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2013 (9) TMI 371 - AT - Income TaxDisallowance of revenue expenditure - Non commencement of business - the appellant company was of preoperative nature and the commencement of the business would start only when the appellant company starts exploitation of the project - Held that - The main object of the Assessee as per Clause 3(A)(10) of the Memorandum of Association is to To promote Schemes for irrigation and water supply in the State for utilization of water from the Sardar Sarovar . Thus in the light of the facts prevailing in Assessee s case, it can be said that the Assessee by supplying water through its main canal had in fact achieved the purpose for which it was established. One of the purpose for which the Assessee was set up was to supply water through canals. The canal was complete in respect of part of the stretch and that enabled supply of water through such canal to certain destinations. The fact that the entire stretch of canal up to the desired destination was not completed would not be sufficient to hold that the Assessee s business was not set up. The AO as well as CIT(A) have misdirected themselves in this regard by laying emphasis on flow of revenue as a condition precedent for coming to a conclusion that business of the Assessee has been set up as the flow of revenue from supply of water is not relevant as has been laid down in the case of CIT v. Sarabhai Management Corpn. Ltd. (1991 (8) TMI 6 - SUPREME COURT ). - In fact in the past the revenue has been taking a stand that flow of water through the canal would be the point of time when the business of the Assessee can be said to be set up. When that happened, the revenue is taking a stand that there should be flow of revenue on supply of water and only then it can be said that the business of the Assessee has been set up. This apparent contradiction in the stand taken by the Revenue is not acceptable, thus the stand taken by the revenue regarding absence of flow of revenue would be irrelevant. As the business of the Assessee was set up on 21.2.2001 when water was supplied through the main canals and all revenue expenditure after that date have to be allowed as deduction. As on pursuing the details of Schedule-I to the Balance Sheet as on 31.3.2001 which gives the break of the incidental expenditure pending capitalization. The salary, wages, gratuity and allowances and other employee costs, rent electricity would be in the range of Rs. 122 crores , the interest and discount on deep discount bonds is Rs. 566.99 crores and Rs. 148.10 Crores respectively. The interest income sought to be brought to tax by the revenue in this assessment year is Rs. 26,13,28,117/-. If business of the Assessee is held to be set up on 21.2.2001 then the proportionate expenses as set out above for the period from 21.2.2001 to 31.3.2001 would be much more than the interest income brought to tax. Therefore the other issues raised by the Assessee in its appeal do not require any adjudication in view of our above conclusion on the commencement/setting up of business - Following decision of Sardar Sarovar Narmada Nigam Ltd. Versus Assistant Commissioner of Income-tax, Gandhinagar Circle 2012 (9) TMI 300 - ITAT AHMEDABAD - Decided in favour of assessee.
Issues Involved:
1. Whether the Corporation was already set up and commenced business. 2. Treatment of income from other sources as business income. 3. Application of cost-sharing formula for determining the cost of assets for depreciation. 4. Verification of the date of acquisition of land and applicability of sections 43(6) and 50 of the IT Act. 5. Quantification of loss and unabsorbed depreciation to be set off and carried forward. Issue-wise Detailed Analysis: 1. Whether the Corporation was already set up and commenced business: The Assessee, a company wholly owned by the Gujarat Government, filed a return declaring a loss. The AO disallowed the claim of incidental expenses pending capitalization as revenue expenses. The CIT(A) allowed the Assessee's claim, stating that the expenses were valid and legal, and the Department should develop a system to prevent duplicate claims in the future. The Tribunal upheld the CIT(A)'s decision, noting that a similar issue had been decided in the Assessee's favor in earlier years, and the Revenue could not bring any material to counter the CIT(A)'s findings. 2. Treatment of income from other sources as business income: The AO treated the income from the sale of water as "income from other sources" instead of business income. The CIT(A) held that the Assessee had commenced its business activities, and the sale of water should be treated as business income. The Tribunal upheld the CIT(A)'s decision, noting that the business of the Assessee was set up when water was supplied through the main canals, as decided by the Special Bench of the Tribunal in the Assessee's own case. 3. Application of cost-sharing formula for determining the cost of assets for depreciation: The AO restricted the depreciation claim based on the cost-sharing formula among participating states. The CIT(A) held that the Assessee, being a separate company, should not have its asset costs restricted by the cost-sharing formula. The Tribunal upheld the CIT(A)'s decision, noting that the Assessee's costs were independent of the arrangement among the states, and the transfer of funds between states did not affect the Assessee's asset costs. 4. Verification of the date of acquisition of land and applicability of sections 43(6) and 50 of the IT Act: The AO treated the profit on the sale of land as short-term capital gain due to a lack of purchase date information. The CIT(A) directed the AO to verify whether the sale involved land alone or land with buildings and to decide the tax treatment accordingly. The Tribunal upheld the CIT(A)'s direction, finding no error in the order. 5. Quantification of loss and unabsorbed depreciation to be set off and carried forward: The CIT(A) directed the AO to work out the depreciation and set off and carry forward losses as per law, noting that the Assessee's business had commenced. The Tribunal upheld the CIT(A)'s direction, with the Revenue unable to point out any mistakes in the CIT(A)'s order. Cross Objections by the Assessee: The Assessee raised issues regarding the claim of depreciation on "Indira Sagar Dam," treatment of certain incomes as "income from other sources," and the chargeability of interest under sections 234B and 234D. The Tribunal found these objections either infructuous or upheld the CIT(A)'s decisions, dismissing the Assessee's cross objections. Conclusion: The Tribunal dismissed the appeals of the Revenue for both years and the cross objections of the Assessee, upholding the CIT(A)'s decisions on all grounds. The order was pronounced in open court on 05-09-2013.
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