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TMI Blog2019 (6) TMI 608X X X X Extracts X X X X X X X X Extracts X X X X ..... curred by the assessee after setting off of the business though before commencement of the business. Moreover, the assessee itself has capitalized many of its expenditure and only claimed the expenses which are of revenue in nature. Interest income to be set off u/s 71 being inextricably linked with the business of the assessee - HELD THAT:- When it is proved that the assessee has set up the business, earned the income from interest during the construction period and has set off of the same against the loss under the head PGBP as per section 71 of the Act, CIT (A) has rightly deleted the addition as the funds parked in the bank on which interest has been earned were inextricably linked with the setting up of the hospitality business. So, following the decision rendered in Indian Oil Panipat Power Consortium [ 2009 (2) TMI 32 - DELHI HIGH COURT] income earned by the assessee from interest during the period prior to the commencement of business and at the stage of setting up of business, the same is of the nature of capital receipt and as such loss incurred by the assessee under the head PBGP is eligible to be set off against the interest income earned during the year under assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count the expenses on account of depreciation, employee benefit expenses and operating & other expenses. The amount of ₹ 5,75,23,000/- has been claimed by the assessee on revenue account. Declining the contentions raised by the assessee, AO reached the conclusion that since the assessee has been undertaking only construction of projects which is still in progress, expenses amounting to ₹ 5,75,23,000/- is capitalized to the cost of construction. AO also treated the amount of ₹ 3,39,98,656/- as income from other expenses and made addition thereof to the total income of the assessee. 3. Assessee carried the matter by way of an appeal before the ld. CIT (A) who has deleted the addition after accepting the appeal. Feeling aggrieved, the Revenue has come up before the Tribunal by way of filing the present appeal. 4. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. GROUNDS NO.1, 2 & 3 5. Ld. DR for the Revenue challenging the impugned order passed by the ld. CIT (A) contended that since busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly made a distinction between commencement of business and setting off of business by thrashing the facts brought on record. 9. Ld. CIT (A) has categorically recorded the finding of facts as to setting up of the business by the assessee by returning following findings :- "4. …..The appellant has made elaborate submissions and has claimed that they had set-up the business. As per the submissions of the Appellant, substantial amounts of money have been raised through equity capital on 20/10/2010, business decisions had been taken, key personnel were employed, lease agreements were signed to take hotel properties on lease and in fact the improvements to properties had also commenced prior to the year under consideration. I have considered the arguments of the appellant. The Hon'ble Jurisdictional High Court, in the case of Commissioner of Income-tax- IV vs Dhoomketu Builders & Development (P) Ltd. (2013) (supra) while deciding upon similar issue of set-up of business by an assessee engaged in real estate, held that the mere fact that the assessee could not acquire any land during the relevant assessment year would not mean that the business had not commenced. The Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s incurred in the business are permissible deductions. 11. Hon'ble High Court of Bombay in case cited as Western India Vegetable Productions Ltd. (supra) decided the identical issue in favour of the assessee by returning following findings :- "Section 37(1), read with section 3 of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) read with section 2(11) of the Indian Income-tax Act, 1922] - Business expenditure - Year in which deductible - Assessment year 1947-48 - Whether for purpose of a business it is only after business is set up that previous year of that business commences and in that previous year expenses incurred in business can be claimed as permissible deductions - Held, yes - Assessee-company was registered on 29.12.1945 and received its certificate of commencement of business on 20.4.1946 - It purchased a groundnut oil mill on 1.11.1946 for running it - Assessee closed its accounts for first time on 31.3.1947 - Expenditure incurred from its inception was debited to profit and loss accounts - ITO held that business started on 1.11.1946 when assessee purchased ground-nut mill while AAC held that business started on 20.4.1946 when it received certificate of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal while allowing the similar expenses by making distinction between the commencement of business and setting off of business by returning following findings:- "Section 28(i), read with section 3, of the Income-tax Act, 1961- Business - Commencement of [Illustrations] - Assessment year 2006-07 - Assessee, engaged in realty business, participated in an auction to acquire a piece of land - It obtained loan from its holding company and deposited same as earnest money to acquire land - However, it could not succeed in auction - It paid interest on borrowed fund and received interest on earnest money - It claimed differential between interest as loss and claimed for carry forward of said loss - Assessing Officer found that current year was first year of existence of assessee and since it failed to acquire land, it could not be said that business was set up in relevant year - He disallowed said claim - However, Tribunal held that acts of applying for participation in tender, borrowing of monies on interest from holding company and deposit of borrowed monies on same day as earnest money clearly established that business had been set up - Whether finding returned by tribunal being fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the plant. The clue is perhaps available in section 3 which states that for newly set-up business, the previous year shall be the period beginning with the date of setting up of the business. Therefore, as per the provision of section 4 which is the charging section, income, which arises to an assessee from the date of setting up of the business but prior to commencement, is chargeable to tax, depending on whether it is of a revenue nature or a capital receipt. The income of a newly set-up business, post the date of its setting up, can be taxed if it is of a revenue nature under any of the heads provided under section 14 in Chapter IV. For an income to be classified as an income under the head 'profits and gains of business or profession', it would have to be an activity which is in some manner or form connected with business. The word 'business' is of wide import which would also include all such activities which coalesce into setting up of the business. Once it is held that the assessee's income i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds parked in the bank on which interest has been earned were inextricably linked with the setting up of the hospitality business. 18. So, following the decision rendered by Hon'ble High Court in Indian Oil Panipat Power Consortium (supra), income earned by the assessee from interest during the period prior to the commencement of business and at the stage of setting up of business, the same is of the nature of capital receipt and as such loss incurred by the assessee under the head PBGP is eligible to be set off against the interest income earned during the year under assessment. So, we are of the considered view that the ld. CIT (A) has rightly directed the AO that interest income of ₹ 3,39,98,656/- be set off u/s 71 of the Act being inextricably linked with the business of the assessee. 18. In view of what has been discussed above, contentions raised by the ld. DR for the Revenue and the decision rendered by the coordinate Bench of the Tribunal in case of Orient Cosmetics Ltd. vs. DCIT 74 ITD 135 is not applicable to the facts and circumstances of the case. Consequently, appeal filed by the Revenue is hereby dismissed. Order pronounced in open court on this 10th day of Ju ..... X X X X Extracts X X X X X X X X Extracts X X X X
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