The Income Tax Appellate Tribunal (ITAT), Pune Bench has held that expenditure incurred during the setting up of the new business and its commencement is allowable as a deduction.
The appellant, Messung Systems Private Limited, engaged in the business of trading Programmable Logic Controllers (PLC) and parts thereof. The return of income for the assessment year 2014-15 was filed on 30.09.2014 declaring a total income of Rs.27,83,430/-.
The assessment was completed by the Income Tax Officer, Ward-14(4), Pune vide order dated 29.11.2016 passed u/s 143(3) of the Income Tax Act, 1961 (‘the Act’) at a total income of Rs.2,21,92,970/-.
There was a disparity between the returned income and assessed income on account of not allowing the business loss incurred on account of the expenditure incurred from the date of set-off of the business against the interest income earned on the deposits made out of the funds.
The appellant company sold his business and was in the process of setting up a new business, incurred certain expenditures and also earned interest income on FDs. The appellant company claimed the set-off of the expenses incurred against the interest income. The Assessing Officer was of the opinion that the expenses incurred for preoperative nature cannot be set off against the interest income and brought to tax the interest income of Rs.2,21,92,972/under the head “Income from other sources”.
On appeal, the CIT(A) confirmed the action of AO and held that the appellant had not carried on any business and the expenses incurred by the assessee are pre-operative expenses that cannot be allowed as a deduction.
It was contended by the assessee that the expenses incurred during the intervening period between setting up and actual business should be allowed as a deduction. On the other hand, the revenue relied on the order of the CIT(A).
For the process of setting up a new business by identifying some distribution business, the assessee incurred certain revenue expenditure in the form of salary, etc other expenses which are part of the Paper Book. The Assessing Officer was of the opinion that all these expenditures were incurred in the process of setting up a new business which is only pre-operative expenses and cannot be allowed as deduction.
It was settled law that expenses incurred during the interval between the setting up of the business and commencement of the business are allowable as a deduction
A Coram comprising of Shri Inturi Rama Rao, Accountant Member and Shri S S Viswanethra Ravi, Judicial Member observed that the Assessing Officer, as well as the CIT(A), had failed to examine the nexus of the expenditure incurred and the new business stated to have been set-up.
The Tribunal viewed that a new business had been set up by the assessee and the expenditure incurred during the interval period of setting up of a new business and its commencement of business can be allowed as a deduction and can be set off against the interest income earned on fixed deposits by the assessee assessed under the head “Income from the other sources”.
While allowing the appeal, the Tribunal remitted the matter to the file of the Assessing Officer for fresh consideration after affording reasonable opportunity of being heard to the assessee.
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