2017 (3) TMI 1251 - AT - Income Tax

Allowable business expenditure - non commencement of business - Held that - As seen from the Director s report placed in the paper book, the assessee had acquired the land and had paid the compensation to the displaced land owners and has also initially awarded contract to one company, but later on due to certain circumstances cancelled the contract and had called for tenders from various international bidders and finally awarded the contract to L&T Ltd. Therefore, it is clear that the assessee has taken all the necessary steps to facilitate the building of Metro Rail System. Since the assessee has taken steps in furtherance of its main objects, it cannot be stated that the assessee has not commenced its business. Even from the perusal of the expenditure debited to the P&L A/c which has been disallowed by the AO, it is seen that most of it relates to the administrative office of the assessee and not for manufacturing or making the system operational. As the Revenue has not disallowed the business expenditure claimed by the assessee in the earlier two years, we are of the opinion that the assessee has commenced its business and the expenditure has to be allowed as business expenditure. - Decided in favour of assessee Interest income - Nature of the income earned by the assessee - Held that - The govt. has released the grant for carrying out the objects of the assessee and therefore, the govt. grant has to be considered as the business receipts of the assessee. The interest on deposits is the interest earned by the assessee on deposits made by the assessee of the unutilized funds as short term deposits. It is thus clear that the funds are for business purposes of the assessee and when they are not immediately needed, instead of keeping them idle, the assessee is parking them in short term deposits. The funds received by the assessee are for the purpose of the business of the assessee but it is for commercial exploitation of the unused funds, that they are parked as short term deposits. Therefore, we hold that interest income is business income. The Hon ble Supreme Court in the case of SA Builders 2006 (12) TMI 82 - SUPREME COURT has held that where the interest bearing funds are advanced without interest for commercial expediency, then the interest paid on such borrowings is to be allowed. Applying the said principle of commercial expediency in a counter situation, where the assessee earns interest on its business receipts which are temporarily not required for business, and are parked in banks for earning of interest in order to reduce the cost, then the same attains the nature of business income. As regards the other income we find that the details of the other incomes are given in Schedule VIII which and on perusal of the same, we find that the income is derived from sale of RSQ and RSB documents. The RSQ & RSB documents are the tender documents and are, therefore, inexplicably linked with the business of the assessee and therefore, the receipt on sale of such documents also has to be treated as business income. The details of the other miscellaneous income is not given before us, therefore, we are inclined to treat the miscellaneous income as income from other sources . The AO is therefore, directed to compute the business income in accordance with the directions given above and allow the intra head set off in accordance with the law. The assessee s grounds of appeal as well as additional ground of appeal are treated as partly allowed.

Issues Involved:
1. Classification of income as "business income" or "income from other sources".
2. Disallowance of business expenditure claimed by the assessee.
3. Commencement of business activities by the assessee.
4. Treatment of Government grants and interest income.
5. Admissibility of additional ground of appeal regarding deduction of expenditure under Section 57.

Issue-wise Detailed Analysis:

1. Classification of Income:
The primary issue was whether the income reported by the assessee should be classified as "business income" or "income from other sources". The assessee argued that the income from Government grants, interest on deposits, and other incomes were part of its business activities. The authorities below treated these incomes as "income from other sources", asserting that the assessee had not commenced its core business activities.

2. Disallowance of Business Expenditure:
The authorities disallowed the business expenditure claimed by the assessee, including administrative expenses, M.D.’s remuneration, and preliminary expenses, on the grounds that these were pre-operative expenditures not connected with earning the reported income. The assessee contended that these expenditures were incurred in furtherance of its business objectives, such as planning and facilitating the development of the Metro Rail System.

3. Commencement of Business Activities:
The authorities held that the assessee had not commenced its business activities, as its core objective was to operate the mass transit system, which had not yet started. The assessee argued that it had commenced its business by acquiring land, paying compensation to displaced landowners, and floating tenders for the Metro Rail project, thus engaging in activities aligned with its business objectives.

4. Treatment of Government Grants and Interest Income:
The assessee claimed that Government grants and interest income should be treated as business income. The authorities disagreed, citing that the interest income from short-term deposits of unutilized funds should be classified as "income from other sources". The Tribunal, however, held that since the funds were for business purposes and parked temporarily in short-term deposits, the interest income should be considered business income. The Tribunal also noted that Government grants were released for carrying out the assessee’s objectives and should be treated as business receipts.

5. Admissibility of Additional Ground of Appeal:
The assessee raised an additional ground of appeal, arguing that if the income was treated as "income from other sources", the related expenditure should be allowed as a deduction under Section 57. The Tribunal admitted this ground, considering it arose from the assessment and was a legitimate alternative claim.

Conclusion:
The Tribunal found that the assessee had indeed commenced its business activities by engaging in planning and facilitating the development of the Metro Rail System. Consequently, it held that the business expenditure claimed by the assessee should be allowed. The Tribunal also ruled that the Government grants and interest income were part of the business income, except for miscellaneous income, which was to be treated as "income from other sources". The appeals were partly allowed, directing the AO to compute the business income and allow intra-head set off in accordance with the law.

← Previous Next →