2024 (3) TMI 661 - AT - Income Tax

Real estate business commences with land acquisition, not revenue generation - expenditure allowed despite no revenue

The ITAT Delhi allowed the assessee's appeal regarding disallowed expenditure claims. The revenue authorities had rejected the expenditure on grounds that ... Disallowing claim of expenditure - non-carrying of business activity during the year under reference - only reason for not allowing the expenditure/loss claimed by the assessee is that the assessee did not generate any revenue during the assessment year under consideration and, therefore, the assessee did not carry out any business operations - whether the assessee commenced its business operations during the year under consideration and as to whether the expenditure claimed by the assessee is an allowable expenditure or not? - HELD THAT:- It is not in dispute that the assessee is into real estate business. It is also not in dispute that the assessee has purchased land for its real estate purchases and has shown in the balance sheet as inventories/stock-in-trade. Therefore, in our view once the assessee has purchased the land for its business purposes and shown it as inventory and as stock-in-trade in the balance sheet it cannot be said that the assessee did not commence its business operations during the year under consideration. The Jurisdictional High Court in the case of CIT Vs. Dhoomketu Builders & Development P. Ltd. [2013 (4) TMI 668 - DELHI HIGH COURT] on identical facts held that the commencement of real estate business would normally start with the acquisition of land or immovable property. It has been held that once the land is acquired by the assessee it can be said that assessee has actually commenced its business which is development of real estate. We hold that the assessee had commenced its business operations during the assessment year under consideration and the expenditure incurred by the assessee is an allowable expenditure. Non generation of any revenue during the assessment year under consideration cannot be the reason for holding that the assessee has not commenced any business operation. Ground no.1 of grounds of appeal of the assessee is allowed. Issues:The judgment involves the issue of disallowance of expenditure claimed by the assessee on the grounds of non-carrying out of business operations during the assessment year under consideration.Comprehensive Details:Issue 1: Disallowance of ExpenditureThe assessee appealed against the order disallowing the claim of expenditure amounting to Rs. 62,47,234 on the basis of non-carrying out of business activities during the relevant year. The appellant contended that the expenses were routine and incurred wholly and exclusively for the purpose of business, emphasizing that non-earning of revenue should not affect the validity of the expenditure claim. The appellant argued that the disallowance lacked basis, genuineness of the claim was not disputed, and the disallowance was merely mechanical. It was further stated that the disallowance was contrary to past history and legal principles.Issue 2: Sustainability of Lower Authorities' OrdersThe appellant challenged the sustainability of the orders passed by the lower authorities, asserting that they were not factually sustainable and legally sound.Issue 3: Commencement of Business OperationsThe main issue revolved around whether the assessee had commenced its business operations during the assessment year and if the claimed expenditure was allowable. The assessee, engaged in Real Estate business, declared a loss for the year as it had not generated any revenue. The Assessing Officer (AO) disallowed the expenses, stating that no business operations were conducted. The appellant argued that the purchase of land and its registration in the balance sheet as inventory demonstrated the commencement of business. The AO and CIT(A) upheld the disallowance, prompting the appeal.Legal Analysis and Decision:The Tribunal noted that the assessee, being in the real estate business, had purchased land and accounted for it as inventory, indicating the commencement of business operations. Citing a relevant High Court decision, it was established that the acquisition of land marked the initiation of real estate business. The Tribunal held that the assessee had indeed commenced business operations during the assessment year, making the claimed expenditure allowable. It was emphasized that the absence of revenue generation should not negate the commencement of business. Consequently, the appeal was allowed, and the order pronounced in favor of the assessee on 13/03/2024.