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2014 (11) TMI 655 - AT - Income TaxRefusal to allow deduction of expenses – Business not commenced during the previous year relevant to the assessment year – Held that:- The assesee formally signed contract with the NDMC on 08.03.2006, which falls in the preceding year - On 30.3.2006, the assessee entered into manufacturing agreement with Uttam Sucrotech International Pvt. Ltd. for manufacture and installation of BQSs and also made advance payment - In the preceding year itself, the assessee arranged for credit facility and obtained overdraft limit as well as term loan - A security deposit of ₹ 1 crore was paid to NDMC under the contract - All these activities took place in the preceding year - there is a basic fallacy in the appreciation of the concept of setting up of business - the business of a building contractor is set up on his having all the necessary tools and equipments ready to take up the construction activity - the project of NDMC for construction of BQSs was not set up, but insofar as the assessee is concerned, it had certainly commenced its business with the execution of contract awarded by NDMC - The authorities below have tagged the setting up of business with the provision of space for advertisement by NDMC. This is certainly a post commencement business stage of the assessee. Such an event would mark the generation of actual income on commencement of business and cannot be construed as the setting up of business - the assessee’s business was set up when it prepared itself for undertaking the activity of building BQSs on receipt of contract from NDMC - not only the business of the assessee was set up but had also commenced in the instant year - As section 3 read with section 4 refers to the starting of previous year from the date of setting up of a new business, the business stood already set up in the preceding year and as such there can be no question of canvassing a view that the business would be set up in a subsequent year when BQSs would be ready for providing space to the assessee for advertisement - relying upon CIT vs. ESPN Software India Pvt. Ltd. 2008 (3) TMI 90 - DELHI HIGH COURT] – thus, the business was set up in the preceding year. Claim for deduction – Held that:- The AO also held such expenditure to be of revenue nature, but, still disallowed as, it was incurred before the commencement of the business and, hence, was in the nature of pre-operative expenses – as it has been decided that the business set up in the preceding year, all the revenue expenses incurred during the year become eligible for deduction – the order is set aside – Decided in favour of assessee.
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