DEPUTY COMMISSIONER OF INCOME- TAX, CIRCLE - 1(1)(2), BANGALORE vs. M/S. BANGALORE AIRPORT RAIL LINK LIMITED, BANGALORE

We heard the parties and perused the record. The assessee is engaged in the business of implementing a high speed rail link from the city to Bangalore International Airport. During the year under consideration, the AO noticed that the assessee has claimed business expenses aggregating to Rs.188.75 lakhs as deduction against “Other income” (consisting of mainly interest income). The AO took the view that the assessee has not set up or commenced its operations and hence the expenses claimed by the assessee are not allowable as deduction. The AO also expressed the view that these expenses may be capitalised. Accordingly he disallowed the entire expenses claimed by the assessee. Accordingly the AO assessed entire “Other income” as total income of the assessee.

The Ld CIT(A), however, took the view that the assessee has commenced its operations and hence the business expenses claimed by the assessee is allowable as deduction. Accordingly he directed the AO to allow the claim of the assessee.

After hearing both the parties, the bench observed that the entire expenses may be required to be capitalised against the fixed assets, as the assessee is in the process of implementing the Rail link project, i.e., it is a case of construction of project, in which case, the entire pre-construction expenses are required to be capitalised.

The Ld A.R submitted that both the AO/CIT(A) has examined the issue from the angle of commencement of business only. However, the Ld D.R rightly pointed out that the AO has also observed that the impugned expenses may be capitalised. At this stage, the Ld A.R submitted that the “other income” earned by the assessee is intricately connected with the activity of implementation of project and hence the said income should be deducted from the pre-construction expenses. Accordingly he submitted that the AO was not correct in law in assessing the other income separately.

The Ld D.R, however, submitted that the assessee has raised a new claim and there was no occasion for the AO to examine this new claim.

Since the assessee is in the process of implementing a project, which is in the nature of Construction of project, the question of examining the “setting up of business or commencement of business” does not arise in this case. Since the assessee is constructing a project, all the expenses are incurred in connection there with are called pre-construction expenses and they are required to be capitalised as per the decision rendered by Hon’ble Supreme Court in the case of Challapalli Sugar Ltd (1975 AIR 97, 98 ITR 167). Hence the alternative view expressed by the AO is accordingly upheld. Accordingly, the order passed by Ld CIT(A) on this issue is set aside.

Before us, the Ld A.R has raised a new contention that the “other income” should not be assessed separately, but it has to be reduced from the pre-construction expenses. However, we notice that this claim of the assessee requires examination of facts relating to “other income” and also the law explained by Hon’ble Supreme Court/High Courts in this regard, which is also dependent upon the facts relating to “Other income”. The assessing officer did not examine this claim of the assessee with regard to other income, even though he has observed that the expenses can be capitalised.

In the result, the appeal of the revenue is treated as allowed for statistical purposes.