Texworld Fashions Pvt. Ltd., Ahmedabad V. The Income Tax Officer, Ward-4(1)(1), Ahmedabad

ITA 1442/AHD/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 6081 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 8 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-02-2018
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: SMC
• Assessment Year: 2012-2013
• Appeal Filed On: 31-05-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Unexplained cash credit; Business income; Depreciation; Business expenditure; Capital expenditure
• Section: 143(3); 153A

Judgement Text

, ,L ,L,L ,L- -- -,E ,E,E ,E- -- -LH LHLH LH IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH, AHMEDABAD BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI MAHAVIR PRASAD, JUDICIAL MEMBER !# I.T.A. NO. 1442/AHD/2016 ( / ASSESSMENT YEAR : 2012-13) TEXWORLD FASHIONS PVT. LTD., 63/2, NEW CLOTH MARKET, AHMEDABAD 380 002 # VS. ITO, WARD 4(1)(1), AHMEDABAD. $ # % & # PAN/GIR NO. : AACCT 2582 M ( !$' / APPELLANT ) .. ( ($' # RESPONDENT ) !$') # APPELLANT BY : SHRI SANJAY R. SHAH, A.R. ($'*) / RESPONDENT BY : SHRI MUDIT NAGPAL, SR. D.R. + ,*-. / DATE OF HEARING 07/02/2018 /012*-. / DATE OF PRONOUNCEMENT 20/02/2018 3# O R D E R PER MAHAVIR PRASAD, JUDICIAL MEMBER : THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORD ER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-7, AHMEDABAD, VIDE APPEAL NO.CIT(A)-7/126/15-16 DATED 14/03/2016 FOR THE ASSE SSMENT YEAR (AY) 2012-13. 2. THE ASSESSEE HAS TAKEN FOLLOWING GROUNDS OF APPE ALS: 1.0 (I) THE LEARNED CIT(A) ERRED IN LAW AND ON FAC TS IN CONFIRMING DISALLOWANCE OF RS.19,92,128/- U/S.36(1) (III) OF THE ACT ON THE GROUND THAT THE APPELLANT HAS NOT COMMEN CED BUSINESS. YOUR APPELLANT SUBMITS THAT THE APPELLANT HAS ALREADY COMMENCED THE BUSINESS BY RENTING OUT ITS LAND AND EARNING ITA NO.1442/AHD /2016 TEXWORLD FASHIONS PVT. LTD. VS. ITO ASST.YEAR 2012-13 - 2 - RENTAL OF RS.7,20,000/- DURING THE YEAR. IT SUBMITT ED THAT IT BE SO HELD NOW AND DEDUCTION OF INTEREST PAID OF RS.19,92 ,128/- BE ALLOWED TO THE APPELLANT. (II) IN ANY CASE, WITHOUT PREJUDICE TO ABOVE, IF THE SAID AMOUNT OF INTEREST OF RS.19,92,128/- IS HELD AS NOT ALLOWABLE THE SAME BE DIRECTED TO BE CAPITALIZED AS PRELIMINARY EXPENSE A ND DIRECTION BE GRANTED TO ALLOW DEPRECIATION ON THE SAME CONSID ERING IT AS CAPITAL EXPENDITURE. 2.0(I) THE LEARNED C1T(A) ERRED IN CONFIRMING DISAL LOWANCE OF RS.5,73,796/- U/S 35D OF THE ACT MADE BY THE LEARNE D A.O. (II) WITHOUT PREJUDICE TO ABOVE, IF IT IS HELD THAT THIS AMOUNT OF PRELIMINARY EXPENSE OF RS.28,68,982/- OF WHICH 1/5 TH , I.E. RS.5,73,796/- IS NOT ALLOWABLE U/S.35D OF THE ACT, THE SAID AMOUNT MAY PLEASE BE DIRECTED TO BE ALLOWED TO BE CAPITALI ZED AND APPROPRIATE THEREON BE DIRECTED TO BE GRANTED. 3. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERI ALS ON RECORD ARE AS UNDER:- THE ASSESSEE COMPANY WAS INCORPORATED WITH AN OBJEC T TO CARRY ON MANUFACTURING IN TRADING OF CLOTH. THE CASE WAS DIS CUSSED WITH AR DURING THE COURSE OF ASSESSMENT PROCEEDINGS. 4. THE ISSUES ARISING DURING THE COURSE OF ASSESSME NT, PROCEEDINGS, WHICH AFFECT THE TOTAL INCOME OF THE ASSESSEE COMPA NY, ARE DISCUSSED AS UNDER: 4.1 DISALLOWANCES U/S.36(L)(III) OF THE IT ACT. DURING THE ASSESSMENT PROCEEDINGS, IT IS NOTICED TH AT THE ASSESSEE COMPANY HAS SHOWN ONLY RENT INCOME OF RS.7,20,000/- AND NO RECEIPT/ SALES HAS BEEN SHOWN IN THE PROFIT & LOSS ACCOUNT DURING THE YEAR UNDER CONSIDERATION. HOWEVER, THE ASSESSEE COMPANY HAS CLAIMED ITA NO.1442/AHD /2016 TEXWORLD FASHIONS PVT. LTD. VS. ITO ASST.YEAR 2012-13 - 3 - BUSINESS EXPENDITURE OF RS.30,03,166/- IN THE PROFI T & LOSS ACCOUNT. THEREFORE, THE SAME IS PRIMA FACIE NOT ALLOWABLE AS BUSINESS EXPENDITURE. FURTHER, IT IS ALSO NOTICED THAT THE RENT INCOME SH OWN BY THE ASSESSEE COMPANY SHOULD BE TAXED UNDER THE HEAD INCOME FROM HOUSE PROPERTY. ACCORDINGLY, QUERIES HAVE BEEN RAISED BEFORE THE AS SESSEE COMPANY IN THIS REGARD VIDE LETTER DATED 13/10/2014. THE SAID QUERIES ARE REPRODUCED HEREUNDER: VI) ON VERIFICATION OF P & L A/C OF THE COMPANY IT IS NOTICED THAT THERE IS NO BUSINESS INCOME SHOWN IN THE P & L A/C. THEREFORE, SUBMIT YOUR EXPLANATION WHY THE EXPENSES DEBITED OF RS.30,03,166 SHOULD NOT BE DISALLOWED ON THE GROUND THAT THESE EXPENDITURE ARE REQUIRED TO EITHER CAPITALIZE AGAIN ST THE FIXED ASSETS SHOWN IN THE BALANCE SHEET OR TREATED PREOPE RATIVE EXPENDITURE OF THE COMPANY. VII) PLEASE SUBMIT DETAILS OF PROPERTY GIVEN ON RE NT BY THE COMPANY DURING THE YEAR AND ALSO SUBMIT YOUR EXPLANATION AS TO WHY RENT INCOME SHOULD NOT BE TAXED UNDER THE HEAD INCOME FR OM HOUSE PROPERTY. IN RESPONSE OF THE ABOVE QUERIES, THE ASSESSEE COMP ANY HAS SUBMITTED ITS EXPLANATION VIDE LETTER DATED 18/10/2 014 RECEIVED ON 22/10/2014 AS UNDER: DURING THE YEAR UNDER REVIEW THE COMPANY HAS EARNE D BUSINESS INCOME OF RS.7,20,000. KINDLY NOTE THAT THIS IS BUS INESS INCOME AND NOT THE INCOME FROM HOUSE PROPERTY. KINDLY NOTE THAT TH E MAIN OBJECT OF THE COMPANY IS TO DO MANUFACTURING AND TRADING IN TEXTI LE AND TEXTILE PRODUCTS. THE COMPANY ACQUIRED LAND FOR ITS BUSINES S AND DEVELOPED IT. WHILE IT WAS SCOUTING AND APPRAISING VARIOUS PROPOS ALS FOR SETTING UP THE TEXTILES BUSINESS, IT GOT A CHANCE TO USE A PAR T OF ITS DEVELOPED LAND. IT ALLOWED M/S. NANDAN EXIM PRIVATE LIMITED TO USE THIS LAND FOR PARKING OF THEIR VEHICLES. FOR USING THE LAND M/S N ANDAN EXIM LIMITED PAID TO THE COMPANY A SUM OF RS.7,20,000 AS USER CH ARGES AND RS.2,17,261 AS REIMBURSEMENT OF SECURITY EXPENSES P AID BY THE COMPANY. KINDLY NOTE THAT THE COMPANY HAD NO BUILDI NG READY FOR ITA NO.1442/AHD /2016 TEXWORLD FASHIONS PVT. LTD. VS. ITO ASST.YEAR 2012-13 - 4 - GIVING ON RENT. IT DID MERELY GIVE A PART OF ITS LA ND FOR USE TO M/S NANDAN EXIM LIMITED. KINDLY NOTE THAT WHEN A BUSINE SS ASSET IS LET OUT FOR A TEMPORARY PERIOD JUST TO GET SOME INCOME OUT OF THE PROPERTY WHICH IS MEANT FOR ULTIMATE USE OF THE BUSINESS (FOR SETTING UP A TEXTILE MANUFACTURING UNIT IN THIS CASE), THE INCOME ARISIN G OUT OF THIS LETTING OUT IS TREATED AS INCOME FROM BUSINESS. (UNIVERSAL PLAST V CIT (1999) 237 ITR 454(SC) AT PAGE 460 BASED ON THE EARLIER DE CISIONS OF THE COURT INCLUDING CIT V SHRI LAKSHMI SILK MILLS LIMITED (19 51) 20 ITR 451 (SC) KINDLY NOTE THAT DURING THE YEAR, THE COMPANY INCUR RED EXPENDITURE OF RS.30,03,166/- FOR EARNING THE BUSINESS INCOME. TH EREFORE, THE EXPENDITURE INCURRED IS ALLOWABLE EXPENDITURE. THE REPLY OF THE ASSESSEE COMPANY HAS BEEN DULY CON SIDERED AS REGARDS TO THE RENT INCOME. HOWEVER, AS PER THE RE PLY OF THE ASSESSEE COMPANY IT IS FOUND THAT THE INTEREST EXPENDITURE D EBITED IN THE PROFIT & LOSS ACCOUNT IS NOT ALLOWABLE AS PER PROVISO OF SEC TION 36(I)(III) OF THE I.T. ACT. THEREFORE, A SHOW-CAUSE NOTICE WAS ISSUED TO THE ASSESSEE COMPANY ON 31/10/2014 AND CASE WAS FIXED FOR HEARIN G ON 02/12/2014 REGARDING DISALLOWANCES OF INTEREST EXPENDITURE OF RS.19,92,128/- U/S.36(I)(VII) OF THE I.T. ACT. THE RELEVANT PORTIO N OF THE SHOW-CAUSE NOTICE IS REPRODUCED HEREUNDER: 3. ON VERIFICATION OF THE REPLY, IT IS NOTICED THAT YO U HAVE ACCEPTED THAT THE FACTORY BUILDING & PLANT OF THE COMPANY IS UNDER CONSTRUCTION. FURTHER, YOUR COMPANY HAS GIVEN LAND ON RENT TO NAN DAN EXIM PVT. LTD. FOR PARKING PURPOSE. THEREFORE, IT IS CLEAR TH AT FACTORY BUILDING & PLANT IS NOT PUT TO USE FOR THE PURPOSE OF THE BUSI NESS OF THE COMPANY. IN THIS REGARD, YOUR ATTENTION IS DRAWN TO THE PROVISI ONS OF SEC.36(1)(III) OF THE ACT WHICH PROVIDES FOR ALLOWANCE OF INTEREST PA YMENT IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSES OF THE BUSINESS O R PROFESSION. FURTHER, AS PER THE PROVISO BELOW CLAUSE (III) TO S EC.36(1) OF THE ACT, THE AMOUNT OF INTEREST PAID, IN RESPECT OF CAPITAL BORR OWED FOR ACQUISITION OF AN ASSET TILL THE DATE ON WHICH SUCH ASSETS IS F IRST PUT TO USE, SHALL NOT BE ALLOWED AS DEDUCTION. UNDER THE CIRCUMSTANCES, Y OUR CLAIM FOR ITA NO.1442/AHD /2016 TEXWORLD FASHIONS PVT. LTD. VS. ITO ASST.YEAR 2012-13 - 5 - DEDUCTION OF INTEREST EXPENSES OF RS.19,92,128/- FO R ACQUISITION OF ASSET IS NOT ALLOWABLE U/S.36(1)(III) OF THE ACT. PLEASE EXPLAIN WHY THE SAME SHOULD NOT BE DISALLOWED AND ADDED BACK TO THE TOTA L INCOME OF YOUR COMPANY. IN RESPONSE TO THE ABOVE SHOW CAUSE NOTICE, THE ASS ESSEE COMPANY VIDE LETTER DATED 02/12/2014 HAS SUBMITTED, WHICH I S REPRODUCED HEREUNDER: 'KINDLY REFER TO YOUR SHOW NOTICE DATED 31ST OCTOBE R, 2014. IN THIS CONNECTION WE WOULD LIKE TO SUBMIT THAT TH E COMPANY INCURRED THE FOLLOWING EXPENDITURE ON LAND AND LAND DEVELOPM ENT: SR. PARTICULARS RS. 1. LAND 55,21,300 2. CETP 43,68,750 3. BOUNDARY WELL AND SHED 17,88,193 4. PRELIMINARY AND PREOPERATIVE 22,95,185 KINDLY NOTE THAT THE LAND, C.E.T.P AS WELL THE SHED WERE READY FOR USE. AS THE LAND AND SHED WAS READY FOR USE, THE COMPANY GAVE THE PREMISES ON HIRE TO NANDAN EXIM LIMITED. NANDAN EXIM LIMITED DID USE THIS PREMISES ITS VARIOUS PURPOSES. KINDLY NOTE THAT THE ASSETS WERE READY FOR USE AND THAT IS WHY WE COULD GIVE THEM ON RENT TO NANDAN EXIM LIMITED. AS THE COMPANY WAS NOT HAVING SUFFICIENT I NCOME, IT DID NOT CLAIM DEPRECIATION. THE ASSETS WERE ALREADY COMPLETE AND WERE NOT CAPIT AL WORK IN PROGRESS. AS SUCH THERE WAS NO NEED TO CAPITALIZE T HE INTEREST INCURRED ON BORROWINGS. KINDLY NOTE THAT THE RENT EARNED FRO M NANDAN IMPEX LIMITED WAS PROFIT AND GAIN BUSINESS. THE INTEREST INCURRED BY THE COMPANY WAS ALSO BUSINESS EXPENDITURE. THEREFORE, THE INTEREST INCURRED WAS TO BE ALLOWED IN COMPUTING THE BUSINES S INCOME. KINDLY NOTE THAT IT HAS BEEN HELD A NUMBER OF CASES THAT IF A COMMERCIAL ASSET IS NOT CAPABLE OF BEING USED AS SUCH, THEN IT S BEING LET OUT TO OTHERS DOES NOT RESULT IN AN INCOME WHICH IS INCOME OF BUSINESS, BUT IT CANNOT BE SAID THAT AN ASSET , WHICH WAS ACQUIRED AND USED FOR THE PURPOSE OF BUSINESS CEASED TO BE A COMMERCIAL ASSET OF THAT BUSINESS AS ITA NO.1442/AHD /2016 TEXWORLD FASHIONS PVT. LTD. VS. ITO ASST.YEAR 2012-13 - 6 - SOON AS IT IS TEMPORARILY PUT OUT OF USE OR LET OUT TO ANOTHER PERSON FOR USE IN HIS BUSINESS OR TRADE. THE YIELD OF INCOME B Y A COMMERCIAL ASSET IS THE PROFIT OF THE BUSINESS IRRESPECTIVE OF THE M ANNER IN WHICH THAT ASSET IS EXPLOITED BY THE OWNER OF THE BUSINESS. HE IS ENTITLED TO EXPLOIT IT TO HIS BEST ADVANTAGE AND HE MAY DO SO EITHER BY US ING IT HIMSELF PERSONALLY OR BY LETTING IT OUT TO SOMEBODY ELSE. IN CEPT VS. SHRI LAKSHMI SILK MILLS LIMITED (1951) 20 ITR 451 (SC), THE ASSESSEE OWNED A DYING PLANT WHICH COULD NOT BE USE D BY IT PERSONALLY OWING TO NON AVAILABILITY OF YARN. IT THEREFORE, LE T OUT THE PLANT TO ANOTHER COMPANY ON RENTAL BASIS. THE QUESTION FOR C ONSIDERATION WAS WHETHER THE RENTAL INCOME WAS ASSESSABLE AS PROFIT FROM BUSINESS. THE COURT HELD THAT IT WAS A PART OF THE NORMAL ACTIVIT Y OF THE ASSESSEE'S BUSINESS TO EARN MONEY BY MAKING USE OF ITS MACHINE RY BY EITHER EMPLOYING IN ITS OWN MANUFACTURING CONCERN OR TEMPO RARILY LETTING IT TO OTHERS FOR MAKING PROFIT FOR THAT BUSINESS WHEN FOR THE TIME BEING IT COULD NOT ITSELF RUN IT. WE WOULD REQUEST YOU TO KINDLY TREAT OUR RENT AS BU SINESS PROFIT AND ALLOW THE INTEREST PAID AND P&P EXPENSES INCURRED A S BUSINESS EXPENDITURE.' THE REPLY OF THE ASSESSEE COMPANY IS DULY CONSIDERE D BUT THE SAME IS NOT ACCEPTABLE ON THE FOLLOWING GROUNDS: I) THE ASSESSEE COMPANY HAS GIVEN CONTRADICTORY SUBMIS SION ON THE ISSUE. ON ONE HAND THE ASSESSEE COMPANY AS PER THE SUBMISSION DATED 18/10/2014, HAS ITSELF ADMITTED TH AT COMPANY ACQUIRED THE LAND AND DEVELOPED IT AND ALLOWED M/S NANDAN EXIM PRIVATE LIMITED TO USE THIS LAND FOR PARKING OF THEIR VEHICLES AND FOR THE SAME M/S NANDAN EXIM PVT. LIMITED PAID TO THE COMPANY A SUM OF RS.7,20,000/- AS USER CHARG ES AND RS.2,17,261 AS REIMBURSEMENT OF SECURITY EXPENSES P AID BY THE COMPANY M/S NANDAIN EXIM PVT. LIMITED, FURTHER, IN THE SAME ITA NO.1442/AHD /2016 TEXWORLD FASHIONS PVT. LTD. VS. ITO ASST.YEAR 2012-13 - 7 - REPLY ASSESSEE HAS ITSELF ADMITTED THAT THE COMPAN Y HAD NO BUILDING READY FOR GIVING ON RENT AND IT HAS GIVEN MERELY PART OF ITS LAND FOR USE TO M/S NANDAN EXIM LIMITED . HOWEVER, IN ANOTHER REPLY DATED 02/02/2012 THE ASSESSE E COMPANY HAS TAKEN CONTRARY STAND WHEREIN IT IS CONTENDED THAT L AND, C.E.T.P AS WELL THE SHED WERE READY FOR USE. AS THE LAND AN D SHED WAS READY FOR USE, THE COMPANY GAVE THE PREMISES ON HIR E TO NANDAN EXIM PVT. LIMITED AND THE SAID COMPANY HAS U SED THIS PREMISE FOR ITS VARIOUS PURPOSES. HOWEVER, ON VERIFICATION OF THE BALANCE SHEET OF TH E ASSESSEE COMPANY, IT IS FOUND THAT, THE REPLY DATED 02/12/2012 IS FOUND TO BE VAGUE AND IRRELEVANT. AS PER T HE BALANCE SHEET OF THE ASSESSEE COMPANY, IT IS NOTICED THAT T HE ASSESSEE COMPANY HAS SHOWN FOLLOWING ITEMS UNDER THE HEAD WO RK IN PROGRESS: NOTE NO. 7 FORMING PART OF BALANCE SHEET: LAND RS.55,21,300/- C.E.P.T. PLANT UNDER CONSTRUCTION RS.43 ,68,750/- BUILDING UNDER CONSTRUCTION RS.17 ,88, 193/- THUS, IT IS APPARENT THAT THE PLANT & BUILDING CLAI MED BY THE ASSESSEE IN HIS REPLY DATED 02/12/2012 AS READY TO USE AND GIVEN SUCH PREMISES TO NANDAN EXIM PVT. LTD. ON HIRE IS N OTHING BUT AN AFTERTHOUGHT AND MISREPRESENTATION OF FACTUAL PO SITION. IT IS BEYOND DOUBT AND ALSO ESTABLISHED FROM THE AUDITED ACCOUNTS OF ITA NO.1442/AHD /2016 TEXWORLD FASHIONS PVT. LTD. VS. ITO ASST.YEAR 2012-13 - 8 - THE COMPANY THAT, PLANT & BUILDING ARE UNDER CONSTR UCTION. THUS, THE PROVISO BELOW THE SECTION 36(I)(III) IS S QUARELY APPLICABLE IN THE CASE OF THE ASSESSEE COMPANY. AS PER THE PROVISION OF SECTION 36(I)(III) OF THE ACT, ANY AMO UNT OF THE INTEREST PAID IN RESPECT OF BORROWED FUND, SHALL NO T BE ALLOWED AS DEDUCTION, TILL THE DATE ON WHICH THE ASSET WAS FIRST PUT TO USE. IN THE PRESENT CASE, AS IS ESTABLISHED ABOVE, THE PLANT & BUILDING ARE STILL UNDER CONSTRUCTION AND THEREFORE , THE ASSESSEE COMPANY IS REQUIRED TO CAPITALIZE THE INTEREST EXPE NDITURE OF RS.19,92,128/- UNTIL THE DATE THE ASSETS ARE PUT TO USE. ACCORDINGLY, THE ASSESSEE COMPANY IS NOT ENTITLED T O DEDUCTION CLAIMED U/S.36(L)(III) OF THE ACT. II) RELIANCE IS PLACED ON THE JUDGMENT IN THE CASE OF NAHAR POLYFILMS LTD. VS. CIT(P&H)201 TAXMAN 304, WHEREIN IT IS HELD THAT: 'SINCE THIS AMOUNTS TO EXTENSION OF BUSINESS AND MA CHINERY WAS NOT PUT TO USE DURING THE PREVIOUS YEAR, INTEREST I NCURRED IS TO BE CAPITALIZED TILL THE MACHINERY IS PUT TO USE PROVIS ION TO SECTION 36(I)(III) CONSIDERED.' III) IN THE CASE OF CIT VS. VARDHMAN POLYTEX LTD. (P & H ) 299 ITR 152, IT IS HELD AS UNDER: INTEREST ON CAPITAL BORROWED FOR THE PURPOSE OF ACQ UISITION OF THE ASSETS OF THE NEW UNIT IS TO BE ALLOWED AS A REVENU E EXPENDITURE ONLY WHEN SUCH ASSETS STARTS YIELDING INCOME AND NOT FOR ANY PERIOD PRIOR THERETO-' ITA NO.1442/AHD /2016 TEXWORLD FASHIONS PVT. LTD. VS. ITO ASST.YEAR 2012-13 - 9 - IV) THE HON'BLE ITAT, CALCUTTA, IN THE CASE OF JCT LT D VS. ACIT (ITAT, CAL)65 ITD 169, IT IS HELD THAT ' BORROWED MONEY CAPITALIZED IN THE BOOKS - TREATED A S PART OF ACTUAL COST OF MACHINERY - NOT ELIGIBLE FOR DEDUCTION OF INTEREST U/S.36(I)(III) OF THE I.T. ACT. IN VIEW OF THE ABOVE, THE INTEREST EXPENDITURE OF R S.19,92,128/- IS DISALLOWED IN VIEW OF THE PROVISIONS OF SEC.36(L)(I II) OF THE ACT AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE COMP ANY. PENALTY PROCEEDINGS U/S.271(L)(C) OF THE ACT ARE INITIATED FOR FURNISHING INACCURATE PARTICULARS OF INCOME AND THEREBY CONCEALMENT OF IN COME. WITHOUT PREJUDICE TO THE ABOVE, IT IS PERTINENT TO CLARIFY THAT, THE ASSESSEE COMPANY HAS PAID INTEREST OF RS.4,80,110/- TO LILY ENCLAVE PVT. LTD. IN THIS REGARD ON VERIFICATION OF THE RECORD OF THE ASSESSEE COMPANY FOR THE A.Y.2009-10, IT IS NOTICED THAT, THE UNSEC URED LOAN RECEIVED FROM LILY ENCLAVE PVT. LTD. HAS BEEN TREATED AS UNEXPL AINED CASH CREDIT U/S.68 OF THE ACT VIDE ORDER U/S.153C / 153A R.W.S. 143(3) OF THE ACT DATED 30/12/2011. THE SAID UNEXPLAINED CASH CREDIT HAS BE EN CONFIRMED BY THE LD.CIT(A)-III, AHMEDABAD VIDE HIS ORDER IN APPEAL N O.CIT(A)- III/436/AC-CC.2(4)/11-12 DATED 18/01/2013. THEREFOR E, INTEREST EXPENDITURE TO THE EXTENT OF RS.4,80,110/- IS NOT A LLOWED. HOWEVER, NO SEPARATE ADDITION IS MADE SINCE THE ENTIRE INTEREST EXPENDITURE HAS BEEN DISALLOWED, AS DISCUSSED ABOVE. [DISALLOWANCE OF RS.19,92,128/-] ITA NO.1442/AHD /2016 TEXWORLD FASHIONS PVT. LTD. VS. ITO ASST.YEAR 2012-13 - 10 - 4.2 DISALLOWANCES U/S. 35D OF THE IT ACT: DURING THE ASSESSMENT PROCEEDINGS IT IS NOTICED THA T THE ASSESSEE COMPANY HAS CLAIMED PRELIMINARY EXPENSES OF RS.5,73 ,796/- (1/5 TH OF 28,68,982/-) IN THE PROFIT & LOSS ACCOUNT. THEREFO RE, VIDE NOTICE U/S.142(1) DATED 19/08/2014, THE ASSESSEE COMPANY W AS ASKED TO SUBMIT THE DETAILS OF PRELIMINARY EXPENSES OF RS.28,68,982 /-. IN RESPONSE TO THE ABOVE NOTICE, THE ASSESSEE COMPA NY SUBMITTED THE DETAILS OF PRELIMINARY EXPENSES VIDE LETTER DAT ED 08/09/2014, THE SAME IS REPRODUCED AS UNDER: DESCRIPTION AMOUNT RS. OPENING BALANCE 13,63, 630/- BANK CHARGES 385/- CONSULTANCY CHARGES 2,757/- FILLING & REGISTRATION EXP. 590/- SALARY 1,68,661/- SECURITY EXPENSES 1,97,390/- INTEREST 11,26,826/- MUNICIPAL TAX 534/- AUDIT FEES 5,515/- TOTAL 28,68,982/- ITA NO.1442/AHD /2016 TEXWORLD FASHIONS PVT. LTD. VS. ITO ASST.YEAR 2012-13 - 11 - OUT OF THE ABOVE EXPENDITURE BEING CLAIMED AS PRELI MINARY EXPENDITURE, NONE OF THE EXPENDITURES ARE COVERED IN THE DEFINITION GIVE N IN THE SECTION 35D(2)/(3) OF THE I.T. ACT AND ALSO THE BUSINESS ACTIVITY OF THE ASSESSEE COMPANY HAS NOT YET STARTED AND THE PL ANT & BUILDING ARE UNDER CONSTRUCTION. THEREFORE, THE ASSESSEE COMPANY IS PRIMA-FACIE NOT ELIGIBLE FOR DEDUCTION U/S.35D(1) OF THE I.T. ACT. ACCORDINGLY, A SHOW- CAUSE NOTICE WAS ISSUED TO THE ASSESSEE COMPANY VID E LETTER DATED 31/10/2014 AND CASE WAS FIXED FOR HEARING ON 02/12/ 2014 FOR DISALLOWANCE OF EXPENDITURE CLAIMED AS PRELIMINARY EXPENDITURE U/S.35D OF THE I.T. ACT. THE RELEVANT PORTION OF THE SHOW C AUSE NOTICE IS REPRODUCED HEREUNDER: 4. FURTHER, YOUR COMPANY HAS CLAIMED DEDUCTION OF RS.5,73,796/- (1/5 TH OF TOTAL PRE-OPERATIVE EXPENSES OF RS.28,68,981/-) U/S.35D OF THE ACT BEING PRELIMINARY EXPENSES WRITTEN-OFF. HOWEVER ON VERIFICATION OF THE DETAIL & SUBMITTED REGARDING THE PRELIMINARY AND PRE-OPERA TIVE EXPENSES, IT IS SEEN THAT NONE OF EXPENDITURE ARE COVERED IN THE DEFINIT ION PROVIDED U/S.35D(2) OF THE ACT. YOU ARE, THEREFORE, REQUESTED TO EXPLAIN W HY THE CLAIM FOR PRELIMINARY EXPENSES OF RS.5,73,796/- SHOULD NOT BE DISALLOWED AND ADDED BACK TO THE TOTAL INCOME OF YOUR COMPANY. IN RESPONSE TO THE ABOVE SHOW-CAUSE NOTICE, THE AS SESSEE COMPANY VIDE LETTER DATED 02/12/2014 HAS SUBMITTED THE DETA ILS ON OTHER ISSUE, BUT IS SILENT ON THE ABOVE ISSUE. THEREFORE, IT IS CLEA R THAT ASSESSEE HAS NOTHING TO SAY IN THIS MATTER. ACCORDINGLY, THE CLAIM OF TH E ASSESSEE COMPANY FOR DEDUCTION OF RS.5,73,796/- IS DISALLOWED ON THE FOL LOWING GROUND: I). AS STATED ABOVE, NONE OF THE ABOVE EXPENDITUR E INCURRED ARE COVERED IN THE DEFINITION OF SECTION 35D(2)/(3) OF THE I T ACT. : II) IN SECTION 35D(1) OF THE I T ACT, IT IS ST ATED THAT: ITA NO.1442/AHD /2016 TEXWORLD FASHIONS PVT. LTD. VS. ITO ASST.YEAR 2012-13 - 12 - THE ASSESSEE SHALL IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THIS SECTION BE ALLOWED A DEDUCTION OF AN AMOUNT EQUAL TO ONE- FIFTH OF SUCH EXPENDITURE FOR EACH OF THE FIVE SUCCESSIVE PREVIOUS YEARS BEGINNING WITH THE PREVIOUS YEAR IN WHICH THE BUSINESS COMMENCES OR AS THE CASE MAY BE OR THE NEW UNIT COMMENCES PRODUCTION OR OPERATION.' III) FURTHER IN THE CASE OF LIC HOUSING FINANCE LTD VS. DCIT (ITAT, MUM) 105 ITD 86 IT IS HELD THAT, T O AVAIL DEDUCTION U/S.35D, INDUSTRIAL UNDERTAKING MUS T BE ENGAGED IN SOME MANUFACTURING, PRODUCING OR PROCESSING ACTIVIT Y'. IN THE CASE OF THE ASSESSEE COMPANY THE CONDITIONS STIPULATED UNDER THE PROVISIONS OF SEC.35D(L) OF THE ACT HAVE NOT BEEN FULFILLED AND ALSO NONE OF THE EXPENDITURE ARE COVERED IN THE DEF INITION OF SEC.35D(2) & 35D(3) OF THE ACT. UNDER THE CIRCUMSTANCES, THE A SSESSEE COMPANY IS NOT ENTITLED TO CLAIM THE DEDUCTION U/S.35D OF THE ACT IN RESPECT OF PRELIMINARY EXPENDITURE OF RS,5,73,796/- (L/5 TH OF 28,68,982/-). ACCORDINGLY, THE DEDUCTION CLAIMED OF RS.5,73,796 U /S.35D OF THE ACT IS DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASS ESSEE COMPANY. PENALTY PROCEEDINGS U/S.271(L)(C) OF THE ACT A RE INITIATED SEPARATELY FOR FURNISHING OF INACCURATE PARTICULARS OF INCOME AND THEREBY CONCEALMENT OF INCOME. (DISALLOWANCE OF FLS.5,73,7967-) 5. SUBJECT TO ABOVE DISCUSSION/REMARKS, TOTAL INCOM E OF THE ASSESSEE COMPANY IS RECOMPUTED AS UNDER: ITA NO.1442/AHD /2016 TEXWORLD FASHIONS PVT. LTD. VS. ITO ASST.YEAR 2012-13 - 13 - (RS.) (RS.) TOTAL LOSS AS PER RETURN OF INCOME (-)22,83,166/- ADD: I) INTEREST EXPENDITURE AS PER PARA 4.1 RS.19,92,128/- II)PRELIMINARY EXPENSES AS PER PARA 4.2 RS.5,73,796/- 25,65,924/- ASSESSED TOTAL INCOME 2,82,758/- ROUNDED OFF 2,82,760/- BOOK PROFIT U/S.115JB BOOK PROFIT U/S.115JB AS PER RETURN OF INCOME : (-)22,83,166/- (-)22,83,166/- 6. AGAINST THE SAID ADDITION ASSESSEE PREFERRED FIR ST STATUTORY APPEAL BEFORE THE LD. CIT WHO DISMISSED THE APPEAL OF THE APPELLANT. 7. WE HAVE GONE THROUGH THE RELEVANT RECORD AND PAP ER BOOK FILED BY THE APPELLANT. AS WE CAN SEE THAT COMPANY HAD NOT S TARTED ITS BUSINESS DURING THE YEAR UNDER CONSIDERATION AND THERE WERE NO RECEIPTS OR SALES DURING THE YEAR UNDER CONSIDERATION. THE APPELLANT ON THE OTHER HAND CLAIM THAT IT HAD EARNED RENTAL INCOME OF RS.7,20,0 00/- DURING THE YEAR WHICH WAS ITS BUSINESS INCOME AND HENCE EXPENSES WE RE ALLOWABLE. AS WE CAN SEE FROM THE MEMORANDUM AND ARTICLES OF ASSO CIATION OF TAXWORLD FASHIONS PRIVATE LIMITED COMPANY MAIN BUSI NESS IS NOT A RENTAL BUSINESS. APPELLANT SHOWS THAT AS PER BALANC E SHEET OF THE ITA NO.1442/AHD /2016 TEXWORLD FASHIONS PVT. LTD. VS. ITO ASST.YEAR 2012-13 - 14 - APPELLANT COMPANY, IT IS SHOWN THAT IT IS PLEA OF C EPT PLANT TO BE UNDER CONSIDERATION. FURTHER, THE NATURE OF BUSINESS OF T HE APPELLANT IS MANUFACTURING AND TRADING OF CLOTH, BUT APPELLANT H AD MADE STATEMENT BEFORE THE LOWER AUTHORITIES THAT RENTAL INCOME OF RS.72,00,000/- EARNED DURING THE YEAR WAS ITS BUSINESS INCOME. AFTER GOIN G THROUGH THE RECORD, WE CAN SEE THAT APPELLANT YET TO START ITS BUSINESS . SO IN OUR CONSIDERED OPINION, WE ARE NOT CONVINCED WITH THE ARGUMENT OF THE LD. AO BUT DIRECT THE AO TO CAPITALIZE RS.72,00,000/- AND ALLOW DEPRE CIATION. 8. SO FAR AS DISALLOWANCE OF RS.5,73,796/- U/S.35D OF THE ACT IS CONCERNED. IT IS NOTED BY THE AO THAT APPELLANT HAD CLAIMED PRELIMINARY EXPENSES OF RS.5,73,796/- WHICH IS 1/5 TH OF THE TOTAL EXPENSE OF RS.28,68,982/- IN ITS PROFIT AND LOSS ACCOUNT. ASSE SSING OFFICER HAS HELD THAT THESE EXPENSES WERE NOT COVERED U/S.35D(2)/(3) OF INCOME TAX ACT. SINCE THE BUSINESS ACTIVITY OF THE APPELLANT HAD NO T YET COMMENCED AND THUS THE COMPANY WAS NOT ELIGIBLE TO CLAIM THIS DED UCTION. ACCORDINGLY, THE AO DISALLOWED THE AMOUNT OF RS.5,73,796/-. THER EFORE, APPEAL FILED BEFORE THE LD. CIT(A). LD. CIT(A) ALSO CONFIRMED TH E ACTION OF THE AO. WE ARE GONE THROUGH THE RELEVANT RECORD AND IMPUGNE D ORDER. IN OUR CONSIDERED OPINION APPELLANT HAD NOT STARTED ITS BU SINESS ACTIVITY AND EVEN THE PLANT AND BUILDING ARE STILL UNDER CONSTRU CTION. THE APPELLANT HAS MERELY STATED IN ITS SUBMISSION THAT IT HAD NOT BUS INESS ACTIVITY OF PLANT AND MACHINERY UNDER CONSTRUCTION. BUT THIS FACT IS NOT CORRECT BECAUSE NO BUSINESS ACTIVITY HAS BEEN SHOWN BY THE APPELLANT A ND NO SUPPORTIVE DOCUMENTS HAVE BEEN FILED BY THE APPELLANT DURING T HE YEAR UNDER CONSIDERATION. IN AUDIT TO GET DEDUCTION U/S.35D OF THE ACT MUST AGAINST ITA NO.1442/AHD /2016 TEXWORLD FASHIONS PVT. LTD. VS. ITO ASST.YEAR 2012-13 - 15 - THE MANUFACTURING OUR BUSINESS ACTIVITIES. SO IN OU R CONSIDERED OPINION, THIS GROUND CANNOT BE ALLOWED. THEREFORE, WE DIRECT THE AO TO CAPITALIZE RS.5,73,796/- AS PER LAW AND ALLOW DEPRECIATION. 9. IN THE RESULT, APPEAL FILED BY THE APPELLANT IS DISMISSED. THIS ORDER PRONOUNCED IN OPEN COURT ON 20/02/2018 SD/- SD/- ( ) 4 5 ( N.K. BILLAIYA ) ( MAHAVIR PRASAD ) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD; DATED 20/02/2018 PRITI YADAV, SR.PS !'# $#! # COPY OF THE ORDER FORWARDED TO : 1. !$' / THE APPELLANT 2. ($' / THE RESPONDENT. 3. 67- + 8- / CONCERNED CIT 4. + 8- 4!5 / THE CIT(A)-7, AHMEDABAD. 5. 9:;-67 !.!672 ! / DR, ITAT, AHMEDABAD 6. ;<=, # GUARD FILE. % & / BY ORDER, (9-- //TRUE COPY// '/& () ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD 1. DATE OF DICTATION 07/02/2018 (DICTATION-PAD 2 PA GES ATTACHED AT THE END OF THIS APPEAL-FILE) 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 12/02/2018 3. OTHER MEMBER 4. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S.. 5. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 6. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S. 7. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK ... 9. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 10. DATE OF DESPATCH OF THE ORDER