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TMI Blog2012 (7) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... setting up and development of industrial parks with all infrastructural facilities for rubber and rubber-wood based industries. As a first step, 59.12 acres of land was taken on lease vide lease agreement dated 08-02-1999, and M/s. C.P. Kukreja Associates Pvt. Ltd., New Delhi appointed as Architects. Tender forms for the work of site development, including construction of roads, buildings etc., were invited and contract awarded to one M/s. M.K. Abraham and Co. on 24-09-1999. As on 31-03-2001, M/s. M.K. Abraham & Co. has raised bills amounting to Rs. 191.38 lakhs on the assessee-company for the work done by them. Further, during the year the company had taken another 43 acres of contiguous land on a 99 year lease, as also awarded work for construction of 110/11 K.V., 12.5 M.V.A. sub-station, water supply arrangements, etc. Asstt. Year 2001-02 3.2 It filed its return of income for A.Y. 2001-02 on 30-10-2001 at an income of Rs. 73.39 lakhs. During the course of the assessment proceedings, it was observed that it had earned interest on fixed deposits with bank during the relevant year at Rs. 109.89 lakhs, besides miscellaneous income (from the sale of tender forms and sale of trees) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide is order dated 06-09-2004. Aggrieved, the assessee is in appeal before us. A.Y. 2002-03 The AO likewise disallowed the assessee's claim for expenditure, made at an aggregate of Rs. 43.82 lakhs, including depreciation (at Rs. 18.46 lakhs) as business expenditure, and brought the entire amount of interest and other income (i.e., in respect of sale of trees and tender forms at Rs. 1.65 lakhs) of Rs. 91.05 lakhs to tax as from other sources, placing reliance on a number of decisions by the jurisdictional high court referred to in para 4 and 5 of his order, besides that by other high courts, as well as by the apex court in the case of CIT v. Dr. V.P. Gopinathan [2001] 248 ITR 449/116 Taxman 489. In appeal, the assessee found favour with the ld. CIT(A), in that the appellant had commenced its business activity as soon as it took possession of land on 08-02-1999 and started development work on the said land, relying on the decisions in the case of Saurashtra Cement & Chemical Industries Ltd. (supra) and Prem Conductors (P.) Ltd. (supra). The leasehold land was only the assessee's stock-in-trade, which was being developed for converting the same into plots for allotment in the rubb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was assessable only as income from other sources, admitting of no allowance of the expenditure being claimed there-against, made at Rs. 7.10 lakhs and Rs. 24.87 lakhs respectively for the two consecutive years, which was accordingly disallowed vide orders u/s. 143(3) r.w.s. 147 of even date, i.e., 30-12-2005. The assessee carried the matter in appeal, whereat the ld. CIT(A) rejected the assessee's claim, following his predecessor (for A.Y. 2002-03), to hold that the interest income was a pre-operative investment income and, thus, rightly assessed as income from other sources. So, however, the assessee was entitled to claim 18% thereof as deduction u/s. 57(iii); the Cochin Bench of the tribunal having allowed deduction of expenditure in respect of such income at 30% of the gross interest by way of reasonable expenditure there-against, vide his common order for two consecutive years dated 12-12-2006. Aggrieved, both the parties are in appeal. The Revenue is aggrieved by the allowance of claim for expenditure in view of the provisions of s. 56 and 57 of the Act., placing reliance also on the decision in the case of Saraf Textile Industries v. CIT [1996] 217 ITR 507/85 Taxman 146 (Raj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (supra) and Traco Cable Co. Ltd. v. CIT [1969] 72 ITR 503 (Ker.) relied upon, inter alia, by the Revenue, with the Assessing Officer citing (in the assessment orders for assessment years 2001-02 and 2002-03) about another dozen decisions, primarily by the Hon'ble jurisdictional High Court, including Dr. V.P. Gopinathan's case (supra) by the Apex Court. In fact, the hon'ble jurisdictional High Court has specifically clarified the same while disposing the assessee's Writ Petition (W.P. No.438 of 2005 dt 06-01-2005/copy of record) challenging the assessment for assessment year 2001-02 (per order u/s 143(3) dated 30-10-2003, confirmed by appellate order dated 06-09-2004), relying on the decision by it in the case of Cochin Refineries. The assessee's only case, and for which the honourable court also directed consideration by the Revenue (on the petitioner moving it u/s 154) is the computation of income under the head "Profits and gains of business or profession" and, secondly, set off of business loss in view of the non absorption of the impugned expenditure under that head of income, against positive income under the head "Income from other sources" u/s 71 of the Act. No such app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wood based industries in Kerala. The company entered into an Agreement (MOU) with KINFRA (a statutory corporation constituted by the Government of Kerala (GoK) under the Kerala Industrial Infrastructure Development Act, 1993) on 26-12-1997 for setting up an Industrial Park at Irapuram, 12 kilometres from Perumbavoor in Ernakulam District. Land admeasuring 59.12 acres was leased thereto by KINFRA for an initial period of 99 years on 08-02-1999 for setting up a rubber park, by developing land, constructing roads, buildings and other common facilities, viz. power & water supply, sewage and drainage system, including storm water disposal, pollution control systems for effluent/solid waste disposal, telecommunication lines, etc. ('Project', hereinafter). The project cost was envisaged at Rs. 36.61 crores, though later revised to Rs. 31.88 crores. The land was to be divided into plots to be subleased to the entrepreneurs for setting up such rubber and rubber based industries. The terms and conditions of the joint venture agreement dated 26-12-1997, as well as the directions by the GoK in relation to the lease of land, were to apply to the said lease, as well as to the sub-leases to be ef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing up of business and its actual commencement. All the expenditure incurred over this interval would be allowable, and only that incurred prior to the setting up was impermissible. A business could not be commenced unless it is set up, which would imply "to establish" or "to place on foot" in contradistinction to 'to commence". The basis of the hon'ble courts decision was that the "previous year" is defined as the date from which a business (or a source of income) is set up. The decision was noted with approval in CWT v. Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478 (SC). In that case, explaining the difference between the two expressions, i.e., "commencement" and "set up", it was categorically held by the apex court that a unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up. It is only when the unit has been put in shape that it can start functioning as a business or a manufacturing organization, and it can be said that it (unit) has been set up. The decision clarifies the matter beyond any doubt. Though rendered in the context of establishment of a unit, the difference is inconsequential in view of its rationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... occupied the premises and started paying rent. Though without reference to the decision in the case of Western India Vegetable Products Ltd. (supra), a marked similarity, both on facts and in rationale, characterizes the two cases. 4.6 The assessee has relied on the decision in the case of Commissioner of Income-tax v. Saurashtra Cement & Chemical Industries Ltd. (supra). In the facts of that case, the promoter had obtained a mining licence and also the licence for manufacturing cement prior to the company's incorporation on 11-06-1956. The company started mining operations in April, 1958, and claimed expenditure for the purpose of extracting lime stone, as also depreciation on the machinery involved, for assessment years 1960-61 and 1961-62 (the relevant previous years ending on 30-06-1959 and 30-06-1960 respectively). The same was disallowed on the basis that the company's business had not commenced. Though quarrying lime stone was within the object clauses of the company's MOA, it did not engage in that business, and quarried and extracted the lime stone only as a raw material for the manufacture of cement. It was in this context that the question of commencement of business ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing been incurred in the course of carrying on the same, and income there-from computed u/s. 28 of the Act. Reference in this context could be made with profit to the decision in Ashoke Marketing Ltd. v. CIT [1994] 208 ITR 94/73 Taxman 126 (Cal.), relied upon by the Revenue. Furthermore, the decision in the case of Ramaraju Surgical Cotton Mills Ltd. (supra), would apply as the assessee-company (in the instant case) is admittedly undertaking a Project. All the activities prior to its set up, as unambiguously explained therein, are pre-operative in nature, i.e., as operations for the establishment of the business. In fact, the difference between "ready to commence" and "commenced" is only technical or academic, as once the business is established, all the expenses incurred in relation thereto are deductible, irrespective of the actual commencement of business. For example, a manufacturing company, though in a position to start commercial production, abstains from doing so in view of market volatility or for lack of orders for supply. The position would be akin to where the production is temporarily suspended due to an adverse situation, though that would not impact the allowability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereat. In fact, even by 15/05/2002, the date of the earlier director's report, water supply work at Site B (in Phase I) had not been completed, and sanction for the energisiation of the sub station not obtained. As such, clearly, therefore, the assessee company has not commenced its business by 31-03-2002. Accordingly, the assessee is not entitled to a set off of the administrative expenditure incurred as business expenses u/s 71(1) of the Act. We decide accordingly. 4.9 We may, next, answer the various arguments as well as the grounds raised by the parties in relation to this issue. One of the assessee's arguments is that the Revenue having not appealed against the appellate order for the assessment year 2002-03, which also forms the basis of the assessment for assessment years 1999-2000 and 2000-01, and whereby the ld.CIT(A) has held that the business commenced in September, 1999, when the development work of land and construction of infrastructure facilities started, the said finding has become final. As such, the only dispute or the bone of contention between the parties is the treatment to be given to the impugned expenditure, which he holds as not allowable in view of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equirements; the size profile, which would in turn held design the land space to be put up for lease, etc. That the said activity generates some income, which though may not correspond with the gross sale value (as there would be some cost associated therewith, if only in the form of the printing, stationery and advertisement publicising the forms being on tap), is of no consequence. Assuming an equivalent cost, and which stands debited to the operating statement (P&L Account) - toward which no plea stand made though, there would be no net income, so that the adjustment required would be to reduce the said income from that assessed u/c. IV-F. On the other hand, assuming a net income, the same being inextricably related to the project cost, the latter would require being reduced to that extent, as also would be the case in respect of income by way of sale of trees. Either way, therefore, the same cannot be assessed as income. Reference in this context be made to the decisions in the case of CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315/102 Taxman 94 (SC), applying the decision in Chellapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC). 4.11 The next clarification, in view of our holdin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 147 are otherwise fulfilled [refer: Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316 (SC)]. The income escaping assessment for assessment year 1999-2000 is clearly in excess of Rs. 1 lakh, the threshold limit for reopening beyond four years (but within six years). Accordingly, action u/s 147 is legally valid for both the years. 4.13 Next, we consider the Revenue's grievance qua the allowance of impugned expenditure against bank interest income, which stands allowed by the ld.CIT(A) on the basis that the same works to 18% of the interest, following the decision by the Tribunal in the case of Cochin International Airport Ltd. v. Asstt. CIT (in ITA No.45 & 46/Coch/2000 dated 30-01-2004). The Revenue contests the same placing reliance on Traco Cable Co. Ltd.'s case (supra) and Saraf Textile Industries v. CIT [1996] 217 ITR 507/85 Taxman 146 (Raj). We find that the assessee's claim is not tenable at all. Firstly, as clarified in the foregoing part of this order, with reference to the decision by the hon'ble jurisdictional High Court in the assessee's own case (W.P. No.438 of 2005 dated 06-01-2005), the only issue is the non set off of business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sibly only a direct cost of construction. We have already noted (refer para 4.10), that the income from sale of forms and trees can not be treated as independent of the project, and even if no costs are attributable thereto (which is impractical), or such costs stand already capitalized as part of the project cost (and not included in the impugned administrative expenditure), the same cannot be assessed as income. Further, we also observe a difference in the amounts claimed for two years, i.e., assessment year 2001-02 and 2002-03. While the assessee's claim for assessment year 2001-02 is at Rs. 68,71,306, its accounts disclose an expenditure of Rs. 39.47 lakhs only, including the Architect's fees aforesaid, and donation for Rs. 1 lakh. Similarly, for assessment year 2002-03, while the expenditure disallowed by the assessing officer and confirmed by the appellate order is at Rs. 43,81,588, the assessee agitates the same at Rs. 59,32,893, per its grounds of appeal before us as well as before the first appellate authority, whose order is silent on the matter. These aspects would require being looked into, and which have admittedly not been by any authority. We, accordingly, restore th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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