Case Law Details
To operate the Metro Rail System commercially, the assessee is required to place the necessary infrastructure in place and the assessee is also given the obligation of planning, building and making the system operational. In order to plan the system, the assessee is required to set up an administrative office and also is required to design the system and call for tenders for building the necessary infrastructure. As seen from the Director’s report placed in the paper book, the assessee had acquired the land and had paid the compensation to the displaced land owners and has also initially awarded contract to one company, but later on due to certain circumstances cancelled the contract and had called for tenders from various international bidders and finally awarded the contract to L&T Ltd. Therefore, it is clear that the assessee has taken all the necessary steps to facilitate the building of Metro Rail System. Since the assessee has taken steps in furtherance of its main objects, it cannot be stated that the assessee has not commenced its business. Even from the perusal of the expenditure debited to the P&L A/c which has been disallowed by the AO, it is seen that most of it relates to the administrative office of the assessee and not for manufacturing or making the system operational.
Relevant Extract of ITAT Order
3. Brief facts of the case are that the assessee is a Special Purpose Vehicle company formed on behalf of the Govt. of Andhra Pradesh for interacting with the BOT Developer for setting up and operation of prestigious project of “Metro Rail Development” in Hyderabad. It filed its return of income for the A.Ys 2010-11 & 2011-12 admitting ‘Nil’ income. Subsequently, the revised returns of income were filed and during the scrutiny proceedings u/s 143(3) of the Act, the AO noticed that the assessee had admitted income from (i) Govt. grant (ii) Interest on deposits and (iii) other incomes. He also observed that the assessee claimed administrative expenditure, M.D ‘s remuneration and preliminary expenses written off as business expenditure. The AO observed that the assessee company is an intermediary between the Govt. of A.P. and L&T Construction for the prestigious project of Metro Rail Development in Hyderabad and that the assessee company is still in the process of constructing the infrastructure. Therefore, he was of the opinion that the assessee company has not yet started its business and the expenditure claimed is pre-operative expenditure which cannot be allowed. He also observed that the assessee has earned interest income on bank deposits and also earned other income out of activities which are not part and parcel of the business activities of the assessee and also that the expenditure debited to the P&L a/c has no connection with the earning of the above incomes. Therefore, a show cause notice was issued to the assessee. The assessee submitted its detailed reply vide letter dated 21.01.2013, according to which, the assessee was incorporated mainly to plan, build and commercially operate/facilitate building and commercial operation of various mass transit systems and that the first limb of the activities does not generate any revenue as it is only to develop or facilitate to develop the transport systems. It was submitted that for the years under consideration, the assessee company had undertaken only the first mentioned limb of the activity i.e. developing or facilitating the development of the transport system and therefore, the assessee has in fact commenced its business. However, the AO was not convinced with the assessee’s contentions and held that the core objective of the assessee is to commercially operate the mass transit system and since it has not yet started its core activity, it cannot be construed that the assessee has commenced its business. Further, he also observed that the income shown in the P&L A/c is not generated from the business activity of the assessee. Therefore, he treated the business income returned by the assessee as “income from other sources”. As regards the expenditure incurred by the assessee, the AO held that the same has to be disallowed as it has no connection with the earning of the income returned by the assessee. Aggrieved, the assessee preferred an appeal before the CIT (A) who confirmed the order of the AO and the assessee is in second appeal before us.
4. The learned Counsel for the assessee, Shri P.S.R.V.V. Surya Rao, reiterated the submissions made by the assessee before the authorities below and submitted that the main objective of the assessee was to develop or to facilitate the development of the mass transit system and in accordance with the said objective, the assessee has acquired the land and paid compensation to various displaced land owners. He has also drawn our attention to the Director’s report wherein it was reported that the tenders were called for and the contract has been awarded to L&T Infrastructure Ltd for building the Mass Transit System. Thus, according to the assessee, it has commenced its business of planning and also has facilitated the development of the mass transit system and has incurred expenditure for achieving its objects. He has also drawn our attention to the details of expenditure incurred by the assessee, which is at page 51 of the Paper Book, to demonstrate that most of the expenditure is in the nature of the administrative expenditure. He also submitted that the assessee had to float tenders and has incurred expenditure for execution of such procedures and has also earned income by issuing the tender documents. Therefore, clearly the nexus between the earning of the income from issuance of RSQs and also business expenditure for floating the tenders has been established by the assessee. He also submitted that the purpose of Govt. grant to the assessee was only to implement the plan of development of infrastructure for the Mass Transit System and as seen from the balance sheet of the assessee, the government grant from the earlier years has reduced which only establishes that the assessee has commenced its business activities. According to him, the assessee has utilized the Govt. grants only for the purpose for which they have been granted by the Govt. As far as the interest income on deposits is concerned, the learned Counsel for the assessee submitted that the assessee has deposited the unutilized Govt. grants in short term deposits in order to reduce the operation cost and not to earn interest income and therefore, the interest income is also directly linked to the business activities of the assessee and is to be treated as business income.
5. As regards the additional ground of appeal, the learned Counsel for the assessee submitted that the same arises out of the assessment and as the entire income has been treated as ‘income from other sources’ and the assessee through the additional ground is only an alternative ground seeking that if the business income returned by the assessee is treated as income from other sources, then the expenditure relatable to earning of such income should also be allowed u/s 57 of the Act. He therefore, prayed that the additional ground of appeal be admitted and adjudicated.
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