Expenses prior to setting up or running of business are capital in nature-High Court upheld ITAT order allowing capitalisation of pre-operative expenses
ABCAUS Case Law Citation:
ABCAUS 2217 (2018) (02) HC
The case law involves the appeal filed by the Income Tax Department (Revenue) against the order of the Income Tax Appellate Tribunal (ITAT/Tribunal) on the three substantial questions of law related to:
(a) Claim of depreciation on Foreign Exchange Fluctuation,
(b) Relief under Section 35D(2) (C) (iv) of the Income Tax Act, 1961 (the Act), and
(c) Capitalization of revenue expenses
Before the Hon’ble High Court the Revenue pressed for only third question for the reason that first questions had already been decided against the revenue by the Hon’ble Supreme Court.
Regarding the second question, it was observed that it had also been decided against the revenue by way of several judgements all over India. The High Court had categorically held that the expenses incurred on issue of public subscription of shares or of debentures of the company, any payment made against commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus would be eligible for benefit of Section 35D.
Regarding the third question, the Hon’ble High Court noted that concurrent judgements of the CIT and Tribunal were that any amounts expended by an assessee, which are pre-operative in nature and are in fact made prior to coming in or the existence of the business itself would be a capital expenditure. Therefore both the CIT as well as the Tribunal had allowed the assessee to capitalise the expenses incurred on advertisement, salary and wages, travelling and conveyance and staff welfare expenses made prior to the existence or the formation of the company and have allowed depreciation on them as capital expenses.
The Revenue contended that the expenses were not incurred in connection with installation of Plant and Machinery or constructions of infrastructure of company and hence could not be capitalised .
The Hon’ble High Court upheld their actions of the CIT(A) and the Tribunal as there was no doubt that these amounts, which were expended by the assessee were prior to the setting up of the business and prior to the date when the business ran or started making profits.