The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has ruled that start-up businesses can deduct all revenue expenses, even if the business has not commenced, and held that the expenses are allowable as a deduction under Section 30(1) and Section 37(1) of the Income Tax Act, as they are incurred “wholly and exclusively” for the purpose of the business.
The assessee, Vijay Flexible Containers Private Limited, is a company engaged in the business of manufacturing and sale of Form fill and sealing machines. The assessee claimed a deduction of Rs. 89,07,340 for certain expenses it incurred during the assessment year 2015–16. The Assessing Officer rejected the application of a deduction because, in his opinion, the charges were capital expenditures and hence not eligible for reimbursement.
The assessee filed an appeal with the Commissioner of Income Tax (Appeals) over the Assessing Officer’s decision. The Assessing Officer’s decision was supported by the Commissioner of Income Tax (Appeals). To the Income Tax Appellate Tribunal (ITAT), the assessee subsequently filed an appeal.
The assessee argued that expenses were revenue-based and allowed as deductions, as they were in the normal business course and not capital-based. They also argued that the entries in the books of account were irrelevant for computing total income.
The Assessing Officer argued that the assessee’s expenses were capital-type and not revenue expenditure. They argued that they created an intangible asset without immediate benefit and that the entries in the books of account were relevant for computing total income.
The Commissioner of Income Tax (Appeals) upheld the Assessing Officer’s order, stating that the assessee’s expenses were capital and not revenue expenditure. They also agreed that book entries were relevant for computing total income.
The Calcutta High Court ruled in CIT vs. Berger Paints (India) Ltd. that revenue costs incurred after the establishment of the business are deductible even though the business has not yet started. The Court determined that the costs are expended “wholly and exclusively” for business purposes and that no other Act provision expressly forbids them.
The Tribunal observed that entries in the books of account were not relevant for computing total income, as the expenses were allowable as deductions even if not reflected in the books of account
The Two Bench Members comprising Rahul Chaudhari (Judicial Member) and B.R. Baskaran (Accountant Member) held that the revenue expenses incurred by the assessee were incurred “wholly and exclusively” for the purpose of the business and that they were not specifically disallowed by any other provision of the Act. Therefore, the Tribunal held that the expenses were allowable as a deduction under Section 30(1) and Section 37(1) of the Act.
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