2018 (12) TMI 56 - AT - Income Tax

Business 'Set Up' Timing Key for Deductions: Tribunal Rules in Favor of Assessee

The Tribunal found that the assessee's business was 'set up' during the relevant previous year, allowing the assessee to claim revenue expenses as ... Expenses claimed prior to setting up of business - sequence of point of time when the business can be said to have been set up - Held that:- According to Section 3(1) of the Act it is setting up of the business and not the commencement of the business that is to be considered. A business is commenced as soon as an essential activity of that business is started. A business commenced with first purchase of stock in trade, the date when the first sale is made is not material in that respect. Similarly, a manufacturer has to undertake several activities in order to bring to produce financial goods and he commences his business as soon as he undertakes first of such activities. The three circumstances pointed out by the assessee before the CIT(A) viz., receipt of agency commission, travel by directors to explore the possibilities of getting business and taking the premises on lease for the purpose of manufacturing activity would be sufficient to come to the conclusion that business of assessee had been set up during the relevant previous year. Consequently, the assessee would be entitled to claim all the revenue expenses as deduction in computing its total income - The claim made by the assessee for deduction should have been allowed by the revenue authorities. Accordingly direct the AO to allow the deduction. - Decided in favour of assessee Issues Involved:1. Determination of whether the business of the assessee was 'set up' during the relevant previous year.2. Eligibility of the assessee to claim revenue expenses as deductions.Detailed Analysis:Issue 1: Determination of Whether the Business Was 'Set Up'The primary issue was whether the assessee's business was 'set up' during the relevant previous year, thereby entitling it to claim revenue expenses as deductions. The assessee argued that its business was indeed set up, citing the following facts:1. Commission Income: The assessee earned commission income during the relevant previous year, acting as a commission agent, which is included in its incidental objects under clause 14 of the Memorandum of Association (MoA).2. Travel by Directors: The directors undertook travel to explore trading opportunities in appliances and equipment, indicating active efforts to commence business operations.3. Lease of Premises: The assessee took premises on lease for manufacturing purposes, as evidenced by the lease deed dated 11.11.2014.The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, stating that the business had not commenced operations, and thus, the expenses should be capitalized as pre-commencement expenses. The CIT(A) emphasized the lack of employees, necessary licenses, approvals, and the absence of plant and machinery as reasons for disallowing the expenses.Issue 2: Eligibility to Claim Revenue Expenses as DeductionsThe Tribunal had to determine if the revenue expenses claimed by the assessee could be allowed as deductions. The legal position, as cited from various judicial pronouncements, is that a business is considered 'set up' when an essential activity is started, not necessarily when the business commences operations. The Tribunal referred to the case of Commissioner of Income Tax vs. Saurashtra Cement and Chemical Industries Ltd., which held that a business commences with the first essential activity, such as purchasing stock in trade.Additionally, the Tribunal cited the Hon’ble Delhi High Court in the case of CIT v. ESPN Software India P. Ltd., which explained that the determination of when a business is set up is fact-based. In that case, the business was considered set up when the assessee entered into an agreement to distribute ESPN programming services in India.Tribunal's Findings:- Receipt of Agency Commission: The Tribunal found that earning commission income indicated that the business had been set up.- Travel by Directors: The directors' travel to explore business opportunities was seen as an essential activity towards setting up the business.- Lease of Premises: Taking premises on lease for manufacturing purposes was considered a significant step towards setting up the business.Conclusion:The Tribunal concluded that the assessee's business was set up during the relevant previous year. Consequently, the assessee was entitled to claim all the revenue expenses as deductions in computing its total income. The Tribunal directed the AO to allow the deductions claimed by the assessee.Result:The appeal by the assessee was allowed, and the Tribunal directed the AO to allow the deduction of revenue expenses.Pronouncement:The judgment was pronounced in the open court on the 3rd day of October, 2018.