TaxTMI 
TaxTMI 
2019 (2) TMI 697
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....rred in deleting the addition made by the AO in respect of pre operative expenses in the case of assessee's restaurants "Like that Only" (Bangalore) and "Monkey Bar" (Delhi) and confirmed the same in the case of "Monkey Bar11 (Bangalore) without appreciating the fact that in the books of accounts of the assessee pre-operative expenses amounting to Rs, 1,70,90,906/- were shown under the head of Lease Hold Property/Capital WIP and reflected under Fixed Assets Schedule. 2. On the facts and the circumstances of the case and in law, the Id. CIT (A) erred in deleting the addition made by the AO in respect of pre operative expenses in the case of assessee's restaurants "Like that Only" (Bangalore) and "Monkey Bar" (Delhi) and confirmed the same in the case of "Monkey Bar" (Bangalore) by meting out different treatment to the same expenditure i.e treating it as revenue expenditure for one and as capital expenditure for another. Such expenses are allowable only u/s 35D91)(ii) of the IT Act, 1961 to the extent mentioned therein and Sec 37(1) of the IT Act also does not allow any capital expenditure." 3. The grounds of appeal taken by the assessee are different which are no....
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....llant further submits that the expenses have not brought into existence any capital asset or enduring benefit and satisfy all the essential conditions of revenue expense under the Act; hence on the facts and circumstances of the case, disallowance of pre-operative expenses made by the AO shall be deleted." 4. The brief facts of the case extracted from ITA No.5098/Mum/2017 are that the assessee is engaged in the business of running restaurants and related activities, filed its return of income for AY 2013-14 on 26-09-2013 declaring total income of Rs. 36,80,710. The case was selected for scrutiny and notices u/s 143(2) & 142(1) of the Act were issued. In response to notices, the authorised representative of the assessee appeared from time to time and filed the details, as called for. The assessment has been completed u/s 143(3) of the I.T. Act, 1961 on 19-03-2016 determining total income at Rs. 82,00,864 by making addition towards disallowance of expenditure incurred in relation to exempt income u/s 14A r.w.r. 8D of I.T.Rules, 1962 for Rs. 2,69,162, disallowance of pre-operative expenses capitalised in books of account, but claimed as revenue expenditure in computation of total i....
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....t facts remain that the said expenditure claimed in statement of total income as revenue expenditure u/s 37(1), are purely revenue expenditure, which are incurred wholly and exclusively in connection with existing business. The Ld.CIT(A) further observed that the assessee has an existing business. Neither is the fact that expenditure in question is incurred in respect of additional restaurant set up and which is in the nature of expansion of the existing restaurant business. The management, the control and the funds utilised are common. Therefore, the same cannot be treated as pre-operative expenses, which comes under the provisions of section 35D so as to amortise over a period of years. Insofar as disallowance of expenditure incurred in relation to exempt income, the Ld.CIT(A) held that the AO has rightly disallowed expenses by applying rule 8D(2)(iii) @0.5% of the average value of investment as the assessee made suo moto disallowance in respect of direct expenses u/r 8D(2)(i), but failed to disallow other administrative expenses u/r 8D(2)(iii). Insofar as disallowance of ROC fees paid for increase in authorised capital, the Ld.CIT(A) observed that the assessee has paid fees for ....
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....Appeal No.892 of 2014. 8. On the other hand, the Ld.DR submitted that the Ld.CIT(A) was erred in deleting addition made by the AO towards pre-operative expenses without appreciating the fact that in the books of account, the assessee has shown said expenditure under the head 'work in progress' but in statement of total income, the same has been treated as revenue in nature to be deductible u/s 37(1). The Ld.DR further submitted that the Ld.CIT(A) did not appreciate the fact that pre-operative expenses are allowable only u/s 35D(1)(ii) of Income-tax Act, 1961 to the extent mentioned therein and section 37(1) of the I.T. Act does not allow any capital expenditure to be deducted. The Ld.DR further submitted that a particular expenditure cannot have two natures, i.e. one of capital expenditure for preparation of books of account and revenue expenditure for the purpose of computation of income. The assessee has rightly treated preoperative expenses as capital in its books of account, but when it comes to computation of income, claimed the same as revenue expenditure without any basis. 9. We have heard both the parties, perused the material available on record and gone through the ....
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....r consideration. Therefore, once particular expenditure is revenue in nature, for the purpose of determination of income, what is relevant is - whether a particular expenditure has been incurred wholly and exclusively in connection with business and such expenditure has been incurred for the business in the relevant period or not. It is not relevant as to how the assessee shows a particular income or expenditure in the books of account. Separate computation of income and expenditure would be justified only when several distinct business are carried on and not when the separate business activities were carried out by same person and one set of account is maintained for all set of activities. In this case, it is not in dispute that the assessee has maintained one set of books of account for its business activity even though it has separate units in different places. Further, it is also not in doubt that pre-operative expenses claimed in statement of total income are in the nature of revenue expenses. Therefore, we are of the considered view that when the assessee has commenced its business activity in the relevant previous year and also incurs certain expenses which are revenue in na....
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....vs Evergrowth Telecom Ltd (2013) 29 taxmann.com 273 (Bom). The Hon'ble jurisdictional High Court, while considering the issue of expenditure incurred after setting up of business and before commencement of business held that the said expenditure is allowable as a deduction u/s 37(1) of the Income-tax Act, 1961. The relevant observations of the Court are as under:- "Any expenditure incurred after setting up of a business and before the commencement of business is allowable as a deduction under section 37(1). The issue whether the expenditure has been incurred for purposes of business is an issue of fact and two authorities under the Act have rendered a finding of fact that expenses incurred on account of PSTN charges and dealer's commission are incurred for purposes of business and allowable under section 37(1). In view of the above, no substantial question of law arises with regard to issue in question. [Para 5]" 13. The assessee has also relied upon the decision of Hon'ble Madras High Court in the case of CIT vs Shakti Sugars Ltd 339 ITR 400 (Mad). The Hon'ble High Court, while considering the issue of deductibility of pre-operative expenses held ....
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....l in ITA No.5098/Mum/2017 is disallowance of expenses incurred in relation to exempt income u/s 14A r.w.r. 8(D)(2) of IT Rules, 1962. The AO has disallowed expenditure incurred in relation to exempt income by invoking rule 8D(2)(iii) @0.5% of average value of investments. According to the AO, though the assessee has disallowed direct expenses u/r 8D(2)(i), but expenses coming under the provisions of Rule 8D(2)(iii) has not been considered; therefore, he opined that disallowance is necessary u/r 8D(2)(iii) @0.5% of average value of investments. It is the contention of the assessee that it has already suo moto disallowed expenses incurred in relation to exempt income like 50% salary of Dipak Kadam, conveyance and other expenses. However, further disallowance by invoking rule 8D(2)(iii) amounts to double disallowance which is incorrect. 16. Having heard both the sides, we find that although the AO has accepted the fact that the assessee has made suo moto disallowance of Rs. 2,75,214, without verifying whether disallowance made by the assessee are direct expenses or other expenses which falls under the provisions of Rule 8D(2)(iii), made further disallowance of Rs. 2,69,162 by apply....