2010 (9) TMI 1091 - HC - Income Tax

Pre-business setup costs deemed deductible for construction business, including soil testing and architect fees.

Commissioner of Income Tax & Anr. Versus MFAR Construction Ltd.

The Court allowed the expenditure for setting up a construction business before the actual commencement of business activity. It held that activities like ... Substantial questions of law - expenditure incurred for setting-up of the construction business - allowed as a deduction - No actual business activity - expenditure incurred allowed as a business expenditure - HELD THAT:- depending upon the nature of the work and who has undertaken the work, one has to look into the material placed and then come to conclusion what exactly would be the commencement of work. If integral part of business requires expenditure, it would mean without the said integral activity, the main business cannot be proceed with. Therefore, whenever such expenditure is claimed, the criterion would be what exactly is the nature of business the assessee has undertaken and depending upon the nature of business, one has to see whether such expenditure was spent towards integral part of the business or not. When once it becomes integral part of business like the case on hand, expenditure towards soil testing, submission of tenders, payment of architect fee, etc. would be integral part of the business of the assessee. Therefore, the CIT(A) was justified in the present appeal in saying that commencement of business does not mean actual commencement of construction work but it means whatever is required to start the construction work prior to undertaking the construction work. If it is integral part, it has to be held as commencement of work. Therefore, the expenditure sought by the assessee for the above activity was rightly held as integral part of the construction industry as the very nature of business in the construction needs such expenditure and without such expenditure they cannot proceed with the actual work they undertake. Therefore, the substantial questions which were raised in the above case are answered against the Revenue. Issues:1. Allowance of expenditure for setting-up of construction business before commencement of business activity.2. Claiming business expenditure before actual commencement of business activity.Analysis:1. The case involved the question of whether expenditure incurred for setting up a construction business should be allowed as a deduction before the commencement of business activity. The AO initially rejected the claim of expenditure, stating that the assessee had not yet commenced work. However, the CIT(A) considered various factors like incorporation date, MoU with builders, soil testing, architect fees, and tender applications to conclude that the expenditure should be allowed. The appellate authority noted that submitting tenders in the construction industry is considered the commencement of business. Therefore, the CIT(A) allowed the claim, setting aside the assessment order.2. The Revenue appealed to the Tribunal, which upheld the CIT(A)'s decision based on the material considered by the first appellate authority. The High Court analyzed the distinction between setting up and commencement of business. It noted that incorporation of the company and obtaining a commencement certificate were crucial steps for legally starting the business. Even though the MoU with builders fell through, the expenditure on soil testing and architect fees was deemed necessary for business promotion. The Court emphasized that the nature of the business determines what constitutes the commencement of work. In this case, activities like soil testing, tender submissions, and architect fees were integral to the construction business, making them eligible for deduction as business expenditure.3. The Court critiqued the AO's approach, stating that incorporation alone does not signify the commencement of business without the necessary certificates. It clarified that integral activities essential for the main business to proceed should be considered part of the commencement of work. Expenditure towards such integral activities, like those in the construction industry, should be allowed as business expenditure. The Court concluded that the expenditure claimed by the assessee was rightly held as integral to the construction industry, necessary for commencing work. Therefore, the substantial questions raised against the Revenue were answered in favor of the assessee, affirming the allowance of the claimed expenditure.