Assessee's appeal allowed for pre-commencement expenses, remanded for further assessment

The appeal filed by the assessee regarding the disallowance of Rs. 2,47,98,030/- as pre-commencement expenses was allowed for statistical purposes. The Tribunal noted that the expenses incurred were integral to the business and needed further consideration by the Assessing Officer to distinguish between setting up and commencement of the business. The matter was remanded for denovo consideration to properly deliberate on the relevant facts.

---

---

Issues Involved:
1. Whether the CIT(A) is justified in confirming the disallowance of Rs. 2,47,98,030/- as pre-commencement expenses.

Summary:

Issue 1: Disallowance of Rs. 2,47,98,030/- as Pre-Commencement Expenses

The solitary issue that arises for consideration is whether the CIT(A) is justified in confirming the disallowance of a sum of Rs. 2,47,98,030/- as pre-commencement expenses.

The assessee, a Private Limited Company incorporated on 19th September 2001, engaged in engineering and construction work, filed its return of income for the assessment year 2002-03, declaring a total loss of Rs. 2,47,98,030/-. The Assessing Officer issued notice u/s 148 of the Act and subsequently u/s 143(2), directing the assessee to explain why the expenses debited during the assessment year should not be disallowed as preoperative expenses. The objections raised by the assessee were rejected, and re-assessment was completed, disallowing the expenditure of Rs. 2,47,98,030/- as pre-commencement expenses.

The CIT(A) dismissed the appeal of the assessee and upheld the disallowance made by the Assessing Officer, stating that no work had been executed on the actual site before 19-02-2002, and income-earning business activities did not take place till well after the close of the financial year.

The assessee contended that the Assessing Officer erred in disallowing the expenses without appreciating that all expenses incurred after the date of setting up of the business and before the commencement of business are allowable expenses. The assessee relied on various judicial pronouncements to support its claim.

The learned DR argued that the assessee had not produced the agreement for the EPC contract and whether the expenses claimed were under the EPC contract or O&M contract was not clear. The matter needed to be restored to the file of the Assessing Officer for denovo consideration.

The Tribunal noted that there is a clear distinction between the commencement and the setting up of a business. The Hon'ble jurisdictional High Court in the case of MFAR Construction Ltd. had drawn a distinction between setting up of business and commencement of business, stating that expenditure towards integral parts of the business should be allowed as a deduction.

In the instant case, the various expenses accounted for (Rs. 2,47,98,030/-) are in the nature of interest, commission and banking charges, management fees, soil investigation charges, quarry lease fee, and survey expenses. The Tribunal observed that the facts relevant to the issue were not properly deliberated upon and restored the matter to the file of the Assessing Officer for denovo consideration.

In the result, the appeal filed by the assessee is allowed for statistical purposes.

---