Swaraj Corporation Vs DCIT (ITAT Ahmedabad)
Expenses Incurred After Business Is Set Up but Before Commercial Operations Are Deductible: Ahmedabad ITAT
Summary: The appeal was filed by M/s. Swaraj Corporation against the order of the Commissioner of Income Tax (Appeals)-12, Ahmedabad, relating to Assessment Year 2015-16. The assessee, a partnership firm engaged in real estate development, was constituted on 14.12.2011. Its business involved development of agricultural land contributed by the partners as capital into residential plots.
During assessment proceedings, the Assessing Officer noticed that the assessee had debited Rs.2,07,39,569/- to the Profit and Loss Account under the head “Pre-operative Expenditure”. The amount represented administrative, selling, financial and miscellaneous expenses incurred during FY 2011-12, 2012-13 and 2013-14, relevant to AYs 2012-13, 2013-14 and 2014-15. The assessee explained that various statutory permissions were required before the developed plots could legally be transferred to customers. The final permission for conversion of land for Non-Agricultural residential use was granted by the Collector, Anand, on 04.01.2014. According to the assessee, commercial operations in the form of entering into agreements for sale commenced thereafter, and the accumulated expenditure was therefore claimed in AY 2015-16.
The Assessing Officer, applying the mercantile system of accounting and referring to sections 4, 5 and 28 of the Income-tax Act, 1961, treated the expenditure as prior-period expenditure because the relevant liabilities had accrued and crystallized in earlier years. The entire amount of Rs.2,07,39,569/- was consequently disallowed.
