2004 (8) TMI 314 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessee corporation had commenced its business.
2. Whether the interest income earned by the assessee was taxable under the head "Income from Other Sources".
3. Whether the interest expenditure incurred by the assessee was deductible under section 57(iii) of the Income Tax Act.
4. Whether the assessee was entitled to exemption under section 10(20A) of the Income Tax Act.
5. Validity of reopening of assessment under section 147 of the Income Tax Act.
6. Applicability of section 234D regarding interest on excess refund.

Summary:

1. Commencement of Business:
The assessee corporation, established by the Government of Gujarat for the execution of the Sardar Sarovar Project, claimed that it had commenced its business from its inception. The Assessing Officer (AO) held that the business had not commenced as the project was still under construction and not ready for commercial exploitation. The CIT(A) for the assessment year 1989-90 accepted the assessee's claim, stating that the business had commenced from the day the corporation was set up. However, for subsequent years, the CIT(A) upheld the AO's decision, noting that the project was still in the pre-operative stage and not generating revenue.

2. Taxability of Interest Income:
The AO taxed the interest income earned by the assessee from short-term deposits under the head "Income from Other Sources" u/s 56, relying on the Supreme Court decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT. The CIT(A) upheld this view, stating that the interest income had no direct connection with the assessee's business of executing the Sardar Sarovar Project.

3. Deductibility of Interest Expenditure:
The assessee claimed deduction of interest expenditure u/s 57(iii) of the Act, arguing that the interest paid on borrowed funds used for earning interest income should be allowed. The AO and CIT(A) rejected this claim, stating that the borrowings were for the construction of the project and not for earning interest income. The Tribunal agreed, citing various judicial precedents that the expenditure must be incurred wholly and exclusively for the purpose of earning income from other sources, which was not the case here.

4. Exemption u/s 10(20A):
The assessee claimed exemption u/s 10(20A), arguing that it was an authority constituted for the development or improvement of cities, towns, and villages. The AO and CIT(A) rejected this claim, noting that the assessee was a company incorporated under the Companies Act and did not qualify as an authority for the purposes of section 10(20A).

5. Validity of Reopening of Assessment:
The assessee challenged the reopening of assessment u/s 147, arguing that the reasons for reopening were not valid. The Tribunal upheld the reopening, stating that the assessee had not filed returns and there was assessable income, justifying the AO's action.

6. Applicability of Section 234D:
For the assessment year 1999-2000, the assessee contested the applicability of section 234D regarding interest on excess refund, arguing that the refund was granted before the section came into effect. The Tribunal rejected this claim, stating that the relevant date was when the excess refund was determined, which was after the section came into effect.

Conclusion:
The Tribunal allowed the Revenue's appeal and dismissed all the appeals filed by the assessee, upholding the AO's and CIT(A)'s decisions on all issues.