In CIT v. Axis Pvt Equity Ltd, the division bench of the Bombay High Court held that all expenses incurred during the interregnum between setting up of business and commencement of business would be permissible deductions under the provisions of the Income Tax Act, 1961.
The bench, dismissing the appeal filed by the revenue, clarified that the determination of the issue of whether the business has been set up is essentially one of finding of fact.
The assessee, an asset management company filed its income tax return declaring a business loss of Rs.1.17 crores. The AO observed that the claim of business loss cannot be allowed since the business has not been set up during the year under consideration and no evidence in regard to the same was produced.The first appellate authority upheld the order
On second appeal, the Appellate Tribunal found that 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, i.e during the year under consideration.In the light of balance sheet and P&L account, it was also noted that the company has taken steps for commencing business of venture capital fund, engaged legal and financial advisors and had incurred expenditures to decide the appropriate tax efficient structure for the funds and employed necessary personnel for purpose of running its business. Considering all these facts, the Tribunal held in favour of the assessee, relying upon the decision of the Co-ordinate bench of the Tribunal in HSBC Securities India Holdings Pvt. Ltd.wherein it was held that the business would be held to be set up as and when assessee had taken business premises and has taken steps to recruit employees and has incurred expenses for promoting its business activity.
Before the High Court, the Revenue contended that the claim of business loss cannot be allowed as the business had not commenced and 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. According to them, there is no distinction between setting up of business and commencement of business.
The bench comprising of Justice M.S Sanklecha and Justice A.K Menon noted that in Western India Vegetable Products Ltd. vs. Commissioner of Income Tax, the same Court held that business is said to have been set up when it is established and ready to be commence.
“However, all expenses incurred during the interregnum between setting up of business and commencement of business would be permissible deductions. In this case the CIT (A) had disallowed the expenditure as business loss as on the ground only on the ground that it had not commenced business. However, the impugned order of the Tribunal on examination of facts found that the business of the respondent – assessee has been set up in the subject assessment year and consequently, the business loss arising on account of expenditure as claimed by the respondent –assessee was allowable.”
“Mr.Kotangale, learned counsel for the Revenue has not been able to show any distinction which would warrant taking a different view of meaning of business being set up, as understood by the Tribunal in HSBC Securities India Holdings Pvt.Ltd. (supra). Mr.Kotangale states that the revenue has accepted the decision of the Tribunal in HSBC Securities India Holdings Pvt. Ltd. (supra) with regard to business expenditure being allowed on setting up of business, even if the business is yet to commence. The determination of the issue of whether the business has been set up is essentially one of finding of fact. This finding of fact on the basis of the test laid down by this Court in Western India Vegetable Products Ltd. (supra) and the Tribunal in HSBC Securities India Holdings Pvt. Ltd. (supra) is not shown to be perverse.”
Read the full text of the order below.
