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M/s Prayagraj Power Generation Co. Ltd. Versus Income Tax Officer, Range-V (2) , Lucknow

2016 (3) TMI 924 - ITAT LUCKNOW

Interest accruing on FDRs treated as income from other sources - commencement of business - Held that:- In the facts of the present case, where the entire funds available with the assessee company is in respect of the business undertaking being set up by the assessee company, previous year will start only after the setting up of the business undertaking and not before that and the interest income from the FD is not an independent source of income de horse the business undertaking because the ear .....

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om business but it cannot be said that interest income is a separate and new source of income de horse the business undertaking and therefore, the previous year in respect of interest income starts on the date of purchase of FD. In our considered opinion, on the date of purchase of FD, no new source of income has come into existence because in our considered opinion, the source of income is business undertaking and therefore, the requirement of starting of previous year in the facts of the prese .....

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undertaking which was not set up, interest income earned by the assessee till 31/03/2011 cannot be brought to tax till the assessment year 2011-12 because the business was not set up and therefore, previous year has not commenced. We, therefore, delete the addition made by the Assessing Officer and confirmed by CIT(A) and hold that such interest income should be reduced from the cost of project instead of taxing it as an income from other sources. - Decided in favour of assessee - ITA No. 625 & .....

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he sake of convenience. 2. The grounds raised by the assessee in I.T.A. No.625/Lkw/2013 for assessment year 2010-11 are as under: That the learned CIT (Appeals) has erred in upholding the assessment of interest of ₹ 56,05,335 accruing on FDRs as income from other sources, not appreciating that 1) The appellant is implementing a large-value power project and its entire capital including borrowed funds is for purposes of implementation of the said project. 2) The appellant has no surplus fun .....

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[1999] 236 ITR 315 (SC) and followed in Indian Oil Panipat Power Consortium Ltd v. ITO 315 ITR 255 (Del) and not by the rule in Tuticorin Alkali Chemicals [1997] 227 ITR 172 (S.C.) followed in CIT v. Indo Gulf Fertiliser and Chemicals Corporation Ltd. [2006] 280 ITR 621 (All). 3. The grounds raised by the assessee in I.T.A. No.626/Lkw/2013 for assessment year 2011-12 are identical with difference in amount only. In this year, the amount involved is ₹ 2,83,20,702/-. 4. It was submitted by .....

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d in [1998] 234 ITR 412 (SC) and CIT vs. Autokast Ltd. as reported in [2001] 248 ITR 410. He submitted that in all these judgments, the issue involved was as to whether the interest income is taxable as income from other sources or is to be adjusted against cost of project but this aspect was not at all under consideration in these judgments as to whether the business was set up or not and previous year as commenced or not. Thereafter, he submitted that as per the proviso to section 3 of I.T. Ac .....

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up and then only the previous year will start and unless the previous year has started, the income of an assessee is not taxable. Thereafter, regarding this contention that when it can be said that a business has been set up, he placed reliance on a judgment of Hon'ble Apex Court rendered in the case of Commissioner of Wealth-tax vs. Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478 (SC). He also placed reliance on a judgment of Hon'ble Delhi High Court rendered in the case of CIT vs .....

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usiness is attained. He submitted that in the facts of the present case and as per this judgment of Hon'ble Delhi High Court, it cannot be said that the assessee s business was set up and therefore, the previous year of the assessee has not started and therefore, charging section i.e. section 4 is not attracted. He also placed reliance on another judgment of Hon'ble Delhi High Court rendered in the case of Omniglobe Information Tech India P. Ltd. vs. CIT [2014] 369 ITR 001, copy availabl .....

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per this judgment also, it cannot be said that in the present case, the unit of the assessee was set up. He submitted that therefore, charging section is not attracted in the present case as per this judgment also. 5. Learned D. R. of the Revenue submitted that the issue in the present case is covered against the assessee by the judgment of Hon'ble Jurisdictional High Court in the case of CIT vs. Indo Gulf Fertiliser and Chemicals Corporation Ltd. as reported in [2006] 280 ITR 621 (All). 6. .....

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company received certain loans from financial institutions and due to certain unexpected delay, the amount of loan received remained lying with the bank and the company managed to get some interest from the bank. The Assessing Officer taxed the interest received as income from other sources. When the matter reached to the Tribunal, it was held by the Tribunal in that case that such receipt of interest plus misc. receipts were not exigible to tax as income from other sources but were only receipt .....

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cost of project. One more issue was raised before Hon'ble Allahabad High Court as to whether interest income can be set off against interest payable on borrowed funds but this was not a contention raised in that case as to whether the previous year has started or not and therefore, in our considered opinion, when this issue is raised before us that in the present case, previous year has not started because the unit is not yet set up, we have to decide that aspect of the issue first and the i .....

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he relevant sections of I.T. Act i.e. section 3 & 4, which are as under: Section 3: For the purposes of this Act, "previous year" means the financial year immediately preceding the assessment year: 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 or, as the case may be, the date o .....

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re by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly. (2) In respect of income chargeable under sub-section(1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act. 6.1.1 As per the provisions of section 4 of The Income Tax Act reproduced above, Income Tax is chargeable in respect of income of t .....

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t to the business or source of income also. In our considered opinion, the previous year is to be ascertained with respect to the assessee but for doing so, we have to find out that whether that assessee has set up a business or a source of income has newly come into existence if that assessee is not already having a business already set up or a source of income already in existence. Even if an assessee is already having a previous year in respect of a business already set up prior to start of t .....

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e when new source of income has come into existence. It means, for the same assessee, there may be a previous year from 1st April in respect of an existing business or existing source of income and for a new business or for a new source of income which has come into existence in that financial year then qua such new business or new source of income, the previous year will start from the date of setting up of the new business or from the date when new source of income has come into existence. In .....

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as a deduction from the date of the start of the previous year in relation to that business or source of income. If the previous year in relation to new business or new source of income has started, and expenses are incurred and there is no generation of income, loss to the extent of expenses will be allowable which can be set off against any other income of that year and if it cannot be so set off in full or in part then such loss which could not be so set off can be carried forward as per law. .....

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s carried on in the relevant previous year which is the financial year 1946-47, but the important question that has got to be considered is from which date are the expenses of this business to be considered permissible deductions and for that purpose the section that we have got to look to is Section 2(11) and that section defines the "previous year" and for the purpose of a business the previous year begins from the date of the setting up of the business. Therefore it is only after th .....

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of the business in the language of Section 2(11) and not expenses connected with the commencement of the business. Mr. Palkhiwalla says that if that be the correct approach, then the Tribunal has misdirected itself in considering the commencement of the business and not the setting up of the business. Let us try and understand whether there is any difference between the two expressions "setting up" and "commenced" and if so, what is the difference. It has often been said tha .....

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ue(1). In that case the assessee company was incorporated on the 20th of June, 1913, and between that date and the 6th of October, 1913, the directors arranged for the erection of works and the purchase of plant and machinery, and entered into agreements relating to the purchase of products to be used in the business and to the sale of finished products. On the 6th of October, 1913, the installation of plant and machinery being completed, the company commenced to receive raw materials for the pu .....

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ng the view of the Commissioners, that he business of the company had commenced on the 6th of October, 1913. Now, this is indeed a very strong case on facts in support of the Commissioner, because the view taken by Mr. Justice Rowlatt is that everything that had been done by the company before the installation of the plant and machinery was completed was preparatory to the commencement of the business and it was only when the company actually started receiving raw materials for the purpose of ma .....

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ve Para of this judgment, it comes out that as per this judgment of Hon ble Bombay High Court, section 2 (11) of 1922 Act defines the term Previous year and this section is Para Materia with the definition of this term as per section 3 of 1961 Act. It is also held as per this judgment that for the purpose of a business, previous year begins from the date of setting up of the business and therefore, any expenses incurred prior to setting up of business is not allowable. We draw inference that on .....

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financial year means the period beginning with the date of the setting up of the business and ending with the financial year and it is only if expenditure is incurred by an assessee during the previous year that he can claim it as a revenue deduction in computing the trading profits of the business. Here, in the present case the assessee claimed to deduct an aggregate sum of ₹ 13,770 as revenue expenditure in the assessment for the assessment year 1966- 67 and this revenue expenditure cou .....

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he new business for the assessment year 1966-67 would be the period from the date of the setting up of the business and ending on 31st March, 1966, and the revenue expenditure incurred during this period would be a permissible deduction, provided the other conditions of section 37 were satisfied. But if it was set up subsequent to 31st March, 1966, the revenue expenditure incurred prior to that date would not be a permissible deduction in the assessment of the assessee for the assessment year 19 .....

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the present case or not. This is not a case of the revenue that any business was already set up prior to 01.04.2009 i.e. the start of the previous year relevant to Assessment Year 2010 - 11 or that any source of income was in existence till that point of time. The audited accounts of the assessee company for the year ending on 31/03/2010 relevant to assessment year 2010-11 is available on pages 12- 30 of the paper book. As per the profit & loss account, there is no income and there is no exp .....

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t is ₹ 0.04 Crores on account of other currents assets and ₹ 674.96 Crores on account of loans and advance. Hence, it is seen that only land was acquired and advances are given for plant & machinery etc. and under these facts, it cannot be said that the business was set up. Similarly, the balance sheet for the year ending as on 31/03/2011 is available on pages 64 to 82 of the paper book and as per the same also, there is share capital, share application money and secured loans to .....

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lace on foot or to establish and it has been explained that where a business is established and is ready to commence business then it can be said that the business is set up but before it is ready to commence business, it is not set up. In the present case, the business of the assessee is generation of power and therefore, the business in the present case is not set up at least up to 31/03/2011 because it is not the case of the Revenue that by this date, the assessee company was ready to commenc .....

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as per the judgment of Hon'ble Bombay High Court cited above, it is clear that in the present case, the business was not set up at least up to 31/03/2011 and therefore, the previous year in respect of business undertaking of generation of power was not started till that date. 7.1 Now we deal with the second aspect of the matter because we find that as per the definition of previous year in section 3 of the I.T. Act as reproduced above, there is a previous year from the date on which source o .....

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le partly under one head and partly under a different head and in another case, there may be more than one source of income but all giving rise to income which are taxable under one head only. Source of income in the present case is the industrial undertaking for generation of power being set up by the assessee and all the funds, which are available with the assessee at its disposal are arranged by the assessee for that purpose. A chart showing cost of project and means of finance is available o .....

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unt was left with bank in current account. Hence, it is seen that the entire funds available with the assessee company are in respect of this project being set up by the assessee company being generation of power and FD income is earned by temporary deployment of this fund of this business undertaking and not of any surplus funds not needed for this business undertaking and therefore, source of income is this project only. The source of income and head of income should not be mixed up because bo .....

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any income on sale of such investment will be taxable under the head income from capital gain but source of income for all these income taxable under these three different heads is same i.e. business undertaking. Hence, in the facts of the present case, where the entire funds available with the assessee company is in respect of the business undertaking being set up by the assessee company, previous year will start only after the setting up of the business undertaking and not before that and the .....

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