Tribunal allows business expenses post-setting up but pre-commencement, citing legal precedents

The Tribunal upheld the CIT(A)'s decision to delete the addition made by the Assessing Officer, ruling that the expenses incurred by the assessee for business purposes, after the commencement of business with the acquisition of development rights, should be allowed as revenue expenditure. The Tribunal dismissed the department's appeal, citing legal precedents that distinguish between setting up and commencement of business, and holding that expenses post-setting up but pre-commencement are deductible.

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Issues Involved:
1. Whether the CIT(A) was justified in deleting the addition made by the Assessing Officer by treating the revenue expenditure as pre-operative expenses that need to be capitalized.

Issue-wise Detailed Analysis:

1. Justification of Deleting Addition by CIT(A):
The department appealed against the CIT(A)'s order, which deleted the addition of Rs. 3,71,92,193/- made by the Assessing Officer (AO). The AO had treated the revenue expenditure as pre-operative expenses, arguing that these should be capitalized since the business operations had not started. The assessee, incorporated on 09.04.2007 and engaged in Real Estate Business, filed a return declaring a loss of Rs. 3,71,92,193/-. The AO observed that the assessee was developing a housing project in Panchkula, which was at an initial stage with no income recognition from business activities. The AO added back the expenditure in excess of income to the assessee's income, arguing that all expenses should be capitalized.

2. Assessee's Argument:
The assessee contended that all expenses are allowable after the business has been set up, even if no revenue has been earned during the year. The assessee had acquired development rights on 172.46 acres of land and had filed an application with state authorities for a license to set up an integrated residential township on 136.89 acres. The assessee argued that the business had commenced with the acquisition of development rights and that all subsequent expenses were incurred for business purposes and should be allowed as revenue expenditure.

3. CIT(A)'s Findings:
The CIT(A) considered the submissions and observed that the assessee had indeed commenced its business activities. The company had acquired development rights and incurred expenses on various activities such as land development, surveys, and project management, which indicated that the business was in progress. The CIT(A) noted that the expenses were mainly on salary and advertisement, which were necessary for the business and should be allowed as revenue expenditure.

4. Legal Precedents and Case Laws:
The assessee relied on various case laws to support its claim, including CIT Vs Modi Olivetti Ltd., CIT Vs Berger Paints (India) Ltd., and CIT Vs Citi Financial Consumer Finance Ltd. The CIT(A) also referred to the judgment of the Hon'ble Jurisdictional High Court in the case of CIT Vs Dhoomketu Builders and Development Pvt. Ltd., which stated that there is a difference between setting up and commencement of business, and expenses incurred after setting up the business but before commencement are allowable deductions.

5. Tribunal's Decision:
The Tribunal considered the submissions and the material on record, noting that the AO accepted the incurring of expenditure for business purposes but treated them as capital expenses. The Tribunal referred to the Hon'ble Jurisdictional High Court's decision in CIT Vs Dhoomketu Builders and Development Pvt. Ltd., which held that the commencement of real estate business starts with the acquisition of land and expenses incurred after setting up the business are deductible. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the department's appeal.

Conclusion:
The appeal of the department was dismissed, upholding the CIT(A)'s decision to delete the addition made by the AO. The Tribunal agreed that the business had commenced with the acquisition of development rights and that the expenses incurred were for business purposes and should be allowed as revenue expenditure.

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