2003 (10) TMI 249 - AT - Income Tax

Business - Commencement of/carrying on of, Cash credits, Deductions, Commissioner (Appeals) - Appealable orders

Issues Involved:
1. Validity of reopening assessments under Section 147.
2. Determination of the year in which the business was set up.
3. Classification of income as "income from other sources" versus "profits and gains from business or profession."
4. Allowability of business expenses and depreciation claims.
5. Deductibility of expenses under Section 57(iii) and Section 42.
6. Double addition of income.
7. Application of principles of natural justice.
8. Levy of interest under Sections 234A/B/C.
9. Initiation of penalty proceedings under Section 271(1)(c).
10. Treatment of unexplained share application money.

Detailed Analysis:

1. Validity of Reopening Assessments under Section 147:
- Assessment Year 1993-94 (ITA No. 3678/Ahd/2002): The ground relating to the invalidity of proceedings initiated under Section 147 was not pressed by the assessee and hence was rejected.
- Assessment Year 1994-95 (ITA No. 3679/Ahd/2002): Similar to the previous year, the ground was not pressed and thus rejected.
- Assessment Year 1996-97 (ITA No. 981/Ahd/2003): The ground was not pressed and was rejected.

2. Determination of the Year in which the Business was Set Up:
- The Tribunal concluded that the business was set up in the Assessment Year 1994-95, based on various activities and agreements executed in that year, such as technical collaboration agreements, MOUs, and effective steps taken for seismic processing and work-over operations.
- For Assessment Year 1993-94, the business was not considered set up, and all activities were deemed preparatory.

3. Classification of Income:
- Assessment Year 1993-94: Interest income and miscellaneous income were classified as "income from other sources" as per the principles laid down in Tuticorin Alkali Chemicals & Fertilisers Ltd. vs. CIT and Sarabhai Sons (P) Ltd. vs. CIT.
- Assessment Year 1994-95: Export sales were treated as business income, while interest and dividend incomes were classified as "income from other sources."
- Subsequent Years: Similar classification was maintained, with interest and dividend incomes consistently treated as "income from other sources."

4. Allowability of Business Expenses and Depreciation Claims:
- Assessment Year 1993-94: Only 10% of the total expenses were allowed as deduction under Section 57(iii) for earning income from other sources. The remaining 90% was disallowed as the business was not set up.
- Assessment Year 1994-95 onwards: 90% of the total expenses were allowed as business expenditure, with the remaining 10% allowed under Section 57(iii) against income from other sources. Depreciation claims were also allowed from Assessment Year 1994-95.

5. Deductibility of Expenses under Section 57(iii) and Section 42:
- Section 57(iii): 10% of the total expenses were allowed as deduction for earning income from other sources.
- Section 42: The ground relating to deductions under Section 42 was not pressed by the assessee in any of the years and was thus rejected.

6. Double Addition of Income:
- Assessment Year 1993-94: The Tribunal directed the AO to exclude the income of Rs. 840, which was added twice, thereby correcting the duplication.

7. Application of Principles of Natural Justice:
- The Tribunal acknowledged the assessee's contention that the lower authorities did not properly consider various facts and submissions. However, the Tribunal's findings were primarily based on the main issue of when the business was set up.

8. Levy of Interest under Sections 234A/B/C:
- The Tribunal directed the AO to grant consequential relief regarding the levy of interest under Sections 234A/B/C for all relevant years.

9. Initiation of Penalty Proceedings under Section 271(1)(c):
- The Tribunal held that no appeal is maintainable against the initiation of penalty proceedings under Section 271(1)(c) while dealing with the quantum appeal and thus rejected the ground.

10. Treatment of Unexplained Share Application Money:
- Assessment Year 1995-96 (Revenue's Cross-Appeal ITA No. 1582/Ahd/98): The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 2,29,000 made on account of unexplained share application money, citing that the assessee had provided sufficient details to establish the identity of the shareholders and the genuineness of the transactions.

Conclusion:
- The appeals filed by the assessee were partly allowed, granting relief in terms of business expenditure deductions from Assessment Year 1994-95 onwards.
- The appeals filed by the Revenue were dismissed, particularly concerning the treatment of unexplained share application money and the set-off of business losses against income from other sources.

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