2012 (7) TMI 61 - AT - Income Tax

Disallowance of expenditure including depreciation as business expenditure - on the ground that no business activity had been undertaken during the year - asseessee-company has undertaken a project of providing infrastructure facilities - Development work for Phase II was proceeding satisfactorily, and had reached 90% completion - report dated 21-12-2002, the Board of Directors of the assessee company, commenting on the present status of the project, state that Phase I of the project is complete, though the licence for distribution of power is awaited Held that - no business activity had been carried out during the relevant previous year, and all the activities undertaken were only in the nature of setting up of business - assessee is not entitled to a set off of the administrative expenditure incurred as business expenses u/s 71(1) of the Act Power of the ITAT to consider the issues not raised before it - held that - The same would necessarily require of us to issue a finding as to the date of the commencement of business in the present case, or at least the basis for its determination, and which would be valid for all the years under reference. Also, it is well settled that the tribunal is fully competent to determine the actual issue arising for determination in appeal, as also allow to relief on a ground different from that being urged before it. It is well-settled that it is the correct legal position that is relevant, and not the view that the parties may take of their rights in the matter. Claim of expenditure to be set off against interest income - held that - we are unable to see as to how the said admitted business expenditure is now being claimed as laid out wholly and exclusively for earning bank interest, so as to be deductible u/s 57(iii), qua which there is no finding by the first appellate authority in any the years, and which claim, where admitted by him, would have required a remission to the A.O., i.e., after satisfying himself that a prima facie case is made out. - Decided against the assessee. Direct or indirect cost - Architect s fee - income from sale of forms and trees can not be treated as independent of the project, and even if no costs are attributable thereto (which is impractical), or such costs stand already capitalized as part of the project cost (and not included in the impugned administrative expenditure), the same cannot be assessed as income - Held that - Matter remanded to the file of the AO to allow the assessee an opportunity for verification of the assessee s claims

Issues Involved:
1. Assessment of interest and miscellaneous income.
2. Deductibility of business expenditure.
3. Determination of the commencement of business.
4. Validity of reopening proceedings for assessment years 1999-2000 and 2000-01.
5. Allowance of expenditure against bank interest income.
6. Capitalization of project-related expenditure.

Detailed Analysis:

1. Assessment of Interest and Miscellaneous Income:
The Assessing Officer (AO) assessed the interest income and miscellaneous income as "income from other sources" rather than business income. This assessment was based on the Supreme Court decisions in the cases of Vijaya Laxmi Sugar Mills Ltd. and Tuticorin Alkali Chemicals & Fertilisers Ltd. The AO disallowed the depreciation claimed by the assessee, leading to the entire income being taxed as income from other sources. The CIT(A) upheld this view, noting that the business activities were still in the pre-operative stage.

2. Deductibility of Business Expenditure:
The AO disallowed the business expenditure claimed by the assessee, arguing that no business activity had commenced. The CIT(A) agreed, stating that the expenditure could only be allowed once the business activities were executed as per the Memorandum of Association. The CIT(A) also noted that the expenditure was pre-operative in nature and thus not deductible. The tribunal upheld this view, emphasizing that the business had not commenced by the relevant date, and thus, the expenditure could not be set off against other income.

3. Determination of the Commencement of Business:
The tribunal examined various judicial precedents to determine the commencement of business. The tribunal concluded that the business could only be said to have commenced when the company was in a position to deliver possession of the plots in the industrial park with all necessary amenities. Since the project was not ready by 31-03-2002, the tribunal held that the business had not commenced by that date, making the administrative expenditure non-deductible.

4. Validity of Reopening Proceedings for Assessment Years 1999-2000 and 2000-01:
The tribunal found the reopening proceedings for these years to be valid. The notices under Section 148 were issued within the permissible time frame, and the threshold limit for reopening beyond four years was met. The tribunal cited the Supreme Court decision in Rajesh Jhaveri Stock Brokers (P.) Ltd. to support the validity of the reopening proceedings.

5. Allowance of Expenditure Against Bank Interest Income:
The CIT(A) allowed a deduction of 18% of the interest income as expenditure, following the tribunal's decision in Cochin International Airport Ltd. However, the tribunal found this allowance untenable, emphasizing that the bulk of the expenditure was related to the project setup and not to earning bank interest. The tribunal cited several judicial decisions, including those in the cases of Vijaya Laxmi Sugar Mills Ltd., Tuticorin Alkali Chemicals & Fertilisers Ltd., and Dr. V.P. Gopinathan, to support its view that no part of the expenditure would qualify for deduction under Section 57.

6. Capitalization of Project-Related Expenditure:
The tribunal noted that the assessee had capitalized all direct and indirect costs related to the project in its accounts. However, it observed discrepancies in the amounts claimed as expenditure for different years and directed the AO to verify these claims. The tribunal allowed the assessee an opportunity to justify any part of the expenditure as project-related for capitalization.

Conclusion:
The tribunal partly allowed the assessee's appeals for statistical purposes and allowed the Revenue's appeals for assessment years 1999-2000 and 2000-01 for statistical purposes. The tribunal's decision emphasized the importance of the functional test in determining the commencement of business and the proper classification and treatment of income and expenditure.

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