Facts of the Case

The assessee company, engaged in the development of a large infrastructure/power project, claimed deduction of various expenditures incurred during the relevant assessment years. These expenses included administrative, operational, and project-related costs incurred after the business had been set up but before full commercial operations commenced.

During assessment proceedings, the Assessing Officer disallowed the expenses on the ground that the business had not commenced commercial production and therefore the expenditures were capital in nature or pre-operative expenses not allowable as revenue deduction.

The disallowance was sustained at the appellate stage, leading to the present appeal before the Tribunal.

Meja Urja Nigam Private Limited is a joint venture engaged in power generation activities through a thermal power project.

Issues Involved

  1. Whether the assessee’s business could be regarded as “set up” even though commercial production had not fully commenced.
  2. Whether expenses incurred after setting-up of business but prior to revenue generation are allowable under Section 37(1).
  3. Whether such expenditures should be treated as capital/pre-operative expenses or as revenue expenses deductible in computing business income.

Petitioner’s Arguments (Assessee)

  • The business had already been set up, and substantial operational activities were underway.
  • Expenditure incurred after setting-up is revenue in nature, even if income generation has not begun.
  • The expenses were necessary for maintaining the organizational structure and facilitating project execution.
  • Disallowance merely due to absence of commercial production was legally unsustainable.

Respondent’s Arguments (Revenue)

  • The project had not commenced commercial operations during the relevant period.
  • Expenses incurred prior to commencement should be capitalized as pre-operative costs.
  • Deduction under Section 37(1) is permissible only after business operations begin.
  • Therefore, the Assessing Officer rightly disallowed the claim.

Court Order / Findings (ITAT)

  • Once a business is set up, revenue expenditures incurred thereafter are generally allowable.
  • Actual commercial production or revenue generation is not the sole test for allowability.
  • Expenses necessary for running the business structure, administration, and project activities may qualify as revenue expenditure.
  • Each item of expenditure must be evaluated on facts to determine its nature.

Important Clarification

  • The key test is whether the business was set up, not whether it had started earning income.
  • Expenses incurred after setting-up but before commercial operations may still be deductible.
  • Capital expenditure and revenue expenditure must be distinguished on factual analysis.
  • Infrastructure and project-based companies often incur significant expenses during the pre-revenue phase, which may still qualify as business expenditure.

Link to download the order –

https://itat.gov.in/public/files/upload/1615372067-54%20AND%2055%20Meja%20Urja%20Nigam%20P.%20Ltd..pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.