2007 (4) TMI 386 - AT - Income Tax

Hotel business commencement determined by revenue, not inauguration date. Pre-inauguration expenses deductible. Depreciation permitted on assets used post-setup.

The Tribunal held that the hotel business commenced when revenue was generated, not at the formal inauguration date. It ruled that expenses incurred after ... Business expenditure Issues involved:The issues involved in this case are:1. Determination of the commencement date of the business of a hotel.2. Treatment of expenses incurred before the formal inauguration of the hotel.3. Allowance of depreciation on assets used for less than 180 days.Issue 1: Determination of Commencement Date:The assessee, a private limited company running hotels, renovated and reopened a hotel in Puri. The Assessing Officer contended that the hotel business commenced on 25th December, 2000, while the assessee argued that it began on 16th September, 2000, when revenue was generated. The Tribunal noted that the hotel was operational from 16th September, 2000, generating revenue, and the formal inauguration on 25th December was a ceremonial event. The Tribunal held that business can be said to have commenced as soon as it is set up, and all revenue expenditures after setup but before commencement are deductible. The Tribunal directed the Assessing Officer to allow expenditure incurred after 16th September, 2000, as revenue expenditure.Issue 2: Treatment of Pre-Inauguration Expenses:The Assessing Officer proposed to disallow expenses incurred before 25th December, 2000, as pre-commencement expenditure. The Tribunal disagreed, stating that since revenue was generated from 16th September, 2000, and the hotel was operational, the expenses incurred after this date should be treated as revenue expenditure. The Tribunal directed the Assessing Officer to allow proportionate expenditure incurred after 16th September, 2000, as revenue expenditure.Issue 3: Allowance of Depreciation:The Assessing Officer sought to disallow depreciation on assets used for less than 180 days. However, the Tribunal found that if the business setup date is considered as 16th September, 2000, the assets were used for more than 180 days. Therefore, the Tribunal directed the Assessing Officer to allow the claim of depreciation on the assets. The Tribunal allowed the appeal of the assessee for statistical purposes.This judgment highlights the importance of distinguishing between the setup and commencement of a business, the treatment of expenses incurred before formal inauguration, and the allowance of depreciation on assets used for a specific period.