SETTING UP OF BUSINESS v/s COMMENCEMENT OF BUSINESS

Facts of the case:

  • The assessee “Miele India Pvt Ltd.” is a domestic company incorporated on 27th September, 2008 and was engaged in the business of trading goods.  In AY 2010-11, the assessee filed its loss return of income and claimed pre-operative expenses and advertising expenses as deductions, which were added back as disallowed expenses on the ground that these expenses had been incurred prior to setting up of its business
  • The assessing officer held that, since the assessee is in the business of trading of goods, therefore, it needs a physical place of sale of goods and in the absence of that, it could not have sold its goods, hence, the expenses were disallowed
  • The aforesaid contention of the assessing officer was not accepted by the first appellate and tribunal

As held:

  • The assessee had taken certain steps in previous assessment years like tax registrations, hiring of place of business, hiring of senior employees etc which are sufficient to demonstrate that the business had been set up and was ready to carry on. 
  • Mere non availability of display centre i.e. a physical outlet for sale, cannot be the basis of conclusion that business was set up in the year in which such physical outlet came into existence.  Further, the setting up of a physical outlet of sale was an extension of point of sale and not basis for deciding on the date of set up
  • The fact that business was set up is sufficient to claim expenses and it is nowhere a requirement to commence the business so as to be eligible to claim such expense

Observation:

There is a difference between setting up of business and commencement of business.  Where the assessee has undertaken active steps to put the business in order so as to be ready for business, it is sufficient to claim business expenses as deduction while computing taxable income

Source: PR. COMMISSIONER OF INCOME TAX -6 v. MIELE INDIA PVT. LTD., IN THE HIGH COURT OF DELHI AT NEW DELHI on 25.03.2021