{"id":25692,"date":"2019-10-20T10:03:23","date_gmt":"2019-10-20T04:33:23","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=25692"},"modified":"2019-11-07T11:52:18","modified_gmt":"2019-11-07T06:22:18","slug":"income-and-expenditure","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/income-and-expenditure\/","title":{"rendered":"Tax Implication of \u2018Income and Expenditure\u2019 before the Commencement of Business"},"content":{"rendered":"

The most critical stage for a business is the time before its commencement. Prior to the commencement of business the question which troubles the Revenue Authorities the most is related to the Tax implication of Income and Expenditure during that period. Revenue Authorities consider the expenditure as capital in nature<\/strong> and income as revenue in nature<\/strong> <\/em>whereas on the other hand assesses wish to treat the same in exactly the opposite manner. In this blog, an attempt has been made to remove the confusion and uncertainty regarding this issue and provide a clear and better understanding of this entire problem by analyzing all significant and prominent legal precedents in this regard.<\/p>\n\n\n\n

What will be the Tax Implications of ‘Expenditure’ pertaining to Pre-commencement Business?<\/h2>\n\n\n\n

 Before the commencement of business, there is a large expenditure of funds. All this expenditure which is incurred by business enterprises and start-ups during the initial years of incorporation is considered as pre-operative expenses or expenditure incurred before the commencement of business by the Revenue Authorities<\/strong>. Revenue Authorities consider this expenditure as ‘capital’ <\/strong>in nature to be debited to the “Capital Work In progress” account, till the production of actual business commences and gets proportionately amortized in subsequent years. <\/p>\n\n\n\n

This is a well-defined law that any expenditure incurred before the commencement of business is a capital expenditure. Further, it needs to be noted that for any expenditure to be claimed as tax-deductible revenue expenditure under section 37(1) of the Income Tax Act<\/strong>[1]<\/a><\/sup>, it is required that such expenditure should have incurred exclusively for business purposes, and it should be revenue in nature.<\/p>\n\n\n\n

The natural belief of\nthe Revenue Authorities revolves around the fact that “when the business has\nnot commenced, how can there be any question of claiming any tax-deductible\nbusiness expenditure by the assessee?”<\/p>\n\n\n\n

As per Revenue\nAuthorities, a business is said to be commenced in manufacturing companies,  when the commercial production begins whereas,\nin the case of trading companies, the execution of the first trading order\nmarks the commencement of business.<\/p>\n\n\n\n

However, this simple\nexplanation by Revenue Authorities is not that simple for business enterprises\nand start-ups. The entire expenditure incurred by these business enterprises\nand startups during their initial years of incorporation is denied to be\nclaimed as lawful business expenditure until the actual business has not begun\nor commercial business has not commenced. <\/p>\n\n\n\n

Here we need to understand the difference between ‘commencement’ and ‘setting-up’ of business. Both these terms are not synonymous with each other. The business is said to be “set-up’ when it is ready to be commenced however, the commencement of business is in no relation with setting up of business. There can be a gap between setting-up and commencement of business. <\/p>\n\n\n\n

So, the tax implications for ‘expenditure’ incurred before the commencement of business can be understood as explained by the Hon’ble Bombay High Court. As per the Court, the cut-off point for considering the expenditure as tax-deductible revenue expenditure <\/strong>is ‘setting-up of business’ and not the ‘commencement of business’. Therefore, to take advantage of allowable tax deduction business owners need to understand the clear difference between ‘setting-up’ and ‘commencement’ of business. <\/p>\n\n\n\n

\"INCOME<\/a><\/figure>\n\n\n\n

Allowability of Expenditure in case of a Newly Incorporated Business Enterprise or a ‘Start-Up’<\/h2>\n\n\n\n