operations which was also accepted by the AO.

Therefore, the decision of the Hon’ble Gujrat High Court in the case of Sarabhai Management Corporation Ltd. vs. CIT is squarely applicable.

We hold that by purchase of raw materials and establishment of the plant and machinery and completion of trial production, the assessee has commenced the business operations and the entire expenditure debited to the Profit & Loss A/c relating to Revenue is allowable expenditure.

Accordingly, we uphold the order of the Ld.CIT(A) and dismiss the Revenue’s appeal.

7.0 CO No.167/Mds/2016 for the AY 2010-11:

Cross objections are supportive to the Order of the Ld.CIT(A). Since the issue relating to the disallowance of expenditure amounting to & CO No.167/Mds/2016 :- 6 -: Rs.56,94,653/- was allowed in favour of the assessee, no separate adjudication of the Cross Objections are required and Ground Nos.1 to 4 are of Cross Objections are disposed off accordingly.

8.0 Ground No.5 of Cross Objections is related to depreciation of claim of Rs.96,86,425/- which was not pressed by the Ld.AR before the Ld.CIT(A). During the appeal hearing, Ld.AR fairly accepted the above facts and not pressed the Ground No.5. Therefore, Ground No.5 is dismissed as not pressed.

9.0 Ground No.6 is general in nature which does not require specific adjudication.

10.0 In the result, the appeal of the Revenue is partly allowed and cross objections of the assessee are dismissed.