Analysis of
the Case Law
Case:
Sardar Sarovar Narmada Nigam Ltd vs. ACIT (ITAT Ahmedabad
Special Bench)
Verdict: Distinction
between a “commencement of a business” and “setting up a business” under the provisions
of Income Tax Act, 1961 has been explained
Highlight of the
Judgment
There is a clear
distinction between a “commencement of a business” and “setting up a business”.
A business can be said to have been “set up” when it is ready to commence the business for which it has been
established. An assessee can be said to have set up its business from
the date when one of the categories of its business is started and it is not
necessary that all the categories of its business activities must start either
simultaneously or that the last stage must start before it can be said that the
business was set up.
Back ground of
the Judgment
The assessee was
formed for the purpose of construction of a canal for supply of water and for
construction of a dam for generation of power. The assessee claimed that in AY
2001-02, the canal was partially complete and that it had started the activity
of supplying water and that its’ business was “set up” and that the revenue
expenditure incurred from that date was allowable as a deduction u/s 37(1). The
AO & CIT(A) held that the mere flow of water through the Narmada Canal did
not amount to commencement of business as it was not on a commercial basis and
no revenue was earned there from. On appeal by the assessee, the Division Bench
recommended that the issue be referred to the Special Bench. HELD by the
Special Bench:
“the previous
year for a business newly set up is the period beginning with the date of
“setting up” of the business. Till the business is “set up”, all expenses have
to be capitalized. There is a clear distinction between a “commencement of a
business” and “setting up a business”. A business can be said to have been “set
up” when it is ready to commence the business for which it has been
established. An assessee can be said to have set up its business from the date
when one of the categories of its business is started and it is not necessary
that all the categories of its business activities must start either
simultaneously or that the last stage must start before it can be said that the
business was set up. The test to be applied is as to when a businessman would
regard a business as being commenced and the approach must be from a
commonsense point of view (Western India Vegetable Products 26 ITR 151 (Bom),
Ramaraju Surgical Cotton Mills Ltd 63 ITR 478 (SC) & Sarabhai Management
Corp 102 ITR 25 (Guj) followed);
On facts, though
the assessee’s canal was only partially complete (or complete in parts), it was
able to achieve supply of water. This was sufficient to hold that the assessee
was ready to serve the purpose for which it was formed. The assessee’s business
consists of different categories. Construction of dams and canals would be the
activity which would precede the other activities and an essential part of the
business activity of the Assessee. As one category of business was started, the
business was set up. The flow of revenue from supply of water is not relevant
for deciding whether the business has been set up. Consequently, the assessee’s
business was set up on 21.2.2001 when water was supplied through the canals and
all revenue expenditure after that date has to be allowed as a deduction”.
E: ca.srshetty@icai.org
W: www.casrshetty228359.in
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