2020 (3) TMI 1194 - AT - Income Tax

Non commencement of business - disallowance of expenses - HELD THAT - It is not substantiated with relevant evidences that business has been set up. We have also gone through the judicial pronouncements referred by the ld. counsel and noticed that facts of these cases are distinguishable from the case of the asssessee. In the case of CIT Vs. Samsung India Electronics Ltd. 2013 (7) TMI 335 - DELHI HIGH COURT the assessee company was ready to commence trading operation as on the date of incorporation viz. 3.8.1995. In the case of Prem Conductors (P) Ltd. Vs. CIT 1976 (3) TMI 28 - GUJARAT HIGH COURT it was seen that assessee company has started accepting orders for production of goods since very date of its incorporation. In the light of the facts of the case, material on records and judicial findings, we consider it is not substantiated that assessee has commenced its business operations during the year under consideration and the expenses claimed by the assessee company appeared to be at the stage of setting up of its business, therefore, this ground of appeal is dismissed. Whether interest income earned from temporary deposit of the fund brought by way of share capital are inextricably linked to setting up of manufacturing facilities and same should be considered as capital in nature and should be reduced from the cost of the project? - HELD THAT - Once it has been considered that assessee has not commenced its business, therefore, the interest income earned by the assessee prior to the commencement of the business is required to be treated as capital receipt - See INDIAN OIL PANIPAT POWER CONSORTIUM LIMITED, NEW DELHI VERSUS INCOME TAX OFFICER 2009 (2) TMI 32 - DELHI HIGH COURT We consider that the impugned interest receipt by the assessee company is related to the prior period to commencement of business which is in nature of capital receipt and was required to be set off against pre-operative expenses. Therefore, first ground of appeal of the assessee for treating expenses to the amount as revenue expenditure is dismissed. However, the alternative ground of appeal of the assessee for treating the interest income earned on fixed deposit pertaining to prior period commencement of business is allowed by treating the impugned interest income as capital receipt which is adjusted against pre-operative expenses of the assessee. Therefore, the alternative ground of appeal of the assessee is allowed.

Summary

Issues Involved:
1. Disallowance of Revenue Expenditure
2. Treatment of Interest Income as Capital Receipt

Detailed Analysis:

1. Disallowance of Revenue Expenditure:
The core issue pertains to the disallowance of revenue expenses claimed by the assessee. The assessee filed returns for A.Y. 2013-14 and 2014-15, declaring a total income of Rs. -68,27,726/- and showing book profit under section 115JB of the Income Tax Act, 1961, as Nil. The Assessing Officer (AO) noticed that the assessee had not entered into any business transactions or earned any operational revenue during the assessment years but had claimed various expenses such as salary, entertainment, and foreign travel. The AO disallowed these expenses, treating them as capital expenses since the assessee had not commenced business operations. The AO further noted that the statutory auditor's report indicated no turnover or inventory, reinforcing the conclusion that the business had not commenced.

The assessee argued that the expenses were incurred for the day-to-day running of the company and were necessary for setting up the business. The assessee cited several judicial pronouncements to support the claim that expenses incurred post-setup but pre-commencement should be allowed as revenue expenditure. However, the AO and subsequently the CIT(A) dismissed these claims, maintaining that the business had not commenced and thus the expenses could not be allowed as revenue expenditure.

Upon appeal, the Tribunal examined whether the business had been set up and found that the assessee had undertaken activities such as obtaining regulatory approvals, setting up an administrative office, recruiting employees, and incurring foreign travel expenses for vendor selection. Despite these activities, the Tribunal concluded that the business had not commenced, and the expenses claimed were at the stage of setting up the business. Therefore, the disallowance of Rs. 2,33,36,067/- was upheld.

2. Treatment of Interest Income as Capital Receipt:
The alternative issue raised by the assessee was whether the interest income earned from fixed deposits prior to the commencement of business should be treated as a capital receipt and not chargeable to tax. The assessee argued that such interest income was inextricably linked to the setting up of the business and should be reduced from the cost of the project. The assessee relied on various judicial pronouncements, including Indian Oil Panipat Power Consortium Ltd. v. ITO and Adani Power Ltd. v. ACIT, which held that interest earned during the pre-commencement period should be treated as a capital receipt.

The Tribunal agreed with the assessee on this point, noting that since the business had not commenced, the interest income earned from temporary deposits should be treated as a capital receipt. This interest income was to be set off against pre-operative expenses, following the principles established in judicial precedents. The Tribunal referred to the Delhi High Court's decision in Indian Oil Panipat Power Consortium Ltd., which held that income earned prior to the commencement of business is a capital receipt and should be set off against pre-operative expenses.

In conclusion, the Tribunal upheld the disallowance of revenue expenditure but allowed the treatment of interest income as a capital receipt to be adjusted against pre-operative expenses. Thus, the appeals were partly allowed.