Expenditure relatable to current year can claim as deduction

INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH “H” New Delhi

BEFORE SHRI R. P. TOLANI, JUDICIAL MEMBER

AND

SHRI T. S. KAPOOR, ACCOUNTANT MEMBER

ITA Nos. 843/Del/2011

&

5428/Del/2012

Assessment Year: 2007-2008

M/S Urban Mass Transit Company Ltd.

5th Floor ‘A’ Wing IFCI Tower

61,  Nehru Place,

New Delhi.

 (Appellant)

Vs.

ACIT, Circle- 18(1)

New Delhi

(Respondent)

Appellant by: Sh. Dilip Lakhani, CA

Respondent by: Sri A. K. Mishra, CIT DR

O R D E R

PER R. P. TOLANI, J. M:

These appeals are preferred by the assessee against separate orders of CIT(A) in quantum assessment and penalty imposed u/s 271(1)(c) of the Income-tax Act, 1961, relating to assessment year 2007-08. First we shall take ITA No. 843/Del/2011 against the quantum assessment.

2. Following grounds are raised:

1. The order passed by the Learned Commissioner of Income Tax (Appeals) –XXI (hereinafter refereed as ‘CIT (A)’ under section 250 of the Act is bad in law and on the facts and circumstances of the case.

2. The Learned CIT (A), as well as Learned Assessing Officer (hereinafter referred as ‘AO’) have erred in law and on the facts and circumstances of the case in determining the taxable income at Rs. 64,04,523/- and rejection of the returned loss claimed by the appellant amounting to Rs. 3,46,38,360/- is not justified.

3. The Learned CIT (A), as well as Learned AO has erred by making incorrect allegations and concluding that no business activity of the appellant had commenced during the relevant year.

4. The Learned CIT (A), as well as Learned AO has erred in law and on the facts and circumstances of the case by disallowing the expenditure of Rs. 4,71,624/- on account of professional fees paid to M/s Wilbur Smith Associates by contending that the business of

the appellant not commenced as no revenue has been earned in the relevant year by utilization of services of Wilbur Smith.

5. The Learned CIT (A), as well as the Learned AO has erred in allowing the interest expenditure only to the extent of Rs. 36,40,000/- out of Rs. 4,42,11,258/- incurred by the appellant in the relevant year and the appellant in entitled to the entire amount of expenditure as the liability to pay the same arose in the relevant year.

6. The Learned CIT (A) as well as the Learned AO has erred in levying interest u/s 234B amounting to Rs. 6,68,.286/-.

3. Shri Dilip Lakhani, Ld. Counsel for the assessee contends that ground No. 1 is general in nature, grounds no 2 , 3 and 5 are on the same issue i.e. holding non commencement of assessee’s business and related issues, ground No. 4 is an independent issue about allowability of professional fee paid, ground No. 5 is a major issue pertaining to disallowance of interest paid by the assessee to govt., ground No. 6 is consequential in nature.

3. Brief facts are: Urban Mass Transit Company Limited (‘the appellant’) is a public limited company registered under the provisions of the Companies Act, 1956. The appellant constitutes a Joint Venture (“JV”), between Government of India (Ministry of Urban Development), State Government (Government of Andhra Pradesh), State Transport Service Operator and Infrastructure Leasing and Financial Services Ltd.

3.1. The assessee company was set up in the financial year 1993-94 for undertaking comprehensive mobility studies and offer consultancy to state governments and local bodies with restructuring and reforming their public transport delivery systems.

3.2. The appellant received advance for equity amounting to Rs. 7 Crores from the Ministry of Urban Development, Government of India. Assessee started its consultancy business in 1994 and idle funs including this amount was deployed in investment from time to time. The corresponding income has been taxed in earlier assessment years a business.

3.3. In the wake of MOUD’s insistence for giving back the above amount of share application with return during the Financial Year 2006-2007, the appellant again received a letter from Ministry of Urban Development, Government of India to refund the advance along with the returns thereon. Consequently, the appellant repaid the said advance of Rs. 7 crores along

with the return of Rs. 4,42,11,258 in the same financial year. The amount of return on this amount has been claimed by the assessee as business expenditure which is substantially disallowed by the department on the ground that the business of the assessee has not commenced.

3.4. Apropos ground no. 4, during the financial year 2006-2007, the appellant issued a work order to M/s Wilbur Smith Associates for consultancy pertaining to its main activity related to creation of data on mobility services for generating clientele. The professional fee paid to them was Rs. 4,71,408, it has been considered to be preliminary expenses by assessing officer, thus substantially disallowed and added back to the income in terms of section 35D.

3.5. The appellant had filed the return of income for the AY 2007-08 on 31/10/2007 on the same lines as earlier including assessment year 2003-0 declaring its income under the head “business”, declaring a business loss of Rs. 3,46,38,360/-. AO rejected computation of income as returned the appellant and re-computed the taxable income at Rs. 64,04,523/- refusing assessee’s claim in respect of business expenditure.

3.6. The assessee’s return and computation under the head “Profits & Gains of Business or Profession” for the impugned year is as under:

Income

Interest Income 10,659,001.00

Expenditure

Administration Expenses (614,478.00)

Legal & Professional Charges (471,624.00)

Interest Paid on MOUD (44211258.00)

Business Profit/(loss) (34,638,359.00)

3.7. AO however made above disallowances by following observations:-

“A. The point that the company has not started its business activity has not been refuted. The crux of the claim in that certain study of “published transport related statistical data” was undertaken during the year. From documents filed it is seen that no such study was undertaken by the company itself. A work order was issued to one M/s. Wilbur Smirth & Co. on 20.10.23006 for thus purpose. An amount of Rs. 6 lakhs paid to M/s. Wilbur Smith has been claimed as expense in the Profit and Loss Account. In the submission the assessee company has admitted (in para 11) that it has not earned any business income during the financial year under consideration. They have also stated that the said study allowed it to get projects in subsequent years. The expenditure on this study therefore satisfied the criterion of preliminary expenses as envisioned in Section 35D of the Income Tax Act. The expenditure is disallowed this year (Disallowance of Rs. 4,71,624/-)

B. In its reply to point 2 of this show cause notice dated 03.09.2009 the assessee has admitted (in para 2(a) that the amount of Rs. 7 crore received from Ministry of Urban Development (MoUD) was received during Financial Year 1994-95 as advanced share equity.

However, in the subsequent paragraphs it has been claimed that the character of the amount was essentially that of a borrowing to be repaid at a particular dated (Para 2(j). This is not borne out by the facts of the case. Had it been borrowing, there would have been regular payment of interest which was not the case. Further, there was no agreement regarding repayment as claimed. The assessee company has although declared the corpus amount as “advance received towards share capital.” The fact that no share capital was ever issued to MoUD only reinforces the view that no effort was made to make the entity function as a business entity. No venture in the nature of trade was actually brought into being till the

financial year under consideration. So far as assessee’s argument that in earlier years the income has been assessed as business income goes, needless to state that as per the Income Tax Act, each year is independent as the authorities as empowered to take a view each year

on the basis of facts of the case. Hence the interest income earned for the year i.e. Rs. 1,06,59,001/- is being assessed as income from other sources.

The assessee paid Rs. 4,42,11,258/- to MoUD on Rs. 7,00,00,000/- for the period from 1994-95 to 2006-07 i.e. for 12 years. The rate of interest workout as 5.2 %. The interest allowable for this year work out to Rs. 36,40,000/- which is allowed as deduction. The rest of the interest paid is apportioned to (deduction of Rs. 33,60,000/-) in 11 preceding assessment years).

From the above facts and figures following is concluded:

(a) There is no business conducted by the assessee so far.

(b) The income is in the nature of “Income from other sources’.

(c) The assessee company had to make payment in the year 2001 only as per request of the Ministry of Urban Development, Government of India.

(d) The assessee company, it seems, deliberately manipulated its activity so as to sustain loss this year by making payment of interest by a pre-dated cheque physically issued after expiry of the Financial Year.

(e) During the year under consideration the assessee has done no business as per its Memorandum of Association but its income mainly comprised of interest earned on idle funds. Therefore it can be said that assessee had earned income from ‘Income from Other Sources’ rather than ‘Income from Business and Profession’. In spite of this the assessee is claiming ‘Business Loss’ which would enable it to carry it forward in subsequent years.”

3.8. Aggrieved assessee preferred first appeal before CIT(A), following submissions were made:

(i) The company was incorporated by a joint venture of Govt. Of India and other constituents to provide services in relation to the Hyderabad Light Rail Project. The company was incorporated to aid ILFS as the main consultant for the Hyderabad Light Rail Project. The business of the assessee company commenced way back in 1994 as it had incurred Legal and Professional charges to the tune of Rs. 3,519,272 in the F. Y. 1994-1995 in relation to the Hyderabad Light rail Project. These legal and professional charges in relation to the Hyderabad Light Rail Project were allowed as business expenses in relation to its main business activity.

(ii) Further the company also incurred Advertisement and Travelling expenses during the same year, which were allowed by the assessing officer, it is clearly established that the business of the company had commenced as its main object clause as back as F. Y. 1994-1995. Copy of the director’s report of the company for the F. Y. 1994-1995 discussed the progress of the work status in relation to the Hyderabad Light Rail project were filed before assessing officer/CIT(A).

(iii) As per clause 40 of Memorandum of Association of the company, the company was permitted to undertake following as business activity:-

“to receive money on deposits or interest or otherwise and to lend money with or without securities to such companies firms or persons and on such terms and conditions as may seem expedient and in particular to customers and others having dealings with this company.”

(iv) The Hyderabad Light Rail Project was not further carried on by the government of India and was suspended for an indefinite period. Due to policies and various other issues about financial resources the new projects were not forthcoming from state governments and local bodies. The money lying with the company lay at its disposal, which was invested by it as a matter of business expediency.

(v) During the assessment proceedings for year 2003-04, the assessing officer asked information in relation to the business activities of the appellant and the nature of its income, which was duly explained. After considering the facts and circumstances of the case,

assessing officer accepted that the income is appropriately charged under the head ‘Income from business & Profession’. Copy of assessment order dated 14.10.2005 passed u/s 143 (3) of the Act along with the notice of demand under section 156 were referred.

(vi) There is no ambiguity in relation to the commencement and continuance of the business activity by the company in the financial year 2006-07 as the business activity has never been disputed by department in past. As the Hyderabad Light Rail project was terminated, the money that was received by the company for business purposes which remained idle was used for an activity duly authorized by its Memorandum of Articles. This money in absence of the share allotment was treated as a borrowing which on MOUD’s insistence had to be returned to the MOUD with the returns for use of the money for a long period. The income earned by the appellant being consequent to a business decision was claimed to be chargeable

to tax under the head ‘Income from business and profession’ and not under the head ‘Income from other sources’.

3.9. The assessee’s contention did not find favour with ld. CIT(A), who upheld the order of AO by following observations:

5.1. During the course of appellate proceedings, the Ld. AR vide paper book submitted on 13-10-2010 has contended a under:-

“During the financial year 1994-1995, assessee received Rs. 7 crores from MoUD as advance towards share equity. Due to cessation of the Hyderabad rail project, the shares were not issued and the money remained as a deposit to be returned to the MoUD a department of Govt of India. During the financial year 2006-07 i.e. (year under consideration, the company received a letter No. DO No. K-14011/45/98-MRTS(UT) dated 27.04.2006 from MoUD to return the advance of Rs. 7 crores, along with the returns thereon. Copy of the said letter is on

record. The lower authorities erred in the facts and the circumstances of the case by disallowing the interest paid by the appellant to MoUD on the premises that as the company was liable to pay the interest only if requested by MoUD and of the amount as determined by MoUD in the year of request against a sum that was used by the company for 12 years, therefore, the said interest should be apportioned over the last 12 years. The relevant extract of the order is reproduced for your reference:

“From the above facts and figures following is concluded “----

(d) the assessee company had to make payment in the year 2007 only as per request of the Ministry of Urban Development, Government of India…. The assessee paid Rs. 4,42,11,258/- to MoUD on Rs. 7,00,00,000/- for the period from 1994-95 to 2006-07 i.e. for 12 years. The rate of interest workout at 5.2 %. The interest allowable for this year works out to Rs. 36,40,000/- which is allowed as deduction. The rest of the interest paid is apportioned to (deduction of Rs. 33,66,000/- ) in 11 preceding assessment years)…….”

We have prepared the response to the unsustainable contentions of the Ld. AO as stated in his order in the following paragraphs under the headings addressing to each and every contentions raised by the Ld. AO.

Liability to pay Interest had accrued and arisen in the financial year under consideration. The money lay the disposal of the company till the time its was asked back by MoUD. Thus, repayment of the money along with the interest remained as an uncertain liability. The repayment of the interest remained as a liability of which the amount could not be ascertained till the time it was asked back by MoUD Thus, it can be said that the amount of the interest was contingent upon the event of it being asked by MoUD. The liability to pay accrued and crystallized only in the financial Year 2006-2007 when the contingency of the MoUD asking for repayment of the principal along with the interest materialized.

The Ld. AO has himself admitted that the liability to pay the interest accrued and arose only in the financial year 2007 when a letter was received by MoUD asking for the interest. The relevant extract of the order has been reproduced for your reference:-

“From the above facts and figures following is concluded: …………….(d) The assessee company had to make payment in the year 2007 only as per request of the Ministry of Urban Development, Government of India…..”

Therefore as agreed by the Ld. AO that as the liability to pay the interest accrued and was paid in the year under consideration, it was accordingly claimed by the appellant as expenditure in the year in which liability to pay arose. The expense is thus not a prior period expenditure but is an expense pertaining to relevant financial year only.”

5.2 I have considered the findings of the AO and submissions of the Ld. AR. In this regard, it is crystal clear that for the period from 1994-1995 to 2006-2007, i.e. for 12 years interest has been worked out at the rate of 5.3%. Thus, total interest claim amounting to Rs. 4,42,11,258/- has resulted into loss of Rs. 3,46,38,360/-. It has rightly been held by the AO that interest income earned by the assessee should be treated as “income from other source” instead of business income, because no business activities has been conducted by the appellant company during the year. While analyzing the issue the AO has rightly pointed out that no share capital was ever issued to Ministry of Urban Development (MoUD) as well as no venture in the nature of trade was actually brought into till the financial year under consideration. It has also been rightly held by the Assessing Officer that each year is independent and the authorities are empowered to take a view each year on the basis of facts of the case.

5.3 In view of the above discussion, I am of the considered view that the AO has rightly restricted the claim of interest to the tune of Rs. 36,40,000/- out of total claim of Rs. 4,42,11,258/- and has apportioned rest of the interest in 11 preceding assessment years. The action of the assessing officer is upheld in this regard. Ground No. 5 & 6 are decided against the appellant.”

Aggrieved assessee is before us.

4. Learned counsel for the assessee at the outset requested for admission of additional evidence filed by an application dated 04.04.2011, pleading that some of the documents could be obtained before hearing with Ld. CIT (A) and some documents are supplementary to clarify wrong inference drawn by him. They are very necessary for proper disposal of the appeal. Reliance is placed on CIT v. Km. Satya Setia 143 ITR 486 (MP).

4.1. Ld. D R is heard.

4.2. After hearing both the parties we admit the additional evidence as in our view, the same is in the nature of government related documents and are important for proper disposal of the issues. Our view is supported by Hon’ble Madhya Pradesh High Court judgment in the case of Km. Satya Setia (supra). Thus the additional evidence is admitted under rule 29 of the ITAT Rules.

5. Ld. Counsel Shri Lakhani adverted to issues, reiterated the facts and contends that assessee is a JV and creation of the initiative of the Central Government through Ministry of Urban Development to provide useful services to various arms of the government i.e. State governments, local bodies etc. for reforming the public transport delivery system throughout cities of India, which includes mass transportation, light rail projects etc. Thus, the assessee was and is carrying out an important function of the government through joint venture between MOUD, ILFSL and various other stake holders. One of the important objects of the assessee to provide professional consultancy and assistance to its clients to have efficient mode and quick implementation of urban mass transportation. Lower authorities have failed to appreciate the nature of business of assessee and treated it on the lines of common businessman who enters into frequent trading or manufacturing activities.

5.1. Any working pertaining to the government has its own protocol and conservative system in seeking permissions of relevant departments, the resources of the clients i.e. governments, their internal problems and various other issues. Therefore, lot of time is consumed in these activities for obtaining a contract.

5.2. The lower authorities have not disputed that the assessee undertook the consultancy of Hyderabad Light Rail Project way back in 1994-95. It was demonstrated before the lower authorities that various expenses incurred by the assessee in its consultancy business have been allowed in past. The assessee’s computation on similar lines has been consistently allowed under the head ‘business’ . Reference is made to the assessment order for A.Y. 2003-04 in which the assessee’s income has been assessed under the head “income from business and profession”.

5.3. Assessing officer to justify his somersault has held that every year is a different unit in income-tax proceedings and principle of res-judicata does not apply. There is no debate on this issue, however, ld. Assessing officer has failed to appreciate the Hon’ble Supreme Court’s judgment in the case of Radha Swami Satsang 193 ITR 321 (SC), in which the principle of consistency has been propounded. It has been held that if there is no change in facts and circumstances of the case, settled propositions should not be unsettled in normal course. No abnormal circumstances have been observed by assessing officer. The assessee relies on the principle of consistency.

5.4. The assessee’s claim about its being a JV between the Central Government and other stake holders; the process being subject to various approvals; the Board of Directors being shared by the government nominees as well as the directors of the stake holders and the important fact that in F.Y. 1994-95 assessee undertook the Hyderabad Light Rail Project and its expenditure was allowed as ‘business expenditure’ have not been disputed by assessing officer or CIT(A). For other years the articles of association remains the same. The assessee’s income and expenditure are always treated under the head business and profession which is more evident from A.Y. 2003-04. All these facts go to show that consistently the assessee’s income/ loss were assessed under the head “business income”. It is emphasized that there is no change in facts and circumstances, article of association, stake holders and constituents, except that in some years the business activities were very few like routine administrative work and nil in terms of revenue.

There cannot be a denial of the fact that in the eyes of law the assessee’s JV continued as a business consultancy entity working forward for the clients. The procurement of clients was subject to Central Government schemes, budgetary allocation for planned and unplanned expenditure to state governments and local bodies, the viability of state governments, local

bodies, stake holders and their financial resources. Thus, the principle of consistency is squarely applicable to the assessee’s case.

5.5. It is pointed out that assessing officer has himself accepted that in the next financial year i.e. 2007-08 ( A.Y. 2008-09) there is demonstrative increase in the activity of the assessee and its revenue has been recognized by the department itself. It may be borne in mind that the clients are procured after a long exercise and the fact that the assessee could earn revenue in F.Y. 2007-08 and 2008-09 fairly indicates that the report obtained from M/s Wilbur Smith Associates was towards its consultancy business and not a piece of decoration or pre-operative expenditure as is held by the assessing officer.

5.6. It is vehemently argued that the assessee was into consultancy business way back since 1994-95. In the intervening period there may be a lull in the business activities due to various reasons but there was no closure of the business activities. Had it been so, the government would have wound up the JV. On the contrary, the activities have increased after this assessment year, which are accepted by the department. In this back drop ld. Counsel proceeded to counter the assessing officer’s observations, which are reproduced above in AO's findings.

(a) There is no business conducted by the assessee so far – The assertion is wrong, the assessee carried on business and in this year there were business activities which are wrongly held as pre-operative in nature.

(b) The income is in the nature of “income from other sources” – The accounting principles recognize the interest income earned during the business activities as ‘income from business’. However, the incometax law by a fiction has created a separate head on its taxation system

i.e. ‘income from other sources’. Thus, even if the income is held as “income from other sources”, there cannot be denial of the fact that the assessee was carrying on its business activities and the expenditure incurred during the course thereof, even in terms of interest, will amount to business expenditure. In case of a loss return it is to be treated under the head “business loss” in accordance with law.

(c) The assessee company was asked to reply the share application money in the year 2001 as per request of the Ministry of Urban Development i.e. Government of India. The fact that liability is crystallized in this year and money is returned itself shows that the assessee was making efforts to convince the MOUD not to withdraw the funds advanced for shares, which could not be allocated due to technicalities. But the fact remains that the amount as advanced by a JV constituent and lull of consultancy business was in conformity with the scheme prepared with the consent of the Central Government and the constituents. Therefore, no adverse inference can be drawn on the observation of the assessing officer in this regard vis a vis expenditure items.

(d) The assessee company had deliberately manipulated its activity – Ld. Counsel vehemently argues that it is not an appropriate comment coming from the assessing officer as the assessee being a JV between the government of India and other corporate bodies, their directors are present on the Board could not have indulged in deliberately manipulated activities. The allegation is baseless, bereft of any supporting material and oblivious of the ground realties. The activities of the assessee are duly guarded and controlled by a Board of Directors, comprising of MOUD, ILFS and nominees of other constituents the financial activities and results are monitored and guarded. Therefore, the allegation is baseless.

(e) During the year under consideration the assessee had done no business – It is undisputed that no revenue has been earned. But it does not mean that no business is ever done. The observation of the assessing officer is rash, without appreciating the submissions and arguments of the assessee. The observation of the assessing officer runs contrary to his own observation that in subsequent two years there is voluminous business. As already mentioned, the assessee in order to earn revenue has to indulge into a lengthy protocol of procuring clients and other activities. Besides, the fact that assessee got a consultancy report from M/s Wilbur Smith Associates, itself indicates that assessee was indulged in the process of its consultancy business. Thus, the assessing officer’s observation in this behalf also is wrong.

5.7. It is pleaded that the assessee has no issue if the income from interest is treated as “income from other sources”, but the fact of the matter remains that the payment of returns made to government of India has to be treated as “business expenditure”. Assessee’s denial to the government of India for not giving any returns on their advance would have amounted to a serious breach between the assessee’s joint venture and government of India and in that case assessee’s business could have never survive having taken a dispute with the Government of India. It is thus vehemently argues that the payment of returns on the government of India’s investment was inevitably a business necessity imperative for the existence of assessee’s business. The refusal thereof would bring down the assessee’s business, thus the payment was made in order to defend the title of the business of the assessee.

Therefore, the assessee’s business being in continuance since 1994 the payment of returns which is treated by the assessing officer as relatable to 12 years @ 5.2% p.a. was in fact an amount of returns paid by the assessee to Government of India, since the shares could not be issued in time for technicalities. The payment of returns being expenditure in the course of assessee’s business, the same is an allowable deduction.

5.8. Alternatively, it is pleaded that even if it is assumed that in earlier years actual business had not commenced, it is to be held that the assessee’s business was set up which is evident from the fact of Hyderabad Light Rail Project and other intermitent activities carried out by the assessee. In case it is assumed that business is not commenced in that case it is to be held that it is set up. The business expenditure is allowable even if business set up and not carried. For these propositions ld. counsel placed reliance on following judgments:

- Western India Vegetable Products Ltd. Vs. CIT 26 ITR 151 (Bom.);

- CIT Vs.M/s Hughes Escorts Communications Ltd. 311 ITR 253 (Del.)

- CIT vs. Whirlpool of India Ltd. 318 ITR 347 (Del.)

- CIT Vs. Dhanrajgirji Raja Narasingirji 91 ITR 544 (SC)

- Amarjothi Pictures Vs. CIT 69 ITR 755 (Mad.)

- CIT Vs. Gobald Motor Services Pvt Ltd. 100 ITR 240 (Mad.)

- Rmanand Sagar Vs. DCIT 255 ITR 134 (Bom.)

- Herman Neshoba Sons Vs. CIT 278 ITR 345 (MP)

- Rave Marketing (P) Ltd. Vs. CIT 280 ITR 519 (Cal)

- Sunset Laboratories Ltd. Vs. CIT 162 ITR 883(MP)

- Concord Controls Vs. ITO 57 TTJ 143

- Star India (P) Ltd. Vs. ACIT 103 ITD 73 (Mum)

5.9. In view thereof ld. Counsel pleads the expenditure incurred on return and Wilber Smith Consultancy is allowable deduction.

6. Ld. DR, on the other hand, contends that the assessee was having unborrowed surplus funds of Rs. 7 crores, which were invested in FDRs. It is settled law in Income Tax Act that income from interest is to be treated under the head “income from other sources”. There is no demonstrative business activity carried out by the assessee, which is evident from its P&L A/c. There being no business activity demonstrated by the assessee, income being only interest income, the income is to be assessed under the head “Income from other sources”. Assessing officer has rightly treated that the amount on returns amounts to interest paid by the assessee for utilization of funds for past 12 years. The proportionate interest has been allowed against the interest income for the year in question and balance treated as not relatable to this year. The Government of India asked the assessee in 2001 itself to refund its amount, if the assessee was carrying on any business, in that case a provision should have been made in the books of account in 2001 and assessee should have claimed the interest on accrual basis. This also indicates that the assessee was not carrying on any business. Reliance is placed on the ratio of decisions of Hon’ble Supreme Court in the cases of -

(i) Tuticorin Alkli Chemicals & Fertilizer Vs. CIT 227 ITR 172 (SC);

(ii) Madras Industrial Development Corporation Ltd. Vs. CIT 225 ITR 802 (SC).

6.1. Ld. DR thus contends that:

(i) The assessee has failed to demonstrate and there was no business activity of the assessee which had commenced during this year.

(ii) The 1/12th of the interest expenditure was rightly allowed and balance was rightly disallowed.

(iii) Apropos the expenditure on M/s Wilbur Smith Associates was rightly amortized u/s 35D.

Orders of lower authorities are relied upon.

7. We have heard rival contentions and perused the material available on record. The fact that assessee had carried out the work about Hyderabad Light Railway Project has not been disputed. Besides, the assessee’s stature as a joint venture for the business of consultancy for various state governments and local bodies for urban transport remains intact. Books of a/c and P&L accounts are accordingly prepared, which, in our view, will be submitted to the respective managements of the constituents, including government of India. No challenge has been referred by any of the lower authorities to such accounting of the assessee. In the absence of any dispute about these facts and the fact that in subsequent two years both the lower authorities accepted that assessee has earned substantial revenue, the assessee has a case that its business had commenced way back in 1994-95 and after a lull intervening period the actual revenue was earned in F.Y. 2007-08 and 2008-09. In these years efforts were made for obtaining projects. The question arises as to whether the lull in the business can be considered as cessation of activities of business or not.

7.1. The assessee has demonstrated that it is a joint venture creation of Central Government through Ministry of Urban Development initiative to provide solution for mass urban transportation. The activities of the assessee are regulated by Board of Directors having respective nominees of the constituents, including government and professional directors. The intricacies and working with government as a joint venture partners are to be considered carefully, the lower authorities have not adverted to these facts that assessee had started its business way back in 1994-95. They merely held that no revenue has been generated in all these years and assessee has earned only interest income. In our considered view the assessee’s claim about its commencement of business in 1994-95 remains unrefuted in the absence of any comment about Hyderabad Light Rail Project. Assessee has further pleaded that revenue from various clients cannot be generated without initial work of soliciting the clientage explaining them the productivity of urban mass transportation policies. The resources of the clients also depend upon government policies, planning, health and subsidy issues etc. offered by the government. The fact that revenue has been generated in the immediately succeeding year itself indicates that the assessee had under taken business activities during the year. The crucial point of commencement of business is not only the earning of revenue because in many cases the generation of revenue may be deferred and activities are carrie out earlier. Thus the assessee claims that this fact itself is suggestive of the continuance of assessee’s business. Thus assessee in fact has raised three aspects –

(i) It was already into business right from 1994-95, which continued.

(ii) There was a lull in the intervening period due to various factors including government policies and availability of resources with the prospective clients.

(iii) In any case, the assessee’s business was set up in this year, which also makes the assessee eligible for expenditure incurred post its setting up.

7.2. After carefully consideration and in the given facts and circumstances, we are inclined to hold that assessee’s business commenced from 1994-95 itself which was followed by a lull in the intervening periods. This does not mean cessation of the assessee’s business, in view of the above facts. In any case, looking from any angle, it has to be held that assessee’s business of consultancy was set up in this year as substantial revenue is earned in next 2 years. Therefore, we are inclined to allow the claim of the assessee by holding that assessee’s business was commenced and alternatively relying on the setting up of business as held in cases of M/ Hughes Escorts Communications Ltd. (supra); and Whirlpool of India Ltd. (supra).

7.3. Now coming to the ld. DR’s objection the assessee should have made a provision in 2001 itself in its books of a/c, assessee has contended that it as looking for efforts with the government to retain its equity. However, finding that it was reluctant, it felt desirable that the amount is refunded along with returns as claimed by the government. Assessee cannot be held to be wrong as in this proposition avenging government would have proved very  tly to the assessee’s existence and its reputation. Therefore, assessee refunded the amount along with the returns thereon. Assessee has also demonstrated that looking at the right conduct of assessee, Central government has subsequently approved funds to it and many projects including Delhi have been obtained subsequently. Thus, the assessee’s action is guarded by business prudence and expediency. If the assessee was making efforts to reconcile with the government, accrual based entries in the books of account would have enabled the government to ask the assessee to refund its amount forthwith having recognized in the books of account. This may have been counter productive for assessee. In view of these facts, we do not find any merit in the objection of the ld. DR.

7.4. Now the question will arise whether the entire amount of returns can be allowed to assessee in this year as business expenditure or not. The government has claimed it to be ‘return’, however, for the sake of convenience the amount has been spread over into 12 years on the logic that the returns are for amount utilized by the assessee for 12 years. The amount was by way of application for shares and due to non allotment for what-ever reasons, the government and assessee ultimately agreed to treat it as advance eligible for a compensation thereon termed as ‘return’. We have already viewed that not returning the amount to government would have cost the assessee its business prospectus and its title over the business by way of withdrawing the joint venture etc. In these circumstances, the assessee in order to protect its business interest and business propriety refunded the amount which can be termed as compensation, return; interest or by whatever name. Its accrual, crystallization and finalization is relatable to this year, in view thereof, we hold that the amount of return is allowable to the assessee in this year as business expenditure. Since we have held that assessee’s business has already commenced the entire amount paid to M/s Wilbur Smith Associates is to be allowed to the assessee being professional fee for consultancy services. In view thereof, the grounds of the assessee are allowed.

7.5. In the result, assessee’s appeal is allowed. Penalty appeal no. 5428/Del/2012:

8. Since we have deleted the quantum additions as mentioned above, the penalty imposed u/s 271(1)(c) thereon is also deleted.

9. In the result, both the assessee’s appeals stand allowed.

Order pronounced in open court on 17-05-2013.

Sd/- Sd/-

(T.S. KAPOOR) (R.P. TOLANI)

ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 17th May, 2013.

MP

Copy to:

1. Assessee

2. AO

3. CIT

4. CIT(A)

5. DR