2012 (9) TMI 300 - AT - Income Tax

Disallowance of revenue expenditure - Non commencement of business - the appellant company was of preoperative nature and the commencement of the business would start only when the appellant company starts exploitation of the project - Held that - The main object of the Assessee as per Clause 3(A)(10) of the Memorandum of Association is to To promote Schemes for irrigation and water supply in the State for utilization of water from the Sardar Sarovar . Thus in the light of the facts prevailing in Assessee s case, it can be said that the Assessee by supplying water through its main canal had in fact achieved the purpose for which it was established. One of the purpose for which the Assessee was set up was to supply water through canals. The canal was complete in respect of part of the stretch and that enabled supply of water through such canal to certain destinations. The fact that the entire stretch of canal up to the desired destination was not completed would not be sufficient to hold that the Assessee s business was not set up. The AO as well as CIT(A) have misdirected themselves in this regard by laying emphasis on flow of revenue as a condition precedent for coming to a conclusion that business of the Assessee has been set up as the flow of revenue from supply of water is not relevant as has been laid down in the case of CIT v. Sarabhai Management Corpn. Ltd. (1991 (8) TMI 6 - SUPREME COURT ). - In fact in the past the revenue has been taking a stand that flow of water through the canal would be the point of time when the business of the Assessee can be said to be set up. When that happened, the revenue is taking a stand that there should be flow of revenue on supply of water and only then it can be said that the business of the Assessee has been set up. This apparent contradiction in the stand taken by the Revenue is not acceptable, thus the stand taken by the revenue regarding absence of flow of revenue would be irrelevant. As the business of the Assessee was set up on 21.2.2001 when water was supplied through the main canals and all revenue expenditure after that date have to be allowed as deduction. As on pursuing the details of Schedule-I to the Balance Sheet as on 31.3.2001 which gives the break of the incidental expenditure pending capitalization. The salary, wages, gratuity and allowances and other employee costs, rent electricity would be in the range of Rs. 122 crores , the interest and discount on deep discount bonds is Rs. 566.99 crores and Rs. 148.10 Crores respectively. The interest income sought to be brought to tax by the revenue in this assessment year is Rs. 26,13,28,117/-. If business of the Assessee is held to be set up on 21.2.2001 then the proportionate expenses as set out above for the period from 21.2.2001 to 31.3.2001 would be much more than the interest income brought to tax. Therefore the other issues raised by the Assessee in its appeal do not require any adjudication in view of our above conclusion on the commencement/setting up of business - in favour of assessee.

Issues Involved:
1. Whether the business of the assessee has commenced.
2. Whether interest income is taxable under the head "Income from other sources."
3. Whether interest expenses can be claimed as a deduction under Section 57(iii) of the Income Tax Act.
4. Whether the assessee is an authority within the meaning of Section 10(20A) of the Income Tax Act and thus exempt from tax.
5. Miscellaneous issues related to the computation of income and depreciation.

Detailed Analysis:

1. Whether the business of the assessee has commenced:
The Tribunal had to decide if the business of the assessee, a company established by the Government of Gujarat for executing the Sardar Sarovar Project, had commenced. The assessee claimed that its business commenced from the first year of construction. The Tribunal examined the facts, including the supply of water through partially completed canals during the year under consideration. The Tribunal concluded that the business of the assessee was set up on 21.02.2001 when water was supplied through the main canals. This conclusion was based on the principle that business commences when the first activity necessary for the business is started, even if the entire project is not completed.

2. Whether interest income is taxable under the head "Income from other sources":
The Tribunal held that the interest income earned by the assessee on funds temporarily invested in banks should be taxed under the head "Income from other sources." This conclusion was based on the fact that the funds were borrowed for the purpose of constructing the project and not for earning interest income.

3. Whether interest expenses can be claimed as a deduction under Section 57(iii) of the Income Tax Act:
The Tribunal examined whether the interest expenses incurred on borrowed funds, which were temporarily invested to earn interest income, could be deducted under Section 57(iii) of the Act. The Tribunal held that such interest expenses could not be allowed as a deduction because the borrowings were made for the purpose of constructing the project, not for earning interest income.

4. Whether the assessee is an authority within the meaning of Section 10(20A) of the Income Tax Act and thus exempt from tax:
The assessee claimed that it was an authority constituted in India and thus its income was exempt under Section 10(20A) of the Act. The Tribunal referred to the previous year's order where the CIT(A) held that the assessee was not an authority constituted under Section 10(20A). The Tribunal upheld this conclusion, stating that the assessee did not provide sufficient evidence to support its claim.

5. Miscellaneous issues related to the computation of income and depreciation:
The Tribunal addressed various other issues raised by the assessee, including the computation of income under the head "Profit and Gains of Business or Profession" and the allowance of depreciation on assets used during the year. The Tribunal concluded that these issues did not require adjudication due to its decision that the business of the assessee had commenced and the revenue expenses incurred after that date should be allowed as deductions.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the business had commenced on 21.02.2001. Consequently, all revenue expenses incurred after this date were allowable as deductions, resulting in a loss under the head "Income from Business," which could be set off against the interest income. This decision rendered the other issues raised by the assessee moot.

← Previous Next →