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Before: Shri V. Durga Rao & Shri Manoj Kumar Aggarwal
आयकर अपीलीय अिधकरण, ‘सी’ "ायपीठ, चे"ई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘C’ BENCH, CHENNAI "ी वी. दुगा" राव, "ाियक सद" एवं "ी मनोज कुमार अ"वाल, लेखा सद" के सम" । Before Shri V. Durga Rao, Judicial Member & Shri Manoj Kumar Aggarwal, Accountant Member आयकर अपील सं./I.T.A. No.627/Chny/2018 िनधा"रण वष"/Assessment Year: 2012-13 MMRF Realty and Infrastructure Pvt. The Deputy Commissioner of Vs. Ltd., No. 21, Indira Nagar, Income Tax, 1st Avenue, Adyar, Corporate Circle -4(1), Chennai – 600 020. Chennai. [PAN: AAHCM1575E] (अपीलाथ"/Appellant) (""थ"/Respondent) अपीलाथ" की ओर से / Appellant by : Shri I. Dinesh, Advocate ""थ" की ओर से/Respondent by : Shri G. Johnson, Addl. CIT सुनवाई की तारीख/ Date of hearing : 04.01.2022 घोषणा की तारीख /Date of Pronouncement : 24.01.2022 आदेश /O R D E R Per V. DURGA RAO, JUDICIAL MEMBER: The appeal filed by the assessee is against the impugned order of the ld. Commissioner of Income Tax (Appeals) 8, Chennai dated 20.12.2017 in ITA No. 162/15-16 for the assessment year 2012-13. 2. The assessee has raised the following grounds of appeal: 1. The order of the commissioner of Income Tax (Appeals) enhancing the assessment is wrong, illegal, unjust, arbitrary and is liable to set aside.
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2.1 The Commissioner of Income Tax (Appeals) erred in enhancing the income of the Appellant by disallowing the genuine business expenditures incurred by the Appellant. 2.2 The Commissioner of Income Tax (Appeals) erred in proceeding on the basis that the business had not yet commenced; which is untenable. 3.1 The Commissioner of Income Tax (Appeals) erred in disallowing the preliminary expenses of Rs. 2,04,986/-. 3.2 The Commissioner of Income Tax (Appeals) erred in considering Administrative expenses debited in the profit and loss accounting amounting to Rs. 5,48,747/ as expenditure covered u/s.35D on the assumption that the Appellant's business operations had not commenced. 4. The commissioner of Income Tax (Appeals) erred in disallowing the depreciation of Rs. 13,503/-on office furniture and computer. 5.1. The Commissioner of Income Tax (Appeals) erred in holding that the professional charges of Rs. 7,50,000/- is attributable to acquisition of property and therefore it needs to be capitalised. 5.2. The Commissioner of Income Tax (Appeals) equally went wrong in holding that the charges of Rs. 3,50,000/- is also attributable to acquisition of property and therefore it also needs to be capitalized. 5.3. The Commissioner of Income Tax (Appeals) erred in the business income( loss) computation, in the page number 20 of the CIT(A) order, the net loss as per profit and loss account ( After deferred tax assets of Rs. 48,288/- ) was wrongly taken of Rs. ( 19,05,445/-) instead of Rs (19,53,733/-). While computing the Taxable Income and therefore the net loss as per profit and loss should be taken before deferred tax Asset of Rs. (19,53733/-). 6.1. The Commissioner of Income Tax (Appeals) has grossly erred in confirming the treatment of interest on bank deposits to the tune of Rs.10,36,165/-as income from other sources. 6.2. The Commissioner of Income Tax (Appeals) ought to have seen that the Assessee has rightly capitalized the net the interest paid after netting of interest received during the construction period under the head ``work in progress" and as such, the order of the Assessing Officer is erroneous.
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6.3. The Commissioner of Income Tax (Appeals) ought to have appreciated that the Interest earned on the Deposits is "inextricably linked" with the setting up of the business and therefore is capital receipt, not taxable. 6.4. In any event the Commissioner of Income Tax (Appeals) ought to have set off the interest received with the interest paid, even under the head other sources. 7. Any other ground that maybe raised at the time of hearing.”
The brief facts of the case are that the assessee is engaged in the business of real estate, construction of housing properties and infrastructure development. The assessee filed its return of income on 29.09.2012 and later revised on 09.02.2013 claiming a loss of ₹.17,97,462/-. The case was selected for scrutiny. In response to the statutory notices, the assessee filed various documents and records before the Assessing Officer. After considering the submissions of the assessee, the Assessing Officer completed the assessment under section 143(3) of the Act dated 18.03.2015 by determining the total taxable income of the assessee at ₹.7,20,300/- after making various disallowances/additions.
On appeal, after perusing the written submissions, balance sheet and other documents furnished by the assessee as well as considering the reply to the notice of enhancement, the ld. CIT(A) enhanced the 4 I.T.A. No.627/Chny/18
assessment, besides confirming various additions, which is reproduced as under: ₹.19,05,445 Profit (Loss) as per the P & L account Less: Inadmissible 2,04,986 Preliminary expenses Legal & Professional expenses capitalized 11,00,000 ₹.18,53,733 Expenses considered u/s 35D 5,48,747 Net business income ₹.(-) 51,712 ₹.10,36,165 Add: Interest income received for the year Total income ₹.9,84,453 5. On being aggrieved, the assessee is in appeal before the Tribunal.
The Ld. Counsel for the assessee has argued that the assessee has applied for planning permit with CMDA on 15.11.2011 and hence, the business has been set up and commenced. The ld. Counsel for the assessee also reiterated that until the planning permission is sanctioned no construction activity can be commenced. The first step in the commencement of business is to apply for the planning permit with respective authorities.
Countering the arguments, the Ld. DR argued that except for the application to CMDA for the planning permit there are no activities carried out by the assessee showing commencement of business. Hence, the expenditure incurred before the commencement of 5 I.T.A. No.627/Chny/18
business cannot be treated as pre-operative expenses and capitalized with the project cost. The Ld. DR also argued that the interest n the fixed deposits is arising out of investment on surplus funds in short term fixed deposits and hence to be treated as income from other sources. The Ld. AR argued that the interest under fixed deposits on a short term basis by parking available funds arising out of share capital and it should be utilized to reduce the cost of the project and capitalized. The Ld. DR relied on the Hon’ble Madras High Court judgment in Express Infrastructure Pvt Ltd vs DCIT in TCA No. 783 of 2018. 8. We have heard the rival contentions and perused the material placed on record before us. The issue before us is whether the assessee has commenced its business or not during the assessment year 2012-13. The commencement of real estate business would normally start with acquisition of land or immovable property. In the case of the assessee who is in the business of development of real estate construction and infrastructure development, the acquisition of land would clearly show that the assessee is ready to commence business and as a corollary, that it has already been set up. The actual acquisition of the land may be the first step in the 6 I.T.A. No.627/Chny/18
commencement of the business. Section 3 of the Act does not speak of commencement of business but only of setting up of the business. The question is to when the business has to be said to have been set up has been laid down in Bombay High Court in Western India Vegetable Products Ltd vs. CIT 26 ITR 151. "It seems to us, that the expression setting up means, as is defined in the Oxford English Dictionary, to place on foot or to establish, and in contradiction to commence. The distinction is this that when a business is established and is ready to commence business then it can be said of that 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 the interregnum, would be permissible deductions under sec.10(2).” 9. We find from the records that the assessee has purchased lands vide documents no. 5158 & 5159 of 2012 dated 11.07.2012. Further, the assessee has produced the application of planning permit before the CMDA on 15.11.2011. The approval was accorded by the respective authorities on 01.07.2013. Based on the above, we find that the business of the assessee has been duly set up during the assessment year 2012-13. 10. The next issue raised in the appeal of the assessee relating to disallowance of ₹. 7,50,000/- professional charges and legal charges of ₹. 3,50,000/-. The Assessing Officer disallowed both the professional
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charges and legal charges on the ground that the above expenses are attributable to the cost of acquisition of the project. On appeal before the ld. CIT(A), the assessee was asked to explain with all the vouchers and details of services rendered for incurring the above expenditure. Accordingly, before the ld. CIT(A), the assessee has submitted that M/s. NCR Consultants Ltd has been engaged for preparation of project report documentation support and other advisory service charges and paid ₹.7,50,000/-. Similarly, M/s. Sai Raj Associates has been engaged towards consultation and providing drafts of affidavits, draft agreement, etc. for the property and an amount of ₹. 3,50,000/- has been paid. In support of the claim, the assessee has furnished all vouchers, bills raised by the consultants. After considering the above, the Ld. CIT(A) was of the opinion that the professional charges as well as legal charges are directly related to the acquisition of land as well as joint development agreement entered into by the assessee, these expenditure are directly relatable to capital acquisition and are liable to be capitalized along with the cost of acquisition of the property. Accordingly, as a combined expenditure ₹.11,00,000/- (Rs. 7,50,000 + ₹.3,50,000) are not liable to be claimed as expenditure to set up the 8 I.T.A. No.627/Chny/18
business of the assessee and are not allowable for deduction u/s. 35D of the Act and confirmed the disallowance made by the AO.
10.1 It is an admitted fact that the assessee has incurred legal and professional charges directly attributable to the acquisition of land as the assessee has entered into joint development agreement, we are of the opinion that the authorities below has rightly capitalized above expenditure along with cost of acquisition of the property and thus, we find no infirmity in the order of the ld. CIT(A) on this issue. Accordingly, the ground raised by the assessee is dismissed.
The next issue pertains to treatment of interest from bank deposits at ₹. 10,36,165/- as income from other sources. Before the ld. CIT(A), the assessee has claimed that the interest earned is inextricably linked to the borrowals made. However, the ld. CIT(A) has observed that the substantial funds of the assessee have come on account of share application money received of ₹.8.75 crores and advances received from shareholders and others. Moreover, interest is earned from temporary deployment of funds received by the assessee both from shareholders as well as from financial institutions and others. The funds have been ploughed into the common kitty of the company
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and they have been used as and when required. The assessee company has deployed the surplus available in fixed deposits of three months’ duration. This temporary deployment of funds cannot be considered as inextricably linked to business conducted and inalienable to the business activity of the company and thus, by relying on the decision of the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT (227 ITR 172), the ld. CIT(A) has held that the interest receipt of ₹.10,36,165/- is liable to be taxed separately as income from other sources.
11.1 We have considered the rival contentions. Admittedly, the assessee is engaged in the construction, development & Marketing of residential and commercial flats. The contention of the ld. Counsel for the assessee is that prior to its business operation, the assessee has temporarily parked its funds in short term deposits and earned interest income, which were capitalized and are inextricably linked with the assessee’s business as the entire funds were utilized only for business purposes. We find force in the arguments of the ld. Counsel. On perusal of the material available before us, decision of the Hon’ble Supreme Court in the case of M/s. Tuticorin Alkali Chemicals and 10 I.T.A. No.627/Chny/18
Fertilizers Ltd (supra) is not applicable for the case of the assessee. Without any basis, the ld. CIT(A) has simply opined that the temporary deployment of funds and earning interest there upon cannot be considered as inextricably linked to business activity of the assessee. Admittedly, other than business purpose, the interest income or any other funds sourced were utilized. Thus, we are of the opinion that the assessee has invested amounts received which are inextricably linked with the process of setting up of its business as laid down by Hon’ble Supreme Court in the case of CIT vs. Bokaro Steel Ltd (236 ITR 315) which was followed in the case of CIT vs. Karnal Co-operative Sugar Mills Ltd (243 ITR 2). Therefore we are of the considered opinion that the interest allowed on fixed deposits before the commencement of the project shall be reduced from the cost of the project and thereby, the decision of the ld. CIT(A) is set aside on this issue.
In the result, the assessee’s appeal is partly allowed.
Order pronounced on 24th January, 2022 at Chennai. (MANOJ KUMAR AGGARWAL) JUDICIAL MEMBER Chennai, Dated, 24.01.2022 Vm/-
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आदेश की "ितिलिप अ"ेिषत/Copy to: 1. अपीलाथ"/Appellant, 2.""थ"/ Respondent, 3. आयकर आयु" (अपील)/CIT(A), 4. आयकर आयु"/CIT, 5. िवभागीय "ितिनिध/DR & 6. गाड" फाईल/GF.