M/S EMBASSY INN PRIVATE LIMITED ,BANGALORE vs. THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-2(1)(2), BANGALORE

He erred in holding that the appellant did not commence its business activity. 3. He failed to appreciate that, by providing finances to Concerns carrying on identical business and that, those Concerns had utilized it in its real estate activity confirms the appellant had commenced its business. 4. He failed to appreciate that the appellant had invested in Embassy One Developers Private Limited, carrying on identical business. The expenses claimed had been incurred wholly and exclusively for business purposes. 5. Without prejudice to the above, the appellant submits that the interest paid on the debentures should have been allowed as deduction since proceeds on debentures were utilized for advances, on which the interest was received and included in total income. 6. The appellant submits that, in any case, the addition made is excessive and unreasonable. 7. The appellant, therefore, prays that the disallowance of Rs.1,33,06,032/- may be deleted”.

The assessee filed the following additional evidence: a. Debenture Trust Deed, dt. 04-03-2015; b. Bank statement maintained with HDFC – Current A/c No.50200009971070 for the period 01-04-15 to 31-03-15; 3. The Ld.AR submitted that the above documents could prove that there is direct nexus between the debenture issued and loans advanced. The assessee has pleaded before the CIT(A) that the entire interest expenditure is for the purpose of earning interest income. The assessee was under bonafide belief that the entire interest expenditure will be allowed as deduction. However, Ld.CIT(A) in his order accepted the claim of assessee to the extent of interest paid on loans and not debenture issued. Therefore, now the assessee has been advised to file the above document to prove direct nexus between debenture issued and loans advances. The above

The Ld.DR did not raise any strong objection with regard to admission of additional evidence.

In our opinion, these above additional evidences are very much required to decide the issue in dispute, accordingly, these additional evidences are admitted for adjudication.

On appeal, the CIT(A) observed that the interest other than debenture interest to be allowed as these interest expenditures are allowable u/s.57(iii) of the Act. Thus, the CIT(A) confirmed disallowance of interest paid on debenture at Rs.24,65,753/- against this assessee before us. Before us, the Ld.AR submitted that the above additional evidence filed by the assessee which are not filed before the AO and he has no occasion to examine the issue resulting to the allowability of interest, the above documents are very crucial and the issue may be remitted back to decide the same

Next ground for consideration is with regard to disallowance and loss of Rs.37,32,655/- on reasons of non-set up of business. From the financials on record, it is observed by the AO that the assessee has not shown any revenue from operation for the year or last year as under:

We have heard both the parties and perused the material on record. The main contention of the Ld.AR is that the assessee already set up its business and set up is different from commencement of business. According to Ld.AR, once the business has been set up, the assessee is entitled to claim the expenditure incurred by the assessee and the same to be allowed whether the assessee earned income or not.

We have heard both the parties and perused the material on record. To decide whether the business of the assessee has been set up or not, the assessee has to establish that the company has been already set up for the purpose of carrying on its business operation. The assessee in this case, not established that the assessee is already set up in the business so as to commence its commercial operations and not placed any evidence to suggest that the assessee has set up the business. The financial statement clearly shows that no business has been commenced in the assessment year under consideration and the position of the assessee has been continued till the end of the previous year 2013- 14 relevant to AY.2014-15. There was no work in progress in the assessment year under consideration and also in the subsequent assessment year 2015-16, which remain unchanged at NIL as the company has not commenced its business activities. In other words company has not at all completed set up of the business so as to commercially starts its operation. In such circumstances, lower

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