2019 (8) TMI 842 - AT - Income Tax

Disallowances of expenditure on non commencement of business - expenditure debited into the profit and loss account under various heads, including salary, administrative and other expenses, operating expenses and depreciation - said expenditure are in the nature of capital expenditure and also in the nature of pre-operative expenses, which cannot be allowed as deduction, while computing income under the head income from business or profession - HELD THAT - When the assessee itself had admitted the fact that its project are under construction up to AY 2012-13, then it cannot be said that its business has been setup merely, for the reason that it has shown some revenue from road transport/sea transport, that too from its group company. We further noted that the revenue generated from other stream of business is not regular, which is evident from the fact that for some years, the assesee shown revenue from road transport and for some years, it has shown revenue from sea transport, but both revenues are claims to have been received from Pipavav shipyard Ltd., a group company of the assessee. AO, as well as the Ld. CIT(A) after considering relevant facts has rightly held that the business of the assessee has not been setup and ready for commencement of business, consequently expenditure debited into profit and loss account cannot be allowed as deduction u/s 28. Case laws relied upon by the assessee, we find that none of the case laws are comes to rescue the assessee, because all judgments cited by the assessee have clearly held that the term setup of business and commencement of business largely depend upon facts of each case and nature of business undertaken by the assessee. Further, in all the cases, it has been categorically held that in case of manufacturing company that business said to have been setup, when the plant is ready for use. In cases, where the company involved in services sector, the business said to have been setup only, when the primary conditions for commencement of business is put in place. - Decided against assessee. Disallowances of expenditure incurred, in relation to exempt income u/s 14A r.w.s.Rule 8D(2)(ii) (iii) - HELD THAT - In this case, the fact with regard to details of exempt income was not coming forward from the orders of the lower authorities. At the same time, the Ld.AR for the assesee pleaded for restricting disallowances contemplated u/s 14A r.w.Rule 8D(2) of the I.T.Rules 1962, to the extent of exempt income, therefore we are of the considered view that the issue needs to be set aside to the file of the AO with a direction to recompute expenses incurred in relation to exempt income u/s 14A r.w.Rule 8D of the I.T.Rules, 1962,in light of our discussion hereinabove, but restrict such disallowances to the extent of exempt income earned by the assessee for the relevant assessment years. Further, in case, if there is no exempt income for the relevant assessment year, then there shall be no disallowances of expenditure in relation to exempt income u/s 14A MAT computation for addition u/s 14A r.w.Rule 8D - Whether computation under clause (f) of the explanation 1 to section 115JB (2) is to be made without resorting to computation as contemplated u/s 14A r.w.Rule 8D - HELD THAT - As decided in ACIT vs Vireet investments Pvt.Ltd. 2017 (6) TMI 1124 - ITAT DELHI had considered an identical issue and held that computation under clause(f) of explanation 1 to section 115JB (2) is to be made without resorting to computation as contemplated u/s 14A r.w.Rule 8D. Therefore, AO was erred in recomputed book profit u/s 115JB by adding disallowances computed u/s 14A r.w.Rule 8D of I.T.Rules 1962. As noted that since, the issue of disallowance of expenditure u/s 14A r.w.Rule 8D has been set aside to the file of the AO to determine disallowances in light of our discussions in the proceeding paragraphs, we set aside this issue also to the file of the AO and direct him to first determine disallowances of expenditure in relation to exempt income in light of our discussions in proceedings paragraphs and then, find out amount of disallowances and thereafter, recompute book profit u/s 115JB

Summary

Issues Involved:
1. Disallowance of expenditure as capital expenditure.
2. Disallowance under Section 14A read with Rule 8D.
3. Computation of book profit under Section 115JB.

Detailed Analysis:

1. Disallowance of Expenditure as Capital Expenditure:
The primary issue was whether the expenditure incurred by the assessee should be treated as capital expenditure. The assessee argued that its business had been set up, even though it had not commenced operations. The assessee contended that expenses incurred should be allowed as deductions. The Tribunal examined the facts and found that the projects were still under construction and the business had not been set up. The Tribunal upheld the findings of the AO and CIT(A) that the expenses should be treated as pre-operative expenses pending capitalization. The Tribunal cited various judicial precedents, including the Hon'ble Bombay High Court in Western India Vegetable Products Ltd. vs CIT, to support its conclusion.

2. Disallowance under Section 14A read with Rule 8D:
The second issue involved the disallowance of expenditure incurred in relation to exempt income under Section 14A read with Rule 8D. The AO made disallowances, which were partly upheld by the CIT(A). The Tribunal noted that the Hon'ble Supreme Court in Maxopp Investments Ltd vs CIT and other High Courts had clarified that disallowance under Section 14A is applicable even if investments are made for strategic purposes. The Tribunal also referred to the Hon'ble Bombay High Court's rulings in CIT vs HDFC Bank Ltd. and CIT vs Reliance Utilities and Power Ltd., which held that if own funds exceed investments, no disallowance of interest expenses should be made. The Tribunal set aside the issue to the AO to recompute disallowances, restricting them to the extent of exempt income earned, following the decisions in Cheminvest Ltd. vs CIT and other relevant cases.

3. Computation of Book Profit under Section 115JB:
The third issue was the computation of book profit under Section 115JB. The assessee raised additional grounds, arguing that computation under clause (f) of Explanation 1 to Section 115JB(2) should be made without resorting to Section 14A read with Rule 8D. The Tribunal referred to the ITAT Special Bench decision in ACIT vs Vireet Investments Pvt. Ltd., which supported the assessee's contention. The Tribunal directed the AO to recompute book profit under Section 115JB after determining disallowances under Section 14A read with Rule 8D, in light of the Special Bench decision.

Conclusion:
The appeals were partly allowed for statistical purposes, and the matters were set aside to the AO for recomputation in light of the Tribunal's directions and relevant judicial precedents. The order was pronounced in the open court on 09/08/2019.