2019 (6) TMI 1508 - AT - Income Tax

Capitalization of expenses incurred by the assessee to earn interest income as pre-operative expenses - Non commencement of hotel business by assessee - AO observed that since the assessee has been deploying funds raised by it in short term lending operations till the time it commences business, the receipt of interest income has to be assessed under the head 'income from other sources' - HELD THAT - As decided in own case 2018 (8) TMI 1965 - ITAT CHENNAI Ancillary objects in the Memorandum of Association also permitted the assessee company to carry on the business of financial services. In the process the assessee company had deployed its fund towards earning interest income because during the relevant assessment year the assessee company did not commenced activities with respect to Hotel Business. Since the business of the assessee company during the relevant assessment year was only financial services, the income earned during the relevant assessment year ought to be assessed as business income and the entire expenditure incurred by the assessee for earning such income has to be allowed as deduction - Nothing on record is before us to suggest that the assessee company was indulging in any other business activity during the relevant assessment year - expenditure incurred by the assessee towards salary has also to be allowed as deduction while computing the business income of the assessee for the relevant assessment year - Decided in favour of assessee.

Summary

Issues: Capitalization of expenses incurred by the assessee to earn interest income as pre-operative expenses.

Analysis:

Issue 1: Capitalization of expenses as pre-operative expenses
The assessee appealed against the order of the ld. Commissioner of Income Tax (Appeals) confirming the capitalization of expenses incurred to earn interest income as pre-operative expenses. The Assessing Officer observed that since the company was yet to commence its main business activities of setting up and operating hotels and resorts, the interest income earned from short-term lending operations should be assessed under the head 'income from other sources.' Consequently, the expenses incurred by the assessee were capitalized as pre-operative expenses. The ld. CIT(A) upheld this decision, disallowing all expenses, including salary expenses, and capitalizing them. However, the Tribunal referred to a similar case for the assessment year 2012-13 where it was held that since the assessee was engaged only in financial services during the relevant assessment year, the income earned should be treated as business income. Therefore, the Tribunal directed the Assessing Officer to allow the deduction claimed by the assessee, setting aside the order of the ld. CIT(A).

Issue 2: Delay in filing the appeal
The appeal filed by the assessee was delayed by 3 days. The assessee's counsel filed a petition for condonation of the delay, which was supported by an affidavit. The ld. DR did not raise any serious objection to the delay, and the Tribunal, considering the sufficient cause for the delay, condoned the 3-day delay in filing the appeal, admitting it for adjudication.

Conclusion
The Tribunal allowed the appeal filed by the assessee, setting aside the order of the ld. CIT(A) and directing the Assessing Officer to allow the deduction claimed by the assessee. The decision was based on a previous judgment in a similar case for the assessment year 2012-13, where it was held that expenses incurred by the assessee for earning income during the relevant assessment year should be allowed as deduction since the assessee was engaged solely in financial services. The delay in filing the appeal was condoned, and the appeal was admitted for adjudication.