JINDAL REALITY PVT. LIMITED,NEW DELHI vs. ACIT, NEW DELHI

The assessee has raised the following grounds of appeal:-

1. That the Commissioner of Income Tax (Appeals)-XIII, New Delhi has grossly erred on facts and in the circumstances of the case and in law in holding that the business of the appellant is not set up during the previous year relevant to A Y 2006-07.

The first issue raised vide ground of appeal no.1 by the assessee is against the claim of the assessee that the business of the assessee was set up during the year under consideration.

Briefly, in the facts of the case, the assessee company was incorporated on 25.08.2005, was engaged in the business of real estate.

The Assessing Officer concluded by holding as “I hold that the interest earned on loan & advances given to various persons & corporate bodies and bank interest FDRs is income from other sources as the Company has not commenced any business activity during the year and since its business had not started, there could not be any computation of business income or loss incurred by the assessee in the relevant accounting year. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business could not be allowed as deduction nor could it be adjusted against any other income under any other head”.

The AO also held that interest income earned by the assessee was income from other sources against which business expenses should not be claimed; hence a sum of Rs.94,25,071/- was assessed as income from other sources in the hands of the assessee. The interest paid on 4 borrowed capital and other expenses were held to be preoperative business expenses, as the assessee had not started its business during the year under consideration, hence the expenses were not allowed in the year under consideration.

The CIT(A) with regard to the setting up of the business held as under:-

Coming to the second issue of holding the expenses preoperative in nature, the CIT(A) held that since no project had commenced during the 6 year, interest expenses were to be capitalized and were not allowable in the year. It was further held that the set off of interest income which against the interest expenditure can be allowed partly. The CIT(A) directed that interest income of Rs.79,00,208/- (which has accrued on account of advances to associate consortium entities for purchase of land) be set off against interest expenditure of Rs.4,71,55,160/- (incurred on account of borrowals for purchase of land) and the balance amount of Rs.3,92,54,952/- only shall be capitalised. At the cost of repetition it is again reiterated that the capitalization of this interest had to be with each of the specific project as well as Property at 5, Man Singh Road and Kurukshetra etc. for which too advance had been given during the year from the borrowed loans, on which the interest expenditure had been claimed. Thus the capitalization of interest for Rs.3,92,54,952/- had to proportionately done according to the amount of investment in the projects & properties by way of Loan & Advances (Assets) totalling to Rs.315.34 Crores during the year.

The assessee is in appeal against the order of the CIT(A).

The Ld. AR for the assessee pointed out that the assessee company was incorporated on 25.08.2005. Our attention was drawn to page 6 of the appellate order, wherein the details of the activities undertaken during the year itself are tabulated. He took us through the event of the year i.e. purchase of land at Sonepat and then second purchase of land at Man Singh Road property. The assessee pointed out that the major 7 investments were made for purchase of property in order to launch the project of more than 100 acres at Sonepat and similarly, substantial amount totalling Rs.116.67 crores was paid for purchase the property at Man Sing Road. Our attention was invited to the relevant documents which are placed in paper book. Then he pointed out that board resolution was passed on 01.03.2006 for entering into development agreement which was entered into at the start of the next year. The Ld. AR for the assessee also pointed out that the above said projects were approved in the succeeding years and this was in line with the business activity undertaken by the assessee. He then referred the balance sheet placed at pages 30 and 36 of the paper book, wherein, assets were shown under loans and advances. Undoubtedly, no income was generated during the year but assessee had actually commenced the business and not only set up the business. It was reiterated by the Ld. AR for the assessee that funds were borrowed, portion of land was acquired and advance was given for acquisition of balance land and steps were taken to enter into development agreement. He further referred to various case laws to point out that in line with aforesaid steps taken, the business could be said to have commenced. He stressed that purchase of land itself was start of business activity and specially where funds were borrowed and land was acquired, substantial activities having been taken place, it could not be said that there was no commencement of business.

The Ld. DR for the Revenue pointed out that the question was whether the business was set up or had commenced. He pointed out that the case of the assessee was that when set up was done, the business was commenced. The Ld. DR for the Revenue strongly relied upon the order of CIT(A).

We have heard the rival contentions and perused the record. The first issue which arises in the present appeal is against the claim of the assessee as to setting up of business during the year under consideration itself. The assessee company was incorporated on 25.08.2005 and the nature of the business was to be engaged in the business of real estate. During the instant assessment year, the assessee had acquired land for development of township at sector-33, 34, 35 at Sonepat. For this, the assessee raised loans from the banks and also entered into joint development agreement. The minimum area requirement for residential colony was 100 acres and the assessee along with its associates together acquired 161.3811 acres in order to fulfil the minimum area norms for plotted Colony at Sonepat. The said land was acquired in consortium with other associate company due to ceiling on holdings of land as per The Haryana Ceiling on Holdings Act, 1972. The assessee purchased 19 acres of land by itself and advanced money to the consortium associate entities to purchase land in their respective names to meet with the land ceiling limits. An agreement was entered into between the parties for joint development of land and advancement of 9 moneies for purchase of land. Further Memorandum of Understanding was signed between the assessee company and associates, authorising it to make such application/s on their behalf as lead applicant. The process of acquisition of land was spread over a period of time and the application for obtaining license was filed in the month of July, 2008.

A perusal of the said list of events alongwith relevant documents placed in paper book establishes that the first land was purchased at Sonepat vide deed dated 12.01.2006 and the said land had been reflected as stock in trade in the balance sheet as on 31.03.2006. Further, the Board Resolution dated 01.03.2006 was passed for execution of development agreement and for obtaining financial assistance for land acquisition. The copy of the letter is placed at pages 80 and 81 of the paper book. The assessee entered into development agreement in the initial month of the succeeding year and the copy of the development agreement is placed at pages-138 to 180 of the paper book. Once the land bank was collected by the assessee and its associate as per the requirement of Haryana Laws, an application for grant of license was moved on 23.07.2008, copy of which is placed at pages 182 to 317 of the paper book. The letter of intent was received on 20.07.2009 which is placed in the paper book. Another investment was made by the assessee was entering in agreement for purchase of Man Sing Road property, wherein agreement of sale was entered dated 25.10.2005 placed at pages 332 onwards. The assessee has also filed details of land purchased at pages 83 to 101 of the paper book.

The question which arises for adjudication is whether set up of business is only set up or is also commencement of business. Looking at the facts in entirety what transpires is that the assessee had established its company, borrowed funds for purchase of portion of land in own name and further gave loan to the associates for acquisition of land and then entered into development agreement for the development of township at Sonepat.

The Hon’ble Bombay High Court in Western India Vegetable Products Ltd. vs CIT 26 ITR 151 (Bom.) has laid down the proposition that there was a clear distinction between a person commencing a business and a person setting up a business and for the purpose of the Indian Income Tax Act, the setting up of the business and not the commencement of the business, is to be considered. It is only after the business is set up in the previous year, the business commences and any expenses incurred prior to the setting up of a business would not be a permissible deduction. When a business is established and is ready to commence business then it cannot be said that business had not set up.

The Hon’ble Delhi High Court in case of Dhoomketu Builders & Development (P.) Ltd. vs ACIT 368 ITR 680 (Del.) was considering the case of a person engaged in realty business, who had participated in an auction to acquire a piece of land. It was noted that in order to bid for the land, loan was obtained from its holding company and the same was deposited as earnest money to bid for the land. However, there was no success in auction, but the interest paid on borrowed loans and interest received on earnest money was net off and the loss was claimed to be carried forward. The Tribunal held in such facts there was setting off of business and the same was held to be finding of facts by the Hon’ble High Court.

The Hon’ble Delhi High Court in CIT vs Arcane Developers (P) Ltd. 368 ITR 627 (Del.) while deciding the issue of allowability of interest expenditure on borrowed loan held that when the business of assessee had commenced/was set up, on obtaining loan for making investment, it was held that “date of setting up of business” and “date of commencement of business may be two separate dates. However, the date of setting up of business depends upon facts and the nature of the business. In the facts of the said case, where the assessee company was 13 incorporated for carrying on the business of developers and promoters, then where a memorandum of understanding was entered into for arrangement of funds, then the Hon’ble High Court held as under:-

The Hon’ble High Court thus held that setting up of business takes place then the business is ready and the first steps are taken, which in the case of real estate business were when the assessee looks around and negotiate with party. In such a scenario, the assessee was held entitled to claim of interest as business expenditure

Applying the above said proposition to the facts of the present case, we hold that in the case of the assessee where substantial activities were carried out by the assessee, since the date of incorporation which 14 had culminated in raising loans, making investment in purchase of land, which was reflected as stock in trade and also advancing loans to associate concerns for purchasing different pieces of land, in order to fulfil the condition of Land Bank of 100 Acres or more, to develop the township in Haryana and where the assessee is entered into development agreement at the close of the present year/beginning of the next year, then assessee can be said to have set up and commenced its business.

Now coming to the second issue raised by the assessee, it is consequent to the first issue raised in the present appeal. Once the business had been set up and also commenced in instant year itself, then the interest expenses claimed by the assessee and any other expenditure claimed by the assessee is to be allowed as business expenditure. The assessee had also parked certain funds temporarily in the bank FDRs, on which it had earned interest which is to include also as business income in the hands of the assessee. Accordingly, ground no 15 2 and 3 raised by the assessee also stand decided in the favour of the assessee and same is dismissed.

Ground no. 4 is an alternate claim prayer made by the assessee does not require any adjudication.

The last issue raised vide ground no.5 is taxability of interest income, which we have already held as business income; even otherwise the said interest income needs to be set up of against interest expenditure as funds have been borrowed by the assessee and only surplus borrowed funds have been invested in bank FDRs. Accordingly, the ground no. 5 raised by the assessee is allowed.

In the result, appeal of the assessee is allowed.