Recently the ITAT Mumbai Bench held that assessee’s claim of allowance of business loss during the period , where state of preparedness of company was only towards commencing its business, was not maintainable. It stated that when a company is at a setting up stage , the expenses incurred during that phase ,and the business loss incurred thereof  will not be allowed.Thus, no allowance of business loss will be granted.

Facts of the case:

The assessee ,a newly incorporated company filed its return of income for the year by claiming a business loss and depreciation both for being carry forward and set off in the subsequent year/s in the absence of any income or receipt in the relevant year.

The assessee could not produce any evidence to prove that the business activity of the assessee had started during such relevant year. The company claimed to have appointed MD as well as Chief Operations Manager, putting the infrastructure in place by acquiring office premises, staff, furniture and fittings, etc. Therefore, the company alleged that no grant of any operational lease by the year-end should not be of any consequence

Subsequently, the assessee’s claim for business loss as well as for depreciation was not allowed. An appeal was therefore made by the assessee to Commissioner(Appeals).

It was held that:

It is when the the company (entity) can discharge the functions for which it (the firm) is established, it can be said that the business has been set up. It is only when it could start functioning as a business or a manufacturing organization that the unit could be said to set up. Prior thereto the processes are preparatory in nature. The business of the assessee-company can be to have been set up only on the receipt of the power connection and not earlier on the purchase of raw material or even the installation of machinery subsequently.

It was viewed that the company is clearly in the setting up stage. Besides, clearly, it is only the expenditure, post set-up that could be claimed as a business expenditure, while admittedly the company has claimed the entire expenditure incurred by it since inception, including as it appears expenditure on its’ incorporation itself, which are only, likewise, capital costs. Alternatively speaking, the implication of no incorporation expenses or the company being established on the very date of its incorporation, are both unsupported as well as bizarre propositions. No case for allowance of the assessee’s claim under section 37(1) or section 32(1), as the case may be, is accordingly made out.

Thus the assessee’s appeal was dismissed by the ITAT and judgement was given against the assessee.

 

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