2013 (10) TMI 880 - HC - Income Tax

Allowance of Interest expenditure u/s 36(1)(iii) of the Income Tax Act date of commencement of real estate business - Held that - Respondent company was incorporated on 4th August, 2005, i.e., in the last Assessment Year 2006-07. It had entered into a Memorandum of Understanding dated 31st May, 2006 with third parties in respect of a project near Chandigarh, Mohali, Punjab. Subsequently, joint venture agreement dated 5th July, 2006 was executed between the respondent and third parties - Loan of ₹ 25 crores was taken by the respondent-assessee on 16th May, 2006 - Date of setting up of business depends upon facts and the nature of the business - In case of real estate business, the said setting up of business was complete when first steps were taken by the respondent-assessee to look around and negotiate with parties. There can be a gap between setting up and when first steps were taken by the respondent and finalisation of the first written agreement. Business activities of the respondent did not require construction of a factory, machinery etc. Negotiations are required to enter into a written understanding and it is obvious that the loan was taken for business and to proceed further and conclude the deal Deduction of interest allowed u/s 36(1)(iii) Decided against the Revenue.

Summary

Issues:
1. Allowability of interest paid to M/s Dharti Investments and Holding Limited as expenditure under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Allowability of travel/statutory fees/audit fees as expenditure under Section 37 of the Act.

Analysis:

Issue 1:
The primary issue in this case pertains to whether the interest paid to M/s Dharti Investments and Holding Limited on a loan of Rs.25 crores can be considered as expenditure under Section 36(1)(iii) of the Income Tax Act, 1961. The Assessing Officer had initially disallowed this amount as expenditure, arguing that the business of the assessee had commenced or was set up after the loan was obtained. However, the court referred to a judgment highlighting that the setting up of a business and the commencement of business could be distinct dates. The court noted that the respondent company was incorporated before the loan was taken, had entered into agreements, and had undertaken negotiations indicating readiness to conduct business. The court emphasized that in the real estate business, setting up of business occurs when initial steps are taken, such as negotiations and agreements, rather than the physical establishment of a factory or machinery. The first appellate authority and the tribunal had examined the facts in detail, concluding that the loan was essential for conducting business activities. The court upheld these findings, dismissing the appeal.

Issue 2:
The second issue revolves around the allowance of Rs.2,32,582 as expenditure for travel, statutory fees, audit fees, etc., under Section 37 of the Income Tax Act. The court did not delve into this issue extensively as the primary focus was on the interest payment issue. No specific arguments were raised regarding this expenditure, and the court did not find any merit in the appeal. The decision in a related case cited by the appellant did not support their position, further reinforcing the tribunal's findings. Consequently, the court dismissed the appeal, affirming the tribunal's decision on both the interest payment and the other expenditures.

In conclusion, the court's judgment clarified the distinction between setting up a business and commencing business activities, particularly in the context of real estate ventures. The decision emphasized the importance of readiness to conduct business operations, even before physical construction or machinery installation, in determining the eligibility of certain expenditures as allowable deductions under the Income Tax Act.