2014 (5) TMI 471 - AT - Income Tax

Setting up and commencement of business Held that - Following Styler India (P.) Limited. Versus Joint Commissioner Of Income-tax, Special Range - 1, Pune 2008 (4) TMI 388 - ITAT PUNE-A - the expenditure on building was capital in nature is not allowable - the assessee-company was constituted to develop and operate infrastructure facilities in India towards development of Special Economic Zones at Positra, in the State of Gujarat - The requisite approval was also obtained from the government. After obtaining the approval from the Ministry of Commerce - prospecting activity itself is to be considered as assessee s business activity - There is no dispute with reference to the expenditure being spent on prospecting activities in the year under consideration - the assessee has commenced its business activities. Income from other sources - Taxing of interest receipts on staff loans and deposits for letters of credit - Disallowance of expenses Interest and bank charges u/s 57(iii) of the Act Held that - Following DE Beers India Prospecting (P) Ltd. Versus ITO 2011 (12) TMI 409 - ITAT, Mumbai - the assessee has commenced its business and is eligible for claim of deduction u/s 37(1) on expenditure of non-prospecting activities and depreciation - the assessee is eligible for set off of the interest income - Most of the issues arose as deductions are being claimed on non-operational incomes also - the assessee is expected to place on record the purpose of the deposit, utilization of funds and most important fact is also to be brought on record about the nexus of interest earned and interest paid - the matter should be remitted back to the AO so that the procurement of funds, its utilization and the source of deposit has to be examined afresh by the AO and the nexus can be established in respect of the interest earned and interest paid Decided in favour of Assessee.

Summary

Issues Involved:
1. Whether the assessee had set up its business and commenced operations.
2. Taxability of interest receipt on staff loans and deposits for letters of credit (LC) Bank Guarantee margin as income from other sources.
3. Deductibility of expenditure related to interest and bank charges under section 57(iii) of the IT Act.
4. Levy of interest under sections 234B, 234D, and 244A of the IT Act.

Detailed Analysis:

1. Whether the Assessee Had Set Up Its Business and Commenced Operations:
The primary issue was whether the assessee had set up its business and commenced operations. The AO observed that the assessee company had not commenced its business, and the CIT(A) upheld this observation, stating that the business was in the preoperative stage. The assessee argued that it had undertaken several activities, such as obtaining approvals, acquiring land, conducting surveys, and incurring administrative expenses, which indicated that the business was set up. The Tribunal referred to the case of Styler India Pvt. Ltd., where it was held that the business was set up when the company started one of its business activities. The Tribunal concluded that the assessee's business was set up and the expenses incurred were for propagating the business.

2. Taxability of Interest Receipt on Staff Loans and Deposits for LC Bank Guarantee Margin as Income from Other Sources:
The AO and CIT(A) held that the interest earned on deposits for LC Bank Guarantee margin should be taxed as "income from other sources." The assessee contended that the interest income was linked to the setting up of the project and should be considered a capital receipt. The Tribunal referred to the case of Karnal Co-operative Sugar Mills, where it was held that interest on money deposited to open LC for purchasing machinery required for setting up a plant is a capital receipt and should not be assessed as income from other sources. However, the Tribunal also noted the decisions of the Rajasthan High Court and Allahabad High Court, which held that interest earned during the construction period on bank deposits is taxable as income from other sources. The Tribunal directed the AO to examine the purpose of the deposit, utilization of funds, and the nexus between interest earned and interest paid afresh.

3. Deductibility of Expenditure Related to Interest and Bank Charges Under Section 57(iii) of the IT Act:
The assessee argued that if the interest income is held to be taxable, the AO should allow the deduction of expenditure incurred in relation to interest and bank charges under section 57(iii) of the IT Act. The CIT(A) held that the assessee had not established the nexus between interest income and interest paid, and therefore, the deduction under section 57(iii) was not allowable. The Tribunal directed the AO to re-examine the nexus between interest earned and interest paid and allow the set-off of business loss as per the provisions of the Act.

4. Levy of Interest Under Sections 234B, 234D, and 244A of the IT Act:
The assessee contended that both lower authorities erred in levying interest under sections 234B, 234D, and 244A of the IT Act. However, the Tribunal's decision on this issue was not explicitly detailed in the judgment.

Conclusion:
The Tribunal partly allowed the assessee's appeal for statistical purposes, directing the AO to re-examine the nexus between interest earned and interest paid and to allow the set-off of business loss as per the provisions of the Act. The Tribunal held that the assessee's business was set up and that the expenses incurred were for propagating the business.