2020 (10) TMI 561 - AT - Income Tax

Disallowance of business expenditure - assessee has not commenced its business operations - expenses incurred after setting up of business - HELD THAT - The settled principle is that the expenses incurred after setting up of business and when it is ready for actual commencement of business, is allowable as deduction. The assessee is engaged in the business of real estate development, i.e., it is engaged in the business of acquiring land and developing the same into residential/commercial properties. The question as to when the business can be set up in this kind of business was examined by the co-ordinate bench in the case of Valmark Developers P Ltd 2018 (4) TMI 1565 - ITAT BANGALORE and held that the acquisition of lands for purposes of real estate development would amount to setting up and commencement of business and the expenses claimed by the appellant are allowable. Also see M/S DHOOMKETU BUILDERS DEVELOPMENT PVT. LTD. 2013 (4) TMI 668 - DELHI HIGH COURT In the instant case, there is no dispute with regard to the fact that the assessee has started acquiring lands in 2007 itself. Accordingly, we set aside the view expressed by Ld CIT(A) on this point and direct the AO to hold that the assessee has set up its business. all the expenses related to the project should be taken to Work in Progress . Remaining expenses should be allowed as deduction. If any common expenses have been incurred, then it may be split into project related item and general item on a rational basis. Since this exercise has to be carried out, we restore this issue to the file of AO. Interest income under the head income from other sources - HELD THAT - In the instant case also, the assessee has failed to demonstrate the business compulsion for making deposits with banks. Accordingly, following the above decision GLOBAL ENTROPOLIS (VIZAG) PVT. LTD. 2019 (9) TMI 37 - ITAT BANGALORE we hold that the Ld CIT(A) was justified in assessing the interest income under the head Income from other sources in assessment years 2012-13 and 2014-15.

Summary

Issues Involved:
1. Whether the business activity of the assessee is set up or not.
2. Whether the expenses incurred after setting up of business are allowable as deduction.
3. Whether the interest income earned by the assessee is part of its business activities or not.

Detailed Analysis:

1. Whether the business activity of the assessee is set up or not:
The assessee company, incorporated in 2007 for real estate development, acquired 314 acres of land in West Bengal by September 2009. Despite not declaring any business income from 2012-13 to 2014-15, the assessee claimed expenses as deductions, leading to a loss declaration. The tax authorities disallowed these expenses, asserting that the business was not set up. The Tribunal, referencing the case of Valmark Developers Pvt Ltd, determined that the business of real estate development is considered set up upon acquiring land. The Tribunal concluded that the assessee's business was set up in 2007 when it started acquiring lands, thus rejecting the tax authorities' view.

2. Whether the expenses incurred after setting up of business are allowable as deduction:
The Tribunal highlighted that expenses incurred after the business is set up and ready for commencement are deductible. The assessee's argument, supported by various court decisions, emphasized that business expenses should be allowed even if no income is declared. The Tribunal agreed, stating that since the assessee's business was set up in 2007, the revenue expenses incurred are deductible. However, project-related expenses should be taken to "Work in Progress," and only general expenses are deductible. The Tribunal restored this issue to the AO to bifurcate the expenses accordingly.

3. Whether the interest income earned by the assessee is part of its business activities or not:
The AO assessed the interest income earned by the assessee from deposits as "income from other sources." The assessee contended that this interest income should be set off against business expenses. The Tribunal referred to the case of Global Entropolis (Vizag) Pvt Ltd, where it was held that interest income from deposits not linked to business activities should be assessed as "income from other sources." The Tribunal concluded that the assessee failed to demonstrate any business compulsion for making deposits, thus affirming the AO's decision to assess the interest income under "income from other sources" for the assessment years 2012-13 and 2014-15.

Conclusion:
The Tribunal partly allowed the appeals, recognizing the business as set up in 2007 and allowing the deduction of general revenue expenses while directing the AO to bifurcate project-related expenses. The interest income was upheld as "income from other sources."