TMI Blog2019 (6) TMI 608X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness. 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 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, 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. So, following the decision rendered in Indian Oil Panipat Power Consortium [ 2009 (2) TMI 32 - DELHI HIGH COURT] income earned by the assessee from interest during the period prior to the commencement of business and at the stage of setting up of business, the same is of the nature of capital receipt and as such loss incurred by the assessee under the head PBGP is eligible to be set off against the interest income earned during the year under assessment. So, we are of the considered view that the ld. CIT (A) has rightly directed the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst 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, expenses amounting to ₹ 5,75,23,000/- is capitalized to the cost of construction. AO also treated the amount of ₹ 3,39,98,656/- as income from other expenses and made addition thereof to the total income of the assessee. 3. Assessee carried the matter by way of an appeal before the ld. CIT (A) who has deleted the addition after accepting the appeal. Feeling aggrieved, the Revenue has come up before the Tribunal by way of filing the present appeal. 4. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 set-up the business. As per the submissions of the Appellant, substantial amounts of money have been raised through equity capital on 20/10/2010, business decisions had been taken, key personnel were employed, lease agreements were signed to take hotel properties on lease and in fact the improvements to properties had also commenced prior to the year under consideration. I have considered the arguments of the appellant. The Hon'ble Jurisdictional High Court, in the case of Commissioner of Income-tax- IV vs Dhoomketu Builders Development (P) Ltd. (201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 section 2(11) of the Indian Income-tax Act, 1922] - Business expenditure - Year in which deductible - Assessment year 1947-48 Whether for purpose of a business it is only after business is set up that previous year of that business commences and in that previous year expenses incurred in business can be claimed as permissible deductions - Held, yes - Assessee-company was registered on 29.12.1945 and received its certificate of commencement of business on 20.4.1946 - It purchased a groundnut oil mill on 1.11.1946 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld 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 acquire a piece of land It obtained loan from its holding company and deposited same as earnest money to acquire land - However, it could not succeed in auction - It paid interest on borrowed fund and received interest on earnest money It claimed differential between interest as loss and claimed for carry forward of said loss - Assessing Officer found that current year was first year of existence of assessee and sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, as per the provision of section 4 which is the charging section, income, which arises to an assessee from the date of setting up of the business but prior to commencement, is chargeable to tax, depending on whether it is of a revenue nature or a capital receipt. The income of a newly set-up business, post the date of its setting up, ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee-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 business, the same is of the nature of capital receipt and as such loss incurred by the assessee under the head PBGP is eligible to be set off against the interest income earned during the year under assessment. So, we are of the con ..... X X X X Extracts X X X X X X X X Extracts X X X X
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