Business expenditure – Difference between setting up of business and starting commercial activities – Company formed to design, manufacture and sell commercial vehicles – Commencement of research and development and construction of factory – Business had been set up – Assessee entitled to deduction of operating expenses, financial expenses and depreciation

Business expenditure – Difference between
setting up of business and starting commercial activities – Company formed to
design, manufacture and sell commercial vehicles – Commencement of research and
development and construction of factory – Business had been set up – Assessee
entitled to deduction of operating expenses, financial expenses and
depreciation

The assessee was a
company. In terms of its memorandum of association, it was incorporated for a
bundle of activities, viz., designing, manufacturing, distributing, selling,
after-sales engineering services and research and development of commercial
vehicles and related products and components for the domestic Indian and
overseas market. The AO disallowed the operating expenses, financial expenses
and depreciation. The reason given by him was that the commercial operation of
manufacture and sale of commercial vehicles had not commenced so far and,
therefore, the expenditure incurred by the assessee under the three heads could
not be allowed.

The Tribunal upheld
the order on the ground that the business of the assessee had not been set up.

On appeal by the
assessee, the Madras High Court reversed the decision of the Tribunal and held
as under:

‘(i)   There is a clear distinction between a person
commencing a business and a person setting up a business. When a business is
established and ready to commence business, then it can be said of that
business that it is set up. The test is of common sense and what in the eye of
a business can be said to be the commencement of business. One business
activity may precede the other and what is required to be seen is whether one
of the essential activities for the carrying on of the business of the assessee
as a whole was or was not commenced. In the case of a composite business, a
variety of matters bearing on the unity of the business have to be
investigated, such as unity of control and management, conduct of the business
through the same agency, the interrelation of business, the employment of same
capital, the maintenance of common books of accounts, employment of same staff
to run the business, the nature of the different transactions, the possibility
of one being closed without affecting the texture of the other, etc.

(ii)   There was no dispute with regard to the date
on which the assessee had set up its business. The business of the assessee had
been set up in the relevant assessment year. The Tribunal erred in holding that
merely because the manufacturing and sale of the vehicle did not take place the
business of the assessee had not been set up. This was never an issue before
the AO and the Tribunal had no jurisdiction to unsettle the finding of the date
on which the business of the assessee was set up. The order of the Tribunal had
necessarily to be set aside.

(iii)   The assessee had commenced and performed
activities relating to designing of commercial vehicles and related products
research and development, buying and selling of parts and in the process of construction
of factory building for manufacture of commercial vehicles. The unity of
control, management, etc., of the assessee in respect of each of its activity
had not been disputed by the Revenue. In such circumstances, the assessee on
showing that it had commenced several of its activities for which it was
incorporated would definitely qualify for deduction of the expenditure incurred
by it under the head operating expenses, financial expenses and depreciation.’