TMI Blog2017 (9) TMI 656X X X X Extracts X X X X X X X X Extracts X X X X ..... ty in order of CIT(A) - Appeal of revenue is dismissed. Claim of administrative expenses u/s 37 - chargeability of the interest income under the head ‘Income from business’ - Held That:- While disposing off ground no.1, we confirmed the order of the CIT(A) that the business was set up during the year in January 2008. Therefore the expenses incurred after the set up of the business are revenue expenses - CIT(A) is correct in allowing all these expenses. Similarly, the interest income,the interest earned on Fixed Deposit be assessed as business income out the total interest earned by the assessee - Thus, this ground is also dismissed. Deletion of disallowance u/14A - interest expenses - interest corelated to acquisition of fixed assets and capital work-in-progress and is capitalized - Held That:- For the purpose of disallowance u/s. 14A read with Rule 8D(2)(ii) interest which is directly attributable to acquisition of fixed assets or capital work-in-progress,cannot be disallowed as the same cannot to attributable to any particular income or receipt. No illegality in order of CIT(A) - Appeal by revenue dismissed - ITA No. 4692/Mum/2014 And ITA No. 372/Mum/2015 - - - Dated:- 31- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income against which it set off expenditure amounting to ₹ 16,15,55,733/- u/s. 37(1) of the Act. The bank interest earned by the assessee amounting to ₹ 6,38,28,258/- on investment of surplus funds from share capital and margin money for acquisition of fixed assets was treated as income from other sources and Short Term Capital Gains of ₹ 40,25,895/- on sale of mutual funds was offered to tax. The assessment was completed on total income of ₹ 27,71,90,000/- but the Assessing Officer took a view that the business had not commenced during the year and, therefore, disallowed all expenses u/s. 37 of the Income tax Act as claimed by the assessee. When the matter went before the CIT(A), the CIT(A) took the view that business had been set up during the year. 5. The learned AR before us submitted the following chart showing chronology of events (along with supporting in the form of paper book) of the ship building project carried out by the assessee: Sr. No. Date Particulars 1 October 17, 1997 Company Incorporated (page 34) 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 Undertaking for Special Economic Zone Submitted to the Development Commisisoner of Kandla Special Economic Zone. 21. January 08, 2008 Permission to setup SEZ from the Joint development Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the project unless it has certain orders in place. The assessee 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 30.11.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant test, in our opinion, for allowing expenditure is not when the 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 starte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al assistance, got various permissions for the construction of ship yard 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 ₹ 159.44 lacs; Direct expenses 1785.44 lacs; Employee cost ₹ 502.30 lacs; Operations Other Exps. ₹ 1085.96 lacs; Financial expenses ₹ 7.68 lacs and Depreciation ₹ 17.71 lacs. It was further noted that the assessee had capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent amount of the bank guarantee furnished. The assessee vide its letter dated 21.12.2010 furnished to the Assessing Officer complete corelation of the FDs kept for bank guarantee and the consequential receipt of interest on FDs. In view of the decision of the jurisdictional High Court 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... day of the previous year. i) Nil = Rs. Nil ii) 499797672 X 1225700000 = ₹ 3,56,54,745/- 17181500000 iii) Average Investment ₹ 1225700000 @ 0.50% = ₹ 61,28,500/- Total ii) + iii) = Rs.4,17,83,245/- Since the entire expenditure was capitalized, the Assessing Officer was of the view that the disallowance will only affect the work-in-progress for the purpose of taxable income 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 ₹ 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 ₹ 49,97,97,672/-. During the year, the assessee has n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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