By TIOL News Service

MUMBAI, FEB 07, 2017: THE ISSUE IS - Whether all expenses incurred during the interregnum between setting up of business and commencement of business would be permissible deductions. YES is the verdict.

Facts of the case:

The assessee is an asset management company. During the assessment proceedings, the AO noted that the assessee had shown the business loss of Rs.1.17 crores and Miscellaneous Income of Rs. 24,720/- for the subject A.Y. He disallowed the business loss claimed by assessee on the ground that business had not been set up during the year under consideration and no evidence in regard to the same was produced. So far as miscellaneous income of Rs.24,720/- was concerned, the AO brought it to tax as income from other sources. On appeal, the ITAT recorded the fact that the expenses of Rs.1.17 crores was disallowed as business had not been set up in the year under consideration by the lower authorities. The impugned order also makes reference to the fact that the company was incorporated in the year 2006 and the Assistant Registrar of Companies has issued a certificate that the company had commenced business with effect from 1st October, 2006. The Tribunal further held that expenses incurred were to be allowed as business loss as same had been incurred after the business has been set up. So far as Miscellaneous Income of Rs.24,720/- was concerned, the impugned order records the fact that similar income claimed by the assessee had been categorised as income from other sources, by the AO for subsequent A.Y 2009-10 and accepted by the assessee.

On appeal, the HC held that,

++ the grievance of the revenue is only with regard to the impugned order allowing the expenditure of Rs.1.17 crores as business loss. This conclusion of the Tribunal is premised on the fact that the business has been set up during the year under consideration. It is submitted by the Revenue that no evidence was produced by the assessee to show that any activities of management of funds have been taken by the assessee during the assessment year. Thus no expenditure resulting in business loss could be allowed as the business had not commenced. It is noted that a similar issue viz. distinction between setting up of business and commencement of business had come up for consideration before this Court in Western India Vegetable Products Ltd. vs. Commissioner of Income Tax, wherein it was held that business is said to have been set up when it is established and ready to be commence. However, there may be an interval between a business which is set up and a business which is commenced. However, all expenses incurred during the interregnum between setting up of business and commencement of business would be permissible deductions. In view of above, no substantial question of law arises for consideration.

(See 2017-TIOL-251-HC-MUM-IT)