TMI Blog2011 (7) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... s pre-operative expenses - Decided in favour of the revenue - ITA No.950/2008 - - - Dated:- 11-7-2011 - MR. JUSTICE A.K. SIKRI, MR. JUSTICE M.L. MEHTA, JJ. Mr. Sanjeev Sabharwal, Sr. Standing Counsel for the Revenue. Ms. Devashish Bharuka, Advocate for the Assessee. M.L. MEHTA, J. 1. This is an appeal under Section 260A of the Income Tax Act (hereinafter referred to as the Act for short) against order dated 21st September 2007 of the Income Tax Appellate Tribunal ( the Tribunal for short). This appeal was admitted on the following substantial questions of law: (a) Whether the ITAT was correct in law in holding that the reassessment order was invalidly made for assessment years 1999-2000 and 2000-2001 as no notice under Section 143(2) was issued? (b) Whether the ITAT was correct in law in holding that the interest income on FDRs is not to be treated as income from other sources and is required to be reduced from pre-production expenses? 2. Though the impugned order is related to Assessment Years (henceforth AY for short) 1999-2000 to 2003-2004, but the challenge is in respect to the order relating to AY 1999-2000 and 2000-2001. The facts leadin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded by the assessee that since the investing company is not a resident of India, it will be difficult for the assessee to obtain remittance again. In case the investing company is allowed to take the funds out of India, then all the legal proceedings now initiated by the assessee against the MPSEB will be jeopardized and the assessee will not be able to make the payment of security deposit in time. It was also pleaded by the assessee that it being a statutory body is required to incur various expenses to comply with the statutory requirements, but its own capital is too inadequate to meet these expenses and the promoters have also not contributed, after the failure of the bid with MPSEB. On 25.09.1998, the arbitrator passed the following directions: On the due consideration of the submissions by the claimant and respondent, I find that the claims of the parties are justified in their own right. I fully agree with the claimant that if the respondent is permitted to take away the remittance sum of Rs.6.77 crores out of India then its claim raised under the present proceedings shall be frustrated. Further the claimant is still pursuing legal proceeding shall be frustrated. Furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o allow the defendant No.1 to operate its all other bank accounts including the fixed deposit receipts etc. except the aforesaid seven fixed deposit receipts bearing No. 981830 to 981836. 5. It is in this manner that 07 Fixed Deposits of Rs.1.00 crore each were maintained by the assessee. It may be noted here that in the mean time for making assessment for the AY 2001-2002, the interest income earned by the assessee from FDRs and bank deposit were treated as Income from Other Sources and was allowed to be adjusted against the pre-operative expenses and therefore, reassessment proceedings were initiated in respect of AY 1999-2000 AY 2000-2001. Undisputedly, the assessee was at the stage of pre-commencement of its business when the amounts as mentioned above came to be invested in the FDs. For the AY 1999-2000, the assessee earned interest amounting to Rs.93,81,222/- out of which it had received interest of Rs.48,65,812/- from MPSEB on security deposit of Rs.5.22 crore. The balance amount of interest of Rs.45,15,408/- was earned by the assessee on FDs of Rs.7.00 crore. 6. The assessee filed Return of Income (ITR) on 28.12.1999 under Section 143(1) of the Act. Subsequentl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified and the same remained restricted to FDRs of Rs.7.00 crore. The operative part of the order passed by this Court on 09.12.1998 has already been reproduced above in para No.4. We note that Rs.10.00 crore was invested by the assessee in FDRs on 28.09.1998 after MPSEB returned the security money and thus the investment in FDRs is in no way linked with the power project. The AO also observed that these funds were surplus with the assessee at that stage and its business activities had not yet commenced and thus investment in FDRs was neither connected with nor was it incidental to setting up of a power project. 7. It is also gathered from the impugned order that the AR of the assessee informed the Tribunal that vide order dated 20.02.2002 this Court passed a decree in the aforesaid suit vide which assessee was permitted encashment of 07 FDRs and these FDRs were actually encashed on 08.07.2002 and the amounts were repatriated to the investing company on 11.07.2002. 8. The AO accordingly assessed the interest income of Rs.45,15,408/- earned from FDs under the head Income from Other Sources . Before the CIT(A) additional ground was taken by the assessee challenging the validi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Sources . He accordingly issued notice under Section 148 of the Act. It is settled law that the intimation with regard to assessment made under Section 143 (1) (a) of the Act is not an assessment. A reference in this regard can also be made to the decision in Mahanagar Telephone Nigam Ltd. (supra). 11. As per explanation 2(b) to Section 147 of the Act, where a return income is furnished, but no assessment has been made and it is noticed by the AO that an assessee had understated the income, it will be deemed to be a case where income chargeable to tax had escaped assessment. In the case of Ranchi Club Vs. CIT, 214 ITR 643 (Patna) it was held in a case where only intimation was sent, notice under Section 148 of the Act could be issued in terms of Explanation 2 (b) to Section 147 of the Act. The case of Mahanagar Telephone Nigam Ltd. (supra) confirmed that So long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate to proceed under Section 147 and failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation under Section 143(1) had been issued. 12. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whereas share application money had been received in August 98. Therefore, till the passing of the order by this Court on 09.12.1998, all surplus funds lying with the assessee were invested in the FDs. It was after the return of Rs.6.00 crore on 19.08.98 and Rs.5.65 crore on 11.09.1998 by MPSEB due to delay in deposit of security money, that the assessee got issued ten FDs of Rs.1.00 crore each on 28.09.1998. This was in fact investment made by the assessee to earn interest from the surplus amount lying with it till the resolution of the issues with the investing company and MPSEB. When the MPSEB had already rejected the bid, the assessee seemed to be fighting a lost battle. The investment in FDs in such circumstances could not be said to be anyway linked with the power project. At that stage the funds were lying surplus with the assessee and its business activities had not yet commenced. Thus, the investment in FD cannot be said to be connected with or incidental to setting up a power project. 16. In the case of Tuticorn Alkali Chemicals Fertilizer (supra), the assessee company was incorporated on 03.12.1971 for the purpose of manufacturing heavy chemicals such as ammonium c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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