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.

The Tribunal concluded that the business was set up on 25-4-2005, allowing expenses incurred thereafter as business expenses. The interest income was ... Penalty u/s 271(1)(c) – Proper explanation to furnish the bona fide the claim made or not - Claim of carry forward of unabsorbed depreciation – Held that:- The contention of the assessee is accepted because though it is true that assessee could not commence the business but at the same time it cannot be ignored that from incorporation the intention of the assessee was for obtaining NSE membership and various formalities had to be fulfilled before application for registration could be made – Relying upon Whirlpool Of India Limited. Versus Joint Commissioner Of Income-tax [2007 (11) TMI 331 - ITAT DELHI-B] - the nature of business proposed to be undertaken was such that without complying with various requirements, the assessee could not make application for registration - The application could be made to SEBI only when the assessee had fulfilled/ complied with basic conditions necessary for grant of registration. There can be one point of view that the business had been set up after all the necessary formalities had been fulfilled for making the assessee eligible for filing the application with SEBI - Only the permission for commencement of business was awaited - The business was ready for commencement subject to grant of registration - it cannot be said that assessee’s explanation of claiming expenses for the period 25-4-2005 to 15-1-2006 could be branded as mala fide - The assessee having complied with all the requirements was sanguine of getting registration and therefore treated its business as being set up from the date of making application - the assessee’s intention since beginning was to act as member of NSE also has to be given due weightage - penalty is not leviable - the assessee having filed all the relevant information along with the return, it cannot be said that assessee had concealed particulars of its income to attract penalty u/s 271(1)(c) – Relying upon Reliance Petro Products Ltd. v. CIT [2010 (3) TMI 80 - SUPREME COURT] - Decided in favour of Assessee. 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.