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2018 (11) TMI 1934 - AT - Income TaxDisallowance of Expenses by holding them to be Pre-operative Expenses - Non commencement of business - what is the stage at which a real estate company can be considered to have commenced its business and becomes eligible to claim the expenses incurred as revenue expenses? - AO has held that since the expenses claimed do not have corresponding business revenue, the assessee s business activities have not commenced and therefore, the interest income needs to be charged to tax as pre-operative interest HELD THAT - Whether an assessee is in a position to commence its business operations OR not is the true test for deciding whether the business has been set up and would obviously depend upon the facts and circumstances of each case. We find that the assessee had raised funds from its AE by issuing CCDs and made advance payments to a party for purchase of land. Part of the advance payment was made in the earlier year and balance amount in the current year. No land has been purchased by the said party as can be seen from the suit filed by the assessee against the party in 2011. Other than payments of advance, it is not known as to whether any other activity happened to establish that the assessee was in a position to commence business . In the year under consideration, the assessee has raised funds from its AEs in the form of issue of another series of CCDs and paid advance to Shriram Land Development India (P) Ltd., which has been shown as a related party in the assessee s TP study. Even in this transaction, other than making the advance payment, nothing has been brought on record to establish that the assessee was in a position to commence business. We also notice that out of the expenses claimed as deduction, the major components are Legal and Professional Charges and loss on redemption of investment in mutual funds ( MF ). Whether these expenses are revenue OR capital in nature has not been examined at all. We also find that the TPO has treated the ALP of the interest transactions as NIL and disallowed the interest paid on CCDs. The AO has once again disallowed the same, leading to a double disallowance. We deem it appropriate to remand the matter back to the file of the CIT(A) to decide the issue afresh, after proper examination of the facts and test the facts of this case in the light of the legal principles outlined above - Ground No. 1 of assessee s appeal is allowed for statistical purposes. TP adjustment - assessee had raised funds from its AE, an entity registered in Cypress, by issuing Compulsorily Convertible Debentures (CCDs) to its AE - There were two series of CCDs; one was issued at 0% interest and the other was at 14% - TPO rejected the assessee s contentions that the CCDs are debt instruments and held them to be equity in nature - HELD THAT - TPO while taking the view that CCDs are not in the nature of debts has referred to RBI policy and also the facts of the case on hand where the CCDs issued as a first series carried interest @ 14% and interest was then reduced to 0% and the second series of CCDs issued by the assessee on similar conditions carried interest @ 14%. CIT(A) has also not examined as to whether these two series of CCDs constituted an internal CUP for comparability analysis and determination of ALP. As regards the interest rate to be charged, the CIT(A) has observed that while the Bangalore Bench of ITAT has held that interest rate should be determined as per short term deposits in the home country; the Chennai and Hyderabad Benches of ITAT have held that the average LIBOR rates are to be adopted and is following the Majority View . This approach by the CIT(A) in deciding the issue, without examining the facts of the decisions relied upon and comparing the same to the facts of the case on hand, is erroneous to say the least. The CIT(A) ought to have first examined the currency in which the borrowings have been denominated, by examining the agreement entered into by the assessee and the AE and then decided the issue. There is merit in the assessee s contention that it should have been afforded opportunity of being heard before the CIT(A) decided that the interest rate should be designated in LIBOR and not on the Rupee rate, as was done by the assessee. As it is clear that the basic facts of the case on this issue have not been thoroughly/properly examined in the right perspective by the CIT(A), we deem it appropriate to remand the issue back to the file of the CIT(A) for fresh adjudication - Grounds 2 to 4 of assessee s appeal are allowed for statistical purposes.
Issues Involved:
1. Disallowance of pre-operative expenses and administrative expenses. 2. Transfer Pricing (TP) adjustment related to interest on Compulsory Convertible Debentures (CCDs). 3. Application of LIBOR rate instead of the interest rate paid by the assessee. 4. Enhancement of income without issuing notice under Section 251(2) of the Income Tax Act. Detailed Analysis: 1. Disallowance of Pre-operative Expenses and Administrative Expenses: - Facts and AO's Decision: The assessee reported a loss and filed a return for the Assessment Year (AY) 2009-10. The AO initiated proceedings under Section 147 of the Income Tax Act, 1961, suspecting income had escaped assessment. The AO disallowed pre-operative and administrative expenses, stating the assessee had not commenced business as no business income was reported. - CIT(A)'s Decision: The CIT(A) upheld the AO's decision, citing cases such as Kingfisher Training and Aviation Services Ltd., ALD Automotive (P) Ltd., and Kakinada SEZ (P) Ltd. - Assessee's Argument: The assessee contended that it had commenced business by initiating land acquisition activities and incurring related expenses. The assessee relied on the decision in Swire Holdings (P) Ltd. vs. ITO. - Tribunal's Decision: The Tribunal noted that the CIT(A) and AO had not adequately examined whether the assessee was in a position to commence business. The Tribunal remanded the matter back to the CIT(A) for a fresh decision, instructing to examine the facts and apply relevant legal principles, ensuring both parties are heard. 2. Transfer Pricing Adjustment Related to Interest on CCDs: - Facts and TPO's Decision: The AO referred the matter to the TPO, who proposed an adjustment of Rs. 23,51,564/- towards interest on CCDs issued to the assessee's associated enterprise (AE). The TPO treated CCDs as equity, not debt, and set the Arm's Length Price (ALP) of interest on CCDs to NIL. - CIT(A)'s Decision: The CIT(A) upheld that CCDs are debts but applied the LIBOR rate instead of the 14% interest rate paid by the assessee. - Assessee's Argument: The assessee challenged the application of the LIBOR rate and contended that the CIT(A) enhanced income without issuing notice under Section 251(2) of the Act. - Tribunal's Decision: The Tribunal found the CIT(A)'s approach faulty, noting that the CIT(A) did not properly examine the facts or the relevance of cited judicial pronouncements. The Tribunal remanded the issue back to the CIT(A) for fresh adjudication, ensuring the assessee is given an opportunity to be heard. 3. Application of LIBOR Rate Instead of the Interest Rate Paid by the Assessee: - Facts: The CIT(A) applied the LIBOR rate for interest on CCDs, which the assessee contended was an enhancement without proper notice. - Tribunal's Decision: The Tribunal noted that the CIT(A) did not examine whether the currency of borrowings was in Indian Rupees or foreign currency. The Tribunal remanded the issue back to the CIT(A) to determine the appropriate interest rate, considering the currency of the borrowings and ensuring the assessee is heard. 4. Enhancement of Income Without Issuing Notice Under Section 251(2): - Facts: The assessee contended that the CIT(A) enhanced income by applying the LIBOR rate without issuing a notice, violating Section 251(2) of the Act. - Tribunal's Decision: The Tribunal agreed with the assessee, emphasizing the need for proper notice and opportunity to be heard before any enhancement. The issue was remanded back to the CIT(A) for fresh adjudication, ensuring compliance with procedural requirements. Conclusion: The assessee's appeal for AY 2009-10 is allowed for statistical purposes, with instructions for the CIT(A) to re-examine the issues afresh, ensuring both parties are given adequate opportunity to present their case. The Tribunal emphasized the importance of proper examination of facts, application of relevant legal principles, and adherence to procedural requirements.
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