2006 (9) TMI 350 - AT - Income Tax

Tribunal directs acceptance of business loss & expenses claim, allowing assessee's appeal.

The Tribunal allowed the appeal of the assessee, directing the AO to accept the computation of the assessee, thereby allowing the claim of business loss ... Business loss/deductions Issues Involved:1. Disallowance of business loss of Rs. 85,40,673.2. Disallowance of business expenses of Rs. 91,14,306.Summary:Disallowance of Business Loss of Rs. 85,40,673:The assessee appealed against the order of CIT(A) confirming the disallowance of business loss of Rs. 85,40,673 made by the Assessing Officer (AO) on the grounds that the assessee had not started its business. The assessee-company, incorporated on 10th July 1996, aimed to provide and maintain luncheon or other voucher services. The AO observed that the company did not earn any income from service charges during the previous year ending on 31st March 1997 and earned such income for the first time only in the assessment year 1998-99. The CIT(A) upheld the AO's decision, leading to the present appeal.Disallowance of Business Expenses of Rs. 91,14,306:The AO disallowed the expenditure of Rs. 91,14,306 incurred by the assessee, concluding that it was for setting up the business and since the business had not commenced, the expenses were disallowed. The Tribunal considered the rival submissions and relevant material, noting that the assessee had undertaken various activities such as tying up with 284 hotels and restaurants, entering into agreements for sale of coupons, appointing senior executives, acquiring office premises, and incurring substantial expenses for setting up the business infrastructure. The Tribunal found that the business operations and activities had taken place during the year, establishing that the business was set up and had commenced.Legal Position and Case Laws:The Tribunal referred to various case laws, including CIT v. Saurashtra Cement & Chemical Industries Ltd. [1973] 91 ITR 170 (Guj.), CIT v. Ralliwolf Ltd. [1980] 121 ITR 262 (Bom.), and Hotel Alankar v. CIT [1982] 133 ITR 866 (Guj.), which established that once a business is ready to commence, expenses are allowable as deductions. The Tribunal emphasized that the business need not have receipts to be considered as commenced and that the activities undertaken by the assessee were sufficient to establish that the business was set up and had commenced.Distinguishing Case Law:The Tribunal distinguished the case of CIT v. Piem Hotel (P.) Ltd. [1994] 209 ITR 616 (Bom.), where the business was not considered commenced as the hotel building was under construction and not completed. In the present case, the assessee's business was fully set up and operational, with all necessary infrastructure and agreements in place.Conclusion:The Tribunal allowed the appeal of the assessee, directing the AO to accept the computation of the assessee, thereby allowing the claim of business loss and expenses. The appeal of the assessee was thus allowed.