Business Expenses Allowed: Setting Up Crucial for Deductions

The Tribunal concluded that the business of the assessee was 'set up' during the year as the assessee was ready to cater to its customers. The Tribunal emphasized that setting up of the business is the crucial event for determining the starting point for allowing business expenses, even if the business had not yet commenced. The expenses incurred by the assessee were found to be allowable as business expenses since they were incurred after the business was set up. The Tribunal directed the Assessing Officer to delete the disallowance of the expenses claimed by the assessee.

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Issues Involved:
1. Whether the business of the assessee was set up during the year under consideration.
2. Whether the expenses incurred by the assessee during the year were allowable as business expenses.

Detailed Analysis:

Issue 1: Whether the business of the assessee was set up during the year under consideration.

Background:
The assessee company was incorporated on 27.03.2008 and intended to engage in the business of trading and installation & commissioning of specialized storage tanks. In the financial year 2009-10, the assessee claimed expenses under various heads and showed a net loss of Rs. 75,28,931/-. The Assessing Officer (AO) noticed that there was no opening stock or sales during the year and that the assessee had only earned incidental interest income. The AO concluded that the business had not commenced and disallowed the expenses claimed.

Findings by CIT(A):
The CIT(A) upheld the AO's decision, noting that the business of the assessee was manufacturing of storage tanks and that the assessee did not make requisite arrangements to manufacture the same during the year under consideration. The CIT(A) also observed that the purchases made during the year were insignificant and there was no income from sales.

Tribunal's Analysis:
The Tribunal acknowledged that the assessee was not in the business of manufacturing but in the business of trading specialized storage tanks and their installation and commissioning. The Tribunal noted that in the preceding year (A.Y. 2009-10), the AO had accepted the return of the assessee wherein business expenses were claimed, thereby confirming that the business had already been 'set up'. The Tribunal also observed that during the year under consideration, the assessee had received sales orders, made purchases, appointed skilled employees, arranged office premises, and conducted transactions through banking channels.

Conclusion:
The Tribunal concluded that the business of the assessee was 'set up' during the year as the assessee was ready to cater to its customers. The Tribunal emphasized that setting up of the business is the crucial event for determining the starting point for allowing business expenses, even if the business had not yet commenced.

Issue 2: Whether the expenses incurred by the assessee during the year were allowable as business expenses.

Legal Principle:
The Tribunal referred to several judgments, including the case of Multi Act Realty Enterprises Pvt. Ltd. v. ITO, which established that there is a difference between setting up of business and commencement of business. The law provides that expenses are allowable after the setting up of the business, even if the business has not yet commenced.

Tribunal's Findings:
The Tribunal found that the expenses incurred by the assessee were of a routine nature, such as salary, audit fee, bank charges, rent, traveling expenses, installation expenses, and other administrative expenses. The Tribunal also noted that similar expenses claimed in the preceding year were not disallowed by the AO. The Tribunal held that the expenses were incurred after the business was set up and were therefore allowable as business expenses.

Conclusion:
The Tribunal directed the AO to delete the disallowance of the expenses claimed by the assessee, concluding that the expenses were allowable as business expenses since the business was set up during the year.

Final Order:
The appeal filed by the assessee was partly allowed, with the Tribunal directing the AO to allow the expenses claimed by the assessee in the return of income. The order was pronounced in the open court on 18th November, 2016.

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