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2019 (6) TMI 608

..... shows that the assessee has raised substantial funds through equity capital, employee personnel, entered into lease agreements to take hotel properties on lease and started improvements on the properties and all these facts have been brought on record by the AO, but he has failed to make distinction between setting off of business or commencement of business. When the assessee has taken sufficient steps by way of raising sufficient funds employing skilled personnel and by entering into lease agreements with the hotels on which improvements have been started, it amounts to setting off of business and as such, previous year expenses incurred in the business are permissible deductions. We are of the considered view that the CIT (A) has rightly allowed the expenses having been incurred by the assessee after setting off of the business though before commencement of the business. Moreover, the assessee itself has capitalized many of its expenditure and only claimed the expenses which are of revenue in nature. Interest income to be set off u/s 71 being inextricably linked with the business of the assessee - HELD THAT:- When it is proved that the assessee has set up the business, earned th .....

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..... ng up of the business. 2. Briefly stated the facts necessary for adjudication of the controversy at hand are : Assessee company is into the hospitality business which is to mange, administer, own and carry out the activities/business of running hotels, guest house and similar other facilities. During the year under assessment, the assessee has not run any guest house or hotel but has carried out activities of construction of hotel and as such, no business receipts have been shown in the profit & loss account. Assessing Officer noticed that the assessee has claimed total loss of ₹ 1,99,23,134/-, arrived at after setting off of other income of ₹ 3,39,98,656/- against the total expenses of ₹ 5,75,23,000/- and other adjustments in computation of income. Assessee claimed in the P&L account the expenses on account of depreciation, employee benefit expenses and operating & other expenses. The amount of ₹ 5,75,23,000/- has been claimed by the assessee on revenue account. Declining the contentions raised by the assessee, AO reached the conclusion that since the assessee has been undertaking only construction of projects which is still in progress, expense .....

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..... ly, similar pre-operative stage expenses have been allowed by the Revenue in the preceding years u/s 143 (1) as well as in the succeeding years 2013-14 & 2014-15 u/s 143 (3) of the Act as per assessment order available at pages 67 & 68 and 69 & 70 of the paper book. It is also not in dispute that the main business of the assessee company is to manage, administer, own and carry on activities of business of running hotels, guest house and similar other facilities. It is also not in dispute that the assessee has produced before AO details of capital work-inprogress. 8. In the backdrop of the aforesaid undisputed facts, when we examine the impugned order passed by the ld. CIT (A) as well as financial statement of the assessee, available at pages 1 to 25 of the paper book, it goes to prove that the ld. CIT (A) has clearly made a distinction between commencement of business and setting off of business by thrashing the facts brought on record. 9. Ld. CIT (A) has categorically recorded the finding of facts as to setting up of the business by the assessee by returning following findings :- 4. …..The appellant has made elaborate submissions and has claimed that they had se .....

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..... of the business and all expenses incurred during that interval are permissible deductions. 10. Perusal of the balance sheet and P&L account, available at pages 9 & 10 of the paper book, apparently shows that the assessee has raised substantial funds through equity capital, employee personnel, entered into lease agreements to take hotel properties on lease and started improvements on the properties and all these facts have been brought on record by the AO, but he has failed to make distinction between setting off of business or commencement of business. When the assessee has taken sufficient steps by way of raising sufficient funds employing skilled personnel and by entering into lease agreements with the hotels on which improvements have been started, it amounts to setting off of business and as such, previous year expenses incurred in the business are permissible deductions. 11. Hon ble High Court of Bombay in case cited as Western India Vegetable Productions Ltd. (supra) decided the identical issue in favour of the assessee by returning following findings :- Section 37(1), read with section 3 of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) read with sectio .....

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..... ing assessment year in question - On appeal, Commissioner (Appeals), set aside order of Assessing Officer and held that (a) there is a distinction between commencement of business and setting up of business and the two dates need not necessarily overlap and (by section 3 refers to date of setting up of business and as such it is only thereafter, that previous year of newly set up business would commence and, therefore, expenses incurred prior thereto could be taken into account for purpose of determining profits of a newly set up business - On further appeal, Tribunal confirmed said order - Whether orders of appellate authorities suffered from infirmity - Held, no. 13. Similarly, Hon ble Delhi High Court in case of CIT vs. Dhoomketu Builders & Development (P) Ltd. (supra) held the finding of facts returned by the Tribunal while allowing the similar expenses by making distinction between the commencement of business and setting off of business by returning following findings:- Section 28(i), read with section 3, of the Income-tax Act, 1961- Business - Commencement of [Illustrations] - Assessment year 2006-07 - Assessee, engaged in realty business, participated in an auction to a .....

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..... Ltd.'s case (supra). The test, which permeated through the judgment of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case (supra), was that if funds have been borrowed for setting up of a plant and if the funds are 'surplus' and then by virtue of that circumstance they are invested in fixed deposits, the income earned in the form of interest will be taxable under the head 'income from other sources'. On the other hand, the ratio of the Supreme Court judgment in Bokaro Steel Ltd.'s case (supra) is that if income is earned, whether by way of interest or in any other manner on funds which are otherwise 'inextricably linked' to the setting up of the plant; such income is required to be capitalized to be set off against pre-operative expenses. [Para 5] The test, therefore, is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the plant. The clue is perhaps available in section 3 which states that for newly set-up business, the previous year shall be the period beginning with the date of setting up of the business. Therefore, .....

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..... g the decision of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd, (supra) in the facts of the instant case. On account of the finding of fact returned by the Commissioner (Appeals) that the funds infused by the joint venture partners in the assessee-company were inextricably linked with the setting up of the power plant, the interest earned by the assessee could not be treated as 'income from other sources'. Therefore, the impugned judgment was to be set aside. [Para 7] 17. As has been held in preceding paras, when it is proved that the assessee has set up the business, earned the income from interest during the construction period and has set off of the same against the loss under the head PGBP as per section 71 of the Act, the ld. CIT (A) has rightly deleted the addition as the funds parked in the bank on which interest has been earned were inextricably linked with the setting up of the hospitality business. 18. So, following the decision rendered by Hon ble High Court in Indian Oil Panipat Power Consortium (supra), income earned by the assessee from interest during the period prior to the commencement of business and at the stage of setting up of b .....

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