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2021 (5) TMI 744 - AT - Income TaxAllowability of expenditure - commencement of business or not ? - HELD THAT - As decided in own case 2014 (5) TMI 471 - ITAT AHMEDABAD hon‟ble ITAT has held that the assessee has started the business in the A.Y. 2003-04, hence, no doubt when it has already been held that the assessee has started the business of A.Y.2003-04 then in the present assessment year business is liable to be considered as commenced accordingly. This issue is decided in favour of the assessee against the revenue. Correct head of income - Interest income treated as income from the other sources or business income - HELD THAT - We noticed that the assessee was under obligation to place on record the purpose of the deposit, utilization of funds and most important fact is also to be brought on record about the nexus of interest earned and interest paid. Accordingly, the AO was directed to examine the material afresh so that the nexus can be established in respect of interest earned and interest paid. Accordingly, we set aside the finding of the CIT(A) on this issue and restore the issue before the AO to decide the controversy afresh in accordance above mentioned guidelines. Disallowance of deduction of expenses debited to the profit loss account which were incurred wholly and exclusively for the business carried on by the appellant during the previous year - HELD THAT - Since the business has been commenced in the year 2003-04 then no doubt the deduction of expenses debited to the profit loss account which were incurred wholly and exclusively for the business carried on by the appellant is liable to be allowed in accordance with law. In this regard no doubt the AO is under obligation to verify the facts and to allow the claim of the assessee, hence, this issue is restore to the AO to allow the claim in accordance with law. Disallowance u/s 14A r/w rule 8D - HELD THAT - The factual position which emerges is, in the year under consideration the assessee has not earned any exempt income. That being the case, as per settled principle of law, no disallowance under section 14A r/w rule 8D can be made. See decision of t PCIT v/s Rivian International Pvt. Ltd 2017 (12) TMI 811 - BOMBAY HIGH COURT - In view of the aforesaid, we delete the disallowance made by the Assessing Officer. Allowance of Interest expenditure claim u/s 57(iii) - income earned from ICDs was held by the Departmental Authorities as income from other source as against business income claimed by the assessee - alternative claim made by the assessee for deduction of interest expenditure under section 57(iii) of the Act in respect of such income was rejected on the ground that such interest expenditure has no nexus with the interest earned on ICDs - HELD THAT - As held that interest earned on ICDs are to be treated as income from business. Consequently, the interest expenditure claimed by the assessee has to be allowed. Therefore, the alternative claim of deduction under section 57(iii) of the Act becomes redundant. Suffice it to say, assessee‟s claim of deduction under section 57(iii) of the Act in respect of interest expenditure has been allowed by learned Commissioner (Appeals) and the issue has attained finality as neither the assessee nor the Revenue has contested the order of learned Commissioner (Appeals). Therefore, even otherwise also, assessee‟s claim of deduction under section 57(iii) of the Act is allowable. Disallowance of interest capitalized to work in progress (WIP) - HELD THAT - Advanced given to the sister concern for purchase of land. The AO disallowed the interest expenses and did not allow to get capitalized to WIP. Additional evidence was filed before the CIT(A) appeal who did not admit the additional evidence. The advance was given to the sister concern who is also engaged in the business of land development and used it for business purpose. The Ld. Representative of the assessee has placed reliance upon the decision in the case of S.A.Builders Ltd. vs CIT ( 2006 (12) TMI 82 - SUPREME COURT ) Taking into account all the facts and circumstances, we set aside the finding of the CIT(A) and restore the issue before the AO to examine the matter of controversy denova.
Issues Involved:
1. Whether the business of the assessee had commenced during the previous year under consideration. 2. Whether the interest income should be assessed under the head 'income from other sources' or 'business income'. 3. Whether the income from mutual funds should be assessed under the head 'Short Term Capital Gains'. 4. Deduction of expenses debited to the Profit & Loss Account incurred wholly and exclusively for the business. 5. Deduction of expenses incurred in relation to earning of Interest Income/Other income. 6. Allowance of interest expenditure claimed under section 57(iii) of the Income Tax Act, 1961. 7. Disallowance under section 14A read with rule 8D. 8. Confirmation of disallowance of ?27,32,67,125/- out of interest capitalized to work in progress (WIP). Issue-wise Detailed Analysis: Issue No. 1: Commencement of Business The assessee challenged the finding that it had not started the business during the previous year. The Tribunal referred to its previous decision for A.Y. 2003-04, where it was held that the business was set up as the company was actively engaged in development activities, had obtained necessary approvals, and commenced various operations. Consequently, it was held that the business commenced in A.Y. 2003-04, and thus, for the current year, the business is considered commenced. This issue was decided in favor of the assessee. Issue No. 2: Interest Income Classification The assessee contended that the gross interest income should be treated as business income. The Tribunal referred to its earlier decision where it was directed that the purpose of the deposit, utilization of funds, and the nexus between interest earned and interest paid should be examined afresh by the AO. The matter was remanded back to the AO to decide the controversy afresh following the guidelines provided. The finding of the CIT(A) was set aside. Issue No. 3: Income from Mutual Funds This issue was not pressed by the assessee’s representative and thus was decided in favor of the revenue against the assessee. Issue No. 4: Deduction of Business Expenses The assessee challenged the disallowance of expenses debited to the profit & loss account. Since the business was considered commenced in A.Y. 2003-04, the deduction of expenses incurred wholly and exclusively for the business should be allowed. The AO was directed to verify the facts and allow the claim in accordance with the law. This issue was restored to the AO. Issue No. 5: Deduction of Expenses Related to Interest/Other Income Similar to Issue No. 4, the assessee challenged the disallowance of expenses related to earning of interest income/other income. The AO was directed to verify the facts and allow the claim in accordance with the law. This issue was restored to the AO. Issue No. 7: Disallowance under Section 14A read with Rule 8D The Tribunal noted that the assessee did not earn any exempt income during the year under consideration. Citing the jurisdictional High Court decision in PCIT v/s Rivian International Pvt. Ltd., it was held that no disallowance under section 14A r/w rule 8D can be made in the absence of exempt income. The disallowance made by the AO and sustained by the CIT(A) was deleted. Revised Ground No. 5: Deduction of Expenses This issue was similar to Issue No. 4 and was restored to the AO to allow the claim in accordance with the law after verification of facts. Revised Ground No. 6: Allowance of Interest Expenditure under Section 57(iii) The assessee’s alternative claim for deduction under section 57(iii) of the Act was discussed. The Tribunal held that since the interest earned on ICDs is to be treated as business income, the interest expenditure claimed by the assessee has to be allowed. The alternative claim under section 57(iii) became redundant, and the claim of deduction under section 57(iii) of the Act was allowable. ITA No. 4853/M/2014: The facts and issues in this appeal were similar to those in ITA No. 4852/M/2014. The findings and directions given in ITA No. 4852/M/2014 were applied mutatis mutandis to this appeal. Additionally, the issue of disallowance of ?27,32,67,125/- out of interest capitalized to WIP was addressed. The Tribunal set aside the finding of the CIT(A) and restored the issue to the AO for de novo examination. Issue No. 9 & 10: These issues were general in nature and did not require adjudication. Conclusion: The appeals filed by the assessee were partly allowed. The order was pronounced in the open court on 01/03/2021.
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