By C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi, Bhadresh Doshi
Chartered Accountants
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Section 28(i) r.w.s. 56 of the Income-tax Act, 1961 — Participation in tender for sale of land demonstrates that business of real estate development is set up during the year.
For the relevant assessment year, the assessee, which was a 100% subsidiary of DLF Ltd., filed its return of income declaring a loss. The assessee company borrowed Rs.186 crore from DLF Ltd. and the paid the same amount as earnest money deposit for a tender for sale of land. This deposit was received back along with interest of Rs.0.62 crore and the assessee, in turn, returned the amount to DLF Ltd. and paid interest of Rs.1.79 crore, resulting in a net loss of Rs.1.17 crore. The Assessing Officer disallowed the loss on the ground that the assessee had not commenced any business activity and, therefore, it was not entitled for interest expenses as claimed by it. Similarly, the interest income received by the assessee deserved to be assessed as an ‘income from other sources’ and not as a business income.
The CIT(A) allowed the adjustment of interest received against the interest paid and determined the net loss of Rs.1.17 crore under ‘Income from Other Sources’, but did not allow carry forward of this loss.
The Tribunal allowed the assessee’s claim. The Tribunal noted as under:
(1) Participation in the tender was starting of one activity which enabled the assessee to acquire the land for development. The actual development of the land is immaterial for construing that business of the assessee has been set up.
(2) The investment of Rs.186 crore was not as a deposit out of surplus funds; rather it was earnest money paid by the assessee for the purchase of land. Thus, the assessee had demonstrated that its business was set up during the accounting period relevant for this assessment year.
(3) Therefore, income of the assessee had to be assessed under the head ‘business income’ and consequently loss computed by the first appellate authority at Rs.1.17 crore deserved to be permitted for carry forward.
