2014 (1) TMI 593 - AT - Income Tax

Allowability of expense - Commencement of business - Addition of Additional Evidences under Rule 29 of Income-tax (Appellate Tribunal) Rules Held that - Additional evidences are admitted relying on Commissioner Of Income-Tax Versus Kum. Satya Setia 1982 (4) TMI 22 - MADHYA PRADESH High Court . The assessee s business commenced from 1994-95 itself which was followed by a lull in the intervening periods. This does not mean cessation of the assessee s business, in view of the above facts. In any case, looking from any angle, it has to be held that the assessee s business of consultancy was set up in this year as substantial revenue is earned in the next 2 years. Therefore, we are inclined to allow the claim of the assessee by holding that the assessee s business was commenced and alternatively relying on the setting up of business as held in the cases of Hughes Escorts Communications Ltd. 2007 (9) TMI 261 - DELHI HIGH COURT and Whirlpool of India Ltd. 2009 (8) TMI 28 - DELHI HIGH COURT . Allowability of Expenditure Amount of Returns allowed as business expenditure or not Held that - Not returning the amount to the Government would have cost the assessee its business prospectus and its title over the business by way of withdrawing the joint venture, etc. - the assessee in order to protect its business interest and business propriety refunded the amount which can be termed as compensation, return ; interest or by whatever name - Its accrual, crystallisation and finalisation is relatable to this year - the amount of return is allowable to the assessee in this year as business expenditure - the assessee s business has already commenced the entire amount paid to M/s. Wilbur Smith Associates is to be allowed to the assessee being professional fee for consultancy services Decided in favour of Assessee.

Summary

Issues Involved
1. Legality of the order passed by the Commissioner of Income-tax (Appeals).
2. Determination of taxable income and rejection of returned loss.
3. Commencement of business activity.
4. Disallowance of professional fees.
5. Disallowance of interest expenditure.
6. Levy of interest under section 234B.

Detailed Analysis

1. Legality of the Order Passed by the Commissioner of Income-tax (Appeals)
The appellant contended that the order passed by the Commissioner of Income-tax (Appeals) under section 250 of the Income-tax Act was bad in law and on the facts and circumstances of the case. This ground was general in nature and did not raise specific issues.

2. Determination of Taxable Income and Rejection of Returned Loss
The appellant's taxable income was determined at Rs. 64,04,523 by the Assessing Officer (AO), rejecting the returned loss of Rs. 3,46,38,360. The AO concluded that no business activity had commenced during the relevant year. The appellant argued that its business had commenced in 1994-95 and had been consistently treated as such in previous years. The Tribunal noted that the appellant had undertaken consultancy for the Hyderabad Light Rail Project and incurred expenses, which were allowed as business expenses in earlier years. It was held that the principle of consistency should apply, and the AO's deviation from the established treatment was unwarranted.

3. Commencement of Business Activity
The AO and Commissioner of Income-tax (Appeals) held that no business activity had commenced, as no revenue was earned. The appellant argued that business activities had been ongoing since 1994-95, and the lack of revenue in certain years did not imply cessation of business. The Tribunal agreed, stating that the appellant's business had commenced from 1994-95, and the lull in activity did not equate to cessation. The Tribunal also noted that substantial revenue was earned in subsequent years, indicating ongoing business efforts.

4. Disallowance of Professional Fees
The AO disallowed the expenditure of Rs. 4,71,624 on professional fees paid to M/s. Wilbur Smith Associates, treating it as preliminary expenses under section 35D. The appellant contended that the fees were for consultancy services related to its main business activity. The Tribunal held that since the business had already commenced, the professional fees were allowable as business expenditure.

5. Disallowance of Interest Expenditure
The AO allowed only Rs. 36,40,000 out of Rs. 4,42,11,258 incurred by the appellant as interest expenditure, apportioning the rest over preceding years. The appellant argued that the liability to pay interest crystallized in the relevant year when the Ministry of Urban Development demanded repayment. The Tribunal agreed, stating that the entire amount of Rs. 4,42,11,258 was allowable as business expenditure in the year it was paid, as it was necessary to maintain the appellant's business relationship with the government.

6. Levy of Interest under Section 234B
The AO levied interest under section 234B amounting to Rs. 6,68,286. Since the Tribunal allowed the appellant's claims regarding taxable income and business expenditure, the basis for the levy of interest under section 234B was removed. Consequently, the interest levied was deleted.

Conclusion
The Tribunal allowed the appellant's appeal, holding that the appellant's business had commenced in 1994-95, and the professional fees and interest expenditure were allowable as business expenses. The penalty imposed under section 271(1)(c) was also deleted due to the deletion of the quantum additions. The order was pronounced in open court on May 17, 2013.