2020 (11) TMI 91 - AT - Income Tax

Nature of expenditure - pre-commencement expenditure - Whether it has to be capitalised? - HELD THAT - In the case of the assessee before us, it is evident that the assessee company s business is not set-up and ready for commercial transactions because the assessee company has not equipped itself to start generation of power during the relevant assessment year. Entire expense is proportionately attributable towards the earning of interest income arising out of borrowed interest-bearing funds and the funds received from other sources such as capital contribution etc., which may or may not be interest-bearing funds because there are no other activities conducted by the assessee company during the relevant assessment year for earning income or toward advancing any other objects of the assessee company. Further, when it comes to utilisation of mixed funds of the assessee it is up to the assessee to determine as to which funds are to be deployed for what purpose and what funds are to be treated as retained. That is because the Revenue cannot sit on the shoes of the assessee and decide as to how the assessee has to conduct its business. Hence, we hereby direct the Ld. AO to compute the aggregate expenditure proportionately attributable to borrowed funds as discussed herein above and allow the same as deduction while computing the income of the assessee under the head income from other source since the provisions of Section 57(iii) mandates for the grant of deduction with respect to any revenue expenditure incurred wholly and exclusively for the purpose of earning such income. As regards the interest income earned from the deposits made from non-interest bearing funds are concerned, the same shall be taxable in the hands of the assessee under the head income from other source after granting deduction for the proportionate expenditure incurred by the assessee towards Miscellaneous Expenditure Auditor s remuneration as discussed herein above.

Summary

Issues:
1. Disallowance of expenditure treated as pre-commencement expenditure.
2. Whether the business of the assessee was set-up during the relevant assessment year.

Issue 1: Disallowance of Expenditure:
The appeal was filed against the order confirming the disallowance of expenditure by the Ld. AO, treating it as pre-commencement expenditure. The Ld. CIT (A) upheld this decision. The expenditure in question amounted to &8377; 38,11,919/-. The Ld. AO based the disallowance on the grounds that the assessee had not commenced its business during the relevant assessment year. The Ld. AR argued that the expenditure was related to interest and financial expenses attributable to a loan obtained from the bank, and that the business had indeed commenced as staff were recruited, loans were obtained, and administrative expenses were incurred. The Tribunal noted that the assessee had earned interest income but had not conducted any significant business activity other than obtaining a loan, purchasing land, and making certain investments. The Tribunal directed the Ld. AO to compute the expenditure proportionately attributable to borrowed funds and allow it as a deduction under the head "income from other sources."

Issue 2: Setting up of Business:
The primary contention revolved around whether the business of the assessee was set-up during the relevant assessment year. The Ld. DR argued that since the assessee had not purchased any assets except land, machinery, or obtained licenses for the power project, the business could not be considered set-up. The Tribunal referred to various judicial decisions to define the concept of "setting up" a business. It was established that for a business to be considered set-up, it must be ready to undertake commercial transactions. In this case, the Tribunal found that the business was not set-up as the assessee had not equipped itself to start power generation. However, the Tribunal allowed a proportionate deduction of expenditure attributable to borrowed funds while taxing the interest income earned from non-interest bearing funds under the head "income from other sources."

In conclusion, the Tribunal partially allowed the appeal, directing the computation and allowance of expenditure proportionate to borrowed funds while taxing interest income earned from non-interest bearing funds. The judgment emphasized the distinction between pre-commencement expenditure and revenue expenditure, highlighting the importance of readiness to undertake commercial transactions in determining the setting up of a business.