2014 (8) TMI 715 - AT - Income Tax

Business setup date determines expenses eligibility; interest income included in business income; penalty deleted for lack of concealment.

Elan Equity Services Pvt. Ltd. Versus ITO Ward-11(1), New Delhi

Elan Equity Services Pvt. Ltd. Versus ITO Ward-11(1), New Delhi - TMI Issues Involved:1. Whether the assessee's business was set up during the year under consideration.2. Whether the interest income should be assessed as income from other sources.3. Whether the expenses claimed by the assessee should be disallowed.4. Whether the penalty under section 271(1)(c) of the I.T. Act was rightly levied.Issue-wise Detailed Analysis:1. Whether the assessee's business was set up during the year under consideration:The assessee, a registered broker of NSE, claimed that its business was set up and ready to commence during the year under consideration, despite not having conducted any business activities. The assessing officer disagreed, concluding that the business commenced on 3-4-2006, the first working day of the next assessment year, and not during the year under consideration. The CIT(A) held that the date of the grant of the certificate of registration by NSE (16-1-2006) should be taken as the date of setting up the business. The Tribunal, considering the facts and the legal requirements fulfilled by the assessee, concluded that the business was set up when the application for membership was submitted on 25-4-2005. Hence, the expenses incurred after this date were considered business expenses.2. Whether the interest income should be assessed as income from other sources:The assessing officer assessed the interest income as income from other sources because the business was not considered to have commenced during the year under consideration. The Tribunal, aligning with the conclusion that the business was set up on 25-4-2005, implied that the interest income should be assessed as part of the business income.3. Whether the expenses claimed by the assessee should be disallowed:The assessing officer disallowed the expenses claimed by the assessee, including ROC fees, preliminary expenses, and audit fees, on the grounds that the business had not commenced. The CIT(A) partially allowed the expenses from the date of the grant of registration by NSE. The Tribunal, however, concluded that the expenses incurred after the business was set up (25-4-2005) should be allowed as business expenses, emphasizing that the claim was not mala fide and was based on a debatable issue.4. Whether the penalty under section 271(1)(c) of the I.T. Act was rightly levied:The assessing officer levied a penalty under section 271(1)(c) for the wrong deduction claimed by the assessee, stating that there was no disclosure regarding the set up/commencement of business and citing the decision in CIT Vs. Escorts Finance Ltd. The CIT(A) upheld the penalty, stating that the claim was ex facie bogus. The Tribunal, however, deleted the penalty, reasoning that the issue of the date of setting up the business was highly debatable. The Tribunal cited the decision in Reliance Petro Products Ltd., emphasizing that the assessee had not concealed particulars of income and had filed all relevant information, thus penalty under section 271(1)(c) was not warranted.Conclusion:The Tribunal allowed the appeal, concluding that the business was set up on 25-4-2005, expenses incurred thereafter were allowable as business expenses, and the penalty under section 271(1)(c) was not justified. The order pronounced in open court on 14-08-2014.