TMI Blog2019 (8) TMI 551X X X X Extracts X X X X X X X X Extracts X X X X ..... /2016, ITA No. 5190/Mum/2016 - - - Dated:- 16-7-2019 - Shri Pawan Singh Judicial Member And Shri M Balaganesh Accountant Member For the Appellant : Shri J.D. Mistry Sr Advocate with Niraj Sheth Advocate And Dhrumil Shah CA For the Respondent : Shri Satish Rajore Sr DR ORDER PER PAWAN SINGH, AM : These two appeals by the assessee are directed against the order of Commissioner of Income-tax (Appeals)-6, Mumbai dated 15-06-2016 31.05.2016 pertaining to AY 2012-13. Appeal in ITA No. 5189/Mum/2016 relates to assessment order passed under section 143(3)dated 26.03.2015, however, ITA No. 5190/Mum/2016 arising against the order passed on the rectification application filed under section 154 of the Act. In both the appeals the assessee has raised common grounds of appeals, therefore, both the appeals are heard and are decided by common order. The grounds of appeal taken by the assessee in ITA No 5189/Mum/2015 read as follows:- 1: 0 Re: Interest on fixed deposits of ₹ 15,68,804/- (mentioned in the assessment Order as Rs. 75.75.525/-) reduced from the capital-work-in-progress considered as taxable: 1 : I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. CIT (A), the assessee is before us, in this appeal. 3. We have heard the submissions of the ld. authorised representatives (AR) for the assessee and the learned departmental representatives (DR) for the revenue and gone through the orders of the lower authorities. Ground No. 1 relates to addition on account of addition on account of interest on fixed deposit reduced from work in progress. The Ld. Counsels appearing for the assessee, at the outset, submitted that this issues is covered in favour of the assessee by the decisions of the Tribunal in assessee s group case in Solarfield Energy Two Pvt Ltd in ITA No.5076/Mum/2016 dated 11-09-2017 for Assessment Year (AY) 2012-13. The ld. AR for the assessee submits that the revenue has accepted the decision of the Tribunal and has not file appeal before Bombay High Court. 4. The Ld. DR for the revenue after going through the contents of the decision in Solarfield Energy Two Pvt Ltd (supra), though principally agreed that identical ground of appeal was decided by the Tribunal in assessee s group case in Solarfield Energy Two Pvt Ltd (supra). The ld. DR for the revenue submits that he supports the order of the lower a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or developing the 20 MW Solar Photo Voltaic Power Plant. These facts clearly demonstrate, the funds required for setting up of power project was temporarily parked in fixed deposit, thereby, indicating that the interest earned on such fixed deposit has an immediate and proximate nexus with the setting-up of power project. Notably, the Departmental Authorities have rejected assessee's claim that the interest earned is a capital receipt relying upon the decision of the Hon'ble Supreme Court in Tuticorin Alkalj^ Chemicals and Fertilisers Ltd. (supra). On a careful reading of the said judgment, we are of the view that the ratio laid down therein will not apply to the facts of the present case. In the case of Tuticoj1n_ Alkali Chemicals and Fertilisers Ltd. (supra), the assessee has borrowed funds for setting up of a plant. However, the surplus fund available out of the borrowed fund was invested in fixed deposit and assessee earned interest. The Department held that the interest earned from fixed deposit on investment of surplus fund during the preconstruction period is assessable as income from other sources. However, the Hon'ble Supreme Court in case of Bokaro St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orin Alkali Chemicals and Fertilisers Ltd. (supra) and reversed the order of the (earned Commissioner (Appeals), When the matter came up before the High Court, the High Court following the decision of the Hon'ble Supreme Court in Bokaro Steels Ltd. (supra) held that, since, the interest income was inextricably linked to the set-up of power project, it will be a capital receipt and will come to reduce the cost of the project and accordingly allowed assessee's claim. In our view, the ratio laid down in case of Bokaro Steels Ltd. (supra) and Indian Oil Panipat Power Consortium Ltd. (supra) are squarely applicable to the facts of the present case. Undisputedly, in case of assessee, the funds invested temporarily in the fixed deposit were for the purpose of setting-up of the power project. Therefore, the interest earned is inextricably linked with the power project The other decisions relied upon by the learned Sr. Counsel including the decision in case of CIT v/s Karnal Cooperative Sugar Mills Ltd. (supra) express similar view. That being the case, applying the ratio laid down in the decisions referred to above, we hold that the interest earned on fixed deposit is capital recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he plant. In the event of failure the assesse has a right to reject the plant or ask the contractor to correct it. The purpose to carry out test was to ascertain whether the facility (i.e. Solar Plant) achieves the target performance- in accordance with the term of the contract. During the test trial the plant was connected with Gujarat Power Grid on 4th March 2012. These tests were pending to be completed as on 31.03.2012. The assessee eventually capitalised the solar power in its books of accounts on 9th July 2012 after taking the plant from EPC Contractor on completion of work and necessary performance of tests in accordance with specifications of the contract. Accordingly it was canvassed that the assessee has not started their business in that year. The contention of the assessee was gain not acted by ld CIT(A) holding that the income received by the assessee before the commencement of business has to be assessed as income from other sources and it cannot be held as non-taxable on the ground that it would go to reduce the capital work in progress. We have noted that on similar grounds of appeal the coordinate bench of Tribunal in Eco Axis System Pvt Ltd (supra) pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome from business which is totally untenable and inconsistent with the facts of the case since it was done at the behest of the Holdia Dock Complex authorities in order to establish the stability of the berth. It is an admitted fact that even during a period of test runs and experimentation, a plant may be engaged in actual production, but until the test runs are completed and the plant is properly adjusted on the basis thereof, it cannot be said to be ready for commercial production . The expression Commercial Production'' refers to production in commercially feasible quantities and in a commercially practicable manner. Further, it is a correct and accepted procedure to capitalize all expenses incurred during construction period and in connection with the process of start-up and commissioning of the plant. In fact, such expenses would be incurred in order to bring the plant up to the stage at which it can commence commercial production. Thus, it is correct to capitalize the expenditure incurred on start-up and commissioning of the plant The expenditure so incurred, therefore, should be capitalized in the same way as other indirect construction expenditure. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the event of any flaw in the system. So it is clear that the purpose of the trial run was to check the flaw in the system and not to begin the commercial operations. In the instant case the trial run was successfully completed on dated 13/1/2004 without any flaw in the system. Therefore the commercial operation began immediately thereafter on dated 15/1/2004. Now the question here arises that in case of any flaw caught during the trial run then in that event certainly the commercial operation shall only begin after the removal of the flaw. In view of this the income generated during trial run shall certainly be adjusted against the pre-operative expenses. Having said this we are inclined to reverse the order of the Id. CIT(A) and direct the lower authorities to adjust the trial run income from preoperative expenses of the assessee. We are relying on the judgment of the Delhi High Court in the case of Commissioner of Income Tax Vs. Nestor Pharmaceutical Limited 322 TTR 631 where it was held that: The assessee was in the business of manufacture of pharmaceutical formulation in bulk drugs and supplying drugs to the Government hospitals, instituti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar that there was only a trial production in the assessment year 1998-99 and commercial and full-fledged production commenced only in the year 1999-2000. The order of the Tribunal allowing the benefit of deduction under section 80-IA/80IB of the Act from the assessment year 1999-2000 treating it as the initial year of production to the assessment year 2003-04 was correct in law. The Tribunal held that the assessee had not only produced the goods for trial purposes but there was, in fact, sale of one water cooler and air-conditioner in the assessment year 1998-99 relevant to the previous year/financial year 1997-98. The explanation of the assessee was that this was done to file the registration under the Excise Act as well as the Sales tax Act. The Tribunal held that the sale of one water cooler and one air-conditioner as on March 31, 1998, for the purpose of obtaining registration of excise and sales tax was manufacture within the meaning of section 80-IA, On appeal: Held, that the assessee had sold one water cooler and one airconditioner before April, 1998. Thus, the stage of trial production had been crossed and the assessee had come out with the final salea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f sterile penicillin, the only product that could be sold in the market, in August, 1955. On the question when the manufacture of sterile penicillin had started and whether the assessee was entitled to the exemption under section 15C for the assessment year 1960-61: Held, on the facts, that product/on of articles by the assessee had begun only in August, 1955. The benefit of the exemption under section 15C arose to the assessee for the first time in the assessment year 1956-57 and, therefore, it was entitled to the exempt/on under sect/on 15C for the assessment year 1960-61 also. 10. We also further observe that the facts of the case law cited by the AO i.e. Tutikorin Alkali Chemicals Fertilizers Ltd.(supra) for treating the receipts of trial run as bus/ness receipt are different from the facts of the instant case. The Apex Court in the said case has treated the interest income on the surplus fund as income from other sources because there was no nexus between the activity of the assessee and interest income. The assessee has invested idle fund for short period of time before the commencement of the business. There was no connection between inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... production of the plant, would lead to a distorted picture of the accounts of M/s. GSFC, In these circumstances, especially when Revenue have not placed before us any material contrary to the aforesaid findings of the id. CIT(A) in so far as addition of ₹ 10,99,25,676 is concerned nor pointed out any contrary decision, we have no hesitation in upholding the findings of the Id. CIT(A) while relying upon the decision of the Hon'ble Apex Court in Bokaro Steel Ltd.. Therefore, ground no. 1 in the appeal of the Revenue is dismissed. Besides, the assessee has also capitalized out of the Capital Work-in progress account in the next year as is apparent from the tax audit report filed by the assessee before us. Under these circumstances, we are not in agreement with the conclusion drawn by the CIT(A) that the receipts from sale of 3 Alygn Machines amounting to ? 59,20,8497- and rent of f 64,200/- received during the trial/demo run is revenue in nature. Accordingly, we set aside the order of the CIT(A) and direct the Assessing Officer to a/low deduction of the said receipts by way sale of machines and rent from the Product Development Expenditure Account. We ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y 2004-05 also considered an identical issue and held as under:- 8. We have heard rival contentions of both the parties and perused the materials available on record. The Id. AR submitted the paper book which is running from pages 1 to 113 and highlighted that to make the berth ready for commercial operations the assessee was to undertake the responsibility of completing the work in accordance to the agreement of building the berth 4A. As per the agreement trial run was the pre-condition before the start of the commercial operation. The assessee treated the trial run of vessels as 'preoperative handling1 of the plant and income generated from such preoperative handling has been treated as ' preoperative income*. In the books 'of account of the assessee for the previous year relevant to the assessment year under dispute, such preoperative income has been set off against the preoperative expenses of ₹ 3,17,02,6327-, which consisted of berth hire charges in the sum of ₹ 16,84,5627- and ₹ 3,00,18,0707- being cargo handling charges and the balance amount was capitalized to be apportioned to fixed asset. The specious finding of the AO that loadi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the deposit of money was directly linked with the purchase of plant and machinery. Hence, any income earned on such deposits was incidental to the acquisition of assessee for setting up the plant and machinery. Thus, the interest was a capital receipt which would go to reduce the cost of the asset and Ld AR relied on the decision of Hon'ble Supreme Court in the case of CIT v.Karnal Co-operative Sugar Mills Ltd (2000) 243 ITR 2 (SC) and C.I.T. Vs. Bokaro Steel Limited (1999)~236 ITR 315JSCI. 9. From the aforesaid discussion, we find that the assessee has made some income during the period of trial run and the same was adjusted against the pre-operative expenses. The AO rejected the working of assessee and held that the income generated during the trial run income period cannot be adjusted against the preoperative expenses and the same was confirmed by the Ld. CIT(A). However, we observe that it was the condition in the agreement that the trial run has to be carried out before the beginning of commercial operation. The Id. AR drew our attention on pages 17,18,19,20,21 of the Paper Book where the requirement for the trial run was requested before the begi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtended to the assessee. It further held that as on March 20,1998, only trial production started which was different from commercial production and the benefit of that section should be allowed in the year in which commercial production started, i.e. in the assessment year 1999-2000 and, therefore, would be extendable up to the assessment year 2003-04. On appeal ; Held, that the initial assessment year, for the purpose of section 80-IA, was the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things . The trial production began on March 20, 1998, as per the details given in the audit report furnished by the assessee along with its returns of income for the assessment years 2003-04 and 2004-05. There was no dispute that the first sale was made on April 23,1998, which would be the period relevant to the assessment year 1999-2000. Merely because some closing stock was shown as on March 31, 1998, that would not lead to the conclusion that there was commercial production as well. Even for the purpose of trial production material would be needed and there would be production which would result in st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct for which the section was enacted. The provision was enacted with a view to encouraging the establishment of new industrial undertakings and the object was sought to be achieved by granting exemption from tax on profits derived from such undertakings during the first five years. The object of the section presupposes that profits are capable of being earned. Hence, until an assessee reaches a stage where it is in a position to decide that a final product which can be ultimately sold in the market can be manufactured it cannot be said to have started manufacture of the articles. If it becomes necessary for an assessee to produce a trial product at an earlier stage to verify whether it can be used ultimately in the manufacture of the final article, the commencement of operation for the manufacture of the trial product would not constitute commencement of manufacture of articles for the purposes of section 15C. The assessee-company undertook a project for the manufacture of penicillin. It started actual operations for the manufacture of crude penicillin in December 1954. The first samples of crude penicillin were required to be sent to U.S.A. and U.K. for obtaining certif ..... X X X X Extracts X X X X X X X X Extracts X X X X
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