Expenditure Incurred After Set-Up of Business Is Allowable As Deduction, Even If No Business Income Is Earned By The Assessee : ITAT Chennai

The Chennai Bench of ITAT has ruled that once the business of an assessee is set-up, all the expenditure incurred by it would be allowable as deduction, notwithstanding the fact that no business income was earned by the assessee during the relevant year. The Bench, consisting of Mahavir Singh (Vice President) and Manoj Kumar Aggarwal (Accountant Member), reiterated that there may be an interval between the setting-up of a business and the commencement of a business, however, all the expenses incurred during the said interval would be available as deduction. The assessee RBL Hotels Private Limited is engaged in the Hospitality Industry. The assessee acquired a land and a partially constructed building for opening a hotel. Thereafter, the assessee entered into a Hotel Operating Agreement with the Indian Hotels Company Ltd. The assessee claimed a set-off of the expenditure incurred by it as business expenditure for the relevant assessment year. The Assessing Officer (AO) held that the assessee did not commence any business operations and that it did not earn any revenue from the said operations. Thus, the AO ruled that the expenditure incurred by the assessee could not be allowed as revenue expenditure. Against this, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) (CIT(A)). The assessee submitted before the CIT(A) that it had carried out various preparatory activities to start a business and that it had commenced business operations, therefore, the business expenditure incurred by it should be allowed as expenditure. The CIT(A) ruled that the expenditure incurred by the assessee was a pre-incorporation expenditure and that the assessee was not eligible to claim a set off of the said pre-incorporation expenditure. The CIT(A) held that the business expenditure incurred by the assessee was required to be capitalized along with the cost of the hotel building purchased by it. Against this, the assessee filed an appeal before the ITAT. The assessee RBL Hotels submitted before the ITAT that it had duly set-up its business during the relevant year and therefore, the business expenditure incurred by it should be allowed as deduction. The revenue department contended that the assessee could be said to have set up its business only when the assessee was completely ready to carry out its business operations. The revenue department added that till the assessee was not ready to commence its business, the expenditure incurred by it could not be allowed as deduction and that the same would remain a pre-operative expenditure. The ITAT noted that as per the financial statements of the assessee, the assessee had obtained long term borrowings and had acquired tangible and intangible assets. The ITAT observed that the administrative expenses debited to the assessee's Profit and Loss Account were substantially connected with the construction work done by the assessee. The ITAT added that the assessee had also deputed staff and had paid salaries to them. Therefore, the ITAT held that though the business of the assessee was in pre-commencement stage, however, the assessee had undertaken substantial activities to make the business ready for commencement. The ITAT held that since the assessee had procured a land and a partially constructed building during the relevant year, which was a vital step to commence its business activity of operating a hotel, it could not be said that the business of the assessee was not set-up. Thus, the ITAT ruled that though the business of the assessee was set-up, however, it was in a pre-commencement stage during the relevant year, and that the business of the assessee could not be commenced due to long gestation period. The ITAT observed that in view of Section 3 of the Income Tax Act, 1961, the term 'previous year' means the financial year immediately preceding the assessment year. However, the ITAT noted that in the case of a newly set-up business, the previous year shall be the period beginning with the date of setting up of the business. Thus, the ITAT ruled that till the business was set-up, all the expenses incurred by an assessee would have to be capitalized, even if they were revenue in nature. The ITAT held that, as a corollary, if the business of an assessee was set-up, all the expenditure incurred by the assessee would be allowable as deduction notwithstanding the fact that no business income was earned by it during the relevant year. The ITAT held that in view of the decision of the Bombay High Court in the case of Western India Vegetable Products versus CIT (1954), it is the set-up of business and not the commencement of the business that has to be considered. The ITAT added that once the business is held to be set-up, the business expenditure incurred by the assessee would be available as deduction. The ITAT added that a business can be said to have been set-up once it is ...

Expenditure Incurred After Set-Up of Business Is Allowable As Deduction, Even If No Business Income Is Earned By The Assessee : ITAT Chennai

Parina Katyal

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