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TMI Blog2018 (12) TMI 1566X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue. X X X X Extracts X X X X X X X X Extracts X X X X ..... re not directly related to the case of the assessee. The Ld. DR relied upon the decision of the Hon'ble Bombay High Court in case of ALD Automotive Pvt. Ltd. Vs. DCIT (2018) 254 Taxmann 233 & also referred case of Video Plaza Vs. ITO that of Hon'ble Calcutta High Court being 385 ITR 404. 7. The Ld. AR submitted that the assessee company was incorporated on 12.06.2008 and is a wholly owned subsidiary of HBT Real Estate Holdings Ltd., Mauritius. The aforesaid company had been incorporated for the purpose of development and construction of Real Estate Projects in India. The authorized capital of the assessee company is ₹ 2.65,00,000. It had furnished the returns of income for the AYs 2009-10, 2010-11 and 2011-12. From the perusal of the details tabulated, the Ld. AR pointed out that it had incurred certain expenditure and claimed the same as business loss (for AY 2011-12) and carried forward the same to be set off, which business loss was accepted. HMS REAL ESTATE PRIVAE LIMITED Assessment Year Expenditure incurred and debited to the Profit & Loss A/c expenditur e incurred being cost of the project Treatment by assessee Treatment by the AO 2009-10 22,98,897 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that means the business has been set up. The acts of applying for participation in the tender, the borrowing of monies for interest from the holding company, the deposit of the borrowed monies on the same day with NGEF Ltd. as earnest money were all Acts which clearly establish that the business had been set up. The commencement of real estate business would normally start with the acquisition of land or immovable property. When an assessee whose business it is to develop real estates, is in a position to perform certain acts towards the acquisition of land, that would clearly show that it is ready to commence business and, as a corollary, that it has already been set up. The actual acquisition of land is the result of such efforts put in by the assessee; once the land is acquired the assessee may be said to have actually commenced its business which is that of development of real estate. The actual acquisition of the land may be a first step in the commencement of the business but section 3 of the Act does not speak of commencement of the business, it speaks only of setting up of the business. When the assessee, in the present case, was in a position to apply for the tender, bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt has undertaken construction work and capitalized expenditure in accordance with Accounting Standard-10 issued by the Institute of Chartered Accountants of India. For the instant assessment year, the appellant furnished a return of income declaring loss of ₹ 69,06,799/- in the following manner:- Sr. No. Particulars Amount (Rs.) 1 Interest income under the head 'income from other sources' 31,10,952 2 Less: expenditure claimed under the head profits and gains from business or profession 100,17,751 3 Net loss claimed 69,06,799 6.1 The Assessing Officer has denied the above claim of expenditure of ₹ 1,00,17,751/- by holding that the expenditure should have been capitalized to the capital work in progress. It has been concluded by the AO that since only business of the assessee is building of above mentioned corporate park and therefore, all the expenses whether direct or indirect should be accounted for as capital work in progress and are not allowable as revenue expenditure under section 37(1) of the Act on the ground that there is no revenue from business in the instant assessment year. 6.2 The crux of the appellant's submission is that expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epreciation and amortization expenses (Allowable u/s 32 of the Act. 16,95, 632 Depreciation as per Income tax Act. Finance Costs 257,37 9 This includes foreign exchange loss of 1 NR 2367,714 and interest expense of 19,665 charged by bank. The said expense not being directly relatable to the project was debited to project was debited to profit and loss account. 6.4 It is also noted that the appellant had claimed an expenditure of ₹ 1,19,36,566/- out of total expenditure of ₹ 23,94,85,537/- and balance expenditure of ₹ 22,75,48,971/- have been capitalized in the instant year. The issue therefore, arises is whether such expenditure as incurred and claimed, genuineness of which is not in dispute is eligible for deduction as revenue expenditure. The basis adopted by the Assessing Officer that there is no income in the instant year is not relevant test for determining the allowability of expenditure claimed by the appellant company. The Apex Court in the case of CIT(A) vs. Rajendra Prasad Mody reported in 115 ITR 519 has held as under: "What s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he statute as proper expenditure would be debited as an outgoing and income would be credited as a receipt and the resulting income or loss would be determined. It would make no difference to this process whether the expenditure is X or Y or nil, whatever is the proper expenditure allowed by the statute would be debited. Equally, it would make no difference whether there is any income and if so, what, since whatever it be, X or Y or nil, would be credited. And the ultimate income or loss would be found. We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of s. 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income. It is true that the language of s. 37(1) is a little wider than that of s. 57(iii), but we do not see how that can make any difference in the true interpretation of s. 57(iii). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he office rent also along with audit fees and filing fee and compute the income accordingly. In the result, the assessee's appeal is allowed." 6.6 Similar view has been expressed in the case of Arkaaye Builders & Development (P) Ltd. vs. ITO in ITA No. 3552/Del/2011. The facts of the case are that assessee was engaged in the business of buying, selling, acquiring, constructing, re-constructing, and developing land, building etc. along with trading, import, export, growing, developing and farming of agricultural products. During the year under consideration, the assessee earned agricultural income and other income (i.e. interest on FDR, rental income, profit on sale of mutual fund). No income from business activity was earned by the assessee during the year. While passing the order, the assessing officer held that there is no business activity carried out by the assessee and hence disallowed the administrative expenses and depreciation claimed by the assessee should be disallowed. The same view was upheld by the CIT(A) and he agreed that the disallowance of depreciation and administrative expense is justified. The Tribunal decided in Favour of the appellant holding that only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting up of the business and they might be a gap between the date on which the business is set up and the date of commencement of the business." 6.10 In the case of CIT Vs Hughes Escorts Communication [2009] 311 ITR 253, it has been held that the expenses incurred in the previous year, prior to the commencement of the business but after the setting up of its business, which two dates need not be the same, would be deductible as revenue expenses. In this case, while making distinction between the setting up and commencement of a business the Hon'ble Court has relied upon the Bombay High Court in Western India Vegetables Products Ltd. In this case, the Bombay High Court, which was in this case dealing with the corresponding provision of the Indian Income-tax Act, 1922, then explained the distinction between the concepts of 'commencement' and 'setting up' of a business : ". . . It seems to us, that the expression 'setting up' means, as is defined in the Oxford English Dictionary, 'to place on foot' or 'to establish', and in contradistinction to 'commence'. The distinction is that when a business is established and is ready to com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 1,00,17,151/- claimed as revenue expenditure and capitalizing the same to CWIP is not justified. The said expenditure is held to be allowable as business expenditure u/s 37 of the Act and accordingly, addition of ₹ 1,00,17,751/- is deleted. Grounds raised in this regard are therefore allowed. The CIT(A) has given detailed reasons and the case laws referred by the Ld. DR do not apply in the present case as the facts of those cases are different and the ratio laid down is also not applicable in the present circumstances. Besides that the Hon'ble Delhi High Court also in case of Dhoomketu Builders and Development Pvt. Ltd. (supra) held that when an assessee whose business it is to develop real estates, is in a position to perform certain acts towards the acquisition of land, that would clearly show that it is ready to commence business and, as a corollary, that it has already been set up. The actual acquisition of land is the result of such efforts put in by the assessee; once the land is acquired the assessee may be said to have actually commenced its business which is that of development of real estate. The actual acquisition of the land may be a first step in the comme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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