PRINCIPAL COMMISSIONER OF INCOME TAX 2 vs. GUJARAT INTERNATIONAL FINANCE TECH-CITY CO. LTD.

Facts

The Revenue has appealed against an order of the Income Tax Appellate Tribunal (ITAT) for Assessment Year 2012-13. The ITAT had upheld the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which deleted disallowances made by the Assessing Officer. The assessee, Gujarat International Finance Tech-City Co. Ltd., is engaged in designing, developing, financing, constructing, operating, and maintaining GIFT City. The disallowances pertained to expenses claimed under Section 37(1) and depreciation claimed under Section 32. The assessee had undertaken various studies and obtained approvals before March 31, 2011, and issued Letters of Intent to contractors. The company prepared its Profit and Loss account for the first time in AY 2012-13, claiming administrative expenses and subsequently depreciation via a revised return.

Held

The Tribunal upheld the deletion of disallowances made by the CIT(A) for both issues. Regarding the disallowance under Section 37(1), the Tribunal noted that the assessee's business involved designing, developing, financing, constructing, operating, and maintaining GIFT City. It found that the assessee had engaged specialized consultants for various studies, obtained necessary approvals, and issued Letters of Intent to contractors for construction and infrastructure development. The Tribunal, relying on the decision of the jurisdictional High Court in CIT vs. Saurashtra Cement and Chemical Ltd., held that the business was set up during the year under consideration, as essential business activities had commenced. Consequently, the administrative expenses were allowed. For the second issue concerning depreciation under Section 32, the Tribunal agreed with the CIT(A) that since the business had commenced in AY 2012-13, the assessee was entitled to claim depreciation on plant and machinery, including office equipment, computers, and furniture used for business. The ratio decidendi is that business commences when the first essential activity precedes other activities, and once the business is set up, expenses incurred and depreciation on assets used are allowable.

Key Issues

1. Whether the Appellate Tribunal has erred in law and on facts in upholding the order of the CIT(A) deleting the disallowance of Rs 2,40,18,801/- made under Section 37(1) read with Section 3 of the Income Tax Act, 1961, without properly appreciating the facts and material on record? 2. Whether the Appellate Tribunal has erred in law and on facts in upholding the order of the CIT(A) deleting the disallowance of Rs 1,11,38,327/- made under Section 32 read with Section 3 of the Income Tax Act, 1961, without properly appreciating the facts and material on record? Assessee's Contention (Implicit): The assessee argued that its business had commenced, and therefore, the expenses incurred were for the purpose of business and eligible for deduction, and depreciation was also allowable on assets used for business purposes. Revenue's Contention: The Revenue contended that the Tribunal and CIT(A) failed to properly appreciate the facts and material on record in deleting the disallowances made under Section 37(1) and Section 32.