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TMI Blog2013 (11) TMI 185X X X X Extracts X X X X X X X X Extracts X X X X ..... h such expenditure. (Reference 315 ITR 255) 2. On the facts and circumstances of the case, the Ld CIT (A) erred in confirming the action of the AO for taxing the interest income under the head "income from other sources" 3. CIT (A) erred in confirming the charging of interest u/s 234B/ 234C." 3. Briefly stated relevant facts as emanates from the orders of the AO and the CIT(A) are that the assessee is engaged in the business of 'exploration' and filed the return of income declaring loss of Rs. 65,08,033/-. In the assessment proceedings u/s 143(3) of the Act, AO completed the assessment determining the income at Rs. 7,06,370/-. AO rejected the claim of administrative and other expenses amounting to Rs. 67,81,270/-. Further AO treated the interest income of Rs. 7,84,860/-. Otherwise, the assessee the said expenditure as allowable one and not covered by the provisions of section 35E of the Act. Per contra, AO is the opinion the said expenditure is capital in nature as the business has not commenced in the year under consideration. Further, the AO held that by claiming this expenditure before the commencement of commercial production, the assessee has tried to advance the claim. AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 67,81,270/- is covered by the provisions of section 35E of the Act. CIT(A) arrived at the conclusion that the business is considered set up only when assessee is successful in identifying the commercially viable block. As mentioned in para 8, the conclusion of the CIT (A) reads that "till the assessee identifies the commercially viable block and start production, the business cannot be considered as set up". Only when the business is established and ready to commence the commercial production, then only, it can be said that the business is set up and the expenditure prior to that set up have to be capitalized as per-operate expenditure. Before coming to this conclusion, the CIT (A) discussed various contents of the Annual Report of the Company before coming to the said conclusion. Briefly the contents of the said report include the assessee entered into various agreements with reference to technical services and obtaining from the Government the Reconnaissance Permit (RP), commissioning of reverse circulation (RC) drilling rigs into services, acquiring of the said rig for cost of Rs. 72 lacs, discovery identification of a 1.2 kilometre open ended zone of gold mineralization a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mineral in this year, the assessee has already set up business in the year under consideration. Referring to the decision of the CIT (A) that the business becomes set up, only when the assessee identifies commercially viable block and start production of the minerals/gold, Ld Counsel mentioned that she is under wrong perception and she has not understood the business of the assessee i.e. exploration of minerals. Attempting to distinguish various businesses relating to minerals, Ld counsel mentioned that the 'business of mineral exploration' is distinct from the 'business of commercial production/extraction of the explored minerals'. The business of commercial production of minerals is different from the business of mineral exploration and the exploration involves survey of the mineral rich locations with the use of geographers and geologists, identification of the blocks using the rigs specially designed for the purpose. Mentioning that assessee successfully identified various mineral blocks in this regard, Ld Counsel mentioned that the assessee succeeded in such identification and already made application to the Government called Reconnaissance Permit (RP) Application for an area ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /exploitation of the minerals, by way of mineral extraction, is not the business activity of the assessee and reiterated that the same is different from the 'business of mineral exploration'. Assessee may or may not go for such activities or the blocks so identified may be leased out to some lessees who shall do the job of commercial extraction of minerals which is a separate business by itself. Therefore, the Ld Counsel summed up by stating the fact that the company is incorporated for the purpose of 'mineral extraction', assessee invested in purchase of rigs, requisite manpower i.e. managers, geologists etc were appointed, Reconnaissance Permits in respect of certain mineral blocks were also obtained, application were also made in respect of Prospecting/Mining Licenses, which are required for further business activities of the assessee and all these activities are possible only when the business is set up and commenced. 9. In this regard, Ld Counsel relied on various judicial pronouncements. To start with, Ld Counsel relied on the decision of Tribunal (Delhi Bench) in the case of Hughes Escorts Communications Ltd. v. Jt. CIT which is subsequently upheld by the Hon'ble High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as held by the CIT(A). The commercial exploitation of the mineral blocks is not a pre-requisite for calling the assessee commenced his business activities. The assessee also relied heavily on the fact that he obtained RP from Government of Kerala for exploring gold over an area of 834 sq kms at Attappadi Vally and it shows the commencement of the business of exploration by the assessee for the year under consideration. 12. On the other hand, the case of the Revenue is that the assessee's business cannot be concluded as business commenced until the identification of commercially viable blocks is finalized and the commercial production began. As per the Revenue, all the stages for obtaining permissions, licenses are initial stages and trying to identifying blocks and business cannot be called commenced. 13. We have considered the divergent views of the parties in litigation and find that so far as the bare facts of the case are concerned, there is no dispute. The crux of the litigation relates to if the business of the assessee is set up and has commenced in this year and if the assessee is legally correct in debiting the impugned expenditure of Rs 67,57,190/- to P and L account i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtracting limestone were deductible in computing the trading profits of the assessee for the assessment years 1960-61 and 1961-62." 14. From the above, it is evident that for deciding if the business of manufacturing the cement in that case is set up or not, the timing of assessee's start up of activity of extraction of limestone, which is the first stage of the business process, constitutes the time of 'commencement' of business and the assessee is not required to produce cement commercially to qualify for 'set up and commencement'. The reasoning is obvious that the business is summation business activities and one business steps lays foundation for the next one as held in the said case of Saurashtra Cement & Chemical Industries Ltd. (supra). In the case of cement manufacture, where the lime stone being a raw material, 'the activity of quarrying the leased area of land and extracting limestone from it was as much an activity in the course of carrying on the business as the other two activities of manufacture of cement and sale of manufactured cement. This activity came first in point of time and laid the foundation for the second activity and the second activity when completed la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Western India Vegetable Products Ltd. (supra), the expression 'setting up' means 'to place on foot' or to establish or 'to ready to commence'. Therefore, we find no difficulty in coming to the conclusion that the assessee's business is set up in this year and in fact commenced too. Thus the expenditure incurred after the set up constitutes allowable expenditure. 15. Therefore, we are of the opinion that the arguments of the assessee are valid and the claim of the assessee in respect of the debiting the sum of Rs 67,57,190/- to Profit and Loss account in this year is proper. Consequently, the describing the said expenditure as pre-operative ones is incorrect. Accordingly, grounds 1 and 1.1 of the appeal are allowed. 16. Grounds 1.2 and the 2 relates to the nature of interest receipts and the tax treatment to be given to the interest receipts of Rs 7,84,860/-. Assessee claims that the said receipts constitutes business receipts and entitled for set off against he business expenditure Rs 67,57,190/- AO rejected the claim of the assessee relying on the jurisdictional High Court's judgment in the case of Ravi Ratna Export (P.) Ltd. (supra) and taxed the same under the head ..... X X X X Extracts X X X X X X X X Extracts X X X X
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