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2018 (11) TMI 1934 - AT - Income TaxDisallowance of Expenses by holding them to be Pre-operative Expenses - Non commencement of business - what is the stage at which a real estate company can be considered to have commenced its business and becomes eligible to claim the expenses incurred as revenue expenses? - AO has held that since the expenses claimed do not have corresponding business revenue, the assessee’s business activities have not commenced and therefore, the interest income needs to be charged to tax as pre-operative interest We find that the assessee had raised funds from its AE by issuing CCDs and made advance payments to a party for purchase of land. Part of the advance payment was made in the earlier year and balance amount in the current year. No land has been purchased by the said party as can be seen from the suit filed by the assessee against the party in 2011. Other than payments of advance, it is not known as to whether any other activity happened to establish that the assessee was “in a position to commence business”. In the year under consideration, the assessee has raised funds from its AEs in the form of issue of another series of CCDs and paid advance to Shriram Land Development India (P) Ltd., which has been shown as a related party in the assessee’s TP study. Even in this transaction, other than making the advance payment, nothing has been brought on record to establish that the assessee was in a position to commence business. We also notice that out of the expenses claimed as deduction, the major components are Legal and Professional Charges and loss on redemption of investment in mutual funds (‘MF’). Whether these expenses are revenue OR capital in nature has not been examined at all. We also find that the TPO has treated the ALP of the interest transactions as NIL and disallowed the interest paid on CCDs. The AO has once again disallowed the same, leading to a double disallowance. We deem it appropriate to remand the matter back to the file of the CIT(A) to decide the issue afresh, after proper examination of the facts and test the facts of this case in the light of the legal principles outlined above - Ground No. 1 of assessee’s appeal is allowed for statistical purposes. TP adjustment - assessee had raised funds from its AE, an entity registered in Cypress, by issuing Compulsorily Convertible Debentures (CCDs) to its AE - There were two series of CCDs; one was issued at 0% interest and the other was at 14% - TPO rejected the assessee’s contentions that the CCDs are debt instruments and held them to be equity in nature - HELD THAT:- TPO while taking the view that CCDs are not in the nature of debts has referred to RBI policy and also the facts of the case on hand where the CCDs issued as a first series carried interest @ 14% and interest was then reduced to 0% and the second series of CCDs issued by the assessee on similar conditions carried interest @ 14%. CIT(A) has also not examined as to whether these two series of CCDs constituted an internal CUP for comparability analysis and determination of ALP. As regards the interest rate to be charged, the CIT(A) has observed that while the Bangalore Bench of ITAT has held that interest rate should be determined as per short term deposits in the home country; the Chennai and Hyderabad Benches of ITAT have held that the average LIBOR rates are to be adopted and is following the ‘Majority View’. This approach by the CIT(A) in deciding the issue, without examining the facts of the decisions relied upon and comparing the same to the facts of the case on hand, is erroneous to say the least. The CIT(A) ought to have first examined the currency in which the borrowings have been denominated, by examining the agreement entered into by the assessee and the AE and then decided the issue. There is merit in the assessee’s contention that it should have been afforded opportunity of being heard before the CIT(A) decided that the interest rate should be designated in LIBOR and not on the Rupee rate, as was done by the assessee. As it is clear that the basic facts of the case on this issue have not been thoroughly/properly examined in the right perspective by the CIT(A), we deem it appropriate to remand the issue back to the file of the CIT(A) for fresh adjudication - Grounds 2 to 4 of assessee’s appeal are allowed for statistical purposes.
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