2020 (8) TMI 438 - AT - Income Tax

Commencement of business operation or not - whether set up of business is only set up or is also commencement of business? - Interest expenditure allowance - HELD THAT - The present assessment was made in the hands of the assessee, following the same reasoning as in Assessment Year 2006-07 2020 (6) TMI 569 - ITAT DELHI both by the Assessing Officer and the CIT(A), since the issues have already been decided by the Tribunal in earlier year in assessee s own case, we hold that as the business of the assessee had already commenced in Assessment Year 2006-07, then the interest expenditure and all other expenses both administrative and other expenses are to be allowed as business expenditure. The interest income is to be taxed as business income and the interest expenditure is to be set off against the said business income. During the year under consideration, the assessee had capitalized interest expenditure of ₹ 40.78 Corers, hence, there is no issue of its allowability. Coming to the submissions of the Ld. DR for the Revenue, we find that the interest expenditure of ₹ 18.64 Crores is business expenditure and the same needs to be allowed as expenditure in the hands of the assessee, hence, we hold so. The grounds of appeal raised by the assessee in this year are thus allowed. Facts and issues raised in appeal of the assessee relating to Assessment Year 2008-09 are similar to the facts and issues in Assessment Year 2007-08 and our decision in Assessment Year 2007-08 shall apply mutatis mutandis. The interest expenditure in the respective year which has been capitalized by the assessee and not claimed as business expenditure, hence, the only portion claimed in the hands of the assessee is to be allowed as business expenditure. Accordingly, grounds of appeal raised by the assessee stands allowed.

Issues Involved:
1. Capitalization of interest expenditure on loans for stock in trade.
2. Capitalization of administrative and statutory expenses.
3. Applicability of the Wall Street Construction Ltd. case.
4. Classification of interest earnings as income from investments.
5. Set off of interest income against interest expenditure.
6. Commencement of business operations.

Detailed Analysis:

1. Capitalization of Interest Expenditure on Loans for Stock in Trade:
The primary issue raised by the assessee for Assessment Year 2007-08 was the decision of the authorities to capitalize the interest expenditure of ?59,43,36,188 on loans taken for the purchase of stock in trade (land), treating it as work in progress rather than allowing it as an expenditure for the current year. The Tribunal noted that the business of the assessee had commenced in the previous year (Assessment Year 2006-07), and therefore, the interest expenditure should be allowed as business expenditure rather than being capitalized.

2. Capitalization of Administrative and Statutory Expenses:
The assessee also contested the disallowance of administrative and statutory expenses totaling ?10,62,688, which were capitalized as work in progress by the authorities. The Tribunal, referencing its decision for Assessment Year 2006-07, held that since the business had commenced, these expenses should be allowed as business expenditure.

3. Applicability of the Wall Street Construction Ltd. Case:
The assessee argued that the facts of their case were materially different from those in the Wall Street Construction Ltd. case, which was used as a precedent by the authorities. The Tribunal agreed with the assessee, noting that substantial activities had been carried out since the date of incorporation, including raising loans and making investments in land, which indicated the commencement of business.

4. Classification of Interest Earnings as Income from Investments:
The authorities had classified interest earnings of ?81,75,460 as income from investments of surplus funds rather than business income. The Tribunal, however, held that the interest income should be assessed as business income, considering the funds were temporarily parked in bank FDRs and were part of the business operations.

5. Set Off of Interest Income Against Interest Expenditure:
The Tribunal addressed the issue of setting off interest income against interest expenditure. It was held that since the business had commenced, the interest expenditure should be allowed to be set off against the interest income, which was classified as business income.

6. Commencement of Business Operations:
The Tribunal confirmed that the business operations of the assessee had commenced in Assessment Year 2006-07. This conclusion was based on substantial activities undertaken by the assessee, such as raising loans and investing in land for development projects. Consequently, all related expenditures, including interest and administrative expenses, should be allowed as business expenditures.

Conclusion:
The Tribunal ruled in favor of the assessee for Assessment Years 2007-08 and 2008-09, allowing the interest and administrative expenditures as business expenditures and classifying the interest income as business income. For Assessment Year 2009-10, the Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal and maintaining that the business had commenced, thereby allowing the set off of interest income against interest expenditure. The consolidated order provided a comprehensive resolution of the issues, aligning with the Tribunal's earlier decisions for the assessee's case in Assessment Year 2006-07.

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