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TMI Blog1980 (4) TMI 169X X X X Extracts X X X X X X X X Extracts X X X X ..... other special and mild steel from scrap and iron ore. The Steel Plant is located at the foot-hills of Kanjamalai which contains magnetite iron ore deposits estimated at 75 million tonnes. The first stage of the project has now been taken up. Since the iron content in the ore is only 34 per cent, the ore requires to be beneficiated and pelletised prior to its use in iron making. Higher grade haematite iron ore is available at a distance of 660 Kms. from Salem in Bellary-Hospet region. Techno-economic comparison of the iron ore deposits in Kanjamalai area are being made in laboratories in India and West Germany. Semi-industrial tests were also arranged at National Metallurgical Laboratory, Jamshedpur and with M/s Lurgi, West Germany. The expenditure incurred in extraction of the ore and for carrying out these tests were Rs. 90,100 for asst. yr. 1974-75 and Rs. 2,33,899 for asst. yr. 1975-76. With reference to these tests advice was obtained from M/s Peugeot Loire of France, who have advised the execution of the project in different stages. The main objects of the company are as under: "A. Main objects to be pursued by the company on its incorporation: (1) To carry on in India an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hority of India. Negotiations for finalisation of know-how agreement were still on. Due to constraint of financial resources, the finalisation of know-how agreements, placing of orders for major and ancillary equipments structural steel fabrications, excavation work for the first phase of the complex, foundation work for the complex etc. were, it was reported, held up. The activities which were completed during the year were acquisition of further 293 hectares of land, levelling of the site for the first phase, diversion of natural water courses, construction of project office, excavation for plant, railway track system and commencement of construction of a railway siding and such other work. For the succeeding year, the outlook was described, as depending upon availability of funds, since only Rs. 3 crores were allotted as against requirements of Rs. 17 crores. It was hoped that with greater allotment, the tempo of construction "could again be built up for completion the project as expeditiously as possible". The accounts for both the years show that all the expenditures were capitalised either by way of fixed assets or as "capital works-in-progress" or "expenditure during constru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et up to entitle the assessee to have the interest receipts to be treated as business income so as to enable the assessee to claim the expenditure as business expenditure. He held that the expenditure sought to be set off against the interest receipts were hardly connected with the receipts even in any remote manner. He therefore upheld the assessments. The assessee has come up in second appeal against the said common order of the AAC for both the years. 4. The ld. counsel for the assessee claimed that the extraction of the iron ore for the purpose of test amount to acquisition of raw materials and that the assessee is claiming only a very small fraction of expenditure of Rs. 60 lakhs in the first year and Rs. 70 lakhs in the second year. If trial run could be part of manufacturing process as accepted now, he asked why extraction for test purposes should be different. He claimed that the concept of setting up would vary with the nature of the operations involved in any particular business. He took us over the decision of the Gujarat High Court in the case of CIT vs. Sourashtra Cement and Chemical Industries(1), which held that the extraction of lime-stone by quarrying the leased ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n accounts and returns for his proposition. He also relied upon a number of decisions, with particular reference to the decision of the Madhya Pradesh High Court in Madhya Pradesh State Industries Corporation Ltd. vs. CIT (7), which held that interest from share monies deposited would be income from other sources, the decision of the Kerala High Court in Traco Cable Company Ltd. vs. CIT (8), which also held to the same effect after also holding that office and establishment expenses were not permissible deductions against the same income and the decision of the Allahabad High Court in the case of Vijay Laxmi Sugar Mills Ltd. vs. CIT (9), wherein the interest from deposits at the time of realising assets by a liquidator was held to be assessable under other sources. As for the argument relating to setting up, he relied upon the decision of the Gujarat High Court in the case of CIT vs. Motilal Hirabhai Spg. Wvg. Co. Ltd. (10), wherein it was held that the interest received by manufacturing company on deposits during the period of closure was assessable under other sources and could not be treated as business income. He also relied upon the decision of the Cochin Bench of the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liminary activities for the construction of the first phase of the project. The project is still at elementary stage even at the end of the second assessment year under dispute now. The fact that the quantity of iron ore extracted for purposes of test was large or that the expenditure connected therewith was again large, would not convert the iron ore extracted into raw materials. The fact that they were large merely suggest that the tests were extensive and had been done at numerous places. The basic fact remains that they were merely tests to ascertain suitability of the raw materials and to find out the best way of processing them. They are preliminary stages and none of the decisions cited by the ld. counsel for the assessee would make the activities undertaken by the assessee as commencement or setting up of business or constitute itself to be a business activity by itself. Our view is in accordance with the treatment given by the assessee-company itself in its own accounts. If we were to accept the assessee's arguments, there is no reason why the expenditure should be limited to test expenses to be set off against interest income only. The entire amount of about Rs. 60 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no expenditure is allowable in view of the decision in 122 ITR 139, we find that the decision would be applicable only to the extent of supporting the disallowance on test expenses claimed as it does not have a nexus with the receipts within the meaning of Income-tax law notwithstanding the facts that the monies invested were for share capital to be utilised for purposes of construction including the expenditure on testing. As urged by the departmental representative the office expenses also cannot be allowed as a normal expenditure against interest income. At the same time, it cannot be denied that some expenditure is involved in collection of the interest and managing the bank accounts which will be directly expenditure wholly and exclusively for the purposes of earning such income, notwithstanding the fact that such expenditure is not readily ascertainable. It is for this reason that 10 per cent of the income was claimed as an expenditure by the assessee-company itself. We find no reason why we should adopt a different yardstick for measuring the expenditure. It is inconceivable that there was this income without any expenditure. Under the circumstances, 10 per cent of the recei ..... X X X X Extracts X X X X X X X X Extracts X X X X
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