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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI A.MOHAN ALANKAMONY, & SHRI G. PAVAN KUMAR
आदेश / O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER:
This appeal is filed by the Revenue aggrieved by the order of the Ld. Commissioner of Income Tax (Appeals)-3 in IT Appeal No. 203/15-16 dated 27.10.2016 passed u/s. 250(6) r.w.s. 143(3) of the Act.
The Revenue has raised several grounds in its appeal, however the crux of the issues is that the Ld.CIT(A) has erred in deleting the addition made by the Ld. AO of Rs.88,48,261/- by capitalizing the start up expenditure.
The brief facts of the case are that the assessee is a private limited company engaged in building construction business filed its return of income for the assessment year 2012-13 on 28.09.2012 declaring loss of Rs.3,89,87,871/-. Initially the return was processed u/s.143(1) of the Act and subsequently the case was selected for scrutiny and the assessment was completed u/s.143(3) of the Act on 27.03.2015. During the course of assessment proceedings, it was observed by the Ld. AO that the assessee had started setting up of the business during the relevant previous year.
Most of the machineries were installed during the second half of the financial year between the period October and November. The commercial production commenced from 14.02.2012. Therefore the Ld. AO opined that the amount of Rs.88,48,261/- being “start up expenses” cannot be allowed to written off as revenue expenditure but the same has to be capitalized. Therefore, the Ld. AO added Rs.88,48,261/- to the income of the assessee by capitalizing the same.
On appeal, the Ld. CIT(A) deleted the addition made by the Ld. AO by observing as under:
“5.0 I have considered the grounds raised by the appellant and the assessment order.
5.1 The only ground is against the disallowance of Rs.88,48,461/- made by the Assessing Officer. Vide para 2(c) and 2(d) of the assessment order.
"It has been held by the Madras High Court that mere installation or erection of machinery by itself will not be sufficient by itself and till some end product which is the business of the assessee to profuce is or can be obtained it cannot be said that the assessee is ready to commence production (K Sampathkumar Vs CIT) (158 ITR 25).
As already stated that the business commenced in Feb 12 and therefore the start up expenses amounting to Rs.88,48,261/- is disallowed and has to be capitalized, being capital in nature and not eligible for deduction u/s.37 though claimed by the assessee. In coming to this conclusion, I have also considered the explanation given by the assessee that the company commenced business in the year 2007 and therefore eligible for claiming the expense u/s.37, the expenses being incurred for the business and during the financial year 2011-12.”
The Assessing Officer has treated Rs.88,48,261/- as prior period expenses. The appellant's AR contended that the company has been incorporated in the year 2007 and sales income has also been offered. If expenses are treated as prior period, the income also will have to be treated as capital receipt by same analogy. The case law stated by the Assessing Officer, K.Sampathkumar Vs ClT (158 ITR 25) is regarding interest paid on amounts borrowed to be capitalized. In the instant case, when sales have been offered as income corresponding expenditure will have to be allowed. If the company has made sales even before commercial production and in the period of trial run, it has to be treated as income, which is a revenue receipt. In that event expenditure also will have to be allowed. The disallowance made is not sustainable and is deleted.”
Before us, the Ld. DR argued in support of the Ld. AO and prayed for upholding his order.
The Ld. AR on the other hand relied on the order of the LD. CIT(A) and further argued by stating that the entire start up cost is Revenue in nature. He also furnished the list of set up cost incurred by the assessee to substantiate his claim. Accordingly he requested for confirming the order of the Ld. CIT(A).
We have heard the rival submissions and carefully perused the materials on record. The list of expenditure incurred by the assessee viz, set up cost submitted by the Ld. AR is reproduced herein below for reference:-
From the above, it is apparent that t From the above, it is apparent that the assessee had he assessee had incurred substantial amount of Rs.22,30,317/ incurred substantial amount of Rs.22,30,317/- towards vehicle, towards vehicle, diesel and petrol expenditure and Rs.22,38,985/ diesel and petrol expenditure and Rs.22,38,985/ diesel and petrol expenditure and Rs.22,38,985/- as salary expenditure. Since, the assessee had commenced business only expenditure. Since, the assessee had commenced business only expenditure. Since, the assessee had commenced business only from 12th February, this February, this entire expenditure could not ha expenditure could not have been incurred for the period 12th February to 31st March. Similarly, the incurred for the period 12 March. Similarly, the other expenses incurred by the assessee also needs to be analyzed other expenses incurred by the assessee also needs to be analyzed other expenses incurred by the assessee also needs to be analyzed as to when they have been incurred i.e., before commencement of as to when they have been incurred i.e., before commencement of as to when they have been incurred i.e., before commencement of the business or after commencement of business. business or after commencement of business. Obviously the expenditure incurred before commencement of the business expenditure incurred before commencement of the business expenditure incurred before commencement of the business requires to be capitalized after analyzing the nature of expenditure. All these details of expenditure are also not coming forth from the order of the Ld. AO. Therefore though we find merit in the order of the Ld.A.O., we are of the view that the entire issue has to be looked into afresh. Therefore in the interest of justice, we remit back the matter to the file of the Ld.AO for de-nova consideration.
In the result, the appeal of the Revenue is allowed for statistical purposes.
Order pronounced on 22nd March, 2017 at Chennai.