Income Tax Appellate Tribunal - Delhi
Arcane Developers Pvt. Ltd., New Delhi vs Department Of Income Tax on 10 September, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH "A" NEW DELHI)
BEFORE SHRI RAJPAL YADAV AND SHRI SHAMIM YAHYA
ITA No. 4635/Del/2010
Assessment Year: 2007-08
Arcane Developers Pvt. Ltd., Vs. Income-tax Officer,
th
11 Floor, Narain Manzil, Ward 2(1),
23-Barakhamba Road, New Delhi.
New Delhi.
(PAN: AAFCA7575C)
(Appellant) (Respondent)
Cross Obj. No. 376/Del/2010
( In ITA No. 4635/Del/2010 )
Assessment Year: 2007-08
Income-tax Officer, Vs. Arcane Developers Pvt. Ltd.,
Ward 2(1), 11th Floor, Narain Manzil,
New Delhi. 23-Barakhamba Road,
New Delhi.
(PAN: AAFCA7575C)
(Appellant) (Respondent)
In ITA No. 5471/Del/2010
Assessment Year: 2007-08
Income-tax Officer, Vs. Arcane Developers Pvt. Ltd.,
Ward 2(1), 11th Floor, Narain Manzil,
New Delhi. 23-Barakhamba Road,
New Delhi.
(PAN: AAFCA7575C)
(Appellant) (Respondent)
Appellant by: Simran Mehta, Adv.
Respondent by: Shri Umesh Chandra, Sr.DR
ORDER
PER RAJPAL YADAV: JUDICIAL MEMBER The assessee and revenue are in cross-appeals before us against the order of Learned CIT(Appeals) dated 10.09.2010 passed for assessment year 2 2007-08. The revenue on receipt of notice, in the appeal of assessee, has filed cross-objection bearing No. 376/Del/2010.
2. First, we take up the appeal of revenue i.e. ITA No.5471/Del/ and its cross-objection bearing No.376/Del/2010. The solitary substantial ground of appeal projects the grievance of the revenue as under:
"1. The Learned CIT(Appeals) has erred on facts and in law in holding that the assessee's business was set up and allowing the assessee's claim of Rs.1,26,64,315 u/s. 36(1)(iii) of the I.T. Act, as interest expenses and on similar grounds also deleting other disallowance of Rs.2,32,,582 ignoring that as per decision of Hon'ble Supreme Court in the case of Ramaraju Surgical Cotton Mills Ltd. (63 ITR 478) a unit cannot be said to have been set up unless it is ready to discharge the function for which it is being up set. Reliance is also placed on the decision of Hon'ble Kerala High Court in the case of S.P.V. Bank Ltd. Vs. CIT (126 ITR 773)."
3. In the cross-objection, the revenue has taken a similar grounds of appeal. Therefore, we take up both these grounds together.
4. The brief facts of the case are that assessee company has filed its return of income on 23rd October, 2007 declaring a loss of Rs.31,75,090. The case of the assessee was selected for scrutiny assessment and a notice under 3 section 143(2) dated 16.9.2008 was issued to the assessee which was duly served upon it. In response to the notice, Shri Shridhar Dhabekar, CA appeared before the Assessing Officer. The assessee company was incorporated on 4.8.2005 under the Indian Companies Act, 1956. In the Memorandum of Association, it has been incorporated that main objects of the assessee company are to carry on the business as owner, supplier, colonizer, developers, promoters, proprietors etc. and to deal all kind of immoveable properties whether belonging to the company or not .......etc. For assessment year 2006-07, was the first assessment year and the company has filed its return of income on 29.11.2006 declaring a business loss of Rs.6,.612. The company has entered into a Memorandum of Understanding on 31.3.2006 with two other parties, namely, Vipul Limited and Shri Vardhaman Housing Building Pvt. Ltd. This Memorandum of Understanding was converted into a joint construction and development agreement on 15.7.2006. It was executed between the assessee, M/s. Vipul Limited and M/s. Vardhaman Housing Building Pvt. Ltd. The joint venture agreement was entered for the purpose of construction, development, management and sale of an industrial/I.T. Park at Mohali in the State of Punjab. According to the assessee, it has received proposal from Overseas Investors to participate in the Development of Real Estates Projects in India 4 and on the strength of those proposals, it has entered into the Memorandum of Understanding which was converted into a joint venture development agreement. As per the Memorandum of Understanding, the assessee was required to arrange funds which were to be used for acquiring the projects. The assessee arranged a short term loan of Rs. 25 crores from M/s. Dharti Investment Ltd. In the joint construction and development agreement, a nominee of the assessee was appointed on the board of projects as a director and signatory to the bank account to be operated by this project. The loan taken from M/s. Dharti Investment was returned out of share capital money etc. received by the joint venture. The assessee claimed interest expenses as a deduction. Learned Assessing Officer has disallowed the claim of the assessee on the ground that business of the assessee was yet in the process of being set up. According to the Assessing Officer, the business would be considered as set up when it is in such a position that it can deliver the result immediately. Learned Assessing Officer made reference to the judgment of Hon'ble Supreme Court in the case of Rama Raju Surgical Cotton Mills Ltd. reported in 63 ITR 478. He also made reference to the judgment of Hon'ble Bombay High Court in the case of Western India Vegetable Products Ltd. reported in 26 ITR 151 and the order of the ITAT in the case of JCIT vs. Sardar Sarover Narmada Nigam Ltd. reported in 93 ITD 321. Learned 5 Assessing Officer accordingly did not allow the deduction of interest expenses and made an addition of Rs.1,26,64,315. Similarly, he disallowed a sum of Rs.2,32,582 which was claimed by the assessee towards expenses incurred on audit fee, traveling expenses, statutory filing fees etc.
5. Dissatisfied with the disallowances, assessee carried the matter in appeal before the learned first appellate authority. It was contended by the assessee that learned Assessing Officer has misread the facts on the record. According to the assessee, the main activity of the assessee company is to finance the project through special purpose vehicles (hereinafter referred to SPV) to other local companies for buying land more than 100 acres or bringing other licenses from the Government Departments. According to the assessee, 75.39 acres of project land was acquired by the joint construction development agreement which took government's approval etc. Hence, it cannot be said that the assessee has not set up the business. The assessee put reliance upon the following judgments:
(i) CIT vs. ESPN Spftware India (P) Ltd. (2009) 184 Taxman 452 (Del.);
(ii) CIT vs. Hughes Escort Communications (2007) 165 Taxman 318 (Del.);6
(iii) CIT vs. Whirlpool of India Ltd. (2009) 185 Taxman 387 (Del.);
(iv) M/s. Tetron Commercial ltd. vs. CIT (2003) 133 Taxman 781 (Cal.);
(v) CIT vs. LG Electronics (India) Ltd. (2005) 149 Taxman 168 (Delhi);
(vi) CIT vs. Sarabhai Management Corpn. Ltd. 192 ITR 151(S.C).
6. Learned CIT(Appeals) has made an analysis of section 36(1)(iii) in the light of the facts presented by the assessee. Learned first appellate authority arrived at a conclusion that the business of the assessee was duly set up and the expenses were incurred in connection with its business. The assessee took the loan which was interest bearing. The loan amount was used for the purpose of the business and, therefore, expenses deserves tobe allowed.
7. With the assistance of learned representative, we have gone through the record carefully. The sole question for our adjudication is whether the assessee has set up the business and it has used the borrowed funds for the purpose of its business. Consequently, the interest expenses deserve to be allowed to the assessee or not. The case of the Assessing Officer in brief is that a business is to be construed as set up when it was established and was ready to commence. In case, it was not ready for commencement, it could 7 not be said to have been set up. According to him, the assessee company was not ready to discharge the functions in which it was incorporated as mentioned in its Memorandum and Article of Association. Whereas the case of the assessee is that in the Memorandum of Article of Association, the main object of the assessee company has been provided as to carry on the business as a owner, builder, colonizer, developer, promoters of the properties. In order to resolve the controversy, one has to look in whether assessee has taken active steps for fulfillment of its objects provided in the Memorandum of Article Association, the assessee had entered into a joint construction and development agreement with two more companies on 5.7.2006. The joint venture was in the process of acquiring land and government approvals. It required funds. According to the Memorandum of Understanding, assessee has to provide the funds for fulfillments of the objects of the joint venture. It has arranged the loan and the joint venture was able to acquire the land measuring 75 acres. The sequence of events suggest that assessee has taken active steps in accordance with its Memorandum and Article of Association. The controversy can be explained with the help of a simple example, namely, a person wants to run business of taxi operators. He purchased the taxi, parked it on a tax stand but was unable to get the passengers. Whether his business of a taxi operator has been set 8 up or not? In our understanding, his business of tax operation has been set up because he was in a position to deliver the results. It is a irrelevant factor that customers had approached him or not. In the present case also, the moment it entered into the joint venture agreement and arranged the funds for fulfillment of the objects of the joint venture would suggest the business was set up. Learned Assessing Officer has failed to construe the facts in right perspective.
8. The second aspect is whether interest expenses are to be allowed as a deduction or not. Section 36(1)(iii) provides as under:
"36(1) The deductions provided for the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 -
x x x x x x x x x x x
(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession:
Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the 9 books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction."
9. It suggests that money or the capital must have been borrowed by the assessee. It must have been borrowed for the purpose of the business and interest must have been paid on the borrowed amount then deduction in respect of such interest expenses would be allowed to the assessee. Though learned Assessing Officer has not advanced any reason for disallowance on this count. He simply disallowed because business was not set up which would indicate that borrowed funds was not used for the purpose of the business. In the foregoing paragraph, we have observed that business was set up, consequently, interest expenses incurred on the borrowed funds for the purpose of business and used for the purpose of the business is to be allowed. Learned first appellate authority has made a lucid analysis on this issue and reproduced the contentions raised by the assessee. After taking into consideration the detailed reasoned order of Learned CIT(Appeals), we do not wish to interfere in her finding.
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10. The next issue incorporated by the revenue in the first ground of appeal is that the Learned CIT(Appeals) has erred in deleting the disallowance of Rs.2,32,582. This amount relates to audit fees, traveling expenses, statutory filing fee etc. This was disallowed to the assessee on the ground that business was not commenced. Since in the foregoing paragraphs, we have held that business was set up accordingly, all necessary expenses incurred for the purpose of business deserve to be allowed. Learned CIT(Appeals) has considered this aspect and thereafter deleted the disallowance. We do not see any reason to interfere in the order of the Learned CIT(Appeals).
11. In the result, ground of appeal as well as ground of cross-objection taken by the revenue are de void of any merit, they are rejected. Consequently, the appeal as well as cross-objection of the revenue are dismissed.
12. In the assessee's appeal, the solitary grievance of the assessee is that the Learned CIT(Appeals) has erred in treating the interest income of Rs.97,22,805 received from short term fixed deposits as income from other 11 sources against the claim of assessee that the same be treated as income from business.
13. The brief facts of the case are that the assessee received subscription towards share capital from three foreign as well as two domestic investors who joined hands to participate in the development of industrial I.T. Park Project at Mohali under the joint venture. In order to exercise control on the use of the funds meant for project, the assessee did not pay the total amount received from investors to the development partners at one go. The funds were released only after the details for purchase of project land was negotiated by the development partners and approved by the assessee. The surplus fund was kept in the fixed deposit which give rise to interest income. The assessee claimed that interest income so earned by it, is to be assessed as a business income. Learned Assessing Officer has held that interest income from surplus funds is to be assessed as a income from other sources. Learned Assessing Officer put reliance upon the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. reported in 227 ITR 172.
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14. Dissatisfied with the order of the Assessing Officer, assessee carried the matter in appeal before the Learned CIT(Appeals). It contended that if the assessee has funds which are derived from business and which are used only for business and if they are surplus, deposited in bank, then interest income is to be assessed as a business income because the funds have a direct nexus with the business of the assessee. Learned CIT(Appeals) did not find force in the contentions of the assessee.
15. Before us, learned counsel for the assessee has reiterated his submissions as were raised before the Learned CIT(Appeals). He made reference to the decisions of the Hon'ble Delhi High Court in the case of CIT vs. Koshika Telecom Ltd. reported in 287 ITR 479, Sanam Progetti SPA vs. Additional CIT reported in 132 ITR 70, CIT vs. Lockholdings reported in 189 Taxman 452 and submitted that interest income be assessed as a business income. On the other hand, Learned DR relied upon the jdugmetn of the Hon'ble Supreme Court in the case of Tuticorin Alkaslis Chemicals & Fertilizers as well as upon the order of the Learned CIT(Appeals).
16. We have heard the rival contentions and gone through the record carefully The assessee has not demonstrated as to how it has undertaken the 13 business of lending money or etc. in an organized manner which can suggest interest income from a business activity. It has simply surplus funds which were deposited in the fixed deposit during the period when such funds were not required. The case of the assessee duly fall within the ambit of propositions laid down by the Hon'ble Supreme Court in the case of Tuticorin Alkalis Chemicals & Fertilizers Pvt. Ltd. (supra) and learned Assessing Officer has rightly held that such income is to be assessed as income from other sources. Accordingly, we do not have any merit in the ground of appeal raised by the assessee. The appeal of the assessee is dismissed.
17. In the result, both the appeals as well as cross objection are dismissed.
Decision pronounced in the open court on 22.06.2012 Sd/- Sd/-
( SHAMIM YAHYA ) ( RAJPAL YADAV )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 22/06/2012
Mohan Lal
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Copy forwarded to:
1) Appellant
2) Respondent
3) CIT
4) CIT(Appeals)
5) DR:ITAT
ASSISTANT REGISTRAR