TMI Blog2018 (2) TMI 1699X X X X Extracts X X X X X X X X Extracts X X X X ..... discussed above. Disallowance u/s 35D - Held that:- As we can see from the memorandum and articles of association of Taxworld Fashions Private Limited company main business is not a rental business. Appellant shows that as per balance sheet of the appellant company, it is shown that it is plea of CEPT plant to be under consideration. Further, the nature of business of the appellant is manufacturing and trading of cloth, but appellant had made statement before the lower authorities that rental income of ₹ 72,00,000/- earned during the year was its business income. After going through the record, we can see that appellant yet to start its business. So in our considered opinion, we are not convinced with the argument of the ld. AO but direct the AO to capitalize ₹ 72,00,000/- and allow depreciation. So far as disallowance u/s.35D of the Act is concerned appellant had not started its business activity and even the plant and building are still under construction. The appellant has merely stated in its submission that it had not business activity of plant and machinery under construction. But this fact is not correct because no business activity has been shown by the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e total income of the assessee company, are discussed as under: 4. 1 Disallowances us36 (l) (iii) of the IT Act During the assessment proceedings, it is noticed that the assessee company has shown only rent income of ₹ 7,20,000/- and no receipt/ sales has been shown in the Profit Loss Account during the year under consideration. However, the assessee company has claimed business expenditure of ₹ 30,03,166/- in the Profit Loss Account. Therefore, the same is prima facie not allowable as business expenditure. Further, it is also noticed that the rent income shown by the assessee company should be taxed under the head income from house property. Accordingly, queries have been raised before the assessee company in this regard vide letter dated 13/10/2014. The said queries are reproduced hereunder: vi) On verification of P L a/c of the company it is noticed that there is no business income shown in the P L a/c. Therefore, submit your explanation why the expenses debited of ₹ 30,03,166 should not be disallowed on the ground that these expenditure are required to either capitalize against the fixed assets shown in the Balance sheet or treated pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 02/12/2014 regarding disallowances of interest expenditure of ₹ 19,92,128/- u/s.36(i)(vii) of the I.T. Act. The relevant portion of the show-cause notice is reproduced hereunder: 3. On verification of the reply, it is noticed that you have accepted that the factory building Plant of the Company is under construction. Further, your Company has given land on rent to Nandan Exim Pvt. Ltd. for parking purpose. Therefore, it is clear that factory building plant is not put to use for the purpose of the business of the company. In this regard, your attention is drawn to the provisions of Sec.36(1)(iii) of the Act which provides for allowance of interest payment in respect of capital borrowed for the purposes of the business or profession. Further, as per the proviso below clause (iii) to Sec.36(1) of the Act, the amount of interest paid, in respect of capital borrowed for acquisition of an asset till the date on which such assets is first put to use, shall not be allowed as deduction. Under the circumstances, your claim for deduction of interest expenses of ₹ 19,92,128/- for acquisition of asset is not allowable u/s.36(1)(iii) of the Act. Please explain why the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he may do so either by using it himself personally or by letting it out to somebody else. In CEPT vs. Shri Lakshmi Silk Mills Limited (1951) 20 itr 451 (SC), the assessee owned a dying plant which could not be used by it personally owing to non availability of yarn. It therefore, let out the plant to another company on rental basis. The question for consideration was whether the rental income was assessable as profit from business. The court held that it was a part of the normal activity of the assessee's business to earn money by making use of its machinery by either employing in its own manufacturing concern or temporarily letting it to others for making profit for that business when for the time being it could not itself run it. We would request you to kindly treat our rent as business profit and allow the interest paid and P P expenses incurred as business expenditure. The reply of the assessee Company is duly considered but the same is not acceptable on the following grounds: i) The assessee company has given contradictory submission on the issue. On one hand the assessee company as per the submission dated 18/10/2014, has itself admitted that compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date the assets are put to use. Accordingly, the assessee company is not entitled to deduction claimed u/s.36(l)(iii) of the Act. ii) Reliance is placed on the judgment in the case of Nahar Polyfilms Ltd. Vs. CIT(P H)201 Taxman 304, wherein it is held that: since this amounts to extension of business and machinery was not put to use during the previous year, interest incurred is to be capitalized till the machinery is put to use Provision to section 36(i)(iii) considered. iii) In the case of CIT Vs. Vardhman Polytex Ltd. (P H) 299 ITR 152, it is held as under: Interest on capital borrowed for the purpose of acquisition of the assets of the new unit is to be allowed as a revenue expenditure only when such assets starts yielding income and not for any period prior thereto- iv) The Hon'ble ITAT, Calcutta, in the case of JCT Ltd Vs. ACIT (ITAT, Cal)65 ITD 169, it is held that Borrowed money capitalized in the Books - treated as part of actual cost of machinery - Not eligible for deduction of Interest u/s.36(i)(iii) of the I.T. Act. In view of the above, the interest expenditure of ₹ 19,92,128/- is disallowed in view of the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure, none of the expenditures are covered in the definition given in the section 35D(2)/(3) of the I.T. Act and also the business activity of the assessee company has not yet started and the Plant Building are under construction. Therefore, the assessee company is prima-facie not eligible for deduction u/s.35D(1) of the I.T. Act. Accordingly, a showcause notice was issued to the assessee company vide letter dated 31/10/2014 and case was fixed for hearing on 02/12/2014 for disallowance of expenditure claimed as preliminary expenditure u/s.35D of the I.T. Act. The relevant portion of the show cause notice is reproduced hereunder: 4. Further, your company has claimed deduction of ₹ 5,73,796/- (1/5thof total pre-operative expenses of ₹ 28,68,981/-) u/s.35D of the Act being preliminary expenses written-off. However On verification of the detail submitted regarding the preliminary and pre-operative expenses, it is seen that none of expenditure are covered in the definition provided u/s.35D(2) of the Act. You are, therefore, requested to explain why the claim for preliminary expenses of ₹ 5,73,796/- should not be disallowed and added back to the total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ara 4.2 Rs.5,73,796/- 25,65,924/- Assessed total income 2,82,758/- Rounded off 2,82,760/- Book profit u/s.115JB Book Profit u/s.115JB as per return of income : (-)22,83,166/- (-)22,83,166/- 6. Against the said addition assessee preferred first statutory appeal before the ld. CIT who dismissed the appeal of the appellant. 7. We have gone through the relevant record and paper book filed by the appellant. As we can see that company had not started its business during the year under consideration and there were no receipts or sales during the year under consideration. The appellant on the other hand claim that it had earned rental income of ₹ 7,20,000/- during the year which was its business income and hence expenses were allowable. As we can see from the memorandum and articles of association of Taxworld Fashions Private Limited company ..... X X X X Extracts X X X X X X X X Extracts X X X X
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