M/s Manaveeya Holdings&(Inv)P.Ltd., Hyderabad V. DCIT, Hyderabad

ITA 1593/HYD/2008

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 66281 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 10 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-09-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 18-06-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 24-10-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: M H NAIK
• Assessee Lawyers: SATYANARAYANA MURTHY
• Keywords: Business income; Business expenditure; Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER I.T.A. NO. 1593/HYD/2008 ASSESSMENT YEAR 2005-06 I.T.A. NO. 1243/HYD/2010 ASSESSMENT YEAR 2006-07 M/S. MANAVEEYA HOLDINGS & INVESTMENTS (PVT) LTD., HYDERABAD-33 PAN: AAECM1085E VS. THE DCIT CIRCLE-16(2) HYDERABAD APPELLANT RESPONDENT APPELLANT BY: SRI SATYANARAYANA MURTHY RESPONDENT BY: SRI M.H. NAIK DATE OF HEARING: 09.08.2012 DATE OF PRONOUNCEMENT: 07.09.2012 O R D E R PER CHANDRA POOJARI, AM: THESE TWO APPEALS BY THE ASSESSEE ARE DIRECTED AGA INST DIFFERENT ORDERS OF THE CIT(A)-V, HYDERABAD DATED 2 9.9.2008 AND 7.6.2010 FOR A.YS. 2005-06 AND 2006-07. 2. BRIEF FACTS OF THE ISSUE ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY INCORPORATED ON 5.8.2004 TO CARRY O N THE FINANCE BUSINESS. THE ASSESSEE APPLIED FOR LICENSI NG/ REGISTRATION TO CARRY ON THE BUSINESS OF NON-BANKIN G FINANCE THROUGH RESERVE BANK OF INDIA (RBI). THERE WAS NO REGISTRATION GRANTED BY THE RBI TO CARRY ON NON-BANKING FINANCE ACTIVITY DURING THIS YEAR. THE ASSESSEE DEPOSITED SHAREHOLD ERS FUND COLLECTED IN THE BANK ACCOUNT DURING THE PENDENCY O F REGISTRATION WITH RBI AND EARNED INTEREST ON IT. I N THE PROFIT AND LOSS A/C. THE ASSESSEE SHOWN THE INTEREST INCOME AN D CLAIMED I.T.A. NO. 1593/HYD/2008 & ANR. M/S. MANAVEEYA HOLDINGS & INVESTMENTS PVT. LTD. ========================= 2 EXPENDITURE UNDER DIFFERENT HEAD. THE ASSESSING OF FICER CONSIDERED THE INTEREST RECEIPT UNDER THE HEAD 'INC OME FROM OTHER SOURCES' BY PLACING RELIANCE ON THE JUDGEMENT OF SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS & F ERTILISERS LTD. VS. CIT (227 ITR 172) AND ALSO ON THE JUDGEMENT IN THE CASE OF CIT VS. COROMANDEL CEMENTS LTD. (234 ITR 412). AG AINST THIS THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A). THE CIT(A) CONFIRMED THE ORDER OF THE ASSESSING OFFICER. AGAI NST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 3. THE LEARNED AR SUBMITTED THAT THE ASSESSEE HAS MOBI LISED THE FUNDS TO CARRY ON THE BUSINESS AND THE MOBILISE D FUND WAS NOT ADVANCES IN VIEW OF ABSENCE OF REGISTRATION FRO M RBI. THE ASSESSEE POOLED UP ALL THE RESOURCES AND EMPLOYED R EQUISITE STAFF TO CARRY ON THE BUSINESS. IT MEANS THE ASSES SEE HAS SET UP THE BUSINESS FOR COMMENCEMENT OF THE ACTIVITIES. T HE SET UP OF BUSINESS AND COMMENCEMENT OF BUSINESS ARE TWO DIFFE RENT ACTIVITIES THUS CANNOT BE CLUBBED WITH EACH OTHER. AS SOON AS THE ASSESSEE POOLED UP THE RESOURCES FOR CARRYING ON TH E BUSINESS AND MADE NECESSARY ARRANGEMENTS FOR SET UP OF BUSIN ESS IT CANNOT BE SAID THAT THE COMMENCEMENT OF ACTIVITIES IS A MUST TO ALLOW THE EXPENDITURE. HE HAS NARRATED AN EXAMPLE T HAT EXPENDITURE INCURRED FOR PROCURING MATERIALS FOR EX PORT SHOULD ORDINARILY BE BUSINESS EXPENDITURE, EVEN IF THE ASS ESSEE HAD NOT STARTED HIS EXPORT BUSINESS. HE RELIED ON THE JUDG EMENT OF RAJASTHAN HIGH COURT IN THE CASE OF IN CIT V. STONE S AND MINERAL ASSOCIATED LTD. [2002] 257 ITR 479 (RAJ). IN THIS CASE, THE HIGH COURT ENDORSED THE FINDING OF THE TRIBUNAL, THAT TH E BUSINESS SHOULD HAVE BEEN TREATED AS HAVING BEEN SET UP DURI NG THE YEAR, SO AS TO MAKE THE ASSESSEE ELIGIBLE FOR THE DEDUCTI ON, THOUGH THERE WERE NO PURCHASES NOR EXPORT DURING THE YEAR, BUT ONLY EXPENDITURE FOR PROCUREMENT OF THE MATERIALS. THE D ECISION I.T.A. NO. 1593/HYD/2008 & ANR. M/S. MANAVEEYA HOLDINGS & INVESTMENTS PVT. LTD. ========================= 3 UPHELD THE DECISION OF THE TRIBUNAL AS ONE OF FACT FOUND BY IT. IN THE CASE OF A NEW TRADER, PURCHASE OF STOCK-IN-TRAD E WOULD INDICATE THAT THE BUSINESS HAS BEEN SET UP, THOUGH THERE MAY HAVE BEEN NO SALE. IN THE CASE OF A MANUFACTURER, T HE MANUFACTURE COMMENCES AS SOON AS HE UNDERTAKES THE ACTIVITY REQUIRED FOR MANUFACTURE. THESE WERE GUIDELINES GIV EN IN CIT V. SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD. [197 3] 91 ITR 170(GUJ). THESE GUIDELINES HAVE BEEN APPROVED BY TH E SUPREME COURT IN CIT V. SARABHAI MANAGEMENT CORPORATION LTD . [1991] 192 ITR 151(SC) AND HAVE BEEN FOLLOWED IN A NUMBER OF OTHER CASES. COURTS HAVE FOUND A DIFFERENCE BETWEEN MERE COMMENCEMENT OF A BUSINESS AND SETTING UP A BUSINES S. INCOME- TAX LAW REQUIRES THAT THE BUSINESS SHOULD HAVE BEEN SET UP, BEFORE EXPENDITURE COULD BE BOOKED. IT IS IN THIS C ONTEXT, THE FINDING OF THE TRIBUNAL ENDORSED BY THE HIGH COURT IN STONE AND MINERAL ASSOCIATED LTD'S CASE HAS TO BE TAKEN AS CO NFIRMING TO THE PRINCIPLES LAID DOWN BY THE COURTS. 4. THE LEARNED DR SUBMITTED THAT THE COMPANY WAS INCORPORATED TO CARRY ON NON BANKING FINANCE BUSINE SS. FOR THE PURPOSE OF COMMENCING BUSINESS OF NON-BANKING FINAN CIAL ACTIVITY, IT HAS APPLIED FOR REGISTRATION TO RESERV E BANK OF INDIA. HOWEVER, AS ADMITTED IN THE ANNUAL REPORT FILED WIT H THE RETURN, THE ASSESSEE HAS NOT GOT ANY REGISTRATION FROM RBI AS A NON- BANKING FINANCE COMPANY AND IT COULD NOT CARRY ON A NY NON- BANKING FINANCE ACTIVITY DURING THE YEAR. AS PER TH E MEMORANDUM OF ASSOCIATION, THE MAIN/DOMINANT OBJECT IVE OF THE ASSESSEE COMPANY WAS TO CARRY ON THE BUSINESS O F FINANCING DEVELOPMENT ACTIVITIES THROUGH LONG TERM LOANS AND OTHER MEANS OF FINANCING FOR AGRICULTURAL DEVELOPMENT AND INDUS TRIAL DEVELOPMENT, ETC. HOWEVER, IN THE ABSENCE OF REQUI RED REGISTRATION FROM RBI, IT COULD NOT COMMENCE ANY BU SINESS OF I.T.A. NO. 1593/HYD/2008 & ANR. M/S. MANAVEEYA HOLDINGS & INVESTMENTS PVT. LTD. ========================= 4 NON-BANKING FINANCIAL ACTIVITY, FOR THE PURPOSE OF WHICH IT WAS SET UP, DURING THE PREVIOUS YEAR. IN THE ABSENCE OF ANY BUSINESS ACTIVITY CARRIED ON BY THE ASSESSEE, IT HAS INVESTE D THE ENTIRE SHARE CAPITAL IN MAKING DEPOSITS WITH BANK FROM WHI CH IT HAS EARNED INTEREST INCOME OF RS. 60,30,636 AS SHOWN IN THE PROFIT AND LOSS ACCOUNT. IN THE ABSENCE OF THE ABOVE MAND ATORY REGISTRATION FROM RBI, IT CANNOT BE SAID THAT THE A SSESSEE WAS READY TO COMMENCE ITS BUSINESS OPERATION DURING THE PREVIOUS YEAR. FURTHERMORE, IT CANNOT BE SAID THAT THE BUSI NESS IN THE CASE OF THE ASSESSEE HAS BEEN SET UP DURING THE PRE VIOUS YEAR. 5. THE DR FURTHER SUBMITTED THAT IT IS SETTLED LAW THA T MERE SETTING UP OF BUSINESS DOES NOT JUSTIFY DEDUCTION O F EXPENDITURE, UNLESS THE BUSINESS IS CARRIED OUT DURING THE YEAR. IN WATKINS MAYAR (AGROCO) (P.) LTD. VS. CIT [1979] 117 ITR 202 (P&H), THE ASSESSEE COMPANY, A DEALER IN BLADES AND DISCS, PUR CHASED MACHINERY TO START MANUFACTURING THEM BY ITSELF. MA CHINERY COULD NOT BE INSTALLED DUE TO PAUCITY OF SPACE. AS SESSEE LET OUT THE MACHINERY ON HIRE. ON THESE FACTS, THE PUNJAB & HARYANA HIGH COURT HELD THAT MERE CLAUSE IN MEMORANDUM AUTH ORIZING THE ASSESSEE TO LET THE MACHINERY ON HIRE WOULD NOT MEAN THAT THE ASSESSEE ACTUALLY CARRIED ON THE BUSINESS. THE HIGH COURT FURTHER HELD THAT LETTING OUT OF MACHINERY COULD NO T BE CONSTRUED AS COMMENCEMENT OF BUSINESS. 6. THE DR FURTHER RELIED ON THE DECISION IN THE CASE O F CIT VS. SPONGE IRON INDIA LTD. (1993) [201 ITR 770], WHEREI N THE ANDHRA PRADESH HIGH COURT HELD THAT MERE INCLUSION OF 'BUS INESS' IN THE MAIN OBJECTS CLAUSE IN THE MEMORANDUM OF ASSOCIATIO N OF THE COMPANY IS NOT ENOUGH TO CONCLUDE THAT THE BUSINESS HAS COMMENCED TO LAY CLAIM FOR DEDUCTION OF EXPENSES IN CURRED ON SUCH ACTIVITY; THE BUSINESS PURSUANT TO THE OBJECTS CLAUSE SHOULD I.T.A. NO. 1593/HYD/2008 & ANR. M/S. MANAVEEYA HOLDINGS & INVESTMENTS PVT. LTD. ========================= 5 HAVE BEEN STARTED TO JUSTIFY THE CLAIM. IN THAT CAS E, THE JURISDICTIONAL HIGH COURT HELD THAT EXPLORATION OF IRON ORE DOES NOT CONSTITUTE COMMENCEMENT OF BUSINESS AND EXPENSE S ON EXPLORATION ARE NOT DEDUCTIBLE. THE HIGH COURT FURT HER HELD THAT SINCE BUSINESS HAD NOT COMMENCED, THE INTEREST INCO ME COULD NOT BE TREATED AS BUSINESS INCOME. IT WAS FURTHER HELD THAT THE ASSESSEE IS NOT ENTITLED TO THE DEDUCTION OF THE AD MINISTRATIVE EXPENSES AND EXPLORATION AND MINING EXPENSES OUT OF ITS INTEREST INCOME. 7. THE DR RELIED ON THE DECISION IN THE CASE OF CIT VS . COROMANDEL FERTILIZERS LTD. (2003) [261 ITR 408] (A P), WHERE IN THE ANDHRA PRADESH HIGH COURT FURTHER HELD THAT LIM ESTONE MAY BE AN ESSENTIAL RAW MATERIAL FOR THE MANUFACTURE OF CEMENT BUT QUARRYING LIMESTONE IS TOO REMOTE TO BE IN PROXIMIT Y TO THE BUSINESS OF MANUFACTURE OF CEMENT TO FORM THE FIRST STAGE OF COMMENCEMENT OF BUSINESS OF MANUFACTURE OF CEMENT. 8. THE DR ALSO RELIED ON THE DECISION IN THE CASE OF INTERNATIONAL MARKETING LTD. VS. CIT [2007] 292 ITR 504 (DELHI), WHERE THE DELHI HIGH COURT WHILE HOLDING THAT INCOM E EARNED FROM INVESTMENT, BEFORE COMMENCEMENT OF BUSINESS IS ASSESSABLE AS INCOME FROM OTHER SOURCES. THE COURT FURTHER HELD THAT SINCE NO BUSINESS HAS BEEN TRANSACTED, THAT NO DEDUCTION CAN BE ALLOWED FOR ANY EXPENDITURE. THE DECISION OF THE COURT ON THIS POINT IS AS UNDER (AS PER HEAD NOTE): ' ... ALSO, THAT AS NO BUSINESS HAD BEEN TRANSACTED THERE WAS NO QUESTION OF ALLOWING ANY EXPENSES IN RELATION THERETO. HOWEVER, THE TRIBUNAL HAD ALLOWE D SOME EXPENSES TO THE COMPANY FOR MAINTAINING ITS STATUS AND DEDUCTED THEM OUT OF THE INCOME FROM OTHER SOURCES WHICH ON A STRICT INTERPRETATION OF L AW MAY NOT BE ADMISSIBLE TO IT.' I.T.A. NO. 1593/HYD/2008 & ANR. M/S. MANAVEEYA HOLDINGS & INVESTMENTS PVT. LTD. ========================= 6 9. THE DR SUBMITTED THAT SINCE THE ASSESSEE HAS NOT COMMENCED ANY BUSINESS OPERATION DURING THE PREVIOU S YEAR AND EVEN THE BUSINESS HAS NOT BEEN SET UP DURING TH E PREVIOUS YEAR, RELYING ON THE ABOVE DECISIONS, THE ASSESSING OFFICER WAS JUSTIFIED IN REJECTING THE CLAIM OF THE ASSESSEE FO R DEDUCTION OF EXPENDITURE FOR AN AMOUNT OF RS. 39,38,491 CLAIMED UNDER PERSONNEL EXPENSES AND ADMINISTRATION AND OTHER EXP ENSES ETC. FURTHER, AS THE ASSESSEE HAS NOT COMMENCED ANY BUSI NESS OPERATION, IN VIEW OF THE RATIO OF THE DECISION OF THE SUPREME COURT IN TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. VS. CIT (1997) [227 ITR 172] AND IN CIT VS COROMANDEL CEMEN TS LTD. [234 ITR 412] AND THE DECISION OF THE ANDHRA PRADES H HIGH COURT IN THE CASE OF CIT VS. RAASI CEMENT LTD. (199 8) [232 ITR 554], HE WAS JUSTIFIED IN TAXING THE ENTIRE INTERES T RECEIPT, RECEIVED ON BANK DEPOSITS, UNDER THE HEAD 'INCOME F ROM OTHER SOURCES'. THUS, THE ASSESSMENT MADE BY THE ASSESSIN G OFFICER ASSESSING INCOME AT RS. 60,30,636 IS JUSTIFIED. 10. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. IN THIS CASE THE ASSESSEE HAS NOT COMME NCED THE NON-BANKING FINANCE BUSINESS. THE ASSESSEE DEPOSIT ED THE FUND MOBILISED FROM SHAREHOLDERS IN THE BANK AND EARNED INTEREST. THIS INTEREST INCOME CANNOT BE CONSIDERED AS INCOME FROM BUSINESS AND IT SHOULD BE CONSIDERED AS INCOME FROM OTHER SOURCES ONLY. THE CONTENTION OF THE ASSESSEE COUNS EL IS THAT THE EXPENDITURE INCURRED DURING THIS ASSESSMENT YEAR IS TO BE SET OFF AGAINST THE INTEREST INCOME WHICH IS SAID TO HAVE B EEN EARNED FROM INCOME FROM OTHER SOURCES. IN OUR OPINION THE RE IS NO MERIT IN THE ARGUMENT OF THE ASSESSEE'S COUNSEL. T HE EXPENDITURE INCURRED BEFORE COMMENCEMENT OF BUSINES S CANNOT BE CONSIDERED AS REVENUE EXPENDITURE SO AS TO ALLOW DEDUCTION WHILE COMPUTING INCOME UNDER THE HEAD 'INCOME FROM BUSINESS'. I.T.A. NO. 1593/HYD/2008 & ANR. M/S. MANAVEEYA HOLDINGS & INVESTMENTS PVT. LTD. ========================= 7 TO ALLOW THE DEDUCTION UNDER THE HEAD 'BUSINESS INC OME' THE ASSESSEE IS REQUIRED TO COMMENCE THE BUSINESS. UNL ESS AND UNTIL THERE IS COMMENCEMENT OF BUSINESS IT CANNOT B E SAID THAT THE CASE CARRIED ON BUSINESS ACTIVITY. THE ASSESSEE TRIED TO DISTINGUISH BETWEEN SET UP OF BUSINESS AND COMMENCE MENT OF BUSINESS. SET UP OF A BUSINESS MAY HAVE PROXIMITY FOR COMMENCEMENT OF BUSINESS BUT, HOWEVER, THAT ITSELF CANNOT CONSTRUE AS COMMENCEMENT OF BUSINESS. IN THE CASE OF COROMANDEL FERTILISERS LTD. (261 ITR 408) (AP), THE HIGH COURT HELD THAT LIMESTONE MAY BE AN ESSENTIAL RAW-MATERIA L FOR MANUFACTURE OF CEMENT BUT QUARRYING LIMESTONE IS TO O REMOTE TO BE IN PROXIMITY TO THE BUSINESS OF MANUFACTURE OF C EMENT TO FORM THE FIRST STAGE OF COMMENCEMENT OF BUSINESS OF MANUFACTURE OF CEMENT. IN OUR OPINION, THE JUDGEME NT OF SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMI CALS & FERTILISERS LTD., 277 ITR 172 IS DIRECTLY ON THE IS SUE AND BY APPLYING THE RATIO LAID DOWN BY THE APEX COURT, WE ARE INCLINED TO CONFIRM THE ORDER OF THE CIT(A) FOR BOTH THE ASS ESSMENT YEARS. 11. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH SEPTEMBER, 2012. SD/- (SAKTIJIT DEY) JUDICIAL MEMBER SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED 7 TH SEPTEMBER, 2012 TPRAO I.T.A. NO. 1593/HYD/2008 & ANR. M/S. MANAVEEYA HOLDINGS & INVESTMENTS PVT. LTD. ========================= 8 COPY FORWARDED TO: 1. M/S. MANAVEEYA HOLDINGS & INVESTMENTS PVT. LTD., C/O. M/S. VENUGOPAL & CHENOY, CHARTERED ACCOUNTANTS, 4-1 - 889/16/2, TILAK ROAD, HYDERABAD-500 001. 2. THE DCIT, CIRCLE 16(2), HYDERABAD. 3. THE CIT(A)-V, HYDERABAD. 4. THE CIT-IV, HYDERABAD 4. THE DR B BENCH, ITAT, HYDERABAD