2020 (6) TMI 569 - AT - Income Tax

Setting up of business during the year under consideration - whether set up of business is only set up or is also commencement of business? - HELD THAT - We hold that in the case of the assessee where substantial activities were carried out by the assessee, since the date of incorporation which had culminated in raising loans, making investment in purchase of land, which was reflected as stock in trade and also advancing loans to associate concerns for purchasing different pieces of land, in order to fulfil the condition of Land Bank of 100 Acres or more, to develop the township in Haryana and where the assessee is entered into development agreement at the close of the present year/beginning of the next year, then assessee can be said to have set up and commenced its business. Assessee having also invested substantial amount in the purchase of another property in the year itself, thus, set up of its business as per its Memorandum of Understanding was done, since it was engaged in the business of real estate. It is held that there is no merit in the order of the authorities below in this regard and the same are reversed. Accordingly, we hold that the assessee having not only set up its business but had also commenced its business during the previous year itself. Hence, ground no.1 of the assessee is allowed. Allowance of interest expenses - HELD THAT - Once the business had been set up and also commenced in instant year itself, then the interest expenses claimed by the assessee and any other expenditure claimed by the assessee is to be allowed as business expenditure. The assessee had also parked certain funds temporarily in the bank FDRs, on which it had earned interest which is to include also as business income in the hands of the assessee. Accordingly, ground no 2 and 3 raised by the assessee also stand decided in the favour of the assessee and same is dismissed. Taxability of interest income - HELD THAT - As held as business income; even otherwise the said interest income needs to be set up of against interest expenditure as funds have been borrowed by the assessee and only surplus borrowed funds have been invested in bank FDRs. Accordingly, the ground no. 5 raised by the assessee is allowed.

Issues Involved:
1. Whether the business of the appellant was set up during the previous year relevant to AY 2006-07.
2. Whether the interest expenditure of ?3,92,54,952 on loans taken for the purchase of stock in trade comprising of land should be capitalized as work in progress.
3. Whether administrative and statutory expenses totaling ?35,97,061 are allowable as revenue expenditure.
4. Whether administrative and statutory expenses totaling ?33,24,980 related to the authorized transaction for the purchase of property should be capitalized.
5. Whether the set-off of interest income of ?15,24,862 from banks against interest expenditure of ?4,71,55,160 should be allowed.

Detailed Analysis:

1. Setting Up of Business:
The first issue is whether the business was set up during the year under consideration. The assessee, incorporated on 25.08.2005, was engaged in real estate. The Assessing Officer (AO) noted that the assessee had not commenced its business activities during the relevant year, as there was no evidence of business activities, no employees hired, and no office established. The CIT(A) upheld the AO's findings, stating that the mere purchase of land did not result in setting up or commencement of business. The Tribunal, however, held that substantial activities were carried out by the assessee, such as raising loans, purchasing land, and entering into development agreements, which indicated that the business was set up and commenced during the year. The Tribunal relied on the principle that setting up of business occurs when the business is ready to commence, and any expenses incurred during this interval are permissible deductions. Therefore, the Tribunal allowed the assessee's claim that the business was set up during the year.

2. Capitalization of Interest Expenditure:
The second issue was whether the interest expenditure on loans taken for the purchase of stock in trade (land) should be capitalized. The AO and CIT(A) held that since the business had not commenced, the interest expenses were preoperative and should be capitalized. However, the Tribunal, having concluded that the business was set up and commenced during the year, held that the interest expenses claimed by the assessee should be allowed as business expenditure. Consequently, the interest expenditure was not required to be capitalized.

3. Allowability of Administrative and Statutory Expenses:
The third issue was the allowability of administrative and statutory expenses totaling ?35,97,061. The AO and CIT(A) had disallowed these expenses, treating them as preoperative. However, the Tribunal, in view of its finding that the business had commenced, held that these expenses were allowable as business expenditure.

4. Capitalization of Administrative and Statutory Expenses Related to Property Purchase:
The fourth issue was whether administrative and statutory expenses totaling ?33,24,980 related to the authorized transaction for the purchase of property should be capitalized. The CIT(A) had directed that these expenses be capitalized. However, since the Tribunal held that the business had commenced, these expenses were deemed allowable as business expenditure.

5. Set-off of Interest Income against Interest Expenditure:
The final issue was whether the set-off of interest income of ?15,24,862 from banks against interest expenditure of ?4,71,55,160 should be allowed. The AO and CIT(A) had disallowed the set-off. The Tribunal held that the interest income earned on temporarily parked funds should be treated as business income and allowed the set-off against interest expenditure.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the business was set up and commenced during the year, and consequently, all related expenses and set-offs claimed by the assessee were permissible as business expenditure. The appeal was allowed in favor of the assessee.

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