2023 (9) TMI 1154 - AT - Income Tax

Tribunal overturns disallowance of expenses, directs Assessing Officer to delete Rs. 66,80,505.

M/s. Vijay Flexible Containers Private Limited Versus DCIT-1 (3) (1) Mumbai

M/s. Vijay Flexible Containers Private Limited Versus DCIT-1 (3) (1) Mumbai - TMI Issues:The judgment involves the challenge to the order confirming the addition of Rs. 89.07 lakhs made by the Assessing Officer by treating the expenditure claimed by the assessee as capital in nature for A.Y. 2015-16.Details of Judgment:Issue 1: Nature of ExpensesThe Assessing Officer disallowed the deduction claimed by the assessee of Rs. 89,07,340/-, treating it as capital expenditure to suppress profits. The expenses included foreign & local travelling, exhibition expenses, and telephone calls. The AO viewed these expenses as resulting in an intangible benefit that may accrue in the future, hence capital in nature. The CIT(A) agreed with this view, considering them as pre-commencement expenses for exploring the market abroad.Issue 2: Commencement of BusinessThe assessee argued that it had already set up its business and commenced operations, evident from the manufacturing activities and classification of direct expenses as work in progress. The Tribunal noted that the business of manufacturing packaging machines had commenced, making revenue expenses allowable even if the business had not fully commenced operations.Issue 3: Treatment of ExpensesThe Tribunal analyzed the detailed breakdown of the claimed expenses, which were incurred in the normal course of business to capture the market. It held that these expenditures were revenue expenses and not capital in nature. The AO's view that these expenses would create an intangible asset in the future was deemed baseless.Issue 4: Treatment in Books vs. Income Tax PurposesThe Tribunal clarified that entries in the books of account do not dictate the treatment for income tax purposes. Citing legal precedents, it held that the assessee could claim expenses fully for income tax purposes even if treated as deferred revenue expenditure in the books. As long as the expenses were allowable under the Income Tax Act provisions, they should be allowed.Issue 5: Allowance of ExpensesThe tax authorities had raised concerns about the absence of sales in the books of account. However, the Tribunal emphasized that once the business was set up, all revenue expenses were allowable deductions, irrespective of income receipts. Citing legal precedent, it rejected the tax authorities' view on this matter.ConclusionThe Tribunal concluded that the disallowance made by the Assessing Officer was not justified. It set aside the CIT(A)'s order and directed the Assessing Officer to delete the net disallowance of Rs. 66,80,505/-. As a result, the appeal filed by the assessee was allowed.