M/s. Delight Developers Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 1802/DEL/2011

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3679 (ITAT-DELHI)
• Duration Of Justice: 2 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-06-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 13-04-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: Y KAKKAR
• Keywords: Business income

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B DELHI BEFORE SHRI RAJPAL YADAV AND SHRI K.G. BANSAL ITA NO. 1802(DEL)/2011 ASSESSMENT YEAR: 2006-07 DELIGHT DEVELOPERS PVT. LTD., AS SISTANT COMMISSIONER OF 43, COMMUNITY CENTRE, VS. INC OME-TAX, CIRCLE 10(1), NEW FRIENDS COLONY, NEW DELHI. NEW DELHI. PAN-AACCD1784B (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI ASHWANI KUMAR, ADVOCA TE RESPONDENT BY : M S. Y. KAKKAR, DR ORDER PER K.G. BANSAL : AM THE ASSESSEE HAS TAKEN UP TWO SUBSTANTIVE GROUND S IN THE APPEAL TO THE EFFECT THAT THE LD. CIT(APPEALS) ERRED ON FACTS AND IN LAW IN (I) CAPITALIZING INTEREST EXPENDITURE OF RS. 10,81,856 /- ON THE GROUND THAT NO BUSINESS ACTIVITY HAS BEEN CONDUCTED IN THE YEAR; AND (II) TAXING THE INTEREST INCOME OF RS. 38,751/- UNDER THE RESIDUARY HEAD AN D NOT AS BUSINESS INCOME. 2. THE LD. COUNSEL DREW OUR ATTENTION TO THE ASS ESSMENT ORDER IN WHICH IT IS MENTIONED THAT THE ASSESSEE-COMPANY WAS I NCORPORATED ON 18.5.2005 FOR CARRYING ON THE BUSINESS OF REAL ESTATE, IN CLUDING PURCHASE AND SALE OF ITA NO. 1802(DEL)/2011 2 SHOPS AND COMMERCIAL SPACE. THE MAIN OBJECTS OF THE COMPANY HAVE ALSO BEEN REPRODUCED ON PAGE NOS. 3 AND 4 OF THE IMPUGN ED ORDER, WHICH INTER- ALIA SHOWS THAT THE COMPANY IS AUTHORIZED TO L ET, SELL OR DISPOSE OFF LAND, HOUSE, BUILDING OR COMMERCIAL COMPLEX. THE ASSE SSEE RAISED UNSECURED LOANS AGGREGATING TO RS. 1.37 CRORE FROM VA RIOUS COMPANIES AND PAID INTEREST AMOUNTING TO RS. 10,81,856/- ON THESE LO ANS. THE ASSESSEE ALSO ADVANCED A LOAN TO ELEVATE DEVELOPERS PRIVATE LTD ., ON WHICH IT EARNED INTEREST OF RS. 38,751/-. THE AO HELD THE INTER EST INCOME TO BE TAXABLE UNDER THE RESIDUARY HEAD BY RELYING ON THE DECI SION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. SHRI RAM HONDA POWER EQUIPMENT, 289 ITR 475; AND CIT VS. AUTO KAST LTD., (2007) 248 ITR 110 (SC). FURTHER, HE CAPITALIZED THE INTEREST PAID ON B ORROWED CAPITAL BY HOLDING THAT THE ASSESSEE HAS NOT STARTED THE BUSINESS IN THIS YEAR. THUS, THE TOTAL INCOME WAS COMPUTED AT RS. 38,751/- AGAINST RETU RNED LOSS OF RS. 10,55,170/-. 2.1 FURTHER, THE LD. COUNSEL DREW OUR ATTENTION TO THE FINDINGS OF THE LD. CIT(A), IN WHICH IT IS MENTIONED THAT THE TOTAL EX PENDITURE DEBITED TO PROFIT AND LOSS ACCOUNT AMOUNTS TO RS. 10,93,922/-. T HIS COMPRISES OF AUDIT FEE- RS. 2,806/-, FILING FEE RS. 1,000/-, PRINT ING AND STATIONERY- RS. 750/-, ITA NO. 1802(DEL)/2011 3 GENERAL EXPENSES- RS. 1180/-, PRELIMINARY EXPENSE S WRITTEN OFF- RS. 6,330/- AND INTEREST- RS. 10,81,856/-. THE BALANCE-SHEET AS ON 31.3.2006 SHOWS AN ADVANCE OF RS. 1,80,57,778/- FOR PURCHASE OF C OMMERCIAL SPACE. NO EXPENDITURE HAS BEEN INCURRED BY WAY OF SALARIES. THE BALANCE-SHEET ALSO DOES NOT SHOW THAT THE ASSESSEE HAS AN OFFICE FRO M WHICH THE BUSINESS COULD BE CONDUCTED. FURTHER, NO PURCHASE OF COMMERCIAL SPACE HAS BEEN MADE AND ONLY AN ADVANCE HAS BEEN PAID. ON THESE FA CTS, IT HAS BEEN HELD THAT THE ASSESSEE IS IN THE PROCESS OF SETTING UP I TS BUSINESS AND THE SAME HAS NEITHER BEEN SET UP NOR COMMENCED. THEREFORE, THE ACTION OF THE AO FOR CAPITALIZING THE INTEREST TOWARDS PURCHASE CONSID ERATION OF COMMERCIAL SPACE HAS BEEN UPHELD. THE LD. CIT(APPEALS) HAS AL SO UPHELD THE FINDING THAT INTEREST INCOME OF RS. 38,751/- IS NOT BUSINE SS INCOME AND THE AO HAS RIGHTLY TAXED IT UNDER THE RESIDUARY HEAD. 2.2 THE CASE OF THE LD. COUNSEL IS THAT SALE IS NOT THE SINE QUA NON OF THE SETTING UP OF THE BUSINESS. THE MEAGER EXPENSES INCURRED BY THE ASSESSEE IN THIS YEAR ALSO DO NOT LEAD TO THE INFERENCE T HAT THE BUSINESS HAS NOT BEEN SET UP. THE ASSESSEE HAS PLACED AN ADVANCE FOR PURCHASE OF COMMERCIAL SPACE. THE BUSINESS CAN BE SAID TO BE SET UP O N THE DATE WHEN SUCH AN ITA NO. 1802(DEL)/2011 4 ADVANCE WAS GIVEN FOR PURCHASING THE COMMERCIAL SPACE AS STOCK-IN- TRADE. 3. IN REPLY, THE LD. DR SUBMITTED THAT THE BUSI NESS CANNOT BE SAID TO HAVE BEEN SET UP IN THIS CASE FOR THE REASONS T HAT THE ASSESSEE HAS NOT ACQUIRED OR HIRED ANY OFFICE AND HAS NOT ENGAGED ANY EMPLOYEE FOR THE PURPOSE OF CARRYING ON THE BUSINESS. MERELY P LACING THE ADVANCE FOR PURCHASE OF COMMERCIAL SPACE DOES NOT LEAD TO AN INFERENCE THAT THE BUSINESS HAS BEEN SET UP AS UPON DOING SO IT CAN NOT BE SAID THAT THE ASSESSEE IS IN A POSITION TO START ITS BUSINE SS. 4. WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS MADE BEFORE US. THE FACTS ARE THAT OBJECTS OF THE ASSESSEE-COMPANY INTER-ALIA PERMIT IT TO PURCHASE AND SELL COMMERCIAL SPACE. THE COMPANY WAS INCORPORATED ON 18.5.2005. IN THIS YEAR, THE ASS ESSEE PLACED AN ADVANCE OF RS. 1.37 CRORE FOR PURCHASE OF COMMERCIAL SPA CE, BUT THE DATE OF ADVANCE IS NOT ASCERTAINABLE FROM THE ORDERS OF TH E LOWER AUTHORITIES. THE QUESTION IS-WHETHER, THE BUSINESS HAS BEEN SET U P ON THE DATE OF MAKING THE ADVANCE? ITA NO. 1802(DEL)/2011 5 4.1 THE ASSESSEE HAS RELIED UPON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. HUGES ESCORTS COMM UNICATION LTD., (2009) 311 ITR 253. THE FACTS ARE THAT THE ASSESSEE WAS INCORPORATED ON 17.3.1992 FOR CARRYING ON THE BUSINESS OF SATELLIT E COMMUNICATION SYSTEM FOR WHICH A VERY SMALL APERTURE TERMINAL (VSAT) EQUIPMENT IS USED. ITS MAIN ACTIVITY WAS TO PROVIDE PRODUCTS AND SERVIC ES TO THE DIGITAL SATELLITE MARKET IN INDIA AND TO INITIALLY IMPORT AND GRADUA LLY PRODUCE IN INDIA THE PERSONAL EARTH STATION, WHICH IS OTHERWISE KNO WN AS VSAT. THE VSAT CAN BE USED ONLY AFTER ESTABLISHING, MAIN TAINING AND USING THE COMMUNICATION FACILITIES ON A LICENCE FROM DEPARTME NT OF TELECOMMUNICATIONS (DOT). THE ASSESSEE WAS GRA NTED THE LICENCE ON 3.8.1994. ON 28.7.1994 THE ASSESSEE PLACED PU RCHASE ORDER WITH HUGES NETWORK SYSTEMS, USA FOR SUPPLY OF VSAT EQUIP MENT. IN THE RETURN FOR ASSESSMENT YEAR 1995-96, THE ASSESSEE CLAI MED EXPENDITURE OF RS. 28,96,269/-. ITS CONTENTION WAS THAT IT SET UP THE BUSINESS ON 28.7.1994 WHEN PURCHASE ORDER WAS PLACED WITH HUGES NETW ORK SYSTEMS, USA. THE HONBLE COURT MENTIONED THAT THE BUSINESS OF T HE ASSESSEE INVOLVED DIFFERENT ACTIVITIES IN WHICH THE FIRST STEP W AS PURCHASE OF THE VSAT EQUIPMENT. THE ORDER FOR PURCHASE WITH HUGES NE TWORK SYSTEMS, USA WAS ONLY FOR THE PURPOSE OF ITS BUSINESS. THE A PPLICATION TO THE DOT FOR ITA NO. 1802(DEL)/2011 6 LICENCE AND THE RECEIPT OF SATELLITE SIGNALS WE RE CONSEQUENTIAL STAGES. THE SIGNALS WERE TO BE RECEIVED AFTER THE VSAT EQUIPMENT WAS INSTALLED IN THE PREMISES OF THE CUSTOMER. THEREFORE, IT WA S HELD THAT THE BUSINESS WAS SET UP ON 28.7.1994. THE CASE OF THE LD. COUNSEL IS THAT THE ASSESSEE HAD PLACED ADVANCE FOR PURCHASE OF COMMERCIAL SP ACE IN THIS YEAR, WHICH CAN BE SAID TO BE ONLY FOR THE PURPOSE OF ITS BUS INESS. THEREFORE, THE BUSINESS HAS BEEN SET UP IN THIS YEAR. 4.2 FURTHER, HE RELIED ON THE DECISION OF HONB LE GUJARAT HIGH COURT IN THE CASE OF CIT VS. SAURASHTRA CEMENT AND CHEMI CAL INDUSTRIES LTD., (1973) 91 ITR 171. THE HONBLE COURT MENTIONED THAT THE ACTIVITIES OF THE ASSESSEE COULD BE PLACED UNDER THREE CATEGORI ES. THE FIRST CATEGORY IS THE EXTRACTION OF LIME STONE FROM THE LEASED L AND. THE SECOND CATEGORY IS MANUFACTURE OF CEMENT BY UTILIZING THE PLANT AN D MACHINERY SET UP FOR THIS PURPOSE. THE THIRD CATEGORY CONSISTS OF S ELLING THE CEMENT. THE THREE ACTIVITIES TAKEN TOGETHER CONSTITUTED THE BUSINE SS OF THE ASSESSEE. IN THIS SITUATION, THE QUARRYING ACTIVITY WAS AN INTEG RAL PART OF THE BUSINESS ACTIVITY, WHICH CAME FIRST IN POINT OF TIME AND W HICH WAS ESSENTIAL FOR THE SECOND ACTIVITY OF MANUFACTURING CEMENT. THEREF ORE, THE ASSESSEE COMMENCED ITS BUSINESS WHEN IT STARTED QUARRYING OF THE LIME STONE. HE ITA NO. 1802(DEL)/2011 7 ALSO RELIED ON THE DECISION OF HONBLE ANDHRA P RADESH HIGH COURT IN THE CASE OF CIT VS. SPONGE IRON INDIA LTD., (1993) 201 ITR 770. THE ASSESSEE IS A GOVERNMENT COMPANY AND WAS INCORPO RATED ON 18.3.1975 WITH THE MAIN PURPOSE OF MANUFACTURING SPONGE IRON . FROM THE SHARE CAPITAL, IT MADE SHORT-TERM DEPOSITS WITH THE BANK AND RECEIVED INTEREST. SUCH INTEREST INCOMES WERE TREATED AS INCOME FRO M OTHER SOURCES FOR ASSESSMENT YEARS 1976-77 TO 1979-80. AGAINST THE INTEREST INCOME, IT CLAIMED DEDUCTION OF EXPENDITURE INCURRED UNDER THE HEAD EXPLORATION AND GENERAL ADMINISTRATION. IT WAS SUBMITTED THAT THE ASSESSEE HAD COMMENCED ITS BUSINESS AND, THEREFORE, IT WAS ENT ITLED FOR COMPUTING THE BUSINESS LOSS. HOWEVER, THE AO CONCLUDED THAT TH E BUSINESS HAS NOT COMMENCED AND, THEREFORE, DID NOT ALLOW THE SET OF F. AS IN THE CASE OF SAURASHTRA CEMENT & CHEMICAL INDUSTRIES LTD., THE HONBLE COURT CATEGORIZED THE ACTIVITIES IN THREE PARTS- (I) E XPLORATION OF IRON ORE, (II) MINING OF IRON ORE, AND (III) PRODUCTION OF SPONG E IRON. THE HONBLE COURT CAME TO THE CONCLUSION THAT EXPLORATION ACTIVITY D ID NOT HAVE PROXIMATE CONNECTION WITH THE PRODUCTION OF SPONGE IRON AND, THEREFORE, MERE INCLUSION OF SUCH ACTIVITY IN THE OBJECT CLAUSE W ILL NOT BE SUFFICIENT FOUNDATION TO COME TO THE CONCLUSION THAT THE BUSIN ESS HAS COMMENCED. ACCORDINGLY, IT WAS HELD THAT THE ASSESSEE WAS N OT ENTITLED TO THE ITA NO. 1802(DEL)/2011 8 DEDUCTION OF EXPLORATION AND GENERAL ADMINISTRATION EXPENSES. THE CASE OF THE LD. COUNSEL ON THE BASIS OF THESE DECISIONS IS THAT ABSENCE OF SALE IS NOT THE SINE QUA NON OF SETTING UP OF THE BUSINESS. 4.3 COMING TO THE DECISIONS CITED BY THE LD. DR , RELIANCE HAS BEEN PLACED ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. L. AND T. MCNEIL LTD., (1993) 202 ITR 662. IN THIS CASE, IT HAS BEEN HELD THAT A BUSINESS CAN BE SAID TO HAVE BEEN SET UP WHEN IT IS ESTABLISHED AND IT IS READY TO COMMENCE BUSINESS. THE ASSESSEE HAD INSTALLED PLANT AND MACHINERY ON 10.6.1974, LONG AFTER THE END OF THE RELEVANT PREVIOUS YEAR. THE ACTUAL MANUFACTURI NG ACTIVITIES COMMENCED THEREAFTER AND THE FIRST ORDER WAS EXECUTED ON 2 7.9.1974. ALTHOUGH THE ASSESSEE HAD PURCHASED RAW-MATERIAL AND PROCURED ORDERS IN THIS YEAR, YET THE COURT CAME TO THE CONCLUSION THAT THE BUSINES S HAS NOT BEEN SET UP BECAUSE IT WAS NOT IN A POSITION TO COMMENCE THE PROCESS OF PRODUCTION IN THIS YEAR. IN THE CASE OF MINING MACHINERY & EX PLOSIVES (P) LTD. VS. CIT, (1993) 202 ITR 710 (CAL.), THE ASSESSEE HAD BEEN CARRYING ON THE BUSINESS AS DISTRIBUTOR OF DETONATORS USED IN MIN ING OPERATIONS AND THIS WAS THE ONLY LINE OF BUSINESS. IT DECIDED TO EXPORT MANGANESE ORE AND IMPORT STEEL ON BARTER BASIS, FOR WHICH REQUISITE PERMIS SION WAS OBTAINED FROM GOVERNMENT OF INDIA. THE ASSESSEE SENT AN EMP LOYEE TO EUROPE IN ITA NO. 1802(DEL)/2011 9 CONNECTION WITH THE DEALINGS IN THE NEW LINE OF B USINESS. AN EXPENDITURE OF RS. 3,852/- WAS INCURRED ON HIS FOREIGN TOUR . THE ASSESSEE ALSO INCURRED EXPENDITURE ON RENT FOR PREMISES TO BE U SED FOR STORAGE OF MANGANESE AND STEEL. HOWEVER, IN THE YEAR 1964 -65 NO BUSINESS WAS DONE. THE HONBLE COURT CAME TO THE CONCLUSION THAT SINCE THE BUSINESS OF IMPORT AND EXPORT WAS NEVER SET UP, THERE WA S NO QUESTION OF ALLOWING THE EXPENDITURE INCURRED FOR THIS BUSINESS. IN THE CASE OF CIT VS. PIEM HOTEL PVT. LTD., (1994) 209 ITR 616 (BOM.), IT HAS BEEN HELD THAT A UNIT CAN BE SAID TO BE SET UP ONLY WHEN IT REACHES A POSITION FROM WHERE IT CAN START FUNCTIONING AS A BUSINESS OR A MANUF ACTURING ORGANIZATION. ONCE IT IS READY FOR FUNCTIONING, IT DOES NOT MATTE R THAT IT HAD NOT ACTUALLY STARTED BUSINESS, BUT IT MUST BE IN A POSITION TO START BUSINESS. IN THE CASE OF CIT VS. COROMANDAL FERTILIZERS LTD., (2003) 261 ITR 408 (A.P), THE HONBLE COURT AGAIN REITERATED THAT THE BUSINESS OF THE ASSESSEE CAN BE PLACED IN THREE CATEGORIES- (I) EXTRACTION OF LIM E STONE, (II) MANUFACTURING OF CEMENT AND (III) SELLING OF THE CEMENT MANUFACTU RED BY IT. THERE WAS NO EVIDENCE ON RECORD TO SUGGEST THAT THE ASSESSEE WAS IN A POSITION TO USE THE QUARRIED LIME STONE AS RAW-MATERIAL FOR MA NUFACTURING CEMENT. THEREFORE, IT WAS HELD THAT IT CANNOT BE SAID THAT THE BUSINESS OF MANUFACTURING CEMENT HAD BEEN SET UP DURING THIS Y EAR. ITA NO. 1802(DEL)/2011 10 4.4 AFTER CONSIDERING THE FACTS OF THE CASE AND THE CASES RELIED UPON BY THE RIVAL PARTIES, WE FIND THAT THERE IS SOME DIVE RGENCE OF OPINION IN THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CA SE OF HUGHES ESCORTS COMMUNICATION LTD., RELIED UPON BY THE LD. COUNSEL AND OTHER CASES RELIED UPON BY THE LD. DR. HONBLE DELHI HIGH COURT HA S HELD THAT IN A BUSINESS WHICH REQUIRES DIFFERENT ACTIVITIES, ONCE THE FIR ST STEP HAS BEEN TAKEN UP BY PLACING ORDER FOR PURCHASE OF VSAT EQUIPMENT , THE BUSINESS CAN BE SAID TO HAVE BEEN SET UP. OBVIOUSLY, ON PLACING T HE ORDER FOR PURCHASE OF VSAT EQUIPMENT, THE ASSESSEE WAS NOT IN A POSI TION TO PROVIDE ANY SERVICE TO ANY OF ITS CLIENT. YET, THE HONBLE J URISDICTIONAL HIGH COURT HELD THAT THE BUSINESS HAD BEEN SET UP. HOWEVER, TH E DECISIONS OF ANDHRA PRADESH AND BOMBAY HIGH COURTS ARE TO THE EFFECT THAT A BUSINESS CAN BE SAID TO HAVE BEEN SET UP ONLY WHEN IT REACHES A S TAGE FROM WHERE IT CAN PERFORM BUSINESS OPERATIONS. THE FACTS IN THE CASE OF MINING MACHINERY & EXPLOSIVES P. LTD. ARE QUITE DISTINGUISHABLE. THE CASE AT HAND PERTAINS TO THE DELHI HIGH COURT JURISDICTION AND, THEREFOR E, WE ARE BOUND TO FOLLOW THE RATIO LAID DOWN IN THE CASE OF HUGHES ESCORT S COMMUNICATION LTD. AS IN THAT CASE, THE ASSESSEE HAD PLACED ADVANCE FO R PURCHASE OF COMMERCIAL SPACE. THE ASSESSEE IS ENTITLED TO CARRY ON THE BUSINESS OF PURCHASE AND SALE OF COMMERCIAL SPACE. THEREFORE, EVEN IF S PACE IS ACTUALLY PURCHASED ITA NO. 1802(DEL)/2011 11 AND SOLD IN IMMEDIATELY SUCCEEDING YEAR, WHICH I S THE ADMITTED POSITION, IT CAN BE SAID THAT FIRST STEP FOR CARRYING ON T HE BUSINESS FOR PURCHASE OF COMMERCIAL SPACE HAS BEEN TAKEN IN THIS YEAR. TH EREFORE, IT IS HELD THAT THE BUSINESS HAS BEEN SET UP ON THE DATE WHEN SUCH ADVANCE WAS PLACED. AS MENTIONED EARLIER, THE DATE OF ADVANCE IS NOT ASCERTAINABLE FROM THE ORDERS OF THE LOWER AUTHORITIES. THE ASSESSEE S HALL FURNISH THE DETAIL TO THE AO, IF NOT ALREADY FURNISHED TO HIM, AND THEREA FTER THE AO SHALL ALLOW THE INTEREST ON BORROWED FUNDS FROM THE DATE OF ADVANCE TO THE CLOSE OF THE PREVIOUS YEAR. THUS, THE GROUND IS PARTLY ALLO WED AS ABOVE. 5. THE LD. COUNSEL FAIRLY CONCEDED THAT INTEREST IS TAXABLE UNDER THE RESIDUARY HEAD IN VIEW OF THE DECISION IN THE C ASE OF SHRI RAM HONDA POWER EQUIPMENT (SUPRA). THUS, THE GROUND TAKEN IN THIS BEHALF IS DISMISSED. 6. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. THE ORDER WAS PRONOUNCED IN THE OPEN COUR T ON 24TH JUNE, 2011. SD/- SD/- (RAJPAL YADAV) (K.G.BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE OF ORDER: 24TH JUNE, 2011. SP SATIA ITA NO. 1802(DEL)/2011 12 COPY OF THE ORDER FORWARDED TO:- DELIGHT DEVELOPERS PVT. LTD., NEW DELHI. ACIT, CIRCLE 10(1), NEW DELHI. CIT(A) CIT THE DR, ITAT, NEW DELHI. ASSISTANT REGISTRAR.