Assessee's Business Commencement Not Established; Expenses Disallowed, Appeal Dismissed.

The Tribunal upheld the CIT(A)'s order, determining that the assessee did not establish the commencement of business in the assessment year 1998-99. Consequently, the disallowance of expenses totaling Rs. 15,85,691 was deemed justified, leading to the dismissal of the assessee's appeal.

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Issues Involved:
1. Disallowance of expenses amounting to Rs. 15,85,691 based on the claim that no business operations commenced during the year.
2. Determination of whether the assessee's business was set up and had commenced.

Issue-wise Detailed Analysis:

1. Disallowance of Expenses:
The assessee, running a software development center, incurred an expenditure of Rs. 15,85,691 and claimed it as a deduction, asserting these were revenue expenses related to software development. The Assessing Officer disallowed the expenditure, reasoning that no business activities occurred during the year as no bills were raised for software development activities, and no supporting documents were provided by the assessee to substantiate the claim.

2. Determination of Business Commencement:
The assessee appealed to the CIT(A), arguing that the business commenced immediately after incorporation in June 1997, and that business setup and readiness to discharge functions equate to business commencement. The assessee cited various decisions to support this claim and provided evidence of activities such as developing software for Adasoft A.G. Switzerland, which had advanced Rs. 48,70,903.94.

The CIT(A) reviewed the submissions and evidence, including letters from Adasoft AG Switzerland dated 18-6-1997 and 15-12-1998, which indicated that the business was not expected to produce the first operational prototype until June 1999. This suggested that the business had not commenced by 31-3-1998, relevant to the assessment year 1998-99. The confirmation letter from Adasoft AG Switzerland dated 5-3-2002 further supported that the money received was an advance against future work, with no work done by the assessee till 31-3-1998.

Tribunal's Analysis:
The Tribunal considered the rival submissions, case law, and the facts of the case. It emphasized that the business is considered set up and ready to start when it is in a shape to function as a business or manufacturing organization. The Tribunal noted that merely purchasing computers, renting space, and employing software engineers were preliminary steps and did not constitute business commencement. The Tribunal found that the first installment of the developed prototype software was exported on 31-3-2000, indicating that the business was not set up or commenced in the assessment year 1998-99.

Conclusion:
The Tribunal upheld the CIT(A)'s order, concluding that the assessee failed to establish the commencement of business in the assessment year 1998-99. Consequently, the disallowance of the expenses amounting to Rs. 15,85,691 was justified, and the appeal filed by the assessee was dismissed.

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