2005 (6) TMI 225 - AT - Income Tax

Assessee entitled to claim expenses & depreciation as Tribunal remands matter for proper examination.

The Tribunal concluded that the assessee had set up its business and was entitled to claim expenses and depreciation. The Tribunal set aside the impugned ... Business Expenditure Issues Involved:1. Disallowance of expenses and depreciation claimed by the assessee under the head 'Business'.2. Determination of whether the business was set up and entitled to claim expenses and depreciation.3. Applicability of Section 28 of the IT Act regarding computation of income chargeable under the head 'Profits and Gains of Business or Profession'.Issue-wise Detailed Analysis:1. Disallowance of Expenses and Depreciation:The assessee's appeal was against the order of CIT(A) confirming the AO's disallowance of expenses and depreciation claimed under the head 'Business'. The assessee, a company formed with foreign collaboration, aimed to manufacture and supply railway wheels to Indian Railways. The AO disallowed the claims on the grounds that the assessee did not carry on any business during the relevant period as there were no sales or orders from Indian Railways, and the company lacked manufacturing facilities and ISI standardization.2. Determination of Whether the Business was Set Up:The CIT(A) upheld the AO's decision, stating that the business could only be considered carried on if commercial production had commenced. The CIT(A) noted that the balance sheet showed no production of finished goods and no sales or orders were made during the relevant period. The assessee contended that the business was set up as wheels were purchased, processed, and tenders were submitted to the Railways. The Tribunal observed that the business is considered set up when it is ready to commence, even if commercial production has not started. The Tribunal referenced several cases, including Western India Vegetable Products Ltd. vs. CIT and Sarabhai Management Corpn. Ltd. vs. CIT, to support this distinction.3. Applicability of Section 28 of the IT Act:The Tribunal held that the Revenue authorities erroneously applied the test of commercial production commencement rather than business setup. The Tribunal noted that the assessee had procured raw wheels, processed them, and submitted tenders, indicating that the business was set up. The Tribunal emphasized that expenses incurred between setting up and commencement of business are deductible. The Tribunal also addressed the AO's incorrect emphasis on ISI marking, noting that the Railways had their own specifications which the assessee's wheels could meet.Conclusion:The Tribunal concluded that the assessee had set up its business and was entitled to claim expenses and depreciation. The Tribunal set aside the impugned orders and remanded the matter to the AO to examine the claims in accordance with the law, allowing expenses and depreciation as permissible. The appeal was allowed, and the matter was to be decided after affording the assessee a reasonable opportunity of being heard.