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TMI Blog2017 (9) TMI 656X X X X Extracts X X X X X X X X Extracts X X X X ..... essee was set up during the previous year under consideration while the assessee has not done any business activity during the previous year under consideration." 2. "Whether on the facts and in the circumstance?; of the case and in law, the Ld. CIT(A) is justified in holding that the general administrative expenses are deductible as revenue expenses and interest income of the assessee is assessable to tax as income from business and profession while the business of the assessee was not set up during the previous year under consideration." 3. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in deleting the disallowance u/s.14A w.r.t. to interest expenses of Rs. 49,97,97,672/- while the assessee has not maintained separate pool of funds for general operating expenses and for capital expenses end investment." In ground no.3 for A.Y. 2009-10, the amount of Rs. 49,97,97,672/- be read as Rs. 58,93,07,820/- 4. Ground no.1 relates to the issue as to when the business was set up. The brief facts of the case are that the assessee is engaged in the business of development of ship building and ship repairing yard. It filed its retu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 15,2007 Entered into Technical Service Agreement for design of 74. 5K DWT Bulk Carrier (Page 474) 13 April 12, 2007 Letter from GMB raising few queries on the request - (Pages 546 & 547) 14 April 19, 2007 Clarification given by Pipavav Shipyard Ltd to GMB in response to their letter dtd. 12.04.2007 (Ref No.PSL/GMB/03/07-08) (pages 548 to 550) 15 April 16, 2807 Letter of permission no. K/IM/LQP/1733/T3/1Q17 for manufacture of fabricated block for ship building. 16. June 25, 2007 Permission under Section 35(1) of the GMB Act to start construction activities for the shipyard project at Pipavav Port, received from GMB (Ref No.: GMB/N/PVT/428/163) - (Pages 551 & 552). 17 July 01, 2007 Central Sales Tax registration (CST) under Gujarat VAT from the Assistant Commissioner of Commercial Tax- Gujarat Sr. No. Date Particulars 18. August'08, 2007 License for Private Bonded Warehouse u/s 58 and 65 of the custom act 1962 issued by the assistant Commissioner Rural Division Bhavnagar. 19. September 06, 2007 Central Excise registration certificate issued by the assistant Commissioner Central Excise Rural Division Bbavnagar. 20. January 08, 2008 Bond Cum Legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee had duly received orders prior to January and, therefore, the business was duly set up. It was also pointed out that all necessary permission for setting up of plant was duly received by the assessee. Although the business of the assessee was set up when the orders were received, the assessee had conservative approach decided to consider set up of business when it started purchasing steel. Reliance in this regard was placed on the decisions of Hon'ble Gujarat High Court in the case of CIT vs. Sarabhai Sons (P) Ltd 90 ITR 318 and CIT vs. Saurashtra Cement & Chemical Industries Ltd. 91 ITR 153. 6. The learned DR, on the other hand, relied on the order of the Assessing Officer and took a view that during the year, the assessee has not constructed any ship or started construction of ship, therefore, it cannot be said that the assessee had commenced business. 7. We have heard the parties and have considered their submissions along with the orders of the tax authorities below. From the chart of chronological events, we noted that the assessee has entered into contract and got orders from Golden Ocean Group on 30.11.2006, from SETAF s.a.s France and ALIISOSS Shipping, SA on 04.12.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had commenced the business but when the business has been set up. A business is said to be set up when it is ready to start the business. The Hon'ble Supreme Court in the case of CIT vs. Sarabhai Management Corporation Ltd. (supra), took a view that business commences when the property is made ready and the assessee is in a position to offer services to the licensee in a case of the company, whose business is to give property on leave and license basis, expenses incurred thereafter are allowable as a deduction. We have also gone through the decision of Hon'ble Gujarat High Court in the case of CIT vs. Saurashtra Cement & Chemical Industries Ltd. 91 ITR 153 (Guj), on which the learned AR has vehemently relied. We noted that in this case, the Hon'ble Gujarat High Court has held that business connotes a continuous course of activities. All the activities which go to make up the business need not be started simultaneously in order that the business may commence. The business would commence when the activity which is first in point of time and which must necessarily precede all other activities which had started. In this case, the company was formed in 1956 for the manufacture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activities from Gujarat Maritime Board and also got registration under the Sales tax as well as Excise and Customs Act done. The assessee has started purchasing steel for ship building activity. All these activities are preparatory activity for construction of ship carried out up to January. These activities, in our opinion, are such that the assessee has set up business. We, therefore, do not find any illegality or infirmity in the order of the CIT(A). We accordingly dismiss ground no.1 taken by the Revenue. 8. Ground no.2 relates to the claim of administrative expenses and chargeability of the interest income under the head 'Income from business'. The facts relating to this ground are that the Assessing Officer noted that the assessee has debited following amounts of expenditure against the interest income [the only source of income]: Material consumed Rs. 159.44 lacs; Direct expenses 1785.44 lacs; Employee cost Rs. 502.30 lacs; Operations & Other Exps. Rs. 1085.96 lacs; Financial expenses Rs. 7.68 lacs and Depreciation Rs. 17.71 lacs. It was further noted that the assessee had capitalized material consumed and direct expenses in work-in-progress relating to ship construction a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in the case of CIT vs. Paramount Premises (P) Ltd 109 ITR 259 (Bom), wherein it has held that when an assessee was required to give a guarantee to the bank in respect of the land on lease for construction work for that purpose, certain amounts were kept in fixed deposits on which the assessee earned interest. Since the entire interest sprang from the business activity of the assessee and did not arise out of any independent activity, interest income was to be considered as business income. Interest so received earned by the assessee on the FDs kept for the purpose of guarantee amounting to Rs. 2556.66 lacs has to be assessed as income under the 'Income from business'. Similar view has been taken by the Hon'ble Patna High Court in the case of Shyam Bihari vs. CIT 345 ITR 283, wherein it was held that interest accrued on security deposit which was kept for securing contract work would be assessable as business income. We, therefore, confirm the order of the CIT(A) holding that the interest earned on Fixed Deposit amounting to Rs. 2556.66/- lacs be assessed as business income out the total interest earned by the assessee amounting to Rs. 2771.90/- lacs. Thus, this ground is also d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome for the year. When the matter went before the CIT(A), the CIT(A) deleted the disallowance made under Rule 8D(2)(ii) with regard the interest amounting to Rs. 49,97,97,672/-. 10. We have heard the rival submissions and carefully considered the same. We noted that it is a fact that the assessee has capitalized interest amounting to Rs. 49,97,97,672/-. During the year, the assessee has not claimed deduction of the said interest. This interest amount is directed corelated to acquisition of fixed assets and capital work-in-progress. The said interest cannot be considered for the purpose of disallowance u/s. 14A read with Rule 8D(2)(ii). As per Rule 8D(2)(ii), interest which is directly attributable to acquisition of fixed assets or capital work-in-progress, the same cannot be considered for the disallowance as the same cannot to attributable to any particular income or receipt. In view of specific provision of Rule 8D(2)(ii), we do not find any illegality in the order of the CIT(A) and, hence, we confirm the order of the CIT(A). In so far as sustenance of disallowance of Rs. 7,68,000/-, we noted that the assessee is not in appeal before us. Therefore, we cannot entertain the plea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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