THE DY.COMMISSIONER OF INCOME TAX CIRCLE-2(1)(1),, AHMEDABAD vs. M/S. GUJARAT INTERNATIONAL FINANCE TECH-CITY CO. LIMITED, GANDHINAGAR

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “A” BENCH Before: Shri Rajpal Yadav, Judicial Member And Shri Amarjit Singh, Accountant Member ITA No. 1177/Ahd/2016 Assessment Year 2012-13

The DCIT, M/s. Gujarat Circle-2(1)(1), International Finance Ahmedabad Vs Tech-City Co. Ltd. Zonal (Appellant) Facility Centre, Block-12 Road1-D, Gandhinagar- 382355 PAN: AACCG9675L (Respondent)

Revenue by: Shri S.K. Dev, Sr. D.R. Assessee by: Shri Vijay Ranjan, A.R. Date of hearing : 28-11-2018 Date of pronouncement : 30-11-2018 आदेश/ORDER PER : AMARJIT SINGH, ACCOUNTANT MEMBER:-

This revenue’s appeal for A.Y. 2012-13, arises from order of the CIT(A)-7, Ahmedabad dated 16-02-2016, in proceedings under section 143(3) of the Income Tax Act, 1961; in short “the Act”.

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Disallowance of Rs. 2,40,18,801/- u/s. 37(1) r.w.s. 3 of the act and Disallowance of Depreciation of Rs. 11138327/-

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In view of the above facts, the assessee was directed to explain how it has claimed such expenses of Rs. 2,40,18,801/- as revenue expenses in the profit and loss account during the year under consideration. The assessing officer has observed that as per the summary of project report the first phase of the project was to be set up by 2016. Therefore, he was of the view that there was no basis to claim that this project was set up and ready to commence the business. The assessee was asked to explain the evidence of commencement of the business as well as the evidence of the set up of the business for allowability of expenditure of Rs. 2,40,18,801/- for the year under consideration. In response the assessee has submitted its explanation vide letter dated 19th Jan, 2015 reproduced as under:- "This is in reference to hearing on 13"'January, 2015 at your office regarding assessment proceedings of Gujarat International Finance Tec-City Company Ltd. (GIFTCL) for the A.Y. 2012-13, In this regard, we would like to submit as under. As you are aware, GIFT Project is a Government project initiated by the Government of Gujarat (GoG) for developing a Global Financial Hub at Gandhinagar. For implementation and management of the project, GoG has set up a SPV i.e. Gujarat International Finance Tec-City Company Ltd. (GIFTCL) GIFT is planned as a financial Central Business District (CBD) between Ahmedabad and Gandhinagar as a Greenfield development. GIFT is designed as a hub for the global financial services sector. More particularly, state-of-the-art connectivity, infrastructure and transportation access have been integrated into the design of the city, it is the Company who is looking after development of GIFT. GIFTCL is incorporated on 21" June, 2007 with equal shareholding of Gujarat Urban Development Company (GUDC), a 100% Government of Gujar.at owned company arid Infrastructure Leasing & Financial Services Limited (IL&FS) GIFTCL is a Board managed Company with Government of Gujarat nominating four senior Government Officials as directors including Chairman of the Company who has a second or casting vote. GIFT Project is a public project and structured to provide the required quality infrastructure and facilities. Development of the much required activities for the envisaged "Global Financial Hub" is the object. For developing the required infrastructure and facilities, jt would require 'support from Government and Government agencies, Keeping this in view, Government of Gujarat has transferred the required land in April, 2011 at a nominal cost of Re. 1 and surplus if any generated would be also on account of the Government. In the initial years till the financial year 2010-11 since inception of the company on 21s( June, 2007, no Profit and Loss Account was prepared by the company and no expense was claimed against the Other Income of the company during the initial 4 years as the business activities had not started. During the course of relevant assessment year of AY 2012-13, the Company prepared Profit and Loss account for the first time since its operations disclosing Interest Income, Bid Documents Fees, License Fees, Scrutiny Fees and Water Charges and claiming

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deduction of various administrative office expenses. Besides, the Company claimed deduction of tax depreciation later on by filing revised return of income. The case of the Company was selected for scrutiny assessment whereby all information requested have been submitted from time to time. During the course of hearing on 13th January, 2015, it was asked to explain why expenses debited to Profit and Loss Account should not be disallowed as expenses incurred before commencement of business. Further the Company was asked to explain why depreciation should not be disallowed being expenses before commencement of business. In this connection, the Company hereby submits the following: 1. Allowability of Expenses after Set-up of Business 1.1 Without prejudice to the fact that the Company has already commenced the business during relevant previous year' and all expenses are incurred after- Commencement of business, it is submitted that the generaj expenses) incurred by the Company are allowable not from the Commencement of Business but also from the date of setting up of business. The Judicial Authorities have worked out a fine line of distinction between Set-up of Operations and Commencement of Operations. For the purpose of allowing deduction of expenses, business should not have been expenses are ncurred after that during intervening period of commencement of business judicial authorities have rightly held that expenses are eligible for deduction, 1.2 The aforesaid view has been held by Bombay High Court in Western India Vegetable Products Ltd. v. CIT. The relevant extracts of the judgment reads as under: "There is difference between the two expressions "setting up" and "commenced". The expression "setting up" means, as is defined in Oxford English Dictionary, "to place on foot" or "to establish", and in contradiction to "commence", The distinction is that when a business is established and is ready to commence business then it can be said of business that it is set up, But before it is ready to commence business it is not set up. But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced and all expenses incurred after setting up of the business and before the commencement of the business, all expense’s during the interregnum, would be permissible deductions under section 10(2).” 1.3 The decision is also supported by Gujarat High Court in the case of CIT v. Saurashtra Cement and Chemicals Industries Ltd., wherein it was held that “The business would commence when the activity which, is first in point of time and which must necessarily precede the other activities is started. 4s soon as an activity which is an in the course of carrying on the business, or which, in other words, is a business activity is started, the assesses must be held to have commenced the business. To take any other view would not only be illogical but also irrational. The conclusion reached by the Tribunal could not, therefore, be said to be unreasonable or perverse or based on no evidence at all." The above decisions support a view that the general expenses incurred by the Company are revenue expenses in nature and allowable in nature if such expenses are Incurred after setting up of business but before commencement of business. Setting up of business of the Company; 2.1 Without prejudice to the fact that business of the Company has already commenced operations and all expenses are incurred by the Company only after setting up of business, it is humbly submitted by the Company, that the business of the Company is already set up in previous year 2011-12. Gujarat High Court .in the case of GIT v, Saurashtra Cement and Chemicals Industries Ltd has defined the connotation setting up of business" as "The business would commence when the activity which, is first in point of time and which must necessarily precede the other activities is started. As soon as an activity which is an essential activity in the course of carrying on the business,

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or which, In other words, is a business activity is started, the assessee must be held to have commenced the business." 2.2 In order to establish the fact that the Company has already set up its business, the details provided below for your kind perusal In financial year 2011-12, vide Collector Order dtd, 15.04.2011 (in Gujarati and its English Translated version placed at Annexure-1), the-State Government has transferred the land of 662 acres to GIFTCL (412 acres) and its subsidiary company GIFT SEZ Ltd. (250 acres) at a token value of Re.1/-. Annexure; 1st phase of the project, any surplus amount received from Development rights by both the companies over and abvoe the original cost shall be distributed equally between the government and both the companies (50- 50%) respectively and for all the phases thereafter, the distribution of surplus would be (80-20%) towards the cost of the land, After the transfer of land by the Government of Gujarat, the implementation work of the infrastructure was commenced by GIFTCL and various Tenders were floated and bids were invited from contractors as per details placed at Annexure-2. The details of major infrastructure works for which Letter of Intent was issued to the contractors in F.Y. 2011- 12 (A.Y. 2012-13) amounting to Rs. 57.42 crores are placed at Annexure-3. 2.3 It can also be deduced from the series of events listed above that the Company has actually commenced the Business Operations. It is also evidenced from the fact that Company has inventoried expenditure amounting to Rs. 40,03,25,606/- to Project Development Expenditure during the financial year 2011- 12 attributable to Land Development Expense, Site and Infrastructure Works etc. The expenses on the other hand debited in Profit-Loss Statement are General Expenses such as Audit Fees, Rental Charges that tantamount to Administrative Expenditure not relating to Project Expenditure and hence not inventoried. After drawing conclusions form the judicial pronouncements that the expenditure Incurred after Set-up of business is allowable under the Income Tax Act and that such expense are revenue in nature, the same is allowable under Section 37 of the Income tax Act, 1961. 2.4 It is also submitted that owing to the Accounting Standard requirements, no revenue has been accounted for in the Profit-Loss Statement. Henceforth, the commencement of operations cannot be linked with the booking of revenue in the accounting books. 3. Allowability of Expenses.Transferred from PDE 3.1 In the concerned assessment year, the Company has debited to the Profit and Loss Statement expenses amounting to Rs. 17,210,600/- as "Transferred from PDE pending Allocation. During the hearing, it is questioned the allowabllity of the same considering the same as preliminary expenses. 3.2 In connection with the same, the Company hereby submits that the Profit-loss Statement has been prepared for the first time since incorporation. The aforesaid expenses are Administrative and office expenditure In nature which has been expended before Profit and Loss Statement is prepared. Such expenses are . i actually incurred after business has been set up and therefore allowed as deduction. As per accounting principles, such expenses are debited to Profit and Loss Statement of this year and therefore expenses are allowed as deduction in current assessment year based on principles discussed in para 2 of the submission. 3.3 As discussed above, the expenses incurred after set-up of business are allowable as deduction. Given the fact that such expenses are not Project related and that have been incurred after the set-up of business, the same is allowable as revenue expenditure to the Company. 3.4 Without Prejudice to the above, the Company also submits that even if it is treated as Preliminary Expenditure, 1/5th of the aforesaid expenditure shall be allowable under Section 35D of the Act.

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District Cooling System 01/08/2012 24/11/2013 23/11/2018 77.10 (Building level) 66/35kv substation 27/07/2012 27/07/2013 26/07/2018 27.19

In view of the above detail, the assessing officer was of the view that business of the assesse was not set up till the end of financial year 2011-12 and observed that claim of aforesaid expenditure as revenue expenditure was not allowable. The assessing officer stated that it is evident that the business of the assessee was not set up during the year under consideration and hence the claim of other expenses of Rs. 2,40,18,801 was not allowable as deduction during the year under consideration. Therefore, the assessing officer has treated the same as capital expenditure and added back to the total income shown by the assessee . He has also stated that the business of the assessee was not ready to commence, therefore, the claim of depreciation of Rs. 1,11,38,327/- made by the assessee in the revised return of income was also disallowed and added back to the total income of the assessee.

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participation in a bid for acquisition of land for a real estate developer would constitute “setting up" of business. The relevant part of the decision is reproduced as under: "Section 28(i) read with section 56, of the Income-tax Act, 1961 - Business income -Chargeable as - Assessment year 2006-07 - Assessee company was incorporated to carry on business of real estate development - It filed its return of income declaring a loss - In course of assessment, Assessing Officer noticed that Official Liquidator of High Court floated a tender for sale of land - Assessee had raised an interest bearing unsecured loans of Rs. 186 crores from its holding company, i.e., DLF Ltd. and had deposited above amount of Rs. 186 crores on same day as earnest money in response to tender invited by Official Liquidator - Bid, however, could not materialize and ultimately amount of Rs. 186 crores was returned to assessee along with interest - Assessee also paid interest to DLF Ltd. - Assessing Officer was of view that assessee had not commenced any business activity; therefore, it was not entitled for interest expenses as claimed by it similarly interest income received by assessee deserved to be assessed as an 'income from other sources' and not as a 'business income' - Whether participation in tender was starting of one activity which enabled assessee to acquire land for development and, in such a situation, actual development of land was immaterial for construing that business of assessee had been set up - Held, yes - Whether, therefore, assessee had demonstrated that its business was set up during relevant year and, as a consequence, interest income earned by assessee was to be taxed as its business income - Held, yes" This ruling by the Delhi High Court reiterates that business can be considered as set up when the activity that is chronologically first and must precede all other activities is started. That is, the moment an essential activity is started, the business is considered to be set-up. In the case of Saurashtra Cement & Chemicals Industries Limited Vs. CIT, the Hon'ble Gujarat High Court has held as under: "Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of -Assessment years 1960-61 and 1961-62 - Assessee company, incorporated in 1956 for manufacture of cement, had obtained a mining lease for quarrying limestone as limestone was essential raw material in manufacture of cement - It started extracting limestone from leased area from 1958 - Assessee completed installation of plant and machinery in June, 1960 and started manufacture of cement in October, 1960 - Whether on facts, it could be said that assessee had commenced its business in 1958 when it started activity of extraction of limestone by quarrying leased and, therefore, expenditure incurred by assessee in carrying on activity of extraction of limestone as also depreciation allowance and development rebate in respect of machinery employed in extracting limestone were deductible in computing trading profits of assessee-Held, yes" Thus the Hon'ble Gujarat High Court established principles of "Setting Up" as under: "The business would commence when the activity which is first in point of time and which must necessarily precede the other activities is started..." Further, in the case of Saurashtra Cement the Hon'ble jurisdictional High Court has also held as under: "... ..... The term business connotes a continuous course of activities. All the activities, which go to make up the business, need not be started simultaneously in order that the business may commence. The business would commence, when the activity which is first in point of time and which must necessarily precede all other activities, is started. It was further held that in order to determine the question whether, the business of an assessee has commenced or not, it is necessary to consider, what constitutes the business of the assessee. It was also laid down that in determining this question arising under fiscal legislation, one must consider what are the activities which constituted such

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business without being misguided by the loose expressions of vague and indefinite import ... ... Thus, the Hon'ble High Court has held that in order to determine whether the business of the assessee has commenced or not, it is essential to see what the business of the assessee is. In the case of Western India Vegetable Products Ltd. 26 ITR 151, the Hon'ble Bombay High Court has held as under: " "There is difference between the two expressions "setting up" and "commenced". The expression "setting up" means, as is defined in Oxford English Dictionary, "to place on f foot" or "to establish", and in contradiction to "commence". The distinction is that when is established and is ready to commence business then it can be said of business that it is set up. But before it is ready to commence business it is not set up. But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during interregnum, would be permissible deductions under section 10(2)". 4.2.3 Now it would be pertinent to see what the business of the appellant is, and whether any activity had actually taken place towards meeting the business objectives of the appellant. A perusal of the Memorandum of Association of the appellant company shows that the objective of the company is to design, develop, finance, construct, operate and maintain Gujarat International Finance Tech. City (GIFT City). Various evidences have been furnished by the appellant to support its contention that business had indeed been setup. The following documents have been furnished by the appellant- 1. Environment Clearance for the Project received from State Level Environment Impact Assessment Authority, Gujarat on 3rd November, 2009. 2. NOC for Height Clearance for the Project issued by Airports Authority of India on 21st May, 2010. 3. Approval of Land Use Plan of GIFT Project Area under Government Notification of Urban Development and Urban Housing Department No.GH/V/116 of 2011/GIFTv 102011-2523-L dtd.22-07-2011. 4. Recommendation for Seismic Design for GIFT Project received from Institute of Seismological Research vide Letter dtd.16.05.2011. 5. Notification of Urban Development and Urban Housing Department, Government of Gujarat dtd.19.10.2011 regarding approval of General Development Control Regulation for the GIFT Area. 6. Collector Order dtd.15.04.2011 vide which the State Government has transferred 662 acres of land to GIFTCL (412 acres) and its subsidiary Company GIFT SEZ Ltd. (250 acres) at a token value of Re.l/- in financial year 2011-12. 4.2.4 As mentioned above, the objective of the appellant company is to design, develop, business, construct, operate and maintain Gujarat International Finance Tech. City (GIFT City). In pursuance to these objectives, it is seen that the appellant has acquired land, obtained environmental clearance, received NOC from Airport Authority of India, received recommendation from the Institute of Seismological Research and has also received an approval from the Urban Development and Housing Department for land use plan of the GIFT project area. The appellant has also submitted Letters of Intent given to various contractors in respect of carrying out work related to the its business such as notice to commence work for construction, operation and maintenance of water pumping station for water supply to GIFT zone, notice to commence work for power supply arrangement for GIFT project and notice to commence work for pipe network for bore-well connection for GIFT project. The fact that the work had also started in pursuance of these contracts has been established by the appellant by submission of work completion certificates of

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these contractors. All these evidences clearly establish that the business of the appellant had been set up during the year under consideration. 4.2.5 Considering the facts of the case, the nature of the appellant's business and its objectives, the evidences filed and the judicial decisions referred to above, I am of the viey that in this case, the appellant's business had been set up and was positioned in the interim period between set up and commencement as envisioned by the Hon'ble Bombay High Court in the case of Western India Vegetable Products Ltd. Therefore, the expenditure claimed by the appellant would be allowable u/s. 37(1) of the Act. The disallowance of Rs.2,40,18,801/- is accordingly deleted. Ground of appeal No. 2 is allowed”

“5.2 I have considered the assessment order and the submissions made by the appellant. A perusal of the submission made by the appellant shows that the depreciation has been claimed on account of plant & machinery which includes office equipment and vehicles, computers and computer software and furniture and fixtures. It has been already been held by me while adjudicating the ground of appeal No.2 that the appellant's business had been set up and while no income had been earned during the year, activities were being carried out by the appellant towards commencement of business. In view of the same, I am of the opinion that the appellant will be entitled to claim of depreciation and therefore the disallowance of Rs.1,11,38,327/- is deleted. Ground of appeal No. 3 is allowed.”

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The nature of business of the assessee company was to design, develop, finance, construct, operate and maintain Gujarat International Finance Tech. City (Gift City). The company had engaged specialized consultant to undertake various studies for the development of the gift project which included detailed master plan, architectural and engineering design including concept design of building and infrastructure, context study, talent assessment study, skills, demand supply study, demand assessment and feasibility, ICT master plan and design for building ICT infrastructure, real estate and market assessment, soil investigation etc. The assessee has submitted that all these studies had taken place before 31st March, 2011. The assessee company has also obtained various approvals and clearance for implementation of the project as elaborated in detail in finding of the CIT(A) as supra in this order. The assessee company has also issued Letters of Intent to various contractors in respect of carrying out work related to its business such as notice to commence work for construction, operation and maintenance of water pumping station for water supply to GIFT zone, notice to commence work for power supply arrangement for GIFT project and notice to commence work for pipe network for bore-well connection for GIFT project. The assessee has also submitted work completion certificates of these contractors. During the course of assessment year 2012-13, the assessee company has prepared its profit and loss account for the first time since its operation disclosing interest document fees, license fees, scrutiny fees and water charges and claimed deduction of various administrative office expenses. Subsequently, the assessee company has also claimed deduction of depreciation by filing revised return of income. The ld. CIT(A) has also referred the decision of Saurastra Cement and Chemical Ltd. vs. CIT of the jurisdictional High Court wherein it is held that the business would commence when the activity which is first in point of time and which must necessarily precede the other activity is started. It is clear from the decision of jurisdictional High Court that as soon as a activity which is an essential activity in the course of carrying on the business or which in other words is a business activity is started the

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assessee must be held to have commenced the business. The nature of business of the asssessee company was to develop various common facilities and the material facts as elaborated in this order substantiate that the business of the assessee company was set up during the year under consideration. We observe that all these evidences clearly demonstrate that the business of the assessee had been set up during the year under consideration.In the light of the above fact and the detailed findings of the CIT(A), we do not find any error in the decision of the ld. CIT(A), therefore, this ground of appeal of the revenue is dismissed.

Order pronounced in the open court on 30-11-2018

Sd/- Sd/- (RAJPAL YADAV) (AMARJIT SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad : Dated 30/11/2018 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file.

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By order/आदेश से, उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद