2017 (9) TMI 656 - AT - Income Tax

Whether Business Activity taken place during the PY by assessee - business of development of ship building and ship repairing yard - Business set up in January 2008 - AO disallowed all the expenses u/37 in view that the business had not commenced during the year - Held That - No doubt, the assessee has commenced commercial operation on 01.04.2009, but that is not the date when the business has been set up. Setting up business and commencement of business are two different things. Expenses prior to setting up of business are not allowable. If the facts of Saurashtra Cement & Chemical Industries Ltd (supra), is applied to the facts of the assessee, we are of the view that business activities of the assessee can be divided in to various activities such as the receipt of the confirmed orders, designing of the ship, procurement of raw materials, erection and building of ship, elaborate and comprehensive testing analysis and inspection and delivery of the ship. - No illegality or infirmity in order of CIT(A) - Appeal of revenue is dismissed. Claim of administrative expenses u/s 37 - chargeability of the interest income under the head Income from business - Held That - While disposing off ground no.1, we confirmed the order of the CIT(A) that the business was set up during the year in January 2008. Therefore the expenses incurred after the set up of the business are revenue expenses - CIT(A) is correct in allowing all these expenses. Similarly, the interest income,the interest earned on Fixed Deposit be assessed as business income out the total interest earned by the assessee - Thus, this ground is also dismissed. Deletion of disallowance u/14A - interest expenses - interest corelated to acquisition of fixed assets and capital work-in-progress and is capitalized - Held That - For the purpose of disallowance u/s. 14A read with Rule 8D(2)(ii) interest which is directly attributable to acquisition of fixed assets or capital work-in-progress,cannot be disallowed as the same cannot to attributable to any particular income or receipt. No illegality in order of CIT(A) - Appeal by revenue dismissed

Summary

Issues Involved:
1. Determination of the date when the business was set up.
2. Deductibility of general administrative expenses and classification of interest income.
3. Applicability of Section 14A disallowance for interest expenses.

Issue-wise Detailed Analysis:

1. Determination of the date when the business was set up:
The primary issue was whether the business of the assessee was set up during the previous year under consideration. The assessee, engaged in the business of shipbuilding and ship repairing, claimed that the business was set up in January 2008. The Revenue contended that no business activity had commenced during the year, thus disallowing expenses under Section 37 of the Income Tax Act. The Tribunal reviewed a detailed chronology of events, including contracts entered, advances received, and permissions obtained, concluding that the business was set up when the assessee started purchasing steel for shipbuilding in January 2008. The Tribunal differentiated between the setting up and commencement of business, emphasizing that expenses incurred after the business is set up are allowable. Citing precedents, the Tribunal upheld the CIT(A)'s view that the business was set up during the year, dismissing Revenue's ground.

2. Deductibility of general administrative expenses and classification of interest income:
The second issue addressed whether general administrative expenses were deductible and if interest income should be classified under 'Income from business and profession'. The Assessing Officer had disallowed expenses and classified interest income under 'Income from other sources' due to the business not being commenced. The Tribunal, having established that the business was set up in January 2008, allowed the expenses as revenue expenses. The Tribunal also examined the nature of the interest income, noting that it was earned from FDs kept as guarantees for advances received. Citing jurisdictional High Court decisions, the Tribunal held that the interest income was business income, confirming the CIT(A)'s order.

3. Applicability of Section 14A disallowance for interest expenses:
The third issue involved the disallowance under Section 14A related to interest expenses amounting to ?49,97,97,672/-. The Assessing Officer had applied Rule 8D to disallow a portion of the interest expenses. The Tribunal noted that the interest was capitalized towards acquisition of fixed assets and capital work-in-progress, which cannot be considered for disallowance under Rule 8D(2)(ii). The Tribunal upheld the CIT(A)'s decision to delete the disallowance, as the interest was directly attributable to capital assets. The Tribunal dismissed the Revenue's ground, noting that the assessee had not claimed deduction for the capitalized interest.

Conclusion:
The Tribunal dismissed the appeals filed by the Revenue, upholding the CIT(A)'s orders. The business was deemed set up in January 2008, allowing the deduction of administrative expenses and classifying interest income as business income. The disallowance under Section 14A was deleted due to the interest being capitalized for capital assets.