TaxTMI 
TaxTMI 
2015 (9) TMI 1503
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.... against of business income." 3. Grounds raised by the revenue in its appeal is as under:- "Deleing the addition of notional interest income by holding that the ld. AO cannot dictate terms and conditions of business to the assessee for earning income on interest free advances either for business and or otherwise as a prudent businessmen is not expected to give advance free of interest after borrowing and payment huge interest." 4. Briefly stated facts of the case as culled out from the order of the lower authorities are that the assessee filed its return of income declaring loss in the status of a partnership firm, which came into existence on 28.12.2005. As per the partnership deed, the firm was engaged in business of construction work, acquiring land, developing and constructing buildings on such land. In the previous year relevant to the assessment year, the assessee entered into an agreement with the Army Welfare Housing Organization (in short 'AWHO') for purchasing of land and constructing a residential accommodation on such land and took an advance of Rs. 13.0 crores from the AWHO against the Bank guarantee of Rs. 13.50 crores submitted. In its profit and loss ....
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.... of AWHO and that was the reason for which assessee paid the sum, just after completion of six months of agreement to the AWHO. In view of observations, the ld. CIT(A) justified the disallowance Rs. 50.00 lakhs by the ld. AO as penal interest. As regards to the balance interest of Rs. 17,36,671/- claimed by the assessee during the year, the ld. CIT(A) held that same was not allowable u/s 36(1) (iii) of the Act because the assessee had advanced funds to one of its partner. The ld CIT(A), further held that even if the interest is allowable otherwise as business expenditure in any other section, same cannot be allowed u/s 40(a) (ia) of the Act as the assessee has not deducted TDS on the interest, either penal or non-penal. Further, with regard to disallowance of business expenditure of Rs. 11,42,700/-, the ld CIT(A) held that it was undisputed fact that the project was not completed in the relevant period and therefore all the expenditure debited in Profit and Loss Account was nothing but part of the work in progress and thus required capitalization of the expenditure. Holding so, the ld CIT(A) justified that action of the ld. AO in treating the business income at NIL. Further, the ac....
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....Further, he submitted that the said advance was used for making payment for acquiring land, which was part of the business activity of the assessee and business was already set up , therefore, the interest was allowable as business expenditure. Further, the ld. AR relied on the following judicial pronouncements reported in 196 ITR 421(Cal), 222 ITR 772(P&H), 135 ITR 811(MP), 205 ITR 163(SC), 107 ITR 172(Guj). As regards to the balance interest expenditure of Rs. 17,36,671/-, the ld. AR submitted that all the advances were made for the purpose of business and the capital was withdrawn by one of the partner M/s Chandana Developers at the fag end of the previous year i.e. 21/03/2007 out of the capital of Rs. 6-7 crores contributed by the partners and therefore no disallowance of interest was called for u/s 36(1)(iii) of the Act. c. As regard to the disallowance of interest payment u/s 40(a)(ia) of the Act, the ld AR submitted that out of the total interest claimed of Rs. 67,36,671/-, the interest of Rs. 50.00 lakhs stood paid as on 09.02.2007 and was not payable at the end of the year and thus Section 40(a)(ia) of the Act was not applicable in view of the judicial pronounceme....
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....has observed as under: "The important question that has got to be considered is from which date i are the expenses of this business to be considered permissible deductions and for that purpose the section that we have got to look to is s. 2(11) and that section defines the 'previous year' and for the purpose of a business the previous year begins from the date of setting up of the business. Therefore, it is only after the business is set up that the previous year of that business commences and in that previous year the expenses incurred in the business can be claimed as permissible deductions. Any expenses incurred prior to setting up a business would obviously not be permissible deductions because those expenses would be incurred at a point of time when the previous years of the business would not have commenced." 9.2 Further, the Hon'ble Gujarat High Court in the case of CIT Vs. Saurastra Cement and Chemical Industries Ltd. (1973) 91 ITR 170 has made following observation on the question of setting up of business: "... A business activity consists of three stages: the first stage relates to the activity necessary for the purpose of acquiring the raw m....
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....lopment (P) Ltd. 368 ITR 680 (Del) has held as under:- "The Tribunal has observed that having regard to the business of the assessee, which is the development of real estates, the participation in the tender represents commencement of one activity which would enable the assessee to acquire the land for development. If the assessee is in a position to commence business, that means the business has been set-up. The Acts of applying for participation in the tender, the borrowing of monies for interest from the holding company, the deposit of the borrowed monies on the same day with NGEF Ltd. as earnest money were all Acts which clearly establish that the business had been set-up. The commencement of real estate business would normally start with the acquisition of land or immoveable property. When an assessee whose business it is to develop real estates, is in a position to perform certain Acts towards the acquisition of land, that would clearly show that it is ready to commence business and, as a corollary, that it has already been set-up. The actual acquisition of land is the result of such efforts put in by the assessee; once the land is acquired the assessee may be said t....
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....of law and facts depends upon the line, nature and character of the business/ professional activity. For example, for manufacturing business, purchase of new material or electricity connection may be relevant point to determine setting up but in case of a properly dealer, the moment, he puts up a chair and table, or starts talking, his business is set up. The present assessee was engaged and incorporated for carrying on trading activities in different commodities. The word 'trade' even though not defined in the act is used to denote operations of a commercial character by which a trader provides to customer for reward, some kind of goods or services. In other words, when the trader start providing such goods and services, the business is said to have commenced but the same may not hold good for set up of a business, which is a stage before the commencement. To set up a business, the following activities become relevant. 'Preparation of business plan, establishment of a business premises, research into the likely markets or profitability of the business, acquiring assets for use in the business, registration as an entity and under the local laws etc.' The ....
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....le high Court of Madhya Pradesh in the case of CIT, Madhya Pradesh-I Vs. Rajkumar Mills Ltd reported in 135 ITR 811 has held that amount paid by the assessee to the Export Promotion Council for shortfall in export performance was not a penalty for infraction of law. The Hon'ble Supreme Court in the case of CIT Vs. Ahmedabad Cotton Mfg. Co. Ltd reported in [1994] 205 ITR 163 has held that payment made to textile commissioner for non fulfillment of conditions of bond was not a penalty or something akin to penalty. Respectfully, following the above judicial pronouncements, we hold that payment of interest of Rs. 50.00 lakhs was not a penalty and therefore the same is allowable u/s 37(1) of the Act. As regards to balance interest expenditure of Rs. 17,36,671/- payable to the AWHO is concerned, we agree with the contention of the ld AR that the assessee has paid advances for the purpose of purchase of land and which is one of main business activity of the assessee. Merely withdrawing capital by one of the partner at the fag end of the previous year out of the capital of partners lying in the firm, it cannot be said that the assessee has utilized interest bearing fund for the purpose of ....
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.... nature are allowable as business expenditure and no capitalization is required. 16. In nutshell, out of interest expenses of Rs. 67,36,671/- interest expenses of Rs. 50.00 lakhs only are held as allowed and other business expenses of Rs. 11,42,700/- are held as fully allowed to the assessee. Accordingly, the ground No. 1 of the assessee stands partly allowed. 17. In ground no.2, the assessee has challenged the action of the ld. AO in considering the interest income of Rs. 26,43,583/- from fixed deposit with bank as income from other sources as against the business income claimed by the assessee. The ld AR submitted that fixed deposit was made for giving guarantee to the AWHO by way of security for the purpose of receiving advance and thus said fixed deposit was made for the purpose of business and the interest income being part of business income, should not be assessed separately as income from other sources. In support thereof, he relied on the judicial pronouncements reported in 9 ITS 263 (mum), 345 ITR 283 (All), 297 ITR 70 (Kar) , 132 ITR 70 (Del). Further, the Ld AR submitted that without prejudice to the above, if interest income might be treated towards the project a....
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....dditional CIT reported in 132 ITR 70. In that case the assessee was an Italian company and came to India as a Contractor and extra funds available were deposited in Bank. The interest earned on funds with bank has been held as business income by the Hon'ble Court. In view of the above judgements of the various courts, we are of the considered opinion that the assessee was required to make a fixed deposit for the purpose of business necessity and therefore, the interest income earned thereon falls under the head "Profit and Gains of business and Profession". As the interest income as been held as part of business income, the alternative arguments of the ld. AR are rendered otiose. Accordingly, this ground of the assessee is allowed. 19. In the result the appeal of the assessee is partly allowed. 20. Now, we take up the appeal of the Revenue. ITA No.5548/Del./2010 21. In the solitary ground, the revenue has agitated the issue of notional interest income of Rs. 38,50,000/- deleted by the ld CIT(A). The ld SR. DR relied on the order of the ld. AO. On the other hand, the ld AR relied on the finding of the ld CIT(A) and submitted that funds of Rs. 5.50 crores were utilized fo....