Allowability of expenditure incurred prior to setting up of business

Allowability of expenditure incurred prior to setting up of business

For purpose of allowing any expenses under section 37 of the Income-tax Act, 1961 in respect of any business or profession, such business or profession should have been carried on during the previous year; taking the premises on hire will only demonstrate the intention of setting up of the business but cannot be said to be carrying on of the business.



ITAT, DELHI BENCH ‘I’ : NEW DELHI

CitiFinancial Consumer Finance India Ltd.

v.

Addl. CIT

ITA No. 2623/Del/2004

July 31, 2009

RELEVANT EXTRACTS:

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14. We have considered the relevant facts, arguments advanced and the case laws cited. The company in its notes on accounts for the financial year ended on 31st March 1998 reported that the profit and loss account is prepared for the period 25th September, 1997 to 31st March, 1998. 25th September, 1997 is the date on which the company was registered as an NBFC with RBI. This manifests that the company carried on the business only as an NBFC and no other business was carried though certain other objects are mentioned in the Memorandum of Association. The company has also treated the expenses prior to registration with RBI as an NBFC as expenses incurred prior to carrying on of the business as an NBFC and has amortized such expenses over 5 years from 25th September, 1997. This also makes clear that the expenses claimed are incurred in relation to the business as an NBFC and not in respect of any other business. In fact as per the accounts, no other business was ever carried on by the assessee. It is contended that the expenses incurred immediately after set up of the business is allowable and for this purpose reference is made to section 3 of the Act. Section 3 of the Act defines the term "previous year". As per Proviso to section 3 in the case of a business or profession newly set up the previous year shall begin with the date of setting up of the business and ending with the financial year in which the business was newly set up. However, the definition of "previous year" is limited for the purpose of computation of the period of previous year and does not in any way determine the allowability of expenses. The expenses claimed herein are those referred to in section 37 of the Act. As per section 37(i) any expenditure not being in the nature of capital expenditure or personal expenses of the assessee laid out or expanded wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". The income chargeable under the head "Profits & gains of business or profession" is computed as per sections 28 & 29 of the Act. As per section 28(i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year is chargeable to tax under the head "Profits & gains of business or profession". Under section 29, the income referred in section 28 shall be computed in accordance with the provisions contained in section 30 to 43D of the Act. Therefore, in respect of any expenses claimed under section 37, the same can be allowed as per section 29 only in respect of computing the income chargeable under section 28 of the Act. For purpose of income chargeable under section 28 of the Act, the same can be charged only when the business or profession is carried on by the assessee. Therefore, though as per section 3, the previous year may commence on setting up of the business, yet the income will be chargeable to tax under the head "Profits and gains of business" only when the business or profession was carried on by the assessee. Therefore, for purpose of allowing any expenses under section 37 in respect of any business or profession, such business or profession should have been carried on during the previous year. Admittedly, since the expenses were incurred prior to carrying on of business as an NBFC, the expenses are not allowable as such. Taking the premises on hire will only demonstrate the intention of setting up of the business but cannot be said to be carrying on of the business. The assessee has placed reliance on the decision of Hon'ble Delhi High Court in the case of CIT vs. Hughes Escorts Communications (supra). In the said case the Hon'ble Delhi High Court held that the business of assessee involved different activities in which the first step was the purchase of VSAT equipment. The said purchase was for the purpose of business. Accordingly it was held that the business of the assessee should be held to have been set up. In the present case there is no dispute regarding set up of the business of the assessee but for claiming expenses. Under section 37, what is required to be established is whether such expenses were incurred wholly and exclusively for the purpose of business or profession carried on by the assessee. Since the accounting treatment by the assessee and as per the notes of accounts, since it is made clear that the expenses are in relation to business not carried on prior to 25.9.1997, the expenses incurred prior thereto are not allowable under section 37 of the Act.

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