D. Karunakara Rao, Accountant Member - There are four appeals under consideration. Out of the four appeals, I.T.A. NO. 4123/M/2011 and C.O. No.36/M/2012 are cross appeals and remaining two appeals I.T.A. No. 6435/M/2011 and I.T.A. No.127/M/2012 are filed by the assessee. For the sake of convenience, we are adjudicating all the four appeals in this consolidated order. Appeal wise and ground wise adjudication is given in the following paragraphs.
Assessee's Appeal - I.T.A. No.127/M/2012 - AY 2005-06
2. Firstly, we shall take up I.T.A. No.127/M/2012 filed by the assessee on 6.1.2012 is against the order of CIT (A)-4, Mumbai dated 24.10.2011 for the assessment year 2005-2006. In this appeal, assessee raised the following grounds which read as under:
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The notice issued u/s 148 and reassessment order passed by the Assessing Officer are illegal, bad in law and without jurisdiction. |
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That Ld CIT (A) failed to appreciate that AO has already considered all the material facts and evidences during the original assessment proceedings and reassessment proceedings initiated by the AO is merely on basis of change of opinion, hence reassessment order is liable to be quashed. |
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That the AO has wrongly & illegally held that the business of the assessee has not commenced and the expenses have been wrongly & illegally disallowed & CIT (A) has erred on facts & in law in upholding same. |
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That the AO and CIT (A) has failed to appreciate that the business of appellant was not only setup but had also commenced. The invitations and processing of tenders is a part of business activity of appellant i.e. infrastructure development activities. |
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That AO and CIT (A) has erred in law and on facts in treating interest income under the head income from other sources and failed to take into account that income earned is inextricably linked to business of the appellant. |
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That Ld CIT (A) has erred in law and on facts in treating interest income which is earned from bank FDR's and SICOM Ltd under the head 'income from other sources' and has failed to appreciate that it is not the case that the surplus funds were parked to ear interest. |
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That AO and CIT (A) has failed to appreciate that interest income from funds primarily brought for business purpose is to be treated as business income and has wrongly treated it as income from other sources. |
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That the addition/disallowance made are illegal, unjust and bad in law and are based on mere surmises and conjunctures and the same cannot be justified by any material on record. |
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That the evidence filed and materials available on record have not been properly construed and judiciously interpreted, hence the addition / disallowance made is uncalled for. |
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That without prejudice to the above grounds if interest income will be treated under the head income from other sources then expenses which were incurred to earn interest are allowable u/s 57(ii) of Income Tax Act, 1961. |
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That interest u/s 234 B and 234D of the Income Tax Act, 1961 has been wrongly and illegally charged and has been wrongly worked out." |
3. Briefly stated relevant facts of the case are that the assessee filed the return of income declaring the loss of Rs. 1,01,15,584/- and the same was scrutinized u/s 143(3) of the Act. The loss returned was accepted vide order dated 25.10.2010. Based on the information available in the assessment records, on finding that the company was incorporated in August, 2002 with an object to do business of airport infrastructure at Nagpur and also Special Economic Zone (SEZ), Nagpur, AO came to the conclusion that the company has not commenced the business during the year. Further, he came to the conclusion that the expenditure debited to P & L Account amounting to Rs. 1,37,06,149/- constitutes pre-operative expenses. Further, he was also of the opinion that the direct and other income amounting to Rs. 37,27,107/- constitutes 'income from other sources' of the assessee.
4. Therefore, the AO issued notice u/s 148 of the Act and thus, the reassessment proceedings commenced. During the reassessment proceedings, assessee objected to the same and mentioned that considering the original assessment proceedings, where these issues were examined before the loss returned by the assessee was accepted. Therefore, invoking the provisions of section 147 is merely based on the 'change of opinion' is not valid. In this regard, assessee relied on various judicial pronouncements to support its stand. Further, regarding the interest receipts, assessee mentioned that requisite funds of the assessee were received from MSRDC, MIDC and NIT amounting to Rs. 14.85 Cr (rounded off) and part of the funds were parked by the assessee in FDs with the banks due to delay in use of such funds and the said deposits yielded income of Rs. 22,53,254/-. In addition, assessee also earned other interest income from Savings Bank Account of Rs. 3,05,890/-. Such interest income constitutes 'business income'. Assessee also earned direct income in the form of processing fees amounting to Rs. 11.42 lacs. Assessee also provided information regarding expenditure debited to the P & L Account.
5. On the issue of 'change of opinion' - based reopening, AO is silent in his order on the objection of the assessee, except the bland statement that "the assessee's contention that the reopening of proceedings is bad in law is not acceptable, as there is reason to believe that the income has escaped assessment and the proceedings are thus as per the provisions of the IT Act". On this limited issue, before the CIT (A) also, assessee objected to the reopening without raising a specific ground in this regard. CIT (A), though rejected the objection of the assessee, the reasons given by him for rejecting are given in para 6 of the impugned order. In effect, CIT (A) has not attended to the assessee's opprobrium against the notice u/s 148 based on the change of opinion. Merely, he mentioned that the "prima facie income has escaped and, therefore, the issue of notice u/s 148 is upheld." The sufficiency of the ground cannot be challenged. In these factual circumstances of the issue of reopening, assessee filed appeal with the ground no.1 before us.
6. During the proceedings before us, Sri Salil Kapoor, Ld Counsel for the assessee filed paper book and also the written submissions dated 16.1.2013. Relying on them, he mentioning that the AO applied him mind on the impugned issues during the regular assessment proceedings. In this regard, our attention was brought to the exhaustive questionnaire issued by the AO, a copy of which is placed at page 57 of the paper book for the AY 2005-06. Further, Ld Counsel also brought out attention to the reply letter of the assessee, copy placed at page 58 to 71 of the paper book and read out relevant details relating to the nature of the business, share holding patterns, increasing share holding patterns, unsecured loans, Fixed Assets, details of Bank Accounts, details of deposits, sundry creditors details, details of the Board of Directors, the nature of the business activities carried out during the year. It also provides the details of the Multi Modal International Passenger and Cargo Hub International Air Port at Nagpur (known as MIHAN project), processing fee, interest and other income details, the details of the expenditure debited to the P & L Account etc. When so much of information was furnished in respect of the queries from the AO in the regular assessment proceedings with a specific query with regard to the nature of the activities, as per the counsel, it is obvious that the AO has applied his mind and formed an opinion before accepting the claim of the assessee in the regular assessment proceedings.
7. Interpreting his own arguments, Sri Kapoor mentioned that this is a case of change of opinion and the AO is not allowed to issue notice u/s 147 of the Act, merely based on the change of opinion, which is an integral part of the "reason to believe". In addition, Ld Counsel mentioned that the very fact that the AO has expressively depended on the information already available on the record for issue of notice u/s 148 of the Act. It is also obvious, that there is no fresh material or tangible material, which has an effect of contributing to the AO for formation of reason to believe. In this regard, Ld Counsel relied on the ratio of the Hon'ble Apex Court's judgment in the case of CIT v. Kelvinator of India Ltd. [2012] 320 ITR 561/187 Taxman 312 for the proposition that "hence, after 1.4.1989 the AO has power to reopen, provided there is a "tangible material" to come to the conclusion that there is escapement of income from assessment". Referring to the summery assessment cases also, Ld Counsel relied on the recent judgment of the Hon'ble Delhi High in the case of CIT v. Orient Craft Ltd. [2013] 29 taxmann.com 392 for the proposition that summary assessment cases also there is a requirement of a fresh material with AO to reopen the assessment. Relying on the Delhi High Court judgment in the case of CIT v. Kelvinator of India Ltd. [2012] 256 ITR 1/123 Taxman 433, Ld Counsel mentioned that mere change of opinion cannot form the basis for reopening of a complete assessment. Further, he also mentioned that "….one must treat the concept of "change of opinion" as an in-built test to check abuse of power by the Assessing Officer".
8. On the other hand, Ld DR relied dutifully on the orders of the Revenue Authorities.
9. We have heard both the parties on this preliminary issue relating to the validity of notice u/s 148 of the Act and perused the paper book filed before us and the details relied upon by both the parties.
10. Firstly, we need to examine whether there are enquiries conducted by the AO into the issue of nature of business activities of the assessee for the year under consideration. For this purpose, we have examined the show cause notice/questionnaire issued by the AO along with the 142(1) notice dated 5.10.2007 (page 57 of the paper book). From the said enquiry notice it is noticed that the first item in the questionnaire reads as follows. "(1) Please furnish the details of nature of business activity carried out". In this regard assessee replied vide letter dated 12.10.2007 stated that "the company is engaged in infrastructure and development activities". Assessee furnished further reply vide letter dated 25.10.2010 elaborating the nature of business and the same reads as follows. "The company is engaged in the infrastructure development activities during the Financial Year 2005-2006 and the company is working on development of MIHAN project at Nagpur". It is also evident that the assessee submitted various details regarding to the commencement of the business relating to the paid-up capitals, expenditure incurred, income earned, services rendered etc in respect of the rest of the questions in the questionnaire. It is also evident from the orders that it is an admitted fact that the assessee does not have any fresh or tangible material which works out as a "livewire" to the AO to form an opinion or create a reason to believe that there is concealment of income. It is also obvious from the written reasons mentioned by the AO that the basis for re-opening is essentially the product of the "perusal of the assessment records". In our opinion, issue of notice u/s 148, under the circumstances and the details mentioned above, is not proper and not in tune with the settled position in law relating to the provisions of section 148 of the Act. Therefore, the preliminary issue raised in ground no. 1 and 2 by the assessee is allowed.
10.1 Since, reopening is to be held bad in law, it may not be necessary to take up the issue urged before us on the merits of the additions/disallowances made by the tax authorities. However, since identical issues are coming up in the subsequent years and both the parties have advanced arguments in detail, we deem it necessary to consider the grounds on merits also, though it may serve academic purpose only.
11. We shall now take up ground 3 and 4 now and they deal with the issue of setup and commencement of the business activity i.e. development of airport infrastructure activity. Under the circumstances of our finding on the validity of the reassessment, adjudication of this issue is merely academic. However, we proceed to adjudicate this issue considering the fact the AY 2005-06 constitutes the first year of such setup or commencement of the business and the decision on this issue here has effect on the issues raised in the appeal for the subsequent assessment years.
11.1 During the reassessment proceedings, an opportunity was given to the assessee to explain if the business of the assessee has commenced. In reply, it was stated that the assessee was engaged in the development of Nagpur Air Port and SEZ in Nagpur. Further, assessee mentioned that it is Public Sector Undertaking of Maharashtra Government incorporated to carry out infrastructure development activities like setting up of a SEZ and developing the international Air Port at Nagpur called MIHAN Project. During the year, assessee commenced MIHAN Project at Nagpur and the pre-operative expenses related to the project are carried out to the balance sheet and debited to the P & L Account. Further, assessee submitted that how part of the funds raised from the shareholders was utilized and how the raised funds, which are unutilized for the project were kept in the banks which yielded interest income. Assessee also mentioned the earning of 'processing fees' by way of investing adventures for execution of various projects during the period. As seen from para 10 of the assessment order, assessee also furnished details of expenditure giving the break-up on various heads of expenditure namely salaries and medical reimbursement, Director's remuneration and other benefits, expenditure on advertisement and publicity, consultancy and legal expenses, rent paid to World Trade Centre, repairs and maintenance charges paid and maintaining travelling expenses etc. It is also mentioned that the expenditure relatable to the MIHAN Project is not debited to the P & L Account and they were capitalized as pre-operative expenses as evident from the balance sheet. The expenditure expanded in connection with the business activities are only booked to the P & L Account and income earned during the year such as processing fees, interest income and other incomes are credited to the P & L Account as 'business income' of the assessee. AO considered the above submissions of the assessee and he was of the opinion that the assessee has not commenced his business operations, therefore, the expenses debited to the P & L Account were treated as capital expenditure on par with the pre-operative expenses related to the MIHAN Project. The income earned by the assessee during the period was treated as income from other sources. Relevant para 1.4 to 1.6 of the assessment order are relevant in this regard which reads as under:
"1.4 The assessee reply is considered. For the submissions, it is evident that the assessee has received interest income from funds received for the MIHAN Project that were temporarily parked in fixed deposits. The assessee has also received interest from savings account and other parties. The income under head 'direct income' is in the nature of processing fee on account of tenders, against which expenses in the form of consultation fee, etc have been incurred. During the year under consideration, the assessee has capitalized expenses relating to MIHAN Project amounting to Rs. 5.24 Cr.
1.5 In view of the fact that the assessee has already capitalized expenses in relation to the MIHAN Project, it is evident that the business of the assessee has not begun. The assessee is in the process of establishing its business activity and the calling of tenders is also only a part of this process and not the actual business activity. The receipt of tender processing fee is not in the nature of actual business of the assessee. Hence, the expenses debited to the P&L Account re also in the nature of preoperative expenses as they are related to the preoperative activities of the assessee. The assessee's contention that it has conducted its normal business activity is not acceptable, as the assessee has not begun its main business. The expenses debited are not revenue in nature and are hereby capitalized. The fact that the issuing of tenders is in the nature of preoperative process, the expenses are being capitalized net of tender fee received.
1.6 In respect of the interest income, it is submitted that the same is income from other sources and not related to the business of the assessee. The assessee's contention that the interest income is in the nature of business income is not acceptable. In the case of Shree Krishna Polyster Ltd. v. DCIT [2005] 274 ITR 21 (Bom.), it has been held by the Mumbai High Court that the interest income in respect of surplus money not required for business immediately and deposited in banks for short periods would be assessable as income from other sources. In view of this decision and in view of the fact that in assessee's own case, the funds received for MIHAN Project were parked as FDRs for short periods, the interest income earned is to be taxed as income from other sources. The savings bank interest income and income from other parties is also not in the nature of business receipts and need to be taxed as income from other sources."
12. Aggrieved with the above, assessee filed an appeal before the CIT (A).
13. During the proceedings before the first appellate authority, after hearing the assessee, CIT (A) reviewed the AO's findings that business has not started during the year; the AO's stand that the expenditure in question should be capital in nature; and also the decision of charging the interest income on the FDs with Bank as income from other sources and finally, came to the conclusion that the AO's opinion has to be confirmed. On the issue of commencement of the business, Para 9 is relevant in this regard which reads as under:
"9. I have considered the facts of the case and submissions of the assessee. The expenses claimed relate to salary and medical reimbursement, directors remuneration, advertisement and publicity, consultancy and legal expenses, rent paid, repair and maintenance and travelling expenses etc as per the details given in the assessment order. Whereas, these expenses are clearly applicable to running of offices and carrying out other activities which relate to the MIHAN Project which is not yet complete and there is no other business activity claimed or shown by the assessee. Whereas, merely inviting of tenders etc cannot be claimed to be business activity of the assessee. Therefore, it is clear that the main business of the assessee has not yet started and there is no other business other than MIHAN Project. The claim of the assessee that MIHAN Project itself is a business of the assessee, but in any case, all the expenses relating to MIHAN project can be charged to MIHAN Project only, even if it is the business of the assessee. Therefore, the action of the AO is confirmed and the ground of appeal is rejected."
14. On the issue of treating the interest income as business income of the assessee and also the applicability of netting provisions as per the provisions of section 57(iii) of the Act, CIT (A) is of the opinion that AO has rightly taxed the said receipts under the head 'income from other sources'. Regarding nexus, considering the assessee's failure to demonstrate that the burden of proof, CIT (A) rejected the assessee's claim for netting of expenditure incurred in this regard and held that no deduction is allowable u/s 57 (iii) of the Act. Aggrieved with the above decision of the CIT (A), assessee raised ground nos. 3 to 10 before the Tribunal.
15. During the proceedings before us, Ld Counsel for the assessee mentioned that the grounds raised by the assessee give raise to the following issues. (1) Whether the business of the assessee has commenced or not?. (2) Whether the expenditure debited in the P and L Account should also be treated as preoperative expenses on par with that of the MIHAN Project expenses already capitalized?. (3) If the interest income earned from the banks shall constitute business income or not?. (4) If the interest income is treated as income from other sources should be netted against the expenditure as per the provisions of section 57(iii) of the Act or not?.
16. We shall now take-up arguments of the Ld Counsel on the above issues. Regarding the issue of set up and commencement of business activity of the assessee during the year under consideration, Ld Counsel stated as under:
"Assessee is engaged in the development of infrastructure development activities. The main object of the company is to design, plan, construct, erect, build, remodel, repair, execute, develop, operate, sell, lease, rent, improve, administer, manage, control, maintain road, railways, airport, Special Economic Zone etc. The business of the assessee is not only confined to construction of MIHAN project. The few of the objectives for which company is established are as follows:
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To design, plan, construct, erect, build, remodel, develop, operate, administer, control and/or maintain market recreational facilities, social infrastructure, hotels and commercial facilities for the purpose of business of company. |
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To borrow or raise money from domestic and foreign market/institutions from the issue of or upon bonds, debentures, bills of exchange, promissory notes or other obligations or securities of the company, or by mortgage, hypothecation, pledge or charge of all or any part of the property of the company or of its uncalled capital or such other manner and their appurtenances. |
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To appoint any agency or consultant to collect data and information, to carry out surveys and investigations and to prepare the feasibility report and detailed cost estimate of the schemes and project identified and to carry out the financial and economic viability of such projects. |
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To purchase, take on lease or otherwise acquire and hold either solely or jointly with others, any movable or immovable or other properties. |
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To adopt such measures of making known the business of the company as they seem expedient and in particular by advertising in the press, by circular, by purchases and exhibition work of art or interest, by publication of books and periodicals and by granting prizes, rewards or donations." |
17. In this regard, Ld Counsel relied on the Hon'ble Bombay High Court judgment in the case of CIT v. Ralliwolf Ltd. [1980] 121 ITR 262 for the proposition that "the assessee has already set up business and therefore, the expenditure incurred is allowable as revenue expenditure". Further, Ld Counsel took strength from the Hon'ble Delhi High Court judgment in the case of CIT v.Whirlpool of India Ltd. [2009] 318 ITR 347/185 Taxman 387 and the held portion of the said judgment read as under:
"Held, dismissing the appeal, that the question as to when the business was set up depends on the facts of each case and the nature of the business and no hard and fast rule could be laid down as to when the business was set up. The order of the Tribunal exhaustively detailed the facts and reasons as to why the business was set up not on February 1, 1996, as contended by the Assessing Officer but on November 1, 1995. Accordingly, no substantial question of law arose."
17.1 Further, in support of the assessee's submissions that the business commenced in the AY 2005-06, the assessee traced the following activities executed by the assessee in this year and the same are inserted as under:
"During the year assessee has performed following activities as the assessee is in the business of development of infrastructure projects.
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It has acquired 1479 Hectare of land for project as on date as per their objective. |
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It has appointed consultant namely M/s. SICOM for due diligence study of Nagpur airport. Due diligence was obtained to prepare the feasibility report and detailed cost estimate of the schemes and projects identified and to carry out the financial and economic viability of such projects. |
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M/s. YASHADA was appointed as consultant for preparation of development plan and development control regulation which as per their main objective of designing and planning of their main project. |
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M/s. Scott Wilson Kirkpatric India Pvt. Ltd. for consultancy services of Environmental Impact Study (EIS) for Captive Power Plant of 100MW. EIS is a mandatory requirement under the Environment Protection Act, 1986 before starting project of such a nature. |
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The assessee has also appointed consultants for Captive Power Plant, road network, rail and road terminals etc. and has also bringing the IT forms like Satyam computer Services Ltd. |
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Processing of tenders of applicant as regards the technical and financial eligibility for the applicant is also a part of due diligence activity. |
As evident from the above operation of assessee, it is clear that his business was commenced in the period relevant to AY 2005-2006. The AO and CIT (A) has erred in holding during proceedings u/s 147 r.w.s 143(3) that the business of the assessee had not commenced."
18. On the other hand, Ld DR relied on the order of the Revenue Authorities.
19. We have heard the parties and perused the orders of the revenue and judgmental laws and written arguments placed before us. On perusal, we find that the core object of the assessee, as stated by the assessee repeatedly, is the "development of international Air Port called MIHAN Project and SEZ in Nagpur", besides other development of infrastructural facilities. The following extract is significant and the same reads as under:
"The assessee is engaged in the business of development of Infrastructure Development Activities. The main object of the company is to design, plan, construct, erect, construct, build remodel, repair, execute, develop, operate, sell lease, rent, improve, administer, manage, control maintain and/or demolish airports, air traffic equipment, traffic terminals, roads, railways, highways, expressways, bridges, tunnels, railroads, urban transport systems, alleys, township schemes, industrial parts, docks, shipyards, canals, wells, ports, reservoirs, embankments, dams, irrigation works, reclamations, improvements, sanitary system, water works, water supply gas or any other structural or architectural work and Special Economic Zones.
The Govt. of Maharashtra vide Resolution No. TPS 2401/1494/Capital Receipt-238/02/UD-9 dated 4.2.2003 appointed the appellant as the special planning authority for development of Multi Modal International Passenger and Cargo Hub International Airport at Nagpur also known as MIHAN Project. In this resolution, Govt. Of Maharashtra has also notified the area in which the development work is to be undertaken and also provides the scope of work to be done by the appellant.
During the FY 2004-2005 MADC commenced its business operation and acquired 1479 Ha of land for MIHAN. It appointed consultants namely M/s. SICOM for due diligence study of Nagpur airport, M/s. Yashada for preparation of development plan and development control regulation & M/s. Scott Wilson Kirkopatrick India Pvt. Ltd. for consultancy services of Environmental Impact Study for Captive Power Plant of 100MW. The assessee has also appointed consultants for Captive Power Plant, road network, rail and road terminals etc. and has also bring the IT forms like Satyam Computer Services Ltd."
20. From the above, it is obvious the assessee's is engaged in the business of 'development of international-airport-related infrastructure for MIHAN'. Therefore, for deciding the impugned issue relating to the commencement of the said business, our focus is on if the assessee undertook any activities related to the development of said infrastructure. In this regard, we have studied the details of the works done by the assessee during the year, the details of which are already listed above. We have analyzed the said activities i.e. the acquisition of 1479 hectares of land for the MINAS, appointment of SICOM, YASHADA, M/s Scott Wilson Kirkpatric India Pvt Ltd, other consultants for various other purposes etc. It is an admitted fact that feasibility reports both financial and economic viability is not yet obtained, preparation of development plans is not yet complete, mandatory Environmental Impact Study under Environment Protection Act, 1986 by SICOM is not yet complete and 100MW - captive power plant is also at preliminary stages. Thus, the assessee has not completed the stages, which are considered elementary to start the business. What if the mandatory environmental clearances and feasibility reports are negative and against the set up of the business? Regarding the land of 1492 hectares of land, it is relevant to mentioned that this appears to be the land identified by the Government of Maharashtra and role of the assessee appears to be very nominal. Therefore, the activity of acquiring the said land cannot be attributed to the activities of the assessee.
21. Further, we have examined the objection of the CIT(A) in confirming the conclusions of the AO on the issue of commencement of business. In this regard, the singular objection of the CIT(A) is as follows:
"Therefore, it is clear that the main business of the assessee has not yet started and there is no other business other than MIHAN Project. The claim of the assessee that MIHAN Project itself is a business of the assessee, but in any case, all the expenses relating to MIHAN project can be charged to MIHAN Project only, even if it is the business of the assessee."
21.1 From the above it is evident that his objection is that the main business has not commenced and what is commenced is other than main business. As seen from above, there is no clarity on what the CIT(A) summed up in para 9 of his order. CIT(A) has not countered the assessee's arguments on the activities undertaken by the assessee with regard to the so called main business of the assessee. The CIT(A) has not gone in to the aspect of 'set up' of the business in this year.
22. In this regard, we have examined the settled legal position on the issue of 'set up and commencement' qua the business of development of infrastructure. In our opinion, the Gujarat High Court has laid a good foundation to understand the concepts of 'set up and commencement' of business while dealing with the case of CIT v. Saurashtra Cement & Chemical Industries Ltd.[1973] 91 ITR 170 (Guj.). The held portion of the said judgment is relevant and therefore, the same is reproduced as under:
"Held, that the activities which constituted the business of the assessee were divisible into three categories, the first category consisted of the activity of extraction of limestone by quarrying the leased area of land. This activity was necessary for the purpose of acquiring the raw material to be utilized in the manufacture of cement. The second activity comprised the activity of manufacture of cement by use of the plant and machinery set up for that purpose; and the third category consisted of selling manufactured cement. These three activities combined together constituted the business of the assessee. 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. 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 second activity and the second activity when completed laid the foundation for the third activity. Hence, the assessee commenced its business when it started the activity of extraction of limestone. Since extraction of limestone commenced in 1958, the assessee was carrying on business during the relevant years of account. The expenditure incurred by the assessee in carrying on the activity of extraction of limestone as also depreciation allowance and development rebate in respect of machinery employed in extracting limestone were deductible in computing the trading profits of the assessee for the assessment years 1960-61 and 1961-62."
23. What is 'set up': Normally the process of 'set up' of the business commences with the creation or incorporation of the company. Subsequently, the requisite managers/CEO or manpower are appointed. Then, the procedures relating to obtaining of the permissions or clearances from the governmental departments shall follows. In this case, obtaining mandatory environmental clearances from concern Ministry of Central or state Government is the requirement. Further, with regard to SEZ, there is need for issue of Notification by the Ministry Commerce. Subsequently, purchase of requisite land from the farmers or from the Government's allotment as the case may be shall start and the requisite infrastructure development shall commence on the said land acquired by the assessee. Thus, the above discussion by the Gujarat High Court relates to the period subsequent to the time of obtaining the approvals or clearances or preparation of favourable feasibility reports etc. For deciding, if the business of airport infrastructure development or SEZ is set up or not in this year, we need to understand and appreciate the various phases involved in set up of the business of development of infrastructure of international airport at Nagpur. In the specialized business of the assessee i.e. airport infrastructure development as well as the SEZ development, important stages involves the obtaining of various clearances, approvals of the concerned departments of the Government, procurement of land should for part of the set up. Then after, the assessee must have infrastructure to develop the land to be fit enough to lease out or construct requisite infrastructure on the said land to commence business. In this line of business, we are of the opinion, the first stage must include obtaining of the necessary license/permissions/clearance to do the business after obtaining the favourable feasible reports. The second stage must include obtaining of the other clearances and permissions required under the provisions of various laws from ministries. Further, the assessee is required to undertake feasibility and other survey reports required for setting up the business. These stages constitute elementary stages which must be complete in all respects before the business of the assessee is designated as 'set up'. It is not required that the assessee must raise first invoice for constituting 'set up or commencement' of business as held by the Tribunal (Delhi Bench) in the case of CIT v. Hughes Escorts Communications . [2009] 311 ITR 253/[2007] 165 Taxman 318which is subsequently upheld by the Hon'ble High Court of Delhi. Therefore, the activity of commercial production is not needed to describe the business is set up. What is required is obtaining of all the clearances, favourable feasibility reports, approval of the development plans etc. Existence of skeletal staff and an office building are not sufficient to declare that the business is 'set up'. What if the stated clearances are negative and against such set up of the business? As analyzed by the jurisdictional High Court in the case of Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151 (Bom.), the expression 'setting up' means 'to place on foot' or to 'establish' or 'to ready to commence'. The establishment or the readiness should always denote with all permissions and clearances and in accordance with the set procedures and law of the land. If the environmental clearance, which is mandatory in this case, is not obtained in this year, can we declare that the business is set up? In our considered opinion, the answer is negative. We have also examined the cited Special Bench decision in the case of Sardar Sarovar Narmada Nigam Ltd. v. Asstt. CIT [2012] 138 ITD 203/25 taxmann.com 198 (Ahd.) (SB) for the proposition that the business of the assessee should be considered to be set up from the date when water was supplied through main canals during current year. In our opinion, releasing of water into the canals must constitute very advanced stage in that case.
24. Therefore, on the admitted fact that the assessee is yet to obtain the environmental clearance under the Environment Protection Act, yet to obtain the favourable feasibility reports - financial and technical fronts, yet to obtain the approved plans of development, we are of the opinion, the business of the development of airport infrastructure cannot be declared "set up" in this year under consideration. Acquiring of land with a stroke of pen of the Government of Maharashtra cannot be attributed to the business activity of the assessee. What has happened in this year in substance is mere appointment of SICOM, YASHADA, M/s Scott Wilson Kirkpatric India Pvt Ltd, other consultants for various other purposes, which constitutes stages prior to the "set up" of the business of the assessee. Therefore, in our opinion, the conclusions of the CIT(A) that the main business is not commenced in the year under consideration does not call for any interference. Accordingly, the grounds 3 and 4 relating to "set up and commencement" are dismissed.
25. Grounds 5 to 9 relates to the third issue i.e. whether the interest income earned from the banks shall constitute business income or not. Further, the ground 10 is raised without prejudice and the assessee seeks set off against the expenditure allowable u/s 56(iii) of the Act. Regarding the taxability of the interest income, the case of the Assessing Officer is that the interest income in respect of surplus money not required for business immediately and deposited in banks for short period would be assessable as "income from other sources". AO relied on the binding judgment in the case of Shree Krishna Polyster Ltd. v. Dy. CIT [2005] 274 ITR 21/144 Taxman 41 (Bom.). Of course, AO is also of the view that the business since not commenced, the interest income has to be taxed u/s 56 of the Act. On the contrary, the case of the assessee is that the FDRs along with the bank were loans and advances raised for the purpose of development of infrastructure and the FDs were made due to delay in utilization of funds, therefore, the income earned on such funds should be treated as business income. For these purposes, assessee relied on the decision of the Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. v. ITO [2009] 315 ITR 255/181 Taxman 249, wherein the High Court held as under:
"Held, allowing the appeals, that the funds in the form of share capital were infused for the specific purpose of acquiring land and development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not be classified as 'income from other sources". Since, the income was earned in a period prior to commencement of business it was in the nature of a capital receipt and was required to be set off against pre-operative expenses."
26. Further, Ld Counsel relied on Apex court's judgment in the case of CIT v. Karnal Co-operative Sugar Mills Ltd. [2000] 243 ITR 2/[2001] 118 Taxman 489, Kalinga Coal Mining (P.) Ltd. [ITA No. 123 & 279/CTK/2010] Cuttack Bench of the Tribunal and Delhi High Court's judgment in the case of NTPC Sail Power Company (P.) Ltd. v. CIT [2012] 210 Taxman 358/25 taxmann.com 401 etc. to suggest that the interest income needs to be treated as 'business income' of the assessee.
27. On the other hand, Ld DR relied on the order of the AO and CIT (A).
28. We heard both the parties and perused the material placed before us. Various judgment cited before us are also studied. To start with, we have examined the impugned order of the CIT(A) on this issue at para 13 and find the same constitutes a non speaking one. Relevant lines read as follows:
"13. …..Earning interest from Bank is not the business of the assessee and there is a separate head of income for interest income. Therefore, AO has rightly assessed the interest from bank under the head 'income from other sources'. Assessee has not shown any nexus between the funds borrowed and kept in the bank. Therefore, no deduction u/s 57(iii) is allowable, whereas, assessee must have claimed it as part of the project expenses…"
28.1 Notwithstanding the above inadequate adjudication by the CIT(A), we find that the funds kept with the Banks as the FD is undisputedly for temporary period of non-utilisation for business purposes. In that sense of the matter, the said funds are not in use for business purposes. The purpose of parkings such funds in the bank is obviously for safety and security and ready use of the funds as and when there arise business needs of the assessee. It is stated that the fund are meant for purchase of the lands at the later days. Thus, the earning of interest income cannot be dominant or business intention of the assessee. In this regard we have examined the judgments relied upon by Ld counsel. The Judgment in the case of Indian Oil Panipat Power Consortium Ltd. (supra) deals with the interest receipts earned prior to the commencement of business and it is not known if they are earned prior to 'set up' too. Therefore, the same is distinguishable on facts. The Apex court judgment in the case of Karnal Co-operative Sugar Mills Ltd. (supra) relates to the case of 'share capital money', which is meant for purchase of Plant and Machinery in connection with set up of the business. Per contra, we have also perused the binding judgment of the Hon'ble High Court of Bombay in the case of Shree Krishna Polyster Ltd. (supra), which is relied upon by the revenue and the conclusion of the same read as follows-
"Income earned by the assessee by investing surplus money received in public issue, in bank deposits for a short period is assessable under the head 'Income from other sources'."
29. The ratio is binding on us and therefore, we are of the opinion the stand taken by the AO merits our acceptance. For the said reasons, we uphold the views of the revenue. Accordingly, grounds 5 to 9 are dismissed.
30. Regarding the applicability of the provisions of section 57(iii), there is need for primary facts relating the exact expenditure wholly and exclusively expended for earning of the said interest receipts chargeable to tax u/s 56 of the Act. For want of fact, we set aside ground 10 raised without prejudice to the files of the AO for fresh adjudication after granting reasonable opportunity of being heard to the assessee. Accordingly, ground 10 is set aside.
31. Further the ground 11 being consequential in nature, the same is dismissed as consequential.
32. To sum up, reopening of assessment, for AY 2005-06, is bad in law though the interest receipts are chargeable to tax under section 56 of the Act, since the business of the assessee cannot be stated to have commenced in the year under consideration but in the ultimate analysis the appeal filed by the assessee has to be treated as allowed.
Revenue's Appeal I.T.A. No.4123/M/2011 & Assessee's C O No.36/M/2012 AY: 2006-2007
33. We shall now take up the CO of the assessee on 8.3.2012 against the order of the CIT (A)-7, Mumbai dated 16.3.2011 for AY 2006-2007.
34. In this Cross Objection, ground nos. 1 and 2 raised by the assessee relate to the setting up commencement of the business activities which are linked to the issue raised and adjudicated in I.T.A. No.127/M/2012 (AY: 2005-2006). In the said appeal, we have held against the assessee considering the fact that the assessee has neither obtained necessary and mandatory approvals or permissions for commencing the business nor ready to start the business nor actually started the business in the AY 2005-06. In the light of the above, we have examined the activities or developments undertaken by the assessee in the AY 2006-07. The list of such activities or developments relevant for the instant AY, as supplied by the assessee's counsel contains the following:
| "(1) |
|
MADC has arranged loans worth Rs. 300 Crores for development of land in MIHAN. |
(2) |
|
It had started developing MIHAN project and a large chunk of 1600 hectares has been developed as SEZ. MADC started allotment of land during the year & details of parties to whom land was allotted during the year are as under : (Pg 4 of CIT(A) order): |
(i) |
|
Dr. D.Y. Patil Educational Enterprises Pvt. Ltd. |
(ii) |
|
Shapoorji Palonji & Co. Ltd. |
(iii) |
|
Reatox Builders & Developers Pvt. Ltd. |
(iv) |
|
Satyam Computer Services Ltd. |
(3) |
|
The company has thereafter taken up developmental works related to the infrastructure such as construction of roads, drainages, compound wall. |
(4) |
|
Assessee appointed consultants for the works such as planning, Designing, Supervising, Implementation of Water supply, Development of Road Network and related elements. |
(5) |
|
Assessee appointed contractors for construction of roads, drainages, compound walls etc. |
(6) |
|
Processing of tenders of applicant as regards the technical and financial eligibility of the applicant is also a part of due diligence activity." |
35. From the above, it is evident that the assessee has not obtained mandatory clearances from the Authorities or Ministries concerned both for MIHAN and SEZ. However, the activities at sl 1, 2 and 3 makes some difference. We have considered the arguments of Ld Counsel that unless the business is set up, the activity of 'allotment of land' the parties mentioned as sl no 2 would not be possible. We find weight in the argument of Ld counsel. We are unable appreciate how such allotment is procedurally possible and legally sustainable. Other activities named at sl no 4,5 and 6 are mere appointments, which in principle are no different from the ones named in the AY 2005-06. Therefore, giving weightage to the activities of procuring more land as well as the activity of allotment of land by the assessee to certain customers named above, in our opinion, the assessee must be declared to have 'set up' the business of the assessee with the rider that the such allotment is procedurally possible and legally sustainable. We have no factual details to give finding on this part of the matter. Therefore, we remand the matter to the AO for this limited purpose. Accordingly, the grounds raised in this regard are allowed pro-tanto.
36. Cross Objections nos. 3 to 8 are supporting the order of the CIT (A), therefore, they are dismissed as academic.
37. In the result, Cross Objection filed by the assessee is allowed partly.
I.T.A. No.4123/M/2011
38. In this appeal, Revenue raised the following grounds which read as under:
"1. |
|
On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in holding that all the expenses claimed in the P & L Account relate to earning of various income which are held as income from other sources without appreciating that all the items of the expenditures claimed viz salary of the directors, renting of office, consultancy charges, web designing etc are in the nature of regular business expenditure and are not allowable deduction against incomes included in income from other sources since it is held by Ld CIT (A) himself that the business is still in the progress of setting up and also that there is no commencement of business. |
2. |
|
On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in directing the AO to allow the interest expenditure of Rs. 65,14,201/- against the receipt of interest on Bank FDRs of Rs. 1,01,42,802/- being allowable deduction against other sources income u/s 57 of the Act". |
39. In the ground no.1, Revenue has question the direction of the CIT (A) who held that the expenditures such as salaries, rent, consultancy charges, web designing etc are allowed to be set off against the income from other sources without appreciating the facts that the expenditure have nothing to do with the 'income from other sources'. CIT (A) is of the opinion that the business has not set up or commenced and it was in the process of setting up the business. Assessee filed a Cross Objection questioning the CIT (A)'s finding that the assessee is in the process of setting up and the business has not commenced vide ground nos. 1, 2 and 3 of the Cross Objection raised by the assessee. In the context of the CO, we have held that the assessee must be declared to have set up its business with certain reservations relating to the procedures and permissions. In this regard, we remanded to the AO's file. Therefore, the final outcome on the issue of the set up and commencement of the business is the relevant matter for adjudication of the ground 1 of the revenue's appeal. In all fairness, we set aside this issue also to the files of the AO to re-examine the issue in the light of the outcome on the cross objections 1, 2 and 3 of the CO. Accordingly, the ground 1 of the revenue is set aside.
40. Ground 2 relates to direction to the AO to allow netting of expenditure amounting to Rs. 65,14,201/- u/s 57 of the Act. Para 2.4 of the impugned Order is relevant and the same reads as under.
"2.4 However, the AOs action in treating all the expenses claimed in the profit and loss account as capital expenditure is not correct. Expenses claimed in the profit and loss account definitely relates to the earning of this income from other sources. All other expenditure claimed the profit and loss account and not added to the cost of MIHAN Project by the appellant can be considered as attributable to the earning of such other sources income u/s 57 of the Income Tax Act. However, the claim of interest expenditure of Rs. 65,14,201/- will be allowed only if the assessee explains to the satisfaction of AO that it relates to the amount used for fixed deposit in the bank which yielded interest receipt of Rs. 1,01,42,802/-. The AO is directed to re-compute the income under the head 'other sources' accordingly."
41. We find that the gross receipts of Rs. 1,75,04,796/- contains the earning of interest of Rs. 1,01,42,802/-. Further, we find that said sum of Rs. 65,14,201/- is undoubtedly an interest expenditure. The question for resoling here relates if the said expenditure is incurred in connection with earning of the interest receipts of Rs. 1,01,42,802/- Under these factual circumstances, the direction given by the CIT(A) is fair and reasonable and it does not call for any interference. Accordingly, we approve the direction of the CIT(A) and hence, the ground 2 of the revenue is dismissed.
42. In the result, the Revenue's appeal is partly allowed for statistical purpose.
I.T.A. No.6435/M/2011 (AY: 2007-2008) (By assessee)
43. This appeal filed by the assessee on 21.9.2011 is against the order of the CIT (A)-7, Mumbai dated 31.5.2011 for the assessment year 2007-2008.
44. In this appeal, assessee raised the following grounds which read as under:
"1. |
|
The appellant says and submits that the Ld CIT (A) erred in holding that the appellant's business has not yet commenced and hence is not eligible for deduction of business expenditure which is otherwise of revenue nature. |
2. |
|
The appellant says & submits that the Ld CIT (A) further erred in holding that the receipts of Rs. 13,56,67,380/- are taxable under the head "income from other sources", instead of "Business income" on the ground that the appellant's business had not yet commenced. |
3. |
|
The appellant says and submits that the Ld CIT (A) failed to appreciate that the appellant's business had already started when activities like acquisition of land, appointment of consultants/contractors, allotment of land to prospective clients were undertaken, which were in the nature of business activities in the context of the appellant business. The appellant says and submits that the CIT (A) erred in not appreciating that the appellant's business is of building infrastructure and the same cannot be equated with ordinary trading activities. |
4. |
|
Without prejudice to the above, the appellant says and submits that there is a difference between commencement and setting up and the appellant's business was set up much prior to the year relevant to the assessment year under consideration. The appellant is entitled to the deduction of all business expenses on setting up of the business. The Ld CIT (A) was not justified in overlooking this distinction between commencement and setting up." |
45. Ground nos. 1, 3 and 4 raised in this appeal relate to the setting up and commencement of the business and treating the receipts as income from other sources instead of business income. This issue is common to the grounds raised in I.T.A. No. 127/M/2012 (AY: 2005-2006) and we have adjudicated against the assessee under the factual matrix of the case and based on the activities listed out by Ld counsel for the assessee. Further, the same issue came up for adjudication in the AY 2006-07 too and held that the business must be declared 'set up' under the factual matrix of that year of course, with certain conditions. In the back ground of the above, we proceed to examine the activities under taken by the assessee during the Ay 2007-08 and they are as under:
"Total land in possession has gone upto 2180.6 hectares…
| (1) |
|
Environmental clearance for the Airport part of MIHAN project excluding SEZ has been obtained by the assessee. |
(2) |
|
Notification for the SEZ is received from Ministry of commerce for 1511.51 hectares. |
(3) |
|
Telecom network is started. |
(4) |
|
The work of internal roads was done to the extent of Rs. 64.5 crores, boundary wall to Rs. 4.7 crores construction of storm water drainage channels in MIHAN area to Rs. 1.7 crores and construction of Flyover Interchange at the junction of NH-7 and COB across railway track is done to the extent of Rs. 15.65 crores. |
(5) |
|
Assessee leased out over 1517 acres of land both in processing and non processing zone." |
46. From the above, it is evident that the assessee not only obtained necessary and mandatory Environmental clearance from the Government and Ministry of Commerce has also issued Notification relating to the SEZ. Assessee also commenced the telecom network, constructed the internal roads, boundary walls, drainage channel systems, construction of flyovers is also done. Finally, the assessee successfully leased out the land to the customers, which is part of the main business of the assessee. In these circumstances, in our opinion, we have no doubt in adjudicating the issue in its favour that the assessee's business is in place and therefore, the business of the assessee both set up and commenced too. Accordingly, ground 1 and 4 are allowed.
47. Ground no.2 relates to treating of certain receipts amounting to Rs. 13,56,67,380/- as 'income from other sources'. In the above paragraphs, with regard to the interest income, we have already adjudicated and given our finding while dealing with the issues in the AY 2005-06. AO is directed to treat the relevant receipts as income from other sources. With regard to the other receipts, we direct the AO to reexamine his conclusions in the light of our findings on the core issue of 'set up' and commencement of the business, which is decided in favour of the assessee. Thus, ground 2 is decided pro-tanto.
48. In the result, the appeal filed by the assessee is partly allowed.