TMI Blog2015 (9) TMI 1503X X X X Extracts X X X X X X X X Extracts X X X X ..... capital of partners lying in the firm, it cannot be said that the assessee has utilized interest bearing fund for the purpose of activity other than business, hence, the interest expenditure is held to allowable business expenditure. Therefore, the entire interest is allowable as business expenditure subject to the allowability under the provision of section 40(a)(ia) of the Act. As regards to the alternative disallowance of interest u/s 40(a)(ia) interest of ₹ 50.00 lakhs, being already paid before the end of the relevant previous year and therefore provision of section 40(a)(ia) of the Act are not applicable in respect of said interest paid of ₹ 50.00 lakhs. As regards to the balance interest of ₹ 17,36,671/- which was payable at the end of the years, the assessee has already not pressed for allowance of the same u/s 40(a)(ia) of the Act. So, although same is otherwise held as allowable business expenditure, but it is not allowed in the current assessment year in terms of section 40(a)(ia) of the Act. Considering the interest income from fixed deposit with bank as income from other sources as against the business income claimed by the assessee - Held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n taking the business income as NIL as against loss of ₹ 52,35,797/- by disallowing all expenses i.e. interest of ₹ 67,36,671/- paid to AWHO and other expenses of ₹ 11,42,700/-. On the facts and in the circumstances of the case, the ld CIT(Appeals) was not justified in taking interest income of ₹ 26,43,583/- as income from other sources as 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o.B/03003/15/AWHO/Mysore dated 09.08.2006, it was specifically mentioned that in case of the project was not completed within six months as per clause 9 of the said MOU, the assessee was required to pay ₹ 50.00 lakhs as interest and other miscellaneous expenditure. Further, the ld CIT(A) observed that the rate of interest of 9.05 per cent on advance from AWHO claimed by the assessee was not borne out of any documents 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 ₹ 50.00 lakhs by the ld. AO as penal interest. As regards to the balance interest of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. b. As regards to finding of the ld ld. AO and ld. CIT(A) that the out of amount of ₹ 67,36,671/- claimed as interest, the sum of ₹ 50 lakhs paid to the AWHO on 09.02.2007 was penal in nature , the ld. AR submitted that interest paid to the AWHO was against the advance received from the AWHO and as per contractual terms and conditions, therefore, the interest was not a penalty for any infraction of statutory law. 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 ₹ 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 ₹ 6-7 crores contributed by the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of ld.AO and ld. CIT(A). We are of opinion that such minor contradictions are not making significant impact on otherwise findings of both lower authorities that the business of the assessee was not carried out. Therefore, the main issue for us to decide when the business expense incurred becomes eligible for deduction u/s 37(1) of the Act. The Hon ble High Court of Bombay in the case of Western India Vegetable Products Ltd. Vs. CIT (1954) 26 ITR 151 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot allowable as revenue expenditure. As against, the ld AR asserts that in facts of the case the business was set up and therefore, once the business is set up , the assessee was eligible to claim the expenses as business expenses. So, whether in the facts of the case, business was set up or not, we look into finding of the jurisdictional high court on the issue. The Hon ble High Court of Delhi in the case of CIT Vs. Dhoomketu Builders Development (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 wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. it is clear that it is only after the business is set up, that the expenses incurred in the business can be claimed as permissible deduction under section 37 of the Act. For commencement of business, there must be in place some income generating asset or income earning structure. In several cases, there is a gap or an interval between setting up and commencement. When the business is set up, is a mixed question 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bligation and payment of such amount for non compliance of terms and conditions of agreement, was not an infringement of the statutory law. The Hon ble High Court of Punjab and Haryana in the case of CIT Vs Indo Asian Switch- Gears (P) Ltd reported in 222 ITR 772 has held that certain amount paid by way of penalty on account of late delivery of goods was not on account of infraction of law and therefore, it was deductible. The Hon ble 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 ₹ 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 ₹ 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the years, the assessee has already not pressed for allowance of the same u/s 40(a)(ia) of the Act. So, although same is otherwise held as allowable business expenditure, but it is not allowed in the current assessment year in terms of section 40(a)(ia) of the Act. 15. As regards the business expenses of ₹ 11,42,700/- is concerned we have already held that business of the assessee was set up and therefore, the expenses claimed by the assessee being administrative in nature are allowable as business expenditure and no capitalization is required. 16. In nutshell, out of interest expenses of ₹ 67,36,671/- interest expenses of ₹ 50.00 lakhs only are held as allowed and other business expenses of ₹ 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 ₹ 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 sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee was for the purpose of providing a bank guarantee to the contractee in order to acquire contract work and therefore, the interest received on fixed deposit was in the nature of business income. In the instant case also the assessee has made fixed deposit for the purpose of bank guarantee to be submitted to the AWHO for the purpose of getting advance. Further the ld AR has also relied on the judgement of the Hon ble jurisdictional High Court in the case of Snam Progetti Vs. Additional 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, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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