Assessee's Pre-operative Expenses Disallowed, Tribunal Rectifies Errors

The tribunal held that the assessee's business was not set up during the relevant year, and the expenses claimed were pre-operative and not allowable as revenue expenses. The tribunal rectified mistakes in its original order regarding the capitalization of tools and jigs and project responsibility but upheld the decision to disallow the expenses. The Miscellaneous Application was partly allowed for corrections, but the outcome remained unchanged.

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Issues Involved:
1. Whether the assessee's business was set up during the year under consideration.
2. Allowability of expenses claimed by the assessee as revenue expenses.
3. Rectification of mistakes in the tribunal's order.

Issue-Wise Detailed Analysis:

1. Whether the assessee's business was set up during the year under consideration:
The tribunal examined whether the assessee had set up its business during the relevant assessment year, which would affect the allowability of claimed expenses. The assessee, a joint venture between Tata Advanced Systems Ltd. and Lockheed Martin Aerostructure Corporation, was in the process of setting up a manufacturing unit for aircraft structural articles in Hyderabad. The tribunal found that the business was not set up during the year as the manufacturing unit was still under construction and not operational by the end of the relevant year. Consequently, the tribunal held that the expenses incurred were pre-operative and could not be allowed as business expenses.

2. Allowability of expenses claimed by the assessee as revenue expenses:
The assessee claimed expenses amounting to Rs. 2,10,11,032/- as revenue expenses, which included personnel, office, and administrative expenses. The tribunal, however, held that these expenses were pre-operative in nature and should be capitalized as part of the project cost. The tribunal noted that the assessee's activities, such as employing technical staff and reviewing assembly operation sheets, were preparatory steps for setting up the manufacturing unit and did not constitute the commencement of business operations. Therefore, the tribunal disallowed the claimed expenses as revenue expenses.

3. Rectification of mistakes in the tribunal's order:
The assessee filed a Miscellaneous Application under Section 254(2) of the Income-tax Act, 1961, seeking rectification of mistakes in the tribunal's order dated 08.08.2018. The assessee argued that the tribunal erred in holding that the tools and jigs were to be capitalized in its books and that Lockheed Martin was responsible for setting up the project. The assessee presented two agreements—the JV agreement and the Tooling agreement—to support its claims. Upon review, the tribunal acknowledged the mistakes and corrected them, clarifying that the tools and jigs were the property of Lockheed Martin and should be accounted for in its books. The tribunal also corrected the finding that Tata and the assessee were responsible for implementing the project, not Lockheed Martin. However, the tribunal maintained its original decision that the business was not set up during the relevant year and that the expenses could not be allowed as revenue expenses.

Conclusion:
The tribunal concluded that the assessee's business was not set up during the relevant year, and the claimed expenses were pre-operative and not allowable as revenue expenses. The tribunal rectified the mistakes in its original order regarding the capitalization of tools and jigs and the responsibility for project implementation but upheld its decision to disallow the claimed expenses. The Miscellaneous Application was partly allowed to correct the identified mistakes, but the final decision remained unchanged.

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