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Income Tax Appellate Tribunal, BANGALORE BENCH ‘A’
Before: SHRI N.V VASUDEVAN & SHRI A.K GARODIA
All these appeals are filed by the Revenue against the common order dated 27/9/2017 relating to assessment year 2009-10 to 2014-15. When these appeals were taken up for hearing, it was submitted that the tax effect involved in to 2652 was less than Rs.10 lakhs and, therefore, those appeals by the .2648 to 2653/B/17 revenue have to be dismissed as not maintainable in view of the CBDT Circular No.21/2015 dated 10/12/2015.
The ld DR however submitted that para 5 of the aforesaid Circular which reads as follows:- “5. The Assessing Officer shall calculate the tax effect separately for every assessment year in respect of the disputed issues in the case of every assessee. If, in the case of an assessee, the disputed issues arise in more than one assessment year, appeal, can be filed in respect of such assessment year or years in which the tax effect in respect of the disputed issues exceeds the monetary limit specified in para 3. No appeal shall be filed in respect of assessment year or years in which the tax effect is less than the monetary limit specified in para 3. In other words, henceforth, appeals can be filed only with reference to the tax effect in the relevant assessment year. However, in case of a composite order of any High Court or appellate authority, which involves more than one assessment year and common issues in more than one assessment year, appeal shall be filed in respect of all such assessment years even if the "tax effect" is less than the prescribed of the year(s) in which the "tax effect" exceeds the monetary limit prescribed. In case where a composite order/judgment involves more than one assessee, each assessee shall be dealt with separately."
According to the learned DR, if the order of the CIT(A) is a composite order involving more than one assessment year and common issues in more than one assessment year are involved appeal can be filed in respect of all such assessment years even if the tax effect is less than the prescribed limit for some of the Assessment years comprised in the composite order of the appellate authority. The learned DR pointed out that the CIT(A) in the present case has passed a common order for several AYs and tax effect in one of the AY i.e., AY 13-14 is more than Rs.10 lacs and therefore the appeals for all the AYs should be held to be falling within the exception contained in paragraph 5 of the circular referred to above.
ITA Noe.2648 to 2653/B/17
The ld counsel for the assessee, however, pointed out that paragraph 5 of the Circular on which the ld DR paced reliance in support of his contention that the appeals of the Revenue are not hit by the Circular No.21/2015 is similar to paragraph 5 issued by the CBDT viz., Circular No.3/2012 which was the Circular issued by the CBDT prescribing monetary limits for filing appeals before Tribunal. This circular was in force prior to the issuance of CBDT Circular No.21/2015. He brought to our notice that paragraph 5 of CBDT Circular No.3/2012 had come up for consideration before the Hon’ble Karnataka High Court in the case of CIT, Central Circular Vs. PSI Hydraulics (2014) 226 Taxman 34 (Kar). In the aforesaid decision, Hon’be Karnataka High Court held merely because the order of the CIT(A) is consolidated order passed for several years tax effect should not be seen for each AY separately. The Hon’ble Karnataka High Court held that paragraph 5 of Circular No.3/2013 was discriminatory and offended Article 14 of the Constitution of India. The Hon’ble High Court finally held that even though the cumulative tax effect in a common order passed by CIT(A) for several years is more than 10 lakhs but if the individual tax effect in each assessment year is less than the monetary limit prescribed in Circular No.3/2011, the same should be held to be not maintainable. He therefore submitted that the tax effect for each AY should be seen separately and in that event the appeals for the other AYs except AY 2013-14, would be not maintainable as the tax effect was admittedly less than Rs.10 lacs.
We have considered the rival submissions and are of the view that the decision of the Hon’ble Karnataka High Court is directly on the point and was rendered in identical circumstances. Para 5 of the Circular No.3/2011 considered by the Hon’ble Karnataka High Court is in pari materia same as para 5 of Circular No.21/20115. For the sake of ready reference, we give below the relevant paragraphs of Hon’ble Karnataka High Court on this issue.
“….Per contra, Sri K.V. Aravind, learned counsel for the Appellants refers to para 5 of Circular No. 3/2011, which reads thus:-
ITA Noe.2648 to 2653/B/17
5. The Assessing Officer shall calculate the tax effect separately for every assessment year in respect of the disputed issues in the case of every assessee. If, in the case of an assessee, the disputed issues arise in more than one assessment year, appeal, can be filed in respect of such assessment year or years in which the tax effect in respect of the disputed issues exceeds the monetary limit specified in para 3. No appeal shall be filed in respect of assessment year or years in which the tax effect is less than the monetary limit specified in para 3. In other words, henceforth, appeals can be filed only with reference to the tax effect in the relevant assessment year. However, in case of a composite order of any High Court or appellate authority, which involves more than one assessment year and common issues in more than one assessment year, appeal shall be filed in respect of all such assessment years even if the tax effect" is less than the prescribed of the year(s) in which the "tax effect" exceeds the monetary limit prescribed. In case where a composite order/judgment involves more than one assessee, each assessee shall be dealt with separately."
In case of an assessee, where common order is passed in respect of more than one assessment year, which involves common issues even if in one of the assessment years the tax effect is more than Rs. 10 lakhs, irrespective of the fact that in respect of other assessment years which is part of the common order, the tax effect is less than Rs. 10 lakhs, the revenue is entitled to file appeal even in respect such assessment years where the tax effect is less than Rs. 10 lakhs. However, in case where there is no common order and an order is passed only in respect of an assessment, year and the tax effect therein is less than Rs. 10 lakhs, the revenue cannot file the appeal.
On thorough scrutiny of para 5 of the Circular No. 3/2011, we find that there appears to be a glaring discrimination offending the sprit of Article 14 of the Constitution. In the case of a common order passed in respect of one or more assessment year/years, if the tax effect is less than Rs. 10 lakhs, the assessee is not entitled to benefit of exemption and the revenue is not debarred from filing an appeal, even though the tax effect in respect of one or more assessment years is less than Rs. 10 lakhs. In other words, the revenue can file an appeal against all the assessment orders which is a part of the common order, irrespective of the fact, whether for one of the assessment year/years, the tax effect is less than Rs. 10 lakhs. However, if it is a solitary order and tax effect is less than ITA Noe.2648 to 2653/B/17 Rs. 10 lakhs, the assessee is entitled to the benefit of exemption and the revenue cannot file the appeal.
The para-5 of the circular is highly discriminatory. After all the bunching and clubbing of cases and passing common orders is a procedure adopted for convenient disposal of the cases by the court or quasi judicial authority. The assessee has no say in the matter of clubbing of cases and passing of common orders. Merely because the authority concerned for judicial convenience, clubs the cases and pass common order, the assessee should not be denied of the benefit of circular-3/2011 when the tax effect for the assessment year/years the tax effect is less than Rs. 10 lakhs. Therefore, it is to be held that whether it is a solitary order or common order, the assessee should have the benefit of the tax effect less than Rs. 10 lakhs and in all such cases whether it is a part of the common order or a solitary order, the revenue will not be entitled to file an appeal”. (emphasis supplied)
In view of the aforesaid decision of Hon’ble Karnataka High Court, we hold that the appeal of the Revenue for assessment year 2009-10 to 2012-13 being to 2651 and for assessment year 2014-15 being ITA 2653/B/2017 are dismissed for reason that the tax effect in these appeals are less than Rs.10 lakhs and, therefore, such appeals are not maintainable in view of CBDT Circular No.21/2015. (assessment Year 2013-14)
As far as this appeal of the Revenue is concerned, the grounds of appeal
raised by the Revenue reads as follows:- “1. The order of the Learned Deputy Commissioner of Income Tax, Central Circle-1(4) in so far as it is against the appellant is opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
2. (i) The Learned Assessing Officer erred in disallowing the business loss for the year under reference amounting to Rs.46,74,561/-.
ITA Noe.2648 to 2653/B/17
(ii) The Learned Assessing Officer erred in treating the amounts transferred to work-in-progress as a mere operational loss and not a loss arising in the course of business. 3. For the above and other grounds of appeal urged at the time of hearing of the appeal, your appellant prays that the relief sought for may be granted and justice rendered.”
The assessee is a company engaged in the business of real estate development. It also engaged in trading of TDR(Transfer Development Right). The assessee did not derive any income during the financial year 2012-13. The AO noticed that in the profit and loss account, the assesee has debited expenditure of Rs.51,47,140/- incurred under various heads namely depreciation amortization expenses, other expenses etc. The AO was of the view that since there is no revenue earned during the relevant previous year as well as in the past, the expenditure claimed in the profit and loss account should not be allowed as a deduction.
9. In response to the query of the AO in this regard, the assessee submitted that the Assessee is engaged in the business of real estate and has ventured into development of real estate project. Various activities were carried out during the year, of which being in nature of revenue expenditure are accounted in profit and loss account. These expenditures are incurred in the course of a business, meaning there is a business in existence. It was submitted that once a business is found to have been “set up” as a matter of fact, expenses of revenue nature incurred wholly and exclusively for the purpose of business are allowable. The Assessee pointed out that it had acquired land and thus commenced its activity of business. It was submitted that the Assessee incurred various operating and administrative expenses. These expenses are not connected to project and relates to day to day administrative expenses which is claimed as expenditure. The expenses connected to project have been transferred to work-in-progress account. The Assessee thus submitted that the business of the Assessee had been set up and all expenses debited in the profit and loss account were revenue expenditure and therefore the loss claimed by the ITA Noe.2648 to 2653/B/17 Assessee has to be allowed. The Assessee relied on the following decisions as to when a business can be considered as having been set up and when a business is set up, all revenue expenditure have to be allowed as deduction in computing income from business.
CIT v.. Dhoomketu Builders and Development Pvt. Ltd. (TS - 190- HC —2013(DEL) CIT v. Sarabhai Management Corporation (1991, 192 ITR 151 SC) CIT vs Saurashtra Cement & Chemical Industries Ltd. (1973) 91 ITR 170
The AO however, held that business of real estate can be considered as set up only when properties are acquired and development is carried out thereon. The AO held that merely acquiring land cannot be equivalent to setting up business of real estate development. The AO accordingly treated the business loss declared by the assessee of Rs.46,74,561/- as incorrect and treated the income of the Assessee as nil. It is undisputed that the loss declared by the Assessee in the return of income is only because of the Revenue expenditure claimed in the P & L account. The AO treated the business loss of the assessee as Nil and refused to allow carry forward of business loss as claimed by the assessee.
On appeal by the assessee, the CIT(A) held that the business was set up and the assessee was entitled to claim all revenue expenses and computed its business income accordingly. In coming to the aforesaid conclusion, the CIT(A) relied on the decision of the ITAT Bangalore Bench in the case of Bangalore Goa Estate Pvt. Ltd., in dated 31/8/2015.
Aggrieved by the order of the CIT(A), revenue has preferred present appeal before the Tribunal.
ITA Noe.2648 to 2653/B/17
We have heard the rival submissions. The ld DR relied on the order of the AO. The ld counsel for the assessee relied on the order of the CIT(A).We have given careful consideration to the rival submissions. Before us, the assessee has cited the decision of the jurisdictional ITAT in the case of Bangalore Goa Estate Pvt. Ltd., in dated 31.08.201 wherein it was held as under: "10. We have heard both sides of the argument and perused the material on record and learned Assessing Officer has relied on the judgment of Hon 'ble Supreme Court M/s. Tuticorin Alkali Chemicals and Fertilizers Ltd., (supra) while evaluating this case with the present case. We find that the major question is when a business can be considered as set up and commenced. The concept of set up and commencement will differ industry to industry. M/s. Tuticorin Alkali Chemicals and Fertilizers Ltd. (Supra) was a manufacturing concern. Setting up and commencement in case of the real estate business is entirely different. The concept of setup and commencement are different. The first is capacity to start its earning capacity whereas the latter is actual commercialization of the business. Normally, a manufacturing business requires turnaround time of less than six months, whereas a real estate business may require more than one accounting year. 11. We find that the case of Dhoom Ketu (Supra) of Hon'ble Delhi High Court is similar to the relevant case in hand. We are of the view that the commencement of real estate business will start with acquisition of land property, by an assessee whose intention is develop it and do real estate. Assessee had spent considerable sum for developing the piece of land. This would clearly show that it had set up the business......
It is clear from the decision of the Hon’ble Delhi High Court in the case of Dhoom Ketu (supra) that business of real estate developer can be considered as set up when properties are acquired. In the case of the Assessee, the AO has accepted the fact that the Assessee has acquired properties for the purpose of development. Therefore the business of the Assessee ought to have been considered as having been set up. All revenue expenses have therefore to be allowed as deduction in computing income from business. Respectfully following the views expressed by ITA Noe.2648 to 2653/B/17
9 the Hon'ble ITAT, it is held that the acquisition of lands for purposes of real estate development would amount to setting up and commencement of business and the expenses claimed by the appellant are allowable. We find no grounds to interfere with the order of the CIT(A). The appeal for AY 13-14 is dismissed.
In the result, all the appeals by the Revenue are dismissed.
Order pronounced in the open court on 11th April, 2018.