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April, 27th 2013
%                                       Judgment delivered on: 23.04.2013

+       ITA 528/2012
+       ITA 529/2012

        COMMISSIONER OF INCOME TAX-IV                                 .......Petitioner


        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.




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

ITA 528/2012 & 529/2012                                          Page 3 of 12
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


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.

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

ITA 528/2012 & 529/2012                                          Page 12 of 12
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