2007 (2) TMI 361 - AT - Income Tax

Summary

Issues Involved:
1. Determination of whether the business of the assessee had been set up during the relevant assessment year.
2. Classification of interest income on Fixed Deposits as "Income from business" or "Income from other sources."
3. Allowability of revenue expenses incurred prior to the setting up of business.

Issue-wise Detailed Analysis:

1. Determination of whether the business of the assessee had been set up during the relevant assessment year:
The primary contention was whether the assessee's business activities had commenced during the financial year 1995-96. The assessee argued that its business involved both the supply of equipment and the provision of telecommunication services, which were independent activities. The assessee had already started trading in VSAT equipment, securing contracts, and importing equipment. The CIT(A) agreed with the assessee, noting that the business of equipment supply was distinct and had already commenced. The Tribunal upheld this view, emphasizing that the supply of equipment did not require a license and had indeed started, thus the business was set up.

2. Classification of interest income on Fixed Deposits as "Income from business" or "Income from other sources":
The Assessing Officer classified the interest income on Fixed Deposits as "Income from other sources," relying on the Supreme Court decision in Tuticorin Alkali Chemicals & Fertilisers Ltd. v. CIT. The CIT(A) and the Tribunal, however, found that since the business had already been set up, the revenue expenses should be allowed, and the interest income should be considered in the context of the business. Consequently, the Tribunal deemed the classification issue as academic because the business loss, once recognized, would offset the interest income, resulting in a negative income.

3. Allowability of revenue expenses incurred prior to the setting up of business:
The Assessing Officer disallowed the revenue expenses, arguing that the business had not been set up as the license for providing telecommunication services was obtained only in December 1996. The CIT(A) held that the business activities, including consultancy services, indicated that the business had been set up and thus, the revenue expenses should be allowed. The Tribunal supported this view, stating that the supply of equipment and consultancy services were part of the business activities and had commenced, thereby justifying the deduction of revenue expenses.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision that the assessee's business had been set up during the relevant financial year. The Tribunal also upheld the allowance of revenue expenses and the treatment of interest income in the context of the business setup. The Tribunal found no merit in the Revenue's arguments and concluded that the business activities, including the supply of equipment, were independent and had commenced, thus entitling the assessee to the claimed deductions.