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TMI Blog2014 (1) TMI 593X X X X Extracts X X X X X X X X Extracts X X X X ..... s business expenditure or not – Held that:- Not returning the amount to the Government would have cost the assessee its business prospectus and its title over the business by way of withdrawing the joint venture, etc. - the assessee in order to protect its business interest and business propriety refunded the amount which can be termed as compensation, return ; interest or by whatever name - Its accrual, crystallisation and finalisation is relatable to this year - the amount of return is allowable to the assessee in this year as business expenditure - the assessee's business has already commenced the entire amount paid to M/s. Wilbur Smith Associates is to be allowed to the assessee being professional fee for consultancy services – Decided in favour of Assessee. - ITA Nos. 843/Del/2011 & 5428/Del/2012 - - - Dated:- 17-5-2013 - SHRI R. P. TOLANI AND SHRI T. S. KAPOOR, JJ. For the Appellant : Sh. Dilip Lakhani, CA For the Respondent : Sri A. K. Mishra, CIT DR Order R. P. Tolani (Judicial Member).- These appeals are preferred by the assessee against separate orders of the Commissioner of Income-tax (Appeals) in quantum assessment and penalty imposed under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid by the assessee to the Government, ground No. 6 is consequential in nature. 3. The brief facts are : Urban Mass Transit Co. Ltd. ("the appellant") is a public limited company registered under the provisions of the Companies Act, 1956. The appellant constitutes a joint venture ("JV"), between Government of India (Ministry of Urban Development), State Government (Government of Andhra Pradesh), State Transport Service Operator and Infrastructure Leasing and Financial Services Ltd. 3.1. The assessee-company was set up in the financial year 1993-94 for undertaking comprehensive mobility studies and offer consultancy to State Governments and local bodies with restructuring and reforming their public transport delivery systems. 3.2. The appellant received advance for equity amounting to Rs. 7 crores from the Ministry of Urban Development, Government of India. The assessee started its consultancy business in 1994 and idle funds including this amount was deployed in investment from time to time. The corresponding income has been taxed in the earlier assessment years as a business. 3.3. In the wake of the Ministry of Urban Development's insistence for giving back the above amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... self. A work order was issued to one M/s. Wilbur Smith Co. on October 20, 2006 for that purpose. An amount of Rs. 6 lakhs paid to M/s. Wilbur Smith has been claimed as expense in the profit and loss account. In the submission the assessee-company has admitted (in para 11) that it has not earned any business income during the financial year under consideration. They have also stated that the said study allowed it to get projects in subsequent years. The expenditure on this study therefore satisfied the criterion of preliminary expenses as envisioned in section 35D of the Income-tax Act. The expenditure is disallowed this year (disallowance of Rs. 4,71,624) B. In its reply to point 2 of this show-cause notice dated September 3, 2009 the assessee has admitted (in para 2(a)) that the amount of Rs.7 crores received from Ministry of Urban Development (MoUD) was received during the financial year 1994-95 as advanced share equity. However, in the subsequent paragraphs it has been claimed that the character of the amount was essentially that of a borrowing to be repaid at a particular date (para 2(j)). This is not borne out by the facts of the case. Had it been borrowing, there woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmissioner of Income-tax (Appeals), following submissions were made : (i) The company was incorporated by a joint venture of the Government of India and other constituents to provide services in relation to the Hyderabad Light Rail Project. The company was incorporated to aid ILFS as the main consultant for the Hyderabad Light Rail Project. The business of the assessee-company commenced way back in 1994 as it had incurred legal and professional charges to the tune of Rs. 35,19,272 in the financial year 1994-95 in relation to the Hyderabad Light rail Project. These legal and professional charges in relation to the Hyderabad Light Rail Project were allowed as business expenses in relation to its main business activity. (ii) Further the company also incurred advertisement and travelling expenses during the same year, which were allowed by the Assessing Officer, it is clearly established that the business of the company had commenced as its main object clause as back as financial year 1994-95. Copy of the director's report of the company for the financial year 1994-95 discussed the progress of the work status in relation to the Hyderabad Light Rail Project were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's contention did not find favour with the learned Commissioner of Income-tax (Appeals), who upheld the order of the Assessing Officer by following observations : 5.1 During the course of appellate proceedings, the learned authorised representative vide paper book submitted on October 13, 2010 has contended as under : "During the financial year 1994-95, the assessee received Rs. 7 crores from the Ministry of Urban Development as advance towards share equity. Due to cessation of the Hyderabad Rail Project, the shares were not issued and the money remained as a deposit to be returned to the Ministry of Urban Development a Department of Government of India. During the financial year 2006-07, i.e., (year under consideration, the company received a letter No. DO No. K14011/45/98-MRTS(UT) dated April 27, 2006 from the Ministry of Urban Development to return the advance of Rs. 7 crores, along with the returns thereon. Copy of the said letter is on record. The lower authorities erred in the facts and the circumstances of the case by disallowing the interest paid by the appellant to the Ministry of Urban Development on the premises that as the company was l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r reference : 'From the above facts and figures the following is concluded : (d) The assessee-company had to make payment in the year 2007 only as per request of the Ministry of Urban Development, Government of India. Therefore as agreed by the learned Assessing Officer that as the liability to pay the interest accrued and was paid in the year under consideration, it was accordingly claimed by the appellant as expenditure in the year in which liability to pay arose. The expense is thus not a prior period expenditure but is an expense pertaining to the relevant financial year only.' 5.2 I have considered the findings of the Assessing Officer and submissions of the learned authorised representative. In this regard, it is crystal clear that for the period from 1994-95 to 2006-07, i.e., for 12 years interest has been worked out at the rate of 5.3 per cent. Thus, total interest claim amounting to Rs. 4,42,11,258 has resulted into loss of Rs. 3,46,38,360. It has rightly been held by the Assessing Officer that interest income earned by the assessee should be treated as "income from other sources" instead of business income, because no business activities has been conducted by the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nction of the Government through joint venture between the Ministry of Urban Development, ILFSL and various other stakeholders. One of the important objects of the assessee is to provide professional consultancy and assistance to its clients to have efficient mode and quick implementation of urban mass transportation. The lower authorities have failed to appreciate the nature of business of the assessee and treated it on the lines of a common businessman, who enters into frequent trading or manufacturing activities. 5.1. Any working pertaining to the Government has its own protocol and conservative system in seeking permissions of relevant departments, the resources of the clients, i.e., Governments, their internal problems and various other issues. Therefore, a lot of time is consumed in these activities for obtaining a contract. 5.2. The lower authorities have not disputed that the assessee undertook the consultancy of the Hyderabad Light Rail Project way back in 1994-95. It was demonstrated before the lower authorities that various expenses incurred by the assessee in its consultancy business have been allowed in past. The assessee's computation on similar lines has been con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iability of the State Governments, local bodies, stakeholders and their financial resources. Thus, the principle of consistency is squarely applicable to the assessee's case. 5.5. It is pointed out that the Assessing Officer has himself accepted that in the next financial year, i.e., 2007-08 (the assessment year 2008-09) there is demonstrative increase in the activity of the assessee and its revenue has been recognised by the Department itself. It may be borne in mind that the clients are procured after a long exercise and the fact that the assessee could earn revenue in the financial years 2007-08 and 2008-09 fairly indicates that the report obtained from M/s. Wilbur Smith Associates was towards its consultancy business and not a piece of decoration or pre-operative expenditure as is held by the Assessing Officer. 5.6. It is vehemently argued that the assessee was into consultancy business way back since 1994-95. In the intervening period there may be a lull in the business activities due to various reasons but there was no closure of the business activities. Had it been so, the Government would have wound up the joint venture. On the contrary, the activities have increased af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous of the ground realties. The activities of the assessee are duly guarded and controlled by a board of directors, comprising of the Ministry of Urban Development, ILFS and nominees of other constituents the financial activities and results are monitored and guarded. Therefore, the allegation is baseless. (e) During the year under consideration the assessee had done no business-It is undisputed that no revenue has been earned. But it does not mean that no business is ever done. The observation of the Assessing Officer is rash, without appreciating the submissions and arguments of the assessee. The observation of the Assessing Officer runs contrary to his own observation that in the subsequent two years there is voluminous business. As already mentioned, the assessee in order to earn revenue has to indulge in a lengthy protocol of procuring clients and other activities. Besides, the fact that the assessee got a consultancy report from M/s. Wilbur Smith Associates, itself indicates that the assessee indulged in the process of its consultancy business. Thus, the Assessing Officer's observation in this behalf also is wrong. 5.7. It is pleaded that the assessee has no issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 345 (MP) ; - Ravi Marketing P. Ltd. v. CIT [2006] 280 ITR 519 (Cal) ; - Suneeta Laboratories Ltd. v. CIT [1986] 162 ITR 883 (MP) ; - Concord Controls v. ITO [1997] 57 TTJ (Delhi) 143 ; and - Star India P. Ltd. v. Addl. CIT [2009] 311 ITR (AT) 235 (Mum). 5.9. In view thereof learned counsel pleads the expenditure incurred on return and Wilber Smith Consultancy is allowable deduction. 6. The learned Departmental representative, on the other hand, contends that the assessee was having unborrowed surplus funds of Rs. 7 crores, which were invested in fixed deposits. It is settled law in the Income-tax Act that income from interest is to be treated under the head "Income from other sources". There is no demonstrative business activity carried out by the assessee, which is evident from its profit and loss account. There being no business activity demonstrated by the assessee, income being only interest income, the income is to be assessed under the head "Income from other sources". The Assessing Officer has rightly treated that the amount on returns amounts to interest paid by the assessee for utilisation of funds for past 12 years. The proportionate interest has been allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 7.1. The assessee has demonstrated that it is a joint venture creation of the Central Government through Ministry of Urban Development initiative to provide solution for mass urban transportation. The activities of the assessee are regulated by the board of directors having respective nominees of the constituents, including Government and professional directors. The intricacies and working with Government as a joint venture partners are to be considered carefully, the lower authorities have not adverted to these facts that the assessee had started its business way back in 1994-95. They merely held that no revenue has been generated in all these years and the assessee has earned only interest income. In our considered view the assessee's claim about its commencement of business in 1994-95 remains unrefuted in the absence of any comment about the Hyderabad Light Rail Project. The assessee has further pleaded that the revenue from various clients cannot be generated without initial work of soliciting the clientage explaining them the productivity of urban mass transportation policies. The resources of the clients also depends upon the Government policies, planning, health and sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that looking at the right conduct of the assessee, the Central Government has subsequently approved funds to it and many projects including Delhi have been obtained subsequently. Thus, the assessee's action is guarded by business prudence and expediency. If the assessee was making efforts to reconcile with the Government, accrual based entries in the books of account would have enabled the Government to ask the assessee to refund its amount forthwith having recognised in the books of account. This may have been counter-productive for the assessee. In view of these facts, we do not find any merit in the objection of the learned Departmental representative. 7.4. Now the question will arise whether the entire amount of returns can be allowed to the assessee in this year as business expenditure or not. The Government has claimed it to be "return", however, for the sake of convenience the amount has been spread over into 12 years on the logic that the returns are for amount utilised by the assessee for 12 years. The amount was by way of application for shares and due to non allotment for whatever reasons, the Government and the assessee ultimately agreed to treat it as advance eligib ..... X X X X Extracts X X X X X X X X Extracts X X X X
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