2012 (7) TMI 408 - AT - Income Tax

Commencement of business activity - Denial of assessee s claim of interest expenses u/s 36(1)(iii) as business of the assessee was yet in the process of being set up - CIT(A)allowed the claim - Held that - The main activity of the assessee company is to finance the project through special purpose vehicles to other local companies for buying land more than 100 acres or bringing other licenses from the Government Departments and the assessee had entered into a joint construction and development agreement with two more companies which was in the process of acquiring land and government approvals, the sequence of events suggest that assessee has taken active steps in accordance with its Memorandum and Article of Association warranting that the business has been set up - in favour of assessee. Treatment of interest income received from short term fixed deposits - income from other sources or income from business - Held that - The assessee has not demonstrated as to how it has undertaken the business of lending money in an organized manner which can suggest interest income from a business activity. It has simply surplus funds which were deposited in the fixed deposit during the period when such funds were not required - against assessee.

Summary

Issues Involved:
1. Whether the assessee's business was set up and the interest expenses claimed under Section 36(1)(iii) of the Income Tax Act should be allowed.
2. Whether the interest income from short-term fixed deposits should be treated as business income or income from other sources.

Issue-Wise Detailed Analysis:

1. Business Set-Up and Interest Expenses Claim under Section 36(1)(iii):
The primary issue was whether the assessee's business was set up, allowing the claim of Rs. 1,26,64,315 as interest expenses under Section 36(1)(iii) of the Income Tax Act. The assessee company, incorporated on 4.8.2005, entered into a joint construction and development agreement to develop an industrial/I.T. Park. The assessee arranged a short-term loan of Rs. 25 crores and claimed interest expenses on this loan. The Assessing Officer disallowed the claim, stating that the business was not yet set up, referencing the Supreme Court's decision in Ramaraju Surgical Cotton Mills Ltd. and other judgments.

The CIT(Appeals) analyzed Section 36(1)(iii) and concluded that the business was duly set up and the expenses were incurred in connection with its business. The assessee had taken active steps to fulfill its business objectives, including entering into a joint construction and development agreement and arranging necessary funds. The tribunal agreed with the CIT(Appeals), stating that the business was set up the moment the joint venture agreement was entered, and funds were arranged. Consequently, the interest expenses incurred on the borrowed funds for the business were to be allowed.

2. Deletion of Disallowance of Rs. 2,32,582:
The second issue was whether the disallowance of Rs. 2,32,582 towards audit fees, traveling expenses, and statutory filing fees should be deleted. The Assessing Officer disallowed these expenses on the ground that the business was not commenced. However, since it was held that the business was set up, all necessary expenses incurred for the business were to be allowed. The CIT(Appeals) had considered this aspect and deleted the disallowance, which the tribunal upheld.

3. Treatment of Interest Income from Short-Term Fixed Deposits:
The third issue was whether the interest income of Rs. 97,22,805 from short-term fixed deposits should be treated as business income or income from other sources. The assessee argued that the interest income should be treated as business income since the funds were derived from business activities and used for business purposes. However, the Assessing Officer and CIT(Appeals) held that the interest income should be assessed as income from other sources, referencing the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd.

The tribunal agreed with the Assessing Officer and CIT(Appeals), noting that the assessee had not demonstrated that it undertook the business of lending money in an organized manner. The interest income from surplus funds deposited in fixed deposits fell within the propositions laid down by the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd., and thus, it was rightly assessed as income from other sources.

Conclusion:
The tribunal dismissed both the appeals and the cross-objection, upholding the CIT(Appeals) findings on all issues. The business was considered set up, allowing the interest expenses under Section 36(1)(iii), and the disallowance of Rs. 2,32,582 was deleted. However, the interest income from short-term fixed deposits was rightly assessed as income from other sources. The decision was pronounced in the open court on 22.06.2012.