TMI Blog2009 (4) TMI 806X X X X Extracts X X X X X X X X Extracts X X X X ..... n agreement with MPEB was one of the essential activities for the business but this essential activity was in furtherance of setting up business. The assessee has pointed out that it had employed managerial and other staff in order to start the business. All these actions were essential for setting up of business because, admittedly, in order to priorities for Escrow Protection the assessee had submitted its offer for better terms on different parameters in pursuance to letter as mentioned in the written submissions filed by assessee placed on record. The assessee had undertaken this venture in pursuance to liberalized government policy which could not be implemented on account of change in policy decision itself and, therefore, it could not be said that the assessee's business had been set up because setting up implies that assessee is only few steps away from formal commencement of business. In this regard, we may refer to some decisions relied upon by Ld Counsels for the assessee: In the case of Western India Seafood (P) Ltd.[ 1992 (8) TMI 68 - GUJARAT HIGH COURT] , it was held that the test to be applied is as when a businessman would regard a business as having comme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... situation persisted in A.Y. 2003-04 and, therefore, it cannot be said that the business had been set up in assessment year 2003-04. That being the factual state of affair, whatever expenditure had been incurred and whatever amount was received on security deposit were in capital field and could not be treated as revenue in nature. The decision in the case of Tuticorin Alkali cannot be applied because in that case there was no dispute regarding the setting up of the business. The business was treated as being set up and, therefore, the receipts by way of interest by deployment of surplus funds were held to be assessee's income. But till the business is set up, the receipts cannot be held to be in revenue field. The receipts upto the stage of setting up of business would go to reduce the cost of setting up of business. While parting we may observe that it would be travesty of justice if the assessee's expenditure upto the stage of setting up is treated as capital in nature but not the receipts during the same period. In view of above discussion, we allow the additional ground raised by assessee. In the result the assessee's appeal for AY 2002-03 is dismissed while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted the assessee's contention, inter alia, observing that the assessee company had not explained under which section, the assessee company was claiming these expenses, which had already been capitalized and routed through the balance sheet of the earlier assessment years, can now be categorized as revenue expenditure. He observed that the assessee company after having made entries in the books of account, consistent with the method of accounting followed, guided by the principles of accounting, could not be permitted to seek assessment of his income for income tax purposes on a different basis altogether at variance with its books of account. He observed that to this extent the entries made in the books of account are as much binding as the method of accounting itself. He pointed out that only when the entries are not conclusive or decisive of the matter, then only, they can be varied. He relied on the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. 82 ITR 363 (SC). He, accordingly, determined the net taxable income at Rs. 39,55,741/- by adding therein interest income of Rs. 58,04,533/-. He further observed that since the book pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , therefore, necessary for MPEB to provide IPPS for providing Escrow Agreements upto 2500 MW. In order to priorities IPPS for Escrow Protection, MPEB asked all IPPS vide its letter No. 07/11/PC/1006 dated 24th July, 1998 to submit their offers for better terms on different parameters. Each IPPS was also required to pay alongwith the offer a security deposit equal to an amount of 2% of the Project Cost. The project cost in the case of the company was Rs. 466.54 crores. Two percent of such cost worked out to Rs. 9.33 crores. Accordingly, the company submitted its offer alongwith a demand draft of Rs. 9.33 crores on 11th August, 1998 towards security deposit. 5. Thereafter, MPEB invited revised Bids from Liquid Fuel Based IPPS on different parameters vide its letter dated 11th September, 1998. This was challenged by the assessee company and other IPPs by writ petition before the Madhya Pradesh High Court. The Division Bench of the Hon'ble High Court upheld the legality and validity of the impugned MPEB letter dated 11th September, 1998 by its order dated 25th June, 1999. Some of the IPPs including the assessee company had gone to the Hon'ble Supreme Court on Escrow protecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss need not be started simultaneously. It was held that as soon as an activity which is the essential activity in the course of carrying on the business is started, the business must be said to have commenced. Similar view was expressed by the Hon'ble Gujarat High Court in the case of Hotel Alankar v. CIT 133 ITR 865 (Guj), wherein, it was laid down that it is no doubt true that a business can be said to have been set up when it is established and it is ready to commence business. It does not mean necessarily that the business must be fully equipped in the sense that it could commence all its activities at a time immediately. He further relied on the decision of the Hon'ble Rajasthan High Court in the case of CIT v. Stones and Minerals Associated Ltd. 257 ITR 479 (Raj), wherein, it was held that procurement of materials for export in an export business would mean that the business has already been set up, the expenditure incurred for procuring materials for export should ordinarily be business expenditure. Learned Counsel for the assessee pointed out that the decision in the case of Saurashtra Cement and Chemical Industries Ltd. (supra), the Hon'ble Gujarat High Court h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears. The abandonment of the project was not because of any lapse on the part of the assessee but was due to reasons beyond control of the assessee. vii) The activity of the company was within the parameters of Articles of Association and Memorandum. viii) After the abandonment of the project with MPEB, the assessee did not stop its business which was already set up and the company continued its activities and it was in search of some other project. Hence, the expenses incurred of Rs. 2,43,96,772/- were correctly claimed by the assessee as business loss. Learned Counsel for the assessee referred to proviso to Section 3, which defines the previous year, wherein, it is mentioned as under: Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year. He relied on the following decisions for the proposition that the expenses incurred after the business is s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various activities before it is set up and ready for commencement. The business activities may be classified into two broad categories, firstly the activities which are in furtherance of setting up of a business and secondly the activities which are in furtherance of commencement of business after it has been set up. Business is set up when it is ready for take off but the activities following the setting up of business prior to its commencement constitute the essential activities for commencement of business and the expenditure incurred in carrying on such activities is allowable deduction under the head income from business . However, the expenditure incurred prior to the setting up of business is only in capital field and cannot be treated as business expenditure. As is evident from the facts noted earlier, the assessee had only entered into agreement with MPEB but MPEB finally backed out from the said agreement. This was only an assurance to the assessee for purchasing power from it subject to fulfillment of series of activities. It cannot be said that the assessee's business had been set up on 18.11.1997 when the agreement had been entered into with MPEB. Entering into ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the plant and machinery set up for that purpose and the third category consisted of selling manufactured cement. Under these facts, it was held that the assessee commenced its business when it started the activity of extraction of limestone by quarrying the leased area of land. Thus, this decision primarily deals with a case when the business is said to have commenced and not the business is to have been set up. 12. In the case of Hotel Alankar (supra), it was held that hotel business necessarily comprised variegated activities commencing from the stage of acquisition of a proper and suitable building, making it more suitable and convenient for the hotel business, purchasing linen, cutlery, furniture, etc, appointing the staff as managers, bearers, cooks, etc and ultimately reaching the stage of receiving customers. In this case the business was held to be set up when the activity of acquiring the building was undertaken. No impediment was there for commencement of business after acquisition of building. This decision also is distinguishable on facts and cannot be applied to the present set of facts. 13. In the case of Western India Seafood (P) Ltd. (supra), it was held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Government in August, 1970, on annual rental basis and the contracts with the fishermen for supplying fish were completed on June 28, 1970. However, the actual business started only in October, 1970, after the monsoon season when fish and other marine products could be caught from the sea. The company had incurred expenditure amounting to Rs. 18,225 prior to July 31, 1970. This expenditure was not claimed by way of permissible deduction under Section 37 of the Act but it was capitalized by the assessee while the expenditure which the company had incurred from August 15,1970 to October 6, 1970, was claimed by way of deduction under Section 37 of the Act. The AO made adjustment in respect of certain preliminary expenses of Rs. 5,968 and disallowed the balance of Rs. 47,190 in computing the total income of the assessee. In the backdrop of these facts, Hon'ble High Court at page 780 observed as under: The assessee's business during the accounting year was of processing marine products for which fish and other marine products had to be caught by the fishermen. For that purpose, the assessee had entered into various contracts with fishermen in June 1970. That cannot be cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure claimed as capital in nature in earlier years as being revenue on the ground of abandonment of project. In this regard we may observe that it is well settled commercial principle of accounting that the nature of expenditure is determined at the first instance when it is incurred and its nature cannot be altered on account of subsequent events. Once the expenditure has been classified as capital in nature, it cannot partake the character of revenue on account of supervening circumstances. 17. Learned Counsel for the assessee has referred to the decision of the ITAT in the case of Rajesh Khana (supra). In this case the facts were that the assessee was a film producer and there was no dispute about the fact that the film Police ke Peeche Police was abandoned during the previous year relevant to the assessment year under consideration. Though the expenditure was incurred in two years, the entire expenditure was claimed as allowable in the year of abandonment relying on Rule 9A and Sub-clause 6(b) of the said rule. In this case, the expenditure was not classified as capital expenditure and films in the hands of the producer were to be treated as stock in trade and, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer's action of treating the interest income of Rs. 2,10,68,657/- as income from other sources instead of business income as claimed by the appellant. 2. Learned CIT(A) erred in confirming the Assessing Officer's disallowance of Rs. 2,01,349/- out of the business expenses claimed for the year and holding the same to be capital in nature. 21. The assessee has taken following addition grounds of appeal: The appellant, without prejudice to the main grounds of appeal in the alternative submits that (i) receipt of interest of Rs. 2,10,64,657/- should be treated as capital receipt on the basis of judicial pronouncements and (ii) even if the income is held as income under the head other sources expenses should have been allowed Under Section 57(iii) by reason of close nexus between income and expenditure. 22. Having heard both the sides, we admit the additional ground being purely legal in nature and not requiring fresh scrutiny of facts. 23. First of all, we will consider the additional ground raised by the assessee because the findings in regard to this issue will have bearing on the grounds raised by the assessee. The security deposit had been give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee as in revenue field and has taxed under the head income from other sources . However, the assessee's contention is that the interest earned on the security deposit given in pursuance of the terms of the tender was in capital field. For this proposition, Learned Counsel has relied on the decision in the case of Bokaro Steel (supra). In this case, money was borrowed by a newly started company which was in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money, admittedly, could be capitalized and added to the cot of fixed assets created as a result of such expenditure. The Hon'ble Supreme Court held that by the same reasoning if the assessee receives any amount which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These were receipts of capital nature and could not be taxed as income. The Hon'ble Supreme Court in the case Bokaro steel (supra) also considered the decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra) and held that the said decision was not applicable because in ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
