M/S. WHISTLING WOODS INTERNATIONAL LTD, MUMBAI V. THE ITO 9(3)(4), MUMBAI

ITA 1394/MUM/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1483 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 3 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-06-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 03-03-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 26-02-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Business income; Depreciation; Business expenditure; Source of fund; Capital receipt; Revised return; Revenue expenditure; Capital expenditure
• Section: 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH G MUMBAI BEFORE SHRI T.R.SOOD, AM & SHRI V.D.RAO, JM & I.T.A.NOS.4662/MUM/2007 & 1394/MUM/2008 ASSESSMENT YRS. 2003-04 & 2004-05 WHISTLING WOODS INTERNATIONAL LTD., FILM CITY COMPLEX, BEHIND ADLABS, GOREGAON [EAST], MUMBAI 400 065. PAN NO.AAACW 4307 R VS. INCOME TAX OFFICER 9 (3)(4), MUMBAI (APPELLANT) (RESPONDENT) ASSESSEE BY : MR. K. SHIVRAM. REVENUE BY : MR. MOHD. USMAN. O R D E R PER T.R.SOOD, AM: AS THESE APPEALS PERTAIN TO THE SAME ASSESSEE, INV OLVING COMMON ISSUES AND WERE HEARD TOGETHER, THEY ARE BEI NG DISPOSED OF BY WAY OF THIS CONSOLIDATED ORDER. 2. IN BOTH THESE APPEALS, THE ASSESSEE HAS FILED RE VISED GROUNDS RAISING IDENTICAL ISSUES. THE GROUNDS RAISED FOR TH E A.Y 2003-04 ARE AS UNDER: 1. THE LEARNED CIT[A] HAS ERRED IN CONFIRMING THE ASSESSING OFFICERS FINDINGS THAT APPELLANT HAS NOT COMMENCED BUSINESS AND HENCE THERE CANNOT BE ANY QUESTION OF ASSESSMEN T OF ITS PROFITS AND GAINS OF BUSINESS FOR THE REASONS STATE D IN THE ORDER. 2. THE LEARNED CIT[A] HAS ERRED IN FOLLOWING THE JUDGMENT OF M/S TUTICORIN ALKALI CHEMICALS & FERTILISERS LTD. V/S. CIT [227 ITR 172] AND HAS FURTHER ERRED IN NOT APPRECIATING AN F OLLOWING OR DISCUSSING THE JUDGMENT OF BOKARO STEEL LTD. [236 I TR 315] WHICH IS MORE APPROPRIATE AND ALSO HAS NOT TAKEN CO GNIZE OF JUDGMENT IN CASE OF M/S ACUPRINT SYSTEM LTD. DECIDE D BY HON. TRIBUNAL D BENCH, MUMBAI AND HAS THUS PASSED AN O RDER WHICH IS DEVOID OF JUST, EQUITY & FAIRPLAY. 3. THE LEARNED CIT[A] HAS ERRED IN CONCLUDING THAT WHILE TREATING THE INCOME M/S ACUPRINT SYSTEM LTD. DECIDED BY HON. TRIBUNAL D BENCH, MUMBAI INCOME FROM OTHER SOURCES EXPEN SES OF REVENUE NATURE INCURRED BY THE APPELLANT SHOULD ONL Y BE 2 ALLOWED U/S.57 OF THE INCOME TAX ACT., 1961 AND NOT M/S ACUPRINT SYSTEM LTD. DECIDED BY HON. TRIBUNAL D B ENCH, MUMBAI BUSINESS EXPENDITURE FOR THE REASONS STATED IN THE ORDER. 3. GROUNDS OF APPEAL RAISED FOR THE A.Y 2004-05 AR E AS UNDER: 1. THE LEARNED CIT[A] HAS ERRED IN CONFIRMING THE ASSESSING OFFICERS FINDINGS THAT APPELLANT HAS NOT COMMENCED BUSINESS AND HENCE THERE CANNOT BE ANY QUESTION OF ASSESSMEN T OF ITS PROFITS AND GAINS OF BUSINESS FOR THE REASONS STATE D IN THE ORDER. 2. THE LEARNED CIT[A] HAS ERRED IN FOLLOWING THE JUDGMENT OF M/S TUTICORIN ALKALI CHEMICALS & FERTILISERS LTD. V/S. CIT [227 ITR 172] AND HAS FURTHER ERRED IN NOT APPRECIATING AN F OLLOWING OR DISCUSSING THE JUDGMENT OF BOKARO STEEL LTD. [236 I TR 315] WHICH IS MORE APPROPRIATE AND ALSO HAS NOT TAKEN CO GNIZE OF JUDGMENT IN CASE OF M/S ACUPRINT SYSTEM LTD. DECIDE D BY HON. TRIBUNAL D BENCH, MUMBAI AND HAS THUS PASSED AN O RDER WHICH IS DEVOID OF JUST, EQUITY & FAIRPLAY. 3. THE LEARNED CIT[A] HAS ERRED IN CONCLUDING THAT WHILE TREATING THE INCOME M/S ACUPRINT SYSTEM LTD. DECIDED BY HON. TRIBUNAL D BENCH, MUMBAI INCOME FROM OTHER SOURCES EXPEN SES OF REVENUE NATURE INCURRED BY THE APPELLANT SHOULD ONL Y BE ALLOWED U/S.57 OF THE INCOME TAX ACT., 1961 AND NOT M/S ACUPRINT SYSTEM LTD. DECIDED BY HON. TRIBUNAL D B ENCH, MUMBAI BUSINESS EXPENDITURE FOR THE REASONS STATED IN THE ORDER. 4. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY WAS INCORPORATED ON 10-1-2001. THE MAIN OBJECT OF THE C OMPANY WAS AS UNDER: TO ESTABLISH RESEARCH AND TRAINING INSTITUTE CUM I NTEGRATED STUDIO IN THE FIELD OF ENTERTAINMENT CAPABLE OF EDUCATING STU DENTS IN THE FIELD OF MOVIE, TELEFILMS, TALKSHOWS, DRAMAS, STAGE SHOWS, V IDEO, AUDIO VISUAL PROGRAMMES AND COMMUNICATION AND TO BUILD, CONSTRUC T, ERECT, IMPROVE, EQUIP, MAINTAIN, ALTER, ENLARGE, PURCHASE, HIRE OR OTHERWISE ACQUIRE OR PROVIDE ANY BUILDING, STUDIOS, WOODEN ST UDIOS, SHOOTING LOCATION, LABORATORIES, OFFICES, LIBRARIES, WORKSHO P TOOLS, IMPLEMENTS, APPARATUS, PLANT & MACHINERIES AND OTHER THINGS NEC ESSARY OR USEFUL FOR CARRYING OUT THE BUSINESS OF THE COMPANY. THE ASSESSEE FILED RETURN DECLARING NIL INCOME. IT WAS NOTICED THAT THE ASSESSEE HAD AUTHORISED CAPITAL OF RS.20 CRORES AND PAID UP SHARE CAPITAL WAS OF RS.10.10. CRORES. THERE WAS NO UNSEC URED LOAN AND, THEREFORE, TOTAL FUNDS AVAILABLE WITH THE ASSESSEE WERE FROM SHARE CAPITAL. A QUERY WAS RAISED REGARDING BUSINESS ACTI VITY OF THE ASSESSEE 3 AND IN RESPONSE TO THE SAME IT WAS SUBMITTED VIDE L ETTER DATED 16-6-2005 AS UNDER: THE COMPANY IS ESTABLISHING RESEARCH & TRAINING IN STITUTE-CUM- INTEGRATED STUDIO. THE PROJECT IS UNDER CONSTRUCTIO N THERE ARE NO OTHER ALLIED ACTIVITIES. 5. IT WAS FURTHER NOTICED BY THE AO THAT ASSESSEE H AD ENTERED INTO A CONTRACT FOR CONSTRUCTION OF THE INSTITUTE WITH M /S LARSEN & TOUBRO LTD. THE TOTAL EXPENDITURE ON THE PROJECT UPTO 31-3 -2003 WAS SHOWN AT RS.1,67,19,603/-. IT WAS NOTICED THAT FROM THIS EXP ENDITURE, A SUM OF RS.61,56,030/- WAS REDUCED FROM THE CAPITAL WORK-IN -PROGRESS. THE SUM OF RS.61,56,030/- CONSISTED OF THE FOLLOWING IT EMS: (I) INTEREST ON FIXED DEPOSITS RS. 2,51,537/- (II) INTEREST ON LOANS RS.59,04,493/- RS.61,56,030/- AFTER REDUCTION OF THIS EXPENDITURE, CAPITAL WORK-I N-PROGRESS WAS SHOWN AT RS.1,05,63,573/-. INTEREST ON LOAN WAS RECEIVED ON ACCOUNT OF LOANS GIVEN BY THE ASSESSEE COMPANY TO VARIOUS OTHER COMP ANIES AS WELL SHORT TERM DEPOSIT WITH BANK OUT OF THE PROCEEDS OF SHARE CAPITAL. AO WAS OF THE VIEW THAT SINCE ASSESSEE WAS, ADMITTEDLY , IN THE PROCESS OF SETTING UP OF TRAINING INSTITUTE DURING THE YEAR AN D, THEREFORE, INTEREST EARNED BY DEPLOYING SURPLUS FUNDS RECEIVED FROM SHA RE CAPITAL SUBSCRIPTION WAS INCOME TO BE ASSESSED UNDER THE HE AD INCOME FROM OTHER SOURCES AND THE SAME WAS REQUIRED TO BE BROU GHT TO TAX. AS PER NOTING-SHEET ENTRY DATED 16-6-2005 ASSESSEE WAS REQ UIRED TO SHOW CAUSE AS TO WHY SUCH INTEREST INCOME SHOULD NOT BE BROUGHT TO TAX UNDER THE HEAD INCOME FROM OTHER SOURCES, IN RESP ONSE TO THE SAME, ASSESSEE VIDE ITS LETTER DATED 17-8-2005 SUBMITTED AS UNDER: 4 THE COMPANY HAS ADOPTED ACCOUNTING POLICY OF CAPIT ALIZING THE EXPENSES OF REVENUE NATURE NET OF REVENUE EARNED AS COST OF THE PROJECT TILL THE COMPLETION OF PROJECT. THE SAME CA PITALIZED AND ARE TREATED AS PART OF PROJECT COST. WITHOUT PREJUDICE TO ABOVE YOU WILL APPRECIATE THAT IF REVENUE EARNED AND REVENUE EXPENDITURE INCURRED ARE TO BE TREATED AS REVENUE THE RESULTANT WILL BE LOSS TO BE CARRIED FORWARD. THE TOTAL EXPENSES FOR DEVELOPMENT INCURRED ARE RS. 1,67,19,603/- OUT OF WHICH REVENUE EXPENDITURE IS RS.71,73,804/- EXCE PT LAND DEVELOPMENT EXPENSES OF RS.35,06,131/- AND BUILDING UNDER CONSTRUCTION OF RS.60,39,668/-. IF THE INCOME OF RS.61,56,030/- REDUCED FROM EXPEND ITURE OF RS.71,73,804/-, THE RESULT WILL BE LOSS OF RS.10,17 ,774/-. THE CAPITAL COST WILL BE RS.95,45,799/- AND LOSS WILL BE CARRIE D FORWARD FOR 8 YEARS TO BE SET OFF AGAINST FUTURE INCOME. THUS IF THIS PROPOSITION IS ACCEPTED THERE WILL BE REVENUE LOSS TO THE DEPARTMENT IN AS MUCH AS DEPRECIATION ALLOWABLE AS SUCH CAPITAL COST WILL BE DEDUCTED AT PERCENTAGE ALLOWED AS PER I.T.A CT, 1961. WHICH WILL BE LESSER AMOUNT IN MORE NUMBER OF YEAR WHERE AS LOSS WILL BE ALLOWED AGAINST FUTURE INCOME OF ANY YEARS WHICH WI LL BE IN TWO OR THREE YEARS. THE ASSESSEE FURTHER SUBMITTED VIDE LETTER DATED 23 -9-2005 THAT PROJECT OF WHISTLING WOODS INSTITUTE WAS BEING CAPI TAL WORK-IN-PROGRESS AND AS PER GUIDANCE NOTE THE COMPANY HAD DECIDED TO CAPITALIZE ALL THE NET EXPENDITURE AND THE SAME WAS TREATED AS CAPITAL WORK-IN-PROGRESS. RELIANCE WAS ALSO PLACED ON THE DECISION OF THE HON 'BLE SUPREME COURT IN THE CASE OF BOKARO STEEL LTD. [236 ITR 315], CIT VS. KARNAL CO- OPERATIVE SUGAR MILL LTD. [243 ITR 2] AND CIT VS. K ARNATAKA POWER CORPORATION [247 ITR 268]. 6. THE AO AFTER CONSIDERING THESE SUBMISSIONS OBSER VED THAT THE ASSESSEE COMPANY WAS IN THE PROCESS OF ESTABLISHING RESEARCH AND TRAINING INSTITUTE WHICH WAS UNDER CONSTRUCTION AND SINCE NO ALLIED ACTIVITIES WERE CARRIED OUT BY THE ASSESSEE COMPANY , THE COMPANY HAS NOT COMMENCED ITS BUSINESS AND, THEREFORE ACCORDING LY, THERE CANNOT BE ANY QUESTION OF ASSESSMENT OF ITS INCOME AS INCO ME FROM BUSINESS. 5 AT THE SAME TIME, IT DOES NOT MEAN THAT UNTILL THE COMPANY COMMENCES ITS BUSINESS, INCOME FROM OTHER SOURCES W ILL NOT BE TAXED. AO REFERRED TO THE VARIOUS OBSERVATIONS OF THE HON' BLE SUPREME COURT IN THE CASE OF M/S TUTICORIN ALKALI CHEMICALS & FER TILISERS LTD. V/S. CIT [227 ITR 172], AND HELD THAT INTEREST EARNED BY THE ASSESSEE COMPANY WAS TO BE CHARGED UNDER THE HEAD INCOME FROM OTHER SOURCES. HE ALSO DISCUSSED AND THEN DISTINGUISHED THE DECISION OF HO N'BLE SUPREME COURT IN THE CASE OF BOKARO STEEL LTD. [SUPRA], KAR NAL CO-OPERATIVE SUGAR MILL LTD. [SUPRA] AND CIT VS. KARNATAKA POWER CORPORATION [SUPRA]. IN THIS BACKGROUND, THE SUM OF RS.61,56,03 0/- BEING INTEREST EARNED FROM FIXED DEPOSITS AND INTEREST ON LOANS FR OM OTHER COMPANIES WAS SUBJECTED TO TAX UNDER THE HEAD INCOME FROM OT HER SOURCES IN A.Y 2003-04. 7. SIMILARLY, IN A.Y 2004-05 INCOME FROM OTHER SOU RCES FROM THE FOLLOWING ITEMS WAS ALSO ASSESSED TO TAX: 1. INTEREST EARNED ON F.DS. RS. 1,23,411/- 2. INTEREST ON LOANS RS.26,93,042/- 3. INCOME FROM UNITS OF MUTUAL FUNDS RS.48,23,594/- RS.76,40,047/- 8. BEFORE THE CIT[A] IT WAS MAINLY SUBMITTED THAT ASSESSEE COMPANY WAS A JOINT VENTURE BETWEEN MUKTA ARTS LIMI TED [A PRIVATE COMPANY] AND MSFDC LTD. [A 100% MAHARASHTRA GOVT. C OMPANY]. THE COMPANY WAS CONSISTENTLY FOLLOWING THE POLICY OF CA PITALIZING OF THE EXPENDITURE AND INCOME, IF ANY, AS COST OF THE PROJ ECT TILL THE COMPLETION OF THE PROJECT AND THE SAME MAY BE TREAT ED AS PROJECT COST. IT WAS FURTHER SUBMITTED THAT BEFORE THE AO IT WAS ALSO PLEADED THAT IN 6 CASE INTEREST INCOME EARNED WAS TO BE TREATED AS RE VENUE EARNED DURING THE YEAR, THEN ON SAME PRINCIPLE, REVENUE EX PENDITURE INCLUDING DEPRECIATION ON ASSETS USED, PRELIMINARY EXPENDITUR E ALLOWABLE AND OTHER REVENUE EXPENDITURE ALLOWABLE, WAS DEDUCTIBLE FROM SUCH REVENUE RECEIPTS AND THIS ARGUMENT HAS NOT BEEN CON SIDERED AT ALL BY THE AO. LD. CIT[A] AFTER EXAMINING THE SUBMISSIONS , DID NOT FIND ANY FORCE IN THE SAME AND REJECTED THE CLAIM OF THE ASS ESSEE THAT INTEREST AND OTHER INCOME EARNED BY THE ASSESSEE SHOULD BE R EDUCED FROM THE PROJECT COST. HOWEVER, HE AGREED WITH THE SUBMISSIO N THAT IN CASE ANY EXPENDITURE HAS BEEN INCURRED FOR THE PURPOSE OF EA RNING INTEREST INCOME, THEN AO SHOULD EXAMINE THE SAME AND ALLOW T HE SAME. IN FACT, THE LD. CIT[A] HAS GIVEN A FINDING VIDE PARA -4 OF HIS ORDER WHICH IS AS UNDER- 4. I HAVE GONE THROUGH THE ABOVE FACTS OF THE CASE AND SUBMISSION MADE BY THE LD. AR. AND DO NOT FIND ANY MERIT IN ITS CASE. IT IS AN UNDISPUTED FACT THAT THE APPELLANT COMPANY HAD EARNED INCOME BY WAY OF INTEREST ON ACCOUNT OF INVESTMENTS MADE I N FDRS OF THE FUNDS. FURTHER IT IS ALSO NOT IN DISPUTE THAT THE B USINESS OF THE APPELLANT COMPANY WAS NOT SET UP DURING THE YEAR UN DER CONSIDERATION. AND THEREFORE INTEREST EARNED OUT OF INVESTMENT WOULD BE LIABLE TO TAX UNDER THE HEAD INCOME FROM OTHER SOURCES. THIS ISSUE WAS ALSO AN ISSUE BEFORE THE HON'BLE APEX COURT IN THE CASE OF M/S TUTICORIN ALKALIES REPORTED IN [227 ITR 172 WHERE T HE HON'BLE COURT HAS OBSERVED THE CASE FACTS OF THIS CASE ARE NOT IN DISPUTE. IN THE USUAL COURSE, INTEREST RECEIVED BY THE COMPANY FROM BANK DEPOSITS AND LOANS WOULD BE TAXABLE AS INCOME UNDER THE HEAD IN COME FROM OTHER SOURCES UNDER SECTION 56 OF THE INCOME-TAX ACT. IT IS ARGUED ON BEHALF OF THE COMPANY THAT IT HAD NOT YET COMMENCED ITS BU SINESS AND IN ANY EVENT THE INCOME WAS DERIVED FROM FUNDS BORROWED F OR SETTING UP THE 7 FACTORY OF THE COMPANY AND SHOULD BE ADJUSTED AGAIN ST THE INTEREST PAYABLE ON THE BORROWED FUNDS. IN OUR JUDGMENT NEITHER OF THE TWO FACTORS CAN AFF ECT THE TAXABILITY OF THE INCOME EARNED BY THE COMPANY. UND ER THE INCOME-TAX ACT, 1961, THE TOTAL INCOME OF THE COMPANY IS CHARG EABLE TO TAX UNDER SECTION 4. THE TOTAL INCOME HAS TO BE COMPUTED IN A CCORDANCE WITH THE PROVISIONS OF THE ACT. SECTION 14 LAYS DOWN THA T FOR THE PURPOSE OF COMPUTATION, INCOME OF AN ASSESSEE HAS TO BE CLASSIFIED UNDER SIX HEADS: (A) SALARIES (B) INTEREST ON SECURITIES (C) INCOME FROM HOUSE PROPERTY (D) PROFITS AND GAINS OF BUSINESS OR PROFESSION (E) CAPITAL GAINS (F) INCOME FROM OTHER SOURCES BY AN AMENDMENT MADE IN 1988 INTEREST ON SECURITIE S HAS BEEN MADE CHARGEABLE TO TAX AS BUSINESS INCOME WHEN SUCH INTEREST FORMS PART OF BUSINESS PROFITS AND IN ALL OTHER CASES UND ER SECTION 56[2][ID] AS INCOME FROM OTHER SOURCES. THE AMENDMENT MADE IN 1988 HAS NO RELEVANCE FOR THE PURPOSE OF THIS CASE. WE SHALL TA KE THIS ACT AS IT STOOD AT THE MATERIAL TIME IN THE ASSESSMENT YEAR 1 983-84. THE COMPUTATION OF INCOME UNDER EACH OF THE ABOVE S IX HEADS WILL HAVE TO BE MADE INDEPENDENTLY AND SEPARATELY. THERE ARE SPECIFIC RULES OF DEDUCTION AND ALLOWANCES UNDER EACH HEAD. NO DEDUCTION OR ADJUSTMENT ON ACCOUNT OF ANY EXPENDITURE CAN BE MAD E EXCEPT AS PROVIDED BY THE ACT. THE BASIC PROPOSITION THAT HAS TO BE BORNE IN MIND IN THIS CASE IS THAT IT IS POSSIBLE FOR A COMPANY TO HAVE SIX DIFFERENT SOU RCES OF INCOME, EACH ONE OF WHICH WILL BE CHARGEABLE TO INCOME-TAD. PROFITS AND GAINS OF BUSINESS OR PROFESSION IS ONLY ONE OF THE HEADS UNDER WHICH THE COMPANYS INCOME IS LIABLE TO BE ASSESSED TO TAX. I F A COMPANY HAS NOT COMMENCED BUSINESS, THERE CANNOT BE ANY QUESTIO N OF ASSESSMENT OF ITS PROFITS AND GAINS OF BUSINESS. TH AT DOES NOT MEAN 8 THAT UNTIL AND UNLESS THE COMPANY COMMENCES ITS BUS INESS, ITS INCOME FROM ANY OTHER SOURCE WILL NOT BE TAXED. IF THE COM PANY, EVEN BEFORE IT COMMENCES BUSINESS, INVESTS THE SURPLUS FINDS IN IT S HANDS FOR PURCHASE OF LAND OR HOUSE PROPERTY AND LATER SELLS IT AT PROFIT, THE GAIN MADE BY THE COMPANY WILL BE ASSESSABLE UNDER THE HE AD CAPITAL GAINS. SIMILARLY, IF A COMPANY PURCHASES A RENTED HOUSE AND GETS RENT, SUCH RENT WILL BE ASSESSABLE TO TAX UNDER SEC TION 22 AS INCOME FROM HOUSE PROPERTY. LIKEWISE, A COMPANY MAY HAVE I NCOME FROM OTHER SOURCES. IT MAY BUY SHARES AND GET DIVIDENDS. SUCH DIVIDENDS WILL BE TAXABLE UNDER SECTION 56 OF THE ACT. THE CO MPANY MAY ALSO, AS IN THIS CASE, KEEP THE SURPLUS FUNDS IN SHORT-TERM DEPOSITS IN ORDER TO EARN INTEREST. SUCH INTEREST WILL BE CHARGEABLE UND ER SECTION 56 OF THE ACT. THE FACTS OF THE CASE ARE IDENTICAL WITH THE CASE O F TUTICORIN ALKALIES LIMITED AND THEREFORE TAKING THE CUE FROM THE DECIS ION OF THE APEX COURT I AM IN AGREEMENT WITH THE ACTION OF THE AO I N TREATING THE INCOME AS INCOME FROM OTHER SOURCES AND AS SUCH T HERE IS NO INFIRMITIES IN THE ACTION OF THE AO IN CHARGING INT EREST TO TAX. FURTHER APPELLANTS RELIANCE PLACED ON THE JUDGMENT OF APEX COURT IN CASE OF BOKARO STEEL WOULD NOT BE APPLICABLE TO THIS CASE S INCE THE FACTS OF THE CASE OF BOKARO STEEL IS DIFFERENT FROM THAT OF THE FACTS OF THE CASE AND AS SUCH THE SAME IS NOT APPLICABLE TO THE INSTA NT CASE. HOWEVER, WHILE TREATING THE INCOME AS INCOME FROM OTHER SOU RCES THE AO SHOULD ALSO CONSIDER THE EXPENSES INCURRED FOR THE PURPOSE OF EARNING SUCH INCOME AND ALLOW THE SAME U/S.57 OF THE I. T. ACT. THUS CONSIDERING THE FACTS OF THE CASE THIS GROUND OF AP PEAL IS PARTLY ALLOWED. 9. BEFORE US, THE LD. COUNSEL OF THE ASSESSEE SUBMI TTED THAT IN THE CASE BEFORE US THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF M/S TUTICORIN ALKALI CHEMICALS & FERTILISERS LTD . V/S. CIT [SUPRA] WAS NOT APPLICABLE, BECAUSE FUNDS WERE RAISED THROUGH S HARE CAPITAL AND ASSESSEE HAD ALREADY STARTED THE CONSTRUCTION OF TH E PROJECT THROUGH THE CONTRACTOR M/S LARSEN & TOUBRO LTD. HE SUBMITT ED THAT IN THIS 9 CASE, THE RATIO LAID DOWN BY HON'BLE SUPREME COURT IN THE CASE OF CIT VS BOKARO STEEL LTD. [SUPRA], KARNAL CO-OPERATIVE S UGAR MILL LTD. [SUPRA] AND CIT VS. KARNATAKA POWER CORPORATION [SU PRA], SHOULD BE APPLIED. HE FURTHER SUBMITTED THAT THE DECISION OF M/S TUTICORIN ALKALI CHEMICALS & FERTILISERS LTD. V/S. CIT [SUPRA] AND B OKARO STEEL LTD. [SUPRA] HAS BEEN DISCUSSED BY THE HON'BLE DELHI HIG H COURT IN THE CASE OF INDIAN OIL PANIPAT POWER CONSORTIUM VS. ITO 315 ITR 255. IN THIS CASE THE HON'BLE HIGH COURT AFTER REFERRING TO SEC. 3 OF THE ACT, WHICH STATES THAT IN NEWLY SET UP BUSINESS THE PREVIOUS Y EAR SHALL BE PERIOD BEGINNING WITH THE DATE OF SETTING UP OF THE BUSINE SS AND, THEREFORE, SETTING UP OF BUSINESS ITSELF IS A BUSINESS ACTIVIT Y AND ULTIMATELY THE INTEREST EARNED WAS HELD TO BE TAXABLE AS INCOME FR OM BUSINESS. HE ALSO RELIED ON THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF SHAPOORJI PALLONJI POWER CO. LTD. VS. ITO 28 DTR (MUM) (TRIB) 12 [COPY OF THE DECISION WAS FILED]. HE ALSO REFERRED TO THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. ASP ENTECH INDIA (P) LTD. 32 DTR (DEL) 173 [COPY OF THE DECISION WAS FILED]. HE POINTED OUT THAT IN THIS DECISION IT HAS BEEN HELD THAT BUSINESS ACT IVITY CONSISTS OF THREE STAGES AND THE FIRST STAGE RELATES TO THE ACTIVITY NECESSARY FOR THE PURPOSE OF ACQUIRING THE RAW MATERIAL AND ESTABLISH MENT OF PLANT AND MACHINERY AND THE SECOND ACTIVITY COMPRISES THE PRO CESSING AND MANUFACTURING BY USING THE RAW MATERIAL AND THE PLA NT AND MACHINERY SET UP FOR THE PURPOSE AND THIRD CATEGORY CONSISTED OF MARKETING THERE OF. IT WAS OBSERVED THAT FIRST IN POINT OF TIME LAY S THE FOUNDATION FOR THE SECOND ACTIVITY AND THE SECOND ACTIVITY WHEN CO MPLETED LAYS THE 10 FOUNDATION FOR THE THIRD ACTIVITY. ULTIMATELY, IT W AS HELD THAT EXPENDITURE INCURRED FOR CARRYING OUT ANY OF THESE ACTIVITIES INCLUDING THE FIRST ACTIVITY, IS ALSO ALLOWABLE AS BUSINESS E XPENDITURE AND THEREFORE, EXPENDITURE INCURRED BY THE ASSESSEE ON ACCOUNT OF REVENUE ITEM LIKE SALARY, DEPRECIATION SYSTEM AND NET WORK EXPENSES ETC., WHICH TOTAL UPTO RS.71,73,804/- SHOULD HAVE BEEN AL LOWED IF THE INTEREST INCOME WAS TO BE CHARGED TO INCOME TAX. 10. ON THE OTHER HAND, THE LD. DR, SUBMITTED THAT I N THIS CASE FACTS ARE EXACTLY IDENTICAL WITH THE FACTS OF M/S TUTICOR IN ALKALI CHEMICALS & FERTILISERS LTD. V/S. CIT [SUPRA] AND, THEREFORE, T HE RATIO OF THAT DECISION SHOULD BE APPLIED. HE SUBMITTED THAT EVEN IN THE CA SE OF BOKARO STEEL LTD. [SUPRA] AS FAR AS INTEREST INCOME WAS CONCERNE D, SAME WAS HELD TO BE ASSESSABLE AS INCOME FROM OTHER SOURCES AND THE DECISION OF M/S TUTICORIN ALKALI CHEMICALS & FERTILISERS LTD. V/S. CIT [SUPRA] WAS APPLIED. ONLY THE ITEMS LIKE, RENT RECEIVED FROM TH E CONTRACTS FROM THE HOUSES ALLOTTED TO CONTRACTORS STAFF, MACHINE HIRE CHARGES FROM THE MACHINES GIVEN TO THE CONTRACTORS AND INTEREST RECE IVED FROM CONTRACTORS ON ADVANCES GIVEN TO THE CONTRACTORS, W ERE HELD TO BE DEDUCTIBLE FROM THE PROJECT COST, BECAUSE THESE ITE MS WERE DIRECTLY RELATED TO THE EXECUTION OF CONTRACT FOR SUCCESSFUL COMPLETION OF THE PROJECT. BUT IN THE CASE BEFORE US, NO SUCH INCOME HAS BEEN RECEIVED WHICH IS DIRECTLY RELATED TO THE EXECUTION OF THE P ROJECT. SIMILARLY, IN THE CASE OF CIT VS. KARNATAKA POWER CORPORATION [SUPRA] , INTEREST WAS RECEIVED FROM CONTRACTORS AND, THEREFORE, PRINCIPLE OF BOKARO STEEL LTD. WAS MADE APPLICABLE BY THE HON'BLE SUPREME COURT. S IMILARLY, IN THE 11 CASE OF KARNAL CO-OPERATIVE SUGAR MILL LTD. [SUPRA] ALSO THE INTEREST WAS RECEIVED FROM MONEY DEPOSITED FOR OPENING A LET TER OF CREDIT FOR PURCHASE OF MACHINERY AND, THEREFORE, THE PRINCIPLE S LAID DOWN IN BOKARO STEEL LTD., WAS MADE APPLICABLE. 11. HE FURTHER SUBMITTED THAT THERE IS NO QUESTION OF LOSS OF REVENUE EXPENDITURE BECAUSE NO SUCH DISALLOWANCE HAS BEEN M ADE BY THE AO. IN ANY CASE, THE DECISION OF HON'BLE DELHI HIGH COU RT IN THE CASE OF CIT VS. ASPENTECH INDIA (P) LTD. [SUPRA] IS DISTINGUISH ABLE ON FACTS BECAUSE IN THAT CASE THE ASSESSEE COMPANY WAS TRYING TO SET UP THE SOFTWARE DEVELOPMENT PROJECT WHICH CANNOT BE EQUATED WITH CO NSTRUCTION OF A TRAINING INSTITUTE. FURTHER, THE HON'BLE DELHI HIGH COURT HAS GIVEN THREE STAGES OF PROJECT, I.E., PROCUREMENT OF RAW MATERIA L, ESTABLISHMENT OF PLANT AND MACHINERY, PROCESSING OF SUCH RAW MATERIA L IN THE PLANT SET UP FOR THIS PURPOSE AND ULTIMATELY MARKETING OF SUC H PROJECT. BUT IN THE CASE OF TRAINING INSTITUTION THERE ARE NO SUCH STAG ES INVOLVED AND THE BUSINESS OF THE ASSESSEE COMPANY WOULD COMMENCE ONL Y WHEN THE INSTITUTION IS FULLY CONSTRUCTED AND STUDENTS ARE A DMITTED FOR TRAINING. THUS, DECISION OF THE HON'BLE DELHI HIGH COURT IS D ISTINGUISHABLE. 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY IN THE LIGHT OF THE MATERIAL ON RECORD AS WELL AS DECISIONS CITE D BY THE PARTIES. IN THE CASE OF M/S TUTICORIN ALKALI CHEMICALS & FERTIL ISERS LTD. V/S. CIT [SUPRA] THE HON'BLE SUPREME COURT OBSERVED AS UNDER : THE ASSESSEE WAS A COMPANY INCORPORATED ON 3RD DEC ., 1971 FOR THE PURPOSE OF, INTER ALIA, MANUFACTURING HEAVY CHEMICA LS SUCH AS AMMONIUM CHLORIDE AND SODA ASH. THE TRIAL PRODUCTIO N OF THE FACTORIES OF THE COMPANY COMMENCED ON 30TH JUNE, 1982. FOR TH E PURPOSE OF 12 SETTING UP OF THE FACTORIES, THE COMPANY HAD TAKEN TERM LOANS FROM VARIOUS BANKS AND FINANCIAL INSTITUTIONS. THAT PART OF THE BORROWED FUNDS WHICH WAS NOT IMMEDIATELY REQUIRED BY THE COM PANY WAS KEPT INVESTED IN SHORT-TERM DEPOSITS WITH BANKS. SUCH IN VESTMENTS WERE SPECIFICALLY PERMITTED BY THE MEMORANDUM AND ARTICL ES OF ASSOCIATION OF THE COMPANY. THE COMPANY HAD ALSO DEPOSITED CERT AIN SUMS WITH THE TAMIL NADU ELECTRICITY BOARD. IT HAD ALSO GIVEN INTEREST-BEARING LOANS TO ITS EMPLOYEES TO PURCHASE VEHICLES. UPTO T HE ASST. YR. 1980- 81, INTERESTS EARNED BY THE COMPANY FROM THE VARIOU S LOANS GIVEN BY THE COMPANY AND ALSO FROM THE BANK DEPOSITS WERE SH OWN AS INCOME AND WAS TAXED ACCORDINGLY. FOR THE ACCOUNTING YEAR ENDING ON 30TH JUNE, 1981, (ASST. YR. 1982-83), THE ASSESSEE RECEI VED A TOTAL AMOUNT OF INTEREST OF RS. 2,92,440. IN ITS RETURN OF INCOM E FILED ON 22ND JUNE, 1982, THE COMPANY DISCLOSED THE SAID SUM OF RS. 2,9 2,440 AS 'INCOME FROM OTHER SOURCES'. IT ALSO DISCLOSED BUSINESS LOS S OF RS. 3,21,802. AFTER SETTING OFF THE INTEREST INCOME AGAINST BUSIN ESS LOSS, THE COMPANY CLAIMED THE BENEFIT OF CARRY FORWARD OF NET LOSS OF RS. 29,360. THE COMPANY LATER ON REALISED ITS MISTAKE A ND ON 26TH DEC., 1984, IT FILED A REVISED RETURN SHOWING BUSINESS LO SS OF RS. 3,21,802. IT CLAIMED THAT ACCORDING TO THE ACCEPTED ACCOUNTING P RACTICE, INTEREST AND FINANCE CHARGES ALONG WITH OTHER PRE-PRODUCTION EXPENSES WILL HAVE TO BE CAPITALISED, AND THAT, THEREFORE, THE IN TEREST INCOME OF RS. 2,92,440 SHOULD GO TO REDUCE THE PRE-PRODUCTION EXP ENSES (INCLUDING INTEREST AND FINANCE CHARGES), WHICH WOULD ULTIMATE LY BE CAPITALISED. IN THIS CONNECTION, THE COMPANY HIGHLIGHTED THE FACT T HAT DURING THE PREVIOUS YEAR RELEVANT TO THE ASST. YR. 1982-83, IT HAD INCURRED A SUM OF RS. 1,13,06,068 AS AND BY WAY OF INTEREST AND FI NANCE CHARGES, WHICH HAD TO BE CAPITALISED ALONG WITH OTHER PRE-PR ODUCTION EXPENSES. IN OTHER WORDS, ACCORDING TO THE ASSESSEE, THE INTE REST INCOME OF RS. 2,92,440 WAS NOT EXIGIBLE TO TAX. THE ITO REJECTED THE ASSESSEE S CLAIM THAT THE INTEREST INCOME WAS NOT EXIGIBLE TO TAX. THE VIEW OF THE ITO WAS UPHELD BY THE CIT(A). THE COMPANY S FURTH ER APPEAL TO THE TRIBUNAL WAS DISMISSED. WE ARE ALSO CONCERNED IN TH IS CASE WITH THE ASST. YR. 1983-84. DURING THE PREVIOUS YEAR RELEVAN T TO THIS ASSESSMENT YEAR, THE ASSESSEE HAD RECEIVED INTEREST INCOME OF RS. 1,08,336. THE ASSESSEE THIS ASSESSMENT YEAR, THE A SSESSEE HAD RECEIVED INTEREST INCOME OF RS. 1,08,336. THE ASSES SEE FILED ITS RETURN IN WHICH IT CLAIMED THAT THE INTEREST INCOME OF 1,0 8,336 SHOULD GO TO 13 REDUCE THE PRE- PRODUCTION EXPENSES INCLUDING THE I NTEREST AND FINANCE CHARGES WHICH WOULD ULTIMATELY BE CAPITALISED. THE INCOME-TAX OFFICER REJECTED THE ASSESSEES CLAIM THAT THE INTEREST INC OME WAS NOT EXIGIBLE TO TAX. THE VIEW OF THE ITO WAS UPHELD BY THE CIT[A ] . THE COMPANYS FURTHER APPEAL TO THE INCOME TAX APPELLATE TRIBUNAL WAS DISMISSED. IN VIEW OF THE CONFLICT OF DECISIONS BETWEEN THE MADRA S AND ANDHRA PRADESH HIGH COURTS., THE TRIBUNAL REFERRED THE QUE STION REGARDING TAXABILITY OF INCOME, DIRECTLY TO THE SUPREME COURT . ON THE ABOVE FACTS, IT WAS HELD AS UNDER: THE COMPANY HAD SURPLUS FUNDS IN ITS HANDS. IN ORDE R TO EARN INCOME OUT THE SURPLUS FUNDS, IT INVESTED THE AMOUNT FOR T HE PURPOSE OF EARNING INTEREST. THE INTEREST THUS EARNED IS CLEAR LY OF REVENUE NATURE AND WILL HAVE TO BE TAXED ACCORDINGLY. THE ACCOUNTA NTS MAY HAVE TAKEN SOME OTHER VIEW BUT ACCOUNTANCY PRACTICE IS N OT NECESSARILY GOOD LAW. THIS CASE NOT A CASE OF DIVERSION OF INCO ME BY OVERRIDING TITLE. THE ASSESSEE WAS AT LIBERTY TO DEAL WITH THE INTEREST AMOUNT AS IT LIKED. THE APPLICATION OF THE INCOME FOR PAYMENT OF INTEREST WOULD NOT AFFECT ITS TAXABILITY IN ANY WAY. THE COMPANY COULD NOT CLAIM ANY RELIEF. UNDER SECTION 70 OR SECTION 71 SINCE ITS BUSINESS H AD NOT STARTED AND THERE COULD NOT BE ANY COMPUTATION OF BUSINESS INCO ME OR LOSS INCURRED BY THE ASSESSEE IN THE RELEVANT ACCOUNTING YEARS. IN SUCH A SITUATION, THE EXPENDITURE INCURRED BY THE ASSESSEE FOR THE PURPOSE OF SETTING UP ITS BUSINESS COULD NOT BE ALLOWED AS DED UCTION, NOR COULD IT BE ADJUSTED AGAINST ANY OTHER INCOME UNDER ANY OTHE R HEAD. SIMILARLY ANY INCOME FROM A NON-BUSINESS SOURCE COULD NOT BE SET OFF AGAINST THE LIABILITY TO PAY INTEREST ON FUNDS BORROWED FOR THE PURPOSE OF PURCHASE OF PLANT AND MACHINERY EVEN BEFORE COMMENC EMENT OF THE BUSINESS OF THE ASSESSEE . IN THE DETAILED DISCUSSION WHILE ADJUDICATION THIS MATTER, THE HON'BLE SUPREME COURT HAD ALSO OBSERVED AT PAGE 179 AS UNDE R: THE BASIC PROPOSITION THAT HAS TO BE BORNE IN MIND IN THIS CASE IS THAT IT IS POSSIBLE FOR A COMPANY TO HAVE SIX DIFFERENT SOURCES OF INCOME, EACH ONE OF WHICH WILL BE CHARGEABLE TO INCOME TAX. PROFITS AND GAINS OF BUSINESS OR PROFESSION IS ONLY ONE OF THE HEADS UNDER WHICH THE COMPANYS INCOME IS LIABLE TO BE ASSESSED TO TAX. I F A COMPANY HAS 14 NOT COMMENCED BUSINESS, THERE CANNOT BE ANY QUESTIO N OF ASSESSMENT OF ITS PROFITS AND GAINS OF BUSINESS. TH AT DOES NOT MEAN THAT UNTIL AND UNLESS THE COMPANY COMMENCES ITS BUS INESS, ITS INCOME FROM ANY OTHER SOURCE WILL NOT BE TAXED. IF THE COM PANY, EVEN BEFORE IT COMMENCES BUSINESS, INVESTS THE SURPLUS FUND IN ITS HAND FOR PURCHASE OF LAND OR HOUSE PROPERTY AND LATER SELLS IT AT PROFIT, THE GAIN MADE BY THE COMPANY WILL BE ASSESSABLE UNDER THE HE AD CAPITAL GAINS . SIMILARLY, IF A COMPANY PURCHASES A RENTE D HOUSE AND GETS RENT, SUCH RENT WILL BE ASSESSABLE TO TAX UNDER S. 22 AS INCOME FROM HOUSE PROPERTY. LIKEWISE, A COMPANY MAY HAVE INCOME FROM OTHER SOURCES. IT MAY BUY SHARES AND GET DIVIDENDS. SUCH DIVIDENDS WILL BE TAXABLE UNDER S. 56 OF THE ACT. THE COMPANY MAY ALS O, AS IN THIS CASE, KEEP THE SURPLUS FUND IN SHORT-TERM DEPOSITS IN ORD ER TO EARN INTEREST. SUCH INTERESTS WILL BE CHARGEABLE UNDER S. 56 OF TH E ACT. THUS, IT IS CLEAR FROM THE ABOVE DISCUSSION THAT IF WHENEVER AN ASSESSEE IS IN THE PROCESS OF SETTING UP OF THE BUS INESS, IF ANY, INCOME ARISES UNDER ANY OF THE HEADS EXCEPT UNDER THE HEAD PROFITS AND GAINS OF BUSINESS, THEN SUCH INCOME HAS TO CHARGED TO TAX UNDER THAT PARTICULAR HEAD. 13. THE LD. COUNSEL OF THE ASSESSEE HAD VEHEMENTLY ARGUED THAT THIS PRINCIPLE WAS DILUTED BY HON'BLE SUPREME COURT WHIL E DECIDING THE ISSUE IN THE CASE OF BOKARO STEEL LTD. [SUPRA], KAR NAL CO-OPERATIVE SUGAR MILL LTD. [SUPRA] AND CIT VS. KARNATAKA POWER CORPORATION [SUPRA]. BUT HAVING READ THESE JUDGMENTS VERY CAREF ULLY, WE FIND THAT THE LD. DR IS RIGHT THAT IN THESE LATER THREE DECIS IONS WERE RENDERED BECAUSE OF DISTINGUISHABLE FACTS. IN THE CASE OF BO KARO STEEL LTD. [SUPRA], THE ISSUE WAS WHETHER RENT RECEIVED FROM C ONTRACTORS AGAINST HOUSES GIVEN FOR STAFF OF CONTRACTORS, MACHINE HIRE CHARGES RECEIVED FROM MACHINES GIVEN BY THE ASSESSEE COMPANY AND INT EREST RECEIVED 15 FROM CONTRACTORS ON ADVANCES MADE BY THE ASSESSEE C OMPANY TO SUCH CONTRACTORS, WAS ASSESSABLE TO TAX. THE HON'BLE SUP REME COURT OBSERVED THAT THESE RECEIPTS BASICALLY PERTAIN TO A RRANGEMENTS MADE BY THE ASSESSEE WITH CONTRACTORS PERTAINING TO THE WORK OF CONSTRUCTION. TO SMOOTHLY EXECUTE THE WORK, SOME FA CILITIES WERE EXTENDED BY THE ASSESSEE COMPANY TO THE CONTRACTORS TO FACILITATE THE WORK OF CONSTRUCTION AND THUS THESE RECEIPTS HAVE B EEN CORRECTLY ADJUSTED BY THE ASSESSEE COMPANY AGAINST THE CHARGE S PAYABLE TO CONTRACTORS. IT WAS ALSO OBSERVED THAT HAD THE ASSE SSEE NOT MADE THESE ARRANGEMENTS AND HAD THE CONTRACTORS MADE THE SE ARRANGEMENTS, CHARGES TO THE COMPANY WOULD HAVE BEE N MORE. IT IS SIGNIFICANT TO NOTE THAT IN THIS CASE ITSELF ONE MO RE ISSUE WAS THERE, I.E. INTEREST RECEIVED FROM INVESTMENTS MADE OUT OF BORR OWED FUNDS WHICH WERE NOT IMMEDIATELY REQUIRED. THIS INTEREST WAS HE LD TO BE TAXABLE BY FOLLOWING THE DECISION OF M/S TUTICORIN ALKALI CHEM ICALS & FERTILISERS LTD. V/S. CIT [SUPRA]. IN FACT, WE ARE REPRODUCING THE PARA GIVEN AT PAGE-321 OF THE REPORT- DURING THESE ASSESSMENT YEARS, THE RESPONDENT ASSESSEE HAD INVESTED THE AMOUNTS BORROWED BY IT FOR THE CONSTRU CTION WORK WHICH WERE NOT IMMEDIATELY REQUIRED, IN SHORT-TERM DEPOSI TS AND EARNED INTEREST. IT HAS BEEN HELD IN THESE PROCEEDINGS THA T THE RECEIPT OF INTEREST AMOUNTS TO INCOME OF THE ASSESSEE FROM OTHER SOURCES. THE ASSESSEE HAS NOT FILED ANY APPEAL FROM THIS FINDING WHICH I S GIVEN AGAINST IT. IN ANY CASE, THIS QUESTION IS NOW CONCL UDED BY A DECISION OF THIS COURT IN OF M/S TUTICORIN ALKALI CHEMICALS & F ERTILISERS LTD. V/S. CIT [1997] 227 ITR 172. HENCE, WE ARE NOT CALLED UPTO T O EXAMINE THAT ISSUE. 14. THUS, IT IS CLEAR THAT AS FAR AS INTEREST RECEI VED FROM SHORT TERM DEPOSITS WHICH WERE NOT IMMEDIATELY REQUIRED, WERE HELD TO BE TAXABLE 16 FOLLOWING THE DECISION OF M/S TUTICORIN ALKALI CHEM ICALS & FERTILISERS LTD. V/S. CIT [SUPRA]. ONLY THOSE SUMS WHICH WERE R ECEIVED FROM CONTRACTORS, WHICH WE CAN SAY WERE INEXTRICABLY CON NECTED WITH THE CONSTRUCTION ACTIVITIES, WERE HELD TO BE NOT TAXABL E, RATHER THAN THEY WERE HELD TO BE REDUCED FROM THE TOTAL CAPITAL EXPE NDITURE. 15. IN THE CASE OF KARNAL CO-OPERATIVE SUGAR MILL L TD. [SUPRA], INTEREST WAS RECEIVED ON THE MONEY DEPOSITED TO OPE N A LETTER OF CREDIT FOR PURCHASE OF MACHINERY WHICH IS AGAIN DIRECTLY C ONNECTED WITH THE PURCHASE OF MACHINE AND THAT IS WHY THE RATIO OF BO KARO STEEL LTD. [236 ITR 315] WAS MADE APPLICABLE. IN THE CASE OF C IT VS. KARNATAKA POWER CORPORATION [SUPRA], THE FIRST QUESTION REFER RED BEFORE THE HON'BLE COURT WAS AS UNDER- '(1) WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL IS RIGHT IN LAW IN UPHOLDING THE ORDER OF THE CIT(A) WHO DELETED THE ADDITION OF RS. 1,30,44,518 BEING INTEREST RECEIPTS AND HIRE CHARGES FROM CONTRACTORS BY HOLDING THAT THE SAME ARE IN THE NATURE OF CAPITAL RECEIPTS WHICH WOULD GO TO REDUCE CAPITAL COST ? FROM THE QUESTION ITSELF IT IS CLEAR THAT IN THIS C ASE THE ISSUE WAS REGARDING INTEREST RECEIPTS AND HIRE CHARGES FROM T HE CONTRACTS AND THAT IS WHY THE PRINCIPLE LAID DOWN IN BOKARO STEEL LTD. [SUPRA] WAS FOLLOWED. 16. WE FURTHER FIND THAT HON'BLE SUPREME COURT HAS AGAIN FOLLOWED THE DECISION OF M/S TUTICORIN ALKALI CHEMICALS & FE RTILISERS LTD. V/S. CIT [SUPRA] IN THE CASE OF CIT VS. COROMANDAL CEMENTS L TD. [234 ITR 412]. IN THIS CASE THE HEAD NOTE READS AS UNDER: 17 AGAINST THE JUDGMENT OF THE ANDHRA PRADESH HIGH CO URT REFUSING TO CALL FOR A REFERENCE OF THE QUESTION WHETHER THE TR IBUNAL WAS RIGHT IN HOLDING THAT INTEREST EARNED ON SHORT-TERM BANK DEP OSITS DURING THE PRE-PRODUCTION STAGE COULD NOT BE TREATED AS INCOME FROM OTHER SOURCES AND SHOULD GO TOWARDS THE PROJECT COST, THE REVENUE FILED AN APPEAL TO THE SUPREME COURT. THE SUPREME COURT, FOL LOWING ITS OWN JUDGMENT IN OF M/S TUTICORIN ALKALI CHEMICALS & FER TILISERS LTD. V/S. CIT [1997] 227 ITR 172, ALLOWED THE APPEAL OF THE REVEN UE AND SET ASIDE THE JUDGMENT OF THE HIGH COURT. THUS, IT IS CLEAR THAT WHENEVER INTEREST IS RECEIVE D DURING PRE- PRODUCTION STAGE FROM SHORT TERM DEPOSITS, SAME HAS TO BE TAXED AS INCOME FROM OTHER SOURCES. THIS DECISION HAS BEEN A GAIN FOLLOWED BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. AU TOKAST LTD. [248 ITR 110]. THE HEAD NOTE OF THIS DECISIONS READS AS UNDER- FROM THE DECISION OF THE KERALA HIGH COURT (SEE [1 998) 229 ITR 789) HOLDING THAT WHERE THE ASSESSEE KEPT THE MONEY BORROWED FROM THE INDUSTRIAL DEVELOPMENT BANK OF INDIA FOR PURCHASE O F PLANT AND MACHINERY IN SHORT-TERM DEPOSITS IN BANKS AND USED IT IN BILL DISCOUNTING UNTIL PAYMENT FOR THE PLANT AND MACHINE RY, THE INTEREST EARNED ON THE DEPOSITS WAS NOT TAXABLE IN THE HANDS OF THE ASSESSEE AS INCOME FROM OTHER SOURCES BUT WOULD GO TO REDUCE THE ACTUAL COST OF THE PLANT AND MACHINERY. THE DEPARTMENT TOOK AN APPEAL TO THE SUPREME COURT, THE SUPREME COURT REVERSED THE DECIS ION OF THE HIGH COURT HOLDING THAT THE INTEREST WAS TAXABLE IN THE HANDS OF THE ASSESSEE . THIS JUDGMENT HAS BEEN RENDERED ON NOVEMBER 21, 200 0 I.E., MUCH AFTER THE DECISION OF BOKARO STEEL LTD. [SUPRA] WHI CH WAS RENDERED ON SEPTEMBER 3, 1999 AND THE DECISION IN THE CASE OF C IT VS. KARNATAKA POWER CORPORATION [SUPRA] WHICH WAS RENDERED ON JUL Y 27, 2000. THUS, IT IS CLEAR THAT THE PRINCIPLES LAID DOWN IN OF M/S TUTICORIN ALKALI CHEMICALS & FERTILISERS LTDS CASE [SUPRA] WERE NEV ER DILUTED AND THE 18 DECISIONS OF BOKARO STEEL LTD. [SUPRA] AND KARNAL C O-OPERATIVE SUGAR MILL LTD. [SUPRA] AND CIT VS. KARNATAKA POWER CORPO RATION [SUPRA], OPERATES IN DIFFERENT FIELD. AS FAR AS THE DECISION OF TRIBUNAL IN THE CASE OF SHAPOORJI PALLONJI POWER CO. LTD. VS. ITO [SUPRA ] IS CONCERNED, THE TRIBUNAL MADE THE DISTINCTION FROM OF M/S TUTICORIN ALKALI CHEMICALS & FERTILISERS LTDS PRINCIPLE [SUPRA], BECAUSE MONEY WAS DEPOSITED AS SECURITY DEPOSIT WITH THE ELECTRICITY BOARD WHICH W AS PART OF THE CONDITION OF THE CONTRAC WHICH THE ASSESSEE COMPANY WAS TO EXECUTE BY WAY OF CONSTRUCTION OF POWER PLANT FOR THE GOVER NMENT OF MADHYA PRADESH BUT THAT CONTRACT COULD NOT BE EXECUTED. TH EREFORE, THIS DECISION IS CLEARLY DISTINGUISHABLE, PARTICULARLY I N THE LIGHT OF THE PRINCIPLES LAID DOWN BY THE HON'BLE SUPREME COURT. 17. AS FAR AS THE SECOND LIMB OF THE ARGUMENT IS CO NCERNED, TO WHICH THE LD. COUNSEL OF THE ASSESSEE HAS REFERRED TO THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF INDIAN OIL PANIPAT POWER CONSORTIUM LIMITED VS. ITO [SUPRA], IT WAS OBSERVED BY THE HON'BLE DELHI COURT AT PLACITUM AS UNDER: 4. IT IS IMPORTANT TO NOTE THAT THE TRIBUNAL WITHO UT HOLDING THAT THE FINDING OF FACT OF THE COMMISSIONER OF INCOME-TAX (APPEALS), T HAT THE INTEREST EARNED WAS INEXTRICABLY LINKED WITH THE SETTING UP OF TH E POWER PLANT REVERSED THE DECISION OF THE COMMISSIONER OF INCOME-TAX (APPEALS )BY MAKING A BALD OBSERVATION THAT THE 'DEPOSIT OF SHARE CAPITAL HAS NO OR VERY REMOTE CONNECTION WITH SETTING UP OF PLANT AND MACHINERY'. THE TRIBUNAL FURTHER OBSERVED THAT IT WAS AN INDEPENDENT INCOME EARNED I N A SIMILAR FASHION AS WAS THE CASE IN TUTICORIN ALKALI CHEMICALS [1997] 2 27 ITR 172 (SC). FROM THE ABOVE, IT IS CLEAR THAT THERE WAS ALREADY A FINDING BY THE FIRST APPELLATE AUTHORITY THAT INTEREST EARNED WAS INEXTR ICABLY LINKED WITH THE SETTING UP OF THE POWER PLANT. WHEREAS IN THE CASE BEFORE US, THERE IS 19 NO SUCH FINDING AND THE FUNDS RAISED THROUGH SHARE CAPITAL WHICH WERE NOT REQUIRED FOR THE CONSTRUCTION OF THE TRAINING I NSTITUTE HAS BEEN PLACED WITH BANKS AND OTHER COMPANIES AS SHORT TERM DEPOSITS. 18. AS FAR AS THE DECISION IN THE CASE OF CIT VS. A SPENTECH INDIA (P) LTD. [SUPRA] IS CONCERNED, AGAIN THE FACTS ARE QUIT E DISTINGUISHABLE. IN THAT CASE THE ASSESSEE HAD CLAIMED EXPENDITURE OF R S.2.53 CRORES AGAINST THE MEAGER INCOME OF RS.4,93,343/-. THE ASS ESSEE WAS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND THE EXPENDITURE WAS MAINLY INCURRED ON ACCOUNT OF EMPLOYEES SALARY AMOUNTING TO RS.1.72 CRORES, TRAVELLING COST OF RS.30.61 LAKHS A ND OTHER ADMINISTRATIVE EXPENSES OF RS.39.65 LAKHS. THUS, IT IS CLEAR THAT ASSESSEE HAD ALREADY STARTED GENERATING INCOME BECA USE RECEIPTS WERE ALSO SHOWN AT RS.4,93,343/- AND THE OTHER EXPENSES WERE CLAIMED AS REVENUE EXPENDITURE AND WERE NOT CLAIMED AS REDUCTI ON FROM CAPITAL EXPENDITURE AS HAS BEEN DONE IN THE CASE BEFORE US. 19. FROM THE ABOVE DISCUSSION, IT IS CLEAR THAT BOT H THE DECISIONS OF HON'BLE DELHI HIGH COURT ARE NOT APPLICABLE TO THE FACTS OF THE ASSESSEES CASE BEFORE US. THUS, IT IS CLEAR THAT I N THE CASE BEFORE US, ASSESSEE WAS STILL CONSTRUCTING THE BUILDING FOR TH E INSTITUTE WHICH WAS TO ESTABLISH FOR TRAINING OF PEOPLES. DURING THIS P HASE, ASSESSEE HAS RAISED A SHARE CAPITAL AND FUNDS RAISED FROM SUCH S HARE CAPITAL HAVE BEEN INVESTED IN FIXED DEPOSIT RECEIPTS OF THE BANK S AS WELL AS DEPOSITS WITH VARIOUS COMPANIES AND ASSESSEE HAS EARNED INTE REST ON THE SAME. THE SAME HAS TO BE TAXED AS INCOME FROM OTHER SOUR CES IN THE LIGHT OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CA SE OF M/S TUTICORIN 20 ALKALI CHEMICALS & FERTILISERS LTD. V/S. CIT [SUPRA ], WHICH WE HAVE DISCUSSED IN DETAIL. 20. FOR THE ABOVE PROPOSITION, WE ARE ALSO SUPPORTE D BY THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CA SE OF CIT VS. L. AND T. MCNEIL LTD. [202 ITR 662] HAD AN OCCASION TO EXAMINE THIS ASPECT AND IT WAS OBSERVED AS UNDER- 'WHEN A BUSINESS IS ESTABLISHED AND IS READY TO COM MENCE BUSINESS THEN IT CAN BE SAID THAT BUSINESS IS SET UP. BUT BE FORE IT IS READY TO COMMENCE BUSINESS, IT IS NOT SET UP. IF A QUESTION ARISES AS TO WHETHER A PARTICULAR BUSINESS CAN BE SAID TO HAVE BEEN SET UP IN THE RELEVANT ASSESSMENT YEAR, THAT QUESTION WILL HAVE TO BE DETE RMINED ON THE FACTS AND CIRCUMSTANCES OF THE CASE. THE FACTS BEFORE THE HON'BLE HIGH COURT WERE AS UND ER THE ASSESSEE COMPANY WAS INCORPORATED ON MARCH 10, 1973, WITH T HE MAIN OBJECT OF MANUFACTURING, BUYING, SELLING AND D EALING IN ALL KINDS OF VULCANISERS, TYRES AND TUBE PRESSES AND TO SET U P A HEAVY MACHINE SHOP. FOR THE ASSESSMENT YEAR 1974-75 RELEVANT FOR THE PREVIOUS YEAR OCTOBER 1, 1972, TO DECEMBER 31, 1973, THE ASSESSEE FILED ITS RETURN DECLARING A LOSS OF RS.1,88,310. IN ITS PROFIT & LO SS ACCOUNT, THE ASSESSEE CREDITED INTEREST OF RS.1,54,325. THE ASSESSEE CLAIMED THAT THE BUSINESS HAD BEEN SET UP DURING THE PREVIOUS YE AR AND, AS SUCH, IT WAS ENTITLED TO DEDUCTION OF EXPENDITURE DEBITED TO PROFIT & LOSS ACCOUNT AS REVENUE EXPENDITURE. THE INCOME-TAX OFFI CER DID NOT ACCEPT THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE HAD NOT SET UP ITS BUSINESS DURING THE RELEVANT PREVIOU S YEAR, BECAUSE EVEN THOUGH THE COMPANY HAD PROCURED ORDERS FOR SUP PLYING MACHINERY TO OUTSIDERS, NEITHER THE PLANT NOR MACHI NERY HAD BEEN INSTALLED NOR ANY MANUFACTURING ACTIVITY HAD COMMEN CED IN THE PREVIOUS YEAR. THE INCOME-TAX OFFICER TAXED THE INT EREST INCOME UNDER SECTION 56 OF THE INCOME TAX ACT, 1961, UNDER THE H EAD INCOME FROM OTHER SOURCES. THE TRIBUNAL HELD THAT IN VIEW OF T HE FACT THAT THE ASSESSEE HAD PURCHASED SOME RAW MATERIALS AND OBTAINED SOME ORDERS FOR SUPPLYING MACHINERY DURING THE RELEVANT PREVIOUS YEAR, IT 21 COULD BE SAID THAT THE ASSESSEE HAD SET UP ITS BUSINESS DURING THE RELEVANT PREVIOUS YEAR, IT COULD BE SAID THAT THE ASSESSEE HAD SET UP ITS BUSINESS DURING THE RELEVANT PREVIOUS YEAR, AND THA T THE INTEREST INCOME SHOULD BE ASSESSED AS BUSINESS INCOME. ON THE ABOVE FACTS, IT WAS HELD AS UNDER: HELD, (I) THAT THOUGH THE MAIN BUSINESS OF THE ASSESSEE WAS TO UNDERTAKE MANUFACTURING ACTIVITIES, THE PLANT AND M ACHINERY WAS INSTALLED ON JUNE 10, 1974 LONG AFTER THE END OF TH E RELEVANT PREVIOUS YEAR AND THE ACTUAL MANUFACTURING COMMENCED ONLY TH EREAFTER AND THE FIRST ORDER WAS EXECUTED ON SEPTEMBER 27, 1974. THE TRIBUNAL WAS NOT CORRECT IN HOLDING THAT THE ASSESSEE HAD SET UP ITS BUSINESS IN THE PREVIOUS YEAR CORRESPONDING TO THE ASSESSMENT 1974- 75. FROM THE ABOVE, IT IS CLEAR THAT UNLESS AND UNTIL T HE MACHINERY OF THE PROJECT IS FULLY INSTALLED AND THE PROJECT BECOMES OPERATIONAL AND THE ORDER IS EXECUTED, IT CANNOT BE SAID THAT THE BUSIN ESS HAS BEEN SET UP. BEFORE US THE FACT THAT THE ASSESSEE WAS IN THE PRO CESS OF SETTING UP AN INSTITUTE FOR TRAINING OF PEOPLE IN FILM-LINE, B UT THE BUILDING FOR SUCH TRAINING INSTITUTION WAS UNDER CONSTRUCTION DURING THE YEAR AND NOT EVEN A SINGLE STUDENT WAS TAKEN UP FOR THE TRAINING PURPOSES, THEREFORE, IT IS CLEAR THAT BUSINESS WAS NOT SET UP AND THERE WAS NO QUESTION OF CLAIMING ANY EXPENDITURE. 21. IT WAS ALSO CONTENDED THAT IN ANY CASE EXPENDIT URE INCURRED, WHICH WAS ON REVENUE ACCOUNT, SHOULD HAVE BEEN ADJU STED AGAINST THE INTEREST INCOME. AS OBSERVED ABOVE, SUCH EXPENDITUR E CANNOT BE ALLOWED AS BUSINESS EXPENDITURE BECAUSE THE BUSINES S HAS NOT COMMENCED. HOWEVER, IF ANY EXPENDITURE WAS INCURRED FOR EARNING INTEREST INCOME, IT COULD HAVE BEEN ALLOWED AND THE LD. CIT[A] HAS ALREADY OBSERVED IN THE LAST THREE LINES OF HIS ORD ER AS UNDER- 22 HOWEVER, WHILE TREATING THE INCOME AS INCOME INCO ME FROM OTHER SOURCES THE AO SHOULD ALSO CONSIDER THE EXPENSES I NCURRED FOR THE PURPOSE OF EARNING SUCH INCOME AND ALLOW THE SAME U /S.57 OF THE I.T.ACT. THUS CONSIDERING THE FACTS OF THE CASE THI S GROUND OF APPEAL IS PARTLY ALLOWED. THEREFORE, NO FURTHER DIRECTION IS REQUIRED. 22. IN THE RESULT, ASSESSEES APPEALS ARE DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 18 TH DAY OF JUNE, 2010. SD/- SD/- (V.D.RAO) (T.R.SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 18 TH JUNE, 2010. P/-*