This case analysis focuses on the disallowance of expenses by the Assessing Officer on the grounds that the business had not commenced, rendering the expenses non-allowable as revenue. The ld. CIT(A) (Commissioner of Income Tax – Appeals), after considering the audited accounts and relevant documents of the assessee, found that the delay in sales was due to the non-receipt of administrative approval, despite the purchases being made and necessary preparations being completed. The analysis examines how the Hon’ble jurisdictional High Court of Delhi’s judgment in the case of Carefour Wc & C Pvt. Ltd. vs. DCIT influenced the decision regarding the treatment of the expenses.
Analysis: In this case, the Assessing Officer disallowed the expenses incurred by the assessee on the grounds that the business had not commenced during the relevant period. The disallowance was based on the argument that expenses are only allowable as revenue when there is income-generating activity.
However, the ld. CIT(A) reviewed the audited accounts and other relevant documents and noted that the assessee possessed an import license, with the value of imports shown at Rs. 50,34,375/-. The seller company had already satisfied the import requirements. Despite having made purchases and completed necessary preparations, the sales could not be effectively carried out during the year due to the absence of administrative approval, which was a formal requirement to commence sales.
The ld. CIT(A) referred to the judgment of the Hon’ble jurisdictional High Court of Delhi in the case of Carefour Wc & C Pvt. Ltd. vs. DCIT. The High Court held that for the commencement of business, there should be an income-generating asset or income-earning structure in place. It acknowledged that there can be a time gap or interval between the setup and the actual commencement of business.
Applying the judgment, the ld. CIT(A) determined that the period in which the impugned expenses were incurred should be considered as a time gap or interval between setting up and commencement. Therefore, the expenditure incurred during this period was held to be revenue expenditure. The ld. CIT(A) was justified in allowing the expenses as revenue expenditure based on the Hon’ble jurisdictional High Court’s decision.
Conclusion: The analysis of this case highlights the disallowance of expenses by the Assessing Officer on the grounds of non-commencement of business. However, the ld. CIT(A) considered the import license, sales delay due to administrative approval requirements, and the judgment of the Hon’ble jurisdictional High Court of Delhi. Ultimately, it was concluded that the expenses incurred during the period of setup and non-commencement should be treated as revenue expenditure. This case serves as an important precedent for similar situations where there is a time gap or interval between setting up and commencement of business.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal has been filed against the order of CIT(A)-2, New Delhi dated 10.05.2019 for AY 2016-17.
2. The grounds of appeal raised by the revenue are as follows:-
1. On the facts and in the circumstances, the Ld. CIT(A) has erred in deleting the disallowance made by the AO without considering the facts that the business activities of the assessee company had not commended during AY 2016-17.
2. On the facts and in the circumstances, the Ld. CIT(A) has erred in deleting the disallowance made by the A.O. without considering the facts that the assessee has to amortize expenses made before the commencement of business as per the provisions of section 35D of the Act.
3. On the facts and in the circumstances the Ld. CIT(A) has erred in deleting the disallowance made by the A.O. on account of expenses not being revenue in nature.
3. The ld. Senior DR supporting the assessment order submitted that the ld. CIT(A) has erred in deleting the disallowance made by the Assessing Officer without considering the fact that the business activities of the assessee company has not commenced during AY 2016-17 and the assessee had to amortize expenses before commencement of business as per the provisions of section 35D of the Act. The ld. Senior DR submitted that the ld. CIT(A) has granted relief to the assessee without any basis therefore impugned first appellate order may kindly be set aside by restoring that of the Assessing Officer.
4. Replying to the above, the ld. assessee authorize representative submitted that the ld. CIT(A), after considering the entire facts and circumstances of the case in the right prospective and by relying judgment of Hon’ble Bombay High Court in the case of Western India Vegetable Products Ltd. vs. CIT 26 ITR 151 and judgment of Hon’ble jurisdictional High Court of Delhi in the case of Carefour Wc & C Pvt. Ltd. vs. DCIT order dated 22.09.2014 rightly granted relief to the assessee by observing that the appellant has set up business structure and apart from other expenditure has also made huge purchases therefore the entire income earning mechanism was in the place and the commencement abates administrative approval only. The ld. AR also submitted that the Assessing Officer has not doubted quantum and genuineness of expenditure therefore the ld. CIT(A) has rightly relief to the assessee.
5. On careful consideration of above submission, first of all, from the first appellate order we note that the ld. CIT(A) has granted relief to the assessee with following observations and findings:-
6.1 Ground no. 1:-This ground is directed against addition of Rs. 2,31,30,046/- on account of disallowance of all expenses claimed in P&L account on the ground that business has not commenced and that the expenses are not allowable as revenue expenses. They are to be amortised under section 35D. The AO noticed that the company was incorporated on 12. 06. 2015 to act as a certifying authority for issuing and managing digital signature certificates and e-signatures. The impugned year being the first year, there was no sales or trade receivables. The only source of income was interest from loans. There was no business income earned by the assessee during the year.
6.2 The AO asked for the explanation from the appellant. The appellant replied that the sale of digital signature certificates (DSC) had started in subsequent year however, the expenses were incurred to ensure compliance. The A0 also found that the permission or approval from the concerned Ministry was not available during the impugned year. The AO inferred that the business activity had not commenced at all and all expenses were to be amortised.
6.3 During the appeal proceedings the appellant submitted the audited accounts and documents as presented to the AO. During the year, the appellant has imported licenses from the company- Nexus and the CIF value of imports is shown at Rs. 50,34,375/- which has been certified by the seller company @, USD 1,62,000/-. It was admitted that sales were not effected during the year. However, purchases were made and all the necessary preparation was already done. The sales could not be affected due to non-receipt of administrative approval only which was a formal requirement to start the sale. It has been submitted that the business had already commenced even though the sale had not started.
6.4 As per AO’s view, the business has not commenced even though purchases have been made. However, there is a difference between commencement of business and setting up of business which has been explained in a catena of judicial pronouncements, some of them are discussed below:
6.5 The Bombay High Court in Western India Vegetables Products Ltd. vs. CIT  26 IT 151 has examined the concept and noticed the difference between commencement and setting up of a business by observing:-
“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 a business would obviously not be permissible deductions…
6.6 Subsequently, CIT, Gujarat Vs. M/s. Saurashtra Cement and Chemical Industries Ltd. (1973) 91 IT 170 (Guj), has held a business is said to have commenced as soon as an essential activity of that business is started.
6.7 Delhi High Court in the case of Carefour Wc & C India Pvt. Ltd. vs DCIT vide order dated 22.09.2014 observed that-
“11. On a reading of the above referred quotations, it is clear that it is only after the business is set up, that the expenses incurred in the business can be claimed as permissible deduction under Section 37 of the Act. For commencement of a business, there must be in place some income generating asset or income earning structure. In several cases, there is a gap or an interval between setting up and commencement….
12. There is no dispute about the factual aspect of the expenses incurred by the petitioner. In the present case, the position of the primary objectives of the assessee company is also not in dispute..
17. The law being well settled, it may not be necessary to deal with all the judgments relied upon by the appellant. We may only state here that the orders of the authorities below do not indicate that it was the case of the revenue that the assessee has claimed deduction of expenditure, prior to the setting up of business.
We accordingly answer the substantial question of law in favour of the appellant..”
6.8 The above said orders have made it clear that the expenditure incurred after setting up of business can be claimed even though the business has not commenced. In the present case, the appellant has set up the business structure and apart from other expenditure has also made huge purchases. The entire income earning mechanism is in place and commencement awaits administrative approval only. The AO has not doubted the genuineness of expenditure. In view of the clear legal position, the addition is not justified. The same is deleted. The ground is allowed.
6. In view of above, we note that neither the Assessing Officer nor the ld. Senior DR before us as pointed out any defects or discrepancy about the quantum and genuineness of expenditure. The Assessing Officer made disallowance on the ground that business has not commenced therefore expenses are not allowable as revenue The ld. CIT(A) after considering the audited accounts and other relevant document of assessee noted that the assessee has import license and the CIS value of import was shown at Rs. 50,34,375/- which was satisfied by the seller company but the sales were not effective during the year despite the fact that purchases were made and all necessary preparation was already done. The ld. CIT(A) also noted that the sales could not be effected due to non-receipt of administrative approval which was a formal requirement to start the same. Hon’ble jurisdictional High Court of Delhi in the case of Carefour Wc & C Pvt. Ltd. vs. DCIT (supra) held that for commencement of business there must be in place some income gathering asset or income earning structure. In several cases there is a gap or an interval between setting up and commencement. In the present case the setup was ready but in absence of administrative approval sales could not be started and thus the period in which impugned expenses incurred was to be considered as a time gap or interval between setting up and commencement. Therefore respectfully following the judgment of Hon’ble jurisdictional High Court of Delhi (supra) we hold that the expenditure incurred during such a period has to be held as revenue expenditure and thus the ld. CIT(A) was right in allowing the same. We are unable to see any reason to interfere with the finding of ld. CIT(A). Accordingly, grounds of revenue are dismissed.
7. In the result, the appeal of the revenue is dismissed.
Order pronounced in the open court on 09.06.2023.