2011 (12) TMI 409 - AT - Income Tax

Reopening - Determination of date of commencement of business - The main issue is with reference to allowance of expenditure claimed by the assessee disallowed by the Assessing Officer on the reason that the assessee has not commenced the business in the year under consideration - Filing the revised return was due to the fact that an expenditure of 57.44 lakhs stated to have been incurred on prospecting activities were not claimed as per the provisions of section 35E of the Act and was capitalized by the assessee - Held that - There is no dispute with reference to the fact that the assessee has undertaken prospecting activities in the year under consideration and has suo moto disallowed the expenditure pertaining to the prospecting activities under section 35E of the Income Tax Act - High Court of Gujarat in the case of Saurashtra Cements and Chemical Industry Ltd 1972 (8) TMI 19 - GUJARAT High Court it is held that the assessee has commenced its business activities. - Claim of expenditure allowed. Regarding interest received on short term deposit under the head income from other sources instead of business income as claimed in the return of income - There is various case law on the issue holding if the capital funds are kept in deposits then the income is to be assessed as income from other sources and if the working capital funds are kept then to be treated as business income but most of the case law was given on respective facts. Most of the issues arose as deductions are being claimed on non-operational incomes also. In that context various decisions were rendered depending on facts and applicable law. The discussion will become only academic in nature in this case without there being any consequential effect as interest income is eligible for set off to business loss whether assessed as income from business or income from other sources. The Assessing Officer is however directed to allow the set off of business loss as per the provisions of the Act. - Appeals are partly allowed

Issues Involved:
1. Disallowance of expenses on non-prospecting activities.
2. Taxation of interest received on short-term deposits.
3. Commencement of business activities.
4. Reopening of assessments under section 147.

Detailed Analysis:

1. Disallowance of Expenses on Non-Prospecting Activities:
The primary issue was whether the expenses incurred by the assessee on non-prospecting activities should be allowed as revenue expenditure under section 37(1) of the Income Tax Act. The Assessing Officer (AO) disallowed these expenses, arguing that the assessee had not commenced its business activities. The CIT(A) upheld this decision, leading to the appeal.

The Tribunal analyzed the facts and found that the assessee had indeed commenced its business activities by obtaining necessary permissions and undertaking prospecting activities. The Tribunal referred to the decision in the case of De Beers India (P) Ltd vs. DCIT, where similar expenses were allowed under section 37(1). The Tribunal concluded that the business of the assessee had commenced with the prospecting activities, and hence, the expenses on non-prospecting activities should be allowed as revenue expenditure. Consequently, the AO was directed to allow the expenses of Rs. 27,88,030 and depreciation of Rs. 7,13,781 for the relevant year.

2. Taxation of Interest Received on Short-Term Deposits:
The second issue was whether the interest received on short-term deposits should be taxed under the head "income from other sources" or "business income." The AO and CIT(A) taxed the interest under "income from other sources," citing that the assessee had not commenced its business activities.

The Tribunal held that since it had already concluded that the assessee had commenced its business activities, the interest income, whether assessed under "business" or "income from other sources," would be eligible for set-off against the business loss. Therefore, the issue became academic in nature, and the AO was directed to allow the set-off of the interest income as per the provisions of the Act.

3. Commencement of Business Activities:
The Tribunal extensively discussed the commencement of business activities, citing various legal precedents. It was held that the business of the assessee had commenced from the time it started prospecting activities, which were permitted by the Foreign Investment Promotion Board (FIPB) and various state governments. The Tribunal referred to the Gujarat High Court's decision in the case of Saurashtra Cements and Chemical Industry Ltd, where it was held that business activities commence when the first essential activity is started. Similarly, the Supreme Court's decision in Sarabhai Management Corporation Ltd and the Madras High Court's decision in Franco Tosi Ingegneria were cited to support the conclusion that the assessee's business had commenced with the prospecting activities.

4. Reopening of Assessments under Section 147:
In some appeals, the assessee contested the reopening of assessments under section 147. However, since the primary issues were resolved in favor of the assessee, the Tribunal considered the reopening of assessments as academic in nature and did not delve into this issue further.

Separate Judgments:
The Tribunal delivered a consistent judgment across different assessment years and for different subsidiary companies of De Beers Mauritius Ltd, addressing the same issues comprehensively. The appeals for the respective assessment years (2001-02, 2002-03, and 2003-04) were partly allowed, with directions to the AO to allow the expenses on non-prospecting activities and set off the interest income as per the provisions of the Act.

Conclusion:
The Tribunal concluded that the assessee had commenced its business activities with the prospecting activities and was entitled to claim expenses on non-prospecting activities as revenue expenditure under section 37(1). The interest income received on short-term deposits was eligible for set-off against business losses, rendering the issue of its classification as academic. The appeals were partly allowed, providing relief to the assessee.

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