2012 (10) TMI 208 - AT - Income Tax

Dis-allowance of business expenses - assessee having agricultural income and other income comprising of interest on FDR rental income profit on sale of mutual fund and provision written off - Revenue contended that none of the receipts bear the character of business receipts and unless there is any business activity business expenses cannot be allowed - Held that - It is observed that assessee is in real estate business. Assessee has conducted preliminary activities which are necessary for business of the assessee. They include identification of suitable sites and getting them evaluated by lawyer. These activities are very much part of assessee s business. In subsequent period assessee has also acquired two plots for development. In this regard it is incorrect to state that only business income can prove the existence of business. Aforesaid activities would include vehicle and other transportation expenses administrative expenses Lawyer fee depreciation on the assets used for business. Hence in the background of the aforesaid discussions there is considerable cogency in the proposition that assessee s business has commenced. Accordingly order is set aside - Decided in favour of the assessee.

Issues Involved:
1. Classification of interest income.
2. Determination of business activity.
3. Disallowance of depreciation and administrative expenses.
4. Interpretation of business activity in the absence of business income.
5. Charging of interest under sections 234B and 234C.

Issue-wise Detailed Analysis:

1. Classification of Interest Income:
The primary issue was whether the interest income should be classified as "income from other sources" or as business income. The Assessing Officer (AO) treated the interest income from Fixed Deposit Receipts (FDR) as income from other sources, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) referred to multiple judicial precedents indicating that interest earned before the commencement of business on short-term deposits is considered income from other sources.

2. Determination of Business Activity:
The AO observed that the assessee's receipts, including agricultural income, FDR interest, rental income, mutual fund profit, and provision written off, did not bear the character of business receipts. The AO concluded that no business activity was conducted during the year, leading to the disallowance of business expenses. The CIT(A) agreed with this assessment, noting that the assessee did not challenge the treatment of rental income as income from house property.

3. Disallowance of Depreciation and Administrative Expenses:
The AO disallowed depreciation of Rs. 175,048 and administrative and other expenses of Rs. 219,872, arguing that these were not allowable in the absence of business activity. The CIT(A) upheld this disallowance, agreeing with the AO's assessment that no business activity was conducted during the relevant assessment year.

4. Interpretation of Business Activity in the Absence of Business Income:
The assessee argued that the absence of business income does not necessarily indicate the absence of business activity. The assessee provided evidence of activities such as site visits, legal consultations, and negotiations for land purchases, which were preparatory steps for future business operations. The Tribunal agreed with the assessee, stating that business activities can exist even without immediate business income. The Tribunal cited various judicial precedents supporting the view that preparatory activities for business are part of business activities.

5. Charging of Interest under Sections 234B and 234C:
The assessee contested the charging of interest under sections 234B and 234C. However, this issue was not elaborated upon in the judgment, as the primary focus was on the classification of income and the determination of business activities.

Conclusion:
The Tribunal found considerable cogency in the assessee's submissions and held that the business activities had commenced, even in the absence of immediate business income. The Tribunal set aside the orders of the lower authorities, allowing the appeal in favor of the assessee. The Tribunal emphasized that business activities include preparatory steps and that expenses incurred for such activities are allowable. The appeal was thus allowed, and the order was pronounced in the open court on 27/7/2012.

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