BHARATKUMAR RAJENDRAPRASAD DAVE,,AHMEDABAD vs. DCIT, CIRCLE-4(2),, AHMEDABAD

आदेश/ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:-

These appeals are arising out of orders passed by Ld. CIT(Appeals) for assessment years 2013-14 and 2014-15. The same are being disposed by way of a common order since common issues are involved in respect of some of the issues before us.

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Assessment year 2013-14:

“1. The learned CIT(A) has erred both in law and on the facts of the case in confirming the action of AO in disallowing Rs. 1,55,211/- u/s. 14A r.w.r.8D of the Income-tax Rules, 1962. 2. The learned CIT(A) has erred both in law and on the facts of the case hi confirming the disallowance of expenses and depreciation amounting to Rs.33,85,461/-. 3. The learned CIT(A) has erred both in law and on the facts of the case in confirming the action of the AO of treating income from business and profession of Rs.66,563/- as income from other sources. 4. The learned CIT(A) has erred in law and on facts of the case in not adjudicating ground challenging initiation of penalty u/s.271(l)(c) of the Act. 5. Both the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed. 6. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in levying interest u/s.234A/B/C of the Act. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.”

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Ground number 1: disallowance of � 1,55,211/- u/s 14A of the Act:

“Decision 5. The submission of the appellant and the assessment order has been carefully considered. The first ground of appeal is against the additions of Rs.1,55,2117- made by the Assessing Officer u/s.14A read with rule 8D of the Act. The A.O. found that the appellant has claimed exempt income of Rs.5,01,764/- being income from PPF interest, dividend and interest on tax free bonds. As the appellant claimed this income as exempt, the A.O. invoked provisions of section 14A and calculated the amount as per formula given under rule 8D. The appellant contended that the A.O. did not record his satisfaction before making the additions and cited several case laws but the appellant's contention regarding recording of satisfaction is found factually incorrect for the reason that the appellant was given show cause as to why disallowance u/s.14A read with rule 8D should not be made. In response to the said show cause the appellant replied vide letter dated 16tn March, 2016 which has been considered by the Assessing Officer while passing the assessment order. This facts show that the A.O. was

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satisfied that this case is fit for invoking provisions of section 14A. Therefore, this contention of the appellant is rejected. The appellant's other contention that he has not claimed any expenditure, is also not found acceptable for the reason that word used in section is 14A "expenditure incurred" and not the "expenditure claimed". It is a fact that no income can be earned without incurring any expenditure. To earn any income, some expenditure has to be incurred. The expenditure may be small fraction of the income or it may be higher than income resulting into loss. The expenditure incurred may be direct or indirect. The expenditure incurred may be hidden or may be apparent but to earn income, some expenditure has to be incurred. The appellant earned income of Rs.5,01,764/- which has been claimed as exempt. To earn this income, the appellant must have utilized some time, efforts and thinking. To deal with such situation, formula under rule 8D has been given to calculate disallowance. Looking to the above discussion, in the appellant's case, the A.O. is right in calculating the disallowance and the appellant did not point out any error in the calculation made by the A.O. Keeping in view these facts, additions of Rs. 1,55,211/- made by the A.O. are found as per the provisions of the Act. Therefore, these are confirmed. This ground of appeal is dismissed.”

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disallowance of expenditure under section 14A. Again, in the case of Leena Kasbekar [2017] 85 taxmann.com 82 (Mumbai - Trib.), the ITAT held that where assessee earned certain exempt income and claimed that no expenditure was incurred to earn said income, in absence of any direct nexus between expenditure and exempt income, Assessing Officer could not invoke provisions of section 14A to disallow said expenditure. However, on perusal of the records placed before us, the AO has stated that the assessee had incurred certain amount of interest expenditure amounting to � 92,137/- for earning exempt income, while the case of the assessee is that no interest expenditure has been incurred at all for earning such interest income. Accordingly, this ground is being set aside to the file of the AO to verify whether in fact, firstly, whether the assessee has claimed any expenditure for earning interest income and secondly whether all investments for earning exempt income were made from his personal account using own personal funds and not the funds from the proprietary concern. If both the above conditions are satisfied i.e. the investments made in earning exempt income for made out of own personal funds by the assessee in his personal capacity and secondly, no interest expenditure has been incurred and claimed for earning such exempt income, we are of the view that no disallowance is called for under section 14A of the Act.

Ground number 2: disallowances of expenses claimed in Stavya Spine Hospital (SG Road):

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“6. The second ground of appeal is against the additions of Rs. 33, 18,898/- made by the A.O. by disallowing claim of loss in Stavya Spine Hospital (S.G. highway). During the course of assessment proceedings, the A.O. found that the appellant being orthopedic surgeon has shown receipt of Rs. 66,400/- for newly opened Satvya Spine Hospital (S.G. Highway). Against this receipt, the appellant claimed loss of Rs. 33, 18, 898/- under the head of various expenses and depreciation. The A.O. enquired from the appellant stating that the building for the new hospital was purchased on 22nd January, 2013. Therefore, it was requested that the appellant should submit details to prove that the newly purchased building was put to use before the end of the financial year so as to justify various expenditure and depreciation claimed. The appellant submitted various details, which were considered by the A.O. However, the same were not found acceptable for the reasons mentioned in para 5.9. to para 5.14 which is reproduced below. "5.9 The submission of the assessee has been considered. The assessee could not establish that the hospital activities were started in the premises at Mondeal Business Park in the F.Y.2012-13 relevant to AY.2013-14. The assets claimed to have purchased in the name of Stavya Spine (SG Road) were not actually installed and put to use at the said premises, for the following discussion. 5.10 Mere purchase of a property and doing some additions/alterations to it alone would not mean that the intention of the assessee was to start any business. There is no doubt in the fact that assessee has purchased a naked property at Mondeal Business park, Ahmedabad The said property was purchased in the month of December 2012. However, the crux of the issue is that the assessee failed to prove that his intention was to start any business activities (hospital) at the said premises. This fact gets substantiated from the fact that the assessee has not made

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any efforts to carry out any basic groundwork necessary for the business activity at the said premises till the year 2015. The assessee has applied for obtaining necessary permissions from the civic authorities only in the year 2015 and has also got the registration with effect from l 1.09.2015 till 31.12.2015, which is evident from copy of registration (Gumastha certificate) dated 11.09.2015. No such certificate has been produced for the period prior to 11.09.2015.

5.11 Assessee contends that his claim of starling the business from the year 2012 is supported by the fact that professional tax has been paid from the year 2012- 13. In this regard, it is noticed that the assessee has made payment of professional tax for the period 2012-13 to 2015-16_only in the year 2015 along with interest. The same has been paid on 24.04.2015, which Is evident from the copy of receipt furnished by the assessee, In addition to the tax amount, assessee has paid interest of Rs.809/-, Rs.563/- and Rs.203/- respectively for the F.Ys. 2012-13, 2013-14 & 2014-15. It is pertinent to note that the assessee has made the payment of professional tax as well as application for registration only after the issue of notice u/s. 143(2) of the Act, selecting his case for scrutiny assessment. Thus the assessee has made a clever planning to support its claim of expenditure/depreciation in Stavya Spine Hospital (SG Road) by obtaining necessary permissions to start the business from civic authorities in a later stage, in order to apprise the department that the intention of the assessee was to start business. If assessee's claim is admitted, the same can be allowed only from the year 2015-16, when the assessee has actually done some necessary formalities for starting the hospital activities. Assessee has not made any efforts to set-up his business during the previous year relevant to A.Y.2013-14. The business can be said to be set-up only established and ready to commence business. 5.12. The consumption of electricity during the period December 2012 to important aspect to suggest that not only business activities, the a installed the electrical fittings/furniture, claims to have been bought in Spine (SG Road) at the premises. This is because if any furnishing/fitting out at the premises, the consumption would have been at a higher side used for installation of various electrical fittings, air conditioner and for cannot be operated without electricity. The assessee has bought MS P conditioners, etc. for installing at the premises and has also carried out poi work of the premises. The instruments used for carrying out the work of ma etc. cannot run with 20.or 30 units of electricity. Therefore assessee's da were installed and put to use at the premises cannot be accepted and her assessee has not installed any instruments/equipments to be used for activities.

5.13. The assessee has relied on the decision rendered by Hon'ble Gujarat case of Ashima Syntex Ltd. Vs. ACIT in 251 [TR 133 (Gujarat). The above d squarely applicable in the case of assessee. In Ashima Syntex, Hon'ble H< observed that new division was put to use before the end of the relevant previous runs were carried out. In the case of assessee, there is not even a slight moveme of the

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assessee during the year indicating that he is going to start any business Business Park. 5.14. From the above discussion, it can be concluded that the assessee assets in such a shape that he; was ready to go into the business of running carrying out any profession from the premises of Mondeal Business Park expenditure debited to P&L Account of Siavya Spine (SG Road) cannot business expenditure and hence, the same is disallowed. The income shown in (SG Road) is treated as income earned from other sources. Penalty proceedings of the Act are being initiated separately for furnishing inaccurate particulars of income." From the detail discussion made by the A.O., it is clear that the building and various machineries were not put to use before the end of the financial year. The case laws cited by the appellant to substantiate his claim are not relevant as the facts of the case of the appellant are not identical with the facts of the cases cited by the appellant. Therefore, additions of Rs.33,18,898/- made by the A.O. are found factually and legally correct. Hence, these additions are confirmed, This ground of appeal is dismissed. 7. In the result, the appeal is dismissed.”

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use” and hence depreciation should have been allowed on the same. The assessee relied upon certain case laws in this respect. In response, DR relied upon the observations made by Ld. CIT(Appeals) and AO in their respective orders.

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glass manufacturing unit at some different place. The business organization, administration and funds of both existing and new units of assessee were common. Staff to both units was supplied by assessee-company. Production of both units was considered as production of assessee itself. Further in application for licence made by assessee to Government, it was specifically mentioned that newly existing unit was expansion of business carried on by existing unit. The High Court held that on facts, it could be said that there was complete inter-connection, inter-lacing and inter-dependence of both units. Therefore, new unit did not constitute new business but was only establishment of new unit of existing business. Therefore, interest paid by assessee on borrowings utilised for establishing new unit was revenue expenditure. In the case of Jay Engineering Works Ltd.166 Taxman 115 (Delhi), assessee-company was manufacturing fans and sewing machines at various units. It undertook a Fuel Injection Equipment Project in Hyderabad. Assessee claimed that pre-operative expenses incurred in relation to said project like testing charges, interest charges, bank commission, foreign travelling, etc., were in nature of revenue nature. Assessing Officer rejected assessee's claim holding that said pre-operative expenditure was in nature of expenses incurred in connection with setting up of a new line of business and, therefore, said expenditure was capital expenditure. New venture was managed from common funds; control over two units was in hands of same management and administration; and there was necessary unity of control leading to an inter-connection, inter-dependence and inter-lacing of two ventures. The High Court held that Fuel Injection Equipment Project was only an extension of existing business of assessee. Therefore, pre-operative expenditure incurred by assessee on said project was revenue expenditure. In

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the case of Woodcraft Products Ltd69 Taxman 415 (Calcutta), assessee- company was exploring possibility of setting up a factory at Kenya and travelling expenses were incurred in connection with this expansion. However, said proposed expansion of existing business did not materialise. The High Court held that such travel expenditure was an allowable deduction. In the case of Ghanashyam Steel Work Ltd.[2010] 195 Taxman 180 (Gujarat), assessee was engaged in business of manufacture of chemical processing equipment. During relevant assessment years, it had started construction of a new unit in a separate plot, adjacent to its existing unit. For this new unit, assessee borrowed funds and also collected funds through public issue of equity shares. It also incurred certain expenses in relation to said unit which were capitalized in its books of account. However, while filing returns of income, said expenses were claimed as revenue expenditure. Assessing Officer rejected assessee's claim treating expenses in question as capital expenses. Both, Tribunal as well as Commissioner (Appeals), had recorded concurrent findings of fact that so called new unit was merely an expansion of existing business of assessee and was not setting up of a new business and, as such, expenses incurred in this regard were allowable as revenue expenses. Further, considering fact that Assessing Officer had not considered claims of each of items of expenditure incurred by assessee from angle as to whether same were in nature of revenue or capital expenditure, matter had been restored to Assessing Officer to look into nature of expenses and to consider as to whether same were allowable under section 36(1)(iii) or section 37.The High Court held that on facts, there was no infirmity in approach adopted by Commissioner (Appeals) and confirmed by Tribunal so as to warrant

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interference. In the case of Ashwal Investment (P.) Ltd.[2013] 36 taxmann.com 110 (Mumbai - Trib.), the ITAT held that where assessee was engaged in business of trading in investments, and contracts for film production were executed by it for first time during relevant year, it was to be held as same business, as there was complete unity of control and management. Therefore, consultancy fees paid for film production could not be disallowed on ground that it was not connected to assessee's existing business or that it was pre-commencement expenditure for business of film production. In the case of Bell Ceramics Ltd.[2016] 73 taxmann.com 81 (Gujarat), assessee-company had an existing unit manufacturing glass at Baroda. For establishing a new glass manufacturing unit at Bangalore, company incurred expenditure on trial run. Assessing Officer held that Bangalore unit was not a branch of assessee's factory but was a new business and so impugned expenditure was not revenue in nature but a capital expenditure. The Gujarat High Court held that mere fact that Bangalore unit was situated many miles away from Baroda, was not of any consequence because assessee had head office at Baroda, which controlled affairs of both businesses in Baroda and Bangalore and therefore, expenditure incurred in expansion of existing manufacturing facilities was to be treated as revenue expenditure. In the case of Nicholas Piramal (India) Ltd.[2016] 69 taxmann.com 164 (Bombay), assessee-company was engaged in business of manufacturing pharmaceuticals, bulk drugs and glass bottles. During relevant year, assessee sought to expand its glass business and for said purpose, assessee set up and commissioned a new plant to manufacture glass bottles. Assessee claimed interest paid on loan taken for purposes of setting up a new glass bottles manufacturing plant as a revenue expenditure.

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Assessing Officer rejected assessee's claim holding that interest had to be capitalised till asset had been first put into use. Another reason for rejecting assessee's claim was that three activities, viz., pharmaceutical, bulk drugs and glass bottles, of assessee were not interlinked by common management, funds and control. The Commissioner (Appeals) as well as Tribunal held that setting up of a plant for glass manufacturing was an expansion of existing business of assessee. It was further concluded that there was a functional integrity between all three business, viz., pharma business, bulk drugs business and glass manufacturing business with interlinking of management and funds and accordingly, assessee's claim for payment of interest on loan was allowed. The High Court held that findings recorded by authorities below being a findings of fact, no substantial question of law arose therefrom. In the case of Malwa Vanaspati & Chemicals Co. Ltd.[1997] 92 Taxman 262 (Madhya Pradesh), assessee-company, engaged in manufacture, processing and sale of vegetable oil, set up a new unit for manufacture of a kind of acid. For this purpose, assessee borrowed funds which were utilised for purchase of plant and machinery. Assessee claimed deduction of interest paid on amounts borrowed. Since no production had by that time commenced in new unit, Assessing Officer refused to allow deduction holding that payment of interest on borrowed funds would constitute cost of plant and machinery. The Tribunal held that assessee's business activity relating to new unit constituted an expansion of its business and not a different business distinct from its existing business and that interest paid on borrowings for setting up of that unit for period prior to commencement of production in that unit was allowable under section 36(1)(iii).The High Court held that Tribunal was justified in holding

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that assessee's business activity relating to new unit constituted an expansion of its business and not a different business distinct from its existing business. In the case of Indo Rama Synthetics (I) Ltd[2009] 185 Taxman 277 (Delhi), assessee was manufacturer of yarn and polyester for a number of years. It had been generating substantial cash from its existing business. With a view to utilize said surplus cash and to expand its existing operations, it commenced setting up of a spinning and weaving unit for manufacture of fabric and textiles during financial year 1995-96 in State of Karnataka. The said unit was part of process of vertical integration by utilizing products manufactured by existing units as raw material for new unit. For setting up new unit, assessee identified manpower from existing pool of resource. The unit was proposed to be established under common control of board of directors. In relation to setting up of said unit, assessee, from time-to-time, incurred expenditure in nature of salary, wages, repairs, maintenance, design and engineering fee and other expenses of administrative nature. However, assessee could not procure allotment of requisite land from Government of Karnataka and, therefore, setting up of said proposed unit was abandoned during relevant assessment year. The High Court held that assessee could be allowed deduction of project related expenses as revenue expenditure. In the case of Gravis Foods (P.) Ltd[2015] 64 taxmann.com 407 (Mumbai), expenditure incurred by assessee, engaged in manufacturing of ice-creams, on aborted project of 'Mawa', which was covered by nature of assessee's declared business of dairy/milk products, and was under same management and control, was allowable deduction. In the case of Olive Bar & Kitchen (P.) Ltd.[2019] 102 taxmann.com 98 (Mumbai - Trib.), the assessee, engaged in business of running restaurants and related activities, had

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expanded its existing business by opening three more restaurants at different places. The assessee had treated pre-operative expenditure incurred in connection with establishment of restaurants such as salaries and wages, travelling expenses, restaurant rent, repairs and maintenance and like other general administrative expenses under head 'capital work-in-progress' in its books of account, but, when it came to computation of total income, impugned expenses were treated as revenue expenditure and claimed as such. The Assessing Officer disallowed impugned expenses on ground that a particular expense could not have two treatments, i.e., as capital in books of account and as revenue for income tax purposes. Further, according to Assessing Officer, pre-operative expenses could be deducted as per provisions of section 35D(1)(ii). It was noted that assessee had commenced commercial operations of new units established during relevant previous year. Further, there was no dispute that expenditures claimed by assessee were revenue in nature. Furthermore, impugned expenditure was incurred wholly and exclusively in connection with expansion of existing business of assessee and not any separate distinct business. The ITAT held that expenditure was allowable as revenue expenditure irrespective of fact that assessee had given dual status to such expenditure in books of account. In the case of SRF Ltd[2015] 59 taxmann.com 180 (Delhi), assessee was engaged in manufacturing of nylon tyre cord fabrics, packaging film, fluorochemicals, chloromethane and refrigerant gases. During current year, assessee expanded its business and claimed expenses as pre-capitalisation costs. Assessing Officer treated it as capital expenditure. The Commissioner(Appeals) also confirmed findings of Assessing Officer. The Tribunal after considering existing business and expansion, held that there

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was an element of interlacing before new venture and existing venture, and consequently, expenses had to be treated as revenue expenditure. The Delhi High Court held that in view of judgment in Jay Engg. Works Ltd. v. CIT [2009] 311 ITR 405/[2008] 166 Taxman 115 (Delhi), pre-capitalisation expenses would be treated as revenue expenditure. In the case of Euro India Ltd.[2014] 45 taxmann.com 173 (Delhi), the Delhi High Court held that if expenditure is incurred on obtaining feasibility report for expansion of existing business where there is unity of control and common funds, then such expenditure would be treated as business expenditure. In the case of Priya Village Roadshows Ltd[2009] 185 Taxman 44 (Delhi), the Delhi High Court held that expenditure incurred for preparation of feasibility report of a new project, which is in respect of same business which is already carried on by assessee, even if it is for expansion of business, namely, to start a new unit which is same as earlier business, and there is unity of control and a common fund, then such expenditure is to be treated as revenue expenditure. In the case of U.P. Asbestos Ltd.[2013] 37 taxmann.com 80 (Allahabad), the High Court held that where borrowed funds were exclusively utilized for purpose of expansion of existing business having common administration and common fund, which resulted enhancement of production by thrice, interest paid on loan borrowed was to be treated as revenue in nature and accordingly, same was allowable under section 36(1)(iii) of the Act. In the case of Blue Coast Infrastructure Development Ltd.[2021] 131 taxmann.com 282 (Chandigarh - Trib.), the assessee-company was engaged in business of real estate development and financing. During the year, assessee claimed expenditure incurred in respect of expansion of its existing business by way of a new project of starting a

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hotel chain. The Assessing Officer disallowed same on ground that assessee had not started any business activity in respect of such new business project, thus, expenses were to be capitalized being incurred at a preoperative stage. The Commissioner (Appeals) held that said expenditure incurred by assessee was to be treated for purpose of carrying on existing business of assessee and, hence, allowable as revenue expenditure under section 37(1) and same would not become capital in nature merely for reason that such expansion was termed as a new business project. The ITAT held that there was no infirmity in order passed by Commissioner (Appeals) and same was to be upheld.

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accordingly, keeping in view large number of judicial precedents on the subject, depreciation on such assets which are kept “ready to use” should be allowed to the assessee. Further, the counsel for the assessee submitted that during the year under consideration the assessee had received a sum of � 66,563/- towards consultancy fees, which shows that the business of the assessee had commenced during the year under consideration. The counsel for the assessee submitted that the assets were purchased in the month of February 2013 and placed reliance on the case of Ashima Syntex Ltd 122 taxmann 230 (Gujarat), wherein the High Court held that the said position of law is that it is not necessary that the machinery must be used for a particular number of days so as to be entitled depreciation, but it requires that it should be used for the purpose of business or profession or vocation. The Counsel for the assessee submitted that lesser use of machinery, going by the electricity consumption for the impugned assessment year, is not conclusive to the fact that the machinery was not put to use. We are in agreement with the arguments of the counsel of the assessee to the effect that once the new hospital is an extension of the existing business, the machinery viz. Air-conditioning unit and electrical fittings have been purchased during the year under consideration, the assessee has shown consultancy receipts from the new hospital unit at SG Road, the new hospital is in the same line of business i.e. Spine Speciality as the existing hospital at Ashram Road, then depreciation on the assets should be allowed to the assessee during the year under consideration. Notably, in the assessment order passed for the year under consideration, the AO held that business of the assessee commenced from assessment year 2015-16, however, in the immediately succeeding assessment year i.e. AY 2014-15, the AO allowed the assessee’s

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claim of depreciation in respect of those assets. Accordingly, keeping in view the totality of facts placed before us for consideration, we are of the view that the assessee is entitled to depreciation on the above assets.

Assessment Year 2015-16:

“1. The learned CIT(A) has erred both in law and on the facts of the case in confirming the disallowance made by the AO to the extent of Rs.1,36,323/- U/S.14A r.w.r.SD of the Income-tax Rules, 1962. 2. The learned CIT(A) has further erred in wrongly mentioning the amount as Rs. 1,63,232/- instead of Rs.1,36,323/-. 3. Both the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed.

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the matter is being restored to the file of the AO to carry out the necessary verification as regards the figure of interest disallowance.

Order pronounced in the open court on 20-12-2022

Sd/- Sd/- (WASEEM AHMED) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 20/12/2022 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से,

उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद