Facts of the Case

The appeal was filed by the Revenue challenging the order of the Income Tax Appellate Tribunal (ITAT) dated 10.06.2019.

Two primary issues arose:

  1. Deletion of disallowance of pre-operative expenses amounting to ₹5,75,23,000.
  2. Deletion of addition of ₹3,39,98,656 treated as income from other sources.

The Assessing Officer (AO) had:

  • Disallowed pre-operative expenses claimed by the assessee.
  • Added interest income earned on fixed deposits under “Income from Other Sources.”

However, the CIT(A) and ITAT deleted both additions.

Issues Involved

  1. Whether expenses incurred between setting up of business and commencement of business are allowable as revenue expenditure.
  2. Whether interest income earned on fixed deposits during project implementation can be set off against business losses under Section 71.

Petitioner’s (Revenue) Arguments

  • Pre-operative expenses should not be allowed as revenue expenditure.
  • Interest income earned on fixed deposits should be taxed under “Income from Other Sources” without allowing set-off against business losses.

Respondent’s (Assessee) Arguments

  • The business had already been set up, and therefore expenses incurred thereafter qualify as revenue expenditure.
  • Interest earned on fixed deposits was inextricably linked to the project execution, and hence eligible for set-off under Section 71.
  • Funds used for fixed deposits were part of business funds meant for the project.

Court Findings / Order

The Delhi High Court upheld the ITAT’s decision and ruled:

1. Pre-operative Expenses

  • There is a clear distinction between:
    • Setting up of business, and
    • Commencement of business
  • Expenses incurred between these stages are revenue in nature.
  • The Tribunal correctly upheld the deletion of disallowance.
  • The Court also applied the principle of consistency, noting that in subsequent years no such disallowance was made.

2. Interest Income & Set-off

  • It was undisputed that:
    • Interest income was declared under “Income from Other Sources.”
    • It was set off against business losses under Section 71.
  • The Court relied on:
    • Indian Oil Panipat Power Consortium Ltd vs ITO
  • It held:
    • Interest income earned from funds linked to project setup is eligible for set-off.
    • Such funds were inextricably connected to business activity.

Final Order

  • No substantial question of law arose.
  • The appeal filed by the Revenue was dismissed.

Important Clarification

  • Setting up of business ≠ Commencement of business
    Expenses incurred after setup but before commencement are allowable.
  • Interest Income Treatment
    If funds are inextricably linked to business/project, interest income can be:
    • Set off against business losses
    • Not treated purely as independent “Income from Other Sources”
  • Principle of Consistency
    • If the department has accepted a position in subsequent years, deviation without reason is discouraged.

 Link to download the order - https://delhihighcourt.nic.in/app/showFileJudgment/RAS25092023ITA882020_170738.pdf

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