The ITO, Ward-2,, Gandhinagar v. Gujarat State Road Development Corpn. Ltd., Gandhinagar

ITA 2191/AHD/2006 | 2003-2004
Pronouncement Date: 26-02-2010 | Result: Dismissed

Appeal Details

RSA Number 219120514 RSA 2006
Assessee PAN AACFG5706B
Bench Ahmedabad
Appeal Number ITA 2191/AHD/2006
Duration Of Justice 3 year(s) 4 month(s) 13 day(s)
Appellant The ITO, Ward-2,, Gandhinagar
Respondent Gujarat State Road Development Corpn. Ltd., Gandhinagar
Appeal Type Income Tax Appeal
Pronouncement Date 26-02-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 26-02-2010
Date Of Final Hearing 23-02-2010
Next Hearing Date 23-02-2010
Assessment Year 2003-2004
Appeal Filed On 13-10-2006
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD B BENCH BEFORE SHRI BHAVNESH SAINI J.M. AND SHRI A.N.PAHUJ A A.M. ITA NO.2124/AHD/2006 ASSESSMENT YEARS: 2003-2004 GUJARAT STATE ROAD DEVELOPMENT CORPORATION LTD. NIRMAN BHAVAN SECTOR- 10A GANDHINAGAR. V/S ASSTT. COMMISSIONER OF INCOME TAX GANDHINAGAR CIRCLE GANDHINAGAR. PAN NO. AACFG 5706 B (APPELLANT) (RESPONDENT) ITA NO.2191/AHD/2006 ASSESSMENT YEARS: 2003-2004 INCOME TAX OFFICER WARD-2 GANDHINAGAR. V/S GUJARAT STATE ROAD DEVELOPMENT CORPORATION LTD. NIRMAN BHAVAN SECTOR- 10A GANDHINAGAR. PAN NO. AACFG 5706 B (APPELLANT) (RESPONDENT) FOR ASSESSEE: SHRI S.N.SOPARKAR SR. ADV. WITH URMIL A SHODHAN FOR DEPARTMENT: SHRI S.S. PANWAR CIT DR. O R D E R PER SHRI BHAVNESH SAINI J.M. BOTH THE CROSS APPEALS ARE DIRECTED AGAINST THE ORD ER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS) GANDHINAGAR DATED 25 TH JULY 2006 FOR AY 2003-2004. 2. THE APPEAL OF THE ASSESSEE IS FILED ON THE FOLLO WING GROUNDS. 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS I N HOLDING THAT SINCE THE APPELLANT IS MAINTAINING 2 ACCOUNTS AS PER MERCANTILE SYSTEM THE PROJECT EXPENSES INCURRED ON VARIOUS PROJECTS WHICH WERE NOT SOLD OR EXPLOITED COMMERCIALLY SHOULD HAVE BEEN TREATED AS WORK IN PROGRESS. 2. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN HOLDING THAT OUT OF TOTAL PROJECT EXPENSES CLAIMED AT RS.1 15 44 951/- THE EXPENDITURE OF RS.62 63 654/- IS LIABLE TO BE DISALLOWED AS WORK IN PROGRESS. 3. IT IS THEREFORE RESPECTFULLY PRAYED THAT :- 1. THE EXPENSES INCURRED ON VARIOUS PROJECTS WHICH WERE NOT SOLD OR EXPLOITED COMMERCIALLY MAY KINDLY BE HELD AS ALLOWABLE BUSINESS EXPENDITURE AND 2. THE DISALLOWANCE OF RS.62 63 654/- OUT OF VARIOUS EXPENDITURE INCURRED ON PROJECTS MAY KINDLY BE DELETED AND DIRECTED TO BE ALLOWED AS BUSINESS EXPENDITURE. 2.1 THE DEPARTMENTAL APPEAL IS FILED ON THE FOLLOWI NG GROUNDS. 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS OF THE CASE IN DIRECTING THE A.O. TO ALLOW THE ENTIRE PRE-FEASI BILITY STUDIES EXPENSES OF RS.52 80 937/- ON CHHAYAPURI RO B PROJECT INSTEAD OF 1/5 TH OF THE ALLOWANCE HOLDING THAT SECTION 35D IS NOT APPLICABLE IN THIS CASE. 2. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS OF THE CASE IN DIRECTING THE A.O TO DELETE THE DISALLOWANCE OF RS.12 79 762/- INCURRED ON PROJECTS WHICH ARE NOT Y ET STARTED. 3. WE HAVE HEARD LEARNED REPRESENTATIVES OF BOTH TH E PARTIES PERUSED THE FINDINGS OF AUTHORITIES BELOW AND CONSI DERED THE MATERIAL AVAILABLE ON RECORD. 4 THE FACTS OF THE ABOVE GROUNDS ARE THAT THE ASSES SEE HAD FILED RETURN OF INCOME ON 27.11.2003 ADMITTING BUSINESS L OSS OF RS.38 90 290/-. THE ASSESSING OFFICER DURING THE CO URSE OF ASSESSMENT PROCEEDINGS OBSERVED THAT THE ASSESSEE H AD RECEIVED THE FOLLOWING INCOME DURING THE YEAR. 3 PROJECT DEVELOPMENT FESS RS. 58 20 268/- INTEREST RECEIVED RS. 49 49 367/- OTHER INCOME RS. 2 016/- TOTAL RS.1 07 71 651/- 4.1. DURING THE YEAR THE ASSESSEE HAD ENTERED INTO AN AGREEMENT WITH RANJIT PROJECT PVT. LTD. FOR CHHAYAPURI ROB PR OJECT. AS PER THE ABOVE AGREEMENT THE ASSESSEE RECEIVED A SUM OF RS. 58 20 268/- ON 27/5/2002 FROM THE ABOVE COMPANY. THE ABOVE RECE IPT WAS CALCULATED AT 2% OF THE PROJECT COST. AS PER THE AG REEMENT THE PROJECT DEVELOPMENT COST (FEES) MEANT THE COST OF C ONDUCTING THE PRE-FEASIBILITY STUDY PREPARATION OF BID DOCUMENTS AND OTHER PROJECT PREPARATION COSTS. THE PROJECT DEVELOPMENT COST WAS TO BE CONSIDERED AS 2% OF THE TOTAL COST. AS AGAINST THE ABOVE RECEIPTS THE ASSESSEE HAD INCURRED THE FOLLOWING EXPENSES: PRE-FEASIBILITY STUDY EXPENSES RS.1 15 44.951 /- OTHER INDIRECT EXPENSES RS. 23 96 558/- DEPRECIATION RS. 8.13. 942/- TOTAL RS.1.47.55.451 /- THE PRE-FEASIBILITY STUDIES WERE IN RESPECT OF 24 P ROJECTS WHICH HAD BEEN UNDERTAKEN BY THE ASSESSEE (DETAILS GIVEN IN P ARA 3.5 OF THE ASSESSMENT ORDER). THE ASSESSING OFFICER WAS OF THE OPINION THAT THOUGH THE ASSESSEE HAD INITIATED VARIOUS PROJECTS ONLY ONE WAS READY AND INCOME WAS RECEIVED IN RESPECT OF ABOVE P ROJECT DURING THE YEAR. HOWEVER THE PRE-FEASIBILITY STUDY EXPENS ES DEBITED IN THE PROFIT & LOSS ACCOUNT WERE IN RESPECT OF VARIOUS OT HER PROJECTS WHICH WERE NOT COMMENCED TILL THE END OF THE RELEVANT PRE VIOUS YEAR. ACCORDINGLY ASSESSING OFFICER PROPOSED TO DISALLOW SUCH EXPENDITURE AS THEY WERE PERTAINING TO PROJECTS WHI CH WERE NOT 4 COMMENCED. THE OTHER INDIRECT EXPENSES AND DEPRECIA TION WERE ALSO PROPOSED TO BE DISALLOWED. 4.2. THE ASSESSEE SUBMITTED BEFORE THE ASSESSING OF FICER THAT OBJECTIVES INCIDENTAL OR ANCILLARY TO THE ATTAINMEN T OF THE MAIN OBJECT IN THE ASSESSEES CASE WAS TO IDENTIFY PROBABLE SCH EME UNDER BOT AND TO APPOINT ANY GOVERNMENT AGENCY OR ANY PRIVATE CONSULTANT IN ORDER TO COLLECT DATA AND INFORMATION AND TO CARRY OUT DETAILED SURVEY AND PREPARE FEASIBILITY REPORT AND DETAILED ESTIMAT E OF THE PROJECTS IDENTIFIED AND TO CARRY OUT THE FINANCIAL AND ECONO MIC VIABILITY OF SUCH PROJECTS. THE COMPANY HAD ALREADY STARTED ITS ACTIV ITIES OF RENDERING SERVICES TO THE STATE GOVERNMENT IN THE FORM OF ADV ICE ON ALL ISSUES RELATING TO ROADS AND ASSIST THE GOVERNMENT IN FORM ULATION OF POLICIES IN THIS REGARD TO DEVELOP AND PROVIDE CONSULTANCY AND CONSTRUCTION SERVICES AND CARRY ON THE RESEARCH ACTIVITIES OF RO ADS IN THE STATE OF GUJARAT. IN PURSUANCE OF THE INCIDENTAL OR ANCILLAR Y OBJECT TO THE ATTAINMENT OF MAIN OBJECT THE ASSESSEE CARRIED OUT ACTIVITIES TO IDENTIFY PROBABLE SCHEMES UNDER BOT AND TO APPOINT GOVERNMENT AGENCY OR ANY PRIVATE CONSULTANT IN ORDER TO COLLEC T DATA AND INFORMATION AND TO CARRY OUT DETAILED SURVEY AND PR EPARE FEASIBILITY REPORT AND DETAILED ESTIMATE OF THE PROJECTS IDENTI FIED CARRIED OUT THE FINANCIAL AND ECONOMIC VIABILITY OF SUCH PROJECTS. FROM THE VERY INCEPTION THE COMPANY COMMENCED ITS BUSINESS BY AP POINTING PRIVATE CONSULTANT IN ORDER TO COLLECT DATA AND INF ORMATION AND TO CARRY OUT SURVEY AND DETAILED PREPARE PRE-FEASIBILI TY REPORT. THE WORK ON VARIOUS SCHEMES PROPOSED ON BOT WERE CARRIED OUT IN RESPECT OF 23 PROJECTS (DETAILS GIVEN IN PARA 3.8 OF ASSESSMEN T ORDER). EVEN THOUGH THE EXPENDITURE INCURRED WERE STATED TO BE PRE-FEASIBILITY STUDY EXPENSES IF ANY SUCH EXPENDITURE INCURRED F OR PAYMENT TO CONSULTANTS AND COULD ONLY BE REGARDED AS FEASIBILI TY STUDY EXPENSES. IT WAS ALSO SUBMITTED THAT THE INCIDENTAL AND 5 ADMINISTRATIVE EXPENDITURE WERE INCURRED DURING THE YEAR IN CONNECTION WITH THE BUSINESS ACTIVITY AND THE SAME WERE TO BE ALLOWED AS REVENUE EXPENDITURE DURING THE YEAR. THE ASSESSEE FURTHER REFERRED TO THE DISCUSSION ON COMMENCEMENT OF BUSINESS IN SAMPATH IYENGAR'S LAW OF INCOME TAX 2005 EDITION ON PAGE 2274 AND ARGUED THAT COMMENCEMENT OF BUSINESS WAS TO BE APPRECIATED FROM THE POINT OF VIEW OF A BUSINESSMAN. IN THE ABO VE CONTEXT IT WAS ARGUED THAT THE BUSINESS HAD ALREADY COMMENCED AND THE EXPENSES AS PER THE PROFIT & LOSS ACCOUNT WERE LI ABLE TO BE ALLOWED. 4.3. THE ASSESSING OFFICER EXAMINED THE ISSUE AND P OINTED OUT THAT THE EXPENDITURE INCURRED ON CARRYING OUT DETAILED S URVEY AND PREPARATION OF FEASIBILITY REPORTS COULD BE FOR ATT AINING OBJECTS INCIDENTAL AND ANCILLARY TO THE ATTAINMENT OF MAIN OBJECT. PREPARATION OF THE FEASIBILITY REPORT IS NOT THE MAIN OBJECT OF THE COMPANY. THERE HAPPENED TO BE MORE THAN 35 OBJECTS WHICH ARE INCI DENTAL AND ANCILLARY TO THE ATTAINMENT OF MAIN OBJECT. MERELY FULFILLING ONE OR MORE OBJECTS WHICH ARE INCIDENTAL OR ANCILLARY DID NOT MEAN TO CARRY ON THE MAIN ACTIVITIES. THE ASSESSING OFFICER FURTH ER REFERRED TO THE CASE LAWS CITED BY THE ASSESSEE AND POINTED OUT THA T THE FACTS WERE DIFFERENT AND THE PRINCIPLES LAID DOWN IN THOSE CAS ES COULD NOT BE APPLIED TO THE PRESENT FACTS. THE PRE-FEASIBILITY S TUDY EXPENSES WERE PRIMARY EXPENSES WHICH COULD BE AMORTIZED OVER A PE RIOD OF TIME. THE EXPENSES WERE INCURRED ON DIFFERENT PROJECTS AN D SEPARATE ACCOUNTS WERE MAINTAINED FOR EACH PROJECT. ACCORDIN GLY EACH PROJECT SHOULD BE TAKEN AS A SEPARATE PROJECT. THE EXPENSES INCURRED ON THE CHHAYAPURI ROB PROJECT WHICH COMME NCED DURING THE YEAR COULD ONLY BE ALLOWED DURING THE YEAR. THE REST OF THE PROJECT EXPENSES WERE DISALLOWED STATING THAT SUCH EXPENSES COULD ONLY BE CLAIMED ON KEEPING INCOME BY SETTING UP SUC H PROJECT. 6 ACCORDINGLY THE ASSESSING OFFICER DISALLOWED VARIO US EXPENSES TOTALING TO RS.1 04 68 764/-. FURTHER INDIRECT EXP ENSES AMOUNTING TO RS.12 79 762/- WERE ALSO DISALLOWED. 4.4. THE ASSESSEE OBJECTED TO THE ACTION OF THE ASS ESSING OFFICER IN DISALLOWING THE VARIOUS EXPENSES AND COMPUTING INCO ME OF RS. 78 38 236/- AS AGAINST LOSS OF RS.38 90 290/-. IT W AS SUBMITTED THAT THE ASSESSING OFFICER WAS INCORRECT IN FINDING THAT THE ASSESSEE DID NOT CARRY OUT THE MAIN OBJECTIVE DURING THE YEAR. I T ALSO OBJECTED TO THE FINDING OF THE ASSESSING OFFICER THAT EACH PROJ ECT CARRIED OUT BY THE COMPANY WAS A SEPARATE PROJECT AND EXPENSES SHO ULD BE AMORTIZED IN RESPECT OF EACH SUCH PROJECT. FURTHER SUBMISSIONS OF THE ASSESSEE ARE BRIEFLY NOTED AS UNDER:- A. ASSESSING OFFICER WAS INCORRECT IN HIS FINDING T HAT THE ASSESSEE HAD NOT CARRIED OUT THE MAIN OBJECTIVE DU RING THE YEAR. THE MAIN OBJECTS OF THE COMPANY ARE CLASSIFIE D AS UNDER: 1) TO CONSTRUCT OR BUILD ROADS AND HIGHWAYS. 2) TO REGULATE AND CONTROL THE USE OF ROADS. BRIDG ES AND FLYOVERS. 3) TO ADVICE THE GOVERNMENT ON ALL ISSUES RELATING TO ROAD. 4) TO DEVELOP AND PROVIDE CONSULTANCY AND CONSTRUC TION SERVICES AND RESEARCH ACTIVITIES. IT WAS SUBMITTED DURING THE ASSESSMENT PROCEEDINGS THAT THE ASSESSEE -COMPANY MORE OR LESS CARRIED BUSINESS OF RENDERING SERVICES TO THE STATE GOVERNMENT IN THE F ORM OF ADVICE THE GOVERNMENT ON ALL ISSUES RELATING TO ROA DS AND ASSIST THE GOVERNMENT IN FORMULATION OF POLICIES IN THIS REGARD TO DEVELOP AND PROVIDE CONSULTANCY AND CONSTRUCTION SERVICES 7 AND CARRY ON RESEARCH ACTIVITIES OF ROADS IN THE ST ATE OF GUJARAT. IN PURSUANCE OF THE INCIDENTAL AND ANCILLARY OBJECT S TO THE ATTAINMENT OF THE MAIN OBJECT THE COMPANY HAD TO C ARRY OUT THE ACTIVITIES TO IDENTIFY PROBABLE SCHEME UNDER BO T AND TO APPOINT ANY GOVERNMENT AGENCY OR ANY PRIVATE CONSUL TANT IN ORDER TO COLLECT DATA AND INFORMATION AND TO CARRY OUT DETAILED SURVEY AND PREPARE FEASIBILITY REPORT AND DETAILED ECONOMIC VIABILITY OF SUCH PROJECTS. THE COMPANY UPON ITS INCORPORATION COMMEN CED THE BUSINESS BY APPOINTING PRIVATE CONSULTANTS IN ORDE R TO COLLECT DATA AND INFORMATION AND TO CARRY OUT DETAILED SURV EY AND PREPARE FEASIBILITY AND DETAILED ESTIMATE OF THE PR OJECTS AND TO ASCERTAIN THE FINANCIAL AND ECONOMIC VIABILITY OF S UCH PROJECTS. THE DETAILS OF 23 SCHEMES WERE GIVEN. THE COMPANY I NCURRED EXPENDITURE AS DETAILED IN THE AUDIT REPORT IN RESP ECT OF ABOVE SCHEMES. TO CARRY OUT THE ABOVE ACTIVITIES OF THE COMPANY VARIOUS INCIDENTAL AND ADMINISTRATIVE EXPENDITURE W ERE INCURRED DURING THE YEAR AS DETAILED IN THE AUDIT R EPORT UNDER THE HEAD 'OTHER INDIRECT EXPENSES.' IN THE ABOVE BACKGROUND IT WAS ABUNDANTLY ESTABLISH ED THAT THE COMPANY COMMENCED ITS BUSINESS LONG BACK AND DU RING F.Y. 2002-03 IT CARRIED ON ITS BUSINESS ACTIVITIES . B. THE OBSERVATION OF THE ASSESSING OFFICER THAT EX PENDITURE ON FEASIBILITY STUDIES WAS COVERED U/S. 35D OF INCOME- TAX ACT 1961 IS INCORRECT AND NOT SUPPORTED BY ANY EVIDENCE OR PROVISIONS OF LOW. THE PROVISIONS IN SECTION 35D AR E AS UNDER: '35D: (1) WHERE ON ASSESSEE BEING ON INDIAN COMPANY OR A PERSON (OTHER THAN A COMPANY) WHO IS 8 RESIDENT IN INDIA INCURS AFTER THE 31 ST DAY OF MARCH 1970 ANY EXPENDITURE SPECIFIED IN SUB-SECTION (2) (I) BEFORE THE COMMENCEMENT OF HIS BUSINESS OR (II) AFTER THE COMMENCEMENT OF HIS BUSINESS IN CON NECTION WITH THE EXTENSION OF HIS INDUSTRIAL UNDERTAKING OR IN CONNECTION WITH HIS SETTING UP A NEW INDUSTRIAL UNI T THE ASSESSEE SHALL IN ACCORDANCE WITH AND SUBJECT TO T HE PROVISIONS OF HIS SECTION BE ALLOWED A DEDUCTION O F AN AMOUNT EQUAL TO ONE-TENTH OF SUCH EXPENDITURE FOR E ACH OF THE TEN SUCCESSIVE PREVIOUS YEARS BEGINNING WITH THE PREVIOUS YEAR IN WHICH THE BUSINESS COMMENCES OR A S THE CASE MAY BE THE PREVIOUS YEAR IN WHICH THE EXTENSION OF THE INDUSTRIAL UNDERTAKING IS COMPLETE D OR THE NEW INDUSTRIAL UNIT COMMENCES PRODUCTION OR OPERATION: PROVIDED THAT WHERE AN ASSESSEE INCURS AFTER THE 31 DAY OF MARCH 1998 ANY EXPENDITURE SPECIFIED IN SUB-SECTI ON (2) THE PROVISIONS OF THIS SUBSECTION SHALL HAVE EFFECT AS IF FOR THE WORDS 'AN AMOUNT EQUAL TO ONE-TENTH OF SUCH EXPENDI TURE FOR EACH OF THE TEN SUCCESSIVE PREVIOUS YEARS' THE WOR DS 'AN AMOUNT EQUAL TO ONE-FIFTH OF SUCH EXPENDITURE FOR E ACH OF THE FIVE SUCCESSIVE PREVIOUS YEARS' HAD BEEN SUBSTITUTE D.' IN THIS CONTEXT SECTION 35D IS APPLICABLE ONLY IF EXPENDITURE IS INCURRED BEFORE COMMENCING OF BUSINESS OR AFTER THE COMMENCEMENT OF ITS BUSINESS IN CONNECTION WITH THE EXTENSION OF INDUSTRIAL UNDERTAKING OR IN CONNECTIO N WITH HIS SETTING UP A NEW INDUSTRIAL UNIT. IN THE CASE OF TH E ASSESSEE THE EXPENDITURE DISALLOWED WAS NOT INCURRED BEFORE THE COMMENCEMENT OF THE BUSINESS SINCE THE ASSESSEE HAD COMMENCED ITS BUSINESS LONG BACK AS HELD IN THE ASS ESSEES ORDER FOR A.Y. 2002-03 AND THE EXPENDITURE DISALLOW ED WAS NOT 9 INCURRED IN CONNECTION WITH THE EXTENSION OF INDUST RIAL UNDERTAKING OR IN CONNECTION WITH ITS SETTING UP A NEW INDUSTRIAL UNIT. IT WAS SUBMITTED THAT EVEN FROM ACADEMIC POINT OF V IEW THE PROVISION OF SECTION 35D DID NOT APPLY TO THE FACTS OF THE ASSESSEES CASE. C. ASSESSING OFFICER WAS INCORRECT IN CONCLUDING TH AT EACH PROJECT WAS A SEPARATE PROJECT. IT WAS SUBMITTED TH AT THE BUSINESS IS ONE AND INDIVISIBLE AND THE EXPENDITURE COULD NOT BE CONSIDERED PROJECT-WISE. ALL INCOME OF THE BUSIN ESS DURING THE YEAR AND ALL EXPENDITURE DURING THE YEAR FOR ON E PROJECT OR MORE PROJECTS HAD TO BE CONSIDERED TOGETHER AS BUSI NESS. 4.5 THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) CONSIDERING SUBMISSIONS OF THE ASSESSEE AND MATERIA L ON RECORD ALLOWED THE DEDUCTION OF EXPENDITURE IN A SUM OF RS .52 80 973/- INCURRED ON CHHAYAPURI ROB PROJECT AND RESTRICTED T HE DISALLOWANCE OF RS.62 63 654/-. THE REVENUE IS IN GROUND NO.1 CH ALLENGING THE DELETION OF PART ADDITION AND THE ASSESSEE IS IN AP PEAL ON ALL THE GROUNDS CHALLENGING THE PART ADDITION. AS REGARDS INDIRECT EXPENSES OF RS.12 79 762/- LEARNED COMMISSIONER OF INCOME T AX (APPEALS) NOTED THAT THE EXPENSES ARE INCURRED FROM DAY TO DA Y MANAGEMENT OF THE COMPANY FOR THE PURPOSE OF MAIN BUSINESS OF THE ASSESSEE RELATING TO ADVISING THE GOVERNMENT OF GUJARAT ON R OAD POLICIES AND PROJECTS. ADDITIONS OF RS.12 79 762/- WAS ACCORDING LY DELETED. REVENUE IS IN APPEAL ON GROUND NO.2 ON THIS GROUND. THE FINDINGS OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ARE RE PRODUCED AS UNDER:- 2.5 THE FACTS OF THE CASE AND THE SUBMISSIONS HAVE BEEN CONSIDERED. A- SIMILAR ISSUE WAS CONSIDERED IN APPE LLANT'S OWN CASE IN APPEAL FOR ASSESSMENT YEAR 2002-03 IN ITA N O. 10 CIT(A)/GNR/1/2005-06 AS PER ORDER DATED 12/01/2006. AFTER DETAILED EXAMINATION OF THE FACTS (PARA-4 A 4.1 OF THE APPELLATE ORDER) IT WAS HELD THAT THE APPELLANT HAD ALREADY COMMENCED ITS BUSINESS ACTIVITIES. IT WAS DIRECTED IN THE ABOVE A PPELLATE ORDER THAT EXPENSES INCURRED SHOULD BE ALLOWED UNDER THE HEAD 'BUSINESS OR PROFESSION'. IN THE PRESENT ASSESSMENT YEAR THE ASSESSING OFFICER HELD THAT THE APPELLANT DID NOT C ARRY OUT ITS MAIN OBJECTS DESCRIBED IN THE MEMORANDUM OF ASSOCIA TION AND IT HAD ONLY CARRIED OUT CERTAIN ACTIVITIES WHICH WE RE INCIDENTAL AND ANCILLARY TO THE ATTAINMENT OF THE MAIN OBJECTS . IT WAS ALSO HELD THAT THE EXPENDITURE INCURRED BY THE APPELLANT ON PRE- FEASIBILITY STUDIES COULD NOT BE CLAIMED AS 100% RE VENUE EXPENDITURE IN ONE YEAR. HE ALSO TREATED SUCH EXPEN DITURE AS PRELIMINARY EXPENSES (EXCEPT IN THE CASE OF EXPENSE S ON CHHAYAPURI ROB PROJECT). ACCORDING TO HIM THE PRE- FEASIBILITY STUDY EXPENSES ON VARIOUS PROJECTS COULD BE CLAIMED ONLY AFTER GETTING INCOME BY SELLING OUT SUCH PROJECTS. ON CO NSIDERING THE FACTS AND FINDINGS OF THE ASSESSING OFFICER DURING THE YEAR IT IS NOTICED THAT THE FACTS WERE NOT MUCH DIFFERENT FROM THE FACTS AS EXISTED IN THE ASSESSMENT YEAR 2002-03. IT WAS HELD IN THAT YEAR THAT THE BUSINESS ACTIVITIES HAD COMMENCED. FOLLOWI NG THE ABOVE FINDING IT IS HELD THAT THE APPELLANT HAD AL READY COMMENCED ITS BUSINESS ACTIVITIES AND THE PRE-FEASI BILITY STUDY EXPENSES ARE LIABLE TO BE CONSIDERED FOR DEDUCTION IN THE PRESENT ASSESSMENT YEAR. THE FINDING OF THE ASSESSI NG OFFICER THAT SUCH EXPENSES SHOULD BE CONSIDERED U/S.35D OF THE I.T. ACT IS HOWEVER INCORRECT. AS POINTED OUT BY THE APPELLA NT EXPENSES COULD BE CONSIDERED AS PRELIMINARY EXPENSES AS PER THE PROVISIONS OF SECTION 35D OF THAT I.T. ACT ONLY IF THE BUSINESS HAD NOT BEEN COMMENCED OR IF SUCH EXPENDITURE HAD B EEN INCURRED FOR EXTENSION OF INDUSTRIAL UNDERTAKING OR FOR SETTING UP NEW INDUSTRIAL UNIT. IN THE PRESENT CASE THE APPEL LANT CONTINUED THE BUSINESS ACTIVITIES WHICH HAD ALREADY STARTED I N THE EARLIER YEAR. NO EXTENSION OR SETTING UP NEW UNIT WAS DONE. ACCORDINGLY IT IS HELD THAT THE EXPENSES COULD NOT BE CONSIDERED U/S.350 OF THE I.T. ACT. HOWEVER IT IS NOTICED THAT THE APPELLANT WAS MAINTAINING ITS BOOKS OF ACCOUNTS AS PER MERCANTILE SYSTEM. IN THE ABOVE SYSTEM THE PROJECT EXPENSES INCURRED ON VARIOUS PROJECTS WHICH WERE NOT SOLD O R EXPLOITED COMMERCIALLY SHOULD HAVE BEEN TREATED AS WORK-IN-P ROGRESS. SINCE THE SAME WAS NOT DONE SUCH EXPENSES INCURRED SHALL BE DISALLOWED IN COMPUTING INCOME FOR THE YEAR. OUT OF THE TOTAL PROJECT EXPENSES CLAIM AMOUNTING TO RS.1 15 44 951/- ONLY EXPENSES AMOUNTING TO RS.52 80 937/- INCURRED ON CH HAYAPURI ROB PROJECT WAS ELIGIBLE TO BE DEDUCTED. THE BALANC E AMOUNTING TO RS.62 63 654/- IS LIABLE TO BE DISALLO WED. THE DISALLOWANCE MADE BY THE ASSESSING OFFICER TO THE A BOVE EXTENT IS UPHELD AND THE BALANCE IS DIRECTED TO BE ALLOWED . IT IS ALSO CLARIFIED THAT THE APPELLANT WOULD BE ENTITLED TO T REAT THE DISALLOWED EXPENDITURE AS OPENING WORK-IN-P ROGRESS IN THE SUBSEQUENT ASSESSMENT YEAR. SO FAR AS THE IND IRECT EXPENDITURE OF RS.23 96 558/- THE ASSESSING OFFICE R HAD ALLOCATED SUCH EXPENSES ON PROPORTIONATE BASIS ON 2 4 PROJECTS AND A SUM OF RS.12 79 762/- WAS DISALLOWED. IT IS NOTICED THAT THE INDIRECT EXPENSES WERE INCURRED ON DAY-TO-DAY M ANAGEMENT 11 OF THE COMPANY AND ON ACCOUNT OF OTHER ADMINISTRATI VE NEEDS. THESE EXPENSES COULD ONLY BE CONSIDERED AS HAVING B EEN INCURRED FOR THE MAIN OBJECTS OF THE COMPANY AND TH E ENTIRE EXPENDITURE SHOULD BE ALLOWED. THE ALLOCATION OF SUCH EXPENSES ON PROPORTIONATE BASIS ON 24 PROJECTS IS F OUND TO BE INCORRECT AS THE APPELLANT'S MAIN BUSINESS WAS RELA TING TO ADVISING THE GOVERNMENT OF GUJARAT ON ROAD POLICIES AND PROJECTS. THE DISALLOWANCE IS DIRECTED TO BE DELETE D. 5. LEARNED COUNSEL FOR ASSESSEE AT THE OUTSET SUBM ITTED THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY O RDER OF ITAT D BENCH AHMEDABAD IN THE CASE OF THE SAME ASSESSEE I N THE AY 2002-03 IN ITA NO.899/AHD/2006 DATED 12.12.2008 WH EREBY THE DEPARTMENTAL APPEAL ON THE IDENTICAL ISSUE HAS BEEN DISMISSED. HE HAS HOWEVER ELABORATELY ARGUED ON FACTS ALSO AND R EITERATED THE SUBMISSIONS MADE BEFORE AUTHORITIES BELOW. HE HAS REFERRED TO PB- 13 (P&L ACCOUNT) TO SHOW THE EXPENDITURE OF FEASIBI LITY STUDY EXPENSES AND OTHER INDIRECT EXPENSES WHICH ARE SAM E AS CONSIDERED IN THE EARLIER YEAR AND SUBMITTED THAT S INCE THE ASSESSEE WAS ONLY ADVISING THE STATE OF GUJARAT THEREFORE THERE COULD NOT BE ANY WORK-IN-PROGRESS AND NO AMOUNT IS SHOWN IN THE P&L ACCOUNT. HE HAS REFERRED TO DETAILS OF ABOVE EXPENDITURE AND P.B.-17 AND P.B-18 TO HIGHLIGHTS THAT THE ISSUES IS SAME AS CON SIDERED IN THE EARLIER YEAR. P.B.-33 IS RESOLUTION OF STATE OF GU JARAT FOR CREATING THE ASSESSEE WITH THE OBJECTIVE TO UNDERTAKE THE DE VELOPMENTS OF BRIDGES AND ROADS. P.B.-26 ARE THE OBJECTS INCIDENT AL TO THE ATTAINMENT OF THE MAIN OBJECT. P.B.-27 IS THE DETA ILS OF 23 SCHEMES CARRIED OUT BY ASSESSEE AND THAT IT WAS CLARIFIED T HAT EXPENDITURE WAS INCURRED FOR PAYMENT TO THE VARIOUS CONSULTANTS TO COLLECT DATA AND INFORMATION TO CARRY OUT DETAILED SURVEY AND PR EPARE FEASIBILITY REPORT. P.B.-28 SHOWS THAT ASSESSEE BEING A COMPANY WAS CARRYING ON PROFESSION ON ADVISING THE STATE GOVERNMENT ABOU T ITS VARIOUS SCHEMES. HE HAS THEREFORE SUBMITTED THAT THERE CAN NOT BE WORK IN 12 PROGRESS IN THE CASE OF THE ASSESSEE AS IS HELD BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS). 6. ON THE OTHER HAND LEARNED DEPARTMENTAL REPRESEN TATIVE RELIED UPON THE ORDER OF THE ASSESSING OFFICER HOWE VER DID NOT DISPUTE THE ORDER OF THE TRIBUNAL IN THE EARLIER YE AR DATED 12.12.2008 (SUPRA) IN WHICH IT WAS HELD THAT THE ASSESSEE COM MENCED ITS BUSINESS ACTIVITIES IN THE EARLIER YEAR THEREFORE EXPENDITURE CANNOT BE DISALLOWED. LEARNED DEPARTMENTAL REPRESENTATIVE HOWEVER SUBMITTED THAT SINCE IN SOME OF THE PROJECT NO INC OME IS EARNED THEREFORE EXPENDITURE CANNOT BE ALLOWED. LEARNED C OMMISSIONER OF INCOME TAX (APPEALS) WAS THEREFORE JUSTIFIED IN HO LDING THAT SUCH EXPENSES SHOULD HAVE BEEN TREATED AS WORK-IN-PROGRE SS. HE HAS RELIED UPON DECISION OF SUPREME COURT IN THE CASE O F CIT VS. BRITISH PAINT INDIA LTD. 188 ITR 44. ON THE INDIRECT EXPENS ES HE HAS RELIED UPON ORDER OF THE ASSESSING OFFICER. 7. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND MATERIE L AVAILABLE ON RECORD. THE FACTS AS NOTED ABOVE AND THE MAIN OB JECT OF THE ASSESSEE IN ADVISING THE STATE GOVERNMENT ON ALL TH E ISSUES RELATING TO ROADS AND ASSISTS THE GOVERNMENT IN FORMATION OF POLICIES ARE NOT IN DISPUTE. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IN THE ASSESSMENT YEAR 2002-03 DELETED THE ENTIRE ADD ITION BY NOTICING THE SAME OBJECTS OF THE ASSESSEE AND HELD THAT SINC E THE ASSESSEE HAD COMMENCED ITS BUSINESS ACTIVITIES AND THAT THE EXPENDITURE INCURRED ON SUCH BUSINESS ACTIVITIES WERE TO BE CO NSIDERED AND ALLOWED UNDER THE HEAD BUSINESS. THE REVENUE PREFE RRED APPEAL BEFORE THE TRIBUNAL IN ITA NO.899/AHD/2006 (SUPRA) AND THE DEPARTMENTAL APPEAL HAS BEEN DISMISSED BY THE TRIBU NAL. THE FINDINGS IN PARA.9 OF THE ORDER OF THE TRIBUNAL ARE REPRODUCED AS UNDER 13 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE ASSESSEE COMPANY WAS INCORPORATED ON 12.05.1999. TH E MAIN OBJECTS ARE EXTRACTED HEREINABOVE. THE BUSINES S ACTIVITIES HAVE STARTED ON INCORPORATION. THE GOVER NMENT OF GUJARAT BY ITS NOTE DATED 4.08.1999 ENTRUSTED TO TH E COMPANY 10 WORKS OF ROAD AND OVER BRIDGES MENTIONED IN THAT LETTER FOR DEVELOPMENT UNDER BUILD OPERATION TRANSFER SCHEME ( BOT). ON ENTRUSTMENT OF WORK THE ASSESSEE STARTED APPOIN TING TECHNICAL CONSULTANT AND INCURRED EXPENDITURE ON DEVELOPMENT OF THESE ROADS/ OVER BRIDGES. THE INCOM E UNDER THE HEAD PROFITS AND GAINS OF THE BUSINESS IS TO BE COMPUTED IN RESPECT OF BUSINESS SET UP BY THE ASSES SEE AND CARRIED ON DURING THE PREVIOUS YEAR. UNDER SEC.3 T HE PREVIOUS YEAR IS DEFINED. AS PER PROVISO TO SEC.3 I N THE CASE OF A BUSINESS OR PROFESSION NEWLY SET UP THE PREVI OUS YEAR SHALL BE PERIOD BEGINNING WITH THE DATE OF SETTING UP OF THE BUSINESS AND ENDING WITH THE SAME FINANCIAL YEAR. T HEREFORE IN COMPUTING THE INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS THE EXPENSES INCURRED AFTER THE BUSINESS HAS BEEN SET UP SHALL BE CONSIDERED. THERE IS NO CONDITION THAT THE INCOME FROM SUCH BUSINESS SHOULD ALSO HAVE BEEN EAR NED. ENTRUSTMENT OF THE WORK BY THE GOVERNMENT AND APPOI NTING CONSULTANTS FOR EXECUTING SUCH WORK AMOUNTS TO SETT ING UP OF THE BUSINESS. THE BUSINESS HAVING BEEN SET UP DURIN G THE FINANCIAL YEAR RELATING TO A.Y.2000-01 IT WILL BE INCORRECT TO HOLD THAT FOR A.Y. 2002-03 THE ASSESSEE HAS NOT CO MMENCED THE BUSINESS. THEREFORE THE DECISION OF THE HONBL E SUPREME COURT IN THE CASE OF TUITICORIN ALKALIS CHEMICALS & FERTILIZERS LTD. V. CIT(SUPRA) IS NOT APPLICABLE TO THE FACTS O F THE PRESENT CASE. WE THEREFORE DO NOT FIND ANY INFIRMITY IN O RDER OF THE LD. CIT(A). 8. THE FINDINGS GIVING IN THE EARLIER YEAR SHOWS T HAT ASSESSEE COMPANY HAS ALREADY STARTED ITS ACTIVITIES OF RENDE RING SERVICES TO THE STATE GOVERNMENT IN THE FORM OF ADVISE ON ALL ISSUE S RELATING TO ROADS AND ASSISTS THE GOVERNMENT IN FORMULATION OF POLICI ES IN THIS REGARD TO DEVELOP AND PROVIDE CONSULTANCY AND CONSTRUCTION SE RVICES AND CARRY ON RESEARCH ACTIVITIES OF ROADS IN THE STATE O GUJA RAT. THE ASSESSEE THUS SPENT THE EXPENDITURE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ITS BUSINESS. OTHER ADMINISTRATIVE EXPENSES ARE ALS O INCURRED FOR THE PURPOSE OF BUSINESS. THE ASSESSEE TOOK SEVERAL PROJ ECTS IN ORDER TO ACHIEVE ITS AIM AND OBJECTS. IT WOULD THEREFORE SH OW THAT ASSESSEE 14 DID THE WORK FOR STATE OF GUJARAT FOR SEVERAL PROJ ECTS AND IN ENTIRETY ALL THE PROJECTS WERE THE BUSINESS ACTIVITIES OF TH E ASSESSEE THEREFORE CANNOT BE TREATED THE SEPARATE PROJECTS OF THE ASSE SSEE. IN THE CASE OF THE ASSESSEE THE EXPENDITURE DISALLOWED WERE N OT INCURRED BEFORE THE COMMENCEMENT OF THE BUSINESS BECAUSE IT IS ONLY HELD THAT THE ASSESSEE HAD COMMENCED ITS BUSINESS FROM EARLIER YE AR AND THE EXPENDITURE DISALLOWED WAS NOT INCURRED IN CONNECTI ON WITH THE EXTENSION OF INDUSTRIAL UNDERTAKING OR SETTING UP A NEW INDUSTRIAL UNIT. THEREFORE PROVISIONS OF SECTION 35D OF THE INCOME TAX ACT 1961 WOULD NOT APPLY IN THE CASE OF THE ASSESSEE. THE PR OFIT & LOSS ACCOUNT OF THE ASSESSEE P.B.-13 SHOWS THAT ALL EXPE NDITURE SPENT BY ASSESSEE IN THE AY UNDER APPEAL ARE SAME AS WERE IN CURRED IN THE PRECEDING AY 2002-03. THERE IS NO WORK IN PROGRESS IN THE CASE OF THE ASSESSEE. IN THE CASE OF THE ASSESSEE THE ASSESSE E CONTINUED THE SIMILAR BUSINESS ACTIVITIES WHICH HAD BEEN STARTED EARLIER IN PRECEDING ASSESSMENT YEARS. THEREFORE THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE EARLIER ORDER OF THE TRIBUNA L DATED 12.12.2008. WE MAY ALSO NOTE THAT THOUGH LEARNED COMMISSIONER O F INCOME TAX (APPEALS) ACCEPTED THE CONTENTION OF THE ASSESSEE B UT WRONGLY PRESUMED THAT IN THE MERCANTILE SYSTEM THE EXPENSE S INCURRED FOR OTHER PROJECTS SHOULD BE TREATED AS WORK-IN-PROGRES S. THE BUSINESS ACTIVITIES OF THE ASSESSEE ARE COMPOSITE TO ADVISE THE STATE GOVERNMENT IN RESPECT OF THE ROADS BRIDGES ETC. TH EREFORE THE VARIOUS PROJECTS UNDERTAKEN BY THE ASSESSEE CANNOT BE TREATED AS DIFFERENT PROJECTS. THE LEARNED COMMISSIONER OF INC OME TAX (APPEALS) WAS THEREFORE NOT JUSTIFIED IN RESTRICTI NG THE DISALLOWANCE TO RS.62 63 624/-. THE DECISION RELIED UPON BY LEARNE D DEPARTMENTAL REPRESENTATIVE IS CLEARLY DISTINGUISHABLE FROM THE FACTS OF THE CASE. THESE FINDINGS OF THE LEARNED COMMISSIONER OF INCOM E TAX (APPEALS) ARE ACCORDINGLY SET ASIDE. AS REGARDS INDIRECT EXP ENSES WE FIND THAT LEARNED COMMISSIONER OF INCOME TAX (APPEALS) WAS JU STIFIED IN 15 DELETING THE ADDITION BECAUSE SUCH EXPENDITURE WERE INCURRED FOR THE ASSESSEES MAIN BUSINESS RELATING TO ADVISING THE G OVERNMENT OF GUJARAT ON ROAD POLICIES AND PROJECTS. THE FINDING S OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IN DELETING TH E ADDITIONS ARE THEREFORE CONFIRMED. IN VIEW OF THE ABOVE DISCUSSI ON THE PART ADDITION SUSTAINED BY LEARNED COMMISSIONER OF INCOM E TAX (APPEALS) IS ALSO DELETED. AS A RESULT THE ENTIRE ADDITIONS MADE BY THE ASSESSING OFFICER ARE DELETED. 9. AS A RESULT APPEAL OF THE ASSESSEE IS ALLOWED A ND DEPARTMENTAL APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH FEBRUARY 2010. SD/- SD/- (A.N.PAHUJA) ACCOUNTANT MEMBER (BHAVNESH SAINI) JUDICIAL MEMBER DATE : 26/02/2010 PARAS* COPY OF THE ORDER FORWARDED TO : 1. THE RESPONDENT 2. THE APPELLANT. 3. THE CIT CONCERNED 4. THE CIT(A) 5. THE DR ITAT 6. GUARD FILE BY ORDER DY.R/AR ITA T AHMEDABAD