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TMI Blog2012 (5) TMI 110X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance administrative and other expense i.e. fees and taxes of Rs. 3484/-, bank charges of Rs. 9,025/- and audit fees of Rs. 5,056/-, preliminary expenses of Rs. 1162/- u/s. 35D by the Assessing Officer treating the same as prior period expenses. 2. That on the facts and circumstances of the case and contrary to the provisions of law, the Ld. Commissioner of Income Tax (Appeals) has erred in upholding the Assessing Officer view that the company does not have right to transfer or sell the plot or the building constructed thereupon (as trading commodity) and the appellant company can use this plot only for constructing and running of hotel. 3. That the order passed by the Ld. Commissioner of Income Tax (Appeals) is wrong on facts and erroneous in point of law and right is reserved to assail the same on such other ground or grounds as may be advanced at the time of hearing for which the appellant craves leave to amend, vary or add to the ground herein before appearing." 3. Briefly stated facts of the case are that the assessee is a private limited company which was incorporated on 27.4.2005. The assessee company is a wholly owned subsidiary of DLF Ltd. During the relevant assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the business of real estate development and for that purpose the land was taken on lease from the DDA. Since the money has been borrowed by the assessee for the purpose of its business therefore the interest expenditure incurred is revenue in nature and allowable u/s. 36(1)(iii) of the IT Act. On the other hand the Assessing Officer was of the view that since the assessee has not set up its hotel business during the relevant A.Y. all expenses incurred prior to the setting up of business such as interest expenditure etc. are in the nature of pre-commencement expenditure and are capital in nature and the same is not an allowable expenditure in view of the proviso to section 31(1)(iii). Ld. Commissioner of Income Tax (Appeals) further observed that he was inclined to agree with the view of the Assessing Officer. 4.1 Ld. Commissioner of Income Tax (Appeals) further observed that form the perusal of clause 5 of the Memorandum of Association it is gathered that running of hotel is one of the main objects of the assessee company and not its other object. Further, as per clause 6(a) of the perpetual lease dated 4.9.2006 between the assessee and the DDA, the assessee company is not entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tax Act being satisfied. That from the facts of the case, it is evident that the assessee company has merely taken a plot of land for its hotel business during the relevant assessment year. Ld. Commissioner of Income Tax (Appeals) further observed that for setting up of a hotel business assessee had to take number of other sanctions including building plan sanction and various other registrations. Even the construction of the hotel has not been started during the relevant assessment year. Ld. Commissioner of Income Tax (Appeals) observed that in the absence of a building it cannot be said that the assessee's business of hotel was even set up during the relevant assessment year. 4.3 Ld. Commissioner of Income Tax (Appeals) further observed that even otherwise the expenditure is not allowable in the case of the assessee because the business has not been set up during the relevant A.Y. Ld. Commissioner of Income Tax (Appeals) further observed that this position has further been clarified by the introduction of proviso to section 36(1)(iii) by the legislature w.e.f. 1.4.2004. Proviso to clause 36(1)(iii) was inserted by the Finance Act, 2003, with effect from 1.4.2004. Ld. Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... below. 7.2 We have carefully considered the submissions and perused the records. We find that Ld. Commissioner of Income Tax (Appeals) has given a finding that the assessee can use the hotel plot leased to it only for construction and running of hotel, with no right to transfer the same, the hotel plot is indeed a capital asset for the assessee company. Although the assessee company has shown it as a stock in its balance sheet and profit and loss account, however, this will not alter the legal position because the substance of a transaction is important and not its entry in the books of account or its treatment by the assessee company. We further agree with the finding of the Ld. Commissioner of Income Tax (Appeals) that merely taking land on lease, by any stretch of imagination cannot be treated as the commencement / setting up of it's hotel business. From the facts of the case, it is evident that assessee has merely taken a plot of land for its hotel business during the relevant assessment year. Ld. Commissioner of Income Tax (Appeals) has given a finding that for setting up of a hotel business assessee had to take number of other sanctions and various other registrations. Even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset for extension of existing business or profession; for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. By implication this proviso is also applicable when assets are acquired for new business. If the proviso is interpreted to signify that the same will not be applicable to such acquisition of assets, it will defeat the whole purpose of the proviso. Thus, we find that ld. counsel of the assessee's plea that proviso is not applicable, is not sustainable. In the background of the aforesaid discussion and precedent, Ld. Commissioner of Income Tax (Appeals) has passed a reasonable order which does not need any interference on our part and accordingly, we uphold the same. As regards the assessee's alternative submission the expenditure involved be allowed to be capitalized, we find that the same is acceptable. Hence, we direct that the disallowed expenditure be allowed to be capitalized. 7.5 We also find that Ld. Commissioner of Income Tax (Appeals) has rightly upheld the disallowance of administrative and other expenses as the same have been ..... X X X X Extracts X X X X X X X X Extracts X X X X
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