THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 23.04.2013
+ ITA 528/2012
+ ITA 529/2012
COMMISSIONER OF INCOME TAX-IV .......Petitioner
versus
M/S DHOOMKETU BUILDERS &
DEVELOPMENT PVT. LTD. .......Respondents
Advocates who appeared in this case:
For the Petitioner : Mr N. P. Sahni, Sr. Standing Counsel.
For the Respondent : Mr Ajay Vohra with Ms Kavita Jha, Mr Vaibhav Kulkarni
and Mr Somnath Shukla, Advocates.
CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE R.V.EASWAR
JUDGMENT
R.V.EASWAR, J
1. These are two appeals filed by the revenue, both relating to the
assessment year 2006-07 and they are directed against the common order
dated 30.11.2011 passed by the Income Tax Appellate Tribunal, Delhi
Bench ,,B in cross appeals filed by the revenue and the assessee.
2. The brief facts giving rise to the appeals are these. The assessee is
ITA 528/2012 & 529/2012 Page 1 of 12
a company incorporated on 22.08.2005 and according to its memorandum
of association, it was to carry on the business of real estate development,
including purchase and sale of land. It is a 100% subsidiary of DLF Ltd.
which is also engaged in the same business. In the return filed, the
assessee declared a loss of `1,17,12,473/- under the head "business"
which represented the difference between the interest of `62,28,333/-
received from NGEF Ltd. of Bangalore on the earnest money of `186
crores deposited with it and the interest of `1,79,37,534/- paid to DLF
Ltd. from whom the assessee had obtained a loan of `186 crores. The
interest income and payment arose in the following circumstances. The
official liquidator of the Karnataka High Court floated a tender for sale of
140 acres of land belonging to NGEF Ltd. which had apparently gone
into liquidation. In order to participate in the tender, the assessee
obtained a loan of `186 crores on 29.11.2005 from its holding company
i.e. DLF Ltd. and on the same day deposited the aforesaid amount as
earnest money in response to the tender floated by the official liquidator.
The assessee was, however, not successful in purchasing the land and,
therefore, the earnest money was returned to it with interest of
`62,28,333/-. On the amount borrowed from DLF Ltd. the assessee was
ITA 528/2012 & 529/2012 Page 2 of 12
liable to pay interest of `1,79,37,534/-. The difference between the
interest received and the interest paid was claimed by the assessee as loss
under the head "business". This is the basis on which the return of
income was filed.
3. Since this was the first year of the existence of the assessee-
company, the assessing officer examined as to when the assessee could be
said to have set-up its business within the meaning of section 3 of the
Income Tax Act, 1961. It is necessary to notice that the first previous
year of an assessee who claims to carry on business commences from the
date on which the business is set-up and ends on the 31st day of March
immediately following. The assessing officer was of the view that since
the assessee was not successful in acquiring the land from NGEF Ltd., it
cannot be said that the business was set-up in the relevant accounting
year. He also noted that the tax auditors in their tax audit report stated
that the assessee had not commenced any business activity and, therefore,
the accounting standards on "segment reporting" were not applicable.
According to the assessing officer, the mere act of participating in the
tender and making the earnest money deposit did not amount to acts that
can be said to have resulted in the setting up of real estate business. In
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this view of the matter and after referring to some authorities, he assessed
the interest income of `62,28,333/- under the head "income from other
sources". He also did not allow the interest of `1,79,37,534/- paid by the
assessee to DLF Ltd. against the interest income. Since there was no
computation of any income under the head "business" there was no
question of permitting the assessee to carry forward any business loss as
claimed in the return.
4. The assessee appealed against the assessment before the CIT
(Appeals) who after a detailed examination of the facts and the rival
stands, agreed with the assessing officer that the real estate business
cannot be said to have been set-up in the relevant previous year. He
accordingly rejected the assessees claim for computation of the business
loss at `1,17,12,472/- and carry forward of the same to the succeeding
years. However, he held that the interest paid to DLF Ltd. should be
allowed as deduction under section 57(iii) of the Act while computing the
income under the residual head, subject to the condition that there will be
no carry forward of the deficiency under the residual head to the
subsequent years. He thus decided the appeal partly in favour of the
assessee.
ITA 528/2012 & 529/2012 Page 4 of 12
5. Both the assessee and the revenue filed cross appeals before the
Tribunal, the assessee contending that its business in real estate had been
set-up on 29.11.2005 when it deposited the earnest money pursuant to the
tender floated by the official liquidator of the Karnataka High Court on
behalf of NGEF Ltd. and, therefore, it was entitled to the computation of
the business loss at `1,17,12,473/- and carry forward of the same and the
revenue contending that the CIT (Appeals) ought not to have allowed
deduction in respect of the interest paid to DLF Ltd., while computing the
income under the head "income from other sources". The Tribunal in the
common order passed on 30.11.2011 first addressed itself to the question
arising in the assessees appeal, namely, whether the business in real
estate development was set-up during the relevant accounting year. After
examining the rival contentions and after referring to a few relevant
authorities, it agreed with the assessees contention in the following
words: -
"8. Adverting to the facts of present case, we find that
business of assessee is development of real estates. It has
participated in a tender floated by the official liquidator
Karnataka High Court. To our mind, the participation in the
tender is starting of one activity which enable the assessee to
acquire the land for development. The actual development
of the land is immaterial for construing that business of the
ITA 528/2012 & 529/2012 Page 5 of 12
assessee has been set up. The revenue authorities have erred
in not appreciating these facts rather considering the concept
whether the assessee has a surplus fund which has been
invested by it and it had earned interest income on such
funds. The investment of `186 crores was not as a deposit
out of surplus fund rather it was earnest money paid by the
assessee for the purchase of land. Thus, assessee has
demonstrated that its business was set up during the
accounting period relevant for this assessment year. The
observations of the auditor are with regard to
commencement of business and not set up of the business.
In the light of participation in the tender such observations
would not be a decisive factor. Thus, considering the facts
and circumstances, we are of the opinion that income of the
assessee has to be assessed under the head "business
income" and consequently loss computed by the Learned
First Appellate Authority at `1,17,12,473 deserves to be
permitted for carry forward.
9. In the result, the appeal of the assessee is allowed and
that of the revenue is dismissed."
6. In the view taken by the Tribunal, it allowed the appeal of the
assessee and dismissed that of the revenue.
7. The revenue is in appeal and the main contention put forth on its
behalf is that the mere act of depositing earnest money while participating
in the tender floated by the official liquidator of the Karnataka High
Court and the act of borrowing monies from the DLF Ltd. for the purpose
cannot be construed as acts constituting setting-up of the business of real
estate development and that until the assessee actually acquires any land
ITA 528/2012 & 529/2012 Page 6 of 12
for the purpose of carrying on its business as per the objects clause of
memorandum of association, the business cannot be said to have been set-
up within the meaning of section 3 of the Act. On the other hand, the
contention of the assessee is that the business was set-up the moment the
assessee took steps to participate in the tender on 29.11.2005 and
deposited the earnest money and it is a matter of irrelevance that it was
not successful in acquiring the land. It was pointed out that the fact that
the assessees attempts to acquire the land did not fructify is not a
relevant test for the purpose of finding out whether the business was set-
up. It is contended that the setting-up of the business could be either
simultaneous with or anterior to the commencement of the business and
in this case the moment the assessee borrowed money and deposited them
with NGEF Ltd. and thus participated in the tender, it had taken the steps
that constitute the setting-up of the business.
8. On a careful consideration of the issue in the light of the facts and
the rival contentions, it seems to us that the decision of the Tribunal is
based on the relevant tests that have been handed down judicially for the
purpose ascertaining as to when a business can be said to have been set-
up. The question as to when a business can be said to have been set-up is
ITA 528/2012 & 529/2012 Page 7 of 12
a question of fact to be ascertained on the facts and circumstances of each
case and considering the nature and type of the particular business and no
universal test or formula applicable to all types of businesses can be laid
down. In recognition of this position the Indore Bench of the Madhya
Pradesh High Court in Precision Electricals And ... vs Commissioner Of
Income-Tax : (1989) 176 ITR 453 has held that the question as to when
the business of the assessee had commenced is a question of fact and if
the Tribunal as, after appreciating the entire material on record, found
that the business of the assessee was set-up on a particular date, it would
be a finding of fact from which no question of law can be said to arise.
The attempt, therefore, should be to see as to whether the Tribunal had
taken note of the appropriate circumstances and applied the proper tests
in arriving at the conclusion which it did. The locus classicus on the
question as to when a business can be said to have been set-up is the
judgment of the Bombay High Court speaking through Chief Justice
Chagla, in Western India Vegetable Products Ltd. v. CIT : (1954) 26
ITR 151. The following pithy observations are worth quoting: -
"It seems to us, that the expression ,,setting up means, as is
defined in the Oxford English Dictionary, ,,to place on foot
or ,,to establish, and in contradiction to ,,commence. The
disctinction is this that when a business is established and is
ITA 528/2012 & 529/2012 Page 8 of 12
ready to commence business then it can be said of that
business that it is set up. But before it is ready to commence
business it is not set up. But there may be an interregnum,
there may be an interval between a business which is set up
and a business which is commenced and all expenses
incurred after the setting up of the business and before the
commencement of the business, all expenses during the
interregnum, would be permissible deductions under sec.
10(2)."
9. The Tribunal has observed that having regard to the business of the
assessee, which is the development of real estates, the participation in the
tender represents commencement of one activity which would enable the
assessee to acquire the land for development. If the assessee is in a
position to commence business, that means the business has been set-up.
The acts of applying for participation in the tender, the borrowing of
monies for interest from the holding company, the deposit of the
borrowed monies on the same day with NGEF Ltd. as earnest money
were all acts which clearly establish that the business had been set-up.
The commencement of real estate business would normally start with the
acquisition of land or immoveable property. When an assessee whose
business it is to develop real estates, is in a position to perform certain
acts towards the acquisition of land, that would clearly show that it is
ready to commence business and, as a corollary, that it has already been
ITA 528/2012 & 529/2012 Page 9 of 12
set-up. The actual acquisition of land is the result of such efforts put in
by the assessee; once the land is acquired the assessee may be said to
have actually commenced its business which is that of development of
real estate. The actual acquisition of the land may be a first step in the
commencement of the business, but section 3 of the Act does not speak of
commencement of the business, it speaks only of setting-up of the
business. When the assessee in the present case was in a position to
apply for the tender, borrowed money for interest albeit from its holding
company and deposited the same with NGEF Ltd. on the same day, it
shows that the assessees business had been set-up and it was ready to
commence business. The learned senior standing counsel for the revenue
would, however, state that till the land is acquired, the business is not set-
up. The difficulty in accepting the argument is that an assessee may not
be successful in acquiring land for long period of time though he is ready
to commence his business in real estate, and that would result in the
expenses incurred by him throughout that period not being computed as a
loss under the head "business" on the ground that he is yet to set -up his
business. That would be an unacceptable position. The other argument
of the learned standing counsel for the revenue that the tax auditors of the
ITA 528/2012 & 529/2012 Page 10 of 12
assessee have themselves pointed out that the assessee is yet to
commence its business is also irrelevant because of the distinction
between the commencement of the business and setting-up of the same.
10. We do not feel constrained to refer to the authorities cited by both
the sides on the question of setting-up of a business except the judgment
of the Bombay High Court (supra) because as we have already observed,
the question is essentially one of fact depending upon the nature of the
business and none of the authorities cited by both the sides was directly
on the question as to when a real estate business can be said to have been
set-up. Under section 260A of the Act, an appeal lies to the High Court
only on a substantial question of law. The finding of the Tribunal in the
present case is a finding of fact and it cannot be said that the finding was
without any basis or material. Moreover, the Tribunal did take note of
the distinction between the commencement of a business and setting-up
of a business and applied the test laid down by the Bombay High Court
(supra) which decision has been noticed by us to have formed the bedrock
of almost all the authorities cited before us.
11. In the above circumstances, we do not think that any substantial
ITA 528/2012 & 529/2012 Page 11 of 12
question of law arises out of the order of the Tribunal. We accordingly
dismiss the appeals filed by the revenue with no order as to costs.
R.V.EASWAR, J
BADAR DURREZ AHMED, J
APRIL 23, 2013
hs
ITA 528/2012 & 529/2012 Page 12 of 12
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