2011-VIL-733-ITAT-DEL

Income Tax Appellate Tribunal DELHI

IT Appeal Nos. 1428 and 1723 (Delhi) of 2011

Date: 30.11.2011

DHOOMKETU BUILDERS & DEVELOPMENT (P.) LTD.

Vs

ADDITIONAL COMMISSIONER OF INCOME-TAX, RANGE-10

Pradeep Dinodia for the Appellant.
Rohit Garg for the Respondent.

BENCH

RAJPAL YADAV, K.D. RANJAN, JJ.

JUDGMENT

Rajpal Yadav, Judicial Member –

The assessee and revenue are in cross-appeal against the order of Learned CIT(Appeals) dated 24.12.2010 passed for assessment year 2006-07. The substantial grounds of appeal taken by the assessee are interconnected with the solitary grounds of appeal taken by the revenue. The grievance of the assessee is that Learned CIT(Appeals) has erred in law in holding that income of the assessee in this year is taxable under the head "income from other sources" and not from "profit and gains of business or profession". He further erred in not permitting the assessee to carry forward the net business loss claimed by it at Rs. 1,17,12,473. On the other hand, the grievance of the revenue is that the Learned CIT(Appeals) has erred in directing the Assessing Officer to set off the interest paid by the assessee at Rs. 1,79,37,534 from the interest income of Rs. 62,28,333 and determining the net loss at Rs. 1,17,12,472, though without permission to carrying forward.

2. The brief facts of the case are that the assessee company was incorporated on 22.6.2005. According to the Memorandum of Association, it was to carry on the business of real estate development. It is a 100% subsidiary of DLF Ltd. which is also engaged in the same business. It has filed its return of income on 18.11.2006 declaring a loss of Rs. 1,17,12,472. The return was processed under sec. 143(1) but subsequently the case of the assessee was selected for scrutiny assessment and notices under sec. 143(2) and 142(1) of the Income-tax Act, 1961 alongwith questionnaire were issued.

3. During the scrutiny of the accounts, it came to the notice of the Assessing Officer that official liquidator of the Hon'ble High Court of Karnataka floated a tender for sale of 140 acres of land of M/s. NGPF Ltd. (Government of India, Ministry of Company Affairs). The assessee has raised an interest bearing unsecured loans of Rs. 186 crores on 29.11.2005 from its holding company i.e. DLF Ltd. and has deposited the above amount of Rs. 186 crores on the same day as earnest money in response to the tender invited by the official liquidator. The bid, however, could not materialized and ultimately the amount of Rs. 186 crores was returned to the assessee along with interest. An interest of Rs. 62,08,333 after deducting TDS of Rs. 13,97,583 was given to the assessee. The assessee has remitted back the money of holding company. It has paid interest of Rs. 1,79,37,534 to M/s. DLF Ltd. on the above borrowings after deducting TDS of Rs. 40,25,183. Assessing Officer formed an opinion on the basis of observations of the auditor that assessee has not commenced any business, its interest income deserves to be assessed as income from other sources. In other words, the Assessing Officer is of the view that the assessee has not commenced any business activity, therefore, it is not entitled for interest expenses as claimed by it, similarly the interest income received by the assessee deserves to be assessed as an "income from other sources" and not as a "business income". In this way, Assessing Officer disallowed the claim of assessee of alleged interest expenses amounting to Rs. 1,79,37,534. He assessed the interest earned by the assessee as income from other sources at Rs. 62,25,061.

4. Dissatisfied with the action of the Assessing Officer, assessee carried the matter in appeal before the learned CIT(Appeals). It filed written submissions which have been reproduced by the Learned First Appellate Authority in the impugned order. It was contended by the assessee that there is material difference between set up of the business and commencement of the business. The business of the assessee might have not been commenced but it has been set up. The assessee pointed out to the Learned First Appellate Authority that it is engaged in the business of real estates development. The moment it participated in the tender, it will demonstrate that business has been actually commenced. Apart from that factor, if assessee has started any of the activities i.e. identifying the space for the office etc., it would amount to set up of the business and there can be a gap between the set up of a business and commencement of the business. Under the Income-tax Act, 1961, all expenses incurred after the business is set up are allowable expenses, if the same are allowable otherwise as per law. Learned Commissioner took into consideration all these factors. He made a reference to the decision of Hon'ble Delhi High Court in the cases of Indian Oil Panipat Power Consortium Ltd. v. ITO [2009] 315 ITR 255/181 Taxman 249 (Delhi), Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502 (Delhi) and CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315/102 Taxman 94 (SC). He noticed the arguments of the assessee and observed that tender for land during the year did not materialized, therefore, the business of the assessee of real estates development per se cannot be said to have commenced. He made a reference to the auditor's report and hold that assessee did not carry out any business activity in the year, however, Learned First Appellate Authority was of the opinion that even if assessee has income from other sources then corresponding expenses directly interlinked to such income deserves to be allowed under sec. 57(iii) of the Act. He found that assessee had earned interest income of Rs. 62,28,333. It has paid interest also, thus, there is a direct link between the interest expenses vis-à-vis the interest income, therefore, a set off of the interest paid is to be granted against the interest income. In this way, Learned First Appellate Authority has determined the net loss of Rs. 1,17,12,472 under the head "income from other sources" but did not permit to carry forward this amount. The learned counsel for the assessee reiterated his contentions as were raised before the Learned First Appellate Authority. He pointed out that business involves a series of activities and a business can be said to have set up on completion of first activity in the series of activities. For buttressing his proposition, he relied upon the following decisions:

CIT v. Hughes Escorts Communications Ltd. [2009] 311 ITR 253/[2007] 165 Taxman 318 (Delhi)

CIT v. L.G. Electronic India Ltd. [2006] 282 ITR 545/[2005] 149 Taxman 166 (Delhi)

CIT v. Club Resorts (P.) Ltd. [2006] 287 ITR 552 (Mad.)

CIT v. Herbalife International Ind. [2008] 297 ITR 303/[2007] 163 Taxman 147 (Delhi)

SLP dismissed by the Supreme Court in 297 ITR (St.) 17 (SC)

CIT v. Whirlpool of India Ltd. [2009] 318 ITR 347/185 Taxman 387 (Delhi)

Sarabhai Management Corpn. Ltd. v. CIT [1976] 102 ITR 25 (Guj.).

Approved by the Hon'ble Supreme Court in CIT v. Sarabhai Management Corpn. Ltd. [1991] 192 ITR 151

5. On the other hand, Learned DR relied upon the order of the Assessing Officer.

6. We have duly considered the rival contentions and gone through the record carefully. The sole issue before us is whether assessee is able to demonstrate that its business in respect of real estates development was set up during the accounting period relevant to this assessment year and, therefore, it is entitled for carry forward of net business loss suffered in the year.

7. Section 2(13) provides the definition of expression "Business" according to which business includes any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The learned counsel for the assessee has referred a large number of decisions noticed above. Similarly, the Assessing Officer has made a reference to the decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case (supra). In various authoritative pronouncement of Hon'ble Supreme Court and Hon'ble High Court, meaning and scope of expression, business has been propounded. It is not necessary to recite and recapitulate of those decisions but on the strength of them, it would be suffice to say that word "business" had a wide import and it means an activity carried on continuously and systematically by a person by the application of his labour and skill with a view to earn an income. Section 3 of the Income-tax Act, 1961 defines "previous year". Previous means the financial year immediately preceding the assessment year. The proviso appended to this section further contemplates that in case of a business newly set up in the said financial year, the previous year shall be the period beginning with the date of set up of the business. The expression "set up" has not been defined anywhere in the Act but it is understood in the common parlance and has been explained in a large number of decisions. According to the meaning expounded in the authoritative pronouncement, if an assessee is in a position to deliver the goods means that the business is set up. Actual delivery is immaterial. For example, if a person wants to carry on the business of transportation, the moment he purchased the vehicle for transporting the goods and arranged the space then it would indicate that business has been set up, it is immaterial whether he was able to actually transported the goods or not. In the case of Hughes Escorts Communications Ltd.'s case (supra), Hon'ble Delhi High Court has considered this expression and after referring the decision of Hon'ble Bombay High Court in the case of Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151 has observed that Hon'ble Bombay High Court has drawn a distinction between the concept of commencement and setting up of a business. Hon'ble Delhi High Court has reproduced the observations of the Hon'ble Mumbai High Court which read as under:

"The Bombay High Court, which was in this case dealing with the corresponding provision of the Indian Income-tax Act, 1922, then explained the distinction between the concepts of commencement and setting up of a business (pages 158 and 159):

"It seems to us, that the expression 'setting up' means, as is defined in the Oxford English Dictionary, 'to place on foot' or 'to establish', and in contradiction to 'commence'. The distinction is this that when a business is established and is ready to commence business then it can be said of that business that it is set up. But before it is ready to commence business it is not set up. But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deductions under sec. 10(2)."

8. Adverting to the facts of present case, we find that business of assessee is development of real estates. It has participated in a tender floated by the official liquidator Karnataka High Court. To our mind, the participation in the tender is starting of one activity which enable the assessee to acquire the land for development. The actual development of the land is immaterial for construing that business of the assessee has been set up. The revenue authorities have erred in not appreciating these facts rather considering the concept whether the assessee has a surplus fund which has been invested by it and it had earned interest income on such funds. The investment of Rs. 186 crores was not as a deposit out of surplus fund rather it was earnest money paid by the assessee for the purchase of land. Thus, assessee has demonstrated that its business was set up during the accounting period relevant for this assessment year. The observations of the auditor are with regard to commencement of business and not set up of the business. In the light of participation in the tender such observations would not be a decisive factor. Thus, considering the facts and circumstances, we are of the opinion that income of the assessee has to be assessed under the head "business income" and consequently loss computed by the Learned First Appellate Authority at Rs. 1,17,12,473 deserves to be permitted for carry forward.

9. In the result, the appeal of the assessee is allowed and that of the revenue is dismissed.

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.