M/S.ascendas It Park Chennai Limited v. The Deputy Commissioner Of Income Tax,Corporate Circle 1(1),Chennai-600 034

IN THE HIGH COURT OF JUDICATURE AT MADRASRESERVED ON 22.02.2017 CORAM THE HONOURABLE MR. JUSTICE HULUVADI G.RAMESH M/s.Ascendas IT Park Chennai Limited,NO.7 and 8, 1[st] Floor,International Tech Park,Pinnacle Building, Taramani Road,Taramani, Chennai-600 113... Appellant/Appellant Versus The Deputy Commissioner of Income Tax,Corporate Circle 1(1),Chennai-600 034... Respondent/Respondent Appeal under section 260A of the Income Tax Act, 1961 againstthe order passed by the Income Tax Appellate Tribunal, Chennai'C' Bench in ITA. No.1256/MDS/2015 dated 04.05.2016 againstthe order of Commissioner of Income Tax (Appeals)-1, 121,Mahatma Gandhi Road, Nungambakkam, Chennai-34, made inITA.No.298/08-09/A-1, (New No.IT.A35/CIT(A)-1/2008-09) dated30.1.2015 for the Assessment year-2005-06 against the order ofDeputy Commissioner of Income Tax, Company Circle 1(1) Chennaimade in PA/GIR No.AAE CA7979D/AX6-587 dated 12.12.2008 for theAssessment year 2005-2006 for the Assessment year 2005-2006 This Tax Case (Appeal) is filed by the Assesseechallenging an order of the Income Tax Appellate Tribunaldated 04.05.2016 in respect of Assessment Year 2004-05.. Thefollowing substantial questions of law have been raised forour consideration: https://hcservices.ecourts.gov.in/hcservices/ ‘1.Whether on the facts and circumstances of thecase, the Tribunal is right in not appreciating thedifference between 'date of set-up of business' asmentioned in Section 3 of the Act for claim ofexpenditure and 'date of commencement of business'as considered by the Hon'ble Tribunal for denial ofclaim made by the Company? 2. Whether the Tribunal is right in law in notappreciating the fact that the business can beconsidered to be set up when the primary activityi.e. acquisition of land takes place and thesubsequent business expenditure incurred fromthereon is to be allowed as revenue expenditure? 3.Whether on the facts and in the circumstances ofthe case, the Tribunal was justified and correct inlaw in holding that interest income earned could notbe set off against the business expenditure incurredby the Appellant under the Act?” 2. The matter was listed for admission and notice issuedto Sri T.Ravikumar to make his submissions on behalf of theRevenue. 3. By consent of the parties, the matter is taken up forfinal disposal at the stage of admission. The Appellant is aCompany that was incorporated on 3[rd] November 2012 with severalobjects inter alia marketing, consultancy, developing,managing and maintaining information technology parks,industrial parks and other projects. The first return ofincome was filed in terms of the provisions of the Income TaxAct 1961 (in short 'Act') for financial year 2003-04 relevantto assessment year 2004-05 on 25.10.2004 returning businessloss of an amount of Rs.5,09,914/-. The return was acceptedand intimation under Section 143(1) of the Act issued. Theintimation has not been disturbed thereafter and has attainedfinality as of now. The position that the appellant claimed tohave commenced business in the financial year 2003-04 relevantto assessment year 2004-05 was thus within the domain ofknowledge of the department. A return of income was filed inrespect of assessment year 2005-06 on 29.10.2005 also claiminga loss from business. 4. A notice under Section 148 of the Act was issued on06.09.2007 and the 'reasons recorded' in terms of Section 148(2) of the Act duly supplied to the assessee. The basis of there-assessment was the view of the Assessing Officer thatexpenditure claimed under the head ‘business’ ought to bedisallowed and capitalised insofar as the same related to aperiod prior to the commencement of business. 5. He took support of the judgment of the Supreme Courtin Tuticorin Alkalis and Fertilisers Ltd. vs. Commissioner ofhttps://hcservices.ecourts.gov.in/hcservices/Incoem Tax (272 ITR 172) (SC). The Assessee does not appear to 4. A notice under Section 148 of the Act was issued on06.09.2007 and the 'reasons recorded' in terms of Section 148(2) of the Act duly supplied to the assessee. The basis of there-assessment was the view of the Assessing Officer thatexpenditure claimed under the head ‘business’ ought to bedisallowed and capitalised insofar as the same related to aperiod prior to the commencement of business. 5. He took support of the judgment of the Supreme Courtin Tuticorin Alkalis and Fertilisers Ltd. vs. Commissioner ofhttps://hcservices.ecourts.gov.in/hcservices/Incoem Tax (272 ITR 172) (SC). The Assessee does not appear to have objected to the assumption of jurisdiction by theAssessing Officer and participated in the process of re-assessment. Objections were raised on the merits of thedisallowance alone. Accordingly, an order of re-assessmentcame to be made on 12.12.2008 u/s.143 (3) r.w. Section 147 ofthe Act in line with the proposal to disallow interest on theground that the appellant had not commenced business. Theinterest from bank deposits were thus brought to tax under thehead 'other sources'. 6. An Appeal was filed before the Commissioner of IncomeTax (Appeals) (‘CIT(A)’ in short) challenging the order ofassessment on merits and pointing out that business activityhad already commenced and hence the assessment of interestincome under the head 'other sources' was incorrect in law.Significantly, the assumption of jurisdiction under Section147 was not questioned even at this stage. The appeal wasdismissed. A further appeal before the Income Tax AppellateTribunal met with the same fate with the Tribunal upholdingthe orders of assessment and first appeal and confirming theposition that the Assessee had not set up/commenced business. 7. At the stage of admission, the appellant sought toraise additional grounds challenging jurisdiction assumedunder section 147 by way of revised substantial questions oflaw along with supporting grounds. The additional questionssought to be raised are as follows: 1.Whether under the facts and circumstances of thecase, the Income Tax Appellate Tribunal was right inholding that the Appellant has not set up orcommenced the business and accordingly expenditureincurred are not allowable as business expenditure? 2.Whether under the facts and circumstances of thecase, the Income Tax Appellate Tribunal was right inupholding the order of the Commissioner of Income Tax(Appeals) denying the set off of the loss of theappellant in its business against the interestincome, as claimed by the appellant? 3. Whether based on material available before it theTribunal could have come to the conclusion that theappellant did not set up the business? 4. Whether under the facts and circumstances of thecase, the Income Tax Appellate Tribunal was right inholding that the business loss cannot be allowed tobe set off against the interest income, since theappellant has not commenced business, while therequirement for computation of business income isonly on the profits after the set up of the business? 5. Whether under the facts and circumstances of thehttps://hcservices.ecourts.gov.in/hcservices/case, the reopening of the assessment and the consequential assessment made under Section 147 bythe assessing officer is valid? 8. While questions 1 to 4 addressed issues raised in theoriginal three substantial questions, question No.5 seeks tointroduce the issue of re-assessment for the first time beforeus. 9. A counter has been filed by the Revenue objecting tothe additional grounds and substantial questions of law nowsought to be raised on the basis that it was wholly belatedand an afterthought. 10. Various decisions have been relied upon by bothlearned counsel in support of their respective stands. 5. Whether under the facts and circumstances of thehttps://hcservices.ecourts.gov.in/hcservices/case, the reopening of the assessment and the consequential assessment made under Section 147 bythe assessing officer is valid? 8. While questions 1 to 4 addressed issues raised in theoriginal three substantial questions, question No.5 seeks tointroduce the issue of re-assessment for the first time beforeus. 9. A counter has been filed by the Revenue objecting tothe additional grounds and substantial questions of law nowsought to be raised on the basis that it was wholly belatedand an afterthought. 10. Various decisions have been relied upon by bothlearned counsel in support of their respective stands. 11. The main contention of the appellant is to the effectthat the question of jurisdiction goes to the root of thematter and being a legal issue, can be raised at any time inthe proceedings. Mr.Balaji, learned counsel appearing for theappellant assessee, would rely on the judgments of the SupremeCourt in the case of Jute Corporation of India vs. CIT (1991)187 ITR 688 (SC) and National Thermal Power Company Ltd. vs.CIT (1998) 229 ITR 383 (SC) to the effect that a legal issuecould be raised at any stage in the proceedings, particularly,since it did not involve the production of any new material orevidence in support thereof. 12. Per contra, Mr.Ravikumar would point out thatvirtually no reason had been given by the appellant justifyingthe non-raising of the issue relating to re-assessment eitherat the time of assessment or in two earlier stages of appeal,except to plead inadvertence. The petition praying foradmission of additional grounds does not set out any reasonsas to why such an issue was not raised earlier. He would thusurge that having not questioned the assumption of jurisdictionearlier, the appellant should not be permitted to do so atthis stage, particularly in the absence of any justificationfor the delay in doing so. In addition, he would argue thatthe issue of re-assessment does not arise from the order ofthe Tribunal impugned under Section 260A and the appellant wasthus not an 'aggrieved person' in regard to the issue of re-assessment. 13. We have heard the matter at length and perused thematerial as well as case law placed for our consideration. 14. The question of assumption of jurisdiction is,without doubt, a substantial question of law. However, if onewere to note the sequence of events that have transpired inthe present case, it is more than apparent that the Assesseenever intended to question the assumption of jurisdictionunder Section 147 at any stage from the time of assessment oreven thereafter. It is only at the stage of admission of thehttps://hcservices.ecourts.gov.in/hcservices/Tax Case (Appeal) that the issue was raised, even then, as an additional issue. When, from December 2008 the Assessee hasaccepted and was quite content with the jurisdiction assumedunder Section 147, we do not think it fit to permit theAssessee to raise the question now, merely for the asking. 15. The provisions of Section 260 A read with the provisothereto, no doubt empower the Court to consider any question,even one not raised before it, upon the Court recording itssatisfaction that the case ‘involves’ such an issue. The useof the word 'involves' does not in our view extend to all andevery legal issue arising in a case, but only those that theassessee demonstrates, has been contested by it at a stageproximate to the raising of the said issue by the department.Acceptance of jurisdiction without demur at every single stageof the proceeding, assessment and appeals, has to be taken tobe final and inviolable. 16. In the facts and circumstances as we have noticedabove, we reject the prayer of the appellant to contest theissue of re-opening under Section 147 of the Act raised beforeus by way of revised substantial question of law. 16. In the facts and circumstances as we have noticedabove, we reject the prayer of the appellant to contest theissue of re-opening under Section 147 of the Act raised beforeus by way of revised substantial question of law. 17. On merits, the sole issue to be decided is whetherthe appellant has commenced business in financial year 2003-04. The Directors Report annexed with the return of income forAugust 2004-05 states thus with respect to the activities ofthe assessee for the period 01.04.2003 – 31.03.2004: The Company was incorporated on 3[rd] November 2003 andobtained its commencement of business certificate on13[th] January 2004. The company has made an advancetoward transfer of land from the other Joint Venturepartner M/s.Tamil Nadu Industrial DevelopmentCorporation Limited (TIDCO). The Company has awardedDesign and Build contract worth INR 86.5 crores toM/s.Tiong Seng Contractors Private Limited, Chennaiwhich is a wholly owned subsidiary of M/s.Tiong SengContractors Pte. Ltd.Singapore. M/s.KPK QuantitySurveyors (India) Pvt. Limited, Chennai has beenappointed as Quantity Surveyours for the proposedphase 1 development of IT Park at Chennai at the feeof 0.90% of construction cost (excluding service tax& others reimbursable expense). M/s.Ascendas (India)Private Limited has been awarded the ProjectManagement Services Contract for the proposed phase1 development of IT park at Chennai at the fee of 2%of the project construction cost (excluding) servicetax & other reimbursable expenses incurred inconnection with this project. 18. The stand of the appellant in the return of incomefor assessment 2004-05 was that it had commenced businessoperations and the interest income had been set off againstloss from business operations. Form No.1, the return of incomehttps://hcservices.ecourts.gov.in/hcservices/reveals an amount of Rs.5,09,914/- as income from business in the computation of total income. The balance sheet and profitand loss account annexed to the return of income reveals anamount of Rs.31,21,113/- incurred towards operating andadministrative expenses. This return has attained finality andhas not been re-opened by the Income Tax Department. In fact,at the time of issue of notice under Section 148 in respect ofAssessment year 2005-06, on 06.09.2007, the limitation forissue of notice under Section 148 in respect of assessment2004-05 was still available, being 31.03.2009. The return,indicating the stand of the assessee duly supported by theDirectors Report and financials were very much on record, inspite of which the department, for reasons best known to it,chose to allow the same to lie undisturbed. This cannot belooked at as mere inadvertence or over-sight. The assesee hasbeen assessed in the same charge for assessment years 2004-05and 2005-06 and the issue of intimation under section 143(1)is by the same officer. The Directors Report and thefinancials in respect of assessment year 2005-06 reveal thatthe following activities were carried out by the company forthe period 01.04.2004-31.03.2005. Performance of the Company The Board of AITPCL had, in March 2004, approved thedevelopment of phase 1 of the project amounting to525,000 sq.ft. of Hi-TEch & IT office space. Theconstruction commenced in April 2004 and is slatedto be completed for occupation by June 2005. Thecompletion is delayed by about 6 weeks due to cashflow problems faced by the contractor, Tiong SengContractors Private Limited. They are expected tocomplete the project by end June. The quality ofconstruction has been good. The management of ITPark Chennai anticipates that by April 2005, about150,000 sq.ft. Will be committed and by June atleast70% to 80% of the building will be leased out. 19. The activities engaged in by the appellant from the1[st] of April 2003 till 31[st] of March 2005 would thus be asfollows: ** An advance made towards transfer of land from Tamil NaduIndustrial Development Corporation (TIDCO). 19. The activities engaged in by the appellant from the1[st] of April 2003 till 31[st] of March 2005 would thus be asfollows: ** An advance made towards transfer of land from Tamil NaduIndustrial Development Corporation (TIDCO). ** A contract for designing and building the infrastructureentered into with SION Contractors Private Singapore Limited,Chennai entered into for an amount of Rs.86.5 crores. ** KP Quantity Surveyors India Private Limited, Chennaiappointed as Quantity Surveyors for phase 1 of the developmentof the IT Park at an agreed fee of 90% of the constructioncost. ** Award of contract to Indian Private Limited for projectmanagement services as part of the development of IT Park at afee of Rs.2 of the project construction cost. ** Phase 1 of development of the IT Park approved by the Boardfor construction of 5,20,000 sq.ft. of space. ** Commencement of construction of infrastructure in April2004 with the projected completion date as June 2005. ** Proposal to lease 1,50,000 sq.ft. by April 2005 and achieve70-80% lease capacity by June 2005. 20. The question posed, as to whether the Assessee can besaid to have 'commenced business' in assessment year 2004-05has to be seen in the context of the activities enumeratedabove as well as the provisions of Section 3 and the provisothereto extracted below:- 'Previous year defined 3. For the purposes of this Act, “previous year”means the financial year immediately preceding theassessment year: Provided that, in the case of a business orprofession newly set up, or a source of income newlycoming into existence, in the said financial year,the previous year shall be the period beginning withthe date of setting up of the business or professionor, as the case may be, the date on which the sourceof income newly comes into existence and ending withthe said financial year. ' 21. The Income Tax Act does not define 'set up' ofbusiness and thus one would have to construe the date of'setting up' of the business or the date on which the 'sourceof income newly comes into existence', as being the initialstage in the chain of events leading to full-fledged businessoperations. If one were to examine the nature of activitiesengaged in Financial Year 2003-04 and 2004-05, it seemsapparent that the project was at an advanced stage. 22. Useful reference can be made to section 35D(1) of theAct that deals with the amortisation of preliminary expenses.The term 'preliminary expenses' as used in section 35-D andseen in the context of the phrase 'commencement of business',used therein, refers to expenditure incurred prior to suchcommencement. The term 'preliminary expenses' has beenexplained in section 35D(2) to mean such expenditure incurredin the preparation of feasibility report, project report,conduct of market survey, engineering services, legal chargesfor drafting of agreements or drafting of memorandum ofarticles of association and printing of the same, fees paid tothe Registrar of Companies for issue of shares or debentureshttps://hcservices.ecourts.gov.in/hcservices/and other prescribed items of expenditure. Thus, preliminary expenditure constitutes those expenses incurred at a verynascent stage of activity. The terms 'preliminary' by itselfis associated within an exploratory exercise to determine andfinalize various initial parameters prior to commencement ofbusiness activities. There cannot be, in the light of themyriad forms that business assumes today, a hard and fast rulein this regard. expenditure constitutes those expenses incurred at a verynascent stage of activity. The terms 'preliminary' by itselfis associated within an exploratory exercise to determine andfinalize various initial parameters prior to commencement ofbusiness activities. There cannot be, in the light of themyriad forms that business assumes today, a hard and fast rulein this regard. 23. One yardstick that can be adopted is to examinewhether the expenditure is solely explorative, incurred merelyto set the stage for engaging in business activities orwhether the expenditure itself is incurred as part of theactivity of business. Business, as defined in Section 2(13) ofthe Act includes trade, commerce, manufacture or adventure orconcern in the nature of trade, commerce or manufacture. Theprofit earning apparatus of the appellant has be seen to be inplace in order to legitimately accept the claim that businesshas, in fact, commenced or has been 'set up'. The terms'commencement of business' and 'setting up of business' areused interchangeably in the Act. So too by us, in thisdecision. 24. We also refer to a decision of this Court in the caseof CIT vs. Club Resorts (287 ITR 552) wherein the issuerelated to the allowability of expenditure incurred by acompany carrying on the business of promoting time shares. Inthat context, the Bench held as follows: ‘...The time share resort business involvesvarious stages of development. The first stage wassetting up of one or more operating offices fromwhich the sales personnel were sent to solicitcustomers, which the assessee had already started.The second stage was launching a massive publicitycampaign, whch the assessee had already beendoing. In fact, it had already acquired land andstarted construction also, which were thesubsequent changes. So, both the authorities belowhad given a finding that the assessee hadcommenced the business. For the purpose ofdevelopment of the projects of construction, theassessee had to necessarily maintain regular staffmembers, on which it had been incurring expenses.The office expenses that had been incurred wereclearly of revenue nature. Considering the reasonsrecorded by the Tribunal and based on the validmaterials and evidences, the same does not sufferfrom any legal infirmity. ‘ 25. The stage wise activities engaged in by the assesseeover the relevant previous year indicates that it hastraversed beyond the stage of exploratory activity and was, infact, engaged in activity that was integral to the profitearning apparatus and we hold so.https://hcservices.ecourts.gov.in/hcservices/ 26. Yet another aspect is that the stand of the assesseefor the previous year to the effect that it had alreadycommenced business, was accepted by the department. The factthat such acceptance was only by way of Intimation u/s 143(1)and has not been confirmed under scrutiny, is, in our view,not material for the reasons set out in para 18 of this order.The definition of 'previous year' as extracted earlier isapplicable to, and leads to the inference that the assesseehad in fact, commenced business in the Financial year 2003-04,Assessment year 2004-05. 27. One cannot countenance a situation where there is aconsecutive 'setting-up of business' year after year, whichwould be the absurd consequence that the stand taken by thedepartment in the present year will lead to. 28. Substantial questions of law 1, 2, 3 as raised in theoriginal memorandum of appeal stand answered in favour of theassessee and against the revenue. Accordingly, this appeal isallowed. Consequently, connected miscellaneous petitions areclosed. No costs. Sd/- Assistant Registrar(CS ) //True Copy// Sub Assistant Registrar vgTO1. The Deputy Commissioner of Income Tax, Corporate Circle 1(1), Chennai-600 034. 2. Income Tax Appellate Tribunal, Chennai 'C' Bench, Chennai. 27. One cannot countenance a situation where there is aconsecutive 'setting-up of business' year after year, whichwould be the absurd consequence that the stand taken by thedepartment in the present year will lead to. 28. Substantial questions of law 1, 2, 3 as raised in theoriginal memorandum of appeal stand answered in favour of theassessee and against the revenue. Accordingly, this appeal isallowed. Consequently, connected miscellaneous petitions areclosed. No costs. Sd/- Assistant Registrar(CS ) //True Copy// Sub Assistant Registrar vgTO1. The Deputy Commissioner of Income Tax, Corporate Circle 1(1), Chennai-600 034. 2. Income Tax Appellate Tribunal, Chennai 'C' Bench, Chennai. 3.The Commissioner of Income Tax, (Appeals)-1,121, Mahatma Gandhi Road, Nungambakkam, Chennai-34. 4. The Assistant Registrar, Income Tax Appellate Tribunal,IIIrd Floor, Rajaji Bhavan, Besant Nagar, Chennai-90 SKV(CO)EU(22/09/2017) T.C. (Appeal) No.668 of 2016