2018 (12) TMI 1566 - AT - Income Tax

Disallowance of revenue expenses u/s 37(1) - there was no (Revenue from) business in-existence carried out during the relevant Assessment Year - Held that - Hon ble Delhi High Court also in case of Dhoomketu Builders and Development Pvt. Ltd. 2013 (4) TMI 668 - DELHI HIGH COURT held that when an assessee whose business it is to develop real estates, is in a position to perform certain acts towards the acquisition of land, that would clearly show that it is ready to commence business and, as a corollary, that it has already been set up. The actual acquisition of land is the result of such efforts put in by the assessee; once the land is acquired the assessee may be said to have actually commenced its business which is that of development of real estate. The actual acquisition of the land may be a first step in the commencement of the business but section 3 of the Act does not speak of commencement of the business, it speaks only of setting up of the business. - decided against revenue.

Summary

Issues Involved:

1. Whether the CIT(A) erred in deleting the disallowance of revenue expenses under section 37(1) of the Income Tax Act claimed by the assessee, given that there was no business revenue in the relevant assessment year.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Revenue Expenses under Section 37(1):

The Revenue filed an appeal against the CIT(A)'s order, which allowed the assessee's claim of revenue expenses amounting to ?1,00,17,751/- under section 37(1) of the Income Tax Act for the Assessment Year 2012-13. The Assessing Officer (AO) had disallowed these expenses, arguing that since the assessee's only income was interest income of ?31,10,952/- and no business revenue was earned, all expenses should be capitalized to capital work in progress (WIP). The AO contended that the business of the assessee, which involved developing Skyview Corporate Park, had not commenced, and therefore, the expenses should not be treated as revenue expenses.

The CIT(A) allowed the assessee's appeal, stating that the business had been set up, and the expenses incurred were for running the general administration of the business, not directly related to the project. The CIT(A) emphasized that the assessee had entered into a development agreement in 2009-10, which marked the setting up of the business. The expenses claimed were in line with the Accounting Standard-10 issued by the Institute of Chartered Accountants of India (ICAI).

The Tribunal examined the case and upheld the CIT(A)'s decision, emphasizing that the setting up of the business, not the commencement, is the relevant criterion for allowing expenses under section 37(1). The Tribunal referred to several judicial precedents, including the Delhi High Court's decision in CIT vs. Dhoomketu Builders and Development Pvt. Ltd., which clarified that the business is considered set up when the assessee is in a position to perform certain acts towards the acquisition of land for development. The Tribunal noted that the assessee's business activities, including entering into a joint development agreement and incurring various administrative expenses, indicated that the business had been set up.

The Tribunal also cited the Supreme Court's decision in CIT vs. Rajendra Prasad Mody, which held that the purpose of the expenditure, not the actual earning of income, is relevant for determining the allowability of expenses under section 57(iii) of the Act. The Tribunal applied this principle to section 37(1), concluding that the absence of business income in a particular year does not disqualify the expenses from being deductible.

The Tribunal dismissed the Revenue's appeal, affirming that the CIT(A) had rightly allowed the assessee's claim of revenue expenses. The Tribunal found that the AO's basis for disallowance, i.e., the absence of business income, was not a valid test for determining the allowability of expenses under section 37(1).

Conclusion:

The Tribunal upheld the CIT(A)'s decision, allowing the assessee's claim of revenue expenses under section 37(1) of the Income Tax Act, emphasizing that the setting up of the business, not the commencement of business revenue, is the relevant criterion for allowing such expenses. The Tribunal dismissed the Revenue's appeal, affirming that the expenses incurred for general administration were rightly treated as revenue expenses.