As per the Income Tax act expenditure during the year amounting to setting up cannot be treated as preoperative expense

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH: A: NEW DELHI

BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER

AND

SHRI K.G. BANSAL, ACCOUNTANT MEMBER

ITA No.4019/Del/2010

Assessment Year : 2007-08

ITO, Ward 2 (4),

Room No.381, CR Building,

New Delhi.

(Appellant)

Vs.

 Berger Impex India (P) Ltd.,

9, Itaslian Compound, Itt Bhati,

Goregaon Mulund, Link Road,

Goregaon East,

Mumbai.

PAN: AADCB0255A

 (Respondent)

Assessee by: None

Revenue by: Mrs. Anusha Khurana, Sr.DR

ORDER

PER I.P. BANSAL, JUDICIAL MEMBER

This is an appeal filed by the revenue. It is directed against the order passed by the CIT (A) dated 14th June, 2010 for Assessment Year 2007-08. The grounds of appeal read as under:-

1. “On the facts and circumstances of the case and in law, the order of the Ld. CIT (A) is wrong, perverse, illegal and against the provision of law which is liable to be set aside.

2. The ld. CIT (A) has erred on facts and in law in directing the A.O. to allow the losses claimed by the assessee at Rs.12,28,782/- ignoring the fact that there was no business activity during the year under consideration and accordingly the preoperative expenses are not allowable.

3. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.”

2. The notice of hearing was sent to the assessee, however, none was present on the fixed date of hearing. Therefore, we proceeded to decided the present appeal ex parte qua the assessee after hearing the learned DR.

3. In the return of income filed, the assessee computed the loss of ` 12,28,782/-. From the perusal of the balance sheet, the Assessing Officer observed that the assessee had debited loss amounting to ` 12,28,782/- during the year. The assessee company was incorporated in January, 2007. However, no sale and purchases were entered into by the assessee. In the absence of sale and purchase, the Assessing Officer observed that there was no business activity and there was no business income. Therefore, the expenses incurred by the assessee are pre-operative in nature and loss claimed by the assessee cannot be allowed. Therefore, he disallowed the loss and computed the income of the assessee at nil. The disallowance of loss was agitated in an appeal filed before the CIT (A). It was submitted that the assessee is engaged in the business of import and export of kitchen ware items. The first financial statement was prepared for the year ended on 31^st March, 2007. The company had started business activity for trading of kitchen wares in Chennai and incurred expenses and depreciation amounting to ` 12,28,782/-. It was submitted that during the relevant financial year the assessee has done the following business activities:-

i) Employed staff for the business w.e.f. 15.02.07 and paid Rs.4,08,387/- during the period.

ii) Take an office/business premises at following address by entering leave & license agreement with Mr. Anand Surana and paid rent of Rs.64,421/- for the business premises. (Electricity and Telephone Exp Included).

iii) Purchased computer and Air conditioner of Rs.6,25,727/- for proper execution of the work.

iv) Taken loan from M/s Bergner HK Ltd. for capital investment related to the business.

v) Advance for acquisition of land to Smt. Parvati Danji Gala & Smt. Mongiben Chapsi Gala Rs.12,50,000/- each.

vi) Set up other infrastructure required for setting up the business.

4. Referring to these activities, it was submitted that the assessee could not make any purchase or sale, but, it has entered into dialogue with the potential parties/clients and from these efforts the assessee could get the order and managed to start purchase and sales from July, 2007 and due to these efforts only the company managed to get sales of ` 3.12 crore in financial year 2007-08 and ` 6.97 crore in financial year 2008-09. The copies of financial statements of both these years were filed and reliance was placed on the following decisions:-

i) Commissioner of Income Tax vs. ESPN Software India (P) Ltd. (2008) 218 CTR (Del) 427, (2008) 301 ITR 368

ii) Commissioner of Income Tax vs. Saurashtra Cement & Chemical Industries Ltd. (1973) 91 ITR 170 (Guj).

5. It was submitted that the loss claimed by the assessee should be allowed as the activities carried on by the assessee during the year amounts to setting up of business and as per requirements of the Income-tax Act, what is necessary for claiming the expenditure is setting up of business and not the commencement of the business. Entering into sale and purchase is not the criteria for allowability of an expenditure. The business is nothing more than a continuous course

of activity and for the commencement of the business, all the activities which go to make up the business need not be started simultaneously and, thus, it was pleaded that having regard to the facts of the case the loss claimed by the assessee should be allowed.

6. Learned CIT (A) after considering all these submissions has observed that the assessee had started efforts and other activities for its trade though there is no purchase and sale during the initial period. The assessee had given employment to seven persons for marketing activities and has set up infrastructure for running the business at Chennai. The shop rent, electricity bill and telephone bills have been paid and on these facts it cannot be denied that the assessee had commenced the business. In the trade activity there is no preoperative period as the same is required in manufacturing activity and, thus, he has held that the assessee is entitled to have the benefit of carry forward of business loss and depreciation and directed the Assessing Officer to allow the loss claimed by the assessee. In this manner, the issue has been decided by the CIT (A) in favour of the assessee. The department is aggrieved by such findings recorded by the CIT (A) and has raised the aforementioned grounds of appeal.

7. After narrating the facts, it was submitted by the learned DR that the assessee did not enter into sales and purchase, therefore, it was rightly held by the Assessing Officer that the assessee is not entitled for business loss. She submitted that learned CIT (A) has wrongly allowed the claim of the assessee and his order should be set aside and that of the Assessing Officer be restored.

8. We have carefully considered the submissions of the learned DR. We have also gone through the assessment order as well as the order passed by the CIT (A). The facts stated in the order of the CIT (A) are not controverted by the revenue. Learned CIT (A) has recorded a finding that the assessee had employed the staff for carrying out its activities. The assessee has also entered into lease agreement and is paying rent and other infrastructure has also been created for setting up of the business. A finding has been recorded by learned CIT (A) that the business of the assessee was set up. No contrary material has been brought on record to assail those findings of the learned CIT (A). Therefore, having regard to all these facts, we find no infirmity in the order of the CIT (A) vide which the disallowance made by the Assessing Officer has been deleted. We decline to interfere.

9. In the result, the appeal filed by the department is dismissed.

The order pronounced in the open court on 27.01.2012.

                                                Sd/-                                    Sd/-

                                     [K.G. BANSAL]                   [I.P. BANSAL]

                         ACCOUNTANT MEMBER         JUDICIAL MEMBER

Dated, 27.01.2012.

dk

Copy forwarded to: -

1. Appellant

2. Respondent

3. CIT

4. CIT(A)

5. DR, ITAT

TRUE COPY

                                                                                                                              By Order,

Deputy Registrar,

ITAT, Delhi Benches