2013 (4) TMI 668 - HC - Income Tax

Depositing earnest money and borrowing funds count as business setup under Section 260A, not just land acquisition

The HC held that depositing earnest money and borrowing funds to participate in a tender constituted setting-up of the business, distinguishing it from ... Assessment of income - when a business can be said to have been set-up? - whether act of depositing earnest money while participating in the tender floated by the official liquidator of the Karnataka High Court and the act of borrowing monies from the DLF Ltd. for the purpose can be construed as acts constituting setting-up of the business of real estate development? Held that:- 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 revenue contention that till the land is acquired, the business is not set-up is not acceptable as 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. The other argument 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. Under section 260A an appeal lies to the High Court only on a substantial question of law. The finding of the Tribunal in the present case is a finding of fact and it cannot be said that the finding was without any basis or material. Appeal dismissed - no substantial question of law arises. Against revenue Issues Involved:1. Determination of whether the business of the assessee was 'set-up' during the relevant accounting year.2. Classification of interest income and the applicability of deductions under the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Determination of Whether the Business was 'Set-up':The primary issue in this case was to ascertain whether the business of the assessee, a company incorporated for real estate development, was 'set-up' during the relevant accounting year (2006-07). The assessee argued that its business was set-up on 29.11.2005 when it deposited earnest money in response to a tender floated by the official liquidator of the Karnataka High Court for the sale of land. The assessing officer, however, contended that since the assessee was not successful in acquiring the land, the business could not be considered as set-up. The Tribunal, after examining the facts and rival contentions, agreed with the assessee. It held that the participation in the tender and the deposit of earnest money were sufficient activities to constitute the setting-up of the business. The Tribunal emphasized that the actual acquisition of land was immaterial for construing that the business was set-up. The Tribunal's decision was based on judicial precedents, including the Bombay High Court's judgment in Western India Vegetable Products Ltd. v. CIT, which distinguished between the setting-up and commencement of business.2. Classification of Interest Income and Applicability of Deductions:The second issue revolved around the classification of interest income and the applicability of deductions under the Income Tax Act, 1961. The assessing officer classified the interest income of Rs. 62,28,333/- received from NGEF Ltd. under the head 'income from other sources' and did not allow the deduction of interest of Rs. 1,79,37,534/- paid to DLF Ltd. against this income. The CIT (Appeals) agreed with the assessing officer that the business was not set-up and rejected the assessee's claim for computation of business loss. However, the CIT (Appeals) allowed the deduction of interest paid to DLF Ltd. under section 57(iii) of the Act while computing the income under the residual head, subject to no carry forward of the deficiency. The Tribunal, however, held that the income of the assessee should be assessed under the head 'business income' and allowed the computation of the business loss at Rs. 1,17,12,473/- and its carry forward. The Tribunal's decision was based on the fact that the business was set-up during the relevant accounting year, and therefore, the interest income and expenses should be considered under the head 'business income.'Conclusion:The High Court, upon careful consideration of the facts and rival contentions, upheld the Tribunal's decision. It emphasized that the question of when a business is set-up is a question of fact, dependent on the nature and type of business. The Court agreed that the acts of participating in the tender, borrowing money, and depositing the earnest money were sufficient to establish that the business was set-up. The Court dismissed the revenue's appeals, stating that no substantial question of law arose from the Tribunal's order, which was based on a proper appreciation of facts and judicial precedents. The appeals were dismissed with no order as to costs.