2016 (11) TMI 970 - HC - Income Tax

Allowance of expenditure - set up of business - Held that - Although the obtaining of license is on a slightly higher plain, the fact remains that in this case, there is nothing on record to say that the Memorandum of Association of the assessee company prevented it from earning the income that it did. It is not merely the earning of the income, but also the nature of expenditure incurred which is determinative at least in the facts of this case. The company strove and did all that it could to set-up the infrastructure which ultimately culminated in obtaining the NBFC license. In the process, the expenditure incurred by it had a nexus with the license that it could successfully obtain on 09.04.2008. Having regard to all these facts, this Court is of the opinion that the application of law declared in Whirlpool (2009 (8) TMI 28 - DELHI HIGH COURT) and the decision in CIT v. L.G. Electronics (India) Ltd. 2005 (5) TMI 30 - DELHI High Court was unexceptionable. Loss claim - whether the loss could have been allowed at all having regard to the fact that it was claimed in the revised return and not in the original return? - Held that - The revised return was filed within the time prescribed. In fact, the revised return was finally taken up for assessment.; the orders too were passed on it. In the circumstances, the very purpose of filing a revised return and making a provision thereof would be defeated if the Revenue s primary contention that the claims should have been made in the original return were to be followed and upheld. No question of law arises in such circumstances. The appeal is accordingly dismissed.

Summary

Issues:
1. Treatment of interest income as business income.
2. Commencement of business for claiming set-off.
3. Allowance of business expenditure based on the date of business setup.
4. Eligibility of revised return for claiming losses.

Analysis:

Issue 1: Treatment of interest income as business income
The appeal under Section 260A of the Income Tax Act, 1961 challenged the order of the Income Tax Appellate Tribunal (ITAT) regarding the treatment of interest income received by the assessee. The Assessing Officer (AO) initially held that the interest income could not be considered as "business income" and disallowed the claim for set-off. However, the CIT(A) reversed this decision, deeming the interest income as business income and allowing income adjustment under Section 71 of the Act. The ITAT upheld the CIT(A)'s order, leading to the Revenue's contention that the order was erroneous, citing legal precedents to support their argument.

Issue 2: Commencement of business for claiming set-off
The crux of the issue revolved around the commencement of business for the purpose of claiming set-off. The Revenue argued that the business activity, i.e., Non Banking Financial Company (NBFC), could not be considered as started or established before obtaining the license. The CIT(A) detailed the activities undertaken by the assessee, including capital raising, office setup, staff appointments, and regulatory compliance, leading to the conclusion that the business was set up after the incorporation date. The CIT(A) emphasized that the nature of expenditure incurred had a nexus with obtaining the NBFC license, supporting the allowance of business income and expenditure.

Issue 3: Allowance of business expenditure based on the date of business setup
The CIT(A) meticulously analyzed the facts, including the nature of the appellant company's activities, expenses incurred, and the timeline of business establishment. The CIT(A) noted various expenditures, such as lease hold improvements, equipment purchases, and staff salaries, to determine the eligibility of these expenses as business expenditure. The decision to allow business expenditure was based on the establishment of business activities post-incorporation, leading to the approval of income adjustment under Section 71 of the Act.

Issue 4: Eligibility of revised return for claiming losses
Regarding the eligibility of revised returns for claiming losses, the Court dismissed the argument that claims should have been made in the original return. The Court emphasized that the revised return was filed within the prescribed time and was considered for assessment. Upholding the purpose of filing revised returns, the Court concluded that no question of law arose in this context, ultimately dismissing the appeal.

In conclusion, the judgment delved into the intricacies of income classification, business commencement, expenditure allowance, and revised return eligibility, providing a comprehensive analysis to resolve the issues raised in the appeal under the Income Tax Act, 1961.