Brief of the case:
ITAT Mumbai held in Reliance gems & Jewels ltd Vs DCIT that the revenue expenditure would be allowed as an expense after the setting up of the business before the commencement of the business. The expense incurred on recruitment of employees gave indication that the business had been set up so the expenses incurred after setting up of the business related with the employees and other expense would be allowed as a revenue expense u/s 37(1).
Facts of the case:
The assesse had filed its return declaring loss of Rs 87,26,445/-. The case was selected for scrutiny and the AO came to know that the business had not been started by the assesse so the disallowed all the revenue expenses claimed by the assesse and made addition to the income. AO was of the view that expense could only be allowed as deduction only and only after the commencement of business not after setting up of the business. So assesse went into unsuccessful appeal with CIT(A) then assesse went into appeal with ITAT.
Contention of the assesse:
Assessee was of the view that the expenses should be allowed as deduction after the setting up of the business. Assessee relied upon the decision given by Hon’ble High Court of Delhi in the case of Omniglobe Information Tech India Pvt. Ltd. Vs CIT in which it was held that the revenue expense should be allowed as deduction u/s 37(1) even after the setting up of the business. Moreover it was held that the moment employees were recruited for the purpose of the business and therefore any expenditure incurred by the assessee after setting up of the business were allowable u/s. 37(1) of the Act.
Further assesse was of the view that the business requires expertise who had proficiency in understanding the carats of diamonds and related jewellery, without such recruitment, it would be a futile exercise to commence the business.
Contention of the revenue:
Revenue was of the view that any expense could only be allowed as a deduction only after the commencement of the business. As the assesse had not commenced its business it had only set up the business, So deduction u/s 37(1) could not be allowed to the assesse.
Further revenue was of the view that the above case decision on which assesse had relied was related with the assesse whose business was related in service industry but the assesse business in the relevant case was different so the above case of Omniglobe Information Tech India Pvt. Ltd. could not be applied here.
Held by ITAT:
ITAT relied on the case decision given by High Court of Bombay in the case of Western India Vegetable Products Ltd. Vs CIT 26 itr 151 (Bom). Further reliance was placed on the decision in the case of CIT Vs E-Funds International India (2007) 162 Taxman 01 (Del) in which it was held that the moment employees were recruited the business was set up so the expenditure which assesse had claimed should be allowed.
Appeal of the assesse was allowed.