2019 (7) TMI 431 - AT - Income Tax

Exemption u/s 10(20A) - Status of DMRC - assessee should be an authority constituted in India by or under Central, State or Provincial Act - HELD THAT - In the instant case before us the assessee has not produced before us any notification issued by or under any Central, State or Provincial Act for constitution of the assessee. In our considered view, the assessee-company has been merely registered or incorporated under the Companies Act, 1956 and not created as a consequence of the Companies Act,1956. In the said case the Hon ble Supreme Court has observed that said assessee-company was created under the Gujarat Industrial Development Act, 1962, 1997 (8) TMI 3 - SUPREME COURT whereas in the instant case, the assessee has been registered with the Companies Act only and not created under the Companies Act or any other Central or State Act and thus the ratio of the said decision cannot be imported over to the fact of the instant case. We reject the contention of assessee that the language employed in section 10(20A) of the Act is wider and it is not necessary that the assessee be creature of Central or State Act, as provided in section 10(23BB) and section 10(23BBA) of the Act. The assessee failed to satisfy the condition of authority constituted by under any Central, State of Provincial Act . In view of the failure to satisfy this condition, the assessee cannot be granted benefit of exemption under section 10(20A). - ground No. 1 raised in all the respective appeals is dismissed. Commencement of business - no set up of business - adjustment of interest income earned on fixed deposit against the cost of the project, allowance of expenses claimed in profit and loss account including consultancy and professional expenses, claim of deduction u/s 35D - HELD THAT - We hold that business of the assessee was set up only in the period immediately before the date when the assessee carried on commercial run of the Metro rail. AO has reported this date of running the Metro train as 25/12/2002 on page 8 of the assessment order for assessment year 2002-03. This factual information has not been disputed by the assessee before us. The date of setting up of business can only be in period immediately prior to commencement of business. That date may be the date of announcement of inauguration of the Metro Rail network or may be any days slightly before that. Since the business was commenced in 25.12.2002 , the business can be treated as set up in any date in FY 2002-03 corresponding to AY 2003-04 and not in AY 2002-03 or any assessment year prior to that. Accordingly, we hold that the business of the assessee was not set up in any of the assessment years of appeals before us. Taxability of interest income earned on fixed deposit with banks - correct head of income - income from other sources OR business income - HELD THAT - Following the ratio in the case of Tuticorin Alkali Chemical and Fertilizers Ltd 1997 (7) TMI 4 - SUPREME COURT we reject the contentions made while arguing the grounds as well as additional grounds related to the issue in dispute claiming the interest income as part of business income and also that adjustment of interest on fixed deposits against the capital work in progress and uphold the finding of the CIT(A) on the issue in dispute for assessing the interest income from funds invested in bank deposits during the assessment years from AY 1996-97 to 2002-03 as income taxable under the head Income from other sources . Addition u/s 57(iii) - Allowing expenses for earning interest income on fixed deposits with banks taxed under the head Income from other sources - HELD THAT - As under the provisions of section 57(iii) any expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income is deductible against the said income assessed under section 56 i.e under the head Income from other sources . AO estimated the expenditure incurred on the basis of number of employees. In absence of a specific demonstration by the assessee that particular expenses relates to the interest income and in absence of any documentary evidence in support of such a claim, we may not like to disturb the expenses already allowed by the Ld. CIT(A), in view of the fact that there is no appeal of the Revenue before us in which the quantum of expenses allowed under the head Income from other sources has been contested by the Revenue. Disallowance of deduction of 1/10th of preliminary expenses u/s 35D - HELD THAT - The issue of deduction u/s 35D is also connected with the setting up of the business, because previous year in case of newly setup business starts from the setting up of the business and business income under the head profit in gains of the business is computed thereon as per the provisions of section 28 to 44 . As we have already held that business of the assessee was not set up during the period assessment years 1996-97 to 2002-03 and thus the assessee was not entitled to claim the deduction u/s 35D in the these relevant assessment years, however the assessee is eligible to claim such deduction u/s 35D after setting up of the business. CIT(A) in assessment year 1998-99 has confirmed the disallowance on similar grounds. Disallowing deduction in respect of expenses claimed in the profit and loss account including professional and consultancy charges incurred by the assessee - HELD THAT - CIT(A) in relevant years has held that company was in the process of setting up the business and therefore the Assessing Officer were justified in holding that professional or consultancy charges paid were preoperative expenses eligible for amortisation u/s 35D(2)(a). It is now well settled law that, once business is set up , then only expenditure is allowable as business expenditure, as has also been held the judgment of Jurisdictional High Court in the case of CIT vs. Dhoomketu Builders Development Pvt. Ltd. 2013 (4) TMI 668 - DELHI HIGH COURT . We are of the view that the other expenses which have been debited in the profit and loss account and are related directly or indirectly to the plant and machinery or other capital assets constructed or built or purchased by the assessee, then those expenses are eligible for capitalization and eligible for inclusion in written down value of those fixed asset. Deduction of depreciation claimed on office equipments etc - HELD THAT - In the case of National Thermal power Corporation 2012 (10) TMI 720 - DELHI HIGH COURT issue involved whether as an asset though ready to use but not put to use , can depreciation be allowed on such asset. The Hon ble High Court held that the expression used for the purposes of the business in section 32 of the Act has been judicially interpreted to include a case where the asset is kept ready for use, but is not actually put to use. But in the instant case before us as we have already held that business of the assessee was not set up in AY 1996-97 to AY 2002-03, the question of carrying of the business does not arise and in such circumstances the assessee is not eligible for deduction of depreciation u/s 32. We concur with the finding of the Ld. CIT(A) on the issue in dispute and accordingly depreciation claimed from AY 1997-98 to 2002-03 is denied. Revision u/s 263 - non examining whether expenses incurred were in relation to earning of the interest income - HELD THAT - Commissioner cannot substitute his opinion in place of the AO particularly when view taken by the AO is one of the legally possible views. But in the instant case, we find that the Assessing Officer has not examined whether the expenses incurred were in relation to earning of the interest income. At least from the record, it is apparent that the AO has not carried out an enquiry on this issue. The expenses claimed include all sorts of expenses including bank charges, brokerage, Honorarium, ground rent, insurance, membership, security expenses, vehicle hiring and running expenses etc. From a prima-facie perusal of these expenses, one can infer that all those expenses are not related to earning of the interest income on fixed deposits made with banks. In such circumstances, it cannot be said that the commissioner has substituted his opinion in place of that of the AO but the commissioner has found that those expenses cannot be allowed without an enquiry. The assessee has challenged the estimating of quantum of expenses allowable deduction by the Ld. CIT. But we find that, the CIT asked specifically to the assessee for submitting the expenses related to the interest income, however no such details were furnished by the assessee before the CIT. Even such detail has not been furnished before us also. In such circumstances, we are of the opinion that the Ld. CIT is justified in estimating the expenditure relatable to the interest income, which could be allowed u/s 57. The Hon ble Supreme Court in the case of Maharaja BP Singh Deo 1969 (12) TMI 2 - SUPREME COURT held that assessment must be based on some relevant material and it is not a power that can be exercised under the sweet will and pleasure of the concerned authorities. We find that in the instant case before us the CIT has identified the advertisement expenses as not related to the earning of interest income and in respect of the balance expenses also, he identified the employees engaged in looking after the project work of the assessee and made estimate of the expenses allowable against interest income on rational basis. Thus the ratio of the said decision of the Hon ble Supreme Court cannot be applied over the facts of the instant case. As far as the decisions relied upon by assessee on the issue of allowability of the expenditure u/s 37(1) is concerned, we are of the opinion that the Ld. CIT has considered the expenses relatable to the earning of the interest income as per the provisions of section 57, thus, the decisions relied upon by the assessee cannot be applied in the instant case. We uphold the order of the CIT passed u/s 263 for AY 1998-99 and 1999- 2000.

Summary

Issues Involved:
1. Whether the assessee is entitled to the claim of exemption u/s 10(20A) of the Act?
2. What is the date when the business had been set up?
3. Whether disallowance of expenses including deduction claimed u/s 35D of the Act, consultancy expenses, and depreciation is justified?
4. Deduction of expenses for earning interest income.
5. Legality of the orders passed under section 263 of the Income-tax Act.

Issue-wise Analysis:

1. Exemption under Section 10(20A):
The assessee claimed exemption under section 10(20A) of the Act, arguing it was an authority constituted for planning, development, and improvement of cities. The Tribunal held that the assessee, being incorporated under the Companies Act, 1956, does not fulfill the condition of being constituted by or under a Central, State, or Provincial Act. Therefore, the assessee is not entitled to exemption under section 10(20A) of the Act.

2. Date of Setting Up of Business:
The Tribunal examined whether the business was set up in assessment year 1997-98, as claimed by the assessee. It was concluded that the business of the assessee was not set up during the assessment years 1996-97 to 2002-03. The business could only be considered set up in the period immediately before the commercial run of the Metro rail, which commenced on 25/12/2002. Thus, the business was set up in FY 2002-03 corresponding to AY 2003-04.

3. Disallowance of Expenses:
- Deduction under Section 35D: Since the business was not set up during the relevant assessment years, the assessee was not entitled to claim deduction under section 35D of the Act. The Tribunal upheld the disallowance of preliminary expenses written off under section 35D.
- Consultancy and Professional Expenses: These expenses were considered pre-operative and not allowable as business expenditure. However, the Tribunal allowed the capitalization of expenses directly or indirectly related to the construction of the Metro rail network.
- Depreciation: Depreciation was disallowed as the business was not set up during the relevant assessment years. The Tribunal upheld the disallowance of depreciation claimed from AY 1997-98 to 2002-03.

4. Deduction of Expenses for Earning Interest Income:
The interest income earned on fixed deposits was taxable under the head "Income from other sources." The Tribunal upheld the findings of the CIT(A) on the quantum of expenses allowed against interest income under section 57 of the Act. The additional grounds raised by the assessee for adjustment of interest income against the cost of the project were dismissed.

5. Orders under Section 263:
The Tribunal upheld the orders passed under section 263 for assessment years 1998-99 and 1999-2000. It was found that the Assessing Officer had not made proper inquiries regarding the allowability of expenses against interest income. The CIT was justified in invoking section 263 as the orders were erroneous and prejudicial to the interest of the revenue. The estimation of allowable expenses by the CIT was also upheld.

Conclusion:
The appeals for assessment years 1996-97 to 2002-03 were partly allowed, with specific grounds dismissed or upheld as per the findings. The appeals against the orders under section 263 for assessment years 1998-99 and 1999-2000 were dismissed. The Tribunal's decision emphasized the importance of proper inquiry and adherence to legal provisions in assessing income and allowing deductions.