2018 (11) TMI 1656 - AT - Income Tax

Tribunal allows deduction of revenue expenses and depreciation under Income Tax Act

The tribunal upheld the CIT(A)'s decision to allow the deduction of Rs. 2,40,18,801/- as revenue expenses and the claim of depreciation of Rs. ... Allowability of expenses under section 37(1) of the Income tax Act incurred in the interregnum between setting up and commencement of business - Distinction between 'setting up' and 'commencement' of business and test that business commences when the first essential business activity is started - Allowability of depreciation under section 32 where business has been set up though no trading income has yet been earnedAllowability of expenses under section 37(1) of the Income tax Act incurred in the interregnum between setting up and commencement of business - Distinction between 'setting up' and 'commencement' of business and test that business commences when the first essential business activity is started - Disallowance of other administrative and project expenses of Rs. 2,40,18,801/- treated by AO as pre operative/capital and disallowed under section 37(1) read with section 3. - HELD THAT: - The Tribunal accepted the view of the CIT(A) that the assessee's business of designing, developing, financing, constructing, operating and maintaining GIFT City had been 'set up' during the year under consideration. The Tribunal applied the legal principle that to determine commencement one must identify the activities which constitute the business and that business may be positioned in an interim period between setting up and commencement, such that expenses incurred in that interregnum can be allowable. The assessee produced documentary evidence including environmental clearance, NOC from Airports Authority, approval of land use plan, seismic design recommendation, government transfer of land (collector order), tenders/letters of intent to contractors and work completion certificates evidencing that key project activities and contracts had been initiated and physical works had been carried out. In light of these materials and the nature of the appellant's business, the AO's conclusion that the business was not set up was not sustained; the expenses debited to profit and loss were held allowable under section 37(1). [Paras 4, 7]The disallowance of Rs. 2,40,18,801/- was deleted and the expenditure was held allowable under section 37(1).Allowability of depreciation under section 32 where business has been set up though no trading income has yet been earned - Disallowance of depreciation of Rs. 1,11,38,327/- claimed in revised return on plant and machinery, office equipment, vehicles, computers, software and furniture. - HELD THAT: - Having concluded that the assessee's business was set up during the year and that activities towards commencement were being carried out, the Tribunal agreed with the CIT(A) that the assessee was entitled to depreciation on assets used for the purpose of business. The AO's view that depreciation should be disallowed because business was not ready to commence was rejected since the factual matrix showed acquisition/use of assets in furtherance of the project and positioning of the company in the interregnum does not disentitle it from claiming depreciation under section 32. [Paras 5, 8]The disallowance of depreciation of Rs. 1,11,38,327/- was deleted and the claim of depreciation was allowed.Final Conclusion: Both grounds of the revenue's appeal (disallowance of revenue expenses and disallowance of depreciation for A.Y. 2012 13) were dismissed; the Tribunal affirmed the CIT(A)'s findings that the assessee's business had been set up in the year and the expenses and depreciation claimed were allowable. Issues Involved:1. Disallowance of Rs. 2,40,18,801/- under Section 37(1) read with Section 3 of the Income Tax Act.2. Disallowance of Depreciation of Rs. 1,11,38,327/- under Section 32 read with Section 3 of the Income Tax Act.Issue-Wise Detailed Analysis:1. Disallowance of Rs. 2,40,18,801/- under Section 37(1) read with Section 3 of the Income Tax Act:The assessing officer noticed that the assessee had debited various expenses in the profit and loss account but failed to provide sufficient evidence to prove that the business was set up and ready to commence. The expenses included internal audit fees, statutory audit fees, director's sitting fees, electricity charges, rent, and other administrative expenses totaling Rs. 2,40,18,801/-. The project report indicated that the first phase of the project was to be completed by 2016, and the assessing officer believed there was no basis to claim that the project was ready to commence business during the assessment year 2012-13. Consequently, the assessing officer treated these expenses as capital expenditure and disallowed them as revenue expenses.The CIT(A) reversed the assessing officer's decision, stating that the business of the assessee had been set up during the year under consideration. The CIT(A) referred to various judicial precedents, including the Hon'ble Gujarat High Court's ruling in the case of Saurashtra Cement, which established that business activities need not start simultaneously and that business commences when the first activity essential to the business is started. The CIT(A) found that the assessee had obtained necessary clearances, commenced infrastructure work, and incurred expenses related to setting up the business. Therefore, the expenses were allowable under Section 37(1).Upon appeal, the tribunal upheld the CIT(A)'s decision, agreeing that the business had been set up during the year under consideration. The tribunal noted that the assessee had undertaken various activities essential to its business, such as obtaining environmental clearances, land use approvals, and issuing work orders to contractors. The tribunal found no error in the CIT(A)'s conclusion that the expenses were allowable as revenue expenditure.2. Disallowance of Depreciation of Rs. 1,11,38,327/- under Section 32 read with Section 3 of the Income Tax Act:The assessing officer disallowed the depreciation claim of Rs. 1,11,38,327/- on the grounds that the business was not ready to commence, and therefore, the assets were not put to use during the assessment year 2012-13.The CIT(A) allowed the claim, stating that the business had been set up and activities toward commencement were being carried out. The CIT(A) noted that the depreciation was claimed on plant and machinery, office equipment, vehicles, computers, and furniture, which were used for business purposes. The CIT(A) relied on the same judicial precedents and reasoning used to allow the revenue expenses.The tribunal upheld the CIT(A)'s decision, agreeing that the business had commenced during the assessment year. The tribunal found that the assets were indeed used for business purposes and that the assessee was entitled to claim depreciation. The tribunal dismissed the revenue's appeal on this ground as well.Conclusion:In conclusion, the tribunal dismissed both grounds of appeal raised by the revenue. The tribunal upheld the CIT(A)'s decision to allow the deduction of Rs. 2,40,18,801/- as revenue expenses and the claim of depreciation of Rs. 1,11,38,327/-. The tribunal found that the assessee had set up its business during the assessment year 2012-13 and that the expenses and depreciation were allowable under the provisions of the Income Tax Act.