Assessee's Pre-Setup Business Expenses Deemed Allowable

The Tribunal determined that the assessee had set up its business before the relevant accounting period for the assessment year 1979-80. Therefore, all expenses incurred after setting up the business were deemed allowable as business expenditure. Consequently, the losses for each year were to be carried forward. The appeals were allowed, and the orders of the CIT (A) were overturned.

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Issues Involved:
1. Whether the assessee company had set up its business.
2. Whether the expenditure incurred after the business is set up is allowable as business expenditure.

Detailed Analysis:

Issue 1: Whether the assessee company had set up its business.

The assessee, a private limited company incorporated on 7th April 1975, filed appeals against the common order of the CIT (A), Hyderabad, dated 31st Jan. 1983, relating to the assessment years 1979-80, 1980-81, and 1981-82. The main object of the company was to carry on the business of exporters and importers. The company set up an office initially in Trunk Road, Ganapavaram, Chilakaluripet, and later moved to D. No. 47 10 Brodipet, Guntur. Despite setting up the office and incurring various expenses, the company did not secure any business orders and thus did not commence actual business operations.

The CIT (A) held that while the company had set up the business apparatus by renting premises, equipping it with furniture, typewriter, telephone, and employing staff, this did not amount to the commencement of business. The CIT (A) believed that there should be actual business operations before expenses incurred between setting up and commencement could be allowed as business deductions.

Issue 2: Whether the expenditure incurred after the business is set up is allowable as business expenditure.

The Tribunal referred to several judicial precedents to determine the correct legal position. In Western India Vegetable Product Ltd. vs. CIT (1954) 26 ITR 151 (Bom), it was established that there is a distinction between setting up a business and commencing a business. The court held that "when a business is established and is ready to commence business then it can be said of that business that it is set up." Expenses incurred after the business is set up but before actual commencement are permissible deductions.

Similarly, in CWT vs. Ramaraju Surgical Cotton Mills Ltd. (1967) 63 ITR 478 (SC), the Supreme Court approved the dicta of the Bombay High Court, reinforcing that expenses incurred during the interval between setting up and commencement are deductible.

In Sarabhai Management Corporation Ltd. vs. CIT (1976) 102 ITR 25 (Guj), the Gujarat High Court held that a business is set up when it is in a position to start functioning, even if actual operations have not commenced.

Applying these principles, the Tribunal found that the assessee had indeed set up its business by securing office space, furnishing it, and making all necessary arrangements to start operations. The lack of business transactions was not due to the assessee's failure to set up the business but rather due to external circumstances.

Conclusion:

The Tribunal concluded that the assessee had set up its business before the commencement of the accounting period relevant to the assessment year 1979-80. Therefore, all expenses incurred after setting up the business are allowable as business expenditure. Consequently, the losses determined for each year should be carried forward. The appeals were allowed, and the orders of the CIT (A) were set aside.

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