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Income Tax Appellate Tribunal, DIVISION BENCH’A’, CHANDIGARH
Before: SHRI. SANJAY GARG & Dr. B.R.R. KUMAR
IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH’A’, CHANDIGARH BEFORE SHRI. SANJAY GARG, JUDICIAL MEMBER AND Dr. B.R.R. KUMAR, ACCOUNTANT MEMBER ITA Nos.455 & 456/Chd/2016 Assessment Years: 2010-11 & 2011-12 CSJ Infrastructure Private Ltd. Vs. JCIT Range-II 178-178 A Industrial Area, Chandigarh Phase-1, Chandigarh
PAN No. AACCC8021G
(Appellant) (Respondent)
Assessee By : Shri. Ajay Jain Department By : Smt. Chandrakanta
Date of hearing : 23/01/2018 Date of Pronouncement : 16/03/2018
ORDER PER DR. B.R.R. KUMAR, A.M:
Both the above appeals have been filed by the Assessee against the similar order of Ld. CIT(A)-1, Chandigarh dt. 29/03/2016.
Since the issues raised in both the appeals are common therefore they are being disposed off by a consolidated order for the sake of convenience. We shall take ITA No. 455/Chd/2016 for A.Y. 2010-11as a lead case.
Assessee has raised the following grounds in ITA No. 455/Chd/2016:
The learned CIT (A) has erred in not allowing deduction of expenditure amounting to Rs. 54,37,633/- incurred for the purpose of business in computing income under the head 'profit and gains of business or profession' on the basis that the business of the assessee is not commenced & Consequently, the CIT (A) has erred in not allowing set off of the business loss against the interest income earned as per section 71 of the Act.
That without prejudice to ground no. 1, the CIT (A) has wrongly upheld that the interest is taxable & he failed to appreciate the fact that the interest income has direct nexus with construction activities carried by appellant & therefore it should be deducted from work in progress. 3. Without prejudice to ground no. 1 & 2 above, the CIT(A) has erred in not granting the deduction of interest paid u/s 5 7(iii) against the Income taxed u/s 5 7(iii).
Brief facts of the case on this issue are that during the relevant assessment year the appellant was engaged in the development of a 1.10 million sq.ft. integrated project comprising of shopping mall, office space and a hotel at plot No. 178-178A, Industrial Area, Phase-I, Chandigarh. The only income declared during the relevant year is interest on bank deposits amounting to Rs. 4,49,516/- and other income of Rs. 20,464/-. Against this income the appellant had claimed administrative and other expenses amounting to Rs. 54,37,633/- declaring a loss at Rs. 49,22,650/- in its return of income. It was held by the Assessing Officer that the assessee has not commenced the business activities during the year under consideration and therefore the assessee is not entitled to set off the expenses of Rs. 54,37,633/- against the interest income. The Assessing Officer treated the expenses of Rs. 54,37,633/- as preliminary expenses incurred in relation to the project and the same were disallowed to be carried forward. The Assessing Officer has relied upon the judgement in the case of Saraf Textile Industries vs. CIT (217 ITR 507) wherein it was held that administrative expenses claimed by the assessee was allowable u/s 35D of the Income Tax Act, 1961 (hereinafter referred to as 'Act’ and therefore could not be adjusted against the interest income. The Ld. CIT(A) has upheld the action of the Assessing Officer. The rationale of Ld. CIT(A) while upholding the action of the Assessing Officer is as under:
i. On perusal of the decision in the case of Samar Estate Pvt. Ltd. it is found that the issue before Hon'ble Tribunal in this case was (i) to decide whether interest income is to be assessed as business income because assessee had already commenced business, (ii) whether the business of the assessee company has commenced and as such the company was eligible for any relief u/s 70 or 71 of the Act. Though the Ld. ITAT has observed that at para 10 of the said order that "in case of a construction company, once construction activities starts then it can definitely be said that business has commenced. In the case before us the assessee has purchased various materials and has incurred labor charges and other expenses like administrative expenses, salaries, electricity, machinery repair etc. However, since flats were not complete, therefore, all these expenses along with material etc. have been shown as 'work in progress', it is learnt that Hon'ble ITAT has not adjudicated upon the issue that whether the assessee company was eligible for any relief u/s 70 or 71 of the Act. Hence, the reliance upon the judgement in the case of Samar Estate Pvt. Ltd. cannot be accepted.
ii. In the present case, as per schedule H, the appellant has claimed expenses e.g. staff expenses, communication expenses, rent rates and taxes, printing and stationery, professional charges, guest house expenses and miscellaneous expenses etc. amounting to Rs. 54,37,633/- in its profit & loss account. Against such expenses there is no sale receipt shown in the profit & loss account. The only credit in the profit & loss account as interest income on FDRs for Rs. 4,49,516/- and other income of Rs. 20,464/- abundantly reflects that these two receipts are not on account of day to day business activities of the appellant.
iii. It is an admitted fact that in the relevant year under consideration the appellant has shown capital work in progress (construction expenses) of Rs. 97,91,32,224/- in its books of accounts.
iv. It was further admitted that the commercial space remained under construction during the year and was not ready for sale. When appellant itself had shown the entire construction expenses as capital work in progress and admits that the stock was not ready for sale, the ancillary receipts under the head 'income from other sources' cannot be considered to determine that the appellant has commenced the business.
v. In absence of corresponding sale receipts reflecting the commencement of day to day business activities, the preliminary expenses cannot be allowed as revenue expenditure as a whole in the profit & loss account in the relevant year.
vi. These preliminary expenses in nature of staff expenses, communication expenses, rent rates and taxes, printing and stationery, professional charges, guest house expenses and miscellaneous expenses are required to be amortised over a period as per the provisions of the Act.
vii. Further, on the issue that under which head the interest income earned by the assessee company has to be assessed i.e. as 'income from other sources' or 'business income', it was decided by the Ld. ITAT in the case of Samar Estate Pvt. Ltd. (supra) that the interest income cannot be treated income from other sources.
viii.The facts of the case of the appellant is distinguishable on this account as the appellant itself had shown the interest income earned on FDRs (made out of idle funds available through disbursement of loan) as income from other sources.
ix. In the case of the asseesse the bank had disbursed the amount of loans in installments and the amount which was not utilized immediately was kept in FDRs. Hence under no circumstances it can be considered to be incurred for the purpose of earning income from FDRs. The expenses on account of interest paid to the bank cannot be denied to the appellant but it has to be given only against the business income of the appellant. He opined it would be absurd to compute the proportional interest relevant to the investment in FDRs and adjust the same against income from FDRs as it would always be a loss because bank charges more interest on loan given and gives less interest on FDRs.
Before us the Ld. AR submitted that the observations of the Ld. CIT(A) are entirely on unacceptable propositions. It cannot be said that if the sales have not been commenced as observed by the Ld. CIT(A) doesn’t mean that the business has not started. It was argued that the commercial space was under construction during the year. The expenses incurred are related to marketing office, rental expenses, printing & stationary expenses and other miscellaneous expenses.
He relied on the decision of Hon’ble Delhi High Court in case of Samsung India Electronics 356 ITR 354 wherein it has been held that the expenses incurred on commencement of business are permissible deductions. In the case of Samar Estates Pvt. Ltd. 170 TTJ 14 the coordinate Bench of ITAT, Chandigarh held that it was not correct and observing that assessee had not commenced its business. In case of construction company, once construction activity started then it could definitely be said that business had commenced. In the case of Hughes Escorts Communication Ltd. 75 CCH 0940 (Del) wherein it was held that business can be deemed to have commenced when the first purchase order was placed. Whereas in this case the construction is already on the way. The details of the FDR’s have also been submitted wherein the interest of Rs. 494519/- has been earned on various deposits from September 2009 to March 2010 of periods varying from 91 to 11 days
Ld. DR relied on the order of the lower authorities.
We have carefully considered the rival submissions and gone through the facts placed before us. At no stretch of imagination it can be said that business has not commenced since the first sale has not been taken place ignoring the fact that the commercial place was under construction and full- fledged business activity have been undertaken by the assessee. The interest earned is also a part of the business activity. And the assessee is eligible for deductions under section 57(iii). Since it has been adjudicated that the business has already commenced the assessee would be at liberty to claim the benefit of provisions of Section 71.
In the result both the appeals of the assessee are allowed.
Order pronounced in the Open Court.
Sd/- Sd/- (SANJAY GARG) (DR. B.R.R. KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 16/03/2018 AG Copy to: The Appellant, The Respondent, The CIT, The CIT(A), The DR