2007 (9) TMI 261 - HC - Income Tax

Business set up date determines deductibility of expenses pre-commencement. Tribunal upheld decision, no substantial question of law.

The High Court determined that the business was set up on the date of placing the purchase order in July 1994, allowing the assessee to claim expenses as ... Business of setting up satellite business communication systems – Expenses incurred in the previous year during interregnum after the setting up of the business and before the commencement of business, all expenses would be permissible deduction - purchase order for equipment in July 1994 – installation of equipment completed in March 1995 – business should be held to have been set up on July 1994 – this was the relevant date for determining the nature of expenses incurred thereafter – expenditure on equipment deductible in A.Y. 1995-96 – revenue appeal dismissed Issues:- Determination of the date on which the business was set up for the purpose of claiming expenses as revenue or capital expenditure.Analysis:The case involved appeals under section 260(A) of the Income-tax Act, 1961 against a common order passed by the Income-tax Appellate Tribunal for the assessment year 1995-96. The appellant, an assessee-company engaged in setting up satellite business communication systems, claimed an expenditure as revenue expense in its return for the assessment year. The Revenue contended that the business was set up only after the installation was completed in March 1995, while the assessee argued that the business was set up when it placed a purchase order for VSAT equipment in July 1994.The Assessing Officer initially rejected the assessee's explanation, but the Commissioner of Income-tax (Appeals) held that the business was set up on the date the order was placed by a bank on the assessee in October 1994. Both the Revenue and the assessee appealed to the Tribunal. Relying on relevant case law, the Tribunal concluded that the business was set up on the date of placing the purchase order in July 1994. Consequently, the Revenue's appeal was dismissed, and the assessee's appeal was allowed.The High Court analyzed the relevant provisions of the Income-tax Act and previous judicial decisions to determine the date of setting up a business. Referring to the distinction between setting up and commencement of a business, the Court held that the business of the assessee was set up on the date of placing the purchase order in July 1994. The expenses incurred after the setting up of the business but before its commencement were deemed deductible as revenue expenses. The Court found no grounds for interference with the Tribunal's judgment and concluded that no substantial question of law arose in the appeals, dismissing them accordingly.