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TMI Blog2010 (6) TMI 598X X X X Extracts X X X X X X X X Extracts X X X X ..... these items were directly related to the execution of contract for successful completion of the project. See CIT vs Bokaro Steel Ltd.(1998 - TMI - 5705 - Supreme Court) Further, revenue expenditure cannot be allowed as business expenditure unless the business has commenced. - Decided against the assessee. - ITA Nos. 4662 (mum.) of 2007 and 1394 (mum.) of 2008 - - - Dated:- 18-6-2010 - Shri T.R. Sood, And Shri V.D. Rao, JJ. Appearances by: Shri K. Shivram for the Appellant. Shri Mohd. Usman for the Respondent. ORDER Shri T.R. Sood, Accountant Member - As these appeals pertain to the same assessee, involving common issues and were heard together, they are being disposed of by way of this consolidated order. 2. In both these appeals, the assessee has filed revised grounds raising identical issues. The grounds raised for the asst. yr. 2003-04 are as under : "1. The learned CIT(A) has erred in confirming the AO's findings that appellant has not commenced business and hence there cannot be any question of assessment of its profits and gains of business for the reasons stated in the order. 2. The learned CIT(A) has erred in following the judgment of Tuticor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rated studio in the field of entertainment capable of educating students in the field of movies, telefilms, talkshows, dramas, stage shows, video, audio visual programmes and communication and to build, construct, erect, improve, equip, maintain, alter, enlarge, purchase, hire or otherwise acquire or provide any building, studios, wooden studios, shooting location, laboratories, offices, libraries, workshop tools, implements, apparatus, plant and machineries and other things necessary or useful for carrying out the business of the company," The assessee filed return declaring nil income. It was noticed that the assessee had authorised capital of Rs. 20 crores and paid-up share capital was of Rs. 10.10 crores. There was no unsecured loan and, therefore, total funds available with the assessee were from share capital. A query was raised regarding business activity of the assessee and in response to the same it was submitted vide letter dt. 16th June, 2005 as under : "The company is establishing research and training institute-cum-integrated studio. The project is under construction there are no other allied activities." 5. It was further noticed by the AO that assessee had ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be deducted at percentage allowed as per Income-tax Act, 1961, which will be lesser amount in more number of years whereas loss will be allowed against future income of any year which will be in two or three years." The assessee further submitted vide letter dt. 23rd Sept., 2005 that Project of Whistling Woods Institute was capital work-in-progress and as per guidance note the company had decided to capitalize all the net expenditure and the same was treated as capital work-in-progress. Reliance was also placed on the decisions of the Hon'ble Supreme Court in the cases of CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC), CIT v. Karnal Co-Operative Sugar Mills Ltd. [2000] 243 ITR 2 (SC) and CIT v. Karnataka Power Corpn. [2001] 247 ITR 268 (SC). 6. The AO after considering these submissions observed that the assessee company was in the process of establishing research and training institute which was under construction and since no allied activities were carried out by the assessee company, the company has not commenced its business and, therefore accordingly, there cannot be any question of assessment of its income as income from business. At the same time, it does not mean that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is as under : "4. I have gone through the above facts of the case and submissions made by the learned Authorised Representative and do not find any merit in its case. It is an undisputed fact that the appellant company had earned income by way of interest on account of investments made in FDRs of the funds. Further, it is also not in dispute that the business of the appellant company was not set up during the year under consideration. And therefore interest earned out of investment would be liable to tax under the head 'Income from other sources'. This issue was also an issue before the Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals Fertilisers Ltd. (supra) where the Hon'ble Court has observed : The facts of this case are not in dispute. In the usual course, interest received by the company from bank deposits and loans would be taxable as income under the head 'Income from other sources' under s. 56 of the IT Act. It is argued on behalf of the company that it had not yet commenced its business and in any event the income was derived from funds borrowed for setting up the factory of the company and should be adjusted against the interest payable on the borro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also, as in this case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under section 56 of the Act.' The facts of the case are identical with the case of Tuticorin Alkali Chemicals Fertilisers Ltd. (supra) and therefore taking the cue from the decision of the Apex Court I am in agreement with the action of the AO in treating the income as 'income from other sources' and as such there is no infirmity in the action of the AO in charging interest to tax. Further appellant's reliance placed on the judgment of apex Court in case of Bokaro Steel Ltd. (supra) would not be applicable to this case since the facts of the case of Bokaro Steel Ltd. (supra) are different from that of the facts of the case and as such the same are not applicable to the instant case. However, while treating the income as 'income from other sources' the AO should also consider the expenses incurred for the purpose of earning such income and allow the same under section 57 of the IT Act. Thus considering the facts of the case this ground of appeal is partly allowed." 9. Before us, the learned counsel of the assessee submitted that in the case before us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h total upto Rs. 71,73,804 should have been allowed if the interest income was to be charged to income-tax. 10. On the other hand, the learned Departmental Representative submitted that in this case facts are exactly identical with the facts of Tuticorin Alkali Chemicals Fertilisers Ltd. (supra) and, therefore, the ratio of that decision should be applied. He submitted that even in the case of Bokaro Steel Ltd. (supra) as far as interest income was concerned, same was held to be assessable as income from other sources and the decision of Tuticorin Alkali Chemicals Fertilisers Ltd. (supra) was applied. Only the items like rent received from the contracts from the houses allotted to contractor's staff, machine hire charges from the machines given to the contractors and interest received from contractors on advances given to the contractors, were held to be deductible from the project cost, because these items were directly related to the execution of contract for successful completion of the project. But in the case before us, no such income has been received which is directly related to the execution of the project. Similarly, in the case of Karnataka Power Corpn. (supra), in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchase vehicles. Upto the asst. yr. 1980-81, interests earned by the company from the various loans given by the company and also from the bank deposits were shown as income and was taxed accordingly. For the accounting year ending on 30th June, 1981, (asst. yr. 1982-83), the assessee received a total amount of interest of Rs. 2,92,440. In its return of income filed on 22nd June, 1982, the company disclosed the said sum of Rs. 2,92,440 as 'income from other sources'. It also disclosed business loss of Rs. 3,21,802. After setting off the interest income against business loss, the company claimed the benefit of carry forward of net loss of Rs. 29,360. The company later on realised its mistake and on 26th Dec., 1984, it filed a revised return showing business loss of Rs. 3,21,802. It claimed that according to the accepted accounting practice, interest and finance charges along with other pre-production expenses will have to be capitalised, and that therefore, the interest income of Rs. 2,92,440 should go to reduce the pre-production expenses (including interest and finance charges), which would ultimately be capitalised. In this connection, the company highlighted the fact that durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a non-business source could not be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee." In the detailed discussion while adjudicating this matter, the Hon'ble Supreme Court had also observed at page 179 as under : "The basic proposition that has to be borne in mind in this case is that it is possible for a company to have six different sources of income, each one of which will be chargeable to income-tax. Profits and gains of business or profession is only one of the heads under which the company's income is liable to be assessed to tax. If a company has not commenced business, there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed. If the company, even before it commences business, invests the surplus fund in its hand for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head 'Capital gains'. Similarly, if a company purchases a rented ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilisers Ltd. (supra). In fact, we are reproducing the para given at p. 321 of the report : "During these assessment years, the respondent assessee had invested the amounts borrowed by it for the construction work which were not immediately required, in short-term deposits and earned interest. It has been held in these proceedings that the receipt of interest amounts to ; income of the assessee from other sources. The assessee has not filed any appeal from this finding which is given against it. In any case, this question is now concluded by a decision of this Court in Tuticorin Alkali Chemicals Fertilisers Ltd. v. CIT [1997] 141 CTR (SC) 387 : [1997] 227 ITR 172 (SC). Hence, we are not called upon to examine that issue." 14. Thus, it is clear that as far as interests received from short-term deposits which were not immediately required, were held to be taxable following the decision of Tuticorin Alkali Chemicals Fertilisers Ltd. (supra), only those sums which were received from contractors, which we can say were inextricably connected with the construction activities, were held to be not taxable, rather than they were held to be reduced from the total capital expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchase of plant and machinery in short-term deposits in banks and used it in bill discounting until payment for the plant and machinery, the interest earned on the deposits was not taxable in the hands of the assessee as income from other sources but would go to reduce the actual cost of the plant and machinery. The Department took an appeal to the Supreme Court, the Supreme Court reversed the decision of the High Court holding that the interest was taxable in the hands of the assessee." This judgment has been rendered on 21st Nov., 2000 i.e., much after the decision of Bokaro Steel Ltd. (supra) which was rendered on 3rd Sept., 1999 and the derision in the case of Karnataka Power Corpn. (supra) which was rendered on 27th July, 2000. Thus, it is clear that the principles laid down in Tuticorin Alkali Chemicals Fertilisers Ltd.'s case (supra) were never diluted and the decisions of Bokaro Steel Ltd. (supra), Karnal Co-operative Sugar Mills Ltd. (supra) and Karnataka Power Corpn. (supra), operates in different fields. As far as the decision of Tribunal in the case of Shapoorji Pallonji Power Co. Ltd. (supra) is concerned, the Tribunal made the distinction from Tuticorin Alkali Che ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e other expenses were claimed as revenue expenditure and were not claimed as reduction from capital expenditure as has been done in the case before us. 19. From the above discussion, it is clear that; both the decisions of Hon'ble Delhi High Court are not applicable to the facts of the assessee's case before us. Thus, it is clear that in the case before us, assessee was still constructing the building for the institute which was to establish for training of people. During this phase, assessee has raised a share capital and funds raised from such share capital have been invested in FDRs of the banks as well as deposits with various companies and assessee has earned interest on the same. The same has to be taxed as 'income from other sources' in the light of the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilisers Ltd. (supra), which we have discussed in detail. 20. For the above proposition, we are also supported by the decision of the Hon'ble Bombay High Court in the case of CIT v. L T McNeil Ltd. [1993] 202 ITR 662 (Bom.) which had an occasion to examine this aspect and it was observed as under : "When a business is established and is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hinery of the project is fully installed and the project becomes operational and the order is executed, it cannot be said that the business has been set up. Before us the fact that the assessee was in the process of setting up an institute for training of people in film line, but the building for such training institute was under construction during the year and not even a single student was taken up for the training purposes, therefore, it is clear that business was not set up and there was no question of claiming any expenditure. 21. It was also contended that in any case expenditure incurred, which was on revenue account, should have been adjusted against the interest income. As observed above, such expenditure cannot be allowed as business expenditure because the business has not commenced. However, if any expenditure was incurred for earning interest income, it could have been allowed and the learned CIT(A) has already observed in the last three lines of his order as under : "However, while treating the income as 'Income from other sources' the AO should also consider the expenses incurred for the purpose of earning such income and allow the same under section 57 of the IT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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