Pre-commencement expenses disallowed, higher depreciation rate granted for UPS

The Tribunal held that pre-commencement expenses incurred in April and May 2004 were not deductible as the business was deemed set up in June 2004. However, the Tribunal allowed a higher rate of depreciation (60%) on UPS, considering it an integral part of the computer system. As a result, the appeal was partly allowed.

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Issues Involved:
1. Deductibility of pre-commencement expenditure.
2. Rate of depreciation on UPS.

Issue-wise Detailed Analysis:

1. Deductibility of Pre-commencement Expenditure:

The primary issue is whether the expenditure of Rs. 59,02,448 incurred by the assessee in April and May 2004 is deductible in computing the income. The Assessing Officer (AO) contended that this expenditure was incurred before the business was set up and commenced, hence not deductible. The assessee argued that the business had commenced in April 2004, supported by evidence of employee recruitment, salary payments, and other operational expenses.

The learned CIT(A) allowed the appeal of the assessee, concluding that the business was set up in April 2004 based on various evidences such as the agreement for using premises for training, recruitment of employees, and payment of related expenses. The Tribunal considered several precedents, including:

- Akzo Nobel Car Refinishes India (P.) Ltd. v. Dy. CIT [2008] 25 SOT 226: The Tribunal noted that mere incorporation and appointment of directors are insufficient to conclude that the business had been set up.

- CIT v. E-Funds International India [2007] 162 Taxman 1 (Delhi): The Tribunal distinguished this case by noting that the assessee had acquired infrastructure and employed personnel, which indicated business commencement.

- CIT v. Club Resorts (P.) Ltd. [2006] 287 ITR 552 (Madras): The Tribunal observed that the business involved multiple stages, including setting up offices and launching publicity campaigns, which had already started.

- CIT v. Whirlpool India Ltd. [2009] 318 ITR 347 (Delhi): The Tribunal upheld that the business was set up when the company was ready to commence activities by appointing key personnel and acquiring necessary infrastructure.

The Tribunal concluded that the business was set up in June 2004 when the assessee was in a position to render services after training the staff and acquiring its own office. The expenses incurred before this period were not deductible as they were considered pre-commencement expenses.

2. Rate of Depreciation on UPS:

The second issue pertains to the rate of depreciation applicable to UPS. The AO allowed depreciation at 25%, whereas the assessee claimed 60%. The Tribunal referred to the decision of the Hon'ble Delhi High Court in CIT v. BSES Rajdhani Power Ltd. [I.T. Appeal No. 1266 (Delhi) of 2010, dated 31-8-2010], where higher depreciation was allowed on computer peripherals such as printers and scanners. The Tribunal concluded that UPS, being an integral part of the computer system, is entitled to depreciation at the higher rate of 60%.

Conclusion:

In summary, the Tribunal held that the business was not set up until June 2004, and therefore, the pre-commencement expenses incurred in April and May 2004 were not deductible. However, the Tribunal allowed the higher rate of depreciation (60%) on UPS, recognizing it as an integral part of the computer system. Consequently, the appeal was partly allowed.

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