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 the assessee generated no revenue and did not carry out business operations during the assessment year. The ITAT held that a real estate business commences with land acquisition, not revenue generation. Since the assessee purchased land for business purposes and recorded it as inventory/stock-in-trade in the balance sheet, business operations had commenced. Following Delhi HC precedent in CIT v. Dhoomketu Builders Development P. Ltd., the tribunal ruled the expenditure was allowable despite absence of revenue during the year.

---

---

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 Expenditure
The 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' Orders
The 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 Operations
The 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.

---