2016 (2) TMI 488 - AT - Income Tax

Allowance of business expenditure - Commencement of business - whether there is a distinction between setting up of the business and commercialization of the operation which generates actual revenue to the business? - Held that - In this present case the assessee is in the business of construction and development of technology park. In this line of business the process commences from the date of negotiation for acquiring land actual purchase of the land and then actual development of such land. The concept of commencement will change according to the nature and facts of the particular industry. It may vary depending upon the business model and business cycle of the industry. In the present case under consideration the business said to have set up when it is ready or established to commence its operation. The assessee s business had commenced since incorporation and the assessee is eligible to claim the expenditure incurred for running of the business activities. Hence the assessee is eligible for the business expenditure of 29, 54, 923/-. - Decided in favour of assessee Treatment of interest income - whether income from business or from other sources - Held that - As observed above the assessee had set up the business prior to this AY 2009-10 assessee is eligible to treat the interest income earned during this year earned out of the excess funds available in the business. It was earned by the assessee while carrying on the business activities.Similar view was upheld in the case of Dakshin Shelters Pvt. Ltd. 2012 (5) TMI 649 - ITAT HYDERABAD wherein it was allowed to claim expenses as incurred which was debited to profit & loss a/c against interest income. Similar view also expressed by this coordinate bench in the case of ITO Vs. Trident Shelters Pvt. Ltd. 2014 (1) TMI 1224 - ITAT HYDERABAD - Decided in favour of assessee

Summary

Issues:
1. Validity of assessment order passed under section 263 of the Income-tax Act.
2. Determination of the commencement of business for claiming expenditure.
3. Classification of interest income as business income or from other sources.

Issue 1: Validity of assessment order under section 263:
The appeal challenged the order dated 25/02/2014 of the ld. CIT - III, passed under section 263 of the Income-tax Act for the Assessment Year (AY) 2009-10. The CIT directed the Assessing Officer (AO) to redo the assessment due to lack of proper verification, which was deemed erroneous and prejudicial to revenue's interests.

Issue 2: Determination of business commencement for claiming expenditure:
The primary contention revolved around the commencement of the assessee's business to claim expenditure. The assessee argued that its business had commenced since incorporation, citing land acquisitions and operational activities as evidence. The Tribunal analyzed the distinction between setting up a business and commercialization, emphasizing the readiness to commence operations. Relying on case laws like Western India Vegetable Products Ltd., the Tribunal concluded that the business was set up, allowing the expenditure claim.

Issue 3: Classification of interest income:
Regarding the treatment of interest income, the Tribunal considered it as earned during business operations, making it eligible to be treated as business income. Precedents like Dakshin Shelters Pvt. Ltd. were referenced to support this view. Consequently, the Tribunal set aside the order passed under section 263, allowing the assessee's appeal.

In conclusion, the Tribunal determined that the assessee's business had commenced since incorporation, justifying the expenditure claim, and classified the interest income as business income. The appeal was allowed, and the order under section 263 was set aside on 30.11.2015.