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TMI Blog1992 (10) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... s Development Programme, the assessee-company was incorporated for establishment of a sponge iron plant. It is a Government company and is a subsidiary of the Andhra Pradesh Industrial Development Corporation (APIDC), another State undertaking. The share capital is contributed by the State Government as well as the Central Government. Out of its share capital, the assessee made short-term deposits of Rs. 53,74,000 with banks and received interest as noted hereunder. Rs. 1,37,030 for the assessment year 1976-77. Rs. 1,80,930 for the assessment year 1977-78. Rs. 1,83,670 for the assessment year 1978-79. Rs. 2,80,240 for the assessment year 1979-80. This was treated as income from " other sources " and the assessee was taxed. It claimed that it had already commenced its business and, therefore, the expenditure incurred in those assessment years and allocated under the head " Exploration and general administration " may be allowed as deductions from out of that income. The Income-tax Officer found that the business of the assessee did not commence at any time in the accounting years relevant to the said assessment years and he assessed the interest income to tax. Against the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prima facie justifiable under the relevant principles of accountancy. The Tribunal further held that there was no basis to conclude that that allocation was other than bona fide. The Tribunal directed that the assessee's claim for capitalisation be considered by the Income-tax Officer in the light of the decisions of the Special Bench in Nagarjuna Steels Ltd. v. ITO [1983] 3 ITD 796 ; 1 SOT 355 (Hyd) and Arasan Aluminium Industries (P) Ltd. v. First ITO [1982] 1 ITD 10 ; 1 SOT 45 (Mad). On an application under section 256(1) of the Income-tax Act, the aforesaid questions of law are referred to this court. Mr. Ratnakar, learned counsel for the assessee, contended that the assessee's business included various activities including search of iron ore, testing and consultancy and was not confined to establishment of plant and production of sponge iron as would be evident from the articles of association and having regard to the activities of the assessee in the light of the objects clause, the business had already commenced and so the expenses in question are allowable deductions, He further contended that the interest income should be treated as business income and accordingly the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Income-tax Officer allowed expenditure relating to extraction of limestone as revenue expenditure and depreciation allowance and development rebate on the installed machinery, but rejected the claim in regard to the expenditure incurred in connection with the installation of plant and machinery as being capital expenditure. On appeal, the Appellate Assistant Commissioner disallowed the expenditure relating to extraction of limestone and depreciation allowance and development rebate, added these items back and enhanced the assessment. The assessee went up in appeal to the Tribunal. It was pointed out by the Tribunal that the business of the assessee might be classified into three stages : the first stage was procurement of raw material, the second was manufacture of cement and the third was sale of manufactured cement. On a reference to the High Court, Chief justice Bhagwati ( as he then was), speaking for the Division Bench of the Gujarat High Court, approved the approach of the Tribunal and observed that the activities which constituted the business of the assessee were divisible into three categories : the first category consisted of the activity of extraction of limestones ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st laid down in Saurashtra Cement and Chemical Industries Ltd.'s case [1973] 91 ITR 170 (Guj) and held that the business activities of the company fell into three categories : first to acquire, either by purchase or by any other manner, immovable property, so as to offer it on lease or licence ; the second category of the business was to put the building accommodation and lands and gardens in proper shape, so that ultimately the property could be given on lease and licence and the third category was to actually give the accommodation on lease or on licence basis, so that the amount spent by the company was held to be allowable expenditure as it was incurred after the business was commenced. It was also held that there was a distinction between setting up of business and commencement of business and that the expenditure incurred in the interval between the setting up of the business and the commencement of the business would be a permissible deduction. This judgment was affirmed by the Supreme Court in CIT v. Sarabhai Management Corporation Ltd. [1991] 192 ITR 151. The Supreme Court held that, even if the acquisition of the property for being let out could be said to be only a prepa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellate Tribunal, however, held the expenditure to be revenue in nature. On reference, a Division Bench of our High Court held that the expenditure incurred up to April 3, 1968, could not but be said to be capital in nature as, until then, there was no business transaction, but the expenditure incurred after that date could only be revenue in nature. In Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151 (Bom), the question before the Bombay High Court was as to when a business could be said to have been set up within the meaning of the expression under section 2(11) of the Indian Income-tax Act, 1922. The Bombay High Court pointed out that there was a clear distinction between a person commencing a business and a person setting up a business. The relevant question which would fall for consideration under section 2(11) of the Act was the setting up of the business and not the commencement of the business and it was only when a business was established and was ready to commence business then it could be said that the business was set up, but before it was ready to commence business it could not be said to have been set up. CIT v. Sarabhai Sons Pvt. Ltd. [1973] 90 ITR 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred for business purposes. On a reference, the Bombay High Court observed that the findings of fact recorded by the Tribunal showed that between August 19, 1961, and September 11, 1961, finished products were obtained by the assessee though they were sub-standard and, therefore, the business was deemed to have been set up by August 19, 1961, and not in February, 1961. Therefore, the loss would have to be calculated from August 19, 1961. In K Sampath Kumar v. CIT [1986] 158 ITR 25 (Mad), the assessee started a business ; for that purpose, he purchased machinery out of borrowed amounts. The machinery was installed in the assessment year 1979-80. His claim to deduct the interest paid on the borrowed capital as revenue expenditure was rejected by the Income-tax Officer. The Tribunal took the view that any interest paid before the commencement of the production on the amounts borrowed for purchasing and installing the plant and machinery would form part of the actual cost to the assessee and, therefore, the assessee was not entitled to claim interest as revenue expenditure. On the rejection of his application under section 256(1) of the Income-tax Act to refer certain questions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lating to the construction of plant and installation of machinery for establishing the factory for sponge iron, were in progress during the relevant years and the machinery was awaited and that the work had not commenced. What is, however, debated is that, as the search for iron ore has commenced and as that is also one of the main objects of the company, the expenditure incurred for that purpose must be allowed as a deduction. Alternatively, it is submitted that the business of the company fell into three stages: The first stage relates to exploration of iron ore which are suitable for production of sponge iron for non-cooking coal, in the second stage falls the actual mining operations and the third stage is said to be production of sponge iron. As the first activity commenced in the period relevant to the assessment years 1975-76 and 1976-77, the business has commenced and the expenditure is deductible. We shall take up the alternative submission first. Though it is possible, having regard to the nature of the business in question, to divide a business into different stages, we do not think that the business of manufacture of sponge iron can properly be divided into three stag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered. Mr. Y. Ratnakar submits that the interest income has to be treated as business income for purposes of determining the loss and allowing the deduction of the amounts in question. As observed above, this contention was not urged before the Departmental authorities or the Tribunal. But the sweep of the first, question " or otherwise " is broad enough to entertain this contention. In support of this contention, he relied on the judgment of the Supreme Court in CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306. In that case, the assessee-bank which was carrying on banking business held securities as part of the trading assets of its business. It earned certain interest on these securities and suffered some amount of loss in the assessment years in question. The Income-tax Officer refused to set off the loss against the income computed under the head " interest on securities ". The Supreme Court held that the assessee was entitled to set off the loss brought forward against the entire income including the interest on securities in the succeeding years, as the income from securities formed part of the assessee's trading assets and its income included income from interest o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasons, on the first question, we hold that the assessee is not entitled to the deduction of the administrative expenses and exploration and mining expenses from out of its interest income. Accordingly, the first question is answered in the negative, i.e., in favour of the Revenue and against the assessee. The second question is whether the assessee can claim to set off interest received on short-term deposits against the unadjusted expenditure for the four assessment years in question. The assessee allocated the expenses as against three items, viz., exploration, general administration and capital. The claim of the assessee was that the short-term capital amount was invested on short-term deposits, pending utilisation of available funds on erection, construction, etc., and the interest earned on such deposits should go to reduce the capital cost. The Tribunal accepted the claim of the assessee in principle, following the two Special Bench decisions in Nagarjuna Steels Ltd. [1983] 3 ITD 796 ; [1982] Taxman 17 (Hyd) and Arasan Aluminium Industries (P) Ltd. [1982] 1 ITD 10 ; I SOT 45 (Mad). The Tribunal observed that the Income-tax Officer was not justified in dismissing the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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