INCOME TAX ACT, 1961

Section 37(1)

Business expenditure - Expenditure on account of personnel cost and general and administrative expenses - Disallowance as pre-operative expenses - AO alleged that assessee did not commence its business activities of manufacturing/production

Assessee-company claimed expenditure on account of personnel cost and general and administrative expenses. AO disallowed the said expenses by treating the same as pre-operative expenses on the ground that the assessee had not commenced its business activities of manufacturing/production. Assessee submitted that one of its business activities was trading of the parts of motorbikes and since the first step to start the said business was taken by making purchase of CKD units from its parent company under an invoice dated 21-2-2011, the business was very much set up on that date and the expenses incurred after 21-2-2011 were allowable as deduction. It was further submitted that it had also taken a premise on lease and appointed the required staff for the purpose of trading/business. Held: It was observed that various steps were taken by the assessee to commence its business of trading and distribution of CKD parts of motorbikes. Further, the assets required to commence the business of trading were acquired by the assessee and it also appointed necessary personnel to carry on its business operations. Further, the premise was also taken on lease by the assessee to carry on its business. For the purpose of the Indian Income Tax Act, the setting up of a business and not the commencement is to be considered and when a business is established and is ready to commence business, then it can be said that business has been set up. There may be an interval between the setting up of the business and the commencement of business and all the expenses incurred during that intervening period would be permissible deduction. Accordingly, it could be said that the business of the assessee was set up on 21-2-2011 and it was, therefore, eligible for deduction on account of expenses incurred after that date. Hence, the personnel cost and general and administrative expenses claimed by the assessee were allowed.

REFERRED : CIT v. Sarabhai Management Corporation Ltd. (1991) 192 ITR 151 (SC) : 1991 TaxPub(DT) 1560 (SC) and Western India Vegetable Products Ltd. v. CIT (1954) 26 ITR 151 (Bom) : 1954 TaxPub(DT) 0084 (Bom-HC)

FAVOUR : In assessee's favour.

A.Y. :

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