NEW DELHI, APRIL 30, 2013: THE issue before the Bench is - Whether when assessee borrows funds from holding company on interest and participates in tender for land allotment it can be said that it has set up its business even if it fails to get the land allotted. And the verdict goes in favour of the assessee.

Facts of the case

The assessee is engaged in the business of real estate development, including purchase and sale of land. It was a 100% subsidiary of DLF Ltd. In the return filed, the assessee declared a loss of Rs. 1,17,12,473/- under the head “business” which represented the difference between the interest of Rs. 62,28,333/- received from NGEF Ltd. of Bangalore on the earnest money of Rs. 186 crores deposited with it and the interest of Rs. 1,79,37,534/- paid to DLF Ltd. from whom the assessee had obtained a loan of Rs. 186 crores. Since this was the first year of the existence of the assessee, the AO examined as to when the assessee could be said to have set-up its business within the meaning of section 3. The AO 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. The AO assessed the interest income of Rs. 62,28,333/- under the head “income from other sources”. He also did not allow the interest of Rs. 1,79,37,534/- paid by the assessee to DLF Ltd. against the interest income. The CIT(A) agreed with the AO that the real estate business cannot be said to have been set-up in the relevant previous year. However, he held that the interest paid to DLF Ltd. should be allowed as deduction u/s 57(iii) 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 assessee. The Tribunal allowed the Assessee Appeal and dismissed the Revenue Appeal.

On Appeal before the HC the Revenue Counsel contended that the mere act of depositing earnest money while participating in the tender floated by the official liquidator of the Karnataka HC and the act of borrowing monies from the DLF Ltd. for the purpose cannot be construed as acts constituting setting-up of the business. The Assessee Counsel contended 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.

Having heard the parties, the HC held that,

++ the question as to when a business can be said to have been set-up is 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;

++ the commencement of real estate business would normally start with the acquisition of land or immoveable property. When an assessee whose business 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 set-up;

++ 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 assessee's business had been set-up and it was ready to commence business. 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.

(See 2013-TIOL-338-HC-DEL-IT)