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TMI Blog2016 (2) TMI 745X X X X Extracts X X X X X X X X Extracts X X X X ..... charges and Rs. 2,22,23,527/- made on account of the allege discrepancy in TDS certificates in the assessment order passed u/s. 143(3) of the Income Tax Act, 1961 by the Ld. Income Tax Office, Ward 12(3), Kolkata in gross violation of the provisions of s. 142(3) of the Income Tax Act, 1961 and the purported actions in respect of those issues are altogether illegal, invalid and untenable in law. 2. FOR THAT the Ld. Commissioner of Income Tax (Appeals) XXXVI, Kolkata misread the facts and circumstances of the instant case in upholding the purported action of the Ld. Income Tax Officer, Ward 12(3), Kolkata of construing the receipts from trial run in the sum of Rs. 3,17,02,632/- as income of the appellant and the alleged findings in this regard without considering the issues in a proper perspective are altogether arbitrary, unwarranted and perverse. 3. FOR THAT the Ld. Commissioner of Income Tax (Appeals) XXXVI, Kolkata in upholding the impugned finding of the Ld. Income Tax Officer, Ward 12(3), Kolkata of interpreting the receipts from trial runs to the tune of Rs. 3,17,02,632/- as revenue in nature relying on the ratio laid down in the case of TUTIKORIN ALKALI CHEMICALS & FER ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e project. Hence the income earned during the trial cannot be reduced from the preoperative expenses. Accordingly, the AO sought clarification from the assessee on adjusting the trial run income against the preoperative expenses and raised question that why trial run income should not be treated as business income. 5. The assessee submitted that prior to the start of commercial operation, only few vessels were handled to have the trial run of the system and treated as 'preoperative handling' of the plant. Therefore the income generated during trail run has been treated as 'preoperative income'. As a result of this the preITA operative expenses has come down by the said amount and the balance has been capitalized after apportioning to the assets. 6. However, the AO disregarded the claim of the assessee and disallowed the same relying on the judgment of Hon'ble Apex Court in the case of Tutikorin Alkali Chemicals & Fertilizers Ltd. v. CIT 227 ITR 172 (SC), it clearly held by Lordship that "Interest earned on short-term investment of funds borrowed for setting up of factory during construction of factory before commencement of business has to be assessed as income from other sources ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of cargo during the period from 07.12.2003 to 13.01.2004 on trial basis was commercial activity of the assessee and the receipts earned there from was assessed as income from business which is totally untenable and inconsistent with the facts of the case since it was done at the behest of the Holdia Dock Complex authorities in order to establish the stability of the berth. It is an admitted fact that even during a period of test runs and experimentation, a plant may be engaged in actual production, but until the test runs are completed and the plant is properly adjusted on the basis thereof, it cannot be said to be ready for "commercial production". The expression "Commercial Production" refers to production in commercially feasible quantities and in a commercially practicable manner. Further, it is a correct and accepted procedure to capitalize all expenses incurred during construction period and in connection with the process of start-up and commissioning of the plant. In fact, such expenses would be incurred in order to bring the plant up to the stage at which it can commence commercial production. Thus, it is correct to capitalize the expenditure incurred on start-up and commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... run was to check whether there is any flaw in the system or not so that remedial action can be taken well in time in the event of any flaw in the system. So it is clear that the purpose of the trial run was to check the flaw in the system and not to begin the commercial operations. In the instant case the trial run was successfully completed on dated 13/1/2004 without any flaw in the system. Therefore the commercial operation began immediately thereafter on dated 15/1/2004. Now the question here arises that in case of any flaw caught during the trial run then in that event certainly the commercial operation shall only begin after the removal of the flaw. In view of thi,s the income generated during trial run shall certainly be adjusted against the pre-operative expenses. Having said this we are inclined to reverse the order of the ld. CIT(A) and direct the lower authorities to adjust the trial run income from preoperative expenses of the assessee. We are relying on the judgment of the Delhi High Court in the case of Commissioner of Income Tax Vs. Nestor Pharmaceuticals Limited 322 ITR 631 where it was held that : "The assessee was in the business of manufacture of pharmaceutical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cepted by the tribunal as well, from which it was clear that there was only a trial production in the assessment year 1998-99 and commercial and full-fledged production commenced only in the year 1999-2000. The order of the Tribunal allowing the benefit of deduction under section 80- IA/80IB of the Act from the assessment year 1999-2000 treating it as the initial year of production to the assessment year 2003-04 was correct in law. The Tribunal held that the assessee had not only produced the goods for trial purposes but there was, in fact, sale of one water cooler and airconditioner in the assessment year 1998-99 relevant to the previous year/financial year 1997-98. The explanation of the assessee was that this was done to file the registration under the Excise Act as well as the Sales tax Act. The Tribunal held that the sale of one water cooler and one air-conditioner as on March 31, 1998, for the purpose of obtaining registration of excise and sales tax was manufacture within the meaning of section 80-IA. On appeal : Held, that the assessee had sold one water cooler and one airconditioner before April, 1998. Thus, the stage of trial production had been crossed and the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduction of sterile penicillin, the only product that could be sold in the market, in August, 1955. On the question when the manufacture of sterile penicillin had started and whether the assessee was entitled to the exemption under section 15C for the assessment year 1960-61 : Held, on the facts, that production of articles by the assessee had begun only in August, 1955. The benefit of the exemption under section 15C arose to the assessee for the first time in the assessment year 1956-57 and, therefore, it was entitled to the exemption under section 15C for the assessment year 1960-61 also." 10. We also further observe that the facts of the case law cited by the AO i.e. Tutikorin Alkali Chemicals & Fertilizers Ltd. (supra) for treating the receipts of trial run as business receipt are different from the facts of the instant case. The Apex Court in the said case has treated the interest income on the surplus fund as income from other sources because there was no nexus between the activity of the assessee and interest income. The assessee has invested idle fund for short period of time before the commencement of the business. There was no connection between interest income and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dded to the total income of the assessee. 13. Aggrieved, assessee preferred appeal before Ld. CIT(A) who confirmed the action of AO by observing as under:- "I have carefully considered the above. Apparently, the entire amount of Rs. 12,13,61,939/- were received by the appellant towards cargo handling operations and other receipts. Further, M/s Steel Authority of India Ltd. has treated the above payment to the appellant towards charges for operations. Further, no evidence was filed before me to indicate that the above sum of Rs. 22,22,23,527/- represents work-inprogress but not receipts towards operations. Considering the above, I do not find any reasons to interfere with the assessment order. Accordingly, this ground No.3 is dismissed." Being aggrieved by this order of Ld. CIT(A) assessee preferred second appeal before us. 14. We have heard rival contentions and perused the materials available on record. Ld. AR submitted that it is also not in dispute that the alleged finding of the Ld. Assessing officer on the issue of discrepancy of Rs. 2,22,23,527/- is simply an issue which arose from a future imagination. It was apprised that Steel Authority of India, the contractor h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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