2017 (10) TMI 1087 - AT - Income Tax

Allowability of expenditure prior to commencement of the business - Held that - This Tribunal in the case of Thermal Powertech Corporation India Ltd. vs. DCIT 2017 (5) TMI 903 - ITAT HYDERABAD held that the preoperative expenditure was to be capitalized to the assets and Assessee was eligible for depreciation on the value of assets. Therefore in the given facts of the case, we hold that Assessee has only setup the business but has not commenced the business, therefore, the claim of revenue expenditure is not allowable as the provisions of Sec. 28 of the IT Act does not apply. The Hon ble jurisdictional High Court in the case of CIT Vs. Rasi Cement Ltd. 1998 (4) TMI 132 - ANDHRA PRADESH High Court has answered similar questions involved in favour of the Revenue as held that such interest has to be separately treated as income from other sources and cannot be taken as part of the capital structure. interest earned on surplus funds deposited in banks during installation of company, prior to commencement of business, has to be brought to tax as income from other sources u/s. 57. - Decided against assessee. Since it has been held that the assessee has not commenced its business, we direct the AO to capitalize the expenditure and direct him to allow depreciation thereon after commencement of its business. Nature of income - earning interest income on the temporary parking of equity funds - business income OR income from other sources - Held that - We have already directed while dealing with Ground No.5 that the expenditure incurred by the assessee be capitalized and depreciation thereon is to be allowed. The treatment to be given to the interest earned on temporary parking of equity funds has actually not been considered by the authorities below. This is a legal ground and can be raised at any point of time as held by the Hon ble Supreme Court in the case of Hon ble Supreme Court in the case of NTPC Ltd. (1996 (12) TMI 7 - SUPREME Court). In view of the same, we deem it fit and proper to admit the additional ground of appeal and remand the issue to the file of the AO for consideration in accordance with the law. The assessee is also directed to produce the additional evidence in support of such ground.

Issues Involved:
1. Disallowance of expenditure claimed as deductions.
2. Incorrect consideration of expenses claimed as deductions.
3. Disallowance of depreciation.
4. Disallowance of specific expenses due to non-commencement of business.
5. Treatment of interest income from temporary parking of equity funds.

Detailed Analysis:

1. Disallowance of Expenditure Claimed as Deductions:
The assessee claimed deductions for expenses incurred, arguing that these should be allowed from the date of setup of business, not just from the date of commencement. The Tribunal referred to the decision in the case of Thermal Powertech Corporation India Ltd. vs. DCIT, where it was held that such expenses incurred before the commencement of business are not allowable as deductions. The Tribunal rejected Grounds 1 to 4, stating that the assessee had only set up the business but had not commenced it, thus the claim for revenue expenditure was not allowable.

2. Incorrect Consideration of Expenses Claimed as Deductions:
The assessee contended that the AO incorrectly considered ?5,30,86,825 as expenses claimed as deductions, while the actual amount was ?5,31,74,059. This issue was also rejected as it fell under the same principle of non-allowability of pre-commencement expenses.

3. Disallowance of Depreciation:
The assessee claimed depreciation of ?24,19,903 on assets put to use during the assessment year. The Tribunal, following the precedent set in the Thermal Powertech case, held that since the business had not commenced, the claim for depreciation was not allowable. However, the Tribunal allowed the alternate ground for capitalization of the expenditure and directed the AO to allow depreciation thereon after the commencement of business.

4. Disallowance of Specific Expenses Due to Non-Commencement of Business:
The assessee claimed various expenses such as manufacturing, employee benefits, administration, and selling expenses totaling ?3,71,35,976. The Tribunal upheld the disallowance of these expenses, reiterating that the business had not commenced and thus, such expenses could not be claimed as deductions. However, it allowed the alternate ground for capitalization of these expenses.

5. Treatment of Interest Income from Temporary Parking of Equity Funds:
The assessee raised an additional ground regarding the treatment of interest income of ?3,78,22,091 earned from temporary parking of equity funds. Initially, this was treated as "income from other sources" by the AO. The Tribunal admitted this additional ground and remanded the issue to the AO for consideration, directing the assessee to produce additional evidence. The Tribunal referenced the Delhi High Court's decision in Pr.CIT vs. Facor Power Ltd., which held that such interest income, being inextricably linked to the project setup, should reduce the capital cost of the project.

Conclusion:
The Tribunal upheld the disallowance of pre-commencement expenses and depreciation but allowed the alternate ground for capitalization of these expenses. It also remanded the issue of interest income from temporary parking of equity funds back to the AO for reconsideration in light of relevant case law. The appeal was partly allowed for statistical purposes.

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