SUPERLIGHT MKTG. (P) LTD. v. INCOME TAX OFFICER
[Citation -2005-LL-0503-2]

Citation 2005-LL-0503-2
Appellant Name SUPERLIGHT MKTG. (P) LTD.
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 03/05/2005
Assessment Year 2001-02
Judgment View Judgment
Keyword Tags business or profession • development authority • residential complex • allowable deduction • business activity • source of income • purchase of land • interest earned • interest income • bank guarantee • sale of land
Bot Summary: In these appeals, the assessees have challenged the order of the CIT(A) confirming the order of the A O disallowing expenditure amounting to Rs. 2,70,661 and a sum of Rs. 2,62,915 on the ground that the business of t h e assessees had not commenced and the expenditure in connection with business cannot be allowed as deduction. In the PL a/c, administrative expenses amounting to Rs. 2,79,372 in the case of the assessee in ITA No. 4142/Del/2004 and an amount of Rs. 2,70,417 in the case of the assessee in ITA No. 4143/Del/2004 had been claimed as deduction. The case of the AO was that business of the assessee had not commenced in the sense that only lands were acquired and no sale of the same were made by the assessees. The administrative expenses were not allowable deduction according to the AO. The assessee in reply, pointed out that interest earned on the FDRs had inextricable link with the business of the assessee. We proceed to set out the facts of the present case, we deem it proper to set out the principles emerging from the various decided cases on the question as to when it can be said that an assessee can be said to have commenced his business. In Prem Conductors Ltd. vs. CIT 1976 CTR 324: 108 ITR 654, it was again reiterated, that where the business of the assessee consists of different activities, whether the activity which was started earlier then actual commencement of the production, can be said to have been essential part of the business activity of the assessee, has to be decided considering the time at which a businessman would regard a business as having commenced and the approach must be from the common sense point of view. The learned counsel for the assessee also puts forward alternative arguments with regard to the allowability of those expenses which arguments are not considered in view of our conclusion that the assessees have commenced their business.


These are appeals by assessee against two orders both dt. 6th Aug., 2004 of CIT(A)-XII, New Delhi, relating to asst. yr. 2001-02. In these appeals, assessees have challenged order of CIT(A) confirming order of A O disallowing expenditure amounting to Rs. 2,70,661 (in case of assessee in ITA No. 4142/Del/2004) and sum of Rs. 2,62,915 (in case of assessment in ITA No. 4143/Del/2004) on ground that business of t h e assessees had not commenced and, therefore, expenditure in connection with business cannot be allowed as deduction. facts and circumstances under which disallowance was made by AO are identical. These appeals were heard together and common order is being passed for sake of convenience. Both assessees are promoters and developers of land at Gurgaon. For asst. yr. 2001-02, assessee in ITA No. 4142/Del/2004 filed return of income declaring nil income. There was, however, book profit under s. 115J of Rs. 38,881 on which tax had been paid. In case of assessee in ITA No. 4143/Del/2004, return of income was filed for asst. yr. 2001-02 declaring nil income. However, book profit of Rs. 51,889 under s. 115J had been declared on which necessary tax had been paid. In P&L a/c, administrative expenses amounting to Rs. 2,79,372 in case of assessee in ITA No. 4142/Del/2004 and amount of Rs. 2,70,417 in case of assessee in ITA No. 4143/Del/2004 had been claimed as deduction. In case of both assessees interest income of Rs. 3,25,277 and Rs. 3,29,328 were shown as receipt in P&L a/c. There is no dispute that this interest income arose out of FDRs, which were pledged with Bank. On strength of FDRs pledged w i t h Bank, Bank had given Bank Guarantee to Haryana Urban Development Authority (HUDA) for purposes to enable assessee to carry on development works in acquired land. As already stated, assessee- company was in business of acquiring lands and dividing into plots and selling same to various persons. To develop residential colony in State of Haryana, licence is given only after area to be developed is 100 acres or more. It is for these reasons both assessees entered together with their associated companies for purpose of developing residential colony. There is memorandum of joint development agreement between these assessees and certain other companies to carry out joint development of land acquired separately by each of parties to joint development agreement. Copy of said agreement dt. 5th Aug., 1996 has been placed before us. land to be developed by assessees together with its associates was known as Mayfield Gardens. In connection with grant of licence, Director of Town & Planning asked assessees to provide bank guarantee and FDR on which interest was received which have been credited in P&L a/c. by both assessees was taken out for purpose of providing as security to book for bank guarantee provided by Bank on behalf of assessee to Director of Town Planning. In light of aforesaid facts, AO called upon assessee to explain as to why administrative expenses debited to P&L a/c. against interest income earned by assessee be not disallowed. case of AO was that business of assessee had not commenced in sense that only lands were acquired and no sale of same were made by assessees. administrative expenses were, therefore, not allowable as deduction as business expenses. According to AO, interest income declared in P&L a/c. was to be assessed as income from other sources, as it had nothing to do with business of assessee. administrative expenses were, therefore, not allowable deduction according to AO. assessee in reply, pointed out that interest earned on FDRs had inextricable link with business of assessee. assessee also pleaded that since land was acquired for purpose of development and ultimate sales, business activities of assessee shall be construed as having commenced and expenditure debited to P&L a/c. has to be allowed as deduction. assessee submitted that fact that no profit was shown in P&L a/c. on sale of land was not relevant factor. AO, however, rejected claim made by assessee. He held that assessee did not commence any business and that interest income was to be assessed under head Income from other sources . He, however, held that expenses which were incidental to earn interest income were to be allowed as deduction. He found postage and telegram, filing fee, bank charges and audit fees were allowable as expenses in earning interest income and consequently disallowed sum of Rs. 2,70,661 in case of assessee in ITA No. 4142/Del/2004 and sum of Rs. 2,62,950 in case of assessee in ITA No. 4143/Del/2004. On appeal by assessee, CIT(A) upheld order of AO by holding that business of assessee had not commenced and merely acquiring land for purpose of joint development with various other companies and getting licence from HUDA for construction of residential complex cannot be construed as factors which can go to show that assessee had commenced its business. He also held that since business had not commenced, expenses were also be not allowable as deduction under s. 37(1) of Act. He also held that interest income cannot be said to be income from business. order of AO was, thus, upheld by CIT(A). Aggrieved by orders of CIT(A), assessees are in appeal before us. We have heard rival submissions. Before, we proceed to set out facts of present case, we deem it proper to set out principles emerging from various decided cases on question as to when it can be said that assessee can be said to have commenced his business. first thing which one will have to bear in mind is that there is distinction between setting up of business and commencement of business. In Western India Vegetable Products Ltd. vs. CIT (1954) 26 ITR 151 (Bom), it has been held that under IT Act, what is relevant is setting up of business and not commencement of business that is to be considered. definition of previous year as contained in s. 3 of IT Act, 1961 reads as follows: " Previous year defined. For purposes of this Act, previous year means financial year immediately preceding assessment year: Provided that, in case of business or profession newly set up, or sources of income newly coming into existence, in said financial year, previous year shall be period beginning with date of setting up of business or profession or, as case may be, date on which source of income newly comes into existence and ending with said financial year." It is on basis of this definition that Hon ble Bombay High Court held that for purpose of Indian IT Act, it is setting up of business and not commencement of business that is to be considered. Hon ble High Court further held that when business is established and ready to commence business, then it cannot be said that business itself is set up but before it is ready to commence, it is not set up. It further held that there may be time gap in setting up of business and commencement of business and all expenses incurred during that intervening period would be permissible deduction. In CIT vs. Saurashtra Cement & Chemical Industries Ltd. (1973) 91 ITR 170 (Guj), it was held that term business connotes continuous course of activities. All activities, which go to make up business, need not be started simultaneously in order that business may commence. business would commence, when activity which is first in point of time and which must necessarily precede all other activities, is started. It was further held that in order to determine question whether business of assessee has commenced or not, it is necessary to consider, what constitutes business of assessee. It was also laid down that in determining this question arising under fiscal legislation, one must consider what are activities which constituted such business without being misguided by loose expressions of vague and indefinite import. In Prem Conductors (P) Ltd. vs. CIT 1976 CTR (Guj) 324: (1977) 108 ITR 654 (Guj), it was again reiterated, that where business of assessee consists of different activities, whether activity which was started earlier then actual commencement of production, can be said to have been essential part of business activity of assessee, has to be decided considering time at which businessman would regard business as having commenced and approach must be from common sense point of view. Considering principles emerging from various decisions referred to above, we shall now examine as to what constitutes business of assessee. fact of present case narrated by us in paras 2 and 3 of this order are not in dispute. As already noticed while narrating facts, in our view purchase of land for purpose of divisions into plots would amount to commencement of business. copy of licence granted by Director, Town & Planning to assessee and its associated concerns also goes to show that necessary licence had been given by authorities subject to fulfilment of certain conditions. It is also seen that assessees have also entered into agreement for development of plots with prospective buyers and have received advances from them. In light of aforesaid evidence available on record and facts of present case, we are of view that assessees have commenced their business and claim for deduction towards administrative expenses are fully be allowed. learned counsel for assessee also puts forward alternative arguments with regard to allowability of those expenses which arguments are not considered in view of our conclusion that assessees have commenced their business. For reasons stated above, appeals filed by both assessees are allowed. *** SUPERLIGHT MKTG. (P) LTD. v. INCOME TAX OFFICER
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