Proviso to section 3 and section 37(1) – Business is set-up on recruitment of employees and all expenditure incurred thereafter are allowable as business expenditure.

The assessee is in the business of trading and merchandising of diamonds and gold jewelleries. Return for the year was filed disclosing loss of Rs. 87.26 lakh. On perusal of the annual account, the Assessing Officer found that the assessee had not started its business therefore the entire expenditures were disallowed. The assessee carried the matter before the CIT(A) who upheld the order of the AO. Before the Tribunal, the assessee placed before it the details of employee-wise salaries alongwith job description and details of tax deducted at source as well as the details regarding other expenses. The assessee further submitted that the setting up of business is different from commencement of business and the expenditures are allowable on setting up of business. It also relied on the decision of the Delhi High Court in the case of Omniglobe Information Tech India Pvt. Ltd. vs. CIT (Income Tax appeal No. 257 of 2012). The Revenue strongly relied on the orders of the lower authorities and contended that the decision relied upon by the assessee relates to service industries and therefore same cannot be applied on the facts of the assessee’s case.

HELD

The Tribunal noted that the assessee had recruited the employees for the purpose of its business. According to the Tribunal, the type of business the assessee was engaged in, require persons who have expertise in understanding the jewellery, and without such recruitment, it would not be possible to commence the business. It also referred to the proviso to section 3 of the Act, which defines the term “previous year” in relation to a newly setup business (and not with reference to the commencement of business), thus as contended by the assessee, the setting up of business was more relevant than the date of commencement of business.

Therefore, relying on the decision of the Delhi High Court in the case of Omniglobe Information Tech India Pvt. Ltd., the Tribunal held that the recruitment of employees was indicative that business was set up by the assessee. Accordingly, the appeal filed by the assessee was allowed.