2018 (8) TMI 914 - AT - Income Tax

Disallowing the expenses u/s 37(1) - After obtaining the Certificate of Commencement, the assessee company had taken several steps in connection with the setting up of a five star hotel - taxability of interest income derived from Fixed Deposits (FDs) and mutual funds under the head of other sources Held that - we find more merit in the assessee s alternative plea for netting off the interest income against pre-operative expenses. On this alternative plea, we hold that the AO should have netted off the interest income against pre-operative expenses incurred by the assessee in connection with its setting up of the hotel project and the AO is directed to re-compute the assessee s total income accordingly. Since we have allowed the assessee s appeal on the alternate plea raised in the course of appeal, we do not express our opinion on the question as to whether the assessee s business was set-up or not and whether expenses incurred during the relevant year were permissible to be deducted as revenue expenditure. Decided in favor of assessee.

Summary

Issues Involved:
1. Disallowance of expenses of ?6,31,12,350/- charged to the Profit & Loss A/c.
2. Assessment of income of ?7,02,72,979/- derived from Fixed Deposits (FDs) and mutual funds under the head of ‘other sources’.

Issue-wise Analysis:

1. Disallowance of Expenses:
The appellant company, incorporated for establishing a five-star hotel, claimed a deduction of ?6,31,12,350/- in its Profit & Loss A/c for the financial year 2011-12. The hotel was under construction and had not commenced operations. The Assessing Officer (AO) disallowed the claimed expenses, arguing that since the business had not started, the expenses did not qualify as business income deductions. The AO also held that the expenses did not meet the criteria under section 57(iii) for deductions against interest income. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance. The appellant contended that the business had commenced upon taking several steps towards setting up the hotel, such as purchasing land, obtaining necessary approvals, and entering into various agreements related to the project. The appellant argued that the commencement of business should be considered from the initiation of these activities, not just from the start of commercial operations.

2. Assessment of Income from Fixed Deposits and Mutual Funds:
The AO assessed the income of ?7,02,72,979/- earned from FDs and mutual funds as income from ‘other sources’. The appellant argued that this income should not be treated in isolation but should be netted off against the expenses incurred during the pre-commencement phase. The appellant cited precedents to support the claim that income earned from temporary investments of funds raised for the project should be set off against the project expenses. The appellant also highlighted that in the assessment year 2009-10, the department had accepted the commencement of business and allowed the business loss, arguing for judicial consistency.

Tribunal’s Decision:
The Tribunal found merit in the appellant’s alternate plea for netting off the interest income against pre-operative expenses. It held that the funds raised were intended for the hotel project, and the interest earned from temporary investments of these funds should be considered inextricably linked to the project. The Tribunal cited the Supreme Court’s judgment in CIT Vs. Mahalakshmi Textile Mills Ltd., which allows the Tribunal to consider contentions not raised before lower authorities if they relate to the assessment of the assessee. The Tribunal also referred to the Delhi High Court’s judgment in Indian Oil Panipat Power Consortium Ltd. Vs. ITO, which supported the netting off of interest income against pre-operative expenses. Consequently, the Tribunal directed the AO to re-compute the total income by netting off the interest income against the pre-operative expenses.

Conclusion:
The appeal was allowed on the alternate plea, directing the AO to net off the interest income against pre-operative expenses. The Tribunal did not express an opinion on whether the business was set up or whether the expenses were deductible as revenue expenditure, leaving these questions open.