NAVAYUGA ROAD PROJECTS PRIVATE LIMITED,HYDERABAD vs. ASST. COMMISSIONER OF INCOME TAX, CIRCLE-16(1), HYDERABAD

Brief facts of the case are that while scrutinizing the return of income for the assessment year 2014-15, the learned Assessing Officer observed that the assessee did not commence business and, therefore, it is not entitled for any expenditure under section 37 of the Income Tax Act, 1961 (‘the Act’).

Assessee preferred appeal and pleaded that the very business of the assessee is to make investments either by way of share capital or by way of providing funds for the purpose of execution of development of respective infrastructure projects in accordance with the concession agreements entered in to by the respective subsidiaries or associates. Impugned order reveals that the assessee brough to the notice of the learned CIT(A) that in fact the investments by the assessee in the SPVs started more than three years back, the toll collections were also started in some cases and since nearly twenty years to go through which the SPVs will continue to earn toll/annuity there are prospects of earning benefit.

Learned CIT(A), however, observed that the assessee did not carry out any business activity, the company was incorporated mainly with the objectives of carrying on the business of operating, maintaining and managing the infrastructure facilities on toll, cess, annuity or any other revenue collection basis and, therefore, the expenses incurred by assessee prior to generation of income from its business cannot be allowed as deduction, nor can it be adjusted against any other income under any other head. So holding, the learned CIT(A) upheld the disallowance of the entire expenditure and dismissed the appeal.

Hence, the assessee is before us contending that it is incorrect on the part of the authorities to hold that earning of revenue only is the criterion for eligibility to allow expenditure that was incurred wholly, necessarily and exclusively for the purposes of business. Learned AR submitted that when once the business is set up, there is no room for the Revenue to disallow the expenditure that was incurred wholly and exclusively for the purposes of business and both the orders of the authorities nowhere said that the business of the assessee was not set up. However, it is a verifiable fact that the assessee has been making investment by way of share capital or providing funds to the subsidiaries and sister concerns pursuant to the concession agreement and, therefore, the disallowance of expenditure has to be deleted. He placed reliance on the decision of the Hon’ble Gujarat High Court in the case of PCIT vs. Tudor India (P.) Ltd. [2019] 111 taxmann.com 450 (Gujarat) which in turn was rendered in the light of the decisions reported in Eastern Investment Ltd. v. CIT, [1951] 20 ITR 1, CIT v. Walchand & Co. etc., [1967] 65 ITR 381 and Hughes v. Bank of New Zealand, [1938] 6 ITR 636, wherein it is held that earning profit in any particular year is not a sine qua non for allowance of any expenditure.

We have gone through the record in the light of the submissions made on either side. According to the Memorandum and Articles of Association of the assessee, its business is to invest and fund the infrastructure projects for development, operation, maintenance etc. Orders of the authorities below do not spell out about the setting up of business by the assessee and they do not reflect any enquiry into the contention of the assessee that pursuant to the concession agreements, the assessee started investments in the SPVs more than three years back, toll collections also started in some of the cases and since the project has to go for twenty years, the toll earnings/annuities will start accruing. Apparently, the expenditure of the assessee is disallowed solely on the ground that the expenditure incurred by the assessee prior to the generation of income from its business cannot be allowed as a deduction, nor can it be adjusted against any other income under any other head.

In the case of PCIT vs. Tudor India (P.) Ltd. [2019] 111 taxmann.com 450 (Gujarat), the High Court of Gujarat, held that:

“It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur. We may refer to a few of these authorities to elucidate the point. In Eastern Investment Ltd. v. CIT, [1951] 20 ITR 1, it was held by the Supreme Court that "there are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Court is deciding a question under Section 12(2) of the Income Tax Act". It was further held in this case that "it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned". In CIT v. Walchand & Co. etc., [1967] 65 ITR 381, it was held by the Supreme Court that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. It was further observed that the rule that expenditure can only be justified if there is corresponding increase in the profits was erroneous. It has been classically observed by Lord Thankerton in Hughes v. Bank of New Zealand, [1938] 6 ITR 636 that "expenditure in the course of the trade which is unremunerative is none the less a proper deduction if wholly and exclusively made for the purposes of trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense". The question whether an expenditure can be allowed as a deduction only if it has resulted in any income or profits came to be considered by the Supreme Court again in CIT v. Rajendra Prasad Moody, [1978] 115 ITR 519, and it was observed as under: — "We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income." It is noteworthy that the above observations were made in the context of Section 57(iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes the position stronger. In the case of Sassoon J. David & Co. (P.) Ltd. v. CIT, [1979] 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred "wholly, necessarily and exclusively" for the purposes of business in order to merit deduction. Pursuant to public protest, the word "necessarily" was omitted from the section. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred "wholly and exclusively" for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above.”

As rightly contended by the learned AR, the impugned order does not deal with the aspect of setting up of business by the assessee. If the business is set up, the position of law is clear that earning income is not sine qua non for allowing the expenditure, but what is required is that the expenditure should have been incurred "wholly and exclusively" for the purpose of business and nothing more. Since the setting up and conduct of business is a verifiable fact, entitlement of assessee depends upon such a finding of fact.

We, therefore, set aside the impugned order and restore the appeal to the file of the learned CIT(A) to cause verification of the fact of setting up and conduct of business and basing on it to take a view according to law.

In the result, appeal in (AY.2014-15) is treated as allowed for statistical purposes.

Since the facts of the appeal in (AY.2014- 15) are identical to one as decided by us in (supra) and, therefore, our findings in the said appeal, mutatis mutandis, would apply to this appeal as well.

In the result, this appeal of the assessee is also treated as allowed for statistical purposes.

To sum-up, both these appeals are treated as allowed for statistical purposes.