Business could be said to have been set up from date when one of categories of business activity was started: ITAT

Case Details: RBL Hotels (P.) Ltd. v. ACIT - [2022] 141 taxmann.com 457 (Chennai-Trib.)

Judiciary and Counsel Details

• • Mahavir Singh, Vice President & Manoj Kumar Aggarwal, Accountant Member
  • S. Aravindan & Pawan Kumar Karthik, (Adv.)-Ld. ARs for the Appellant.
  • Sajit Kumar, (JCIT)-Ld. DR for the Respondent.

Facts of the Case

Assessee-company was engaged in the business of hotels, motels, and catering. It purchased a semi-constructed building and land. It entered into a hotel operating agreement with IHCL for operating hotels on said land and incurred certain amount of expenses which were claimed same as deduction under section 37(1).

The Assessing Officer (AO) noted that the assessee did not commence business operations and was not earning revenue from operations. Thus, till the time the assessee was not ready to commence business, the expenditure could not be allowed as the same would remain merely pre-operative expenditure.

The CIT(A) upheld the disallowance made by AO on the ground that business expenditure was required to be capitalized along with the cost of the building at this stage of inception. Aggrieved-assessee filed the instant appeal before the Tribunal.

ITAT Held

The Tribunal held that business could be said to have been set up from the date when one of the categories of business activity is started. It is not necessary that all the categories of its business activities must start either simultaneously or that the last stage must start before it can be said that the business was set up.

What is required to be seen is whether one of the essential activities for the carrying on of the business of the assessee-company as a whole was or was not commenced. When a business is established and is ready to commence, then it can be said that the business has been set up.

In the instant case, the assessee had obtained long-term borrowings and acquired tangible and intangible assets and paid mobilization advances to various vendors. The assessee had also deputed staff and paid salaries. Thus, it could be said that the assessee had achieved the process of establishing business and, accordingly, business expenditure claimed during relevant years was to be allowed as a deduction under section 37(1).

List of Cases Reviewed

• • Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151 (Bom.) (para 10)
  • CIT v. Club Resorts (P.) Ltd. [2006] 287 ITR 552 (Mad.) (para 11)
  • Daimler India Commercial Vehicles (P.) Ltd. v. Dy. CIT [2019] 107 taxmann.com 243/416 ITR 343 (Mad.) (para 13) followed.

List of Cases Referred to

• • Ascendas IT Park Chennai Ltd. v. Dy. CIT [TCA No. 668 of 2016, dated 27-4-2017] (para 4)
  • CIT v. Club Resorts (P.) Ltd. [2006] 287 ITR 552 (Mad.) (para 4)
  • CIT v. Samsung India Electronics Ltd. [2013] 37 taxmann.com 239/218 Taxman 66 (Mag.)/356 ITR 354 (Delhi) (para 4)
  • Carefour WC&C India (P.) Ltd. v. Dy. CIT [2015] 53 taxmann.com 289/228 Taxman 261 (Mag.)/[2014] 368 ITR 692 (Delhi) (para 4)
  • Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151 (Bom.) (para 4)
  • Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 93 Taxman 502/227 ITR 172 (SC) (para 7.2)
  • Daimler India Commercial Vehicles (P.) Ltd. v. Dy. CIT [2019] 107 taxmann.com 243/416 ITR 343 (Mad.) (para 13).