Case Law Details
Brief of the Case
ITAT Mumbai held in the case of M/s. Multi Act Realty Enterprises Pvt. Ltd. vs. ITO 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. In the present case, it may be seen that 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. Accordingly, the expenses would stand allowable to the assessee.
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.
Held by CIT (A)
CIT (A) confirmed the dis allowance on the ground that no business was carried out during the year.
Held by ITAT
ITAT held that 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.
In following cases it has been held that whether income has been earned or not and whether ultimate benefit has accrued immediately or not, the expenses incurred shall be allowable if these have been incurred for the purpose of business or for commercial expediency. Eastern Investments Ltd. Vs. CIT (20 ITR 1) (SC) , J.R. Patel & Sons Pvt. Ltd. 69 ITR 782 (Guj), Raipur Mfg. Co. Ltd. (84 ITR 508,516) (Guj), Security Printers of India Pvt. Ltd. (78 ITR 766,774) (All), Tatasons Ltd. (18 ITR 460,467) (Bom) , Walchand & Co. P. Ltd.(65 ITR 381, 385) (SC), J.K. Woolen Manufactures (72 ITR 612) (SC), Aluminium Corp. of India Ltd. (86 ITR 11, 17) (SC) and Orissa Cement Ltd. (73 ITR 14, 17) (Del). Further, in following cases, it has been held that expenses shall become deductible after setting up of the business, even if commencement of business has not yet taken place: CIT Vs. Ralliwolf Ltd. (121 ITR 262) (Bom), Saurashtra Cement & Chemical Industries Ltd. (91 ITR 170) (Guj), Western India Vegetable Products Ltd. (26 ITR 151), Ramaraja Surgical Cottons Mills Ltd. (63 ITR 478) and CIT v. Whirlpool of India Ltd 318 ITR 347 (Delhi High Court).
In the case before us, it may be seen that 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 assesses 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 assesses.
Thus, the dis allowance 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/-.
Accordingly appeal disposed of.
