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Income Tax Appellate Tribunal, DELHI BENCH “A”: NEW DELHI
Before: SHRI BHAVNESH SAINI & SHRI PRASHANT MAHARISHI
O R D E R PER PRASHANT MAHARISHI, A. M.
These are two appeals pertaining to Sentia Power limited (assessee) for two different assessment year. They are taken together and disposed of by this common order.
For assessment year 2011 – 12 in assessee has filed appeal against order of The Commissioner of Income Tax (Appeals) – 4, New Delhi dated 31/3/2015, wherein order of The Income Tax Officer ,[ Ld AO ] holding that employees remuneration of Rs. 2,64,00,715/– and legal and professional charges of INR 4,69,00,663/– held to be capital expenditure is confirmed. Assessee has raised following grounds of appeal:- “GROUND NO. 1.1: On basis of facts and in circumstances of case and in law, Ld. Commissioner of Income Tax (Appeals) has erred in sustaining disallowance in respect of employees remuneration amounting to Rs. 2,64,00,715/-. GROUND NO. 1.2: On basis of facts and in circumstances of case and in law, ld. Commissioner of Income Tax (Appeals) has erred in upholding action of AO regarding treatment of employees remuneration as capital expenditure. GROUND NO. 2.1: On facts and in circumstances of case and in law, Ld. Commissioner of Income Tax (Appeals) has erred in sustaining disallowance in respect of Legal and Professional expenses amounting to Rs. 4,69,00,663/-. GROUND NO. 2.2: On basis of facts and in circumstances of case and in law, ld. Commissioner of Income Tax (Appeals) has erred in upholding action of AO regarding treatment of Legal and Professional expenses as capital expenditure. GROUND NO. 3.1: ld. AO has erred in not treating Interest income amounting to Rs. 7,52,26,392/-, arising out of primary parking of funds arranged for setting up of plant, as capital receipt. Ground No. 3.2 ld AO has erred in not setting off above mentioned capital receipt (interest) against pre operative expenses incurred during setting up plant.”
3. Assessee Company was incorporated on 19 May 2008. During AY, it was engaged in establishment of business of power generation, distribution, trading and transmission of all form of power and ancillary and incidental activities. Assessee filed its return of income on 28/9/2011 declaring a loss of INR 305626/–. Up to AY under consideration, Assessee was in process of construction of a thermal power project at Bhaiyathan in Chhattisgarh and had not started commercial production. On surplus funds not deployed, assessee received interest income of Rs. 7,52,26,392/- on inter corporate deposits from fellow subsidiaries during impugned AY. During the year, Assessee incurred employee cost of Rs. 42,90,432/- and legal and professional charges of Rs. 2,24,77,857/- which was related to construction of project and was shown under head "expenditure during construction pending capitalization". Thus expenditure directly/ indirectly Page | 2 related and attributable to construction of power project and incidental to setting up of power project facilities, incurred prior to date of commencement of commercial operation of power project, were shown under the head "Expenditure During Construction Pending Capitalization”, which was to be capitalized on completion of construction of respective power project and upon commencement of commercial operations. In addition to setting up of power project, Assessee had also evaluated viability of various other business opportunities to increase its operational area and had incurred salary cost and other administrative overheads. Assessee had booked employee cost of Rs. 2,64,00,715/- and legal and professional fees of Rs. 469,00,663/- in its P&L A/c. This expenditure was debited to profit and loss account and assessee claimed it as revenue expenditure.
4. During the course of assessment proceedings the learned AO examined the claim of the assessee and held as under:- “During the assessment proceedings, it is seen from foe P&L account that foe assessee had earned interest income on Inter Corporate Deposits for Rs.7,52,26,392/-.. Against this, the assessee has booked expenses for employees remuneration and benefits for Rs.2,64,00,715/- and legal and professional fees for Rs.4,69,00,663/-. It was also seen that in the preceding year the assessee had declared interest on Inter Corporate Deposits at Rs.38,35,616/- with no expenses for employees remuneration and only Rs.5,51,500/- as expense for legal and professional fees. Vide questionnaire dated 23/12/2013, the assessee was asked that “It is seen from your profit and loss account filed that the only income earned during the year is of Rs.7,52,26,392/- as interest income. Further from this, you have debited an expense of Rs.2,64,00,715/- as salary and wages and Rs.4,69,00,663/- as legal and professional fees. It is to be show caused that why these expenses, if found to be allowed, is not to be capitalized as they pertained to expenditure during construction period.” In response to this, the assessee filed details vide letter dated 05/02/2014 on justification of allowability of salary and Page | 3 professional fees. The assessee has stated that in addition to setting up of the power project, the assessee to increase its operational area had also evaluated the viability of various other areas within its business objects and incurred salary cost and other administrative overheads for the same. It has argued that as these expenses have no correlation with the ongoing project and that they have been incurred for the purpose of its business, it is to be allowed as revenue expenses. In support of its argument, the assessee had relied upon the following case laws: i. CIT vs. Walchand & Co. (P) Ltd. [1967] 65 ITR 381 ii. Titanium Products Ltd. vs. CIT [1966] 60 ITR 227 (SC) iii. Sasson J. David & Co. (P) Ltd. vs. CIT [1979] 118 ITR 261 (SC) iv. Cargo Holding Private Workers Pool vs. DCIT (ITAT Vizag) v. Khalid Automobiles vs. Union of India (1995) Further, vide questionnaire dated 07/02/2014, the assessee was further asked the following: 1. The complete details of interest earned for Rs. 7,52,26,392/- with the name of the entity from which it was received and also their confirmed copy of account. 2 The details of legal and professional charges paid with the specific work performed by them, the bills raised and any agreement with them in this regard. As asked in the earlier questionnaire the proof of TDS being deducted and deposited in Govt, account within the statutory time period is to be filed. 3 The confirmed copy of account for the loan on which an interest payment of Rs. 13,15,068/- was done and the proof of TDS being deducted on this and deposited in Govt, account within the statutory time period is to be filed. Further the assessee was given various opportunities vide order sheet entry dated 17/02/2014, 19/02/2014 and 20/02/2014 to justify its claim of expenses on salary and legal and professional as Page | 4 revenue expenditure during the year. The various reply filed by the assessee is as under: 1. Vide submission dated 14/02/2014, the assessee stated that the legal and professional charges were paid to the following two companies for specific work as mentioned: "a. Elena Power and Infrastructure Limited: WBPDCL invited bids for selection of Mine Developer and operator for development, Mining & Supply of coal from east of Damagoria in Raniganj coal block allotted to WBPDCL Elena Power provided consultancy and co¬ordinated in preparation in preparation of the said bid though- it did not fructify. Such efforts were done in the normal course of the assessee‟s business and is quite routine in nature. It is, thus, claimed as revenue expense, b. Indiabulis Real Estate Limited: The assessee explored the opportunity with MSEDCL who wanted to appoint distribution franchisee for Nagpur Urban Distribution Divisions of Gandhibag. Civil Lines and Mahal. IBREL provided consultancy in preparation of bid to act as distribution franchisee of the state electricity board. Such efforts were done in the normal course of the assessee‟s business and is quite routine in nature. It is, thus, claimed as revenue expense. ” The ld AO asked on 17/02/2014 and 19/02/2014 assessee to file any agreement that were made for legal and professional expenses with the concerned parties. In response to this, the assessee has stated that as the parties who have given consultancy were known to the assessee, the execution of an agreement was not considered necessary. It is to be brought on record here that on the query of the nature of work performed by these entities the assessee has stated vide point no.3 in its letter 19/02/2014 that - with respect of your query regarding agreement with the parties, it is submitted that the conduct of the parties is evident from the invoices Page | 5 attached herewith. From the enclosed invoice of M/s Elena Power & Infrastructure Limited bearing No.EPIL/March/10-11/01 dated 03/03/2011 and EPIL/March/10-11/02 dated 30/03/2011, the particulars of work performed is given as consultancy in relation to Bhaiyathan Power Project. With regard to M/s Indiabulis Private Limited the assessee only submitted Form 16A as a proof of TDS deduction on the payments made to them. I have considered the various submissions given by the assessee in detail. I have also gone through the case laws mentioned by the assessee on the difference between capital expenditure and revenue expenditure. Through all its submissions and the case laws, the assessee has tried to justify that the deductibility of these expenses as revenue expense were determined in accordance with Section 37 of the IT. Act, 1961. I fail to agree with the submissions of the assessee on the following grounds:
1. The assessee is in the business of setting up of power plant in Bhaiyathan. Prior to this year all expenses related to employee remuneration and to legal and professional expenses were capitalized as construction period expenses. In the preceding year the interest income earned from Inter Corporate Deposits were debited by interest paid on Inter Corporate Deposits. It was only during this year that on account of earning of interest on ICD for Rs.7,52,26,392/-, the assessee has claimed huge expenses on these two heads. On various opportunities given to the assessee it has failed to conclusively prove with documentary evidence, the nature of payments that were made under these heads. It is clearly established that the assessee has used these expenses as a means to suppress the taxability of its interest income by suppressing the profits.
2. In the submissions made by the assessee on bills raised to M/s Elena Power & Infrastructure Limited, it is clearly stated under the particulars of work performed as consultancy in relation to Page | 6 Bhaiyathan Power Project. The assessee has itself confirmed that this payment was with respect to Bhaiyathan Power Project. It clearly proves that its submission on Annexure-2 vide letter dated 14/02/2014 that the consultation fee was given for mining bids called by WBPDCL is a sham document and that the assessee has now tried to willfully submit inaccurate particulars.
Even on repeated opportunities being given the assessee did not produce any documentary evidence on the nature of work performed by M/s Indiabulls Real Estate Limited. It has only filed Form No.16A which though stands as a proof for deposit of tax and for the amount paid but by no stretch of imagination it can be considered as a test whether the expense is of capital or revenue nature.
It has been held in the case of Arvind Mills Ltd. Vs CIT (SC) 197 ITR 422 that Capital Expenditure would not become revenue expenditure simply by reason that it was incurred in connection with business activities, which ultimately resulted in efficiently carrying on day-to-day business. Moreover, the expression „enduring benefit‟ and „rights of a permanent nature‟ are only descriptive and not definite and are relative in meaning not synonymous with „permanent‟ or „everlasting‟ as held in Devidas Vithaldas & Co. Vs. CIT (SC) 84 ITR 754.
5. It has been held in the following cases, which further clarifies that these expenses made by the assessee are of capital in nature: a. Commencement of business is relevant for allowance of expenditure u/s 37 and not setting up of the business- Expenditure incurred prior to commencement of business capital expenditure - Citi Financial Consumer Finance India Ltd. Vs. Addl.CIT (ITAT, Del) 33 SOT 414 b. Expenses incurred for the purpose of launching a new project or initiating a new line of business separate from the existing business cannot be held to be revenue expenditure incurred in connection with the existing business – Indian Oxygen Ltd. Vs CIT (Cal) 164 ITR 466 and Trade Wings Ltd. Vs CIT (Bom) 185 ITR 267 From the above stated facts and the documents on record it is conclusively established that the assessee has debited the salary and legal and professional expenses in its P&L account during this year as a means to suppress its taxable income. These expenses relate to the business of the assessee of setting up of power plant and as it is still in construction stage it is taken to be of capital in nature and treated accordingly.”
5. Consequently assessment order u/s 143 (3) of the income tax act, 1961 was passed on 28/2/2014 wherein the total taxable income of the assessee was determined at INR 7 3244057/– wherein the disallowance on account of the employees remuneration of Rs. to 6400715/– and legal and professional charges of INR 46900663/– were disallowed and held to be a capital expenditure.
6. The assessee aggrieved with the order of the learned assessing officer preferred an appeal before the learned CIT – A – 4, New Delhi. He passed an order dated 31/3/2015 discussing the claim of the assessee confirming the action of the learned assessing officer as under:- “Vide the Ground No. 2 of the appeal; the appellant had challenged the action of the AO of holding the legal and professional charges of Rs 4.69 crores as capital in nature. As per the details furnished by the appellant before me, the legal and professional charges were incurred for the following purposes:
Party Amount Specific Work Performed s. Name No. 1 35,847,5 WBPDCL invited bids for Elena 00 Power & selection of Mine Development and operator Infrastruc for developments, Mining & ture Supply of coal from east of Damagoria in Ranjiganj coal Limited block allotted to WBPDCL Elera Power provided consultancy and coordinate in preparation of the said bid Page | 8 though it did not fructify. Such efforts were done in the normal course of the assessee‟s business and is quite routine in nature. It is, thus, claimed as revenue expense. 2 11,030,0 Indiabulls The assessee explored the 00 Real opportunity with MSEDCL Estate who wanted to appoint Limited distribution franchisee for Nagpur Urban Distribution Divisions of Gandhlbag, Civil Lines and Mahal. IBREL provided consultancy in preparation of bid to act as distribution franchisee of the state electricity board. Such efforts were done in the normal course of the assessee‟s business and is quite routine in nature. It is, .thus, claimed as revenue expense. S. Khandelwa 3 l & Co. 1,103 Other Misc. 4 Other Misc. Envirotech 22,060 Consultant s Pvt. Ltd. 46,900,6 Total 63 5.3.2 In this regard, the Ld. AR filed detailed submissions is as under: "In the present case, the AO had treated Rs. 4.69 erores, being the legal and professional charges debited in the audited Profit and Loss Account of the assessee as capital expenditure. In the humble submission of the assessee, these expenses have no correlation with the ongoing project and the same have been incurred for the purpose of assessee's business, not related to the project. Thus, these expenses had been debited in the profit and loss account of the company. As per the standard accounting practice the expenses which were related to the ongoing project had been duly capitalized by the company and Page | 9 the expenses which were of revenue nature and incurred for the purpose of business had been booked in Profit and Loss Account. 2.2 In this regard it is humbly submitted that the nature of the expenses together with documentary evidence had been explained to the AO and submitted vide our submission dated 05.02.0214, 14.02.2014, 19.02.2014 and 20.02.2014. On die one hand the learned AO has not given due consideration to the various submissions and documents produced before himself during the course of assessment proceedings, and on another side, the AO prefers to allege that despite various opportunities given no conclusive prove was given with respect to the nature of expenses. Furthermore, the AO had ignored our reply dated 14.02.2014 wherein the details of legal and professional charges along with the specific work performed was clearly mentioned. Instead, the AO incorrectly assumed that these expenses are nothing but a means to suppress the taxability of its interest income. AO erred in making an assumption with respect to the bills raised by M/s Elena Power & Infrastructure and consequentially treating the expenditure in relation to the bills as capital in nature. 2.3 The AO has stated on clause 2 at page 5 of the order that "it is clearly stated under the particulars of work performed as consultancy in relation to Bhaiyathan Power Project. The assessee has itself confirmed that this payment was with respect to Bhaiyathan Power Project" In this regard it is submitted that the name of the company itself is "....Bhaiyathan Power" and the nature of work as mentioned in the invoice has to be read as "consultancy in relation to Bhaiyathan Power's project" which happened to be a project as mentioned in our submission dated 14.02.2014 (i.e. consultancy provided and co-ordination of a bid invited by a Government corporation). No where the invoice confirms that the consultancy has been provided with respect to On perusal of the above details, it is evident that such expenses were not booked in the immediately preceding year. It was informed that the payment of salary which was booked during the year pertains to only last few months of the financial year, and does not cover the full year. The Ld. AO, while passing the impugned order, has taken notice of this claim of the appellant regarding salary of the high level officials of the appellant company, who observed that the appellant was in the business of setting up a Power Plant at Bhaiyathan, Chhattisgarh, which is yet to be set-up. It was observed by him that prior to the current year all expenses in the nature of employee remuneration were duly capitalised as pre- construction period expenses. Keeping in view the above, the Ld. AO capitalized the salary expenses against the cost of the Power Plant, which is being set-up by the appellant company. 5.2.2 Before me, the Ld. Appellant counsel conceded that undoubtedly the appellant company is still in the process of setting- up a Thermal Power of Project (Bhaiyathan Project) in the state of Chhattisgarh. It was informed that the aforesaid employees are already on the pay-roll of the holding company M/s India Bulls Power Ltd., whose salaries were reimbursed in the current year by the appellant company, as they had provided the services for exploring new opportunities for the company. It was submitted that the appellant was engaged in various form of Power business like establishing/commissioning/setting-up, operating and maintaining electrical power generating stations, which have a long gestation period. It was submitted that in addition to setting up the said power plant, the appellant wanted to increase its operational area, for which it had evaluated the viability of various other areas within its business objects and for would not only be Illogical but also Irrational." The test laid down by the Hon'ble was of starting of an activity which is an essential activity in the course of carrying on the business, or, in Page | 11 other words, is a business activity and the moment the activity started, the assessee must be held to have commenced its business. Thus it can be deduced that the assessee can be said to have set up its business from the date when one of the essential categories of its business activities is started and it is not necessary, that all the categories of its business activities must start either simultaneously or that the lost stage must start before it can be said that the business can be set up. In the present case, the assessee had required man power, funds and office setup, it is not correct to say that the assessee has no setup. We would like to draw your attention to the main object clause of the assessee company (copy of Mo A on Page no of paper book) that reads as under- (A) THE MAIN OBJECTS TO BE PURSUED BYTHE COMPANY ON ITS INCORPORATION ARE: 1 To promote, undertake, carry on either on its own or through any other entity or to enter into agreements, contracts, partnership, alliance or any other arrangement for technical, financial and operational assistance or sharing of profits / losses with any Person / Body / Bodies Corporate incorporated in India or abroad. in connection with the generation, distribution, trading, supply, accumulation and employment of electricity, galvanism, magnetism or otherwise and business of establishing, commissioning, setting up, operating and maintaining electric power generating stations based on conventional/non-conventional resources, tie-lines, sub- stations and transmission lines on Build, Own and Operate (BOO) and/or Build, Own and Transfer (BOT), and/or Build, Own, Lease and Transfer (BOLT) and/or Build, Own, Operate and Transfer (BOOT) basis and/or otherwise, and to carry on the business of acquiring, operating, managing and maintaining existing power generation stations, tie- Page | 12 lines, sub-stations and transmission lines, either owned by the private sector or public sector or the Government or Governments or other public authorities and for any or all of the aforesaid purposes, to do all the necessary or ancillary activities as may be considered necessary or beneficial or desirable and in any manner deal with or dispose of undertaking, property, assets, rights and all other effects which in the opinion of the Company is conducive to the attainment of any or all of its business objectives or to acquire and dispose of shares, securities and interest in such Businesses. (5) To carry on the business of design, engineering, construction and development of power projects Including hydroelectric projects, renewable energy, nuclear, gas and coal and fuel oil based projects. 6.2 The Ld. Counsel were asked to explain whether the said group companies namely M/s Elena Power & Infrastructure Ltd. and M/s India Bull Real Estate Ltd. had any expertise, skill set or any prior experience of executing such consultancy studies. The appellant was also asked to file the documentary evidence in this regard. It was seen that the appellant had assigned these consultancy services to the two group companies without any well defined terms and scope of such consultancy, therefore, the Ld. counsels were asked to file any communication in this regard, that may have been sent by email or through any other made of communication and asked to file a copy of agreement in this regard to prove bonafide of such consultancy arrangement. The Ld. Counsels were also asked to file a copy of the final consultancy report before me. The appellant filed these reports before me vide letter dated 27/10/2014. It was submitted that since both the parties were known to the appellant and hence, execution agreement was not considered necessary. 6.3 On perusal of the consultancy report furnished by M/s Elena Power & Infrastructure Ltd. with respect of West Bengal Power Development Corporation Ltd., East of Damagoria, Ranigunj Coal Page | 13 Block, I find that this report is a detailed technical report comprising basic exploration date and detailed technical studies on the geological formation of the coal block and the exploration possibilities in the said Rani Gunj coal block. In the detailed report, the mention of the appellant company's name comes only in the back-ground page, where in one sentence, it was mentioned that: "East of Damagoria coal blocks of Ranjgunj coalfield have been allotted to West Bengal Power Development Corporation Limited (WBPDCL) M/s Indiabulls CSEB Bhaiyathan Power Limited is one of the parties willing to participate in the bid invited by WBPDCL In this regard. M/s Indiabulls CSEB Bhaiyathan Power Limited sought assistance from Elena Power and Infrastructure Limited to develop bidding strategy for Indiabulls CSEB Bhaiyathan Power Limited to participate in the bid." There is no mention in the entire report about the terms and scope of the said consultancy study, and the time-frame within which such study was to be completed and the methodology used. The report does not mention about the methodology used or the specific technical persons that may have been engaged by that company in preparing this consultancy report. 6.4 Further, on perusal of the other report which was prepared by M/s India bulls Real Estate Ltd. regarding field study report of Nagpur franchisee areas, claimed to be for MSEDC again, the appellant company name comes only in the initially introduction in one sentence without mentioning the terms and scope of the study, the time-frame for the study, the methodology used for the study etc., as under:- "M/s Indiabulls CSEB Bhaiyathan Limited (ICBL) is willing to participate in the bid invited by MSEDCL. In this regard, ICBL ought assistance from Indiabulls Real Estate Limited (IBREAL) to develop bidding strategy for Indiabulls to participate in bid."
6.5 The appellant was also asked to explain the exact nature of the services rendered by M/s Elena Power & Infrastructure ltd. and M/s India bulls Real Estate Ltd., in the light of the feet that the invoices raised by both the parties give the narration 'consultancy in relation to Bhaiyathan Power Project'. The Ld. Appellant counsel before me, submitted that the appellant intended to develop an advance strategy for backward and forward integration with the power plant, which was being set-up in Chhattisgarh. In view of this, it wanted to enter into bidding for coal mines in West Bengal in order to ensure supply to the Bhaiyathan Power Plant, when it is constructed. Further, with regard the participation in the distribution sector of electricity in the state of Maharashtra, it was submitted that the same was for the purpose of forward integration to ensure distribution of the power generated by the power plant. In view of this, it is evident that without prejudice to the bonafide of such professional fee paid to the two group companies, the intended business activity cannot be held as a new business activity, since the same are in the nature of forward/backward integration to power plant. In any case, neither the power plant nor the coal mines/electricity distribution business activities were anywhere close to start operations. Under the circumstances, I find no reason not to upheld capitalization by the AO. 6.5.2 Further, I notice that the Id. AO had observed that contrary to the claim by the appellant that such payments of professional fee to the two group companies was for other new business activities in which the appellant wanted to diversify, the narration on the invoice issued by these two company show the narration 'consultancy in relation to Bhaiyathan Power Project'. The appellant was asked to explain this inconsistency. Before me the Id. AR submitted that this observation alone cannot be considered for deciding the issue, as in the view of the appellant, the narration on the invoices issued by the two companies is explain the fact that the name of the company itself is "Indiabulls Bhaiyathan Power Ltd." and therefore the narration on die invoice should be read as "consultancy in relation to Bhaiyathan Power's Project", and none of the invoices show that the consultancy Page | 15 has been provided with respect to the ongoing power project of the company. In view of this, it was submitted that the observation of the AO was incorrect, and which cannot be the basis for making decision on this ground. 6.5.3 On careful consideration of the above facts, it is evident that the claim by the appellant that in addition to setting up the power plant, it had also started new business activities or started exploring for new business opportunities is not supported by the facts of the case. In the own admission of the appellant, the bidding for the coal mine allocation in West Bengal was in the nature of a backward integration in order to sustain regular coal supply to its power plant, which was yet to be set-up. Similarly, the interest in the Maharashtra State electricity distribution company's bid was to ensure forward integration of power to be produced by its power plant for distribution purposes. Undoubtedly, the invoices issued by M/s Elena Power & Infrastructure Ltd. and M/s India bulls Real Estate Ltd. clearly show that such consultancy services were in respect of M/s Bhaiyathan Power Project only, which is proved by the appellant's own admission in this regard. The appellant's plea that the narration on such invoices does not denote the nature of the services and that in its view since the company's name is "... Bhaiyathan Power", the narration in the invoices have to be read as "consultancy narration to Bhaiyathan Power's Project". However, on the facts of the case it is evident that the appellant's interpretation is not supported by facts and circumstances of the case. Evidently, the appellant intended to make backward and forward integration with respect to its power plant, which is yet to be set-up. The appellant has capitalised all expenses pertaining to the power project. Since the project for backward and forward integration were at bid stage only, which is much beyond the setting up of the power plant, and since the appellant had capitalised all expenses relating to power project, there is no reason not to capitalise such expenses being in the pre-construction stage. On the facts of the case, it is evident that the aforesaid activities were no independent business activities as was claimed by the appellant but Page | 16 were part of the bigger plan to make the power plant viable and profitable. In view of this, the appellant's plea to treat the "legal and professional expenses” as revenue in nature cannot not be admitted. 6.5.4 Vide Ground No. 1 of the appeal, the appellant has challenged capitalisation of payment made to its holding company M/s Indiabulls Power Ltd. in respect of reimbursement of remuneration of certain high level officials, on the ground that such officials had helped the company in exploring new business activities. The appellant was asked to file details of exact services rendered by such employees to the appellant company, however, no such details were filed by the appellant, other than a general submission that all such employees had necessary experience, and had added their services for exploring new opportunity for the company. Since in view of my decision in the above paragraph, it is been held that the appellant had not started any new business activities other than showing an intention to develop forward and backward linkages to the power plant, which too was under construction, it is evident that the expenses in the nature of salary paid to the employees of the appellant company were ultimately for the purpose of setting up of the power plant only and for making it viable and profitable. In view of the above, it is held that salary cost reimbursed by the appellant requires to be capitalised to the cost of the power project.”
Assessee, aggrieved by order of learned CIT – A, has preferred this appeal before us. Contesting this appeal, learned authorised representative summarized his arguments in his written submission as under:- “Ground No. 3.1. 3.2: Interest Income earned during the period of construction is a Capital Receipt and required to be set off against pre-operative expenses: 1) The business of the Assessee was in construction stage and had not started commercial production. The loan was received by the Assessee for the purpose of setting up of its power plant. Since the loan could not be utilized for the time being due to legal entanglements, the funds were temporarily advanced to the fellow subsidiaries and interest was earned thereon. The interest earned was to be used for construction of the power plant. 2) Since the power plant business had not been set up, the receipts and payments would be clearly on capital account and hence not liable to tax. In a case where these receipts and payments pertain to the fixed structure of the company's business that was being set up, it would be inconsistent to hold that the expenditure incurred by the Assessee prior to the setting up would be of a capital nature but the receipts would be of a revenue nature. 3) It has been held in the following case laws that surplus money lying idle which has earned interest income during the period of construction is to be treated as a capital receipt and is to be set off against pre-operative expenses. 4) Further, the Assessee had taken the borrowed funds for the purpose of construction and since the construction activity was temporarily slowed due to various legal issues during the impugned A.Y, the Assessee as a commercial expediency measure, chose not to keep the funds idle and opted to earn interest income there from. These funds were lent to subsidiaries so that they were readily and easily available to the assessee-company for its business transactions at short notice. Besides there would be an accretion in funds available by way of interest which could be used for the construction process in the project. 5} Reliance has been placed on the following: i. NTPC Sail Power Company fP.l Ltd. v. Commissioner of Income- tax* [2012] 25 taxmann.com 401 fDelhn “Interest on temporary deposits is not income from other sources This Court, in Indian Oil Panipat Power Construction Ltd. v. ITO [2009] 315 ITR 255/ 181 Taxman 249 [Delhi] held that where interest on money received as share capital is temporarily placed in fixed deposit awaiting acquisition of land, a claim that such interest is a capital receipt which is to be set off against pre-operative expenses, is admissible, as the funds received by the assessee-company from the joint venture partners are 'inextricably linked' with the setting up of the plant and such interest earned cannot be treated as income from other sources. [Para 9] Interest earned was related to setting up of plant In the instant case, the funds invested by the assessee company and the interest earned were inextricably linked with the setting up of the power plant. It may further be added that the Tribunal has not found Page | 18 that the deposits made as margin monies were not limited to the activity of construction connected with the expansion of the business by way of setting up of a totally new power generation plant [Para 10] he Tribunal and the lower authorities committed error in holding that the interest earned on fixed deposit of amounts borrowed, which is the subject-matter of the present appeal, would have to be treated as revenue receipt. [Para 11 ]" ii. Indian Oil Panipat Power Consortium Ltd. v. Income-tax Officer [2009] 315 ITR 255 fDelhil: Facts of the judgment: The assessee-company was incorporated in pursuance of a joint venture entered into between an Indian company and a Japanese company to set up a power project. In order to effectuate the purpose for which joint venture was conceived, both the joint venture partners contributed share capital which included a sum by way of additional share capital. The assessee stated that said funds were required for purchase of land and development of infrastructure, but due to legal entanglements with respect to title of land, they were temporarily put in fixed deposit with bank and interest was earned thereon. It claimed that said interest was capital receipt and, therefore, should be set off against pre-operative expenses. The Assessing Officer, however, treated the interest as 'income from other sources'. On appeal, the Commissioner fAppeals] categorically found that the funds were placed in fixed deposit so that liquidity was ensured and money would remain available when required for purchase of land and infrastructure development and, hence, the interest earned was 'inextricably linked' with the setting up of the power plant. He, therefore, applied the judgment of the Supreme Court in CIT v.Bokaro Steel Ltd. [1999] 236 ITR 315 / 102 Taxman 94 and allowed the claim of the assessee by directing the Assessing Officer to delete the addition and to consider the same for capitalization towards pre-operative expenses. On the revenue's appeal, the Tribunal, following decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172 / 93 Taxman 502 (SC] reversed the order of the Commissioner (Appeals]. The Hon‟ble High Court held as under: “In the instant case, it was clear upon a perusal of the facts as found by the authorities below that the junds in the form of share capital were in fused for a specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as 'income from other sources'. Since the income was earned in a period prior to commencement Page | 19 of business, it was in the nature of capital receipt and, hence, was required to be set off against pre-operative expenses. [Para 5.2] In view of the discussion above, the Tribunal misdirected itself in applying the decision of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra ] in the facts of the instant case. On account of the finding of fact returned by the Commissioner (Appeals) that the funds infused by the joint venture partners in the assessee-company were inextricably linked with the setting up of the power plant, the interest earned by the assessee could not be treated as 'income from other sources'. Therefore, the impugned judgment was to be set aside. [Para 7]" iii. Additional Commissioner of Income-tax v. India Drugs & Pharmaceuticals Ltd. [1983] 141 ITR 1 34 (Delhi): Facts of the judgment: The assessee-company, being an undertaking promoted to start the manufacture of drugs and Pharmaceuticals, received certain payments during the setting up of its factory. These were (i) on account of sale of tender forms regarding construction and erection of plant and machinery to contractors, (ii] on account of sale of grass and trees, (iii] on account of sale of stone and boulders, and (iv ) by way of recovery from contractors for providing them with electricity and water at the sites. The ITO was of the opinion that these sums represented income taxable in the hands of the assessee under the head "Income from other sources". On appeal, the AAC deleted the above additions on the ground that they did not constitute income. On second appeal, the Tribunal upheld the order of the AAC. The Tribunal held that these receipts were clearly referable to the source of business, profession or vocation and since they were not fully set up at the time the impugned payments were received, the receipts were of a capital nature and were not liable to tax. "So far as the receipts from the sale proceeds of trees, grass, boulders and stone were concerned, they represented the sale proceed of capital assets and were, therefore, capital in nature. So bar as the receipts on account of tender forms and by wav of water and electricity charges to the contractors were concerned, they would not be treated as arising out of a source of income separate from the business which was being set up. Since the business had not been fully set up. the receipts and payments would be clearly on capital account and hence not liable to tax. In a case where these receipts and payments pertain to the fixed structure of the company's business that was being set up. it would be inconsistent to hold that the expenditure incurred bv the assessee prior to the setting up would be of a capital nature but the receipts would be of a revenue nature. Hence, the impugned receipts were of a capital nature and were not liable to tax." iv. Commissioner of Income-tax v. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC): Facts of the judgment: The Company‟s object was to construct and own an integral iron and steel works. During the assessment years under consideration, the work of construction of the company's factory and installation of the plant was in the process of completion and the company had not started any business. The Company had entered into supplementary agreements with its contractors under which it had made certain advances to the contractors on interest to enable them to execute the large-scale construction work smoothly for the company. This arrangement primarily meant payment in advance of the amounts of the contractor's bills for which the company had charged interest. This interest was later adjusted against the dues of the contractors. It was held by the Hon‟ble Supreme Court that: "In case money is borrowed by a newly-started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee received any amounts which were inextricably linked with the process of setting up its plant and machinery, such receipts would go to reduce the cost of its assets. These were receipts of a capital nature and could not be taxed as income." Facts of the Assessee: In the case of the Assessee, the funds were irrefutably borrowed for the capital work and hence were inextricably linked to the project. The said funds had to be temporarily parked gainfully due to a hiatus in the construction activity. v. Commissioner of Income-tax v. Karnataka Power Corpn. [2001] 247 1TR 268 (SC): The Hon‟ble Supreme Court followed the decision in case of CIT v. Bokaro Steel Ltd. [1999] 102 Taxman 99 [SC] and held that the interest receipts and hire charges from contractors are in the nature of capital receipts which would go to reduce capital cost. "2. It is not in dispute that the first two questions must be answered in the affirmative and in favour of the assessee having regard to the judgments of this Court in CIT v. Bokaro Steel Ltd. [1999] 102 Page | 21 Taxman 94 and CIT v. Alcock Ashdown & Co. Ltd. [1997] 224 ITR 353/ 90 Taxman 521, respectively." vi. Principal Commissioner of Income Tax. Bengalure v. Bank Note Paper Mill India (P.) Ltd. [2018] 95 taxmann.com 158 (Karnataka): Facts of the judgment: Assessee-company was engaged in construction activities. Share capital was received to meet capital expenditure for setting up the factory. Funds were not required immediately and hence the Assessee made deposits with bank on which he earned interest. It was held that Interest income earned by Assessee company on bank deposits made out of share capital, prior to confmencement of business operations of the company during the construction period was not liable to be taxed as 1FOS as the said interest income was earned prior to commencement of operations of the company during the construction period and the same was eligible for deduction against public issue expenses incurred by company as it was on capital account. vii. Karnataka State Agricultural Produce Processing & Export Corporation Ltd. [2015] 377 ITR 496 (Karnataka) Facts of the judgment: The assessee was a company, fully owned by the Government of Karnataka, engaged in trading in agricultural produce and was an approved channelising agent for Bangalore in respect of rose, onion and niger seeds. The Government sanctioned Rs 10 crores for improvement of infrastructure in order to encourage the farmers for development of horticultural sector and to promote export. The grant of Rs. 10 crores given by the Government was kept in fixed deposits by the assessee till utilisation for the desired projects. The interest earned on such fixed deposits was treated as income by the Assessing Officer and was brought to tax under the head 'income from other sources'. On appeal, the Commissioner(Appeals) affirmed the order of the Assessing Officer. The Hon'ble Tribunal allowed the appeal of the Assessee. The Hon‟ble High Court held as under: “The very purpose of granting Rs. 10.00 crores to the assessee was to act as a nodal agency for implementation of the scheme. There is no profit motive as the entire fund entrusted and the interest accrued therefrom from deposits has to be utilised only for the purpose of the scheme originally granted. The whole of the fund belongs to the State exchequer and the assessee has to channelize them to achieve the objects of centrally sponsored scheme of infrastructural development as specified in the Government order. Hence, interest on all these fixed deposits are considered to be capitalised and not revenue Page | 22 receipt to treat it as an income. The Tribunal considering these aspects has held that the interest earned on these grants is not an income, which one does not find fault with. [Para 17] There is no substantial question of law arising for our consideration. [Para 18]" viii. ASSISTANT COMMISSIONER OF INCOME-TAX V. BR11 BHIISHAN LAL & SONS [2001] 119 TAXMAN 173 fDELHIl fMAG.l / /I20001 69 TTI 379 fDelhil / IT APPEAL NOS. 8553 fDELHIl OF 1992 AND 3632 fDELHIl OF 1993 Facts of the judgment: Object business resolution was money lending doesnt matter For the assessment years 1989-90 and 1990-91, the assessee earned interest income by way of investing certain surplus amounts in FDRs, securities, etc., and showed it as income from business in order to avail deduction in respect thereof under section 32AB. The Assessing Officer treated the income so earned as income from other sources and negatived the claim of deduction under section 32AB. On appeal before the Commissioner (Appeals), the assessee contended that the capital money in the business was stock-in-trade of the business and such stock-in-trade rotated in one form or the other and, therefore, rotation of capital in different forms was in the course of carrying on of the business. It was further contended that keeping money in safe custody in the shape of FDRs and securities was for a business purpose to start a new unit for which licence was later obtained for manufacturing spun yarn from cotton in existing factory premises and that was why, at the end of the year, the deposits remained only to the tune of one-fourth of the original deposits. The Commissioner (Appeals), after examining the matter in detail, allowed the assessee's claim. The Hon‟ble Tribunal held as under: "In the instant case, the assessee's intention was a bona fide intention and the surplus money, which was earned from the business, was Ivina idle. Then the assessee made a fixed deposit with the bank and when the assessee succeeded in obtaining the licence from the Government of India for the new unit for the manufacturing of spun yarn from cotton in the existing factory premises, it encashed the FDRs and utilised the same for the purpose of expanding the business. From the activities of the assessee, it could be inferred easily that money Ivina idle which was deposited in the FDRs was for the purpose of doing the business and not for earning the interest income only.
The finding of the Commissioner fAppeals1 was, therefore, to be confirmed and the department's appeal was to be dismissed." ix. Adani Power Ltd. v. Assistant Commissioner of Income-tax. Range-1. Ahmedabad [2015] 61 taxmann.com 355 fAhmedabad - Trib.l Facts of the judgment: The assessee company was engaged in the business of developing, operating, maintenance of power projects and sale of power. Admittedly, during the year under consideration, the assessee- companv's projects were under implementation and had not started any commercial activities. The assessee received certain amount as share capital as well as loan for purpose of setting up the power generation plants. The assessee deposited surplus fund in FDRs and Government securities. In return of income, the assessee offered interest income to tax. The Assessing Officer completed assessment treating interest as revenue income liable to tax. In appellate proceedings, the assessee raised an objection relating to chargeability of interest income which was claimed to be capital receipt. The Commissioner (Appeals] set aside assessee's explanation and confirmed addition made by the Assessing Officer. In course of appellate proceedings before the Tribunal, the revenue raised a preliminary objection that assessee could not raise dispute relating to chargeability of interest income for the first time before the Tribunal. The Hon'ble Tribunal held as under: Coming to the merits of case share capital as well as loans were raised for the specific purpose of setting up of the power generation plants. The business of the assessee has not been commenced and, therefore, the interest received in the period prior to commencement of business was in the nature of capital receipt and hence was required to be set off against the pre-operative expenses. The assessee has already set off the interest income against the pre- operative expenses which is titled as 'project development expenditure'. In view of above, it is held that interest income in question was a capital receipt not chargeable to tax during the year under consideration. [Para 24]" Alternate submissions: II. Ground No. 1.1.2.1: Without prejudice to the above. Employee cost and Legal and professional charges should be allowed: 1) Expense incurred wholly and exclusively for the purpose of business: In addition to setting up of the power project, the Assessee had also evaluated the viability of various other areas to increase its operational area. The Assessee had incurred salary cost of Rs. Page | 24 2,64,00,715 and legal and professional charges of Rs. 46,900,663 in respect of the same. Such efforts were done in the normal course of business. 2] Employee cost and Legal and professional charges are revenue in nature: [A] Legal and Professional Charges: The Assessee had received services in the nature of consultancy for the preparation of bid documents for which payment was made. Legal and professional charges were paid to the following: • Indiabulls Real Estate Limited ("1BREAL”): Ultimate Holding Company- Amount charged Rs. 1.10.30.000 a. Maharashtra State Electricity Distribution Company Limited ("MSEDCL”) is one of the largest public sector companies engaged in the business of electricity distribution. b. MSEDCL had sought bids from interested parties to serve the distribution urban divisions of Nagpur (Gandhibag, Civil Lines and Mahal) and urban divisions of Aurangabad (Division - I and Division - 11) as franchisee. c. The Assessee was willing to participate in the bid invited by MSEDCL. d. In this regard, the Assessee sought assistance from 1BREAL to develop bidding strategy for the Assessee to participate in the bid. 1BREAL provided consultancy in preparation of bid to act as distribution franchisee of the state electricity board. e. Work performed by IBREAL: (i) Conducted field visits at each of the distribution operation divisions to collect technical, operational and commercial information from various field offices and substations. (ii) Made independent health assessment of various assets in the distribution divisions. (iii) Interacted with various field officers to obtain feedback on various operational parameters. (iv) Obtained the peak loading of the substations, conducted survey at the existing location of the substations to find out additional space availability for expansion of substation, (v) Compared data collected from the field to data in the RFP document. (vi) Visited the Division offices and took feedback from each of the engineers, collected information regarding the Page | 25 d S. Name of employee Designation Salary i s No. reimbursed in t Rs. r Ashok kacker President & 6,333,333 i 1 Advisor b Gurbans Singh Diretor 4,750,000 u 2 (human t resourse] i 3 Saket Bahuguna President 3,666,667 (legal) o 4 Ashok sharma Head- Finance 3,638,327 n & accounts 5 Tejinderpal Chief 2,400,000 f singh miglani information a officer i 6 Devarajan Vice president 975,000 l - indirect jagannathan taxation u 7 Rahul gochhwal Vice president 950,000 r Niraj tyagi Vice president 931,000 e 8 - legal , 9 Sandra chaujer Asstt. Vice president 585,000 (coordination t & monitoring) h Parag agrawal Asstt. General manager 551,136 e 10 (finance & accounts) 11 Vijay Deputy general manager kumar 536,502 m gupta (business o development) n Ajay thakur Asstt. General manager 450,000 t 12 (business h development) l 13 Kiran chavan General manager 363,750 y Vir Vice singh president 270,000 14 chauhan [administratio n) s INR a 26,400,715 l ary burden for each of the franchisee area and for testing division and the distribution losses, witnessed theft, maximum utilized capacity of the transformers, audit report of the distribution transformers and the sales and demand. (vii) The observations of IBREAL are in the feasibility report, • Elena Power and Infrastructure Limited ("EPlL"~):- Fellow subsidiary Company- Amount charged Rs. 3.58.47.500 Page | 26 East of Damagoria coal blocks of Raniganj Coalfield had been allotted to West Bengal Power Development Corporation Limited ("WBPDCL”). The Assessee was willing to participate in the bids invited by WBPDCL for selection of mine developer and operator for development, mining and supply of coal from east of Damagoria in Raniganj coal block allotted to WBPDCL. The Assessee sought assistance from EPIL to develop bidding strategy for the Assessee to participate in the bid. EPIL had been entrusted to prepare the Mining plan for the coal blocks. It provided consultancy and coordinated in preparation of the said bid though it did not fructify. It provided data on history of the coalfield, communication and accessibility, climate, physiography and drainage, production schedule, area of the block, exploration status, density of boreholes, coal analysis geology and structure, power supply, etc. The observations of EPIL are listed in the feasibility report. (B) Employee Cost Rs. 2.64.00.715 The employee remuneration expenses pertain to reimbursement in respect of salary for 14 high level officials of its holding company, India bulls Power Project Limited. These employees are on the payroll of the Holding Company and their salaries were reimbursed in the current year by the Assessee as they had provided the services for exploring new opportunities of the company. The salary cost debited to P&L account is for those employees that were not involved in the power project of the Company. During the year, the Assessee incurred employee cost of Rs. 42,90,432 which was related to the construction of the project and was shown under the head "expenditure during construction pending capitalization". Such efforts were done in the normal course of business and are routine in nature. Hence the same should be allowed as revenue expenditure. 3) Business within the objects mentioned in the MOA : On perusal of the main object, it may kindly be appreciated that bidding process for new assignments is part and parcel of its activities to achieve its primary objects. The same is within the objects of the Assessee Company. 4) Expenses are not related to the power project: These expenses have no correlation with the ongoing power project and they have been incurred for the purpose of a separate proposed business. The same can be seen from the feasibility reports. For the power project, the Assessee had incurred a massive amount of money, the cost of the same amounting to Rs. 26.97 crores till end of AY 2011-12 and has been capitalized in the Balance Sheet. During the year, the Assessee incurred employee cost of Rs. 42,90,432 and legal and professional charges of Rs. 22,477,857 which was related to the construction of the project and was shown under the head "expenditure during construction pending capitalization". 5) The Expenses are not in the nature of personal expenses of the Assessee: The remuneration paid to the employees and the legal and professional charges were not of nature of capital expenditure, nor was it in the nature of personal expenses of the Assessee. 6) Auditor's Approval: The auditor‟s approval is the conclusive evidence that such expenses are not related to the project of the company. 7) Improper reasons recorded by the Ld. AO and the Ld. CITfAl: For rejecting the claim for allowance of the amount paid, no proper reasons were recorded by the Ld. AO and the Ld. C1T(A). On what basis have they concluded that the expenditure pertains to the power project? 8) Assessee to decide whether any expenditure should be incurred in the course of his or its business: It is open to come to a conclusion either that the alleged payment was not real or that it was not incurred by the Assessee in the character of a businessman or that it is not laid out wholly and exclusively for the purpose of the business of the assessee and to disallow it. But it is the function of the Assessee to determine the work for which the remuneration should be paid to an employee of the Assessee. If the Ld. AO and Ld. CIT(A) are satisfied that the expenditure was laid out or expended wholly and exclusively for the purpose of the business of the Assessee, there was no reason why the amount expended should not have been allowed. Hence, it should be allowed as revenue expenditure. i) S.A. Builders Ltd. v. CIT fAl [2007] 288 ITR 1 fSCl "We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377 2 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case." ii) The Assessee can claim deduction u/s 37(1), even though there is no compelling necessity to incur such expenditure. Sassoon 1. David & Co. fPl Ltd. vs. CIT ri979) 118 ITR 261 fSCl Page | 28 “..Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incur red for promoting the business and to earn profits, the assessee is entitled to deduction even though there was no compelling necessity to incur such expenditure. The fact that some body other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 10(2)(xv) if it satisfies otherwise the test laid down by law." iii) Commissioner of Income-tax v.Walchand and Co. fP.) Ltd. f 1967] 65 ITR 381 (SCI "....In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue. The Income-tax Officer was of the view that there was no adequate increase in the earnings of the assessee, for the increase in remuneration was not reflected in the increase in profits of the assessee and that it appeared that, as compared to the previous years, the business profits disclosed by the assessee had fallen by Rs. 2 lakhs and, therefore, the increase in expenditure could not be justified as laid out wholly and necessarily for the purposes of the business. But an employer in Fixing the remuneration of his employees is entitled to consider the extent of his business, the nature of the duties to be performed, and the special aptitude of the employee, future prospects o f extension of the business and a host of other related circumstances. The rule that increased remuneration can only be justified if there be corresponding increase in the profits of the employer is, in our judgment, erroneous." iv) CIT v. Oracle India fP.l Ltd. f2011) 243 CTR 103 (Delhi!: It was held that revenue cannot sit in arm's chair of Assessee and decide as to how affairs of business were to be run and wasteful or excessive expenditure was to be curtailed v) CIT v. Dalmia Cement IP.l Ltd f20021 121 TAXMAN 706 (DELHI!: Once it is established that there is a nexus between expenditure and purpose of business, revenue cannot justifiably claim to put itself in armchair of a businessman or in position of Board of Directors and assume said role to decide how much is reasonable expenditure having regard to circumstances of case vi) DCIT v. Manish Buildwell fP.l Ltd. [2012] 23 taxmann.com 362 IDelhi - Trib.I "the AO cannot step into the shoes of businessman and review the business expediency of the assessee's decision" vii) DCIT v. Sophisticated Marbles and Granite Industries [2010] 3 ITRfTl 220 (Delhi): "The business interest is well understood by the assessee and the Assessing Officer cannot step into the shoes of the businessman so as to determine how the business is to be conducted". 9) Conclusive evidence was provided to the Ld. AO i) The Assessee has submitted all invoices with respect to the legal and professional charges • Invoice of Rs. 1,10,30,000 raised by Indiabulls Real Estate Limited - Refer page 78A ofPB • Invoices of Rs. 2,34,38,750 and of Rs. 12,408,750 raised by Elena Power and Infrastructure Limited - Refer page 79 and page 80 ofPB ii) Form 16A with respect to services taken from Indiabulls Real Estate Limited Refer page 102 of PB. iii) Copy of Consultancy or feasibility reports • Copy of Consultancy or feasibility report prepared by Indiabulls Real Estate Limited • Refer page 116 and page 164-245 of PB • Copy of Consultancy or feasibility report prepared by Elena Power and Infrastructure Limited Refer page 116 and page 246-359 of PB iv) 1TR acknowledgement and Financial Statements • Copy of ITR acknowledgement and Audited Financial Statements of Elena Power and Infrastructure Limited Refer page 120 and page 121-132 ofPB. • Copy of ITR acknowledgement and Audited Financial Statements of Indiabulls Real Estate Limited Refer page 133 and page 134-157 of PB. v) Employee cost details : Refer page 117 of PB 111. Ground No. 1.1.2.1: Without prejudice to the above. Employee cost and Legal and professional charges should be allowed as the business of the Assessee was set up: 1] A finding regarding the date when a business has been set up is a finding of fact. A business is commenced as soon as an essential Page | 30 activity of that business is started. There is no dispute to the fact that the Assessee was in a complete state of readiness to undertake its activity. 2} The Assessee had taken services of various skilled personnel. The staff was ready for rendering services. The Assessee had fixed assets, an office set up and an operational bank account. The new venture was managed from common funds, control over the two businesses was in hands of same management and administration. Participation hy assessee in the tender demonstrates that its business is set up during relevant year. 3) What was needed for setting up of the said business was to secure a business place or an office, to provide it with furniture, etc., to have a telephone, to maintain the office and make ready everything to start business. As a matter of fact the Assessee had already commenced its business when it had engaged consultants to help it in the preparation of certain bids. 4) Difference between 'ready to commence' and 'commenced' is only technical or academic, as once business is established, all expenses in relation thereto are deductible irrespective of actual commencement of business. 5) The assessment order reveals that Ld. AO had disallowed the expenses claimed by the Assessee for the reason that it has not shown resultant income in the accounting year. It appears that Ld. AO has swayed away with an impression that whenever any expenses are incurred by the Assessee then resultant income should have arisen. However it is well settled that for the purpose of allowance of any expenses under section 37(1) of the Act as expenses it is not necessary that assessee should have earned income out of such activity. Whatever has required to be seen is that whether the expenses are incurred for the purpose of business or not and such expenses are of not capital nature and not expressly disallowable under the other provisions in the Act. 6) In the instant case, the expenditure incurred was in the nature of salary and consultancy fee. Indubitably, in normal course, these expenses would be treated as revenue expenditure. 7) Reliance has been placed on the following case laws: i) Commissioner of Income-tax v. Shri Rama Multi Tech Ltd.[2017] 393 ITR 371 (SCI 3. The respondent is a public limited company. For the assessment year 2000-01 it had incurred an expenditure of Rs.3,37,84,348/- towards payment of interest on loans taken and other items for setting up the industry. Even though it had capitilized Page | 31 the said amount and claimed depreciation before the Assessing Authority, however, in appeal, the respondent raised additional ground claiming deduction of the aforesaid amount on interest paid with some other expenditure on other items connected therewith as revenue expenditure.
4. The Commissioner of Income Tax (Appeals) vide order dated 5.3.2004 allowed the claim of the respondent-assessee only to the extent of interest amount of Rs.2,92,45,670/- paid on loans taken by it for establishing the industry. He, however, disallowed the other expenditures, namely, financial charges, professional expenses, upfront fee etc.
The Revenue, feeling aggrieved by the said allowance, preferred an appeal before the Income Tax Appellate Tribunal which vide order dated 02.12.2004 upheld the order of the Commissioner of Income Tax (Appeals) insofar as it related to the allowance of the expenditure claimed towards payment of interest and also allowed expenditure on other items connected therewith. The High Court did not interfere in the appeal preferred by the Revenue on the ground that the Tribunal has followed the decision of the Gujarat High Court in the case of Dy. CIT v. Core Health Care [2001] 251 ITR 61.
Feeling aggrieved, the Commissioner of Income Tax has preferred the present appeal. "7. We have heard learned counsel for the parties.
8. We find that this Court in the case of Dy. CIT v. Core Health Care Ltd. [2008] 298 ITR 194/167 Taxman 206 has affirmed the view taken by the Gujarat High Court.
9. In this view of the matter, we are of the considered opinion that the Income Tax Appellate Tribunal was justified in allowing the expenditure of Rs.3,37,84,348/- towards the interest paid on the loans taken and expenditure on other items connected herewith for establishment of the unit, while affirming the order of the Commissioner of Income Tax [Appeals).
Learned counsel for the Revenue-appellant submitted that the respondent cannot claim depreciation on the amount of interest which has been allowed as revenue expenditure and therefore, the depreciation referable to such interest expenditure be reversed. Learned counsel for the respondent however submitted that there is nothing on record that depreciation on this amount has been taken by the respondent.
11. Be that as it may, if as a fact the respondent has taken any depreciation on the amount of interest and other items which has been allowed as revenue expenditure that much depreciation should be reversed by the assessing authority, 12. Subject to the aforesaid observations, the appeals fail and the same are dismissed." ii) K.M. Sugar Mills Ltd. v. Commissioner of Income-tax r2015] 373 ITR 42 (SC): "It is not disputed that these gas cylinders were purchased for business purpose. In fact, the plea of the assessee that since manufacturing unit had not started functioning and this necessitated the assessee to lease out these gas cylinders to the aforesaid two parties to enable it to earn some income, rather than keeping those cylinders idle, is also not in dispute. On the contrary, the income which is generated from leasing out those gas cylinders is treated as 'business income'. Once income from leasing those gas cylinders is accepted as the 'business income', which is taxed in the hands of the assessee as such, depreciation on these gas cylinders could not be disallowed on the ground that the cylinders were not purchased for 'leasing business'. [Para 4] The assessee has proved ownership of these gas cylinders and use of these gas cylinders for business purpose. Once these ingredients are proved, the assessee was entitled to depreciation under section 32. [Para 5J" iii) Dhoomketu Builders & Development fP.l Ltd. v. Additional Commissioner of Income-tax. Range-10 [2012] 17 taxmann.com 36 Delhi "The sole issue is whether the assessee is able to demonstrate that its business in respect of real estate development was set up during the relevant accounting period and, therefore, it is entitled for carry forward of net business loss suffered in the year. [Para 6] Section 2(13) provides the definition of expression 'Business', according to which business includes any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture. In various authoritative pronouncements of the Supreme Court and the High Court, meaning and scope of expression, business has been propounded. It is not necessary to recite and recapitulate of those decisions but on the strength of them, it would be suffice to say that word 'business' has a wide import and it means an activity carried on continuously and systematically by a person by the application of his labour and skill with a view to earn an income. Section 3 defines 'previous year'. Previous means the financial year immediately preceding the assessment year. The proviso appended to this section further contemplates that in case of a business newly set up in the said financial year, the previous year shall be the period beginning with the date of set up of the business. The expression 'set up' has not been defined anywhere in the Act but it is understood in the common parlance and has been explained in a large number of decisions. According to the meaning expounded in the authoritative pronouncements, if an assessee is in a position to deliver the goods, it means that the business is set up. Actual delivery is immaterial. For example, if a person wants to carry on the business of transportation, the moment he purchased the vehicle for transporting the goods and arranged the space then it would indicate that business has been set up, it is immaterial whether he was able to actually transported the goods or not. [Para 7] Adverting to the facts of present case, the business of the assessee is development of real estates. It has participated in a tender floated bv the Official Liquidator of the High Court. The participation in the tender was starting of one activity which enabled the assessee to acquire the land for development. The actual development of the land is immaterial for construing that business of the assessee has been set up. The revenue authorities have erred in not appreciating these facts rather considering the concept whether the assessee has a surplus fund which has been invested by it and it had earned interest income on such funds. The investment of Rs. 186 crores was not as a deposit out of surplus fund rather it was earnest money paid by the assessee for the purchase of land. Thus, the assessee had demonstrated that its business was set up during the accounting period relevant for this assessment year. The observations of the auditor are with regard to commencement of business and not set up of the business. In the light of participation in the tender such observations would not be a decisive factor. Thus, considering the facts and circumstances, it is opined that income of the assessee has to be assessed under the head 'business income' and consequently loss computed by the first appellate authority at Rs. 1.17 crores deserves to be permitted for carry forward. [Para 8] In the result, the appeal of the assessee is allowed and that of the revenue is dismissed. [Para 9]" iv) Commissioner of Income-tax v. Saurashtra Cement & Chemical Industries Ltd. "...But, the business is nothing more than a continuous course of activities and 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 the other activities is started.... Page | 34 The revenue says that when the business is of manufacture and sale of cement, how can the assessee be said to have commenced the business when manufacture has not started? This argument suffers from the fault of over simplification and ignores the true nature of the activities which constitute the business of the assessee. We are of the view that as soon as an 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 assessee must be held to have commenced the business. To take any other view would not only be illogical but also irrational." v) Deputy Commissioner of Income-tax 5fl) v. Essar Oil Ltd. [2011] f Mumbai) The assessee was in the business of operation of rings for extraction of oil; undertaking offshore contracts for laying of pipelines; setting up of refinery etc. and marketing of petroleum products. As part and parcel of these activities, it was bidding for various contracts, and incurred expenditure on travelling, bidding for tenders, exploration activities at blocks, etc. It claimed that since these expenses were revenue in nature and directly related with ongoing business, entire expenditure incurred during financial year should be allowed, whereas the Assessing Officer disallowed the same. On appeal, the Commissioner (Appeals) deleted the addition made by the Assessing Officer following the order of the Tribunal in assessee's own case, wherein identical issue had been decided in favour of the assessee by the Tribunal. The Hon‟ble Tribunal held as under: “Following the decision the Tribunal in to 3645/M/2002 The impugned expenditure incurred by the assessee during the previous year for setting up refinery is to be allowed. Therefore, the order of the Commissioner (Appeals) is to be confirmed. [Para 4]" vi) NEIL AUTOMATION TECHNOLOGY LTD. V. DEPUTY COMMISSIONER OF INCOME-TAX [2002) 120 Taxman 205 (Mumbai) (MAG) The business of the assessee-company was distribution of computer software and development and training of software personnel. To set up the business, the assessee-company started imparting training in software. For distribution of computer software, the company entered into correspondence with various parties. Therefore, some of the activities were started from the beginning of the previous year. In this line of business, it is most essential to enter into correspondence with the various parties to make them aware of the production in which the Page | 35 assessee is dealing with. Therefore, writing letters and giving quotations to various prospective customers in respect of various softwares which the assessee was ready to supply was an essential activity in the course of carrying on the business. Therefore, the expenditure incurred by the assessee during the year was for the purpose of business and the same would be allowable as the business was set up from the beginning of the previous year and the same was ready for commencement. The assessee had, therefore, rightly claimed the loss of Rs. 14,46,968 and the same should be allowed to be carry-forward. The Commissioner (Appeals) and the Assessing Officer had erroneously concluded that the expenditure was capitalised in the earlier year and, therefore, the same should have been capitalised this year also. Different assessment years are independent and the liability of the expenditure and the depreciation has to be decided on the basis of the facts available for each year. During the earlier year, no business activity was started, therefore, the assessee had rightly capitalised the expenditure but in the year under consideration, the business activities were started from the beginning of the previous year, therefore, the business was said to have commenced and the assessee made the claim of the expenditure on its merits and it had nothing to do with the earlier years." vii] INCOME TAX OFFICER V. ARAVALI SWACHALIT VAHAN fP.l LTD. H9871 27 TT1 161 flaipurl “Merely for the reason that sections 28 and 29 precede the sections dealing with expenditure from section 30 onwards it does not follow that there must be income before any expenditure could be said to be incurred or allowable. Rather, the reality of any situation is that once the business is set up the assessee has to necessarily incur expenses after which only income could be generated. Since the Legislature in their wisdom did not intend to use the term begins to manufacture, in section 3(l)(d) or section 35D. the object of the enactment clearly goes to indicate that what is important is the setting up of the business, which is the starting point for determination o f revenue expenses and income. It is but natural that unless and until the business is set up it cannot be said to be ready to commence business. Therefore, the actual commencement of business follows the setting up of business which is starting point. Thus, the expenditure incurred from the date of setting up of the business till the actual commencement of production is allowable as revenue expenditure." viii) COROMANDEL EXPORTS (P) LTD. v. INCOME-TAX OFFICER H9841 20 TTI 503 (Hyderabad)
The assessee-company was set up with the object of exporting tobacco. It took on rent a building, incurred some expenses like filing fees, audit fee, postage and telegram and legal expenses. However, the company could not secure any potential order during the accounting year in spite of the efforts made by the directors. It claimed that losses incurred after setting of such business should be allowed, "Held that what was needed for setting up of the said business was to secure a business place or an office, to provide it with furniture, etc.. to have a telephone, to maintain the office and make ready everything to start business. If no intended exporter approached the assessee and got his product exported through the assessee, it was not the fault of the assessee. Ultimately, it might be his bad luck but in legal terms it could not be said that he had not set up his business. Therefore, all the expenses incurred after the business was set up, were business expenditure." IV. Ground No. 1.1.2.1: No mention of section under which disallowance was made: The assessment order makes no mention of the provision under which the disallowance has been made. The provisions of the Act have to be examined to ascertain as to under which provision the addition or disallowance was made. The Ld. AO has failed to mention the section under which he disallowed the employee cost and legal and professional charges. This shows that he was not sure under which section the disallowances should be made and why such disallowances should be made. V. Ground No. 1.1.2.1 Without prejudice to the above, the Ld. AO has erred in taking the correct figure of loss and computed taxable income incorrectly: Without prejudice to the above, the Ld. AO has computed the total taxable income after making additions on loss of Rs. 57,321 instead of loss of Rs. 305,625. Return declaring loss of Rs. 305,625 was filed on 28.09.2011 (Refer page 1 and 2 of PB 1). The Ld. AO and the Ld. CIT(A) has held on the 1st page of his order that returned loss id Rs. 305,626. Hence, the Assessee should get the benefit of the returned loss.
The learned authorised representative referred to the paper book filed by him containing 163 pages in paper book number 1 and 164 – 359 pages in paper book number 2 and submitted that these expenditure are not related to the project and therefore should be allowed independently as revenue Page | 37 expenditure. He further submitted referring to the annual accounts stating that the auditors as well as the board of directors have identified each expenditure and the expenditure related to the project has already been capitalized as expenditure during the construction. An expenditure, which is not related at all to those projects, has been debited to the profit and loss account.
The learned departmental representative vehemently supported the order of the learned lower authorities and submitted that the expenditure of salary and legal and professional expenses incurred by the assessee are also related to the project and therefore it has been correctly held to be the expenditure incurred during the construction period by assessee. He further submitted that the claim of the assessee that interest income should be considered as reducing the cost of the project and should be removed from the taxable income for the year is devoid of any merit as assessee himself has credited the above sum to the profit and loss account as income not related to the project. Therefore, now the assessee cannot say that the same needs to be excluded. 10. Learned authorised representative countering the argument of the learned senior departmental representative vehemently stated that at each stage the attempt must be made to compute the correct total income of the assessee. He submitted that the funds were raised by the assessee for the project, which could not be deployed immediately for the purpose of the project, and therefore they have been utilized in intercorporate deposit which in turn earned interest and therefore such interest should be reduced from the total expenditure incurred during the construction. He referred to several decisions in his decision paper book, which were also incorporated, in his written submission. He extensively referred to the decision of the honourable Delhi High Court in 25 taxmann.com 401 (Delhi) in NTPC sale power company private limited vs Commissioner of income tax dated 17th July, 2012 wherein it has been held that interest on temporary deposits is not income from other sources and interest on was related to the setting up of the plant should not be held as a revenue receipt. He extensively referred to para number 10 and para number 11 of that order. He therefore submitted that the issue of interest income to be not au revenue expenditure is squarely covered in favour of the assessee.
We have carefully considered the rival contention and perused the orders of the lower authorities. The facts of the case have been succinctly stated above and therefore same are not repeated once again for the sake of brevity. The only issue involved is that whether the amount of employee‟s remuneration of Rs. 26400715/– and legal and professional fees expenses of INR 4 6900663/– is required to be considered as preoperative expenditure pending capitalisation. The assessee has debited these expenditure in the profit and loss account. During the year the expenditure during construction. Pending capitalization was increased from INR 2 41308129/– to INR 2 69673881/–. The details of this expenditure have been punished in schedule D of the annual accounts. With respect to the employee‟s remuneration the assessee has considered the expenditure during construction pending capitalization of INR 4 290432/– during the year whereas the opening balance of the above expenditure was Rs. 33922043/– accordingly the total expenditure debited to the expenditure during construction pending capitalization on account of employees remuneration and benefit was INR 3 8212475/–. Similarly with respect to the legal and professional charges until the commencement of the accounting year the assessee has debited Rs 6447965/– and during the year further debited a sum of Rs. 22477857/– making the total expenditure during the construction. Pending capitalization on account of legal and professional charges of INR 5 8925822/–. Over and above this the assessee has debited INR 2 6400715/– as salary and wages expenditure to the profit and loss account and legal and professional fees of INR 4 6900663/– under the head administrative expenses. In note number vi in schedule and the assessee has submitted that any expenditure directly/indirectly related and attributable to the construction of power projects and incidental to setting up power project facilities, incurred prior to the date of commencement of commercial operation of the power project, or accumulated under expenditure during construction. Pending capitalization, to be capitalized on completion of construction of the respective power projects and to commencement of commercial operations. In notes to accounts in a note number ii) the assessee has stated that assessee is in the process of setting up a thermal power project at Bhayathain in the state of Chhattisgarh. The project is planned to have two supercritical units of 660 MW each with a combined capacity of 1320 MW. The Ministry of coal, government of India has allocated captive coal blocks located in certain villages in Korba district in the state of Chhattisgarh in for the project, subject to certain terms and conditions. Development work on the above project is currently progressing at the slow pace due to certain pending statutory clearances relating to the captive coal blocks allocated for the project. The company is hopeful of getting such clearances in the near future. According to note number X expenditure during construction, pending capitalization included the expenditure incurred during the year aggregating to Rs. 28365752/– relating to the setting up of the project was determined. Further according to note number Xii it is also disclosed that employees remuneration and benefit aggregating to INR 2 6400715 pertaining to the cost of employees and the petitioner apportioned by the holding company in the above is power Ltd on specific job basis. This amount has been debited into the profit and loss account as according to the auditor as well as the Board of Directors the above sum was not directly or indirectly related to the above project. Further, according to note number Xviii the assessee also identified out of the borrowing cost a sum of INR 125882713/– which has been accumulated under expenditure during construction pending capitalization to be capitalized to the fixed assets on completion of the construction of the project and on commencement of commercial operations. Therefore from the above disclosure made by the assessee it is apparent that assessee has identified each and every expenditure out of the total expenditure incurred and part of that expenditure is been debited to the expenditure during construction pending capitalization which has disclosed as per schedule D of the balance sheet. With respect to the justification of the allowability of salary and professional fees debited in the profit and loss account, the assessee has submitted that assessee is engaged in the process of setting up of a thermal power plant at cost of Rs 26.97 crores have already been capitalized in the balance sheet. It was further stated that over and above to increase the operational area of the assessee company has also evaluated the viability of various other areas within its business objects and incurred salary costs and other administrative overhead for the same. Therefore, the assessee has incurred the said cost in the profit and loss account as the employees were involved in exploring new opportunities for the assessee company and other expenditure were involved at managing the company at corporate level. It was further stated that some of the employees had been making efforts in helping the company to explore potential and prospective borrowers for the funds available and thus helping earning the income also. Therefore, on the above bases the assessee debited the cost to the profit and loss, as it was neither directly nor indirectly related to the power project. Similarly with respect to the legal and professional charges it was submitted that INR 3 5847500/– has been incurred for bids for selection of mine developer and operator for development mining and supply of coal in coal block allotted to the assessee this sum is provided as consultancy and coordination charges in preparation of the above paid. Ultimately, it is altogether a different aspect that it did not fructified. Therefore the efforts were done in the normal course of the assessee‟s business and are quite routine in nature and it was never related to the project cost of the power plant. Similarly, the assessee incurred a sum of Rs 11030000/– as assessee explored the opportunity for appointment of the distribution franchisee for not poor urban distribution division of Gandhi Bagh civil lines and Marvel. The above sum was paid for consultancy in preparation of bids to act as distribution franchisee of the State Electricity Board‟s which was also not related to the power plant. Therefore, on both issues the contention of the assessee is they are not related to the power project and therefore they cannot be capitalized. Admittedly, the assessee did not have any agreement of provision of services along with these entities as they were sister concerns. Further merely because the reference in the bill is in relation to the power project it cannot be said that same are related to the cost of the power project, when assessee has categorically submitted the details of the expenditure for which it has incurred. Even otherwise, it is apparent that the power project has been progressing at a very slow space due to pending statutory clearances relating to the captive coal blocks allocated for the project. Therefore, it is apparent that there is a temporary suspension of the project. When the projects are temporarily suspended or are under a very slow progress, the prudent accounting solution is also that those expenditure should be debited to the profit and loss account. This is also evident from the annual accounts placed by the assessee for the next year where there is not a single paise expenditure incurred by the assessee on the above project. On looking at these facts from the broader viewpoint, it is apparent that the project is under temporary suspension. Even otherwise, it is apparent that no capital asset has come into existence as assessee has merely given advances for the work in progress and incurred the routine business expenditure. This is evident from the fixed assets schedule forming part of the balance sheet as at 31st of March 2011 as well as schedule D of the balance sheet. Therefore, it is apparent that no fixed assets have come into place and it is merely the advances and the routine expenditure incurred by the assessee. To support the payment of legal and professional fees the assessee submitted the field study report dated March 2011 prepared by India Bulls real estate Ltd that is placed at page number 164 to 245 of the paper book. Further feasibility study report prepared by Eleanor power and infrastructure Ltd is also placed at page number 246 – 359 of the paper book. On perusal of the feasibility study report and field study report, it is apparent that both these expenditure are not related to the power project. In view of this, it is apparent that the narrations mentioned in the invoices are general in nature and does give an indication that they relate to the power project but when the respective reports are seen it is apparent that they do not relate directly or indirectly to the power project. Thus, narration in invoice cannot be the sole guide to determine the capitalization of expenditure involved, if the other relevant documents show otherwise. The only argument of the learned assessing officer is that this expenditure should have been capitalized to the expenditure during construction account and cannot be allowed as a deduction to the assessee. However, it is not the case of the assessing officer that this expenditure is not incurred by the assessee or is not related to the business of the assessee. Had the power project been not in place above expenditure would have been otherwise allowable to the assessee under section 37 (1) of the income tax act. In the present case, also, the learned assessing officer has also not stated that whether any asset has been created by the assessee or there is a reasonable certainty of the creation of the above project. Further with respect to the salaries paid by the assessee to its head office/holding company were with respect to the salary of precedent and advisor, director human resources, president legal, head of finance and accounts, chief information officer, vice president indirect taxation, vice president illegal, Asst VP coordination and monitoring, assistant general manager finance and accounts, deputy general manager business development and administrative expenditure. The total salary paid of these employees is Rs. 26400715/–. It is not the case of the revenue that these expenditure are not as such allowable to the assessee u/s 37 (1) of the act. None of this expenditure has also been shown by the learned AO to be incurred for the purposes of the power project. It is also not the case of the AO that assessee is solely existing only for the purposes of the power project as assessee has also earned substantial interest and has also filed the bids for other project which is available in the field study report as well as the feasibility study report for which the legal and professional fees has been incurred. The assessee has also demonstrated that in its memorandum of articles there is a specific main object for bidding process for new assignment for these projects. Even otherwise out of the total expenditure incurred by the assessee on salaries to the staff on its own it has shown the employee cost of Rs. 4290432/– and legal and professional charges of Rs. 22477857/– related to the construction of the project and has been disclosed under the head expenditure during construction pending capitalization. Even otherwise, the guidance note issued by the Institute of chartered accountants of India with respect to the expenditure during construction has been withdrawn with effect from 2008. Now any capitalization is required to be made in accordance with accounting standard 10 with respect to fixed assets accounting. It has been classified by the auditors and the company itself that the amount of legal and professional expenditure as well as the salary expenditure, which has been debited to the profit and loss account, is not related to the project (fixed assets) therefore it is not required to be capitalized. The above expenditure is required to be tested under the normal income tax provisions u/s 37 (1) of the act. Even otherwise in para number 6.5.3 of the order of the learned CIT – A has held that the assessee has capitalized all expenses pertaining to the power project and the above expenditure incurred by the assessee with respect to the salary and legal and professional fees is backward or forward integration but at bit stage. Merely because assessee has capitalized all the expenditure, relating to the power project there is no reason to capitalize all the expenditure, which are not even related to the power project, should also be capitalized. Further it is not the case of the revenue that assessee has not incurred these expenditure. Further, no evidence has been brought on record by the revenue to show that this expenditure is related to the power project only. The revenue also could not controvert that field study report and feasibility report expenditure incurred by the assessee under the head legal and professional expenditure is any way connected to the power project. Further, with respect to the salary of employees the assessee has given the designation of those employees who salary has been reimbursed to the holding company, the nature of the services rendered by them as shown in the designation. In view of this, we reverse the finding of the lower authorities and allow ground number 1 and 2 of the appeal of the assessee holding that employs remuneration amounting to INR 2 6400715/– on legal and professional fees amounting to INR 4 6900663/– has been correctly debited in the profit and loss account and is allowable to the assessee as a deductible expenditure u/s 37 (1) of the income tax act.
Ground number 3 of the appeal of the assessee is with respect to the interest income of INR 7 5226392/– which is shown by the assessee itself as income chargeable to income tax in the computation of the total income as well as in the return of income. Further, the above amount has also been recognized as other income in schedule J of profit and loss account. The assessee has relied upon the decision of the honourable Delhi High Court in case of NTPC sail power company private limited vs. Commissioner of income tax 25 taxmann.com 401 (Delhi) to say that the above interest expenditure is capital expenditure and should go to the reduce the cost of the power plant and therefore it should be reduced from the expenditure incurred by the assessee during the construction. On careful analysis of the decision of the honourable Delhi High Court it is apparent that only interest that has been earned from the banks by way of margin money or giving advances for the purpose of the expansion was considered towards adjustment on account of making principle. The honourable High Court also held that if the receipt is inextricably linked to the setting up of the project then it would be capital receipt not liable to tax but ultimately be used to reduce the cost of the project. In the present case, the assessee has given advances to fellow subsidiaries. Further, assessee also could not establish that how the above advance given to the subsidiary companies from womb the interest income has been earned are inextricably linked to the setting up of the project. Further assesse has also treated it as a regular income and offered to tax in the computation of income by crediting it as other income in the profit and loss account. In view of this ground number 3 of the appeal of the assessee is dismissed.
Ground number 4 of the appeal is general in nature, no separate arguments were advanced by the parties and therefore it is dismissed.
Accordingly, ITA number 3498/del/2015 filed by the assessee for assessment year 2011 – 12 is partly allowed.
Now we come to ITA number 1461/del/2016 filed by the learned deputy Commissioner of income tax, circle – 23 (2), New Delhi for assessment year 2012 – 13 against the order of the Commissioner of income tax (appeals) – 4, New Delhi wherein the action of the learned assessing officer to treat the expenses of abundant project debited in the profit and loss account of the assessee as a capital expenditure was rejected. The learned assessing officer has raised the following grounds of appeal:- a. the learned CIT (A) erred on facts and in law in relying the expenses in assessment year 2012 – 13 when the project of distribution and generation of power was abandoned in assessment year 2013 – 14. b. The learned CIT (A) has erred in relying the circular of CBDT dated 6/10/2015, which is related to rule 9A of abundant feature films.
16. The assessee company filed its return of income on 18/9/2012 showing total loss at INR 1 0899459/–. The assessment u/s 143 (3) of the act was passed on 16/1/2015 wherein the total income of the assessee was assessed at rupees nil.
The only issue in this appeal is with respect to the fact that assessee company has claimed expenses for the aggregate amount of INR 1 1079481/– under the various heads. The learned AO enquired from the assessee as to why the above expenses claimed in the profit and loss account are allowable as such as during the year no business activities were carried out and why such expenditure should not be capitalized to the work in progress. The assessee submitted his reply dated 23/12/2014 wherein it has been stated that that assessee is engaged in the process of setting up a thermal power plant in the state of Chuck this regard however after lot of efforts the assessee has incurred a massive amount of loss is the cost of the above project amounting to Rs 26.97 crores till the assessment year 2012 – 13 has been capitalized in the balance-sheet. The development work on the project during the year under consideration was at a slow pace due to certain pending statutory clearances relating to the captive coal blocks allocated for the project. Therefore the assessee has incurred a loss of INR 1 0899459/–. The learned assessing officer considered the submission of the assessee and found that during the year no business activities were carried out and the project was under process and therefore the expenses incurred during the year were related to the project and same deserves to be capitalized and therefore he determine the total returned income of the assessee at rupees nil.
Assessee, aggrieved with the order of the learned assessing officer preferred an appeal before the learned CIT – A. The learned CIT – A passed an order on 23/12/2015 holding a close parallel between the abundant feature films and the abandoned industrial projects like 1 of the appellant and allowed the claim of the assessee has assessee has incurred expenses on power project which had to be abandoned and the expenses should be debited to the profit and loss account. Therefore, he directed the learned assessing officer to allow the expenses claimed by the appellant. 19. Learned AO aggrieved with the order of the learned CIT – A has preferred this appeal before us. The learned departmental representative vehemently supported the order of the learned assessing officer and submitted that when the assessee is in the process of setting up of the power project the expenses incurred by the assessee should have been capitalized as they are related to the power project.
The learned authorised representative vehemently supported the order of the learned CIT – A and submitted that when the project itself has been abandoned by the assessee there is no reason to capitalize Those Expenditure to the cost of the power project. He submitted that all these expenses have been incurred by the assessee during the course of the business and are as such allowable u/s 37 (1) of the income tax act. He therefore submitted that there is no reason to as it is apparent that assessee is not able to commence the power project due to certain statutory glitches.
We have carefully considered the rival contention as well perused the orders of the lower authorities. The learned CIT – A has dealt with the whole issue as under:- “4. In this case there is only one disallowance of Rs 1,08,99,459/- which amounts to nullify the returned loss of Rs 1,08,99,459/-, and the income was assessed at NIL The appellant was setting up a thermal power plant at Bhaiyathan in Chattisgarh. The expenses of Rs 26.97 crores till the end of AY 2011- 12 were capitalized in the balance sheet. Since the appellant did not get the clearance from the Forest Department, they debited the expenses to the profit and loss account and abandoned the project in AY 2013-14. The Assessing Officer has concluded that no business activities were carried out during the year and therefore expenses incurred during the year have to be capitalized. The appellant has quoted Circular No. 16/2015 of CBDT dated 06/10/2015 regarding the deductibility of cost of abandoned feature film. In CBDT has clarified that Rule 9A does not apply to abandoned feature films and the expenditure incurred is not to be treated as capital expenditure and such a cost is to be treated as revenue expenditure. I find a close parallel between the abandoned feature films and the abandoned industrial projects like the one of the appellant. The appellant has cited various judicial decisions and in view of the line of arguments taken, I am of the opinion that in the case of the appellant also it will be proper to allow the expenses. They have incurred expenses on power project which had to be abandoned and the expenses should be debited to the P&L account. Therefore, I hereby direct the AO to allow the expenses claimed by the appellant.” Page | 47
Further, identical issue arose in case before the honourable mother High Court in Chemplast Sanmar Ltd. v. Assistant Commissioner of Income-tax* [2018] 97 taxmann.com 347 (Madras) wherein the decision of Honourable Delhi high court in Jay Engg. Works Ltd. v. CIT [2008] 166 Taxman 115/[2009] 311 ITR 405 (Delhi) was followed as under :- “26. In this regard, we are guided by the decision of the Hon'ble Division Bench of the Delhi High Court in the case of Jay Engg. Works Ltd. (supra), which took into consideration all the relevant decisions on the point, some of which are identical to the facts of the present case in the sense that the assessee ran a particular line of business and wanted to start a different line of business, for which, expenditure was incurred and subsequently, the business was abandoned and the question was as to how the expenditure had to be treated. The Delhi High Court referred to the decisions of: (i) the Allahabad High Court in the case of Prem Spg. & Wvg. Mills Co. Ltd. v. CIT [1975] 98 ITR 20 (All.), (ii) the Hon'ble Supreme Court in the case of Produce Exchange Corpn. Ltd. (supra), (iii) the Gujarat High Court in the case of CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 (Guj.), (iv) again the Allahabad High Court in the case of CIT v. Expanded Metal Mfgrs. [1991] 55 Taxman 429/189 ITR 317 (All.), (v) the Delhi High Court in the case of CIT v. Modi Industries Ltd. (No. 3) [1993] 68 Taxman 114/200 ITR 341 (Delhi) and (vi) again the Hon'ble Supreme Court in the case of Veecumsees v. CIT [1996] 86 Taxman 243/220 ITR 185 (SC). 27. After referring to the above referred to decisions, the High Court of Delhi, in the case of Jay Engg. Works Ltd. (supra), held as follows : "On an appreciation of the law laid down by the various decisions referred to above, it is clear that the nature of the new business is not a decisive test for determining whether or not there is an expansion of an existing business. The nature of the business could be as distinct as a jewellery business and a business of cinematographic films; it could be as different as manufacture of metal alloys and manufacture of rubber products. What is of importance is that the control of both the ventures, the existing venture as well as the new venture, must be in the hands of one establishment or management or administration. Page | 48