2022 (2) TMI 1084 - AT - Income Tax

Disallowance of business expenditures as the business had not yet commenced - whether the assessee has commenced its business or not during the assessment year 2012-13? - HELD THAT - The commencement of real estate business would normally start with acquisition of land or immovable property. In the case of the assessee who is in the business of development of real estate construction and infrastructure development, the acquisition of land would clearly show that the assessee is ready to commence business and as a corollary, that it has already been set up. The actual acquisition of the land may be the first step in the commencement of the business. Section 3 of the Act does not speak of commencement of business but only of setting up of the business. We find from the records that the assessee has purchased lands vide documents no. 5158 5159 of 2012 dated 11.07.2012. Further, the assessee has produced the application of planning permit before the CMDA on 15.11.2011. The approval was accorded by the respective authorities on 01.07.2013. Based on the above, we find that the business of the assessee has been duly set up during the assessment year 2012-13. Disallowance of professional charges and legal charges - HELD THAT - It is an admitted fact that the assessee has incurred legal and professional charges directly attributable to the acquisition of land as the assessee has entered into joint development agreement, we are of the opinion that the authorities below has rightly capitalized above expenditure along with cost of acquisition of the property and thus, we find no infirmity in the order of the ld. CIT(A) on this issue. Accordingly, the ground raised by the assessee is dismissed. Treatment of interest from bank deposits as income from other sources - Without any basis, the ld. CIT(A) has simply opined that the temporary deployment of funds and earning interest there upon cannot be considered as inextricably linked to business activity of the assessee. Admittedly, other than business purpose, the interest income or any other funds sourced were utilized. Thus, we are of the opinion that the assessee has invested amounts received which are inextricably linked with the process of setting up of its business as laid down by Hon ble Supreme Court in the case of CIT vs. Bokaro Steel Ltd 1998 (12) TMI 4 - SUPREME COURT which was followed in the case of CIT vs. Karnal Co-operative Sugar Mills Ltd. 1999 (4) TMI 7 - SC ORDER . Therefore we are of the considered opinion that the interest allowed on fixed deposits before the commencement of the project shall be reduced from the cost of the project and thereby, the decision of the ld. CIT(A) is set aside on this issue.

Summary

Issues:
1. Assessment order enhancement by Commissioner of Income Tax (Appeals)
2. Disallowance of business expenditures and depreciation
3. Disallowance of preliminary expenses and administrative expenses
4. Disallowance of depreciation on office furniture and computer
5. Treatment of professional charges and legal charges
6. Treatment of interest on bank deposits

Issue 1: Assessment Order Enhancement
The appeal was against the order of the Commissioner of Income Tax (Appeals) enhancing the assessment for the assessment year 2012-13. The Assessing Officer determined the total taxable income at ?7,20,300 after various disallowances/additions.

Issue 2: Disallowance of Business Expenditures
The Commissioner of Income Tax (Appeals) disallowed genuine business expenditures incurred by the appellant, claiming they were not related to the business that had not yet commenced. This included disallowance of preliminary expenses and administrative expenses.

Issue 3: Disallowance of Depreciation
The Commissioner disallowed depreciation of ?13,503 on office furniture and computer, considering it inappropriate.

Issue 4: Treatment of Professional and Legal Charges
The Commissioner disallowed professional and legal charges of ?7,50,000 and ?3,50,000, stating they were attributable to the acquisition of property. The charges were capitalized along with the cost of acquisition, not allowed as expenditure to set up the business.

Issue 5: Treatment of Interest on Bank Deposits
The Commissioner treated interest on bank deposits as income from other sources. The appellant argued the interest was linked to borrowings made for business purposes. The Tribunal found the interest earned was linked to the business setup and reduced it from the cost of the project.

In the judgment, the Tribunal found that the appellant had commenced business during the assessment year 2012-13 based on land acquisitions and planning permit applications. The Tribunal upheld the disallowance of professional and legal charges related to property acquisition. However, it disagreed with the treatment of interest on bank deposits, ruling that it was linked to the business setup and should be reduced from the project cost. The appeal was partly allowed, setting aside the Commissioner's decision on the interest income issue.