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Income Tax Appellate Tribunal, HYDERABAD BENCH “B-SMC”, HYDERABAD
Before: SMT. P. MADHAVI DEVI
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH “B-SMC”, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER ITA No. 427/Hyd/2018 Assessment Year: 2014-15
M/s. Indian Rotorcraft vs. DCIT, Limited, Circle – 2(1) Hyderabad. Hyderabad.
PAN – AACCI4741F
(Applicant) (Respondent)
Assessee by : Sri A. Srinivas Revenue by : Sri Solgy Jose T. Kottaram
Date of hearing : 11-03-2019 Date of pronouncement : 22-03-2019
ORDER PER P. MADHAVI DEVI, J.M.: This is assessee’s appeal for the A.Y 2014-15 against the order of the CIT(A)-8, Hyderabad dated 11.12.2017. The grounds of appeal raised by the assessee are as under:
“1. The order of the Appellate Commissioner is contrary to the law, facts and circumstances of the case. 2. The Appellate Commissioner erred in confirming the order of the A.O in not allowing the carry-forward of business loss as claimed by the assessee. 3. The Appellate Commissioner failed to appreciate the ratio of decision given in M/s. Bokaro Steel ltd., (236 ITR 315 (SC). 4. The Appellate Commissioner erred in not allowing the set- off of business loss against the interest earned on fixed deposits.
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The Appellate Commissioner erred in confirming the action of the A.O charging the interest on fixed deposits as “income from other sources”. 6. Any other ground which the appellant may urge either before or at the time of hearing. 2. Brief facts of the case are that the assessee company engaged in the business of flight assembly, end user customization and delivery of Agusta Westland’s AW 109 family helicopters, filed its return of income for the A.Y 2014-15 on 26.09.2014 admitting loss of Rs. 2,39,05,060/- after set off of current year loss of Rs. 33,29,185/- from income from other sources.
During the assessment proceedings u/s. 143(3) of the Act pursuant to selection for scrutiny under CASS, the A.O observed that the assessee has shown ‘nil’ revenue from business operations as it has not commenced its business but claimed expenses of Rs. 3,17,42,273/- in its profit and loss account. He observed that the assessee has also added back expenses to the tune of Rs. 46,13,627/- as capital expenditure and thereby claimed revenue expenses of Rs. 2,71,28,646/- only. The assessee was, therefore, asked to furnish justification of expenses since business had not commenced yet. The assessee submitted the details by a letter dated 22.11.2016. Since, the assessee had not commenced its operations, the A.O held that the expenses claimed in the profit and loss account as revenue expenditure are not to be allowed. He therefore reduced the business loss and interest income was assessed separately as ‘income from other sources’.
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3.1. Aggrieved, the assessee preferred an appeal before the CIT(A), who confirmed the order of the A.O and the assessee is in second appeal before us.
The Ld. Counsel for the assessee submitted that there is difference between the setting up of business and commencement of business and it is not disputed that the assessee had set up the business but had not commenced the business operations. He drew our attention to the profit and loss account, to demonstrate that the expenditure claimed was mainly towards ‘employee benefit expenses’. He submitted that after the business has been set up, the assessee had to employ, employees for carrying out the construction activity and therefore the expenditure is business expenditure and its business loss can be set off against the income under the head ‘income from other sources’. For this purpose, he placed reliance upon the decision of the Hon’ble Bombay High Court in the case of CIT Vs. Axis Pvt Equity ltd in income tax appeal No. 1204/2014 dated 30.01.2017. He also placed reliance upon the following other decisions in support of his contentions.
“1. ACIT Vs. Valmark Developers Pvt Ltd., in ITA No. 2684 to 2653/Bang/2017. 2. Pratik Goyal Vs. ITO in ITA No. 696/JP/2017. 3. Hyderabad Hi-tech Textile Park Pvt Ltd., Vs. ITO in ITA No. 587/hyd/2016. 4. Surya Infra IT Park Pvt Ltd., Vs. CIT, in ITA No. 863/Hyd/2014. 5. ITO Vs. Trident Shelters Pvt ltd., in ITA No. 1160/Hyd/2012. 6. Dakshin Shelters Pvt Ltd., Vs. DCIT in ITA No. 1983 to 1985/Hyd/2011”.
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The Ld. DR, on the other hand, supported the orders of the authorities below.
Having regard to the rival contentions and material placed on record, we find that there is no dispute that the assessee had set up its business and it was yet to commence its operations. In similar circumstances the Hon’ble Bombay High Court (cited supra) has held that all expenses incurred in the interregnum period between setting up of business and commencement of business would be permissible deductions. For the sake of ready reference, the relevant paras of the said judgment are reproduced hereunder:
“6. The grievance of the revenue before us is only with regard to the impugned order allowing the expenditure of Rs. 1.17 crores as business loss. This conclusion of the Tribunal is premised on the fact that the business has been set up during the year under consideration. It is submitted by the Revenue that no evidence was produced by the assessee to show that any activities of management of funds have been taken by the respondent – assessee during the assessment year. Thus no expenditure resulting in business loss could be allowed as the business had not commenced. According to the Revenue, there is no distinction between setting up of business and commencement of business. Therefore, no expenditure incurred before commencement of business can be allowed. 7. We note that a similar issue viz. distinction between setting up of business and commencement of business had come up for consideration before this Court in Western India Vegetable Products ltd., Vs. CIT. This court had held that business is said to have been set up when it is established and ready to be commence. However, there may be an interval between a business which is set up and a business which is commenced. However, all expenses incurred during the interregnum, between setting up of business and commencement of business would be permissible deductions. In this case, the CIT(A) had disallowed the expenditure as business loss only on the ground that it had not commenced business. However, the
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impugned order of the Tribunal on examination of facts found that the business of the respondent – assessee has been set up in the subject assessment year and consequently, the business loss arising on account of expenditure as claimed by the respondent – assessee was allowable. We also note that the impugned order of the Tribunal placed reliance upon the order of its Co-ordinate bench in HSBC Securities India Holdings Pvt Ltd., (supra) wherein on similar facts it had held that when executives are employed and the infrastructure is ready to commence business, it can be said that the business has been set up for carrying on business as share brokers”. 6.1. Respectfully following the same, I direct the A.O to allow the business loss as claimed by the assessee to be set off against the income from other sources. Accordingly, the appeal of the assessee is allowed.
In the result, the appeal filed by the assessee is allowed.
Sd/- (P. MADHAVI DEVI) JUDICIAL MEMBER
Hyderabad, Dated: 22nd March, 2019 KRK
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1) M/s. Indian Rotorcraft Ltd., 1st Floor, Block-E, Old Project Site Office, GMR Hyderabad International Airport, Shamshabad, Hyderabad – 500409. 2) DCIT, Circle – 2(1) Hyderabad. 3) CIT(A)-8, Hyderabad. 4) Pr.CIT-2, Hyderabad. 5) The Departmental Representative, I.T.A.T., Hyderabad. 6) Guard File.