AO not justified in making disallowance u/s 37 for expenses incurred by assessee before commencement of business operation but after setting up of business

The important question that has got to be considered is from which date are the expenses of this business to be considered permissible deductions and for that purpose the section that we have got to look to is section 2(11) and that section defines the ^„previous year^‟ and for the purpose of a business the previous year begins from the date of setting up of the business. Therefore it is only after the business is set up that the previous year of that business commences and in that previous year the expenses incurred in the business can be claimed as permissible deductions. Any expenses incurred prior to setting up of a business would obviously not be permissible deductions because those expenses would be incurred at a point of time when the previous years of the business would not have commenced.

IN THE HIGH COURT OF DELHI AT NEW DELHI

Date of decision: 9^th July, 2013

ITA 131/2010

COMMISSIONER OF INCOME TAX

versus

SAMSUNG INDIA ELECTRONICS LTD.

CORAM:

HONORABLE MR. JUSTICE SANJIV KHANNA

HONORABLE MR. JUSTICE SANJEEV SACHDEVA

SANJIV KHANNA, J. (ORAL)

Revenue by this appeal under Section 260A of the Income Tax Act, 1961 (Act, for short) challenges the findings recorded by the Income Tax Appellate Tribunal in the order dated 28^th November, 2008 that the assessee is entitled to claim and set off expenses of Rs.34,95,606/-. It is submitted that the said expense are capital in nature as they are “Set up” expenses. The findings recorded by the tribunal reads as under:-

“6. In view of the above, the business of the assessee could be said to have been set up on 3.9.95 as prior to this necessary agreements had been entered into, key personnel had been recruited and the assessee company had started working necessary infra structure like office premises, office equipments etc. and the assessee company was ready to commence trading operation as on the date of incorporation viz. 3.8.95. Accordingly, A.O. is directed allow the revenue expenditure incurred after the setting up of business which was 3.9.1995, notwithstanding the fact that commercial operations started w.e.f. 1.10.1995. For the purpose of claiming expenditure incurred thereafter, as revenue expenditure, reliance are placed on the following decisions:

x x x x x x x”

2. The respondent- assessee is a joint venture company setup under the incorporation agreement dated 28^th March, 1995 between Samsung Electronics Co. Ltd. (SEC), Korea and M/s Reasonable Computer Solutions Private Ltd., an Indian company. Respondent- assessee was incorporated on 3rd August, 1995 and certificate of commencement of business is dated 29^th August, 1995. Thereafter, respondent- assessee entered into technology licence agreement dated 12^th September, 1995 and started its commercial operations on 1^st October, 1995.