2009 (2) TMI 236 - AT - Income Tax

Tribunal Allows Business Expense Deductions Post-Nov 2001; Upholds 20% Depreciation on Cars, Dismisses Interest Levy Errors

The Tribunal partially allowed both the assessee's and the Revenue's appeals. It determined that the business was set up on 2nd Nov 2001, allowing ... Setting up of business - commencement of business - previous year (definition under s.3 of the IT Act) - pre-commencement/preliminary expenses - revenue expenditure v. capital expenditure - interest under sections 234B and 234C of the IT Act - rate of depreciation for motor cars (commercial vehicle v. business use)Setting up of business - commencement of business - previous year (definition under s.3 of the IT Act) - pre-commencement/preliminary expenses - revenue expenditure v. capital expenditure - Allowability of expenditure incurred between setting up of business and commencement of business - HELD THAT: - The Tribunal held that the date of setting up of the assessee's business was the date on which the Bombay High Court sanctioned the scheme of arrangement (2nd Nov., 2001), even though the appointed date for operations was 1st Jan., 2002. Under s.3 the previous year for a newly set up business begins with the date of setting up. The scheme of arrangement contained conditions (cl.14 and cl.15) making sanction and subsequent approvals necessary for the scheme to be effective; until those conditions were fulfilled the assessee could not be treated as having its business set up. Once the High Court sanctioned the scheme the assessee was ready to commence business and expenses incurred after that date (but before the appointed date of operations) are deductible as revenue expenditure. Applying these principles to the facts, the Tribunal directed the AO to allow expenditure incurred after 2nd Nov., 2001 as revenue expenditure and set aside the disallowance to that extent. [Paras 22]Expenses incurred after 2nd Nov., 2001 (date of High Court sanction) are deductible as revenue expenditure; grounds 1 and 2 of the assessee are allowed to that extent.Interest under sections 234B and 234C of the IT Act - Challenge to levy of interest under sections 234B and 234C - HELD THAT: - The CIT(A) dismissed the assessee's grounds challenging interest because, after rectification under s.154, credit for TDS was allowed and no interest was charged under ss.234B and 234C. The Tribunal found no infirmity in the CIT(A)'s order in light of the rectification which resulted in no interest being leviable. [Paras 23]Grounds contesting levy of interest under ss.234B and 234C are dismissed; no interest was charged after rectification.Rate of depreciation for motor cars (commercial vehicle v. business use) - revenue expenditure v. capital expenditure - Correct rate of depreciation for motor cars transferred on demerger - HELD THAT: - The AO treated the motor cars as not commercial vehicles and allowed depreciation at 20% (sub-item (1A) of Appendix I), while the assessee claimed 50% (rate for new commercial vehicles). The Tribunal applied its earlier decisions (citing Dy. CIT vs. Aramex India (P) Ltd. and Dy. CIT vs. Atos Origin (India) (P) Ltd.) holding that vehicles used for the assessee's own business and not let out for hire are business-use vehicles and not 'commercial use' vehicles attracting the higher rate. Therefore the AO's rate of 20% was restored and the CIT(A)'s allowance of 50% was reversed. [Paras 27, 28]CIT(A)'s allowance of depreciation at 50% is reversed; depreciation at 20% as allowed by the AO is restored; Revenue's ground on this issue is allowed.Revenue expenditure v. capital expenditure - setting up of business - Revenue's challenge to total disallowance of pre-demerger expenditure - HELD THAT: - In view of the Tribunal's finding that expenses incurred after the setting up date (2nd Nov., 2001) are deductible, the Revenue's plea for total disallowance of the pre-demerger expenditure cannot be sustained in full. The Revenue's ground challenging the entire disallowance is therefore partly allowed inasmuch as the Tribunal upheld AO's disallowance only to the extent that expenses were incurred prior to the date of setting up; expenses after that date are to be allowed. [Paras 29]Revenue's ground for total disallowance is partly allowed; disallowance restored only to the extent of expenses incurred prior to 2nd Nov., 2001.Final Conclusion: Assessee's appeal is partly allowed by treating 2nd Nov., 2001 (High Court sanction) as date of setting up and permitting deduction of expenditure incurred after that date though operations commenced on 1st Jan., 2002; challenges to interest under ss.234B/234C are dismissed as no interest was payable after rectification; Revenue's appeal is partly allowed by restoring AO's depreciation rate of 20% for motor cars and by sustaining disallowance only for expenditure incurred prior to the date of setting up. Issues Involved:1. Disallowance of expenditure on the grounds that the business was not set up upon incorporation.2. Levying of interest under sections 234B and 234C of the Income Tax Act.3. Disallowance of excess depreciation claimed on motor cars.4. Total disallowance of expenditure of Rs. 85 lakhs.Detailed Analysis:Issue 1: Disallowance of Expenditure on Grounds that Business was Not Set Up Upon IncorporationThe primary issue raised by the assessee was the disallowance of Rs. 66,23,100 in business expenditure, with the Revenue arguing that the business was not set up upon incorporation. The assessee, engaged in international courier services, was incorporated on 24th April 2001 and incurred Rs. 85 lakhs in expenses before commencing business. The AO disallowed these expenses, noting that the business only commenced on 1st Jan 2002, following the Bombay High Court's order approving the demerger. The AO referenced Section 35D of the IT Act, which allows pre-commencement expenses only under specific conditions not met by the assessee. The CIT(A) upheld this view, restricting the disallowance to Rs. 66,23,100 for expenses incurred before 1st Jan 2002 while allowing Rs. 19,51,120 for post-demerger expenses.The Tribunal examined various judicial precedents distinguishing between the setting up and commencement of business. It concluded that the business was set up on 2nd Nov 2001, when the Bombay High Court approved the demerger, making the expenses incurred after this date deductible as revenue expenditure. Therefore, the Tribunal allowed the assessee's appeal on this ground.Issue 2: Levying of Interest Under Sections 234B and 234C of the IT ActThe assessee also contested the levy of interest under sections 234B and 234C. The CIT(A) noted that after rectification, no interest was charged under these sections, thus dismissing the assessee's grounds. The Tribunal found no infirmity in this decision and upheld the dismissal of these grounds.Issue 3: Disallowance of Excess Depreciation Claimed on Motor CarsThe Revenue challenged the CIT(A)'s decision to delete the disallowance of excess depreciation on motor cars. The assessee had claimed 50% depreciation, arguing that the cars were commercial vehicles under the IT Rules and Motor Vehicles Act. The AO allowed only 20% depreciation, considering them non-commercial vehicles.The Tribunal referred to previous cases, including Dy. CIT vs. Aramex India (P) Ltd., which distinguished between business use and commercial use of vehicles. It concluded that the motor cars were used for business purposes and not let out for commercial use, thus justifying the AO's 20% depreciation rate. The Tribunal reversed the CIT(A)'s order and restored the AO's decision.Issue 4: Total Disallowance of Expenditure of Rs. 85 LakhsThe Revenue also appealed against the CIT(A)'s partial allowance of the Rs. 85 lakhs expenditure. Given the Tribunal's decision on the first issue, it partially allowed the Revenue's appeal, aligning with its conclusions on the setting up and commencement of business.Conclusion:The Tribunal partly allowed both the assessee's and the Revenue's appeals, providing a nuanced resolution based on the distinction between setting up and commencing business, and the appropriate depreciation rates for business-use vehicles.