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TMI Blog2019 (8) TMI 842X X X X Extracts X X X X X X X X Extracts X X X X ..... h is evident from the fact that for some years, the assesee shown revenue from road transport and for some years, it has shown revenue from sea transport, but both revenues are claims to have been received from Pipavav shipyard Ltd., a group company of the assessee. AO, as well as the Ld. CIT(A) after considering relevant facts has rightly held that the business of the assessee has not been setup and ready for commencement of business, consequently expenditure debited into profit and loss account cannot be allowed as deduction u/s 28. Case laws relied upon by the assessee, we find that none of the case laws are comes to rescue the assessee, because all judgments cited by the assessee have clearly held that the term setup of business and commencement of business largely depend upon facts of each case and nature of business undertaken by the assessee. Further, in all the cases, it has been categorically held that in case of manufacturing company that business said to have been setup, when the plant is ready for use. In cases, where the company involved in services sector, the business said to have been setup only, when the primary conditions for commencement of business is put ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Member And Shri Ravish Sood, Judicial Member For the Assessee : Mihir C Naniwadekar And Ruturaj H. Gurjar For the Revenue : Manoj Kumar Singh ORDER PER G. MANJUNATHA (A.M): This bunch of five appeals filed by the assessee and three appeals filed by the revenue are directed against separate, but identical orders passed by the Commissioner of Income Tax (Appeal) 54, Mumbai, all dated 12/06/2017 and 22/11/2017 and they pertains to Assessment Year s (AY) 2010-11,2011-12, 2012- 13, 2013-14 and 2014-15. Since, facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are disposed-off, by this consolidated order. 2. The assessee has, more or less raised common grounds of appeal for all Assessment Year s. Therefore, for the sake of brevity, grounds of appeal raised by the assessee in ITA No. 5813/Mum/2017 for AY 2012-13 are reproduced as under:- 1. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in upholding the views of the Assessing Officer (AO) by confirming the disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court and same is pending? The appellant prays that the order of the CIT(A) on the grounds be set aside and the DC be restored. The appellant craves to amend or alter any ground or add new ground which may be necessary, 4. The Brief facts of the case extracted from ITA No. 5813/ Mum/2017 for AY 2012-13 are that the assessee company, which is engaged in the business of development of infrastructure projects and plans to undertake development of health and wellness, Tourism projects, Special Economic Zone, knowledge park ect. The assessee company has also involved in financial activities and investment in subsidiaries. The assessee company has filed return of income for AY 2012-13 on 29/09/2012, declaring total income of ₹ 10,69,09,957/-. Mean time, the Hon ble Bombay High Court, vide order dated 30/09/2013 has approved amalgamation of SKIL infrastructure Ltd., Horizon Country Wide Logistics Ltd and Fastlane Distripark Logistics Ltd., with assessee company with effect from 01/04/2011. Thereafter, on receipt of the amalgamation order in the month of September, 2013, the assesee has filed a revised consolidated return of income on 20/11/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon ble Bombay High Court. Thereafter, with effect from 22/01/2014, the name of the company has been changed to SKIL Infrastructures Ltd. The assessee company is in the process of setting up a Multimodal Logistics Park/Inland Clearance Depot ( ICD ) at Jhansi in U.P and Warehousing Complex at Village Govirle at Navi Mumbai in April, 2008. The assessee company, through its subsidiary Fastlane Distripark Logistics Private Ltd., started setting up a Container Freight Station (CFS), near JNPT at Dighode village, Panvel Taluk, Raigad District, Maharashtra State and also through its anther subsidiary Chiplun FTWZ Private Ltd., initiated plans to set up FTWZ as a Co Developer at Change Village, in Raigad District. Further, the assessee company was also in process of acquisition land at various places, including Umbergaon and Pipavav in Gujarat, Chennai and National Capital Region to set up CFS/ICD/Multimodal Logistic Park. All these projects were simultaneously undertaken and are still under construction stage up to the end of AY 2012-13. The assessee has capitalized all expenses, including financial cost incurred for development of projects, till commencement opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d into the profit and loss account ignoring the fact that the business of the assesee has been setup for the year under consideration, even though the business was not commenced, for the year under consideration. The Ld. AR further submitted that there is a distinction between setup of business and commencement of business, and when a business is established and is ready to commence business, then it can be said that business is setup. Further, this concept is covered by section 3 of the I.T.Act, 1961. Since, the facts are not controverted by any of the authorities below, the business expenses ought to have been allowed as expenses incurred wholly and exclusively for the purpose of business. The Ld. AR further submitted that without prejudiced to the above, it is also pertain to know that activities carried out generating revenue, were within the overall gamut of objects of the company. Therefore, one of transactions of income from operations cannot be doubted, merely for the reasons that the same has been received from a group company. The Ld. AR further referring to objects of the company argued that if, you go through objects of the company, the assesee is into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Bombay High Court in the case of CIT vs TATA Chemicals Ltd. 256 ITR 395 and Hon ble Kolkata High Court in the case of Keshoram Industries and Cotton Mills Ltd. vs CIT 191 ITR 845. 9. The Ld. DR, on the other hand, strongly supporting order of the Ld. CIT(A) submitted that the assessee itself had admitted before the lower authorities that its projects were under construction up to the end of AY 2012-13, because of various regulator permissions and also it has capitalized all expenditure incurred in relation to such projects to work in progress account. The Ld. DR, further, submitted that when, the business is not setup and is not ready for commencement of business, it can be said that business is not setup. Merely, for the reason that the assessee company has been incorporated, it cannot be said that it has setup its business. The Ld. AO, as well as the Ld. CIT(A) have brought out clear facts to the effect that the business has not setup, for the year under consideration, consequently expenditure incurred under various heads needs to be treated as pre-operative expenses pending capitalization till such time the business has setup and ready for commencement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... project are still at developing stage at various places, including Container Freight Station (CFS), near JNPT at Dighode village, Panvel Taluk, Raigad District, Maharashtra. It is also not in dispute that the assessee is still in the process of acquisition of land and getting clearanses from various authorities. It is also not in dispute that the assessee has capitalized all direct and indirect expenditure including finance cost incurred for construction of the project till commencement of operations. In this factual backgoround, if you examine the claim of the assesee that its business has been setup, even though, the business was not commenced and expenditure incurred under various heads, including expenditure incurred for maintaining the corporate status of the assesee has to be allowed as deduction needs to be examined in light of facts brought out by the authorities. There is no doubt, with regard to the fact that once business has been setup, even though the said business was not commenced for the relevant period, then necessary revenue expenditure incurred in connection with said business needs to be allowed as deduction. But, the question that needs to be first ascertained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of a company formed for leasing of the property, it could not be said that the business was not setup till the first lease took place, the earlier part of the activities, namely engaged staff, buying the equipment and making the staff familiar with the same are all part of the business and the business can be said to be setup, even earlier. The Hon ble Madras High Court was dealing with the case of a company formed for selling property time share in CIT vs Club resorts Pvt. Ltd. (2016) 287 ITR 552 held that the acts of appointing staff for canvassing sales of the property time share, renting of office premises etc., amounted to setting up of the business, even though the construction of the property was yet to begin. Similarly, the Hon ble Gujarat High Court in the case of a Hotel and hospitability industry in case of Hotel Alankar Vs CIT (1982) 133 ITR 866, while recognizing, the question, whether a business is setup or not was essential question of fact and that it would largely depend upon the facts of each case and the nature of business held that in the case of a hotel, due waightage must given to the fact that it cannot commenced its activity overnight. The sum and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ea transport, that too from its group company. We further noted that the revenue generated from other stream of business is not regular, which is evident from the fact that for some years, the assesee shown revenue from road transport and for some years, it has shown revenue from sea transport, but both revenues are claims to have been received from Pipavav shipyard Ltd., a group company of the assessee. The Ld. AO, as well as the Ld. CIT(A) after considering relevant facts has rightly held that the business of the assessee has not been setup and ready for commencement of business, consequently expenditure debited into profit and loss account cannot be allowed as deduction u/s 28 of the I.T.Act, 1961. In so far as, case laws relied upon by the assessee, we find that none of the case laws are comes to rescue the assessee, because all judgments cited by the assessee have clearly held that the term setup of business and commencement of business largely depend upon facts of each case and nature of business undertaken by the assessee. Further, in all the cases, it has been categorically held that in case of manufacturing company that business said to have been setup, when the plant is r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he extent of exempt income earned for the year. 14. The Ld. DR, on the other hand, submitted that Ld. CIT(A) was erred in restricting disallowances to the extent of interest expenditure determined by the AO, ignoring the fact that provision of section 14A shall applies, even if no exempt income has actually been earned or received during the year. The Ld. DR further submitted that the board has issued a circular No. 05/14 dated 11/02/2014, wherein it has been clarified that Rule 8D r.w.s. 14A of the I.T.Rules 1961, provides for disallowances of expenditure even, where the assessee in particulars year has not earned exempt income. The Ld. DR further submitted that although, the Hon ble Delhi High Court in the case of CIT vs Cheminvest Limited 378 ITR 33 had held that where, there is no exempt income there should not be any disallowance, but fact remains that the said decision has not been accepted by the department and SLP has been filed before the Hon ble Supreme Court and same is pending, therefore disallowances made by the AO should be upheld. 15. We have heard both the parties, perused the material available on record and gone through orders of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Cheminvest Ltd. Vs CIT(Supra) had clearly held that where, there is no exempt income, no disallowances could be made in respect of expenditure incurred in relation to exempt income. A similar view has been considered by the Hon ble Bombay High Court in the case of M/s Nirved Traders Pvt.Ltd Vs DCIT in ITA No. 149 of 2017, where by following the decision of Hon ble Delhi High Court in the case of Cheminvest Ltd vs CIT held that where, there is no exempt income no disallowances of expenditure, in relation to exempt income u/s 14A of the I.T.Act, 1961. The Hon ble Supreme Court in the case of CIT vs Chettinad Logistics Pvt.Ltd. (2018) 257 taxmann.com 2 (SC) had considered similar issue and while, dismissing SLP filed by the revenue held that section 14A cannot be invoked, where no exempt income was earned by the assessee in the relevant assessment year. 16. In this case, the fact with regard to details of exempt income was not coming forward from the orders of the lower authorities. At the same time, the Ld.AR for the assesee pleaded for restricting disallowances contemplated u/s 14A r.w.Rule 8D(2) of the I.T.Rules 1962, to the extent of exempt income, the ..... 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