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TMI Blog2018 (11) TMI 1934X X X X Extracts X X X X X X X X Extracts X X X X ..... he said party as can be seen from the suit filed by the assessee against the party in 2011. Other than payments of advance, it is not known as to whether any other activity happened to establish that the assessee was in a position to commence business . In the year under consideration, the assessee has raised funds from its AEs in the form of issue of another series of CCDs and paid advance to Shriram Land Development India (P) Ltd., which has been shown as a related party in the assessee s TP study. Even in this transaction, other than making the advance payment, nothing has been brought on record to establish that the assessee was in a position to commence business. We also notice that out of the expenses claimed as deduction, the major components are Legal and Professional Charges and loss on redemption of investment in mutual funds ( MF ). Whether these expenses are revenue OR capital in nature has not been examined at all. We also find that the TPO has treated the ALP of the interest transactions as NIL and disallowed the interest paid on CCDs. The AO has once again disallowed the same, leading to a double disallowance. We deem it appropriate to remand the matter back t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses. - IT(TP)A No.1497/Bang/2014 - - - Dated:- 5-11-2018 - SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER For the Assessee : Shri. S. K. Mutsaddi, CA For the Revenue : Shri. Siddappaji, ACIT ORDER PER JASON P. BOAZ, ACCOUNTANT MEMBER This appeal by the assessee is directed against the order of the CIT(A)-IV, Bangalore dated 09.10.2014 for Assessment Year 2009-10. 2. Briefly stated, the facts of the case are as under: 2.1 The assessee company was incorporated on 13.04.2007 in order to engage in the business of construction, real estate and plotted development of land. For the year under consideration, i.e., for Assessment Year 2009-10, the assessee filed its return of income on 25.09.2009 declaring loss (-) of Rs.44,31,795/-. The return was processed u/s 143(1) of the Income Tax Act, 1961 (in short the Act ). Subsequently, the Assessing Officer ( AO ) initiated proceedings u/s 147 of the Act as he had reason to believe that income of the assessee exigible to tax had escaped assessment. After recording reasons in this regard, the AO issued notice u/s 148 of the Act on 21.06.2011 and commenced assessment proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above, the erroneous application of LIBOR rate as made by the CIT(A) tantamounts to an enhancement without issuing a notice to that effect. The enhancement so made is without granting any opportunity to the appellant, which is violative of the provision of section 251(2) of the Income Tax Act. 3.2 The assessee had raised the first three grounds (supra) in Form No. 36 on 15.11.2014 and filed Revised Form No. 36 dated 27.07.2015 wherein the fourth ground (supra) was included. In the original Form No. 36 dated 15.11.2014, the assessee had raised grounds related to both issues on which additions/disallowance were made. In the Revised Form No. 36, dated 27.07.2015, the assessee has raised ground No. 4(supra) as an additional ground contending that the decision of the CIT(A) on the TP issue amounts to enhancement of income, which has been carried out without issuing any notice and without affording the assessee any opportunity in the matter and is therefore violative of the provisions of Section 251(2) of the Act. We have heard both parties in the matter and carefully perused the material on record. In our considered view, even though raised before the Tribunal for the first time, si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Development India Pvt. Ltd., for acquiring land in Karnataka and paid advance to this party. It is contended by the learned AR that since the land acquiring process has started, the business of the assessee has commenced and therefore the expenses incurred by it for operations in this regard are to be treated as business expenses and allowed as deduction as claimed by the assessee. In support of the aforesaid contentions, the learned AR, inter alia, placed reliance on the decision of this Tribunal in the case of Swire Holdings (P) Ltd., Vs. ITO (2006) 6 SOT 621 (Bang). 4.3 Per contra, the learned DR for Revenue supported the orders of the authorities below. 4.4.1 We have heard and considered the rival contentions and carefully perused the material on record; including the judicial decisions cited. The issue of dispute boils down to what is the stage at which a real estate company can be considered to have commenced its business and becomes eligible to claim the expenses incurred as revenue expenses. 4.4.2 The AO has held that since the expenses claimed do not have corresponding business revenue, the assessee s business activities have not commenced and therefore, the inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany earned interest income from various loans given by the company and also from the bank deposits. On the aforesaid facts, the Hon'ble Supreme Court held that the assessee company could not claim any relief under sections 70 and 71 since its business had not started and there could not be any computation of income or loss incurred by the assessee in the relevant accounting years. As rightly contended by the learned counsel for assessee, the decisions relied on by the authorities below are factually distinguishable. In the case of the assessee neither setting up factory or erection of machinery is required. The moment the assessee-company incorporated and the amounts advanced, it will lead to the conclusion that the business of the assessee has been commenced. Therefore, I find much more in the stand taken by the assessee. The income shown by the assessee has to be treated as income from business and necessary benefits or deductions claimed by the assessee have to be allowed in accordance with law. It is ordered accordingly. 4.4.5 Further, the point at which a real estate company can be considered as having commenced business has been discussed in the decision of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee is in a position to commence business, 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 immoveable property. When an assessee whose business it is to develop real estates, is in a position to perform certain ITA No. 863 /Hyd/2014 M/s Surya Infra ITT Parks Pvt. Ltd. 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 setup. 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 set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cited in the preceding paragraphs (supra), are as follows: (i) that there is a distinction between setting up of the business and commercialization of the operations which generates the actual revenue to the business. What is relevant under the Income Tax Act is the setting up of the business and not the commencement of the business. (ii) In this line of business, the process commences from the date of negotiation for acquiring land, actual purchase of the land and their actual development of such land. The event of commencement will change according to the nature and facts of the particular industry. It may vary depending upon the business model and business cycle of the Industry. (iii) In the case on hand, the business can be said to be set up when it is ready OR established to commence its operation. (iv) The date of setting up of the business depends on the facts and nature of the business. If the assessee is in a position to commence business, it means the business has been set up. (v) 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record to establish that the assessee was in a position to commence business. 4.4.10 We also notice that out of the expenses claimed as deduction, the major components are Legal and Professional Charges and loss on redemption of investment in mutual funds ( MF ). Whether these expenses are revenue OR capital in nature has not been examined at all. We also find that the TPO has treated the ALP of the interest transactions as NIL and disallowed the interest paid on CCDs. The AO has once again disallowed the same, leading to a double disallowance. 4.4.11 In view of the factual and legal matrix of the case on hand, as discussed above, we deem it appropriate to remand the matter back to the file of the CIT(A) to decide the issue afresh, after proper examination of the facts and test the facts of this case in the light of the legal principles outlined above. Needless to add, both the assessee and AO shall be afforded adequate opportunity of being heard and to make submissions/file details required which shall be duly considered before deciding the issue. Consequently, ground No. 1 of assessee s appeal is allowed for statistical purposes. 5. Ground Nos. 2 to 4 Transfer Pricin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i)(iii)/37 by characterization of debt into equity. In the decision of the AAR in the case of Z, Inre (2012) 20 taxmann.com 91 (AAR New Delhi) the issue for consideration was whether the capital gains arising from sale of securities is exempt from capital gains tax under the DTAA. In the decision of the ITAT, Bangalore Bench in the case of Logic Micro Systems Ltd., (08 ITR (Trib) 159), the issue for consideration was interest to be charged on outstanding receivables. In none of the above decisions cited by the CIT(A) (supra), was the issue of ALP on international transactions on interest payment on CCDs the subject of consideration. 5.4.2 Further, the TPO while taking the view that CCDs are not in the nature of debts has referred to RBI policy and also the facts of the case on hand where the CCDs issued as a first series carried interest @ 14% and interest was then reduced to 0% and the second series of CCDs issued by the assessee on similar conditions carried interest @ 14%. The CIT(A) has also not examined as to whether these two series of CCDs constituted an internal CUP for comparability analysis and determination of ALP. As regards the interest rate to be charged, the CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following judicial precedents supports that the rate interest has to be considered in the currency in which loan has originated: i. India Debt Management Pvt. Ltd., IT(TP)A No. 7518/Mum/2014; ii. CIT Vs. Cotton Naturals (I) Ltd., ITA No. 233/2014 (Del.HC); iii. M/s. Brahma Center Development Pvt. Ltd., Vs. ITO, ITA No. 373/Del/2016 (ITAT Del). By respectfully following the Co-ordinate Bench and Hon'ble High Court decisions, we agree with the assessee's contentions that the CCDs cannot be categorised as a loan and LIBOR plus two hundred basis points benchmark cannot be accepted on the facts of the case. 5.4.4 We are also of the view that there is merit in the assessee s contention that it should have been afforded opportunity of being heard before the CIT(A) decided that the interest rate should be designated in LIBOR and not on the Rupee rate, as was done by the assessee. 5.4.5 In view of the above discussion, as it is clear that the basic facts of the case on this issue have not been thoroughly/properly examined in the right perspective by the CIT(A), we deem it appropriate to remand the issue back to the file of the CIT(A) for fresh adjud ..... X X X X Extracts X X X X X X X X Extracts X X X X
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