2011 (4) TMI 1508 - AT - Income Tax

Appeal Partially Allowed: Pre-commencement Expenses Disallowed, 60% Depreciation Rate on UPS Allowed

ITO Versus Omni Globeinformation Technologies India (P.) Ltd.

The appeal was partly allowed, disallowing the pre-commencement expenses incurred before the business was set up, but allowing the higher depreciation ... - Issues Involved:1. Deductibility of pre-commencement expenses.2. Rate of depreciation on UPS.Summary:Issue 1: Deductibility of Pre-Commencement ExpensesThe assessee-company, incorporated on 19th March 2004, filed its return on 30th Oct 2005 declaring an income of Rs. 27,600. During scrutiny, it was found that the company incurred Rs. 59,02,448 in April and May 2004 for training staff before commencing operations in June 2004. The AO disallowed these expenses, stating they were incurred before the business was set up. The CIT(A) allowed the expenses, considering the business had commenced in April 2004 based on evidence like employee salaries, provident fund deductions, and other operational expenses.The Tribunal examined precedents, including the cases of Akzo Nobel Car Refinishes India (P) Ltd., E Funds International India, Club Resorts (P) Ltd., and Whirlpool of India Ltd. It concluded that a business is set up when it is in a position to procure business, not merely when preparatory activities occur. Since the assessee was not ready to render services until June 2004, the expenses incurred in April and May 2004 were not deductible.Issue 2: Rate of Depreciation on UPSThe assessee claimed a depreciation rate of 60% on UPS, which the AO reduced to 25%. The Tribunal referred to the decision in CIT v. BSES Rajdhani Power Ltd., where higher depreciation was allowed on computer peripherals. It held that UPS, being an integral part of the computer system, is entitled to a depreciation rate of 60%.Conclusion:The appeal was partly allowed, disallowing the pre-commencement expenses but allowing the higher depreciation rate on UPS.