Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, D/“SMC” BENCH, CHENNAI
Before: SHRI CHANDRA POOJARI
आदेश / O R D E R
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal is filed by the assessee, aggrieved by the order of the Learned Commissioner of Income Tax(A)-11, Chennai dated 30.03.2017 pertaining to assessment year 2012-13.
The assessee has raised the following grounds for consideration.
1. The Learned Commissioner of Income tax (appeals) erred in confirming the disallowances of personnel, legal & professional expenses and adding interest received under the head income from other sources made by the assessing officer.
2. The Learned CIT(Appeals) and the assessing officer erred in coming to a conclusion that by applying the matching principles without considering the trade practice of setting up a business and also erroneously applying the decision of Tuticorin Alkali Chemicals Case rendered by the apex court since it was the surplus money in that case was brought to taxation and not otherwise. 3. The Learned CIT (appeals) failed to appreciate the fact that unit was set up and but for the delay in getting completion certificate from municipal authorities, the unit would have commenced operations. 4. The Learned CIT (Appeals) erred in confirming the interest taxed under fixed deposits prior to starting the business under the head “Income from other sources” by overlooking the decision of Delhi High Court in NTPC’s SAIL Case which is the latest decision and it clearly stated that the interest earned on fixed deposits will only go to reduce the cost of project. 5. For the above reasons and such other reasons to be adduced at the time of hearing Your Appellant prays that the addition made by the Learned Deputy Commissioner of Income tax may be deleted and justice rendered in accordance with law. 3. As seen from the above ground Nos.1 to 3 is with regard to expenses relating to personnel, legal and professional expenses.
3.1 The facts of the issue are that the AO disallowed the expenditure of `94,64,729/- claimed under personnel, legal and professional expenses on the ground that AO was not satisfied with matching concept of income and corresponding expenditure by placing reliance in the decision of Supreme Court in the case of Tuticorin Alkali Chemicals And Fertilizers Ltd. Vs. CIT in 227 ITR 172 (SC). Hence, the AO disallowed the expenses claimed by the assessee to the tune of `94,64,729/- as expenditure towards employee benefits and other expenses. Aggrieved by the order of ld. Assessing Officer, the assessee carried the appeal before the Ld.CIT(A).
3.2 Before the Ld.CIT(A), the assessee submitted that the assessee is constructing a hotel at Chandigarh under the brand name of Aloft and during the relevant year construction of hotel was substantially completed. As per original plan, construction of hotel was to be completed by January 2012, and commercial operation was to start from March 2012. There was no delay on the part of assessee. Though construction was completed substantially, completion certificate from Zircapur municipality could not be obtained during the relevant year due to legal issue. There was a civil contempt petition relating to the non-compliance with the directions passed by the Hon’ble High court of Punjab and Haryana in 1998, relating to certain alleged illegal encroachment of the area appurtenant to the national of the affidavit filed before the High Court, Chandigarh and also copy of the approval from municipal council Zirkapur. Chandigarh. Further, it was submitted that government permission letter was dated 26-03-2012, and finally, completion certificate was obtained by the assessee in April 2012.
3.3 The assessee company under the license from Starwood hotels & Restaurants, USA constructs the hotel under the brand name Aloft.
In terms of License agreement with Starwood Hotels dated 10/11/2008, the assessee company hotel managerial staff and personnel have to be properly trained as per standards and procedures of Starwood and also it is the usual practice in the hospitality industry, staff in all departments have to be on board for the trial run in all the departments at least 3 months prior to opening of hotel. As per the original plan, all the staff have to be on board in January 2012, unfortunately, delay in getting completion certtificate from the municipality, dragged the matter.
Expenses disallowed are: a. Employee Cost Rs 80,09, 7433/ b.Other Expenses Rs 14,54,986/- 3.4 Employee cost includes salaries, wages and contribution to provident and other funds. Further personnel employed were only operational staff The breakup of staff expenses along with designation is given. The ld.A.R pleaded before Ld.CIT(A) that all personnel employed relate to operational. Other expenses include Duties and Taxes, legal and professional charges and audit fees. The decision of Tuticorin Alkali Chemicals relied on by the Assessing Officer is erroneous as the case deals with treatment of interest received during construction period and facts of present case is totally different. In this connection, the assessee rely on the decision of CIT Vs Saurashfra Cement& Chemical Industries Ltd. (1973) 91 ITR 170 (Gujarat) wherein the Hon’ble High Court held that “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.
3.5 It was submission of the assessee that in this case, the assessee is in the business of manufacture and sale of cement. For this purpose, it leased a quarry for extraction of limestone for the manufacture of cement. The activity of quarrying the leased area of land and extracting limestone from it was as much an activity in the course of carrying on the business as the other two activities of manufacture of cement and sale of manufactured cement. The business could not in fact be carried on without this activity. This activity came first in point of time and laid the foundation for the second activity, and the second activity when completed, laid the foundation for the third activity. The business consisted of a continuous process of these three activities and when the first activity was started with a view to embarking upon the second and the third activities, it clearly amounted to commencement of the business. It might be that the whole business was not set up when the activity of quarrying the leased area of land and extracting limestone was started. That would be set up only when the plant and machinery was installed, the manufacture of cement started and an organisation for sale of manufactured cement was established. 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.
3.6 It was contended by assessee 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. The conclusion reached by the Tribunal could not, therefore, be said to be unreasonable or perverse or based on no evidence at all.
“The assessee commenced its business when it started activity of extraction of limestone by quarrying leased area of land”
3.7 According to assessee, in the present case, the assessee company had substantially completed construction of hotel and due to unforeseen situation, completion delayed with corresponding delay in commencement of operations and as per the agreement with Star- wood employees were recruited. The delay in commencement of business due to outside forces on which the appellant had no control and hence disallowance of entire expenses is incorrect in law and unreasonable. In view of the above facts and circumstances of the case, the assessee submits that expenses be allowed.
3.8 However, ld.CIT(A) observed that the AO has treated the pre- operative expenses under lead ‘personal, legal and professional expenses’ as capital in nature and disallowed the appellant’s claim of the same as revenue expenditure. According to Ld.CIT(A), due to delay in getting the completion certificate from municipal authorities, the appellant’s business could not commence and therefore the expenditure related to administration should be allowed as revenue expenditure. Further, Ld.CIT(A) observed that it is clear from the assessee’s submission that it has admitted that the aforesaid expenditure was indeed pre-operative expenditure incurred before the commencement of business. The decision in the case of Tuticorin Alkali Chemicals and fertilizers Ltd. (227 ITR 172 (SC) ) is briefly mentioned below:
“Section 72 of the Income Tax Act, 1961 — Loss — Set off and carry forward of— Assessement year 1980-81 — Whether interest income earned on short-term deposit of funds before commencement of busmess dunnq setting —up of factory could be set off against loss of company —Held, No.”
Besides the above case law, the AO has also relied on the decisions mentioned below: a. Akzo Nobel Car Refinishes India (P’j Ltd. Vs. DCIT (ITAT, Del) 25 SOT 226 b. ITO Vs. Omni globe Information technologies India (P) Ltd (ITAT, Del) 131 lTD 280 c. Orient Cosmetics Ltd. Vs. DCIT (ITAT, Mad) 74 lTD 135 Apart from the above decisions, Ld.CIT(A) mentioned the decision of the ITAT Chennai in the case of Mac Industrial products Ltd. Vs. ACIT [2006) 101 lTD 191 (ChennaI) (TM) in which it has held as under:-
Section 37(1) of the Income-tax Act, 1961-Business expenditure — allowability of— assessment years 1994-95 and 1 995-96- Whether where assesse company set up a new project which was separate and distinct from its existing business, pre-operative expenses, interest on term loan and financial consultancy charges incurred towards the said project could be allowed as revenue expenditure — Held, no,, 3.9 Further, Ld.CIT(A) observed that in the case of CIT Vs Saurashtra Cement& Chemical Industries Ltd. (1973) 91 ITR 170 (Gujarat) and the aforesaid decision is not applicable to facts and circumstances of the appellant’s case. In the said decision, the assessee had in fact commenced its business of extraction of limestone whereas in the appellant’s case, it has not commenced its business. In view of above remarks and decisions relied on, the AO’s disallowance is upheld and the appellant’s ground on this issue is dismissed. Against the order of Ld.CIT(A), now the assessee is in appeal before us.
I have heard both the parties and perused the material on record. In this case it is admitted fact that the assessee has not commenced the business of it, so it cannot be said that the expenditure incurred exclusively for the purpose of carrying on the business of the assessee and it cannot be allowed as business expenditure, when the assessee has not commenced the business.
Accordingly, I do not find any infirmity in the order of the CIT(Appeals) and the same is confirmed. Hence, this ground of appeal raised by the assessee stands dismissed.
The next issue is with regard to assessment of interest income from deposits as income from other sources.
The facts of the issue are that during the assessment year under consideration the assessee received interest income of `4,10,925/- and adjusted it against capital work in progress. The ld. Assessing Officer disallowed the said adjustment and treated interest as income from other sources by relying on various Apex Court’s judgments. Aggrieved by the order of ld. Assessing Officer, the assessee carried the appeal before the Ld.CIT(A). Before Ld.CIT(A), the assessee placed reliance in the case of NTPC SAIL Power Company Pvt Ltd. Vs. CIT in of Delhi High Court wherein the Hon’ble High Court has considered the apex court decision of Tuticorin Alkali Chemicals case and also Bokaro Steel’s Case and came to a conclusion that the interest earned on deposits inextricably linked with the setting up of the project will go to reduce the project cost . Whatever income earned will only go to reduce the cost of the project and the income is exempted from the purview of taxation. In view of the above decision, stand of the appellant that interest earned on margin money deposits to be netted off project cost, be allowed.
6.1 The Ld.CIT(A) observed that the AO noticed that the appellant had declared interest income which was set off against capital work in progress. The AO has assessed the interest on bank deposits during the pre-production period under the head, Income from other sources’ and denied set off against pre-operative expenses under the head, ‘Business income’ by relying on the apex court’s decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs. CIT (cited supra).
6.2 Ld.CIT(A) was of the considered opinion that the issue under consideration has been squarely covered in favour of Revenue by the decision of the apex court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT (1997) 227 ITR 172. The decision of the apex court is briefly mentioned below for ready reference:
‘Section 56 of the Income-tax Act, 1961 - Income from other sources Chargeable as - Assessment year 1 980-81 - Whether interest earned on short-term investment of funds borrowed for setting-up of factory during construction of factory before commencement of business has to be assessed as income from other sources and it cannot be said that interest income is not taxable on ground that it would go to reduce interest on borrowed amount which would be capitalized - Held, yes. Section 72 of the Income-tax Act, 1961 - Loss - Set off and carry forward of- Assessment year 1980-81 - Whether interest income earned on short-term deposit of funds before commencement of business during setting-up of factory could be set off against loss of the company - Held, no”
6.3 Further, Ld.CIT(A) observed that the decisions relied on by the appellant’s AR were not applicable to the facts and circumstances of the appellant’s case. According to Ld.CIT(A), in view of the above remarks and in line with the apex court’s decision, the addition made by the ld. Assessing Officer is to be sustained and the appellant’s ground on this issue was dismissed. Against the order of Ld.CIT(A), now the assessee is in appeal before us.
Before us, ld.A.R submitted that the interest income earned was linked with setting up of the project and it has to be reduced from the cost of project. However, there is no evidence brought on record by the assessee to show that the assessee has made fixed deposit out of money borrowed for the purpose of setting up the project.
Hence, I am of the opinion that the judgement of Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT (1997) 227 ITR 172(SC) is squarely applicable to the facts of the present case of assessee wherein it was held that:-
“the company had surplus funds in its hands. In order to earn income out of the surplus funds, it had invested the amount for the purpose of earning interest. The interest thus earned was clearly of revenue nature and would have to be taxed accordingly. The accountants might have taken some other view but accountancy practice was not necessarily good law. This was not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as it liked. The application of the income for payment of interest would not affect its taxability in any way. The company could not claim any relief under section 70 or section 71 since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting years. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business could not be allowed as deduction, nor could it be adjusted against any other income under any other head. Similarly any income from a non- business source could not be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee.”
In view of the above decision of Supreme Court, I do not find any infirmity in the Ld.CIT(A) and the same is confirmed. This ground of appeal raised by assessee stands dismissed.
9. In the result, the appeal of assessee is dismissed. Order pronounced on 02nd November, 2017.