Commissioner of Income Tax, Mumbai Vs M/s. Axis Pvt. Equity Ltd

Appeal under Section 260A of the Income Tax Act, 1961 (the Act) challenges the order dated 19th August, 2013 passed by the Income Tax Appellate Tribunal (the Tribunal). The impugned order is in respect of Assessment Year 2007 – 08.

Question of Law

Whether on the facts and circumstances of the case and in law, the Tribunal was correct in allowing as a deduction the expenses claimed by the assessee in its Profit and Loss Account for the year ended 31st March, 2007 without appreciating that the business of the Assessee Company was not set up during the previous year relevant to Assessment Year 2007 – 2008?

Facts of the case

The Respondent – Assessee is an asset management Company. The respondent – assessee had shown the business loss of Rs.1.17 crores. The Assessing Officer disallowed the business loss claimed by the respondent – assessee on the ground that business has not been set up during the year under consideration.  Being aggrieved, the respondent – assessee carried matter in appeal to the Commissioner of Income Tax (Appeal) [CIT (A)] who upheld the order of Assessing Officer disallowing business loss of Rs.1.17 crores. According to the Revenue, there is no distinction between setting up of business and commencement of Business. Therefore, no expenditure incurred before commencement of business can be allowed.

Being aggrieved the respondent – assessee filed further appeal to the Tribunal.

Contention of Tribunal

1. Company was incorporated in the year 2006 that the Company had commenced business with effect from 1st October 2006.
2. As per Balance sheet & Profit & Loss Account which includes Director’s report, it is clear that the company has taken steps for commencing business of venture capital fund.
3. Company has engaged legal and financial advisors. It had also incurred expenditure to decide the appropriate tax efficient structure for the funds and employed necessary personnel for purpose of running its business.
4. In the case of HSBC Securities India Holdings Pvt. Ltd it was held the business would be held to be set up as and when that assessee had taken business premises and has taken steps to recruit employees and has incurred expenses for promoting its business activity. Similarly, in this case as when executives are employed & infrastructure is ready to commence business, it can be said that the business has been set up for carrying on business as Assets Management Company.
5. In case of Western India vegetable products Ltd. Vs. Commissioner on Income tax it was held that business is said to have been set up when it is established and ready to be commence. However, there may be an interval between a business which is set up and a business which is commenced. However, all expenses incurred during the interregnum between setting up of business and commencement of business would be permissible deductions.

Decision of High Court

The honourable high court agreed with the tribunal as regards to allow ability of  Rs. 1.17 crores as business loss.

Date of Judgment/Order : 30th Jan. 2017