2019 (1) TMI 1934 - AT - Income Tax

Allowable business expenses - allowing the expenses as revenue expenses incurred prior to setting up of the business - HELD THAT - In the case on hand the assessee has already set up the basic infrastructure required in the form of an office having employees with necessary skills. It also obtained a contract from NTPC. On these facts we uphold the finding of the ld. CIT(A) that the assessee has setup its business. In the result this issue is adjudicated in favour of the assessee. Intra head set off - Assessee earned interest income which has been assessed by the A.O. under the head income from other sources - A.O has mentioned that business loss of earlier years cannot be set off against the income from other sources of the current year - HELD THAT - Perusal of the assessment order shows that the business losses are of current year which can be set off against income from other sources of the current year. After considering the relief given in the proceeding paras A.O is directed to set off the remaining losses against income from other sources - Decided against revenue.

Summary

Issues Involved:
1. Claim for deduction against expenses incurred by the assessee company.
2. Adjustment of carry forward business loss with current year income from other sources.
3. Allowability of expenses as revenue expenses incurred prior to setting up of the business.
4. Treatment of interest income from term deposit before setting up of business as revenue receipt or business income.
5. Disallowance of legal and professional expenses, community welfare expenses, salary expenses, and other project-related expenses.

Detailed Analysis:

Issue 1: Claim for Deduction Against Expenses Incurred by the Assessee Company
The primary issue is whether the expenses incurred by the assessee during the financial year 2011-12 should be allowed as deductions. The Assessing Officer (AO) disallowed these expenses, considering them as capital expenditures incurred before the business was set up. The First Appellate Authority, however, observed that the business was set up and had commenced upon receiving a contract from NTPC, thus classifying the expenses as revenue in nature and allowable. The Tribunal upheld this view, noting that the assessee had established necessary infrastructure and hired qualified personnel, indicating the business was set up.

Issue 2: Adjustment of Carry Forward Business Loss with Current Year Income from Other Sources
The AO did not allow the set-off of business losses against income from other sources, arguing that the losses were from earlier years. However, the First Appellate Authority clarified that the losses were from the current year and directed the AO to allow the set-off. The Tribunal found no infirmity in this decision and upheld the First Appellate Authority's ruling, allowing the set-off of current year losses against income from other sources.

Issue 3: Allowability of Expenses as Revenue Expenses Incurred Prior to Setting Up of the Business
The AO disallowed expenses incurred before the business was set up, treating them as capital expenditures. The First Appellate Authority and Tribunal, however, found that the business had been set up upon receiving the NTPC contract. The Tribunal cited the Delhi High Court case of CIT v. Samsung India Electronics Ltd., which distinguished between the "setting up" and "commencement" of business. The Tribunal concluded that the assessee had set up its business by establishing infrastructure and hiring personnel, thus allowing the expenses as revenue expenditures.

Issue 4: Treatment of Interest Income from Term Deposit Before Setting Up of Business as Revenue Receipt or Business Income
The AO treated the interest income from term deposits as income from other sources, not allowing it to be set off against business losses. The First Appellate Authority directed the AO to set off the remaining losses against this income, which the Tribunal upheld, finding no error in this approach.

Issue 5: Disallowance of Legal and Professional Expenses, Community Welfare Expenses, Salary Expenses, and Other Project-Related Expenses
The assessee's cross-objections included the disallowance of various expenses, arguing they should be capitalized as they were directly attributable to project-related work. The First Appellate Authority had directed the AO to treat certain expenses as capital in nature, related to the NTPC project. The Tribunal found no infirmity in this decision, noting that the expenses were indeed related to the project and should be capitalized. The assessee's counsel did not press these cross-objections, leading to their dismissal.

Conclusion:
In conclusion, the Tribunal upheld the First Appellate Authority's decisions on all issues, dismissing both the revenue's appeals and the assessee's cross-objections. The expenses were allowed as revenue expenditures, the set-off of current year losses against income from other sources was permitted, and certain project-related expenses were correctly capitalized.