Case Law Details
PCIT Vs Imperative Hospitality Pvt Ltd (Delhi High Court)
Introduction: The Delhi High Court recently delivered its judgment in the case of PCIT (Principal Commissioner of Income Tax) vs. Imperative Hospitality Pvt Ltd for the assessment year 2012-13. The appeal focused on two primary issues: the disallowance of expenses incurred during the pre-operative stage and the deletion of an addition categorized as “Income from Other Sources.” In this article, we provide a comprehensive analysis of the court’s decision.
1. Pre-Operative Stage Expenses Disallowance: The Assessing Officer (AO) had disallowed a deduction of Rs. 5,75,23,000 claimed by the assessee, Imperative Hospitality Pvt Ltd. These expenses were related to the pre-operative stage of the business. The Tribunal observed that there is a distinction between the date when a business is set up and the date when it is commenced. The expenses incurred between these two dates are considered revenue expenditure. Therefore, the Tribunal upheld the view taken by the Commissioner of Income Tax (Appeals) [CIT(A)].
It is worth noting that the pre-operative stage period extended to two succeeding years, and the AO made no addition concerning the expenses incurred during this period for the subsequent year (AY 2013-14). This fact, along with the principle of consistency, supported the Tribunal’s decision. As a result, the High Court found no substantial question of law regarding this issue.
2. Deletion of Addition under “Income from Other Sources”: The respondent/assessee had included Rs. 3,39,98,651 under the head “Income from Other Sources.” This income was set off against losses incurred under the head “Profits and Gains from Business and Profession,” utilizing Section 71 of the Income Tax Act, 1961.
The respondent’s argument was that the interest income was earned on fixed deposits created from surplus funds, which were essential for the project’s execution. Citing the precedent of Indian Oil Panipat Power Consortium Ltd vs. Income Tax Officer (315 ITR 255), the Tribunal concluded that when the income was earned during the construction period and set off against business losses under Section 71 of the Act, the addition of interest should be deleted.
The Tribunal acknowledged that the funds invested in fixed deposits were directly linked to the establishment of the hospitality business.
Conclusion: The Delhi High Court upheld the deletion of the disallowance on expenses incurred during the pre-operative stage, highlighting the distinction between setting up a business and commencing its operations. The court also ruled in favor of the respondent by allowing the set-off of interest income against business losses when the income was closely related to the project’s execution. Consequently, the High Court determined that no substantial question of law arose in this case, and the appeal was dismissed.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. This appeal concerns Assessment Year (AY) 2012-13.
2. The appellant/revenue, via the instant appeal, seeks to assail the order dated 10.06.2019 passed by the Income Tax Appellate Tribunal [in short, “ITAT”].
2.1 The Tribunal was confronted with two issues. First, the deletion of disallowance was made by the Commissioner of Income Tax (Appeals) [in short, “CIT(A)”] qua expenses incurred at pre-operative stage expenses amounting to Rs.5,75,23,000/-, debited in the profit and loss account by the respondent/assessee.
2.2 Second, the deletion of addition amounting to Rs. 3,39,98,656/- was made by the CIT(A) under the head „Income from other Source‟.
3. Insofar as the first issue is concerned, the record shows that the Assessing Officer (AO) had disallowed the deduction amounting to Rs.5,75,23,000/-, claimed by the assessee.
4. The Tribunal, according to us, noticed quite correctly that there is a distinction between the date when the business was set up and the date when the business was commenced. The expenses incurred between these two dates have rightly been categorized as revenue expenditure. Therefore, the Tribunal proceeded to sustain the view taken by the CIT(A), insofar as the first issue is concerned.
5. In this regard, we may note something which Mr Sanjeev Menon, learned standing counsel, who appears on behalf of the appellant/revenue, has brought to our notice, that since the pre-operative stage period spilled over to two succeeding years as well, the matter came up before the AO and that the AO made no addition with regard to the expenses incurred during this period.
5.1 In this regard, Mr Menon has placed before us a hard-copy of the order dated 30.06.2016 passed by the AO for AY 2013-14.
6. Apart from the aforementioned reason, following the principle of consistency, in our view, no substantial question of law arises, insofar as the first issue is concerned.
7. As regards the second issue, the record discloses that there is no dispute with regard to the fact that the respondent/assessee had included Rs.3,39,98,651/- under the head „Income from other Sources‟.
7.1 The record also discloses, something which is not in dispute, that the said income was set off by the respondent/assessee against the losses incurred under the head „Profits and Gains from Business and Profession‟, by taking recourse to Section 71 of the Income Tax Act, 1961 [in short, “Act”].
8. The respondent/assessee‟s submission before the AO, as well as the CIT(A) and the Tribunal, was that the interest was earned on fixed deposit created out of surplus funds, which were used for the execution of the project.
8. The Tribunal, having regard to this fact situation, applied the ratio of the judgment of a coordinate Bench of this court in Indian Oil Panipat Power Consortium Ltd vs Income Tax Officer 315 ITR 255(Del).
9. The argument advanced by the respondent/assessee was that the funds invested in fixed deposit were inextricably linked to the setting up of the plant.
10. It is in this context that the Tribunal made the following observations and deleted the addition made with regard to the interest:
“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 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 hospitability business.”
11. Given the foregoing discussion, we are of the opinion that no substantial question of law arises for consideration of this court.
12. The appeal is, accordingly, disposed of.
