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2019 (12) TMI 77 - AT - Income TaxIncome from interest as other income - proof of setting up of business - income earned by the assessee on the investment - Deduction u/s 35D - finance activity of making investment in similar business does not fit in the business of the assessee of manufacture and trade of fertilisers and urea - HELD THAT - We are at a loss to understand where from this information is gathered by the learned AO. The Revenue cannot prevent the assessee from pursuing the businesses of the choices as incorporated in the Memorandum and Articles of Association. There cannot be any stipulation that the assessee cannot do business both in manufacture and the trade of a fertilisers and urea and at the same time doing the business of finance activity. Be that as it may, as rightly argued by the assessee before the Ld. CIT(A) as well as before us that a company engaged in financial activity can invest its fund in any type of company to earn interest whereas it is not so in the case of the assessee. In case of assessee it is clearly stipulated that the investment is strictly confined in other companies having similar object including that of manufacturers, fabricators so on and so forth. It is not the case of the Revenue that the business of Duncan industries Ltd does not fit in the description given in the Main objects to be pursued by the company on its incorporation in the Memorandum of Association of the assessee. Further, it was submitted by the assessee before the AO that the investment took place in anticipation of its entrance by the major to a new group company by the name of Kanpur Fertilisers and Cement Limited (KFCL) and the assessee was the proposed strategic investor in the said rehabilitation scheme. In the absence of any rebuttal on this aspect, we do not entertain any doubt that the Duncan industries Ltd was pursuing similar objects as those of the assessee and fits into the description given by the assessee in the Memorandum of Association vide Main objects to be pursued by the company on its incorporation and by making such investment the assessee could be said to have commenced the business. In Carefour WC C India Private Limited vs. Deputy Commissioner of Income-tax TAX 2014 (9) TMI 793 - DELHI HIGH COURT held that merely because actual sales and purchase of products did not happen during the subject financial year, which is not a necessary condition/activity in order to hold a business was set up, it cannot be said that business was not setup Assessment order clearly reads that the investments emanated from the order of BIFR, which was passed for the revival of Duncan Industries Ltd. It is not as though the Duncan Industries Ltd. is a new concern which has yet to commence business. It is covered by the order of BIFR for the revival of its business. BIFR approved the scheme in which the assessee company had entered into an arrangement on renovation and up-gradations of existing assets of a fertiliser unit of Duncan Industries Ltd. to Kanpur Fertiliser and Cements Ltd. for the same funds in the form of investment in shares capital were given to Jaypee Uttar Bharat Ltd. In the circumstances, it cannot be said that the Duncan Industries Ltd had not started the work till the end of the year. It was a sick industry for the revival of which the BIFR approved the scheme proposed by the assessee. We find it difficult to agree with the authorities below that the assessee did not set up business in the relevant assessment year and, therefore, the income earned by the assessee on the investment has to be treated as income from other sources. Direct the Assessing Officer to treat the income from interest as other income, and complete the assessment. In view of this finding, the alternative claim of the assessee u/s 35D becomes academic.
Issues:
1. Disallowance of expenses claimed by the assessee due to the business not being commenced during the year. 2. Treatment of interest derived from investments before the commencement of business as income from other sources. 3. Disallowance of expenses on the ground that expenditure was in respect of preference shares and capital in nature. 4. Consideration of alternative plea under section 35D of the Income Tax Act. 5. Dispute regarding the nature of investment activity by the assessee. 6. Whether the assessee had actually commenced its business during the relevant assessment year. Analysis: 1. The assessee filed an appeal against the order passed by the Commissioner of Income-tax (Appeals) for the Assessment Year 2012-13, where the declared income was treated as other income due to the business not being commenced during the year. The Assessing Officer disallowed expenses claimed by the assessee on this ground. 2. The appeal was dismissed by the CIT(A) citing a Supreme Court decision that interest derived from investments before the commencement of business should be treated as income from other sources. The expenses were also disallowed as they were considered capital in nature. 3. The assessee argued that strategic investments were made in furtherance of its main business objective, and reliance was placed on a decision supporting allowance of expenses even if the business had not commenced. The assessee also raised an alternative plea under section 35D of the Income Tax Act. 4. The Department contended that the investment activity by the assessee was not aligned with its primary business of manufacturing and trading fertilizers and urea. They argued that the company in which investments were made had not commenced business, thus the assessee had not actually commenced its business. 5. The Tribunal reviewed the Memorandum and Articles of Association of the assessee and noted that investments were made in a company for the revival of a sick fertiliser manufacturing unit. The Tribunal found no basis for the Revenue's claim that the investment activity did not fit the business of the assessee. 6. The Tribunal concluded that the assessee had indeed commenced its business during the relevant assessment year by making investments in line with its business objectives. It directed the Assessing Officer to treat the income from interest as other income and allowed the appeal of the assessee. This detailed analysis of the judgment provides a comprehensive understanding of the issues involved and the Tribunal's decision on each issue.
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