Jindal Reality Pvt. Limited, New Delhi V. ACIT, New Delhi

ITA 1408/DEL/2011

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 0343 (ITAT-DELHI)
• Duration Of Justice: 9 year(s) 3 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-06-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 10-05-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 18-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: J MISHRA CIT DR
• Assessee Lawyers: ROHIT JAIN SH DEEPESH JAIN
• Keywords: Business income; Depreciation; Business expenditure; Revenue expenditure
• Section: 143(3); 13; 22; 12

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH D, NEW DELHI , ! ' $ %$$& , ( ) ! BEFORE MS. SUSHMA CHOWLA, VICE PRESIDENT & SHRI O.P.KANT, ACCOUNTANT MEMBER $ / ITA NO.1408/DEL/2011 * + + / ASSESSMENT YEAR-2006-07 JINDAL REALTY PVT LTD. FLAT NO.1104, 11 TH FLOOR, HEMKUNT CHAMBER, 89 TH NEHRU PLACE, NEW DELHI PAN-AACCD2575L .......... ,- /APPLICANT VS THE ACIT, CIRCLE-10(1), NEW DELHI. . ./,- / RESPONDENT ,-0% / APPLICANT BY : SH. ROHIT JAIN, ADVOCATE SH. DEEPESH JAIN, C.A. ./,-0% / RESPONDENT BY : SH. J. MISHRA, CIT.DR 0&( / DATE OF HEARING : 12.03.2020 12 0&( / DATE OF PRONOUNCEMENT: 22.06.2020 3 / ORDER PER SUSHMA CHOWLA, VP THE APPEAL FILED BY THE ASSESSEE IS AGAINST ORDER O F CIT(A)-XIII, NEW DELHI, DATED 24.12.2010 RELATING TO ASSESSMENT YEAR 2006-07 AGAINST ORDER PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT 1961 (IN SHORT THE ACT). ITA NO.1408/DEL/2011 2 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- 1. THAT THE COMMISSIONER OF INCOME TAX (APPEALS)-XIII, NEW DELHI HAS GROSSLY ERRED ON FACTS AND IN THE CIRCUMS TANCES OF THE CASE AND IN LAW IN HOLDING THAT THE BUSINESS OF THE APPELLANT IS NOT SET UP DURING THE PREVIOUS YEAR RE LEVANT TO A Y 2006-07. 2. THAT THE COMMISSIONER OF INCOME TAX (APPEALS)-XIII, NEW DELHI HAS GROSSLY ERRED ON FACTS AND IN THE CIRCUMS TANCES OF THE CASE IN HOLDING THAT THE INTEREST EXPENDITURE O F RS. 3,92,54,952/- ( NET OF INTEREST INCOME OF RS. 79,00 ,208/- ON ADVANCES FOR PURCHASE OF LAND) ON LOANS TAKEN FOR P URCHASE OF STOCK IN TRADE COMPRISING OF LAND DURING THE PREVIO US YEAR SHOULD BE CAPITALIZED AS WORK IN PROGRESS AND THE S AME ARE NOT ALLOWABLE AS EXPENDITURE IN THE PRESENT YEAR FO LLOWING SPECIAL BENCH DECISION OF MUMBAI TRIBUNAL IN THE CA SE OF WALL STREET CONSTRUCTION LTD. VS. JCIT(2006) 101 ITD 156 ( MUM.)[SB)/[2006] 102 TTJ (MUMBAI) (SB). 3. THAT THE COMMISSIONER OF INCOME TAX (APPEALS) -XI1 1, NEW DELHI HAS GROSSLY ERRED ON FACTS AND IN THE CIRCUMS TANCES OF THE CASE IN HOLDING THAT ADMINISTRATIVE AND STATUTO RY NATURE OF EXPENDITURE ON ELECTRICITY & WATER CHARGES, INSURAN CE, LEGAL & PROFESSIONAL CHARGES, AUDIT FEES, MISC. EXPENSES, P RINTING & STATIONARY, RATES & TAXES, TELEPHONE EXPENSES, FILI NG FEES, PRELIMINARY EXPENSES WRITE OFF & BANK CHARGES TOTAL ING AT RS. 35,97,061 ARE NOT ALLOWABLE AS REVENUE EXPENDITURE IN THE PRESENT YEAR. 4. THAT THE COMMISSIONER OF INCOME TAX (APPEALS)-XIII , NEW DELHI HAS GROSSLY ERRED ON FACTS AND IN THE CIRCUMS TANCES OF THE CASE AND IN LAW IN FURTHER HOLDING THAT ADMINIS TRATIVE AND STATUTORY NATURE OF EXPENDITURE ON ELECTRICITY & WA TER CHARGES, INSURANCE, LEGAL & PROFESSIONAL CHARGES AGGREGATING TO RS. 33,24,980/- IN RELATION TO THE AUTHORIZED TRANSACTI ON FOR PURCHASE OF PROPERTY IS TO BE CAPITALIZED TO THE CO ST OF SUCH PROPERTY AND FURTHER THEREFORE ALLOWED ONLY THE BAL ANCE EXPENDITURE OF RS. 2,72,951 /- TO BE CAPITALIZED TO WORK IN PROGRESS. 5. THAT THE COMMISSIONER OF INCOME TAX (APPEALS) - XI II, NEW DELHI HAS GROSSLY ERRED ON FACTS AND IN THE CIRCUMS TANCES OF THE CASE AND IN LAW IN DENYING SET OFF OF INTEREST INCOME OF RS. 15,24,862/- FROM BANKS AGAINST INTEREST EXPENDITURE OF RS.4,71,55,160/- ITA NO.1408/DEL/2011 3 3. THE FIRST ISSUE RAISED VIDE GROUND OF APPEAL NO. 1 BY THE ASSESSEE IS AGAINST THE CLAIM OF THE ASSESSEE THAT THE BUSINESS OF THE ASSESSEE WAS SET UP DURING THE YEAR UNDER CONSIDERATION. 4. BRIEFLY, IN THE FACTS OF THE CASE, THE ASSESSEE COMPANY WAS INCORPORATED ON 25.08.2005, WAS ENGAGED IN THE BUSI NESS OF REAL ESTATE. THE ASSESSEE FILED E-RETURN DECLARING TOTAL LOSS OF RS.4,13,60,684/- ON 30.11.2006. THE CASE OF THE ASSESSEE WAS TAKEN UP F OR SCRUTINY. THE ASSESSING OFFICER NOTED THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD ACCEPTED UNSECURED LOANS AGGREGATING T O RS.318.80 CRORES FROM VARIOUS CORPORATE BODIES. THE LIST OF THE PART IES ALONG WITH AMOUNT OF INTEREST PAID TO THEM IS TABULATED AT PAGES 1 AN D 2 OF THE ASSESSMENT ORDER. THE AO FURTHER NOTED THAT AFORESAID LOANS WE RE UTILIZED FOR PURCHASE OF LAND FOR RS.10,94,97,662/-, IN GIVING A DVANCE AGGREGATE AMOUNTING TO RS.3,15,34,79,267/- TO VARIOUS CORPORA TE BODIES & PERSONS FOR PURCHASE OF LAND BESIDES THE ASSESSEE MADE AGGR EGATE INVESTMENT TO THE TUNE OF RS.39,97,486/- IN PURCHASE OF 1568 EQUI TY SHARES OF RS.10/- EACH OF DSP MERRILY LYNCH LIMITED [INVESTMENT OF RS .33,59,780/-] AND IN PURCHASE OF 48784 EQUITY SHARES OF RS.10 EACH OF JC T LIMITED [INVESTMENT OF RS.6,37,706/-]. THE BALANCE FUND TO THE TUNE OF RS.126.50 CRORES WERE WITH HDFC BANK ON AND WHICH IT EARNED I NTEREST INCOME OF RS.15,24,863/-. THE AO NOTED THAT THE ASSESSEE HAD NOT ADDUCED ANY EVIDENCE WITH REGARD TO COMMENCEMENT OF ITS BUSINES S ACTIVITIES DURING THE RELEVANT YEAR. THE AO NOTED AS UNDER:- ITA NO.1408/DEL/2011 4 THE ASSESSEE CLAIMED TO HAVE EARNED INTEREST INCOME OF RS.94,25,071/- INCLUDING BANK INTEREST OF RS.15,24, 863/- & INTEREST FROM OTHER OF RS.79,00,208/-. THE ASSESSEE COMPANY HAS ALSO RECEIVED DIVIDEND INCOME OF RS.35,694/-. T HE ASSESSEE COMPANY CLAIMED TO HAVE INCURRED ADMINISTR ATIVE & OTHER EXPENSES AGGREGATING TO RS.33,62,870/- ON A/C OF ELECTRICITY & WATER CHARGES RS.2,57,029/-, INSURANC E RS.2,79,951/-, LEGAL & PROFESSIONAL CHARGES RS.27.8 8 LACS, AUDIT FEES RS.22,448/-, MISC. EXPENSES RS.5,385/- P RINTING & STATIONERY RS.2,990/- RATES 7 TAXES RS.200, TELEPHO NE EXP. RS.5,567/- & FILING FEE RS.1300/- BESIDES INTEREST PAYMENT OF RS.4,71,55,160/- TO THE CORPORATE BODES AS DETAILED SUPRA AND BANK CHARGES OF RS.1,46,381/- AND PRELIMINARY EXPENSES RS.87,810/- TO ARRIVE AT THE BUSINESS LOSS OF RS.4,13,20,059/- AFTER CLAIMING DEPRECIATION OF RS. 28,602/- ON THE FIXED ASSETS. THE ASSESSEE COMPANY HAS NEITH ER HIRED ANY PERSON FOR RUNNING DAY TO DAY ACTIVITIES NOR PA ID ANY REMUNERATION TO THE DIRECTORS. 5. THE ASSESSING OFFICER CONCLUDED BY HOLDING AS I HOLD THAT THE INTEREST EARNED ON LOAN & ADVANCES GIVEN TO VARIOUS PERSONS & CORPORATE BODIES AND BANK INTEREST FDRS IS INCOME FROM OTHER SOURCES AS THE COMPANY HAS NOT COMMENCED ANY BUSINESS ACTIVITY DUR ING THE YEAR AND SINCE ITS BUSINESS HAD NOT STARTED, THERE COULD NOT BE ANY COMPUTATION OF BUSINESS INCOME OR LOSS INCURRED BY THE ASSESSEE IN THE RELEVANT ACCOUNTING YEAR. IN SUCH A SITUATION, THE EXPENDITU RE INCURRED BY THE ASSESSEE FOR THE PURPOSE OF SETTING UP ITS BUSINESS COULD NOT BE ALLOWED AS DEDUCTION NOR COULD IT BE ADJUSTED AGAINST ANY OTHE R INCOME UNDER ANY OTHER HEAD. 6. THE AO ALSO HELD THAT INTEREST INCOME EARNED BY THE ASSESSEE WAS INCOME FROM OTHER SOURCES AGAINST WHICH BUSINESS EX PENSES SHOULD NOT BE CLAIMED; HENCE A SUM OF RS.94,25,071/- WAS ASSES SED AS INCOME FROM OTHER SOURCES IN THE HANDS OF THE ASSESSEE. THE INT EREST PAID ON ITA NO.1408/DEL/2011 5 BORROWED CAPITAL AND OTHER EXPENSES WERE HELD TO BE PREOPERATIVE BUSINESS EXPENSES, AS THE ASSESSEE HAD NOT STARTED ITS BUSINESS DURING THE YEAR UNDER CONSIDERATION, HENCE THE EXPENSES WE RE NOT ALLOWED IN THE YEAR UNDER CONSIDERATION. 7. THE CIT(A) WITH REGARD TO THE SETTING UP OF THE BUSINESS HELD AS UNDER:- 4.1. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS M ADE ON BEHALF OF THE APPELLANT, THE FINDINGS OF THE ASSES SING OFFICER AND THE FACTS ON RECORD. FROM THE PAPER BOOK FILED BY THE ASSESSEE, THE FINANCIAL STATEMENTS AND THE FINDINGS IN THE ASSESSMENT ORDER IT IS APPARENT THAT DURING THE PRE VIOUS YEAR THE APPELLANT HAS BORROWED MONIES FOR PURCHASE OF L AND AT SONEPAT DISTRICT FOR THE REAL ESTATE TOWNSHIP PROJE CT AND INCURRED INTEREST EXPENDITURE OF RS.4,71,55,160/-. FURTHER IT HAS UTILIZED SUCH BORROWINGS FOR PURCHASE OF LAND I N ITS NAME AS WELL AS ADVANCED MONIES TO ASSOCIATE PARTIES FOR PURCHASE OF LAND BY THEM FOR THE TOWNSHIP PROJECT AT SONEPAT DISTRICT. ON THE MONEYS SO ADVANCED FOR PURCHASE OF LAND FOR THE PROJECT IT HAS EARNED INTEREST INCOME OF RS. 79,00,208/-. BESI DES IT HAS ALSO EARNED INTEREST ON BANK DEPOSITS OF RS.15,24,8 63/- AND DIVIDEND INCOME OF RS.35,694/- IN THE RELEVANT YEAR . FURTHER SUCH LAND ACQUIRED FOR THE PROJECT IS SHOWN AS STOC K IN TRADE IN THE FINANCIAL STATEMENTS OF THE APPELLANT AND ASSOC IATE COMPANIES. FROM THE MAIN OBJECT CLAUSE OF THE MEMORANDUM OF ASSOCIATION IT IS SEEN THAT THE ASSESSEE IS IN THE LINE OF BUSINESS OF PURCHASING, SELLING AND DEVELOPING PLOT /FLATS WHETHER RESIDENTIAL, COMMERCIAL, RURAL OR URBAN. FO R THIS PURPOSE THE LAND PURCHASED IS INITIALLY REQUIRED TO BE CONSOLIDATED AND DEVELOPED AFTER OBTAINING NECESSAR Y LICENSE ITA NO.1408/DEL/2011 6 FROM THE CONCERNED GOVERNMENT AGENCY AND THEN ONLY THE APPELLANT CAN UNDERTAKE THE ACTIVITY OF SELLING SUC H DEVELOPED PLOTS OR THE BUNGALOWS, OFFICES/FLATS CONSTRUCTED O N THEM TO THE PROSPECTIVE BUYERS. THERE IS NO DENYING THE FACT TH AT IN THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS MERELY AC QUIRED RAW LAND WORTH AROUND RS. 10.94 CRORES FROM CERTAIN PARTIES BY MAKING FIRST PURCHASE ON 12.01.06. APART FROM TH IS THERE IS A BOARD RESOLUTION DATED 01.03.06 WHEREBY THE APPEL LANT HAS BEEN SANCTIONED TO ENTER INTO DEVELOPMENT AGREEMENT AND FINANCIAL ASSISTANCE WITH THEIR ASSOCIATE COMPANIES FOR ACQUISITION OF LAND. THE DEVELOPMENT AGREEMENTS WIT H THE ASSOCIATE COMPANIES HAVE BEEN ENTERED IN THE NEXT F INANCIAL YEAR & APPLICATION FOR LICENSE FOR DEVELOPING TOWNS HIP AT SECTOR 33,34, & 35 SONEPAT HAS BEEN MADE BY THE APPELLANT BEFORE DIRECTOR, TOWN & COUNTRY PLANNING, CHANDIGARH IN JU LY 2008. PRIOR TO THIS ON 21.10.05 & 26.10.05 THE APPELLANT HAS ENTERED INTO AGREEMENT TO SELL FOR PURCHASE OF A PROPERTY A T 5, MAN SINGH ROAD, NEW DELHI. CONSIDERING THE ABOVE SEQUEN CE OF EVENTS IN MY CONSIDERED VIEW, THE MERE PURCHASE OF LAND IN ITSELF WOULD NOT RESULT IN EITHER SETTING UP OF BUS INESS OR ITS COMMENCEMENT. RATHER THIS IS ONLY A PREPARATORY STA GE IN ORDER TO START THE BUSINESS. THIS FACT IS ALSO EVID ENCED BY THE FACT THAT THERE ARE NO SALARY EXPENSES WHICH SHOWS THAT THERE ARE NO EMPLOYEES IN THE COMPANY, NOR THE APPELLANT HAS ANY OFFICE OR PLACE OF BUSINESS, AS SEEN FROM THE SCHED ULE OF ASSETS. THE CASE LAWS RELIED UPON BY THE APPELLANT ARE FOR OTHER NATURE OF BUSINESS AND THAT AS PER JUDICIAL DECISIONS ON T HE SUBJECT, IT IS A QUESTION OF FACT AS TO WHEN A BUSINESS IS SET UP WHICH HAS TO BE DETERMINED SEPARATELY FOR EACH LINE OF BUSINE SS. ACCORDINGLY GROUND NO. 1 OF THE APPELLANT IS DISMIS SED. 8. COMING TO THE SECOND ISSUE OF HOLDING THE EXPENS ES PREOPERATIVE IN NATURE, THE CIT(A) HELD THAT SINCE NO PROJECT HAD C OMMENCED DURING THE ITA NO.1408/DEL/2011 7 YEAR, INTEREST EXPENSES WERE TO BE CAPITALIZED AND WERE NOT ALLOWABLE IN THE YEAR. IT WAS FURTHER HELD THAT THE SET OFF OF I NTEREST INCOME WHICH AGAINST THE INTEREST EXPENDITURE CAN BE ALLOWED PAR TLY. THE CIT(A) DIRECTED THAT INTEREST INCOME OF RS.79,00,208/- (W HICH HAS ACCRUED ON ACCOUNT OF ADVANCES TO ASSOCIATE CONSORTIUM ENTITIE S FOR PURCHASE OF LAND) BE SET OFF AGAINST INTEREST EXPENDITURE OF RS .4,71,55,160/- (INCURRED ON ACCOUNT OF BORROWALS FOR PURCHASE OF L AND) AND THE BALANCE AMOUNT OF RS.3,92,54,952/- ONLY SHALL BE CAPITALISE D. AT THE COST OF REPETITION IT IS AGAIN REITERATED THAT THE CAPITALI ZATION OF THIS INTEREST HAD TO BE WITH EACH OF THE SPECIFIC PROJECT AS WELL AS PROPERTY AT 5, MAN SINGH ROAD AND KURUKSHETRA ETC. FOR WHICH TOO ADVANCE HAD BEEN GIVEN DURING THE YEAR FROM THE BORROWED LOANS, ON WHICH THE INTE REST EXPENDITURE HAD BEEN CLAIMED. THUS THE CAPITALIZATION OF INTEREST F OR RS.3,92,54,952/- HAD TO PROPORTIONATELY DONE ACCORDING TO THE AMOUNT OF INVESTMENT IN THE PROJECTS & PROPERTIES BY WAY OF LOAN & ADVANCES (AS SETS) TOTALLING TO RS.315.34 CRORES DURING THE YEAR. 9. THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF T HE CIT(A). 10. THE LD. AR FOR THE ASSESSEE POINTED OUT THAT TH E ASSESSEE COMPANY WAS INCORPORATED ON 25.08.2005. OUR ATTENTION WAS DRAWN TO PAGE 6 OF THE APPELLATE ORDER, WHEREIN THE DETAILS OF THE ACT IVITIES UNDERTAKEN DURING THE YEAR ITSELF ARE TABULATED. HE TOOK US TH ROUGH THE EVENT OF THE YEAR I.E. PURCHASE OF LAND AT SONEPAT AND THEN SECO ND PURCHASE OF LAND AT MAN SINGH ROAD PROPERTY. THE ASSESSEE POINTED OU T THAT THE MAJOR ITA NO.1408/DEL/2011 8 INVESTMENTS WERE MADE FOR PURCHASE OF PROPERTY IN O RDER TO LAUNCH THE PROJECT OF MORE THAN 100 ACRES AT SONEPAT AND SIMIL ARLY, SUBSTANTIAL AMOUNT TOTALLING RS.116.67 CRORES WAS PAID FOR PURC HASE THE PROPERTY AT MAN SING ROAD. OUR ATTENTION WAS INVITED TO THE REL EVANT DOCUMENTS WHICH ARE PLACED IN PAPER BOOK. THEN HE POINTED OUT THAT BOARD RESOLUTION WAS PASSED ON 01.03.2006 FOR ENTERING IN TO DEVELOPMENT AGREEMENT WHICH WAS ENTERED INTO AT THE START OF TH E NEXT YEAR. THE LD. AR FOR THE ASSESSEE ALSO POINTED OUT THAT THE ABOVE SAID PROJECTS WERE APPROVED IN THE SUCCEEDING YEARS AND THIS WAS IN LI NE WITH THE BUSINESS ACTIVITY UNDERTAKEN BY THE ASSESSEE. HE THEN REFERR ED THE BALANCE SHEET PLACED AT PAGES 30 AND 36 OF THE PAPER BOOK, WHEREI N, ASSETS WERE SHOWN UNDER LOANS AND ADVANCES. UNDOUBTEDLY, NO INCOME WA S GENERATED DURING THE YEAR BUT ASSESSEE HAD ACTUALLY COMMENCED THE BUSINESS AND NOT ONLY SET UP THE BUSINESS. IT WAS REITERATED BY THE LD. AR FOR THE ASSESSEE THAT FUNDS WERE BORROWED, PORTION OF LAND WAS ACQUIRED AND ADVANCE WAS GIVEN FOR ACQUISITION OF BALANCE LAND A ND STEPS WERE TAKEN TO ENTER INTO DEVELOPMENT AGREEMENT. HE FURTHER RE FERRED TO VARIOUS CASE LAWS TO POINT OUT THAT IN LINE WITH AFORESAID STEPS TAKEN, THE BUSINESS COULD BE SAID TO HAVE COMMENCED. HE STRESSED THAT P URCHASE OF LAND ITSELF WAS START OF BUSINESS ACTIVITY AND SPECIALLY WHERE FUNDS WERE BORROWED AND LAND WAS ACQUIRED, SUBSTANTIAL ACTIVIT IES HAVING BEEN TAKEN PLACE, IT COULD NOT BE SAID THAT THERE WAS NO COMMENCEMENT OF BUSINESS. ITA NO.1408/DEL/2011 9 11. THE LD. DR FOR THE REVENUE POINTED OUT THAT THE QUESTION WAS WHETHER THE BUSINESS WAS SET UP OR HAD COMMENCED. H E POINTED OUT THAT THE CASE OF THE ASSESSEE WAS THAT WHEN SET UP WAS D ONE, THE BUSINESS WAS COMMENCED. THE LD. DR FOR THE REVENUE STRONGLY RELIED UPON THE ORDER OF CIT(A). 12. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE FIRST ISSUE WHICH ARISES IN THE PRESENT APPEAL IS A GAINST THE CLAIM OF THE ASSESSEE AS TO SETTING UP OF BUSINESS DURING THE YE AR UNDER CONSIDERATION ITSELF. THE ASSESSEE COMPANY WAS INCO RPORATED ON 25.08.2005 AND THE NATURE OF THE BUSINESS WAS TO BE ENGAGED IN THE BUSINESS OF REAL ESTATE. DURING THE INSTANT ASSESSM ENT YEAR, THE ASSESSEE HAD ACQUIRED LAND FOR DEVELOPMENT OF TOWNSHIP AT SE CTOR-33, 34, 35 AT SONEPAT. FOR THIS, THE ASSESSEE RAISED LOANS FROM T HE BANKS AND ALSO ENTERED INTO JOINT DEVELOPMENT AGREEMENT. THE MINIM UM AREA REQUIREMENT FOR RESIDENTIAL COLONY WAS 100 ACRES AN D THE ASSESSEE ALONG WITH ITS ASSOCIATES TOGETHER ACQUIRED 161.3811 ACRE S IN ORDER TO FULFIL THE MINIMUM AREA NORMS FOR PLOTTED COLONY AT SONEPAT. T HE SAID LAND WAS ACQUIRED IN CONSORTIUM WITH OTHER ASSOCIATE COMPANY DUE TO CEILING ON HOLDINGS OF LAND AS PER THE HARYANA CEILING ON HOLD INGS ACT, 1972. THE ASSESSEE PURCHASED 19 ACRES OF LAND BY ITSELF AND A DVANCED MONEY TO THE CONSORTIUM ASSOCIATE ENTITIES TO PURCHASE LAND IN T HEIR RESPECTIVE NAMES TO MEET WITH THE LAND CEILING LIMITS. AN AGREEMENT WAS ENTERED INTO BETWEEN THE PARTIES FOR JOINT DEVELOPMENT OF LAND A ND ADVANCEMENT OF ITA NO.1408/DEL/2011 10 MONEIES FOR PURCHASE OF LAND. FURTHER MEMORANDUM OF UNDERSTANDING WAS SIGNED BETWEEN THE ASSESSEE COMPANY AND ASSOCIA TES, AUTHORISING IT TO MAKE SUCH APPLICATION/S ON THEIR BEHALF AS LEAD APPLICANT. THE PROCESS OF ACQUISITION OF LAND WAS SPREAD OVER A PE RIOD OF TIME AND THE APPLICATION FOR OBTAINING LICENSE WAS FILED IN THE MONTH OF JULY, 2008. THE CLAIM OF THE ASSESSEE WAS THAT IT HAD PURCHASED THE LAND DURING THE YEAR ITSELF WHICH WAS HELD AS STOCK IN TRADE AT CLO SE OF THE YEAR AND HENCE THE BUSINESS HAD COMMENCED. IN ORDER TO ESTABLISH I TS CASE OF START OF BUSINESS, THE ASSESSEE HAS FILED A LIST OF THE EVEN TS BEFORE THE CIT(A) WHICH IS REPRODUCED AT PAGE-6 AND READS AS UNDER:- TIMELINE OF ACTIVITIES OF JINDAL REALTY PVT LTD. DUR ING AY2006-07 S. NO PARTICULARS REFERENCE DATE 1 FORMATION OF THE COMPANY UNDER SECTION 12 OF THE COMPANIES ACT, 1956 25/08/05 2 BOARDS SANCTION FOR PROPERTY ACQUISITION BOARD RESOL. 11/10/05 3 BOARDS SANCTION FOR BORROWINGS FOR LAND ACQUISITION BOARD RESOL. 11/10/05 4 FIRST LOAN TRANSACTION FOR LAND PURCHASE BANK STATEMENT 13/10/05 5 FIRST PURCHASE OF LAND TITLE DEED 12/01/06 6 COPY OF AGREEMENTS TO SELL FOR PURCHASE OF MANSINGH ROAD PROPERTY 21/10/05 & 26/10/05 7 BOARD SANCTION FOR EXECUTION OF DEVELOPMENT AGREEMENT AND FINANCIAL ASSISTANCE FOR LAND ACQUISITION BOARD RESOLUTION 01/03/06 8 ENTERING INTO DEVELOPMENT AGREEMENT BOARD RESOLUTION DT.01.03.06 03/04/06 14/04/06 20/04/06 08/05/06 18/05/06 05/06/06 28/08/06 & ITA NO.1408/DEL/2011 11 20/1007 9 APPLICATION FOR LICENSE 23/07/08 10 RECEIPT OF LETTER OF INTENT 20/07/09 13. A PERUSAL OF THE SAID LIST OF EVENTS ALONGWITH RELEVANT DOCUMENTS PLACED IN PAPER BOOK ESTABLISHES THAT THE FIRST LAN D WAS PURCHASED AT SONEPAT VIDE DEED DATED 12.01.2006 AND THE SAID LAN D HAD BEEN REFLECTED AS STOCK IN TRADE IN THE BALANCE SHEET AS ON 31.03. 2006. FURTHER, THE BOARD RESOLUTION DATED 01.03.2006 WAS PASSED FOR EX ECUTION OF DEVELOPMENT AGREEMENT AND FOR OBTAINING FINANCIAL A SSISTANCE FOR LAND ACQUISITION. THE COPY OF THE LETTER IS PLACED AT PA GES 80 AND 81 OF THE PAPER BOOK. THE ASSESSEE ENTERED INTO DEVELOPMENT A GREEMENT IN THE INITIAL MONTH OF THE SUCCEEDING YEAR AND THE COPY O F THE DEVELOPMENT AGREEMENT IS PLACED AT PAGES-138 TO 180 OF THE PAPE R BOOK. ONCE THE LAND BANK WAS COLLECTED BY THE ASSESSEE AND ITS ASS OCIATE AS PER THE REQUIREMENT OF HARYANA LAWS, AN APPLICATION FOR GRA NT OF LICENSE WAS MOVED ON 23.07.2008, COPY OF WHICH IS PLACED AT PAG ES 182 TO 317 OF THE PAPER BOOK. THE LETTER OF INTENT WAS RECEIVED ON 20 .07.2009 WHICH IS PLACED IN THE PAPER BOOK. ANOTHER INVESTMENT WAS MA DE BY THE ASSESSEE WAS ENTERING IN AGREEMENT FOR PURCHASE OF MAN SING ROAD PROPERTY, WHEREIN AGREEMENT OF SALE WAS ENTERED DATED 25.10.2 005 PLACED AT PAGES 332 ONWARDS. THE ASSESSEE HAS ALSO FILED DETAILS OF LAND PURCHASED AT PAGES 83 TO 101 OF THE PAPER BOOK. ITA NO.1408/DEL/2011 12 14. THE QUESTION WHICH ARISES FOR ADJUDICATION IS W HETHER SET UP OF BUSINESS IS ONLY SET UP OR IS ALSO COMMENCEMENT OF BUSINESS. LOOKING AT THE FACTS IN ENTIRETY WHAT TRANSPIRES IS THAT THE ASSESSEE HAD ESTABLISHED ITS COMPANY, BORROWED FUNDS FOR PURCHASE OF PORTION OF LAND IN OWN NAME AND FURTHER GAVE LOAN TO THE ASSOCIATES FOR AC QUISITION OF LAND AND THEN ENTERED INTO DEVELOPMENT AGREEMENT FOR THE DEV ELOPMENT OF TOWNSHIP AT SONEPAT. 15. THE HONBLE BOMBAY HIGH COURT IN WESTERN INDIA VEGETABLE PRODUCTS LTD. VS CIT 26 ITR 151 (BOM.) HAS LAID DOW N THE PROPOSITION THAT THERE WAS A CLEAR DISTINCTION BETWEEN A PERSON COMMENCING A BUSINESS AND A PERSON SETTING UP A BUSINESS AND FOR THE PURPOSE OF THE INDIAN INCOME TAX ACT, THE SETTING UP OF THE BUSINE SS AND NOT THE COMMENCEMENT OF THE BUSINESS, IS TO BE CONSIDERED. IT IS ONLY AFTER THE BUSINESS IS SET UP IN THE PREVIOUS YEAR, THE BUSINE SS COMMENCES AND ANY EXPENSES INCURRED PRIOR TO THE SETTING UP OF A BUSINESS WOULD NOT BE A PERMISSIBLE DEDUCTION. WHEN A BUSINESS IS ESTABLI SHED AND IS READY TO COMMENCE BUSINESS THEN IT CANNOT BE SAID THAT BUSIN ESS HAD NOT SET UP. THERE MAY HOWEVER BE AN INTERVAL BETWEEN THE SETTIN G UP OF THE BUSINESS AND THE COMMENCEMENT OF THE BUSINESS AND ALL EXPENS ES INCURRED DURING THAT INTERVAL WOULD BE PERMISSIBLE DEDUCTIONS. 16. THE HONBLE GUJARAT HIGH COURT IN CIT VS SAURA SHTRA CEMENT AND CHEMICAL INDUSTRIES LTD. 91 ITR 170(GUJ.) HELD THAT BUSINESS CONNOTES A CONTINUOUS COURSE OF ACTIVITIES. ALL THE ACTIVITI ES WHICH GO TO MAKE UP ITA NO.1408/DEL/2011 13 THE BUSINESS NEED NOT BE STARTED SIMULTANEOUSLY IN ORDER THAT THE BUSINESS MAY COMMENCE. THE BUSINESS WOULD COMMENCE WHEN THE ACTIVITY WHICH IS FIRST IN POINT OF TIME AND WHICH MUST NECESSARILY PRECEDE ALL OTHER ACTIVITIES. IS STARTED. 16. THE HONBLE DELHI HIGH COURT IN CASE OF DHOOMKE TU BUILDERS & DEVELOPMENT (P.) LTD. VS ACIT 368 ITR 680 (DEL.) WAS CONSIDERING THE CASE OF A PERSON ENGAGED IN REALTY BUSINESS, WHO HA D PARTICIPATED IN AN AUCTION TO ACQUIRE A PIECE OF LAND. IT WAS NOTED T HAT IN ORDER TO BID FOR THE LAND, LOAN WAS OBTAINED FROM ITS HOLDING COMPAN Y AND THE SAME WAS DEPOSITED AS EARNEST MONEY TO BID FOR THE LAND. HO WEVER, THERE WAS NO SUCCESS IN AUCTION, BUT THE INTEREST PAID ON BORROW ED LOANS AND INTEREST RECEIVED ON EARNEST MONEY WAS NET OFF AND THE LOSS WAS CLAIMED TO BE CARRIED FORWARD. THE TRIBUNAL HELD IN SUCH FACTS TH ERE WAS SETTING OFF OF BUSINESS AND THE SAME WAS HELD TO BE FINDING OF FAC TS BY THE HONBLE HIGH COURT. 17. THE HONBLE DELHI HIGH COURT IN CIT VS ARCANE D EVELOPERS (P) LTD. 368 ITR 627 (DEL.) WHILE DECIDING THE ISSUE OF ALLO WABILITY OF INTEREST EXPENDITURE ON BORROWED LOAN HELD THAT WHEN THE BUS INESS OF ASSESSEE HAD COMMENCED/WAS SET UP, ON OBTAINING LOAN FOR MAK ING INVESTMENT, IT WAS HELD THAT DATE OF SETTING UP OF BUSINESS AND DATE OF COMMENCEMENT OF BUSINESS MAY BE TWO SEPARATE DATES. HOWEVER, THE DATE OF SETTING UP OF BUSINESS DEPENDS UPON FACTS A ND THE NATURE OF THE BUSINESS. IN THE FACTS OF THE SAID CASE, WHERE THE ASSESSEE COMPANY WAS ITA NO.1408/DEL/2011 14 INCORPORATED FOR CARRYING ON THE BUSINESS OF DEVELO PERS AND PROMOTERS, THEN WHERE A MEMORANDUM OF UNDERSTANDING WAS ENTERE D INTO FOR ARRANGEMENT OF FUNDS, THEN THE HONBLE HIGH COURT H ELD AS UNDER:- MEMORANDUM OF UNDERSTANDING IS CULMINATION OF THE NEGOTIATIONS STARTED AND UNDERTAKEN EARLIER AND SUBSEQUENTLY FRUCTIFIED ON PAYMENT BY THE RESPONDEN T- ASSESSEE INTO THE JOINT VENTURE AGREEMENT. SETTING UP OF BUSINESS TAKES PLACE WHEN THE BUSINESS IS READY AND FIRST STEPS ARE TAKEN. IN CASE OF REAL ESTATE BUSINESS, T HE SAID SETTING UP OF BUSINESS WAS COMPLETE WHEN FIRST STEP S WERE TAKEN BY THE RESPONDENT-ASSESSEE TO LOOK AROUND AND NEGOTIATE WITH PARTIES. THERE CAN BE A GAP BETWEEN SETTING UP AND WHEN FIRST STEPS WERE TAKEN BY THE RESPONDEN T AND FINALISATION OF THE FIRST WRITTEN AGREEMENT. BU SINESS ACTIVITIES OF THE RESPONDENT DID NOT REQUIRE CONSTR UCTION OF A FACTORY, MACHINERY ETC. NEGOTIATIONS ARE REQUIRED TO ENTER INTO A WRITTEN UNDERSTANDING AND IT IS OBVIOUS THAT THE LOAN WAS TAKEN FOR BUSINESS AND TO PROCEED FURTHER AND CONCLUDE THE DEAL. THE AFORESAID FACTS HAVE BEEN EXAMINED AND HIGHLIGHTED BY THE FIRST APPEAL LATE AUTHORITY. THE SAID FINDINGS OF FACT HAVE BEEN AFFI RMED BY THE TRIBUNAL. A PRAGMATIC AND A PRACTICAL VIEW HAS TO BE TAKEN. 18. THE HONBLE HIGH COURT THUS HELD THAT SETTING U P OF BUSINESS TAKES PLACE THEN THE BUSINESS IS READY AND THE FIRST STEP S ARE TAKEN, WHICH IN THE CASE OF REAL ESTATE BUSINESS WERE WHEN THE ASSE SSEE LOOKS AROUND AND NEGOTIATE WITH PARTY. IN SUCH A SCENARIO, THE A SSESSEE WAS HELD ENTITLED TO CLAIM OF INTEREST AS BUSINESS EXPENDITU RE 19. APPLYING THE ABOVE SAID PROPOSITION TO THE FACT S OF THE PRESENT CASE, WE HOLD THAT IN THE CASE OF THE ASSESSEE WHER E SUBSTANTIAL ACTIVITIES WERE CARRIED OUT BY THE ASSESSEE, SINCE THE DATE OF INCORPORATION WHICH ITA NO.1408/DEL/2011 15 HAD CULMINATED IN RAISING LOANS, MAKING INVESTMENT IN PURCHASE OF LAND, WHICH WAS REFLECTED AS STOCK IN TRADE AND ALSO ADVA NCING LOANS TO ASSOCIATE CONCERNS FOR PURCHASING DIFFERENT PIECES OF LAND, IN ORDER TO FULFIL THE CONDITION OF LAND BANK OF 100 ACRES OR M ORE, TO DEVELOP THE TOWNSHIP IN HARYANA AND WHERE THE ASSESSEE IS ENTER ED INTO DEVELOPMENT AGREEMENT AT THE CLOSE OF THE PRESENT YEAR/BEGINNIN G OF THE NEXT YEAR, THEN ASSESSEE CAN BE SAID TO HAVE SET UP AND COMMEN CED ITS BUSINESS. FURTHER, THE ASSESSEE HAVING ALSO INVESTED SUBSTANT IAL AMOUNT IN THE PURCHASE OF ANOTHER PROPERTY IN THE YEAR ITSELF, TH US, SET UP OF ITS BUSINESS AS PER ITS MEMORANDUM OF UNDERSTANDING WAS DONE, SINCE IT WAS ENGAGED IN THE BUSINESS OF REAL ESTATE. IT IS H ELD THAT THERE IS NO MERIT IN THE ORDER OF THE AUTHORITIES BELOW IN THIS REGARD AND THE SAME ARE REVERSED. ACCORDINGLY, WE HOLD THAT THE ASSESSE E HAVING NOT ONLY SET UP ITS BUSINESS BUT HAD ALSO COMMENCED ITS BUSINESS DURING THE PREVIOUS YEAR ITSELF. HENCE, GROUND NO.1 OF THE ASS ESSEE IS ALLOWED. 20. NOW COMING TO THE SECOND ISSUE RAISED BY THE AS SESSEE, IT IS CONSEQUENT TO THE FIRST ISSUE RAISED IN THE PRESENT APPEAL. ONCE THE BUSINESS HAD BEEN SET UP AND ALSO COMMENCED IN INST ANT YEAR ITSELF, THEN THE INTEREST EXPENSES CLAIMED BY THE ASSESSEE AND ANY OTHER EXPENDITURE CLAIMED BY THE ASSESSEE IS TO BE ALLOWE D AS BUSINESS EXPENDITURE. THE ASSESSEE HAD ALSO PARKED CERTAIN F UNDS TEMPORARILY IN THE BANK FDRS, ON WHICH IT HAD EARNED INTEREST WHIC H IS TO INCLUDE ALSO AS BUSINESS INCOME IN THE HANDS OF THE ASSESSEE. AC CORDINGLY, GROUND NO ITA NO.1408/DEL/2011 16 2 AND 3 RAISED BY THE ASSESSEE ALSO STAND DECIDED I N THE FAVOUR OF THE ASSESSEE AND SAME IS DISMISSED. 21. GROUND NO. 4 IS AN ALTERNATE CLAIM PRAYER MADE BY THE ASSESSEE DOES NOT REQUIRE ANY ADJUDICATION. 22. THE LAST ISSUE RAISED VIDE GROUND NO.5 IS TAXAB ILITY OF INTEREST INCOME, WHICH WE HAVE ALREADY HELD AS BUSINESS INCO ME; EVEN OTHERWISE THE SAID INTEREST INCOME NEEDS TO BE SET UP OF AGAI NST INTEREST EXPENDITURE AS FUNDS HAVE BEEN BORROWED BY THE ASSE SSEE AND ONLY SURPLUS BORROWED FUNDS HAVE BEEN INVESTED IN BANK F DRS. ACCORDINGLY, THE GROUND NO. 5 RAISED BY THE ASSESSEE IS ALLOWED. 23. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND JUNE, 2020. SD/- SD/- (O.P.KANT) (SUSHMA CHOWLA) () /ACCOUNTANT MEMBER ! / VICE PRESIDENT / DATED : 22 ND JUNE, 2020 SHEKHAR, SR. PS . 30.*&4565&7 COPY OF THE ORDER IS FORWARDED TO : 1. ,- / THE APPELLANT 2. ./,- / THE RESPONDENT 3. 8& 9 : / THE CIT(A) 4. ; 8& / THE PR. CIT 5. 5<=.*&* > > / DR, ITAT, DELHI ITA NO.1408/DEL/2011 17 6. =+? 7 GUARD FILE. [ 3 / BY ORDER , /5&.*& // TRUE COPY // @ AB)C , > ASSISTANT REGISTRAR, ITAT, DELHI .