2011 (6) TMI 69 - HC - Income Tax

Allowance of business expenditure against Interest income - whether during the assessment year in question, assessee had commenced its business activities - The tribunal however, was of the opinion that the assessee company had undertaken activities in earlier year in accordance with its main objects contained in memorandum of Articles of Association of the company - assessee was appointed as Nodal Agency for two projects by the Government as well as Semi-Government organizations - In furtherance of such responsibilities, assessee had also undertaken certain tasks - Expenditure was borne by the parent agency - find that CIT(Appeals) as well as tribunal both have taken into account relevant evidence and come to the conclusion that the respondent assessee had in fact started its activities at-least during the year in question - Decided in favour of assessee.

Summary

Issues:
1. Whether the Appellate Tribunal correctly held that the business of the assessee had commenced?
2. Whether undertaking certain activities mentioned in the original objects of the company is sufficient to conclude that the business had commenced?
3. Whether the assessee had commenced its business and could claim business expenses against interest income?

Analysis:

The central issue in this case was whether the assessee had commenced its business activities during the assessment year in question. The Assessing Officer contended that the assessee had only invested funds and earned interest income without engaging in any business activities. However, both the CIT(Appeals) and the tribunal disagreed based on the evidence on record, concluding that the assessee had indeed started its business activities during the relevant year.

The respondent assessee, a Government company registered under Section 617 of the Companies Act, was established to implement the Gujarat Reforms Project by the Urban Development and Urban Housing Department of the Government of Gujarat. Being a 100% Government-owned company, its Directors were appointed by the Government to carry out policies and functions for public welfare. During the relevant year, the assessee incurred business expenditure amounting to Rs.24,70,524, which it claimed as such. However, the Assessing Officer disallowed the claim, asserting that the business activities had not commenced during that period.

Contrary to the Assessing Officer's view, the tribunal found that the assessee had undertaken activities aligned with its main objects as outlined in the Articles of Association of the company. The assessee was designated as a Nodal Agency for implementing various projects, including earthquake reconstruction and rehabilitation efforts, with all related expenses reimbursed by the relevant authorities. The tribunal considered these activities as preoperative in nature and in line with the main objectives of the company.

Both the CIT(Appeals) and the tribunal considered the evidence presented and concluded that the respondent assessee had indeed initiated its activities during the relevant year. Notably, the assessee was appointed as a Nodal Agency for multiple projects by governmental and semi-governmental bodies, fulfilling its responsibilities and incurring expenses covered by the parent agency. Consequently, the court found no reason to deviate from this assessment, leading to the dismissal of the Tax Appeal as no substantial question of law arose in this matter.