DCIT CC 6(3), MUMBAI vs. HORIZON INFRASTRUCTURE LTD, MUMBAI

This bunch of five appeals filed by the assessee and three appeals filed by the revenue are directed against separate, but identical orders passed by the Commissioner of Income Tax (Appeal)–54, Mumbai, all dated 12/06/2017 and 22/11/2017 and they pertains to Assessment Year’s (AY) 2010-11,2011-12, 2012- 13, 2013-14 and 2014-15. Since, facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are disposed-off, by this consolidated order.

for all Assessment Year’s. Therefore, for the sake of brevity, grounds of appeal raised by the assessee in for AY 2012-13 are reproduced as under:-

1. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in upholding the views of the Assessing Officer (AO) by confirming the disallowance in respect of the entire expenditure of Rs.5,64,80,818/-, which stood debited to the Profit & Loss Account including depreciation claimed u/s.32 the Income Tax Act, in respect of the division Horizon Country Wide Logistics as capital expenditure on the grounds that business had not commenced/set up.

2. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in directing the AO to compute the disallowance u/s,14A r.w.r.8D of the Income Tax Act, in respect of shares/investment in mutual funds, which have yielded dividends.

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4. The Grounds taken above are without prejudice to each other and the appellant reserves its right to add to, alter, amend, modify or delete any of the grounds taken in this appeal

3. The revenue has more or less raised common grounds of appeal for all AY’s. Therefore, for the sake of brevity , grounds of appeal raised by the revenue in for AY 2012-13 are reproduced as under:- i. "On the facts and circumstances of the case and in law, the Ld. C1T(A) has erred in deleting the addition u/s 14A of the Income Tax Act, 1961 ignoring that the provisions of Section 14A apply even if no exempt income is actually earned or received during the year in any form whatsoever ii. "On the facts and circumstances of the case and in law, the Ld.. CIT(A) has erred in deleting the addition u/s 14A of the Income Tax Act, 1961 by ignoring the provisions of CBDT Circular no, 5/2014 dated 11.02.2014 wherein, it has been clarified that the Rule 8D r.w.s.14A provides for the disallowance of expenditure even where the assesses in particular has not earned exempt income" iii "On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition u/s 14A of the Income Tax Act, 1961 relying upon the decision of the Hon'ble Delhi High Court in the case of Cheminvest Ltd. overlooking the fact that the above decision is not accepted by the revenue and Civil Appeal has been preferred before the Hon’ble Supreme Court and same is pending?" The appellant prays that the order of the CIT(A) on the grounds be set aside and the DC be restored. The appellant craves to amend or alter any ground or add new ground which may be necessary,

5 Horizon Infrastructure Ltd. and plans to undertake development of health and wellness, Tourism projects, Special Economic Zone, knowledge park ect. The assessee company has also involved in financial activities and investment in subsidiaries. The assessee company has filed return of income for AY 2012-13 on 29/09/2012, declaring total income of Rs. 10,69,09,957/-. Mean time, the Hon’ble Bombay High Court, vide order dated 30/09/2013 has approved amalgamation of SKIL infrastructure Ltd., Horizon Country Wide Logistics Ltd and Fastlane Distripark & Logistics Ltd., with assessee company with effect from 01/04/2011. Thereafter, on receipt of the amalgamation order in the month of September, 2013, the assesee has filed a revised consolidated return of income on 20/11/2013, declaring a loss of Rs. 1,41,43,903/-. Thereafter, the case has been selected for scrutiny and notices u/s 143(2) and 142(1) of the I.T.Act, 1961, were issued on various dates. In response to the notice, the Ld. AR of the assesee appeared from time to time and filed various details as called for. The assessment has been completed u/s 143(3) of the I.T.Act, 1961 on 28/03/2014 determining the total income at Rs. 13,57,68,286/- under normal provision of I.T.Act, 1961, by making additions towards disallowance of expenditure of capital nature, in the case of Horizon Country Wide Logistics Ltd., amounting to Rs. 5,64,80,818/- and also disallowances of expenditure incurred in 6 Horizon Infrastructure Ltd. relation to the exempt income u/s 14A of the I.T.Act, 1961. The AO has also recomputed book profit u/s 115JB of the I.T.Act, 1961, by making additions towards disallowances of expenditure incurred in relation to exempt income u/s 14A of the I.T.Act, 1961. Aggrieved by the assessment order, the assesee carried the matter in appeal before the Ld. CIT(A). The Ld.CIT(A), for the detailed reasons recorded in his appellate order dated 12/06/2017 partly allowed appeal filed by the assesee, where he had confirmed additions made by the AO towards disallowances of capital expenditure incurred in the case of Horizon Logistics Ltd. However, allowed partial relief, in respect of disallowances of expenditure incurred in relation to exempt income, where he had set aside the issue to the file of the AO to recompute disallowance of expenditure and also to restrict such disallowances to the extent of investments, which yield exempt income, for the year under consideration. Aggrieved by the order of the Ld.CIT (A), the assessee, as well as the revenue is in appeal before us.

nature of pre-operative expenses, which cannot be allowed as deduction, while computing income under the head income from business or profession. The facts borne out from the records are that Horizon Country Wide Logistics Ltd., has amalgamated with Horizon Infrastructures Ltd with effect from 01/04/2011 (AY 2012-13), as per the amalgamation order dated 27/09/2013 of the Hon’ble Bombay High Court. Thereafter, with effect from 22/01/2014, the name of the company has been changed to SKIL Infrastructures Ltd. The assessee company is in the process of setting up a Multimodal Logistics Park/Inland Clearance Depot (‘ICD’) at Jhansi in U.P and Warehousing Complex at Village Govirle at Navi Mumbai in April, 2008. The assessee company, through its subsidiary Fastlane Distripark & Logistics Private Ltd., started setting up a Container Freight Station (CFS), near JNPT at Dighode village, Panvel Taluk, Raigad District, Maharashtra State and also through its anther subsidiary Chiplun FTWZ Private Ltd., initiated plans to set up FTWZ as a Co Developer at Change Village, in Raigad District. Further, the assessee company was also in process of acquisition land at various places, including Umbergaon and Pipavav in Gujarat, Chennai and National Capital Region to set up CFS/ICD/Multimodal Logistic Park.

All these projects were simultaneously undertaken and are still under construction stage up to the end of AY 2012-13. The 8 Horizon Infrastructure Ltd. assessee has capitalized all expenses, including financial cost incurred for development of projects, till commencement operations, however indirect expenditure incurred, during construction period is capitalized, to the extent to which the expenditure is directly related to the construction or is incidentally thereto. The expenditure incurred directly or indirectly related to construction of the project was classified as pre-operative expenditure pending capitalization and this regard necessary disclosure had been made in financial statements.

9 Horizon Infrastructure Ltd. certain expenditure, the assesee has shown income from operations in the form of road transport and sea transport from Pipavav shipyard ltd, which is group company of the assesee, therefore, he opined that income earned from road transport/sea transport should be assessable as income from other sources, because the main business activity of the assesee is to develop ICD/CFS and expenditure debited into the profit and loss account under various head has to be treated as pre-operative expenditure, pending capitalization for AY 2010-11, 2011-12 and 2012-13. An appeal before the Ld. CIT(A), the Ld. CIT(A) affirmed the findings of the AO in light of facts brought out during assessment proceedings, however directed the AO to allow direct expenses incurred in relation to transport income/seaport income, even though the same has been assessed under the head income from other sources, because consequent direct expenditure incurred in relation to such income has to be allowed as deduction u/s 57 (iii) of the I.T.Act, 1961.

the year under consideration. The Ld. AR further submitted that there is a distinction between setup of business and commencement of business, and when a business is established and is ready to commence business, then it can be said that business is setup.

Further, this concept is covered by section 3 of the I.T.Act, 1961.

Since, the facts are not controverted by any of the authorities below, the business expenses ought to have been allowed as expenses incurred wholly and exclusively for the purpose of business. The Ld. AR further submitted that without prejudiced to the above, it is also pertain to know that activities carried out generating revenue, were within the overall gamut of objects of the company. Therefore, one of transactions of income from operations cannot be doubted, merely for the reasons that the same has been received from a group company. The Ld. AR further referring to objects of the company argued that if, you go through objects of the company, the assesee is into multiple businesses including Inland Container Depot, Container Freight Station (CFS), Free trade warehouse Zone and other activities and also to carry on all are any of the business of transport, cartage and haulage contractors. Although, the activities undertaken by the assessee group for construction of ICD/CFS is not ready for commencement of business, but other business activities, including transportation has been commenced, which is 11 Horizon Infrastructure Ltd. evident from the fact that, it has start earning from revenue from road transport/sea transport for different years and hence, once business operations has been commenced, necessary expenditure incurred in connection with such business, including day to day expenditure incurred for maintaining corporate status of the assessee needs to be allowed as deduction.

Hon’ble Bombay High Court in the case of Western India vegetable products Ltd. Vs CIT(Supra) and held that once, the business is setup, even though there is no commencement of business, then it cannot be said that business is not setup, consequently all revenue expenditure needs to be allowed as deduction. The Ld. AR for the assessee, has also relied upon plethora of judicial precedents, including the decision of ITAT, Mumbai in the case of samsara Hospitality Pvt.Ltd. reported in [(2017 59 ITR (Tri) 155 (Mumbai)].

The Ld. AR for the assesee has also relied upon the decision of Hon’ble Bombay High Court in the case of CIT vs TATA Chemicals Ltd. 256 ITR 395 and Hon’ble Kolkata High Court in the case of Keshoram Industries and Cotton Mills Ltd. vs CIT 191 ITR 845.

incorporated, it cannot be said that it has setup its business. The Ld. AO, as well as the Ld. CIT(A) have brought out clear facts to the effect that the business has not setup, for the year under consideration, consequently expenditure incurred under various heads needs to be treated as pre-operative expenses pending capitalization till such time the business has setup and ready for commencement of business.

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The only dispute is with regard to expenditure debited into the profit and loss account under various heads, including salary, administrative and other expenses, operating expenses and depreciation. According to the assessee, it has commenced its business and it has been setup, even though the same has been not commenced during the year under consideration. Therefore, consequent expenditure incurred directly and indirectly in connection with said business is allowable as deduction. Alternatively, the assessee further contended that assuming for a movement, its business has not been setup, in respect of ICD/CFS, but other stream of business, including transportation has been commenced, which is evident from the fact that it has derived revenue from road transport and sea transport from Pipavav shipyard Ltd. The assessee, further contended that when the business operations has been commenced and also derived revenue for the year under consideration, merely for the reason that said revenue has been generated from group company cannot be a reason for doubted bonafide transactions entered into by the assessee, in order to disallow expenditure debited into the profit and loss account.

Navi Mumbai is not disputed by the assessee. As per the assessee admission itself, its project are still at developing stage at various places, including Container Freight Station (CFS), near JNPT at Dighode village, Panvel Taluk, Raigad District, Maharashtra. It is also not in dispute that the assessee is still in the process of acquisition of land and getting clearanses from various authorities. It is also not in dispute that the assessee has capitalized all direct and indirect expenditure including finance cost incurred for construction of the project till commencement of operations. In this factual backgoround, if you examine the claim of the assesee that its business has been setup, even though, the business was not commenced and expenditure incurred under various heads, including expenditure incurred for maintaining the corporate status of the assesee has to be allowed as deduction needs to be examined in light of facts brought out by the authorities. There is no doubt, with regard to the fact that once business has been setup, even though the said business was not commenced for the relevant period, then necessary revenue expenditure incurred in connection with said business needs to be allowed as deduction. But, the question that needs to be first ascertained is when a business can be said to have been setup and is ready to commence business. Any business is set up and is reday to commece business is depends upon facts of each

16 Horizon Infrastructure Ltd. case and the nature of business undertaken by the assessee. There can be no hard and fast rule by which, it can be determined as to when the business was setup. Whether a particular business has been setup or not is depends upon the facts of each case and nature of its business activity. Various courts and Tribunals have analysed the terms and concept of business setup and commencement of business. The Hon’ble Bombay High Court in the case of Western India Vegetables Product Ltd. vs CIT had held that when the business is established and is ready to commence business, then it can be said that it has been setup, but before it is ready to commence, it is not set up. The court further observed that there may be interregnum between the date of setting up of the business and the date of actual commencement of business, but under the Act, all expenses incurred after the date of setting up of business are allowed as deduction u/s 28 of the I.T.Act, 1961. The Hon’ble Delhi High Court in the case of CIT vs Hughes escort communication Ltd. (supra) had considered an identical issue and held that where, the business has been setup, though the same has been not been commenced, the expenditure incurred after the date of setting up has to be allowed as deduction, but the question has to when it can be said that a business is setup must largerly depend on the facts of each case and the nature of business. The Court further held that in 17 Horizon Infrastructure Ltd. a case of manufacturing concern, it can be said that the business was setup, when the first order of purchase of raw material was placed and not when the factory was started. The Hon’ble Gujarat High Court, in the case of CIT vs Sarabhai Sons Pvt.Ltd.(973 90 ITR 318) was dealing with a company established for a manufacturing of scientific instruments held that purchase of land, placing of orders for machinery and raw materials were merely operations, for the setting up of the business and the business was actual setup only, when the machinery was installed and the factory was ready to commence business . The Hon’ble Supreme Court, while affirmed the decision of Hon’ble Gujarat High court in the case of CIT vs Sarabhai Management corporation Ltd.(1991 192 ITR 151) held that in the case of a company formed for leasing of the property, it could not be said that the business was not setup till the first lease took place, ”the earlier part of the activities, namely engaged staff, buying the equipment and making the staff familiar with the same are all part of the business and the business can be said to be setup, even earlier. The Hon’ble Madras High Court was dealing with the case of a company formed for selling property time share in CIT vs Club resorts Pvt. Ltd. (2016) 287 ITR 552 held that the acts of appointing staff for canvassing sales of the property time share, renting of office premises etc., amounted to setting up of the business, even though

18 Horizon Infrastructure Ltd. the construction of the property was yet to begin. Similarly, the Hon’ble Gujarat High Court in the case of a Hotel and hospitability industry in case of Hotel Alankar Vs CIT (1982) 133 ITR 866, while recognizing, the question, whether a business is setup or not was essential question of fact and that it would largely depend upon the facts of each case and the nature of business held that in the case of a hotel, due waightage must given to the fact that it cannot commenced its activity overnight. The sum and substances of the ratio laid down by various courts and Tribunals are that the term business setup and commencement of the business is largly depend upon the facts of each case and nature of business carried out by the undertakings. In a case, where the company was incorporated for manufacturing of article or goods, then it can be said that business have been setup and read for commencement of the business only, when the plant and machinery is installed and it is ready for manufacturing goods. Similarly, in a case where a company was formed for engaged in the activity of service industry, then it can be said to have setup and ready for commencement of the business, when it has taken up a premises on rent and appointed a staff and buying the equipment relevant for its business.

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2012-13, then it cannot be said that its business has been setup merely, for the reason that it has shown some revenue from road transport/sea transport, that too from its group company. We further noted that the revenue generated from other stream of business is not regular, which is evident from the fact that for some years, the assesee shown revenue from road transport and for some years, it has shown revenue from sea transport, but both revenues are claims to have been received from Pipavav shipyard Ltd., a group company of the assessee. The Ld. AO, as well as the Ld. CIT(A) after considering relevant facts has rightly held that the business of the assessee has not been setup and ready for commencement of business, consequently expenditure debited into profit and loss account cannot be allowed as deduction u/s 28 of the I.T.Act, 1961.

In so far as, case laws relied upon by the assessee, we find that none of the case laws are comes to rescue the assessee, because all judgments cited by the assessee have clearly held that the term setup of business and commencement of business largely depend upon facts of each case and nature of business undertaken by the assessee. Further, in all the cases, it has been categorically held that in case of manufacturing company that business said to have been setup, when the plant is ready for use. In cases, where the company involved in services sector, the business said to have been 21 Horizon Infrastructure Ltd. setup only, when the primary conditions for commencement of business is put in place. Therefore, we are of the considered view that the cases laws relied upon by the assessee are not applicable to the facts of assesse case. The Ld. CIT(A) after considering relevant facts has rightly affirmed findings of the AO and hence, we are inclined to uphold, the findings of Ld. CIT(A) and reject ground taken by the assessee for AY 2010-11,2011-12 and 2012-13.

The AO has determined disallowances of expenditure incurred in relation to exempt income by invoking prescribed procedure provided under Rule 8D(2) and determined interest disallowance and other expenses, on the ground that the disallowances contemplated u/s 14A shall be determined, in accordance with Rule 8D of I.T.Rules, 1962, whether or not, any dividend income is received for the year. Although, the Ld. AR for the assessee has taken various arguments before the Ld.CIT(A), in respect of investments in group companies, for controlling interest and also for strategic purpose, investments in shares and securities out of own

22 Horizon Infrastructure Ltd. funds in light of decision of Hon’ble Bombay High Court in the case of HDFC bank Ltd. Vs DCIT (2016) 383 ITR 529 and CIT vs. Reliance Utilities and Power Limited (2009) 313 ITR 340 that no disallowance could be made, in respect of interest expenditure, where own funds in form of share capital and reserves is in excess of investment in shares. The assesee had also taken one more argument, in respect of disallowances of expenditure under Rule 8D(2)(iii) of I.T.Rules, 1962, @ 0.5% of average value of investment, on the ground that only those investments, which yield exempt income shall be considered for the purpose of determination of average value of investments. Further, although the Ld. AR for the assesee had taken above arguments, but at time of hearing submitted that the disallowances contemplated u/s 14A shall not exceed exempt income, therefore, disallowances computed by the AO should be restricted to the extent of exempt income earned for the year.

board has issued a circular No. 05/14 dated 11/02/2014, wherein it has been clarified that Rule 8D r.w.s. 14A of the I.T.Rules 1961, provides for disallowances of expenditure even, where the assessee in particulars year has not earned exempt income. The Ld. DR further submitted that although, the Hon’ble Delhi High Court in the case of CIT vs Cheminvest Limited 378 ITR 33 had held that where, there is no exempt income there should not be any disallowance, but fact remains that the said decision has not been accepted by the department and SLP has been filed before the Hon’ble Supreme Court and same is pending, therefore disallowances made by the AO should be upheld.

Although, the Ld.AR for the assessee had taken the argument of strategic instrument for controlling purpose in subsidiary/group companies, the said argument has been considered by the Hon’ble Supreme Court. In the case of Max opp investments Ltd vs CIT(, where the Hon’ble Supreme Court clearly rejected arguments in light of investment in group company for strategic purpose and held that even though, investments made in group/sisters concern for the purpose of controlling interest and strategic purpose, disallowances

24 Horizon Infrastructure Ltd. contemplated u/s 14A is applicable. Therefore, there is no merit in the arguments of the assessee and hence the same is rejected. In so far as, arguments of the assessee that when, own funds are in excess of investments in shares, which yield exempt income question of disallowances of interest expenditure does not arise, we find that although, the Hon’ble Bombay High Court in the case of CIT vs HDFC bank Ltd.(supra) and CIT vs Reliance Utilities and Power Ltd.,(supra) had considered an identical issue and held that if, own funds are in excess of investments in shares, then general presumption is that investments in shares is out of own funds, consequently no disallowances could be made, in respect of interest expenses. No doubt, the ratio laid down by the Hon’ble Bombay High Court in the above cases is applicable to the effect that where, own funds are in excess of investments, then no interest expenses could be allowed, but fact remains that in this case, the Ld. CIT(A) had brought out clear fact to the effect that investments in shares and securities are in excess of share capital and reserves put together, therefore provision of Rule 8D(2)(ii) r.w.Rule 14A of the I.T.Rules,1962,is applicable and hence, no error in the findings of the AO. As regards, disallowances of other expenses u/s 14A Rule 8D(2)((iii), the Ld. CIT(A) has set aside the issue to file of the AO to recompute disallowance in light of the decision of Hon’ble Delhi High

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Court in the case of Cheminvest Ltd. Vs CIT (supra) and also, in the light of special Bench decision of ITAT, Delhi in the case of Vireet Investments Pvt Ltd. Vs DCIT, where the Tribunal held that only those investments which yield exempt income needs to be considered, for the purpose of determination of average value of investments. We find that Hon’ble Delhi High Court in the case of Cheminvest Ltd. Vs CIT(Supra) had clearly held that where, there is no exempt income, no disallowances could be made in respect of expenditure incurred in relation to exempt income. A similar view has been considered by the Hon’ble Bombay High Court in the case of M/s Nirved Traders Pvt.Ltd Vs DCIT in of 2017, where by following the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd vs CIT held that where, there is no exempt income no disallowances of expenditure, in relation to exempt income u/s 14A of the I.T.Act, 1961. The Hon’ble Supreme Court in the case of CIT vs Chettinad Logistics Pvt.Ltd. (2018) 257 taxmann.com 2 (SC) had considered similar issue and while, dismissing SLP filed by the revenue held that section 14A cannot be invoked, where no exempt income was earned by the assessee in the relevant assessment year.

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27 Horizon Infrastructure Ltd. investments Pvt.Ltd. vs DCIT and argued that computation under clause (f) of the explanation 1 to section 115JB (2) is to be made without resorting to computation as contemplated u/s 14A r.w.Rule 8D of the I.T. Rules, 1962. We find that the ITAT special bench, Delhi, in the case of ACIT vs Vireet investments Pvt.Ltd. (2017) 165 ITD 27 had considered an identical issue and held that computation under clause(f) of explanation 1 to section 115JB (2) is to be made without resorting to computation as contemplated u/s 14A r.w.Rule 8D of I.T.Rules, 1962. Therefore, we are of the considered view that the AO was erred in recomputed book profit u/s 115JB by adding disallowances computed u/s 14A r.w.Rule 8D of I.T.Rules 1962. But, we further noted that since, the issue of disallowance of expenditure u/s 14A r.w.Rule 8D has been set aside to the file of the AO to determine disallowances in light of our discussions in the proceeding paragraphs, we set aside this issue also to the file of the AO and direct him to first determine disallowances of expenditure in relation to exempt income in light of our discussions in proceedings paragraphs and then, find out amount of disallowances and thereafter, recompute book profit u/s 115JB in light of decision of ITAT special bench in the case of Vireet investments Pvt.Ltd. vs ACIT (supra).

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Order pronounced in the open court on this 09 /08/2019