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Income Tax Appellate Tribunal, DELHI BENCH ‘B’, NEW DELHI
ORDER PER N.K. SAINI, A.M. This is an appeal by the department against the order dated 24.05.2012 of the ld. CIT(A)-XIII, New Delhi.
The only effective ground raised in this appeal reads as under:
“Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 3,71,92,193/- made by the Assessing Officer by treating the revenue expenditure as pre operative expenses which needs to be capitalized?”
2 DLF Homes Panchkula Pvt. Ltd.
Facts of the case in brief are that the assessee was incorporated on 09.04.2007 and was engaged in Real Estates Business. The assessee filed its e-return of income declaring loss of Rs. 3,71,92,193/- on 25.09.2009. Later on, the case was selected for scrutiny. During the course of assessment proceedings, the AO noticed that the assessee was mainly engaged in development of housing project at Panchkula and had not started income recognition because the project was at very initial stage. The AO further observed that the assessee had shown income of Rs. 1,50,898/- which was mainly because of liability return back and there was no income on account of business activity. However, in the expenditure side the assessee had booked expenditure of Rs. 3,73,40,511/-. According to the AO the assessee should have capitalized all those expenses because the business operation of the assessee has not started. He, therefore, added back the expenditure in excess of income amounting to Rs. 3,71,92,193/- to the income of the assessee.
Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted as under:
“11. The Assessment Order passed by the Assessing Officer is based on wrong interpretation of law, All expenses are allowable after business have been set up. Allowability of 3 DLF Homes Panchkula Pvt. Ltd. expenses cannot be denied merely because no revenue has been earned during the year. Assessing Officer has also mentioned in the Assessment Order that Assessee was incorporated on 09.04.2007 and is engaged in Real Estate Business. In the Assessment Order it has also been verified that company is engaged in development of housing project at Panchkula. Further, while passing the Assessment Order, Assessing Officer has given findings in the Order which are contradicted to the final calculations. In the Assessment Order at page 2 in para 3, Assessing Officer has mentioned as under:- "The Assessee should have capitalized all these expenses accepting small expenditure, which are essential for day to day operation." Whereas in the calculation of Assessed Income AO have disallowed all expenses and assessed income at Nil. Appellant has already acquired development rights on 172.46 acres of land for the purpose of real estate development at village Bhagwanpur, Tehsil Kalka, District Panchkula. Further, the company has already filed an application on September 04, 2007 with the State Authorities for grant of license for setting up of an integrated residential township on 136.89 acres. In this matter please find enclosed copy of audited annual accounts for the year ending 31.03.2009 relevant to the assessment year 2009-10 at page 1 to 25. Kind reference is invited to schedule -5 (inventory) of the Balance Sheet which contained the details of inventory evidencing the fact 4 DLF Homes Panchkula Pvt. Ltd. that the project is already in progress and the assessee has commenced its business. Further Note No. 7 to 9 of schedule - 15 (Notes to Accounts) of the Balance Sheet, is reproduced as follows: "7. The Company has acquired development rights on 172.46 acres of land for the purpose of real estate development at Village Bhagwanpur, Tehsil Kalka, District Panchkula. For the purpose, the Company has filed an application with the State Authorities on September 04, 2007 for grant of license for setting up of an integrated residential township on 136.89 acres. Subsequently, the State Government on September 26, 2007 published notification in official gazette under section 4 of The Land Acquisition Act, 1894 notifying their intention to acquire the specified land for the purpose of development of residential area. Land measuring 26 acres forming part of the Company's above project got covered under the Government's land acquisition notification. Since the Company had applied for license for development of township prior to the date of government notification, the Company filed its objection under Section 5A of the Land Acquisition Act, 1894 on behalf of the land owning company for release of 27 acres of land from the land acquisition proceedings in line with the conditions given in State Government's Memo No. 6/30- 2007/2TCP dated October 26, 2007 regarding government policy for release of land from acquisition proceedings. The management is confident that the Company shall receive approval for release of land from acquisition notification from the State Government shortly and is in the process of undertaking the project layout and other development activities for execution of the project. The management believes that upon launch of the project, the balance project costs shall 5 DLF Homes Panchkula Pvt. Ltd. be funded out of advances from customers and from funding in the form of compulsorily convertible debentures for which the Company already has commitment from its existing debenture holders to the extent of Rs. 146,250,000 as at the balance sheet date. Accordingly, these financial statements have been prepared on a going concern basis.
As per the information available with the Company, no transactions have been entered with suppliers as defined under The Micro, Small and Medium Enterprises Development Act, 2006. Therefore, no disclosures are made as required under the said Act.
The Company has entered into agreements to sell (ATS) for purchase of lands aggregating to 3.74 acres for total purchase consideration of Rs.37,695,000 and has given advances aggregating to Rs.3,769,500 to land owners on December 26, 2007. The Company has also entered into collaboration agreements with the land owners on December 20, 2007 for development of the said land. The said land is covered under the Government Land Acquisition notice under section 4 of The Land Acquisition Act, 1894. The management believes that the Company will be able to develop the said land under the collaboration agreement once the Company receives the licence for development of its 136.89 acres of land as mentioned in Note 7 above and the advance given will be adjusted against the consideration for collaboration agreement. In the scenario of compulsory acquisition of land by the Government, the Company shall be entitled to recover the advance given from the land owners". During the year, following expenses were incurred amounting to Rs. 3,71,92,193/- which comprising the followings:-
6 DLF Homes Panchkula Pvt. Ltd. i) Personnel expenses - Rs. 35,73,399/- ii) Operating and other expenses - Rs. 3,36,68,287/- iii) Financial expenses - Rs. 96,683/- iv) Depreciation - Rs. 2,142/- v) Preliminary expenses - Rs. 2580/- (1/5 of Rs. 12,900/-) vi) Less: other income Rs. 1,50,898/- Major head of expense "Operating and Other expenses" Rs. 3,36,68,287/- was containing Advertising & Publicity Expenses amounting to Rs. 2,84,87,958/- relating to publicize the marketing campaign of its new project launched at Panchkula and the assessee had incurred expenses on advertisement in newspaper, printing of banners etc. We further wish to submit that the company is in the business of real estate and that whenever a new project is launched it is necessary to publicize the project aggressively and intensively and Advertisement and Publicity Expenses were incurred to publicize the marketing campaign of its new project. You will kindly appreciate that there is no dispute about the fact that the business had commenced during the year in which development rights for the land were acquired and development work started and all expenses incurred after the commencement of business are allowable. Keeping in view the nature of expenses and commercial expediency of the business, you will kindly appreciate that all expenses have been incurred wholly and exclusively for the purpose of business and are allowable as revenue expenditure.”
The reliance was placed on the following case laws: � CIT Vs Modi Olivetti Ltd. 84 TTJ 1038 (Del)
7 DLF Homes Panchkula Pvt. Ltd. � CIT Vs Berger Paints (India) Ltd. 254 ITR 503 � DCIT Vs Core Healthcare Ltd. 308 ITR 263 � CIT Vs Salora International Ltd. 308 ITR 199 � CIT Vs Aluminium Industries Ltd. 234/214 ITR 541 (Ker) � Empire Jute Co. Ltd. Vs CIT 124 ITR 1 (SC) � CIT Vs Citi Financial Consumer Finance Ltd. 2011 335 ITR 29 (Del) 6. It was further submitted that there is a distinction between setting up of the business and the commencement of the business and as per Income Tax Act, 1961 what is relevant is the setting up of business and not commencement of the business. It was contended that the expenditure incurred after the business is set up may be allowed u/s 30 to 37 of the Act even if it is incurred before the business had actually commenced. It was further contended that a similar issue has been decided by the ITAT Delhi Bench ‘C’, New Delhi in favour of one of group companies M/s Regency Park Property Management Services Pvt. Ltd. Vs CIT for the assessment year 2005-06. It was submitted that the business of the assessee had been set up as soon as it had acquired development rights in lands. Therefore, all the expenses incurred by the assessee after set up of its business were allowable. The reliance was placed on the following case laws: � CIT Vs Sarabhai 192 ITR 151 � Western India Vegetable Products Vs CIT 26 ITR 151 � Prem Vs CIT 108 ITR 654 8 DLF Homes Panchkula Pvt. Ltd. � CIT Vs Western India 199 ITR 777 � CIT Vs Piem Hotel 209 ITR 616 � CIT Vs L G Electronics (India) Ltd. (2006) 282 ITR 545 (Del) � CIT Vs Herbalife International India (P) Ltd. 297 ITR 303 (Del) � CIT Vs Sarabhai Management Corpn. Ltd. (1991) 192 ITR 151 � Whirlpool of India Ltd. Vs JCIT (2008) 19 SOT 593 � CIT Vs Sponge Iron Ltd. 201 ITR 770, 780 (AP) � M/s Club Resorts Pvt. Ltd. 287 ITR 552 (Mad) � DCIT Vs Core Health Care Ltd. 298 ITR 194 (2008) (SC) 7. The ld. CIT(A) after considering the submissions of the assessee deleted the addition made by the AO by observing in para 4.3 of the impugned order as under: “4.3 I have considered the observation of the Assessing Officer and submission of the appellant. It is seen that the appellant company was incorporated on 09.04.2007 and as per Memorandum & Article of Association it was engaged in the business of Real Estate. Appellant has already acquired development rights on 172.46 acres of land for the purpose of real estate development at village Bhagwanpur, Tehsil Kalka, District Panchkula. Further, the company has already filed an application on September 04, 2007 with the State Authorities for grant of license for setting up of an integrated residential township on 136.89 acres and approval for the same was published in Official Gazette on 26.09.2007. Further appellant has placed on record copy of audited annual accounts for the year ending 31.03.2009. Schedule-5 (inventory) of the Balance Sheet which contained the details of inventory evidencing the fact that the project is already in progress and the appellant has 9 DLF Homes Panchkula Pvt. Ltd. commenced its business. The appellant has spent Rs. 268.34 crores on purchasing various inventories which is shown as work in progress at Schedule-5 page 11 of the paper book. The description of Schedule-5 shows that appellant has undertaken various activities on the land acquired like land development survey expenses, procuring of development rights, brokerage expenses, project management expenses etc. All these expenses prove that business activities of the appellant has already started during the year and expenses incurred on the project have been capitalized, except the routine expenses on running the company which have been claimed as business expenditure. The project has started during the year and work is in progress, therefore, no revenue could be recognized during the year by appellant company. However, facts prove that appellant was in the business and same continued in the subsequent year. If there are no Sales in a particular year that does not mean that appellant was not doing its business activities. In the construction business revenues are recognized after the project raised to some stage. In the current year the project was started and it did not reach to the stage where revenue could be recognized. Therefore, the observation of the Assessing Officer that business operation of the company has not commenced is not correct. The appellant has paid salary expenses of Rs. 35,73,399/- and has also incurred expense on advertisement and publicity of Rs. 2,84,87,958/-. The advertisement & publicity expenses have been incurred for giving advertisement about the project in the news paper and other visual media. Therefore, expenses incurred on making publicity of the projects are wholly and exclusively for the business purposes of the appellant and such expenses are fully allowable. In view of the facts discussed above it is held that business of the appellant company has commenced during the year and expenses of Rs. 3,71,92,193/- were incurred mainly on salary and advertisement were wholly 10 DLF Homes Panchkula Pvt. Ltd. and exclusively for business purposes. Hence, the same are held allowable and disallowance made by the Assessing Officer is deleted.”
8. The reliance was placed on the following case laws: � M/s Club Resorts Pvt. Ltd. 287 ITR 552 (Mad) � Sarabhai Management Corpn. Ltd. Vs CIT (1976) 102 ITR 25 (Guj.) � CIT Vs Herbalife International India (P) Ltd. 297 ITR 303 (Del) � CIT Vs Agra Beverages Corporation (P.) Ltd. (2011) 11 Taxmann.com 350 (Del) � Adidas India Marketing (P.) Ltd. Vs Assessing Officer, Ward 1(2), New Delhi (2011) 10 Taxmann.com 18 (Del) � CIT Vs Salora International Ltd. (2009) 308 ITR 0199 9. Now the department is in appeal. The ld. DR strongly supported the assessment order dated 29.12.2011 and reiterated the observations made in the said order. It was further stated that the assessee did not commence its business activity, therefore, the expenses incurred were capital in nature and were not allowable as revenue expenditure. Therefore, the ld. CIT(A) was not justified in deleting the addition made by the AO.
In his rival submissions the ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the issue under consideration is squarely covered by the judgment of the Hon’ble Jurisdictional High Court in 11 DLF Homes Panchkula Pvt. Ltd. the case of CIT Vs Dhoomketu Builders and Development Pvt. Ltd. (2014) 368 ITR 680 (Del).
We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted fact that the AO accepted the incurring of expenditure for business purpose, his only objection was that those expenses were capital in nature and not revenue in nature as claimed by the assessee, on the basis that the commercial activity of the assessee did not commence. In the instant case it is an admitted fact that the assessee company was incorporated on 09.04.2007 and it acquired development rights on 172.46 acres of land for the purpose of Real Estates Development at Village Bhagwanpur, Tehsil Kalka, District Panchkula. The assessee acquired the approval from the State Government for setting up of residential township on 136.89 acres, the approval was published in Official Gazette on 26.09.2007 and the expenses in question were incurred by the assessee for its business purposes. However, the project which was started in this year did not reach to the stage where revenue could be recognized but it cannot be said that the expenses incurred by the assessee were not for the business purposes. On a similar issue the Hon’ble Jurisdictional High Court affirmed the decision of the ITAT Delhi, in deleting the similar type of addition which was made by the AO in similar circumstances in the case of CIT Vs Dhoomketu Builders and 12 DLF Homes Panchkula Pvt. Ltd. development Pvt. Ltd. (supra). The Hon’ble Jurisdictional High Court in the said case has held as under: “There is a difference between the setting up and commencement of business. When a business is established and is ready to commence business then it can be said of that business that it is set up. But before it is ready to commence business it is not set up. But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deductions. The question as to when a business can be said to have been set up is a question of fact to be ascertained on the facts and circumstances of each case and considering the nature and type of the particular business and no universal test or formula applicable to all types of businesses can be laid down. The commencement of real estate business would normally start with the acquisition of land or immovable property. When an assessee whose business is to develop real estate, is in a position to perform certain acts towards the acquisition of land, that would clearly show that it is ready to commence business and, as a corollary that it has already been set up. The actual acquisition of land is the result of such efforts put in by the assessee; once the land is acquired the assessee may be said to have actually commenced its business which is that of development of real estate. The actual acquisition of land may be the first step in the commencement of the business but section 3 of the Act does not speak of commencement of the business, it speaks only of setting up of the business.”
13 DLF Homes Panchkula Pvt. Ltd. 12. We, therefore, keeping in view the ratio laid down by the Hon’ble Jurisdictional High Court in the aforesaid referred to case, do not see any infirmity in the order of the ld. CIT(A). Accordingly, we do not see, any merit in this appeal of the department.
In the result appeal of the department is dismissed. (Order Pronounced in the Court on 14/10/2015).