2022 (6) TMI 879 - AT - Income Tax

Allowance of interest expenditure - Whether there is direct nexus between the debenture issued and loans advanced? - CIT(A) observed that the interest other than debenture interest to be allowed as these interest expenditures are allowable u/s.57(iii) - CIT(A) confirmed disallowance of interest paid on debenture against this assessee before us - HELD THAT - Before us, the Ld.AR submitted that the above additional evidence filed by the assessee which are not filed before the AO and he has no occasion to examine the issue resulting to the allowability of interest, the above documents are very crucial and the issue may be remitted back to decide the same in the light of above additional evidence. We exceed to the prayer of the Ld.AR accordingly, this issue in dispute is remitted to the AO to examine the nexus between the debenture issued and loans advanced and decide accordingly. This ground of appeal is treated as allowed for statistical purposes. Disallowance of loss on reasons of non-set up of business - whether the business of the assessee has been set up or not, the assessee has to establish that the company has been already set up for the purpose of carrying on its business operation? - HELD THAT - The assessee in this case, not established that the assessee is already set up in the business so as to commence its commercial operations and not placed any evidence to suggest that the assessee has set up the business. The financial statement clearly shows that no business has been commenced in the assessment year under consideration and the position of the assessee has been continued till the end of the previous year 2013-14 relevant to AY.2014-15. There was no work in progress in the assessment year under consideration and also in the subsequent assessment year 2015-16, which remain unchanged at NIL as the company has not commenced its business activities. In other words company has not at all completed set up of the business so as to commercially starts its operation. In such circumstances, lower authorities justified disallowing expenditure claimed by the assessee which is only a pre-operative expenditure and cannot be allowed as business expenditure in the assessment year under consideration. The Ld.AR placed reliance on the judgement of the Hon ble jurisdictional High Court in the case of CIT Vs. GMR Energy Ltd. 2021 (6) TMI 299 - KARNATAKA HIGH COURT which is not applicable to the facts of the present case. In view of this, the ground of appeal is dismissed.

Issues:
1. Disallowance of business loss and deduction claimed u/s. 57(3)
2. Commencement of business activity
3. Investment in Embassy One Developers Private Limited
4. Allowance of interest paid on debentures
5. Excessive and unreasonable addition
6. Admission of additional evidence
7. Disallowance and loss on non-set up of business

Analysis:

1. Disallowance of Business Loss and Deduction Claimed u/s. 57(3):
The appellant contested the disallowance of business loss and deduction claimed u/s. 57(3). The CIT(A) upheld the disallowance due to a lack of matching income offered to tax against the claimed expenditure. The appellant argued that setting up the business entitles them to claim the expenditure, regardless of income earned. However, the authorities found no evidence of the business being set up or any commercial operations being commenced. Consequently, the disallowance was justified.

2. Commencement of Business Activity:
The appellant asserted that by providing finances to similar businesses and investing in a related company, they had commenced business activities. However, the authorities found no proof of the business being operational during the assessment year. The absence of work in progress and commercial operations indicated that the business setup was incomplete. The appellant's reliance on a specific judgment was deemed inapplicable, leading to the dismissal of this ground of appeal.

3. Investment in Embassy One Developers Private Limited:
The appellant argued that the expenses incurred were solely for business purposes, emphasizing an investment in a company engaged in similar business activities. However, without evidence of the appellant's business being operational, the authorities deemed the claimed expenses as pre-operative and disallowed them as business expenditure.

4. Allowance of Interest Paid on Debentures:
The appellant sought allowance for interest paid on debentures, presenting additional evidence to establish a nexus between debentures issued and loans advanced. The authorities admitted the additional evidence for fair adjudication. The issue was remitted back to the AO to examine the nexus and make a decision based on the new evidence.

5. Excessive and Unreasonable Addition:
The appellant contended that the addition made was excessive and unreasonable. However, specific details or arguments regarding the excessiveness or unreasonableness of the addition were not elaborated upon in the judgment.

6. Admission of Additional Evidence:
The appellant submitted additional evidence, including a debenture trust deed and bank statements, to support their case. The authorities admitted the evidence for adjudication, considering it crucial to deciding the disputed issue fairly.

7. Disallowance and Loss on Non-Set Up of Business:
The AO disallowed the business loss claimed by the appellant due to the absence of revenue from operations or any income source established during the assessment year. The CIT(A) upheld the disallowance, emphasizing the lack of matching income against the claimed expenditure. The appellant's argument that the business was set up but not operational was refuted, leading to the dismissal of this ground of appeal.

In conclusion, the appeal was partly allowed for statistical purposes, with specific grounds either upheld or dismissed based on the evidence and arguments presented by the appellant and the authorities' findings.

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