Whether return of fund received by assessee from Central Govt towards equity but no shares allotted and interest was paid on same, can be construed as business expenditure - YES: Delhi HC

THE issues before the Bench are - Whether the return of the fund received by the assessee from the Central Govt towards equity but no shares were allotted and interest was paid on same, can be construed as business expenditure and Whether the nomenclature of the amount paid as compensation, return or interest can affect its allowability. And the verdict goes against the Revenue.

Facts of the case

The assessee, a public limited company, is a joint venture enterprise of the Central Government, the State of Andhra Pradesh and the State Transport Service Operator and Infrastructure Leasing and Financial Services Ltd. It was set up in the financial year 1993- 94 to undertake comprehensive mobility studies and consultancy to the State Government and local bodies, aimed at restructuring and reforming public transport delivery system. It received an advance for equity to the extent of Rs. 7 Crores from the Central Government and started its business in the year 1994. The amounts given by the Central Government were deployed in investments. There was no dispute that the corresponding income was taxed in the earlier AYs. The Central Government insisted for return of its contribution of the share application during the FY 2006-07 (AY 2007-08) and as a result the assessee repaid the amount together with the interest earned from the investments. The interest so paid was Rs 4,42,11,258/- during the said financial year along with the principal sum of Rs. 7 Crores. During AY 2006-07, the assessee had issued a work order to M/s Wilbur Smith Associates for consultancy relating to its main activity i.e. in respect of creation of data on mobility services for generating clientele and paid professional fee which was considered to be preliminary expenses by the AO, thus it had substantially disallowed it and brought it to tax in terms of Section 35D. The assessee’s return for AY 2007-08 reported a loss of Rs. 3,46,38,360/-. This was rejected by AO who had recomputed the taxable income at Rs. 64,04,523/- refusing the assessee’s claim for deduction of the professional fee paid to Wilbur Smith Associates and the interest paid over to the Central Government as business expenditure, on the ground that the assessee did not carry on business in the relevant accounting year and did not earn revenues by utilising the services of Wilbur Smith Associates. On appeal, assessee relied upon the various documents including its MOA, the terms of MOU with regard to the arrangement with the Central Government etc. Its contentions were rejected by the CIT (A).

On further appeal, Tribunal had allowed the appeal and observed that assessee's business commenced from 1994-95 itself which was followed by a lull in the intervening periods. This did not mean cessation of the assessee's business. It had to be held that assessee's business of consultancy was set up in this year as substantial revenue was earned in next 2 years. Therefore, it had allowed 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 MI Hughes Escorts Communications Ltd.; and Whirlpool of India Ltd. 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'. 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. Thus, 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 was relatable to this year. Therefore, it was held that the amount of return was allowable to the assessee in current year as business expenditure. Since it is decided that assessee 's business had already commenced, the entire amount paid to M/s Wilbur Smith Associates was to be allowed to the assessee being professional fee for consultancy services. Thus, the grounds of the assessee were allowed.

On appeal before the HC, the Revenue's counsel contended that the AO’s order allowing only 1/12th of the interest u/s 35D was justified given the circumstances; it was submitted that having regard to the circumstances, the AO’s conclusion that the assessee had not commenced its business and, therefore, the amounts were not deductible was correct in law. It was next contended that the AO had noticed that apart from interest income, the assessee had not earned any other amount. The only activity of the assessee was investing Rs. 7 Crore fund and enjoying the interest. In these circumstances, urged the counsel, the treatment of the amount as “income from other sources” in the manner done by the AO was justified and it could not have been treated as business income. In support of this, it was urged that there was no material to show that the assessee had conducted any business till the assessment year and that it had to only make some payments in 2001 at the request of the Central Government. It was further emphasized that whatever income was earned was for the subsequent years and could not have been the basis for concluding that the assessee was entitled to treat this amount as income from business.

Held that,

++ the findings of fact by the Tribunal that the assessee’s business of consultancy was set up in 1994-95 and that it earned substantial revenue for the next two years cannot be disputed - we noticed that this finding was arrived at after considering the materials including the additional evidence adduced before it. In these circumstances, this Court is of the opinion that the formulation of law by this Court in Commissioner of Income Tax v. M/s. Hughes Escorts Communications Ltd., (2007-TIOL-549-HC-DEL-IT) and CIT v. Whirlpool of India Ltd (2009-TIOL-426-HC-DEL-IT) applies squarely to the facts of this case;

++ so far as the submissions with regard to the amounts paid to M/s Wilbur Smith Associates - which is sought to be added back - is concerned, once the Tribunal was of the opinion that business had commenced on account of the substantial income earned by the assessee after two years of its setting up, the view taken by the Tribunal cannot be faulted. For the above reasons, the Court is of the opinion that no substantial question of law is arises for consideration.