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TMI Blog2013 (11) TMI 933X X X X Extracts X X X X X X X X Extracts X X X X ..... ness activity - Development of airport infrastructure activity - Held that:- Feasibility reports both financial and economic viability is not yet obtained, preparation of development plans is not yet complete, mandatory Environmental Impact Study under Environment Protection Act, 1986 by SICOM is not yet complete and 100MW captive power plant is also at preliminary stages. Thus, the assessee has not completed the stages, which are considered elementary to start the business - Aassessee is yet to obtain the environmental clearance under the Environment Protection Act and favourable feasibility reports – On financial and technical fronts, assessee has yet to obtain the approved plans of development, therefore, the business of the development of airport infrastructure cannot be declared “set up” in this year under consideration. Acquiring of land with a stroke of pen of the Government of Maharashtra cannot be attributed to the business activity of the assessee. What has happened in this year in substance is mere appointment of SICOM, YASHADA, M/s Scott Wilson Kirkpatric India Pvt Ltd, other consultants for various other purposes, which constitutes stages prior to the “set up” of the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders is a part of business activity of appellant ie infrastructure development activities. 5. That AO and CIT (A) has erred in law and on facts in treating interest income under the head income from other sources and failed to take into account that income earned is inextricably linked to business of the appellant. 6. That Ld CIT (A) has erred in law and on facts in treating interest income which is earned from bank FDR s and SICOM Ltd under the head income from other sources and has failed to appreciate that it is not the case that the surplus funds were parked to ear interest. 7. That AO and CIT (A) has failed to appreciate that interest income from funds primarily brought for business purpose is to be treated as business income and has wrongly treated it as income from other sources. 8. That the addition / disallowance made are illegal, unjust and bad in law and are based on mere surmises and conjunctures and the same cannot be justified by any material on record. 9. That the evidence filed and materials available on record have not been properly construed and judiciously interpreted, hence the addition / disallowance made is uncalled for. 10. Tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded information regarding expenditure debited to the P L Account. 5. On the issue of change of opinion - based reopening, AO is silent in his order on the objection of the assesse, except the bland statement that the assessee s contention that the reopening of proceedings is bad in law is not acceptable, as there is reason to believe that the income has escaped assessment and the proceedings are thus as per the provisions of the IT Act . On this limited issue, before the CIT (A) also, assessee objected to the reopening without raising a specific ground in this regard. CIT (A), though rejected the objection of the assessee, the reasons given by him for rejecting are given in para 6 of the impugned order. In effect, CIT (A) has not attended to the assessee s opprobrium against the notice u/s 148 based on the change of opinion. Merely, he mentioned that the prima facie income has escaped and, therefore, the issue of notice u/s 148 is upheld. The sufficiency of the ground cannot be challenged. In these factual circumstances of the issue of reopening, assessee filed appeal with the ground no.1 before us. 6. During the proceedings before us, Sri Salil Kapoor, Ld Counsel for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferring to the summery assessment cases also, Ld Counsel relied on the recent judgment of the Hon ble Delhi High in the case of CIT vs. Orient Craft Ltd (ITA No.555-2012) for the proposition that summary assessment cases also there is a requirement of a fresh material with AO to reopen the assessment. Relying on the Delhi High Court judgment in the case of CIT vs. Kelvinator of India Ltd [2012] 256 ITR 1 (Del) = (2003-TII-19-HC-DEL-INTL-LB), Ld Counsel mentioned that mere change of opinion cannot form the basis for reopening of a complete assessment. Further, he also mentioned that .one must treat the concept of change of opinion as an in-built test to check abuse of power by the Assessing Officer . 8. On the other hand, Ld DR relied dutifully on the orders of the Revenue Authorities. 9. We have heard both the parties on this preliminary issue relating to the validity of notice u/s 148 of the Act and perused the paper book filed before us and the details relied upon by both the parties. 10. Firstly, we need to examine whether there are enquiries conducted by the AO into the issue of nature of business activities of the assessee for the year under consideration. For thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding on the validity of the reassessment, adjudication of this issue is merely academic. However, we proceed to adjudicate this issue considering the fact the AY 2005-06 constitutes the first year of such setup or commencement of the business and the decision on this issue here has effect on the issues raised in the appeal for the subsequent assessment years. 11.1 During the reassessment proceedings, an opportunity was given to the assessee to explain if the business of the assessee has commenced. In reply, it was stated that the assessee was engaged in the development of Nagpur Air Port and SEZ in Nagpur. Further, assessee mentioned that it is Public Sector Undertaking of Maharashtra Government incorporated to carry out infrastructure development activities like setting up of a SEZ and developing the international Air Port at Nagpur called MIHAN Project. During the year, assessee commenced MIHAN Project at Nagpur and the pre-operative expenses related to the project are carried out to the balance sheet and debited to the P L Account. Further, assessee submitted that how part of the funds raised from the shareholders was utilized and how the raised funds, which are unutilized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... establishing its business activity and the calling of tenders is also only a part of this process and not the actual business activity. The receipt of tender processing fee is not in the nature of actual business of the assessee. Hence, the expenses debited to the P L Account re also in the nature of preoperative expenses as they are related to the preoperative activities of the assessee. The assessee s contention that it has conducted its normal business activity is not acceptable, as the assessee has not begun its main business. The expenses debited are not revenue in nature and are hereby capitalized. The fact that the issuing of tenders is in the nature of preoperative process, the expenses are being capitalized net of tender fee received. 1.6. In respect of the interest income, it is submitted that the same is income from other sources and not related to the business of the assessee. The assessee s contention that the interest income is in the nature of business income is not acceptable. In the case of Shree Krishna Polyster Ltd vs. DCIT (2005) 274 ITR 21 (Bom), it has been held by the Mumbai High Court that the interest income in respect of surplus money not required for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of section 57(iii) of the Act, CIT (A) is of the opinion that AO has rightly taxed the said receipts under the head income from other sources . Regarding nexus, considering the assessee s failure to demonstrate that the burden of proof, CIT (A) rejected the assessee s claim for netting of expenditure incurred in this regard and held that no deduction is allowable u/s 57 (iii) of the Act. Aggrieved with the above decision of the CIT (A), assessee raised ground nos. 3 to 10 before the Tribunal. 15. During the proceedings before us, Ld Counsel for the assessee mentioned that the grounds raised by the assessee give raise to the following issues. (1) Whether the business of the assessee has commenced or not?. (2) Whether the expenditure debited in the P and L Account should also be treated as preoperative expenses on par with that of the MIHAN Project expenses already capitalized?. (3) If the interest income earned from the banks shall constitute business income or not?. (4) If the interest income is treated as income from other sources should be netted against the expenditure as per the provisions of section 57(iii) of the Act or not?. 16. We shall now take-up arguments of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of CIT vs. Whirlpool of India Ltd. [2009] 318 ITR 347 (Del) and the held portion of the said judgment read as under: Held, dismissing the appeal, that the question as to when the business was set up depends on the facts of each case and the nature of the business and no hard and fast rule could be laid down as to when the business was set up. The order of the Tribunal exhaustively detailed the facts and reasons as to why the business was set up not on February 1, 1996, as contended by the Assessing Officer but on November 1, 1995. Accordingly, no substantial question of law arose. 17.1. Further, in support of the assessee s submissions that the business commenced in the AY AY 2005-06, the assessee traced the following activities executed by the assessee in this year and the same are inserted as under: During the year assessee has performed following activities as the assessee is in the business of development of infrastructure projects. (1) It has acquired 1479 Ha of land for project as on date as per their objective. (2) It has appointed consultant namely M/s. SICOM for due diligence study of Nagpur airport. Due diligence was obtained to prepare th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , water works, water supply gas or any other structural or architectural work and Special Economic Zones. The Govt. Of Maharashtra vide Resolution No. TPS 2401/1494/Capital Receipt-238/02/UD-9 dated 4.2.2003 appointed the appellant as the special planning authority for development of Multi Modal International Passenger and Cargo Hub International Airport at Nagpur also known as MIHAN Project. In this resolution, Govt. Of Maharashtra has also notified the area in which the development work is to be undertaken and also provides the scope of work to be done by the appellant. During the FY 2004-2005 MADC commenced its business operation and acquired 1479 Ha of land for MIHAN. It appointed consultants namely M/s. SICOM for due diligence study of Nagpur airport, M/s. Yashada for preparation of development plan and development control regulation M/s. Scott Wilson Kirkopatrick India Pvt. Ltd. for consultancy services of Environmental Impact Study for Captive Power Plant of 100MW. The assessee has also appointed consultants for Captive Power Plant, road network, rail and road terminals etc. and has also bring the IT forms like Satyam Computer Services Ltd. 20. From the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not countered the assessee s arguments on the activities undertaken by the assessee with regard to the so called main business of the assessee. The CIT(A) has not gone in to the aspect of set up of the business in this year. 22. In this regard, we have examined the settled legal position on the issue of set up and commencement qua the business of development of infrastructure. In our opinion, the Gujarath High Court has laid a good foundation to understand the concepts of set up and commencement of business while dealing with the case of Saurashtra Cement and Chemical Industries Ltd, supra. The held portion of the said judgment is relevant and therefore, the same is reproduced as under: Held, that the activities which constituted the business of the assessee were divisible into three categories, the first category consisted of the activity of extraction of limestone by quarrying the leased area of land. This activity was necessary for the purpose of acquiring the raw material to be utilized in the manufacture of cement. The second activity comprised the activity of manufacture of cement by use of the plant and machinery set up for that purpose; and the third categ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nagpur. In the specialized business of the assessee ie airport infrastructure development as well as the SEZ development, important stages involves the obtaining of various clearances, approvals of the concerned departments of the Government, procurement of land should for part of the set up. Then after, the assessee must have infrastructure to develop the land to be fit enough to lease out or construct requisite infrastructure on the said land to commence business. In this line of business, we are of the opinion, the first stage must include obtaining of the necessary license/permissions/clearance to do the business after obtaining the favourable feasible reports. The second stage must include obtaining of the other clearances and permissions required under the provisions of various laws from ministries. Further, the assessee is required to undertake feasibility and other survey reports required for setting up the business. These stages constitute elementary stages which must be complete in all respects before the business of the assessee is designated as set up . It is not required that the assessee must raise first invoice for constituting set up or commencement of business a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conclusions of the CIT(A) that the main business is not commenced in the year under consideration does nto call for any interference. Accordingly, the grounds 3 and 4 relating to set up and commencement are dismissed. 25. Grounds 5 to 9 relates to the third issue ie whether the interest income earned from the banks shall constitute business income or not. Further, the ground 10 is raised without prejudice and the assessee seeks set off against the expenditure allowable u/s 56(iii) of the Act. Regarding the taxability of the interest income, the case of the Assessing Officer is that the interest income in respect of surplus money not required for business immediately and deposited in banks for short period would be assessable as income from other sources . AO relied on the binding judgment in the case of Shree Krishna Polyster Ltd 274 ITR 21, Bom. Of course, AO is also of the view that the business since not commenced, the interest income has to be taxed u/s 56 of the Act. On the contrary, the case of the assessee is that the FDRs along with the bank were loans and advances raised for the purpose of development of infrastructure and the FDs were made due to delay in utilizatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds as and when there arise business needs of the assessee. It is stated that the fund are meant for purchase of the lands at the later days. Thus, the earning of interest income cannot be dominant or business intention of the assessee. In this regard we have examined the judgments relied upon by Ld counsel. The Judgment in the case of Indian Oil Panipat Power Consortium Ltd, supra deals with the interest receipts earned prior to the commencement of business and it is not known if they are earned prior to set up too. Therefore, the same is distinguishable on facts. The Apex court judgment in the case of Karnal cooperative sugar Mills Ltd, supra relates to the case of share capital money , which is meant for purchase of Plant and Machinery in connection with set up of the business. Per contra, we have also perused the binding judgment of the Hon ble High Court of Bombay in the case of M/s Shree Krishna Polyster Ltd, supra, which is relied upon by the revenue and the conclusion of the same read as follows,- Income earned by the assessee by investing surplus money received in public issue, in bank deposits for a short period is assessable under the head Income from other so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tails of parties to whom land was allotted during the year are as under : (Pg 4 of CIT(A) order): (i) Dr. D.Y. Patil Educational Enterprises Pvt. Ltd. (ii) Shapoorji Palonji Co. Ltd. (iii) Reatox Builders Developers Pvt. Ltd. (iv) Satyam Computer Services Ltd. (3) The company has thereafter taken up developmental works related to the infrastructure such as construction of roads, drainages, compound wall. (4) Assessee appointed consultants for the works such as planning, Designing, Supervising, Implementation of Water supply, Development of Road Network and related elements. (5) Assessee appointed contractors for construction of roads, drainages, compound walls etc. (6) Processing of tenders of applicant as regards the technical and financial eligibility of the applicant is also a part of due diligence activity. 35. From the above, it is evident that the assessee has not obtained mandatory clearances from the Authorities or Ministries concerned both for MIHAN and SEZ. However, the activities at sl 1, 2 and 3 makes some difference. We have considered the arguments of Ld Counsel that unless the business is set up, the activity of allot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the income from other sources without appreciating the facts that the expenditure have nothing to do with the income from other sources . CIT (A) is of the opinion that the business has not set up or commenced and it was in the process of setting up the business. Assessee filed a Cross Objection questioning the CIT (A) s finding that the assessee is in the process of setting up and the business has not commenced vide ground nos. 1, 2 and 3 of the Cross Objection raised by the assessee. In the context of the CO, we have held that the assessee must be declared to have set up its business with certain reservations relating to the procedures and permissions. In this regard, we remanded to the AO s file. Therefore, the final outcome on the issue of the set up and commencement of the business is the relevant matter for adjudication of the ground 1 of the revenue s appeal. In all fairness, we set aside this issue also to the files of the AO to reexamine the issue in the light of the outcome on the cross objections 1,2 and 3 of the CO. Accordingly, the ground 1 of the revenue is set aside. 40. Ground 2 relates to direction to the AO to allow netting of expenditure amounting to ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t s business had not yet commenced. 3. The appellant says and submits that the Ld CIT (A) failed to appreciate that the appellant s business had already started when activities like acquisition of land, appointment of consultants / contractors, allotment of land to prospective clients were undertaken, which were in the nature of business activities in the context of the appellant business. The appellant says and submits that the CIT (A) erred in not appreciating that the appellant s business is of building infrastructure and the same cannot be equated with ordinary trading activities. 4. Without prejudice to the above, the appellant says and submits that there is a difference between commencement and setting up and the appellant s business was set up much prior to the year relevant to the assessment year under consideration. The appellant is entitled to the deduction of all business expenses on setting up of the business. The Ld CIT (A) was not justified in overlooking this distinction between commencement and setting up. 45. Ground nos.1, 3 and 4 raised in this appeal relate to the setting up and commencement of the business and treating the receipts as income from ..... X X X X Extracts X X X X X X X X Extracts X X X X
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