1980 (4) TMI 169 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of interest income from short-term deposits.
2. Whether the business had commenced or been set up.
3. Allowability of expenditure related to the extraction of iron ore for testing purposes.
4. Deductibility of general office expenses against interest income.
5. Capitalization of interest income and related expenditures.

Detailed Analysis:

1. Taxability of Interest Income from Short-Term Deposits:
The assessee, M/s. Salem Steel Ltd., received interest on short-term deposits with the State Bank of India and other minor interest receipts. The Income Tax Officer (ITO) assessed this interest as income from other sources. The assessee argued that this interest should reduce the cost of the project and not be treated as taxable income. The Appellate Assistant Commissioner (AAC) upheld the ITO's view, stating that the interest income is assessable under other sources and not as business income.

2. Whether the Business Had Commenced or Been Set Up:
The assessee contended that the extraction of iron ore for testing purposes amounted to the commencement of business activities. However, the AAC rejected this argument, stating that the business had neither been commenced nor set up. The AAC noted that the activities were too preliminary to constitute business activity. The Tribunal agreed, stating that the extraction of iron ore for testing did not amount to the acquisition of raw materials for business purposes. The Tribunal emphasized that the project was still in its elementary stages and that the business had not been set up or commenced.

3. Allowability of Expenditure Related to the Extraction of Iron Ore for Testing Purposes:
The assessee claimed that the expenditure incurred in extracting iron ore for testing should be set off against the interest income. The AAC and the Tribunal both rejected this claim, stating that the expenditure on tests was not connected to the interest receipts and that the business had not commenced. The Tribunal noted that the extraction for testing purposes did not constitute a business activity and hence, the related expenditure could not be set off against the interest income.

4. Deductibility of General Office Expenses Against Interest Income:
The assessee also claimed a deduction of 10% of the interest receipts as general office expenses. The AAC did not allow this deduction, and the Tribunal partially agreed. The Tribunal noted that while general office expenses could not be allowed, some expenditure related to the collection of interest and management of bank accounts should be considered. Therefore, the Tribunal allowed a deduction of 10% of the interest receipts as expenditure for both assessment years.

5. Capitalization of Interest Income and Related Expenditures:
The Tribunal discussed the issue of whether the interest income should be capitalized to reduce the cost of the project. The Tribunal referred to the decision in Seshasayee Paper & Boards Limited, which supported the capitalization of interest income. However, the Tribunal ultimately followed the decision of the Madras High Court in Addl. CIT vs. Madras Fertilizers, which held that interest income earned during the pre-commencement period is taxable as income from other sources. The Tribunal concluded that the interest income received by the company is taxable, but allowed a 10% deduction for related expenditures.

Conclusion:
The Tribunal upheld the assessment of interest income as taxable under other sources but allowed a 10% deduction for related expenditures. The business was not considered to have commenced or been set up, and the expenditure on iron ore extraction for testing purposes was not allowed to be set off against the interest income. The interest income could not be capitalized to reduce the cost of the project. The appeals were allowed in part, with the 10% deduction for related expenditures being the only relief granted.