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Issues: (i) Whether business loss claimed by the assessee was allowable where the business had been set up but no revenue had been earned during the year; (ii) Whether disallowance under section 40(a)(ia) could be sustained in respect of external development charges when the amount was not debited to the profit and loss account.
Issue (i): Whether business loss claimed by the assessee was allowable where the business had been set up but no revenue had been earned during the year.
Analysis: The assessee had already entered into project-related arrangements, appointed staff, incurred legal, marketing and administrative s, and maintained infrastructure for its real estate activities. The absence of revenue in the first year did not mean that the business had not been set up. Expenditure incurred after business setup but before commencement of commercial operations is allowable as business expenditure, and the earning of income in the same year is not a precondition for such allowance.
Conclusion: The disallowance of business loss was unsustainable and the assessee succeeded on this issue.
Issue (ii): Whether disallowance under section 40(a)(ia) could be sustained in respect of external development charges when the amount was not debited to the profit and loss account.
Analysis: The impugned external development charges were treated as part of the cost of assets and were not claimed as an expense in the profit and loss account. Section 40(a)(ia) operates in relation to expenditure claimed in computing business income, and where the amount is not debited as revenue expenditure, the provision does not justify a disallowance. On that footing, the addition could not be sustained.
Conclusion: The deletion of the addition was upheld and the Revenue failed on this issue.
Final Conclusion: The assessee's claim for business loss was allowed, and the Revenue's challenge to deletion of the disallowance under section 40(a)(ia) failed, resulting in overall relief to the assessee.
Ratio Decidendi: Expenditure incurred after business setup is allowable even before actual revenue is earned, and section 40(a)(ia) cannot be invoked where the impugned amount is not claimed as an expense in the profit and loss account.
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