Facts of the Case

  • The assessee, Hike Private Limited, filed its return declaring substantial losses for AY 2014-15.
  • The case was selected for scrutiny, and assessment was completed under Section 143(3).
  • The Assessing Officer (AO) disallowed expenses amounting to approximately ₹43 crore, treating them as capital expenditure.
  • The AO observed that the assessee had not commenced business and had earned only interest income.
  • The CIT(A) upheld the disallowance made by the AO.
  • On further appeal, the Income Tax Appellate Tribunal (ITAT) reversed the findings and allowed the expenditure as revenue in nature.
  • Aggrieved, the Revenue filed appeal before the Delhi High Court.

Issues Involved

  1. Whether the expenditure incurred by the assessee should be treated as capital expenditure or revenue expenditure.
  2. Whether absence of revenue generation implies that business was not set up.
  3. Whether the AO was justified in disallowing expenses on the ground that business had not commenced.

Petitioner’s Arguments (Revenue)

  • The assessee had not commenced its business operations.
  • Expenses incurred prior to setting up of business must be treated as capital expenditure.
  • Since no operational revenue was generated, the expenses lacked nexus with business activity.
  • AO and CIT(A) had correctly disallowed the expenditure.

Respondent’s Arguments

  • The business was already set up, even if revenue had not yet been generated.
  • The expenses were incurred in the ordinary course of business operations.
  • In earlier assessment year (AY 2012-13), similar expenditure had been accepted as revenue expenditure.
  • Consistency principle should be applied.

Court’s Findings / Order

  • The Delhi High Court upheld the decision of the ITAT.
  • It held that the AO had asked the wrong question, i.e., focused on revenue generation instead of business setup.
  • The Court observed that:
    • The correct test is whether the business is set up, not whether it has started earning revenue.
    • Expenses incurred after setting up of business are allowable as revenue expenditure.
  • The Court also noted consistency with earlier years where similar expenditure was accepted.
  • Accordingly, the appeals filed by the Revenue were dismissed.

Important Clarification / Legal Principle

  • “Setting up of business” is distinct from “commencement of business.”
  • Revenue expenditure is allowable once the business is set up, even if no income is generated.
  • The AO cannot disallow expenses merely because the assessee has not started earning revenue.
  • Consistency across assessment years is a relevant factor in tax adjudication.

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/RAS04092023ITA4992023_150818.pdf 

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