The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has held that expenses incurred after the ‘date of setting up of the business’ are eligible for income tax deduction.
The bench of Yogesh Kumar U.S. (Judicial Member) and M. Balaganesh (Accountant Member) has observed that there is a clear distinction between “commencement of business” and “setting up of a business”. For income tax purposes, the ‘setting up of the business’ and not the ‘commencement of business’ is to be considered. When a business is established and is ready to commence business then it can be said that the business that it is set up.There may, however, be an interval between ‘setting up of the business’ and ‘commencement of the business’ and all expenses incurred during that interval would be permissible deduction.
“A business can be said to have been set up when it is ready to discharge the function for which it was set up and the actual commencement of revenue generating activity does not have any bearing for determining the date of setting up of business. The date of setting up of business is relevant for computation of income under the head “Business and Profession” and allowance of revenue expenditure incurred after that date,” the ITAT stated.
The respondent/Assessee Company incorporated on 14/06/2006. As per the Memorandum of Association, the main object of promoting, establishing, formatting, acquiring or investing by way of capital or that and also dealing in shares, stocks, government bonds etc.
The Assessee filed a return decaling loss of Rs. 3,01,42,660/- for the year under consideration, which was processed u/s 143(1) of the Income Tax Act, 1961. The case of the Assessee was selected for scrutiny and notice was issued to the Assessee. The Assessment order came to be passed under section 143(3) of the Income Tax Act by which an amount of Rs. 3,02,18,433 has been disallowed by the AO finding the absence of any business activities of business expenses claimed by the Assessee during the year under consideration, accordingly, added back the said amount to the taxable income of the Assessee.
The only reason assigned by the A.O. for disallowing the expenditure alleging that, no business of the Assessee undertaken during the Assessment Year. As per Section 4 of the Act, income-tax is chargeable in respect of the total income of the Assessee for any “previous year”. The term “previous year” is defined in section 2(34) of the Act read with section 3 of the Act to mean financial year immediately preceding the assessment year.
On a conjoint reading of sections 3, 4 and 28 of the Act, the expenses incurred after the ‘date of setting up of the business’ are eligible for deduction, subject to fulfillment of the other provisions of the Act. On the other hand, expenses incurred before the date of setting up of the business are liable to be disallowed.
ITAT noted that the Assessee which is an investment company would be regarded to have set up its business when it was ready to make investment i.e. when it received funds from making investment in its bank account and it is evident from the factum of first investment made by the Assessee as on 31/08/2006 in the shares of Flextronics Software System Ltd. (a software development company which later merged with the Assessee), by using funds received by the Assessee by way of issue of remedial optionally convertible non-cumulative preference shares in its bank accounts.
The tribunal while dismissing the appeal held that the Assessee had set up its business on 11/08/2006 and the expenses incurred thereafter ought to be allowed as deduction subject to the provision of law. Further, the mere entries in the books of accounts of the Assessee are not determinative of ambit of taxation under the provision of Act. If an item of income/expenditure is taxable/deductible, the same must be taken into account as per the provision of the Act not as per the mere books entry.
Case Details
Case Title: DCIT Versus Aricent Technologies (Holding) Pvt. Ltd.
Case No.: ITA No. 1344/Del/2016 (A.Y. 2007-08)
Date: 04/06/2025
Counsel For Appellant: Neeraj Jain, Adv, Sh. AnshulSachdev, Adv and Sh. Tavish Verma, Adv
Counsel For Respondent: Sr. DR Sahil Kumar Bansal
