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<h1>Tribunal Denies Business Expenses Deduction: Lack of Aircraft Procurement Deemed Crucial</h1> <h3>Kingfisher Training & Aviation Services Ltd. Versus Assistant Commissioner of Income tax</h3> The Tribunal upheld the lower authorities' decision to dismiss the appeal, denying the appellant's claim for business expenses deduction and interest ... Business expenditure ISSUES PRESENTED AND CONSIDERED 1. Whether expenditure incurred before commencement of commercial operations by a company engaged in air transportation can be allowed as business expenditure or treated as preliminary expenditure deductible/allowable against income in the assessment year. 2. Whether interest earned on short-term bank deposits (pending utilisation of funds for setting up business) can be set off against pre-operation/expenditure claimed by the company. 3. Whether the distinction drawn in precedent between 'setting up' and 'commencement' of business applies to a service/air-transport undertaking where the core asset (aircraft) had not been taken into possession by the end of the relevant previous year. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Allowability of pre-operation expenditure as business expenditure Legal framework: Deductibility of expenditure depends on whether expenditure is incurred in carrying on the business or is a preliminary expenditure referable to setting up the business; provisions permit amortisation/allowance of preliminary expenses only if the business is in such a state as to claim the expenditure as business expenditure under the Act. Precedent treatment: Reliance was placed on authority holding that there is a distinction between 'setting up' and 'commencement' of business and that once essential activities of business are begun the business may be regarded as set up for income-tax purposes; that precedent was cited by the appellant as supportive. Interpretation and reasoning: The Tribunal examined the facts specific to an air-transport undertaking and held that mere corporate, financial and organisational activities (incorporation, obtaining certificate of commencement, governmental clearances, recruitment, office establishment, entering into agreements to purchase/lease aircraft) do not equate to setting up the business if the essential instrumentalities for carrying on the business are not in the assessee's possession. For an air-transport undertaking the aircraft is the soul/essential factor of the business; absence of actual procurement/possession of aircraft by the end of the previous year meant the essential factor to carry on the business had not been set up. Ratio vs. Obiter: Ratio - where the nature of the business is such that a particular asset is the essential prerequisite (here, aircraft for air-transport), the absence of that asset at the end of the relevant previous year precludes treating pre-operational expenditure as deductible business expenditure; obedience to the factual-asset-centric test is part of the binding reasoning. Obiter - general remarks on corporate and organisational activities being insufficient in other industries are explanatory. Conclusion: Pre-operation expenditure claimed could not be allowed as business expenditure in the assessment year because the core operational asset was not in the company's possession and the business was not sufficiently set up to attract deduction as revenue expenditure; lower authorities were justified in disallowing the expenditure for computing taxable income. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Set-off of interest income against pre-operation expenditure Legal framework: Income from other sources (e.g., bank interest) is assessable unless allowable deductions or permissible set-offs apply under the Act; whether such income can be set off against pre-operational expenditure depends on whether the expenditure is allowable as business loss/expenditure in the year. Precedent treatment: No distinct precedent was applied to alter the general proposition; treatment follows from determination of whether expenditure is allowable as business expenditure. Interpretation and reasoning: Because the Tribunal held that the pre-operation expenditure was not allowable as business expenditure in the relevant year (see Issue 1), there was no basis to permit set-off of interest income against those expenditures. The assessing authority and first appellate authority correctly treated interest as income from other sources and taxed it accordingly when expenditure could not be claimed as deductible. Ratio vs. Obiter: Ratio - income from other sources cannot be set off against expenditures that are not allowable business deductions; Obiter - none significant. Conclusion: Interest income earned on short-term deposits pending utilisation could not be set off against the disallowed pre-operation expenditure and was properly assessable as income. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Application of the 'setting up' vs 'commencement' distinction to service/air-transport industry Legal framework: The jurisprudential distinction between 'setting up' and 'commencement' permits earlier recognition of business status where essential activities of the business have been commenced even though commercial operations have not fully begun; industry-specific characteristics bear on whether essential activities have been commenced. Precedent treatment: The appellant relied on a decision recognising the distinction and allowing expenditure once essential activities commenced; that precedent was considered but not followed as a literal or automatic rule applicable in all industries without regard to the nature of the essential assets or activities. Interpretation and reasoning: The Tribunal accepted the distinction in principle but applied it factually: for a service/air-transport company the essential activity is possession/availability of aircraft. Although several preparatory steps had been taken (agreements, clearances, recruitment), the absence of actual aircraft meant the setting up was not complete. Therefore the precedent's ratio is distinguished on facts - the controlling element is the availability of the core operational asset rather than mere corporate or administrative steps. Ratio vs. Obiter: Ratio - the 'setting up' vs 'commencement' distinction must be applied with regard to the industry-specific essential activities/assets; where the core asset is not in possession, the distinction does not help the assessee. This factual limitation is part of the operative ratio. Obiter - general observations on differences between service and manufacturing industries are explanatory. Conclusion: The precedent distinguishing setting up from commencement does not automatically entitle an assessee to treat pre-operational expenditure as business expenditure; in industries where a specific tangible asset is central to carrying on business, possession of that asset is a necessary element to treat the business as set up for income-tax purposes. DISPOSITION The appeal is dismissed on the grounds that the essential asset for operating the business (aircraft) was not in the company's possession by the end of the relevant previous year; pre-operation expenditures were therefore not allowable as business expenditure and interest earned was properly assessable as income from other sources.