2013 (11) TMI 185 - AT - Income Tax

Disallowance of Administrative and Other Expenses as pre-operative expenses Whether the CIT (A) erred in confirming the action of the AO in disallowing the administrative and other expenses - Held that - The business should be construed set up as the assessee obtained necessary approvals, recruited requisite personal, procured requisite machinery etc. Following CIT v. Saurashtra Cement & Chemical Industries Ltd. 1972 (8) TMI 19 - GUJARAT High Court - the assessee had successfully identified certain mineral rich blocks too - the expression setting up means to place on foot or to establish or to ready to commence - the assessee s business was set up in this year and in fact commenced too - The arguments of the assessee were valid and the claim of the assessee in respect of the debiting the sum to Profit and Loss account in this year is proper - describing the expenditure as pre-operative ones was incorrect. Nature of Interest Receipts and Tax Treatment - Charging of Interest u/s 234B OR 234C - Whether the CIT (A) erred in confirming the action of the AO for taxing the interest income under the head income from other sources Held that - The interest receipts are earning after set up of the business of assessee - Therefore, this issue requires fresh adjudication considering our finding on the main issue discussed and adjudicated above i.e. whether the business of assessee is set up in the year under consideration or not Following Commissioner of Income-Tax Versus Bokaro Steel Limited 1998 (12) TMI 4 - SUPREME Court - the business is set up in the year under consideration and the expenses as an allowable expenditure in the year under consideration. As such, the orders of the Revenue do not contain requisite details on the source of the funds kept with the banks which yielded interest income and the details related to the source of these funds kept with the Banks i.e interest bearing funds/non-interest bearing funds/excess funds or otherwise own funds of the assessee etc. In the set aside proceedings, AO is directed to examine these issues afresh and adjudicate the same.

Summary

Issues Involved:
1. Disallowance of administrative and other expenses amounting to Rs. 67,57,190/-.
2. Determination of whether the business was set up or not.
3. Taxation of interest income under the head "income from other sources".
4. Charging of interest under sections 234B and 234C.

Detailed Analysis:

1. Disallowance of Administrative and Other Expenses:
The assessee claimed administrative and other expenses amounting to Rs. 67,57,190/-. The Assessing Officer (AO) disallowed these expenses, considering them capital in nature as the business had not commenced. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, stating that the business had not been set up. However, the ITAT found that the business of exploration involves various stages, such as acquiring machinery, employing personnel, and obtaining necessary permits. The ITAT concluded that the business was set up during the year under consideration, making the expenses allowable. Consequently, grounds 1 and 1.1 of the appeal were allowed.

2. Determination of Whether the Business Was Set Up or Not:
The core issue was whether the business of the assessee was set up during the year. The ITAT examined the activities undertaken by the assessee, such as obtaining Reconnaissance Permits (RPs), purchasing drilling rigs, and employing geologists. The ITAT referred to judicial pronouncements, including the Gujarat High Court's decision in CIT v. Saurashtra Cement & Chemical Industries Ltd., which held that business is considered set up when initial activities necessary for the business are undertaken. The ITAT concluded that the assessee's business was set up during the year, and the expenses incurred were not pre-operative but allowable.

3. Taxation of Interest Income:
The AO taxed the interest income of Rs. 7,84,860/- under the head "income from other sources," relying on the jurisdictional High Court's judgment in CIT v. Ravi Ratna Export (P.) Ltd. The CIT(A) upheld this view, stating that the assessee failed to prove the linkage between the deposits and the business setup process. The ITAT noted that the interest receipts were earned after the business was set up. The ITAT directed the AO to re-examine the source of funds and adjudicate the issue afresh, considering the ITAT's finding that the business was set up during the year. Accordingly, ground no.2 was set aside.

4. Charging of Interest Under Sections 234B and 234C:
This ground was dismissed as consequential to the other grounds raised.

Conclusion:
The ITAT partly allowed the appeal, holding that the business was set up during the year under consideration, making the administrative and other expenses allowable. The issue of taxation of interest income was set aside for fresh adjudication by the AO. The ground related to charging of interest under sections 234B and 234C was dismissed.