Case Law Details

Case Name : Multi Act Realty Enterprises Pvt. Ltd Vs ACIT (ITAT Mumbai)
Appeal Number : ITA no.7274/Mum/2011
Date of Judgement/Order : 28/08/2016
Related Assessment Year : 2008-09
Courts : All ITAT (1730) ITAT Mumbai (489)

CA Suraj R. Agrawal

Suraj R. Agrawal

A business is “set up” and expenditure is deductible whether actually assessee got any customer and earned any business income during the year or not

Brief of the Case:-

The assessee may not have been successful in getting customers or earning the business income, but if the assessee has done requisite preparations and if the assessee can be said to be in a position to cater to its customers, then it can be said that business is set up and it would amount to carrying on the business and accordingly the expenses would stand allowable to the assessee, irrespective of the fact whether actually assessee got any customer and earned any business income during the year or not.

Case Summary:-

Facts of the case:

  • The assessee was in the business of dealing in immovable properties and development rights etc.
  • It was observed for by the AO that no business income was earned by the assessee company during the year. However, in the income tax expenditure account, the assessee has debited various expenses such as travelling expenses, conveyance, printing & stationery, audit fees, professional fees, sundry expenses and interest on statutory payments etc. aggregating to Rs. 2,69,275/-. The AO disallowed these expenses on the ground that there was no business income received by the assessee during the year.
  • The assessee contested this issue before the Ld. CIT (A), wherein the Ld. CIT (A) confirmed the disallowance on the ground that no business was carried out during the year.

Contentions of Appellant:

Routine business expenses incurred during the normal course have been wrongly disallowed by the authorities and requested for reversing the action of AO and Ld. CIT (A).

Contention by Respondent:

The Ld. DR relied upon the orders of Ld. CIT (A) and the AO.

Ruling of Honorable ITAT/Court:

  • The assessee had purchased residential flats at Ashoka Towers for the purpose of resale/lease. It is also admitted fact that it is main object of the assessee company. Under these circumstances, ITAT have to examine whether there was commencement of the business during the year or not.
  • Relevant date for commencement of the business would be the date of setting up of business. It has been held in various judgments that ‘setting up of business’ and ‘commencement of business’ may be too different and independent events. For the purpose of deductibility of the business expenses, the reference point would be initial setting up of the business. The commencement of the business may take place at later date. Thus, even if the assessee does not earn any business income during the year, but if the business is set up, it would amount to carrying on the business under the income tax law and therefore, the business expenses would stand allowable.
  • The assessee has already purchased residential flat for the purpose of resale/lease, and therefore assessee was apparently ready to do its business. Under these circumstances, it can be said that the business is set up by the assessee during the year under consideration. For the deductibility of expenses incurred after this stage, earning of the business income is not a mandatory condition under the law. The assessee may not have been successful in getting customers or earning the business income, but if the assessee has done requisite preparations and if the assessee can be said to be in a position to cater to its customers, then it can be said that business is set up and it would amount to carrying on the business and accordingly the expenses would stand allowable to the assessee, irrespective of the fact whether actually assessee got any customer and earned any business income during the year or not.
  • Thus, the disallowance made by the AO is contrary to law and facts and the same is deleted and the AO is directed to allow the expenses claimed by the assessee amounting to Rs. 2,69,275/-. Thus, revised ground of the assessee is allowed.

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Category : Income Tax (20866)
Type : Judiciary (8910)
Tags : ITAT Judgments (3704) Suraj R. Agrawal (31)

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