INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH “B”, HYDERABAD

ITA No. 863/Hyd/2014
Assessment Year: 2009-10
M/s Surya Infra IT Parks Pvt. Ltd (Appellant) vs. Commissioner of Incometax (Respondent)
Date of Order: 30-11-2015

ORDER

PER S. RIFAUR RAHAMAN, A.M.:
This appeal by assessee is directed against the order dated 25/02/2014 of ld. CIT-III, passed u/s 263 of the Income-tax Act (Act), Hyderabad for the AY 2009-10.

2. Briefly the facts of the case are that the assessee company is engaged in the business of constructions, running, conducting, maintaining and managing leasing and to act as developer of private information technology parks. The Assessee filed its return of income for the AY 2009-10 on 23/09/2009 admitting loss of Rs. 8,94,094. The assessment was completed u/s 143(3) on 17/05/2011 and total income of the assessee was determined at loss of Rs. 8,94,094.

3. Subsequently, CIT, by virtue of his powers vested u/s 263 of the Income-tax Act, 1961 ( in short ‘Act’), assessment records were called and examined by him. Based on the following observation by him, he directed the AO to carry out the verifications on the below observations and redo the assessment since the AO completed the assessment without making proper verification, which was erroneous and prejudicial to the interests of revenue.
a) The business of the assessee had not commenced, it is not eligible to claim expenditure.
b) Interest income was erroneously considered under the head ‘profits and gains of business and profession

4. The assessee filed its objections for the above reopening of the assessment u/s 263. In its objection, the assessee had submitted that the business had commenced and it was its fourth year of operation, it had accordingly filed its return of income. All these facts were brought to the notice of the AO during the assessment proceedings. The AO had considered and applied his mind in all these aspects before passing order u/s 143(3). The assessee’s submissions were rejected and the order u/s 263 was passed.

5. Aggrieved with the above order, now, the assessee is in appeal before us.

6. Ld. AR submitted that the company was incorporated on 04/05/2005. Since the company was set up and commenced the negotiations for acquiring land etc., only by setting up of operation, it was able to acquire land admeasuring acres 20 guntas 09, forming part of survey Nos. 310,311 & 318 situated at Village Poppalguda, Hyderabad (pages 105 to 139 of the paper book). The above lands were purchased as below:
(a) Land admeasuring acre 15 guntas 30 vide sale deed No. 10550/06 on 31/07/2006 (pages 162 to 191 of paper book).
(b) Land admeasuring acre 4 guntas 19 vide sale deed No. 10549/06 on 31/07/2006 (pages 192 to 222 of paper book)

The above lands were purchased during the FY 2006-07. It shows that the business is set up. The purchase was materialized in July, 2006 but the similar negotiations, etc., were commenced from the day, the company was incorporated.

6.1 The ld. AR also submitted that the assessee was filing its return of income since incorporation and it was duly accepted by the department. He submitted that the assessee was eligible to claim business operative expenditure and interest income should be treated as business income. The ld. AR relied on the following cases to support his contentions:
1 Western India Vegetable Products Ltd. v. Commissioner of Income-tax [1954] 26 ITR 1 5 151 (BOM.) (HC) 2 CIT v. Arcane Developers (P.) Ltd [2014]42 taxmann.com 10 (Delhi) (HC) 3 CIT V Dhoomketu Builders & Development (P.) Ltd [2013] 34 taxmann.com 18 (Delhi) (HC) 4 UE Development India (P.) Ltd v. ACIT [2013] 35 taxmann.com 607 (Bang) 5 CIT v. Samsung India Electronics Ltd [2013] 37 taxmann.com 239 (Delhi) (HC) 6.CIT v. Sardar Sarovar Narmada Nigam Ltd. [2013] 37 taxmann.com 344 (Gujarat) (HC) 7 CIT v. Raliiwolf Ltd. (1980) 1211TR 262 (Bom.) (HC) 8 CIT v. Saurashtra Cement & Chemical Industr ies Ltd. [1973] 91 ITR 170 (Guj.)(HC) 9 Hotel Alankar v. CIT [1982]133 ITR 866 (Guj. ) (HC) 10. CIT v. Tamil Nadu Dairy Development Corporation Ltd [1995] 216 ITR 535 (Mad.) 11. Eveready Industr ies India Ltd. vs. Commissioner of Income- tax [2010] 323 ITR 312(Cal.) (HC)

7. The ld. DR relied on the CIT’s order u/s 263.

8. We have considered the arguments of both the sides and perused the material information and facts on the record. The question which arises for consideration is as to when the assessee said to have commenced its business. It has to be observed that there is a distinction between setting up of the business and commercialization of the operation, which generates actual revenue to the business. What is relevant under the Income-tax Act is the set up of the business and not the commencement of the business by referring to the provisions of section 3 of the Act. In this present case, the assessee is in the business of construction and development of technology park. In this line of business, the process commences from the date of negotiation for acquiring land, actual purchase of the land and then actual development of such land. The concept of commencement will change according to the nature and facts of the particular industry. It may vary depending upon the business model and business cycle of the industry. In the present case under consideration, the business said to have set up, when it is ready or established to commence its operation, for which, we refer to the case law Western India Vegetable Products Ltd., 26 ITR 151 (Bom.). Similarly, in the case of Arcane Developers (supra) date of setting up of business depends upon facts and the nature of the business. This is the reason why we have referred to the objects for incorporation of the company and the main business activities in which assessee was engaged.

9. The ratio of the judgment of Hon’ble Delhi High Court in the case of CIT Vs. Dhoomketh Builders& Development (P) Ltd., (supra) are exactly similar to the present case under consideration. The ratio of the judgment is as under:

“9. The Tribunal has observed that having regard to the business of the assessee, which is the development of real estates, the participation in the tender represents commencement of one activity which would enable the assessee to acquire the land for development. If the assessee is in a position to commence business, that means the business has been set-up. The Acts of applying for participation in the tender , the borrowing of monies for interest from the holding company, the deposit of the borrowed monies on the same day with NGEF Ltd. as earnest money were all Acts which clearly establish that the business had been set-up. The commencement of real estate business would normally start with the acquisition of land or immoveable property. When an assessee whose business it is to develop real estates, is in a posit ion 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 the land may be a 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. When the assessee in the present case was in a position to apply for the tender , borrowed money for interest albeit from its holding company and deposited the same with NGEF Ltd. on the same day, it shows that the assessee's business had been set-up and it was ready to commence business. The learned senior standing counsel for the revenue would, however, state that t ill the land is acquired, the business is not setup. The difficulty in accepting the argument is that an assessee may not be successful in acquiring land for long period of time though he is ready to commence his business in real estate, and that would result in the expenses incurred by him throughout that period not being computed as a loss under the head "business" on the ground that he is yet to set-up his business. That would be an unacceptable position. The other argument of the learned standing counsel for the revenue that the tax auditors of the assessee have themselves pointed out that the assessee is yet to commence its business is also irrelevant because of the distinction between the commencement of the business and setting-up of the same.”

10. The other issue under consideration is the treatment of interest income whether income from business or from other sources. As observed above, the assessee had set up the business prior to this AY 2009-10, assessee is eligible to treat the interest income earned during this year earned out of the excess funds available in the business. It was earned by the assessee while carrying on the business activities. Similar view was upheld in the case of Dakshin Shelters Pvt. Ltd. in ITA Nos 1983 to 1985/Hyd/2011 by the coordinate bench of ITAT, Hyderabad wherein it was allowed to claim expenses as incurred which was debited to profit & loss a/c against interest income. Similar view also expressed by this coordinate bench in the case of ITO Vs. Trident Shelters Pvt. Ltd., ITA No. 1160/Hyd/2012.

11. Accordingly, the grounds raised by the assessee are allowed and the order passed u/s 263 is set aside.

12. In the result, appeal of the assessee is allowed.

Pronounced in the open court on 30th November, 2015

(P. MADHAVI DEVI)                 (S. RIFAUR RAHMAN)
JUDICIAL MEMBER                ACCOUNTANT MEMBER