The DCITBharuch Circle, Bharuch V. M/s. Jhagadia Copper Ltd., Dist.Bharuch

ITA 3546/AHD/2008

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 0477 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-11-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 28-07-2009
• Assessment Year: 2003-2004
• Appeal Filed On: 24-10-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K SHREEDAR
• Assessee Lawyers: T P HEMANI; S N SOPARKAR
• Keywords: Business income; Depreciation; Retrospective amendment; Initiation of penalty proceedings; Scheme of amalgamation; Capital receipt; Revenue expenditure; Capital expenditure
• Section: 271(1)(c); 43B; 251; 32; 147; 56; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD AHMEDABAD A BENCH (BEFORE S/SHRI R.V.EASWAR, VICE-PRESIDENT AND N.S. SAINI, ACCOUNTANT MEMBER) SR.NO. ITA NO. APPELLANT RESPONDENT 1) 3741/AHD/2007 A.Y : 2004-2005 M/S.JHAGADIA COPPER LTD. 747, GIDC INDUSTRIAL ESTATE, JHAGADIA 393 110. DCIT, BHARUCH CIRCLE BHARUCH. 2) 3546/AHD/2008 A.Y.2003-2004 DCIT, BHARUCH CIRCLE BHARUCH. M/S.JHAGADIA COPPER LTD. 747, GIDC INDUSTRIAL ESTATE, JHAGADIA 393 110. 3) 3547/AHD/2008 A.Y.: 2005-2006 DCIT, BHARUCH CIRCLE BHARUCH. M/S.JHAGADIA COPPER LTD. 747, GIDC INDUSTRIAL ESTATE, JHAGADIA 393 110. 4) 3253/AHD/2008 A.Y.2001-2002 M/S.JHAGADIA COPPER LTD. 747, GIDC INDUSTRIAL ESTATE, JHAGADIA 393 110. DCIT, BHARUCH CIRCLE BHARUCH. 5) 3254/AHD/2008 A.Y: 2003-2004 M/S.JHAGADIA COPPER LTD. 747, GIDC INDUSTRIAL ESTATE, JHAGADIA 393 110. DCIT, BHARUCH CIRCLE BHARUCH. 6) 3255/AHD/2008 A.Y:2005-2006 M/S.JHAGADIA COPPER LTD. 747, GIDC INDUSTRIAL ESTATE, JHAGADIA 393 110. DCIT, BHARUCH CIRCLE BHARUCH. 7) 3545/AHD/2008 A.Y. : 2001-2002 DCIT, BHARUCH CIRCLE BHARUCH. M/S.JHAGADIA COPPER LTD. 747, GIDC INDUSTRIAL ESTATE, JHAGADIA 393 110. REVENUE BY : SHRI K.SHREEDAR ASSESSEE BY : SHRI S.N.SOPARKAR AND SHRI T.P.HEMANI. O R D E R PER R.V.EASWAR, VICE-PRESIDENT : THESE APPEALS, BOTH BY THE ASSESSEE AND THE REVENUE, INVOLVE CERTAIN COMMON IS SUES. THEY WERE THEREFORE CLUBBED AND HEARD TOGETHER AND ARE ALSO DISPOSED OF BY A COMMON ORDER FOR THE SAKE OF CONVENIENCE. PAGE - 2 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -2- 2. THE ASSESSMENT YEARS INVOLVED ARE 2001-2002, 200 3-2004, 2004-2005 AND 2005-2006. FOR THE ASSESSMENT YEARS 2001-2002, 2003-2004 AND 2005- 2006 BOTH THE ASSESSEE AND THE DEPARTMENT ARE IN AP PEAL. FOR THE ASSESSMENT YEAR 2004-2005, IT IS ONLY THE ASSESSEE WHICH IS IN APPEAL. 3. THE ASSESSEE IS A LISTED PUBLIC LIMITED COMPANY UNDER THE COMPANIES ACT, 1956 AND IS ENGAGED IN THE PRODUCTION OF COPPE R CATHODES. ASSESSMENT YEAR 2001-2002 (ITA NOS.3253/AHD/2008 AN D 3545/AHD/2008) 4. WE MAY TAKE UP ITA NO.3253/AHD/2008 WHICH IS AN APPEAL FILED BY THE ASSESSEE. THE FIRST GROUND WHICH IS AGAINST THE RE OPENING OF THE ASSESSMENT UNDER SECTION 147 OF THE INCOME TAX ACT IS DISMISSE D AS NOT PRESSED. 5. THE SECOND GROUND, TOGETHER WITH ITS SUB-GROUNDS , READS AS UNDER: 2. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF THE AO IN ADDING A SUM OF RS.93,47,688/- BEING THE INTEREST INCOME EARNED BY THE APPELLANT. 2.1 ALTERNATIVELY AND WITHOUT PREJUDICE, LD.CIT(A) HAS ERRED IN NOT APPRECIATING THAT THIS INTEREST INCOME WOULD GO TO REDUCE THE COST OF THE ASSETS/CAPITAL WORK-IN-PROGRESS AS THE APPELLANT HA S NOT COMMENCED ITS BUSINESS ACTIVITIES. 2.2 IN ANY CASE, THE APPELLANT HAS INCURRED HUGE IN TEREST EXPENDITURE OF RS.123.74 CRORES AND THEREFORE THIS INTEREST INC OME OF RS.93,47,688/- WOULD BE NETTED OFF AGAINST SUCH INTEREST EXPENDITU RE. THE BRIEF FACTS RELATING TO THESE GROUNDS MAY BE NO TICED. IT WAS NOTICED BY THE ASSESSING OFFICER THAT THE ASSESSEE HAD NOT INCLUDE D THE INTEREST OF RS.93,47,688/- IN THE RETURN. HE THEREFORE CALLED UPON THE ASSESSEE TO FURNISH THE DETAILS OF THE SAME AND ALSO EXPLAIN WHY IT SHO ULD NOT BE ASSESSED. ON THE GROUND THAT THE ASSESSEE DID NOT RESPOND TO THE NOT ICES ISSUED BY THE AO SEEKING CLARIFICATIONS ON THIS POINT, THE AO PROCEE DED TO COMPLETE THE ASSESSMENT UNDER SECTION 144 READ WITH SECTION 147 AND INCLUDED THE INTEREST AS PAGE - 3 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -3- INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. THE REASONS FOR DOING SO ARE CONTAINED IN THE ASSESSMENT ORDER. ACCORDING T O THE AO THE INTEREST WAS EARNED ON THE DEPOSITS MADE BY THE ASSESSEE OUT OF ITS SURPLUS FUNDS AND BEFORE THE COMMENCEMENT OF THE BUSINESS AND THEREFORE IT W AS TAXABLE UNDER THE RESIDUARY HEAD AS HELD BY THE SUPREME COURT IN TUTI CORIN ALKALIES CHEMICALS & FERTILISERS VS. CIT, 227 ITR 172 AND CIT VS. CORO MANDEL CEMENTS LTD., 234 ITR 412. THE AO ALSO NOTED THAT THE PROFIT AND LOSS ACCOUNT REVEALED THAT NO BUSINESS ACTIVITIES WERE CARRIED ON BY THE ASSES SEE DURING THE RELEVANT PREVIOUS YEAR AND THAT THE ASSESSEE WAS IN THE PROC ESS OF SETTING UP THE COPPER PROJECT AND HAD NOT COMMENCED BUSINESS. APPLYING THE AFORESAID AUTHORITIES, HE BROUGHT THE INTEREST TO TAX UNDER THE HEAD INCO ME FROM OTHER SOURCES. 6. IT APPEARS THAT WHEN THIS PROPOSAL WAS PUT BEFOR E THE ASSESSEE, THE ASSESSEE, IN ADDITION TO CONTENDING THAT THE INTERE ST IS NOT TAXABLE, ALSO PUT FORTH A CLAIM THAT THE INTEREST OF RS.123.74 CRORES SHOUL D BE ALLOWED AS A DEDUCTION AGAINST THE INTEREST RECEIVED BY THE ASSESSEE IN WH ICH CASE THERE WOULD ONLY BE A LOSS. THE AO NEGATIVED THIS CLAIM ON THE GROUND THAT THE ASSESSEE HAD NOT COMMENCED COMMERCIAL PRODUCTION. HE RELIED ON THE ORDER PASSED BY THE CIT(A) IN THE ASSESSMENT YEAR 2004-2005 ON THIS POI NT AND DISALLOWED THE CLAIM OF THE ASSESSEE. THE RESULT WAS THAT THE ENT IRE INTEREST INCOME OF RS.93,47,688/- WAS ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES WITHOUT ANY DEDUCTION BEING ALLOWED AGAINST THE SAM E. 7. IN THE APPEAL BEFORE THE CIT(A) IT WAS SUBMITTED THAT INTEREST OF RS.6,03,085/- WAS RECEIVED ON DEPOSITS KEPT WITH TH E BANK OUT OF THE BORROWED FUNDS, AS MARGIN MONEY FOR OPENING LETTERS OF CREDI T FOR ACQUIRING MACHINERY, SPARES ETC. FOR THE COMPLETION OF THE PROJECT AND T HEREFORE THIS INTEREST CANNOT BE ASSESSED AS INTEREST OUT OF SURPLUS FUNDS. IT WAS SUBMITTED THAT THIS INTEREST WAS RIGHTLY REDUCED FROM THE CAPITAL WORKS IN PROGRESS ACCOUNT WHEREIN ALL THE EXPENDITURE INCURRED DURING THE CONSTRUCTION PERIOD WAS CAPITALISED. IT WAS FURTHER SUBMITTED THAT THE INTEREST OF RS.84,64,578 /- WAS RECEIVED ON SHORT TERM PAGE - 4 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -4- DEPOSITS KEPT OUT OF TEMPORARILY UNUTILISED BORROWE D FUNDS DURING THE CONSTRUCTION STAGE OF THE PROJECT AND WAS ALSO REDU CED FROM THE CAPITAL WORK IN PROGRESS ACCOUNT. IT WAS ALSO CONTENDED THAT THE CASES CITED BY THE AO WERE DISTINGUISHABLE ON FACTS IN AS MUCH AS IN THOS E CASES THE ASSESSEES HAD DEPOSITED THE SURPLUS FUNDS WHEREAS IN THE PRESENT ASSESSEES CASE THE DEPOSITS WERE MADE OUT OF BORROWED AMOUNTS WHICH WERE NOT IM MEDIATELY REQUIRED BY THE ASSESSEE. IN THE ALTERNATIVE IT WAS CONTENDED THAT THE ASSESSEE WAS ENTITLED TO THE DEDUCTION OF THE INTEREST OF RS.123.74 CRORE S PAID, FROM THE INTEREST RECEIVED, UNDER SECTION 57(III) OF THE ACT. ANOTHE R CONTENTION PUT FORTH BEFORE THE CIT(A) WAS THAT THE AO WAS NOT RIGHT IN DISALLO WING THE INTEREST PAYMENT ON THE GROUND THAT THE COMMERCIAL PRODUCTION HAD NO T COMMENCED. IT WAS IN THIS CONNECTION POINTED OUT THAT THE ASSESSEE WAS A N EXISTING COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF PHOSPHOR BRONZE WIRE CLOTH, STAINLESS STEEL WIRE CLOTH, DANDI ROLES, BRACKETS AND AUXILIARIES, WATER SHOVERS, ED M WIRES AND DRYERS SCREENS, BRASS/BRONZE WIRES, COPPE R AND COPPER ALLIED STRIPS AND SPECIALTY PAPERS AND THAT IN THE YEAR 1993 IT D ECIDED TO SET UP A PLANT FOR THE MANUFACTURE OF COPPER CATHODE AS AN EXTENSION OF TH E EXISTING BUSINESS. IT WAS POINTED OUT THAT IN THE ASSESSMENT YEAR 1995-96 TO 1997-98, THE AO ALLOWED THE INTEREST EVEN THOUGH IT WAS CAPITALISED IN THE BOOKS OF ACCOUNT AND THE ASSESSMENTS FOR THESE YEARS WERE COMPLETED AFTE R A SCRUTINY UNDER SECTION 143(3). IT WAS POINTED OUT THAT THE INTEREST WAS A LLOWED AS REVENUE EXPENDITURE UNDER SECTION 36(1)(III). IN SUPPORT OF THE CLAIM FOR THE ALLOWANCE OF THE INTEREST PAID BY THE ASSESSEE, THE ASSESSEE RELIED ON THE JUDGMENT OF THE SUPREME COURT IN DCIT VS. CORE HEALTHCARE PVT. LTD. RENDERED ON 8-2-2008. 8. THE CIT(A) SUSTAINED THE AOS ACTION IN ASSESSIN G THE INTEREST OF RS.93,47,688/-, RELYING ON HIS ORDER DATED 25-7-200 7 IN RESPECT OF THE ASSESSMENT YEAR 2004-2005. HE HELD, RELYING ON THE AFORESAID ORDER THAT THE COMMERCIAL PRODUCTION IN THE COPPER CATHODE PLANT H AD BEGUN ONLY IN MAY, 2006 AND NOT DURING THE PREVIOUS YEAR RELEVANT TO T HE ASSESSMENT YEAR 2001- 2002. THE CIT(A) MADE ALSO A REFERENCE TO HIS ORDE R DATED 1-1-2008 IN RESPECT PAGE - 5 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -5- OF THE ASSESSMENT YEAR 2002-2003 WHERE ALSO HE HAD HELD THAT THE COPPER CATHODE PLANT WAS DECIDED TO BE SET UP IN 1993 BUT WAS NOT ACTUALLY SET UP FOR A LONG TIME INCLUDING THE PREVIOUS YEAR RELEVANT TO T HE ASSESSMENT YEAR 2002- 2003. IN THIS ORDER, THE CIT(A) FURTHER HELD THAT THE SETTING UP OF THE COPPER SMELTER PLANT CANNOT BE CONSIDERED AS AN EXTENSION OF THE EXISTING BUSINESS SINCE THERE WAS NO COPPER PLANT OR COPPER MANUFACTU RING UNIT EARLIER. ACCORDINGLY, IT WAS HELD BY THE CIT(A) IN HIS ORDER FOR THE ASSESSMENT YEAR 2002-2003 THAT NO BUSINESS INCOME CAN BE COMPUTED F OR THAT YEAR AND THEREFORE THERE WAS NO QUESTION OF ALLOWING ANY INTEREST UNDE R SECTION 36(1)(III). THIS ORDER PASSED BY THE CIT(A) FOR THE ASSESSMENT YEAR 2002-2003 WAS ADOPTED BY HIM WHILE DISPOSING OF THE ASSESSEES CLAIM FOR THE YEAR NOW UNDER APPEAL, TO THE EFFECT THAT THE INTEREST OF RS.123.74 CRORES SH OULD BE ALLOWED AS A DEDUCTION. EVENTUALLY, THE CLAIM OF THE ASSESSEE FOR THE DEDUCTION OF THE INTEREST WAS DISMISSED. 9. THE ASSESSEE HAS COME IN FURTHER APPEAL BEFORE T HE TRIBUNAL AGAINST THE AFORESAID ORDER OF THE CIT(A). THE GROUND TAKEN BY THE ASSESSEE IS FIRSTLY THAT THE INTEREST OF RS.93,47,688/- CANNOT BE TAXED AND THAT IT WOULD GO TO REDUCE THE COST OF THE ASSETS/ CAPITAL WORK IN PROGRESS SINCE NO BUSINESS HAD BEEN COMMENCED IN THE RELEVANT PREVIOUS YEAR. IN THE A LTERNATIVE IT IS CONTENDED THAT IN ANY CASE THE INTEREST OF RS.123.74 CRORES P AID BY THE ASSESSEE SHOULD BE ADJUSTED OR NETTED AGAINST THE INTEREST INCOME. TH E LEARNED COUNSEL FOR THE ASSESSEE DID NOT CONTEND BEFORE US THAT THE INTERES T INCOME OF RS.93,47,688/- CANNOT BE TAXED UNDER THE HEAD INCOME FROM OTHER S OURCES, BUT THE ONLY CONTENTION ADVANCED BEFORE US IS THAT THE INTEREST EXPENDITURE SHOULD BE ADJUSTED AGAINST THE INTEREST RECEIPTS BY VIRTUE OF SECTION 57(III) OF THE ACT. HE CLARIFIED THAT THE ASSESSEES CONTENTION IS NOT THA T THE ENTIRE INTEREST EXPENDITURE OF RS.123.74 CRORES SHOULD BE ALLOWED AS A DEDUCTIO N AND THAT THE ASSESSEE WOULD BE PROPERLY ENTITLED ONLY TO THE ALLOWANCE OF INTEREST INCURRED TO EARN THE INTEREST INCOME OF RS.93,47,688/-. TO THIS EXTENT IT WAS SUBMITTED THAT GROUND NO.2.2 STANDS MODIFIED. IN SUPPORT OF THE CLAIM FO R ALLOWANCE OF INTEREST PAGE - 6 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -6- EXPENDITURE INCURRED BY THE ASSESSEE TO EARN THE IN TEREST INCOME OF RS.93,47,688/-, THE LEARNED COUNSEL FOR THE ASSESSE E RELIED ON THE ORDER OF THE AHMEDABAD BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. TORRENT GUJARAT BIO-TECH LTD. (AND VICE-VERSA) IN ITA NOS.3139 AND 3140/AHD/1996 (AY 1993- 94) DATED 5-6-2009. A COPY OF THE SAID ORDER IS FI LED AND OUR ATTENTION WAS DRAWN TO PARA-10 TO 15 OF THE SAID ORDER. AS AGAIN ST THIS, THE LEARNED CIT-DR STRONGLY RELIED ON THE ORDERS OF THE DEPARTMENTAL A UTHORITIES. 10. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTI ONS AND THE FACTS. WE MAY REFER TO PAGES 54, 90 AND 103 OF THE PAPER BOOK FILED BY THE ASSESSEE FOR THIS YEAR IN ORDER TO UNDERSTAND THE ASSESSEES CLA IM. THE COMPUTATION OF TAXABLE INCOME FOR THE YEAR ENDED 31-3-2001 (PAGE 5 4) SHOWS THAT THE INTEREST INCOME WAS NOT SHOWN AS INCOME UNDER THE HEAD INCO ME FROM OTHER SOURCES. THE PROFIT AND LOSS ACCOUNT AT PAGE 90 READ WITH SC HEDULE-H THERETO (PAGE 97) SHOWS THAT THE INTEREST INCOME WAS NOT INCLUDED IN THE INCOME SIDE OF THE SAID ACCOUNT. THE NOTES ON ACCOUNTS START FROM PAGE 101 OF THE PAPER BOOK AND THE DETAILS OF THE CAPITAL WORKS-IN-PROGRESS ARE GIVEN AT PAGE 103. THIS SHOWS THAT SEVERAL ITEMS OF EXPENDITURE ON CAPITAL ACCOUNT SUC H AS MACHINERY IN TRANSIT, ADVANCES ON CAPITAL ACCOUNT, STOCK OF STORES AND PR EOPERATIVE EXPENSES REFERABLE TO THE COPPER PROJECTS WERE ALL CAPITALIS ED AND THE AGGREGATE FIGURE CAME TO RS.4,621,334,621/-. AGAINST THIS FIGURE, T HE SALE OF RAW MATERIAL, INTEREST OF RS.94,47,688/-, OTHER RECEIPTS AND TRAN SFERS TO CAPITAL WORK-IN- PROGRESS ACCOUNT, ALL AGGREGATING TO RS.200,813,984 /- WAS DEDUCTED AND THE BALANCE OF RS.4,420,520,637/- WAS TAKEN TO CAPITAL WORK-IN-PROGRESS. IT IS THUS CLEAR FROM THE ACCOUNT THAT THE INTEREST OF RS.93,4 7,688/- WAS NOT SHOWN IN THE ACCOUNTS OR IN THE RETURN AS THE ASSESSEES TAXABLE INCOME, BUT WAS REDUCED FROM THE CAPITAL WORK-IN-PROGRESS ALONG WITH OTHER RECEIPTS SUCH AS SALE OF RAW MATERIAL AND MISCELLANEOUS RECEIPTS. SINCE THE LEA RNED COUNSEL FOR THE ASSESSEE DID NOT DISPUTE BEFORE US THE TAXABILITY OF THE INT EREST INCOME, GROUND NOS.2 AND 2.1 ARE DISMISSED. PAGE - 7 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -7- 11. GROUND NO.2.2 AS MODIFIED BEFORE US REMAINS TO BE CONSIDERED. THE LEARNED COUNSEL FOR THE ASSESSEE HAD RELIED ON THE ORDER OF THE AHMEDABAD BENCH OF THE TRIBUNAL IN THE CASE OF TORRENT GUJARA T BIO-TECH LTD. (SUPRA). WE HAVE CAREFULLY PERUSED THE SAID ORDER. IN PARA-10 TO 12 OF THE ORDER, THE TRIBUNAL DEALT WITH THE ASSESSEES CONTENTION THAT THE INTEREST EARNED DURING THE PRE-COMMENCEMENT PERIOD CANNOT BE ASSESSED AS INCOM E AND HELD THAT THERE WAS NO MATERIAL TO SHOW THAT THE INTEREST EARNED WA S INEXTRICABLY LINKED TO THE SETTING UP OF THE PLANT. ACCORDINGLY, THE CONTENTI ON WAS REJECTED AND THE ASSESSMENT OF THE INTEREST AS INCOME FROM OTHER SOU RCES WAS UPHELD. THE ALTERNATIVE CONTENTION THAT THE EXPENDITURE INCURRE D FOR EARNING THE INTEREST SHOULD BE ALLOWED AS A DEDUCTION UNDER SECTION 57(I II) WAS ALSO CONSIDERED BY THE TRIBUNAL IN PARA-13 TO 15. THE TRIBUNAL NOTED THAT THE INTEREST INCOME IN THE CASE BEFORE THEM WAS RECEIVED ON THE DEPLOYMENT OF THE ENTIRE FUNDS RAISED BY ISSUE OF PARTLY CONVERTIBLE DEBENTURES AND THERE FORE .. THE EXPENDITURE INCURRED IN RELATION TO THE ISSUE OF SAID DEBENTURE S AND INTEREST PAID THEREON WERE EXPENDED FOR THE PURPOSE OF EARNING OF INTERES T INCOME OF RS.1,08,40,072/- DURING THE YEAR UNDER CONSIDERATIO N AND, THEREFORE, THE SAME HAS TO BE DEDUCTED FOR COMPUTING THE INCOME ASSESSA BLE UNDER THE HEAD INCOME FROM OTHER SOURCES. IN THE LIGHT OF THIS ORDER OF A CO-ORDINATE BENCH, WHICH IS BINDING ON US, WE HAVE TO HOLD IN THE PRES ENT CASE THAT THE INTEREST PAID BY THE ASSESSEE TO EARN THE INTEREST INCOME OF RS.9 3,47,688/- SHOULD BE ALLOWED AS DEDUCTION. IT IS NOT IN DISPUTE THAT THE DEPOS ITS MADE BY THE ASSESSEE ON WHICH INTEREST WAS EARNED WERE MADE OUT OF BORROWED MONIES. THE INTEREST PAID IN RESPECT OF THE BORROWED MONIES, TO THE EXTE NT IT IS ATTRIBUTABLE TO THE EARNING OF THE INTEREST INCOME OF RS.93,47,688/- IS THEREFORE DIRECTED TO BE ALLOWED AS A DEDUCTION UNDER SECTION 57(III) AGAINS T THE AFORESAID INTEREST INCOME. THE QUANTIFICATION OF THE INTEREST ALLOWAB LE ON THE ABOVE BASIS IS LEFT TO THE AO WHO SHALL DO SO AFTER GIVING DUE OPPORTUN ITY TO THE ASSESSEE OF BEING HEARD. THUS, THE GROUND NO.2.2 IS PARTLY ALLOWED. PAGE - 8 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -8- 12. GROUND NO.3 IS DIRECTED AGAINST THE ADDITION OF RS.7,52,882/- TO THE OTHER INCOME OF THE ASSESSEE. AT THE TIME OF HEARING, TH E LEARNED COUNSEL FOR THE ASSESSEE STATED THAT HE WOULD RESTRICT HIMSELF TO C HALLENGING THE ADDITION ONLY TO THE EXTENT OF RS.2,10,890/- WHICH REPRESENTS THE SA LE PROCEEDS OF SCRAP GENERATED BY THE CAPITAL WORKS-IN-PROGRESS AND THE BALANCE OF THE ADDITION THAT IS RS.5,41,992/- WAS NOT PRESSED. A PERUSAL OF THE ASSESSMENT ORDER SHOWS THAT THE MISCELLANEOUS RECEIPT OF RS.2,10,890/- WAS ASSE SSED AS INCOME FROM OTHER SOURCES. IT APPEARS THAT THE SAID AMOUNT WAS REDUC ED BY THE ASSESSEE FROM THE CAPITAL WORKS-IN-PROGRESS ACCOUNT AND WAS NOT SEPAR ATELY SHOWN AS INCOME. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE REL IED ON THE ORDER OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF FLOATG LASS INDIA LTD. VS. JCIT, (2007) 107 ITD 426. THE LEARNED CIT-DR RELIED ON T HE ORDERS OF THE INCOME TAX AUTHORITIES. WE HAVE GONE THROUGH THE SAID ORD ER OF THE MUMBAI BENCH AND FIND THAT IT SUPPORTS THE ASSESSEES CONTENTION. I T HAS BEEN HELD IN THIS ORDER THAT WHERE THE COST OF EQUIPMENT IS ADDED TO THE COST OF THE PROJECT, THE SALE PRICE REALISED FROM THE DISPOSAL OF SUCH MATERIAL MUST BE REDUCED FROM THE COST OF THE PROJECT AND CANNOT BE BROUGHT TO TAX AS REVENUE REC EIPT. RESPECTFULLY FOLLOWING THE ORDER OF THE MUMBAI BENCH CITED ABOVE, WE DELET E THE ADDITION OF RS.2,10,890/- FROM THE ASSESSMENT. THE GROUND IS T HUS PARTLY ALLOWED. 13. GROUND NO.4 IS A GENERAL GROUND AND REQUIRES NO SEPARATE ADJUDICATION. GROUND NO.5 IS AGAINST THE LEVY OF INTEREST UNDER S ECTIONS 234A TO 234D. THIS IS CONSEQUENTIAL. GROUND NOS.6 AND 7 ARE DISMISSED AS NO APPEAL CAN BE FILED AGAINST THE MERE INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) AND SECTION 271B OF THE ACT. 14. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. 15. WE NOW TAKE UP THE APPEAL OF THE DEPARTMENT IN ITA NO.3545/AHD/2008. THERE ARE TWO GROUNDS BUT THE IS SUE INVOLVED IS THE SAME. THE GROUNDS ARE TO THE EFFECT THAT THE CIT(A) ERRED IN DIRECTING THE AO TO ALLOW CAPITALISATION OF THE INTEREST EXPENDITURE OF RS.12 3.74 CRORES. IT IS ALSO PAGE - 9 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -9- CONTENDED THAT IN DIRECTING THE AO TO CAPITALIZE TH E INTEREST, HE FAILED TO APPRECIATE THAT THE INTEREST WAS NOT ACTUALLY PAID BY THE ASSESSEE AND THE BUSINESS HAD NOT COMMENCED. THE DEPARTMENT WANTS T HE ORDER OF THE ASSESSING OFFICER ON THE ABOVE POINTS TO BE RESTORE D. 16. IN SUPPORT OF THE APPEAL, IT WAS CONTENDED BY T HE LEARNED CIT-DR THAT THE ASSESSMENT WAS COMPLETED UNDER SECTION 144 OF T HE ACT BECAUSE THE ASSESSEE DID NOT FURNISH THE RELEVANT DETAILS. OUR ATTENTION IN THIS CONNECTION WAS DRAWN TO PAGE-7 OF THE ASSESSMENT ORDER WHERE I N THE SECOND SUB- PARAGRAPH OF PARA-8 THE AO HAS CLEARLY STATED THAT THE ASSESSEE HAS NOT FURNISHED THE DETAILS OF INTEREST ACTUALLY PAID NOR WAS THE TAX AUDIT REPORT FILED. THE AO HAS ALSO OBSERVED THAT THE PROFIT AND LOSS A CCOUNT WAS NOT DRAWN UP ONLY BECAUSE THE BUSINESS HAD NOT COMMENCED. THE A O HAS ALSO REFERRED TO SECTION 43B OF THE INCOME TAX ACT IN SUPPORT OF THE DISALLOWANCE. HE HAS ALSO REFERRED TO THE ORDER OF THE CIT(A) FOR THE ASSESSM ENT YEAR 2004-2005 IN WHICH HE HAS HELD THAT THE ASSESSEE WILL NOT BE ALLOWED T O CAPITALIZE THE INTEREST. IT WAS THE FURTHER SUBMISSION OF THE LEARNED CIT-DR BE FORE US THAT THE GENUINENESS OF THE INTEREST PAYMENT WAS ITSELF IN D OUBT AND THEREFORE THE CIT(A) WAS NOT JUSTIFIED IN GIVING DIRECTIONS TO TH E AO TO CAPITALIZE THE INTEREST. 17. ON BEHALF OF THE ASSESSEE THE LEARNED COUNSEL S UBMITTED THAT SINCE THE AO HAS INVOKED SECTION 43B, THE ASSUMPTION IS THAT THE INTEREST CLAIM WAS GENUINE AND THEREFORE THERE WAS NO JUSTIFICATION FO R NOT ALLOWING THE ASSESSEE TO CAPITALIZE THE SAME. HE DREW OUR ATTENTION TO THE SECOND SUB-PARAGRAPH OF PARAGRAPH-8 OF THE ASSESSMENT ORDER AND SUBMITTED T HAT THE OVERRIDING REASON FOR NOT ALLOWING CAPITALIZATION WAS NOT THAT THE IN TEREST CLAIM WAS NOT GENUINE, BUT IT WAS BECAUSE THE BUSINESS OF THE ASSESSEE HAD NOT COMMENCED. ACCORDING TO THE LEARNED COUNSEL, THIS REASON WAS NOT RELEVAN T FOR THE PURPOSE OF DISALLOWING THE CLAIM OF CAPITALIZATION. IN FACT T HE CAPITALIZATION CAN BE PAGE - 10 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -10- ALLOWED ONLY IF THE BUSINESS HAS NOT COMMENCED. HE STRONGLY RELIED ON THE ORDER OF THE CIT(A) AND THE REASONING GIVEN THEREIN . 18. WE HAVE CAREFULLY CONSIDERED THE FACTS AND THE RIVAL CONTENTIONS. THERE IS NO DISPUTE THAT THE ASSESSEE HAS CAPITALIZED THE INTEREST OF RS.123.74 CRORES. IN FACT THE AO IN HIS LETTER DATED 21-9-2007 HAS RA ISED THE FOLLOWING QUERY: 8) YOU HAVE CAPITALIZED INTEREST OF RS.123.74 CROR ES, YOU ARE REQUESTED TO FURNISH THE NAME OF THE BANK/FINANCIAL INSTITUTIONS, QUANTUM OF PRINCIPAL AMOUNT, INTEREST PAYABLE AND DETAILS O F INTEREST ACTUALLY PAID DURING THE YEAR. IF THE INTEREST HAS NOT BEEN ACTUALLY PAID DURING THE YEAR, YOU ARE REQUESTED TO EXPLAIN AS TO WHY TH E SAME SHOULD BE ALLOWED TO BE CAPITALIZED. IN THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE AS SESSEE CLAIMED THE INTEREST AS DEDUCTION UNDER THE HEAD PROFITS AND GAINS OF B USINESS OR PROFESSION. AS ALREADY SEEN WHILE DISPOSING OF THE ASSESSEES APPE AL, THE AO DISALLOWED THE INTEREST ON THE GROUND THAT THE COMMERCIAL PRODUCTI ON IN THE COPPER PROJECT HAS NOT COMMENCED. ACCORDING TO THE AO, THE ASSESSEE D ID NOT FURNISH ANY REPLY TO THE QUERY OF THE AO QUOTED ABOVE TO THE EFFECT T HAT WHY THE CLAIM FOR CAPITALIZATION OF INTEREST SHOULD NOT BE DISALLOWED . HE THEREFORE INVOKED SECTION 43B AND ALSO REFERRED TO THE FACT THAT THE ASSESSEE DID NOT COMMENCE THE PRODUCTION AND DISALLOWED THE CLAIM OF CAPITALIZATI ON. WHILE DEALING WITH THE GROUND NO.2 IN THE ASSESSEES APPEAL, WE HAVE HELD THAT OUT OF THE INTEREST CLAIM OF RS.123.74 CRORES, THE INTEREST RELATING TO THE E ARNING OF THE INTEREST INCOME OF RS.93,47,688/- SHOULD BE ALLOWED AS A DEDUCTION UND ER SECTION 57(III). WE HAD ALSO DIRECTED THE AO TO QUANTIFY SUCH INTEREST. IN DEALING WITH THE PRESENT GROUND, WE THEREFORE MAKE IT CLEAR AT THE OUTSET TH AT THE ENTIRE INTEREST CLAIM OF RS.123.74 CRORES CANNOT BE CAPITALIZED AND ONLY THA T PART, IF ANY, WHICH REMAINS AFTER THE AO GIVES EFFECT TO OUR DECISION IN RESPEC T OF GROUND NO.2 IN THE ASSESSEES APPEAL CAN BE CONSIDERED FOR CAPITALIZAT ION. 19. WITH THIS CLARIFICATION, WE PROCEED TO DISCUSS THE PRESENT GROUND. THE CAPITALIZATION OF THE INTEREST PAID AND INCLUSION O F THE SAME IN THE CAPITAL WORK- PAGE - 11 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -11- IN-PROGRESS ACCOUNT WOULD MEAN THAT THE INTEREST WO ULD BECOME PART OF THE COST OF THE PROJECT AND THE ASSETS THEREOF ON WHICH THE ASSESSEE WOULD BE ENTITLED TO DEPRECIATION. THE ISSUE OF CAPITALIZATION THUS ASS UMES IMPORTANCE ONLY FROM THE ANGLE OF DEPRECIATION ONCE THE BUSINESS COMMENC ES. THE ARGUMENT OF THE LEARNED CIT-DR THAT THE GENUINENESS OF THE INTEREST CLAIM ITSELF IS IN DOUBT IS NOT ACCEPTABLE AS IT APPEARS TO TRAVEL EVEN BEYOND THE ASSESSMENT ORDER. THE AO HAS NOWHERE IN THE ASSESSMENT ORDER QUESTIONED T HE GENUINENESS OF THE INTEREST CLAIM. HE HAS NOT QUESTIONED OR DOUBTED T HE FACT THAT THE ASSESSEE ACTUALLY INCURRED THE LIABILITY TO PAY THE INTEREST . WHAT HE HAS SAID IS THAT THE INTEREST IS NOT ALLOWABLE AS A DEDUCTION UNDER SECT ION 43B OF THE ACT SINCE IT HAS NOT BEEN ACTUALLY PAID. THIS TAKES CARE OF THE ASSESSEES CLAIM MADE BEFORE THE AO THAT THE INTEREST IS ALLOWABLE AS A DEDUCTIO N UNDER SECTION 36(1)(III). WHEN ADMITTEDLY THERE IS NO BUSINESS INCOME TO BE A SSESSED, THERE IS NO QUESTION OF ALLOWING ANY DEDUCTION FOR THE INTEREST EXPENDITURE. HOWEVER THESE REASONS FOR NOT ALLOWING THE INTEREST AS A DEDUCTIO N CANNOT CONSTITUTE VALID REASONS FOR NOT PERMITTING THE ASSESSEE TO CAPITALI ZE THE INTEREST. IT IS WELL SETTLED THAT ANY INTEREST EXPENDITURE INCURRED PRIO R TO THE COMMENCEMENT OF THE PRODUCTION AND DURING THE CONSTRUCTION PERIOD HAS T O BE CAPITALIZED. THE CIT(A), IN ADDITION TO THE AFORESAID REASONING, HAS ALSO REFERRED TO EXPLANATION- 8 TO SECTION 43(1) INSERTED BY THE FINANCE ACT, 198 6 WITH RETROSPECTIVE EFFECT FROM 1-4-1974. ACCORDING TO THE SAID EXPLANATION WHERE ANY AMOUNT IS PAID OR IS PAYABLE AS INTEREST IN CONNECTION WITH THE AC QUISITION OF AN ASSET, SO MUCH OF SUCH AMOUNT AS IS RELATABLE TO ANY PERIOD AFTER SUCH ASSET IS FIRST PUT TO USE SHALL NOT BE INCLUDED, AND SHALL BE DEEMED NEVER TO HAVE BEEN INCLUDED IN THE ACTUAL COST OF THE ASSET. IN EFFECT, IT MEANS THA T INTEREST RELATING TO THE CONSTRUCTION PERIOD CAN ONLY BE CAPITALIZED. THIS IS ALSO A SETTLED ACCOUNTANCY PRINCIPLE. THE ASSESSEE BY CAPITALIZING THE INTERE ST EXPENDITURE HAS FOLLOWED THE WELL SETTLED ACCOUNTANCY PRINCIPLE AND ALSO THE LEGAL POSITION. WE ACCORDINGLY UPHOLD THE DECISION OF THE CIT(A) TO AL LOW CAPITALIZATION OF THE INTEREST. AS ALREADY NOTED ONLY THAT PART OF THE I NTEREST OUT OF RS.123.74 CRORES PAGE - 12 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -12- WILL BE CAPITALIZED WHICH REMAINS AFTER ALLOWANCE, IF ANY, OF ANY INTEREST AS EXPENDITURE INCURRED TO EARN THE INTEREST INCOME OF RS.93,47,688/- UNDER SECTION 57(III). SUBJECT TO THIS RIDER, THE DECISI ON OF THE CIT(A) IS AFFIRMED AND THE APPEAL OF THE DEPARTMENT IS DISMISSED. 20. ASSESSMENT YEAR 2003-2004: ITA NO.3254/AHD/2008 IS AN APPEAL FILED BY THE ASSE SSEE AND ITA NO.3546/AHD/2008 IS AN APPEAL FILED BY THE DEPARTME NT. 21. WE FIRST TAKE UP THE ASSESSEES APPEAL. THE F IRST GROUND IN THIS APPEAL CHALLENGES THE JURISDICTION OF THE ASSESSING OFFICE R TO REOPEN THE ASSESSMENT UNDER SECTION 147. THE GROUND WAS NOT PRESSED AT T HE TIME OF HEARING AND IS ACCORDINGLY DISMISSED. SIMILARLY, GROUND NOS.3 AND 4 WHICH ARE RESPECTIVELY DIRECTED AGAINST THE ADDITION OF RS.26,250/- AS DIV IDEND EARNED BY THE ASSESSEE AND RS.4,50,000/- UNDER THE HEAD INCOME FROM HOUSE PROPERTY ARE ALSO DISMISSED AS NOT PRESSED. 22. GROUND NO.6 RELATES TO THE TREATMENT OF A SUM O F RS.18,29,618/- WHICH WAS RECEIVED BY THE ASSESSEE ON SALE OF SCRAP GENER ATED DURING THE CONSTRUCTION PROCESS OF THE PROJECT. THE ASSESSEE REDUCED THE C APITAL WORKS-IN-PROGRESS BY THE AFORESAID AMOUNT AND DID NOT OFFER THE SAME TO TAX ON THE GROUND THAT THE PRODUCTION HAD NOT COMMENCED AND THE PROPER TREATME NT TO BE GIVEN TO SUCH A RECEIPT WAS TO REDUCE THE CAPITAL WORKS-IN-PROGRESS BY THE SAID RECEIPT. THIS WAS NOT ACCEPTED BY THE DEPARTMENTAL AUTHORITIES WH O BROUGHT THE RECEIPT TO TAX UNDER THE HEAD INCOME FROM OTHER SOURCES. AN IDE NTICAL GROUND WAS CONSIDERED BY US IN THE ASSESSEES APPEAL FOR THE A SSESSMENT YEAR 2001-2002 (GROUND NO.3). FOLLOWING THE ORDER OF THE MUMBAI B ENCH OF THE TRIBUNAL IN THE CASE OF FLOATGLASS INDIA LTD. (SUPRA) WE HAVE UPHEL D THE ASSESSEES CONTENTION AND DELETED THE ADDITION MADE UNDER THE HEAD INCOME FROM OTHER SOURCES. SINCE THE FACTS AND THE CONTROVERSY ARE THE SAME, I N LINE WITH OUR DECISION CITED PAGE - 13 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -13- ABOVE, WE DELETE THE ADDITION OF RS.18,29,618/- MAD E UNDER THE HEAD INCOME FROM OTHER SOURCES AND ALLOW THE GROUND. 23. WE MAY NOW TAKE UP GROUND NO.2 IN WHICH THE ASS ESSEE HAS FIRSTLY CHALLENGED THE ADDITION OF THE INTEREST INCOME OF R S.68,19,906/- UNDER THE HEAD INCOME FROM OTHER SOURCES AND HAS ALTERNATIVELY C ONTENDED THAT IN ANY CASE THE INTEREST PAID BY THE ASSESSEE ON AMOUNTS BORROW ED FOR MAKING THE DEPOSITS WHICH GAVE RISE TO THE INTEREST INCOME SHOULD BE AD JUSTED AGAINST THE INTEREST INCOME UNDER SECTION 57(III) OF THE ACT. IT MAY BE RECALLED THAT A SIMILAR CONTROVERSY WAS DECIDED BY US IN THE ASSESSEES APP EAL FOR THE ASSESSMENT YEAR 2001-2002 IN WHICH YEAR ALSO THE ASSESSEE HAD RAISE D AN IDENTICAL GROUND NO.2. IN OUR DECISION FOR THAT YEAR, WE HAVE NOTED THAT T HE ASSESSEE DID NOT PRESS THE GROUND THAT THE INTEREST INCOME CANNOT BE TAXED. F OR THE PRESENT YEAR ALSO THE ASSESSEE DID NOT PRESS THE FIRST CONTENTION AND ACC ORDINGLY GROUND NOS.2 AND 2.1 ARE DISMISSED. THE ALTERNATIVE CONTENTION TAKEN IN GROUND NO.2.2 REGARDING THE ALLOWANCE OF THE INTEREST EXPENDITURE IS HOWEVER AC CEPTED AND AS WAS DONE IN OUR DECISION FOR THE ASSESSMENT YEAR 2001-2002, WE LEAVE IT TO THE AO TO QUANTIFY THE INTEREST PAID WHICH IS ATTRIBUTABLE TO THE BORROWINGS MADE FOR EARNING THE INTEREST INCOME OF RS.68,19,906/- AND A LLOW RELIEF ACCORDINGLY. GROUND IS THUS PARTLY ALLOWED. 24. THAT TAKES US TO THE ONLY OTHER GROUND LEFT IN THE APPEAL WHICH IS GROUND NO.5 AND ITS SUB-GROUNDS. THE MAIN GROUND IS THAT THE CIT(A) ERRED IN CONFIRMING THE ADDITION OF RS.67,73,433/- AS ACCRUE D INTEREST UNDER THE HEAD INCOME FROM OTHER SOURCES. IN THIS CONNECTION IT IS CONTENDED IN GROUND NO.5.1 THAT THE CIT(A) FAILED TO ADMIT VITAL ADDITI ONAL EVIDENCE WHICH WOULD GO TO SHOW THAT THE ASSESSEE HAD TO PAY TO SHALIMAR WI RES INDUSTRIES LTD. MORE INTEREST THAN WHAT WAS STATED TO BE DUE FROM THAT C OMPANY AND THEREFORE THERE WAS NO QUESTION OF ANY INTEREST ACCRUING TO THE ASS ESSEE. IN GROUND NO.5.2 THE CONTENTION IS THAT IN ANY EVENT THE DEBT FROM SHALI MAR WAS ITSELF DOUBTFUL OF RECOVERY AND THEREFORE THE INTEREST DID NOT ACCRUE. FINALLY IN GROUND NO.5.3 IT IS PAGE - 14 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -14- CONTENDED THAT IN ANY EVENT THE INTEREST SAID TO HA VE ACCRUED TO THE ASSESSEE WOULD GO TO REDUCE THE COST OF THE ASSET/CAPITAL WO RKS-IN-PROGRESS AND CANNOT BE BROUGHT TO TAX AS INCOME SINCE THE ASSESSEE HAS NOT COMMENCED ITS BUSINESS ACTIVITIES. 25. IT IS NOTICED FROM PARA-7 TO 7.4 OF THE ORDER OF THE CIT(A) THAT HE HAS DECIDED THE GROUNDS AGAINST THE ASSESSEE FOLLOWING HIS DECISION ON THE SAME POINT FOR THE ASSESSMENT YEAR 2004-2005. THE APPEA LS FOR THE ASSESSMENT YEAR 2004-2005 ARE ALSO BEFORE US. ELABORATE ARGUMENTS WERE ADVANCED BY BOTH THE SIDES WHEN THE APPEAL FOR THAT YEAR WAS HEARD. IT WAS AGREED BY BOTH THE PARTIES THAT SUBSTANTIALLY THE SAME ARGUMENTS WOULD BE RELE VANT FOR THE PRESENT YEAR ALSO IN RESPECT OF THIS GROUND. THEREFORE, WE WOUL D REFER TO THE ARGUMENTS OF BOTH THE SIDES TAKEN BEFORE US IN THE APPEALS FOR T HE ASSESSMENT YEAR 2004- 2005. 26. THE BRIEF FACTS IN RELATION TO THE GROUND ARE T HAT THE ASSESSEE ENTERED INTO AN AGREEMENT WITH ANOTHER COMPANY BY NAME SHALIMAR WIRE INDUSTRIES LTD., (HEREINAFTER REFERRED TO AS SHALIMAR) UNDER WHICH ALL ITS BUSINESSES OTHER THAN THE COPPER UNIT AND THE INTERNATIONAL BUSINESS DIVI SION WERE TRANSFERRED TO SHALIMAR WITH EFFECT FROM 1-4-2000. THIS DE-MERGER AGREEMENT WAS APPROVED BY THE CALCUTTA HIGH COURT UNDER SECTIONS 391/394 O F THE COMPANIES ACT, 1956 BY ORDER DATED 15-5-2001. IN THIS IT WAS PROV IDED THAT ALL THE ASSETS AND LIABILITIES ARISING OUT OF THE INTERNATIONAL BUSINE SS DIVISION OF THE ASSESSEE SHALL BE TRANSFERRED SEPARATELY TO SHALIMAR FOR SEPARATE CONSIDERATION AND ON MUTUALLY AGREED TERMS. GIVING EFFECT TO THIS ORDER OF THE CALCUTTA HIGH COURT THE ASSESSEE AND SHALIMAR ENTERED INTO AN AGREEMENT ON 14-1-2002 FOR TRANSFER OF THE INTERNATIONAL BUSINESS DIVISION OF THE ASSES SEE WITH EFFECT FROM 1-10- 2001. A COPY OF THIS AGREEMENT IS PLACED AT PAGES 82 TO 87 OF THE PAPER BOOK FILED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2004- 2005. CLAUSE-3 OF THE SAID AGREEMENT PROVIDED AS UNDER: PAGE - 15 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -15- 3. IN CONSIDERATION OF THE SALE OF AFORESAID IBD, THE PURCHASER AGREES TO PAY THE VENDOR AN AGGREGATE AMOUNT OF RS.3.12 CRORE S (RUPEES THREE CRORES TWELVE LACS) ONLY AND IN CONSIDERATION OF THE SALE OF AFORESAID INVESTMENTS THE PURCHASER AGREES TO PAY THE VENDOR AN AGGREGATE AMO UNT OF RS.2.27 CRORES (RUPEES TWO CRORES TWENTY SEVEN LACS) ONLY. THE SA ID CONSIDERATION IS PAYABLE AS UNDER: A) REPAYMENT : PAYABLE IN THREE EQUAL ANNUAL INSTALMENTS IN THIRD, FOURTH AND FIFTH YEAR FROM THE DATE OF SIGNING OF THIS AGREEMENT. B) INTEREST : 12% PER ANNUM PAYABLE ANNUALLY FROM THE DATE OF SIGNING OF THE LOAN AGREEMENT. THEREAFTER, THE ORIGINAL SCHEME OF ARRANGEMENT BETW EEN THE ASSESSEE AND SHALIMAR UNDERWENT A MODIFICATION AND AN APPLICATIO N WAS MADE TO THE CALCUTTA HIGH COURT IN COMPANY APPLICATION NO.144 O F 2003 CONNECTED WITH COMPANY PETITION NO.99 OF 2001 AND COMPANY APPLICAT ION NO.742 OF 2000. THE CHANGE PROPOSED IN THE SCHEME OF AMALGAMATION W AS THAT CLAUSE 27 OF THE SCHEME AS ORIGINALLY APPROVED SHOULD BE MODIFIED AN D SUBSTITUTED IN THE MANNER PRAYED FOR BY THE PARTIES. CLAUSE-27 OF THE ORIGINAL ARRANGEMENT READ AS FOLLOWS: STAMP DUTY, PREMIUM PAYABLE TO MAHARASHTRA INDUSTR IAL DEVELOPMENT CORPORATION (MIDC), MUTATION COST RELATING TO TRANS FER OF ASSETS TO THE DEMERGED UNDERTAKING AND ANY OTHER COSTS, CHARGES, LEVIED, DUTIES OR EXPENSES IN RELATION TO OR IN CONNECTION WITH OR IN CIDENTAL TO THE SCHEME OR THE IMPLEMENTATION THEREOF AS AGREED TO BY THE L EAD INSTITUTION TO THE EXTENT OF RS.8 CRORES, SHALL BE BORNE AND PAID FOR BY SWIL AND ANY SUM OVER AND ABOVE RS.8 CRORES SHALL BE BORNE AND PAID BY THE RESULTING COMPANY. IN THEIR ORDER DATED 7-5-2003 IN THE AFORESAID COMP ANY APPLICATIONS/PETITIONS, THE CALCUTTA HIGH COURT PERMITTED THE PARTIES TO MO DIFY THE CLAUSE 27 OF THE SCHEME OF ARRANGEMENT BY A SCHEDULE, THE SCHEDULE I TSELF BEING AS UNDER: SCHEDULE ABOVE REFERRED TO STAMP DUTY, PREMIUM P AYABLE TO MAHARASHTRA INDUSTRIAL DEVELOPMENT CORPORATE (MIDC) , MUTATION COST RELATING TO TRANSFER OF ASSETS OF THE DEMERGED UNDE RTAKINGS TO THE PAGE - 16 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -16- RESULTING COMPANY AND ALL OTHER COSTS, CHARGES, DUT IES, LEVIES OR EXPENSES IN RELATION TO OR IN CONNECTION WITH OR IN CIDENTAL TO THE SCHEME OR THE IMPLEMENTATION THEREOF SHALL BE BORN AND PAI D BY THE RESULTING COMPANY ALONE, SWIL SHALL NOT BE LIABLE FOR THE SAI D EXPENSES OR ANY PART THEREOF. SWIL SHALL HOWEVER PAY A SUM OF RS.8 CRORES TO THE RESULTING COMPANY IN DISCHARGE OF ITS LIABILITY ON THIS ACCOUNT AS AGREED EARLIER AFTER DEDUCTING ALL SUMS PAYABLE BY THE RESULTING COMPANY TO SWIL ON ACCOUNT OF TRANSFER OF THE INTER NATIONAL BUSINESS DIVISION AND INVESTMENTS AND AFTER DEDUCTING ALL CO STS, CHARGES AND EXPENSES INCURRED BY SWIL OR LEAD INSTITUTION IN IM PLEMENTATION OF THE SCHEME TILL THE DATE OF PAYMENT OF THE SAID SUM OF RS.8 CRORES BY SWIL TO THE RESULTING COMPANY. 27. IT MAY BE SEEN FROM THE MODIFICATION OF THE SCH EME OF ARRANGEMENT THAT WHEREAS ACCORDING TO CLAUSE-27 OF THE ORIGINAL SCHE ME THE STAMP DUTY ETC. TO THE EXTENT OF RS.8 CRORES WAS TO BE PAID FOR BY THE ASSESSEE, WHICH WAS EARLIER KNOWN AS SWIL LTD. AND ONLY THE SUM OVER AND ABOVE RS.8 CRORES WAS TO BE BORNE AND PAID FOR BY THE RESULTING COMPANY, AFTER THE MODIFICATION THE POSITION WAS THAT THE ASSESSEE WAS TO PAY THE AFORESAID SUM OF RS.8 CRORES TO SHALIMAR (WHICH WAS REFERRED TO AS A RESULTING COMPANY) AFTE R DEDUCTING ALL SUMS DUE TO AND PAYABLE BY SHALIMAR TO THE ASSESSEE ON ACCOUNT OF TRANSFER OF THE INTERNATIONAL BUSINESS DIVISION AND AFTER DEDUCTING ALL THE COSTS ETC. FOR THE IMPLEMENTATION OF THE SCHEME. IT MAY BE RECALLED THAT UNDER CLAUSE-3 OF THE AGREEMENT DATED 14-1-2002 FOR THE TRANSFER OF THE I NTERNATIONAL BUSINESS DIVISION, SHALIMAR WAS TO PAY TO THE ASSESSEE AN AG GREGATE SUM OF RS.5.39 CRORES. UNDER CLAUSE 27 OF THE SCHEME OF ARRANGEM ENT AS ORIGINALLY FORMULATED, THE ASSESSEE WAS TO BEAR THE EXPENSES A ND PAY RS.8.00 CRORES TO SHALIMAR. THE RESULT OF THE MODIFICATION WAS THAT THE ASSESSEE COULD DEDUCT THE AMOUNT OF RS.5.39 CRORES DUE TO IT FROM SHALIMAR FR OM THE AMOUNT OF RS.8 CRORES WHICH THE ASSESSEE WAS TO DUE TO PAY SHALIMA R. 28. A MEETING OF THE BOARD OF DIRECTORS OF THE ASSE SSEE-COMPANY WAS HELD ON 8-11-2003 AT MUMBAI IN WHICH THE FOLLOWING RESOL UTION WAS PASSED: RESOLVED THAT INTEREST OF RS.67,73,433/- (RUPEES SI XTY SEVEN LACS SEVENTY THREE THOUSAND FOUR HUNDRED THIRTY THREE ON LY) FOR THE PAGE - 17 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -17- PERIOD FROM 1ST APRIL 2002 TO 17TH APRIL, 2003 ON A N AMOUNT OF RS.5.39 CRORES, PAYABLE BY SHALIMAR WIRES INDUSTRIES LIMITE D TO THE COMPANY IN TERMS OF AGREEMENT DATED 14TH JANUARY, 2002 BETWEEN SWIL LIMITED AND SHALIMAR WIRES INDUSTRIES LTD. BE AND IS HEREBY WAIVED OFF. IN ACCORDANCE WITH THE AFORESAID RESOLUTION, THE AS SESSEE COMPANY DID NOT INCLUDE ANY INTEREST FROM SHALIMAR IN ITS RETURN OF INCOME. IN THE COURSE OF THE ASSESSMENT PROCEEDINGS FOR THE ASSESSMENT YEAR 2004 -2005 THE ASSESSEE WAS ASKED TO SUBMIT THE LEDGER ACCOUNTS OF SHALIMAR. I T APPEARS THAT THE ASSESSEE SUBMITTED THE LEDGER ACCOUNT ONLY FOR THE FINANCIAL YEAR 2002-2003 AND DID NOT SUBMIT THE ACCOUNT FOR THE YEAR ENDED 31-3-2004. I N THE WRITTEN SUBMISSIONS FILED BY THE AO THE ASSESSEE REFERRED TO THE RESOLU TION PASSED IN THE BOARD MEETING TO WAIVE THE INTEREST PAYABLE BY SHALIMAR A ND SUBMITTED THAT IN VIEW OF THE RESOLUTION, NO INTEREST WAS CHARGED FROM SHA LIMAR FOR THE YEAR ENDED 31- 3-2004. THE ASSESSING OFFICER WAS NOT SATISFIED WI TH THE CORRECTNESS OF THE ASSESSEES STAND. ACCORDING TO HIM SHALIMAR WAS D UE TO PAY INTEREST AT THE RATE OF 12% ON THE AMOUNT OF RS.5.39 CRORES DUE TO THE A SSESSEE AS PER THE AGREEMENT DATED 14-1-2002 AND THERE WAS NO PROVISIO N IN THE AGREEMENT FOR WAIVER. FURTHER THE ASSESSEE WAS FOLLOWING THE MER CANTILE SYSTEM OF ACCOUNTING AND THEREFORE THE INTEREST DUE IS ASSESS ABLE TO TAX. THERE IS NO MENTION OF THE WAIVER IN THE DIRECTORS REPORT ANNE XED TO THE ANNUAL ACCOUNTS FOR THE YEAR ENDED 31-3-2004 WHICH WAS SUBMITTED TO THE SHAREHOLDERS IN AUGUST, 2004. HAD THERE BEEN A RESOLUTION IN NOVEM BER, 2003 TO WAIVE THE INTEREST, IT WAS EXPECTED THE SAME WOULD HAVE BEEN MENTIONED IN THE ANNUAL REPORT TO THE SHAREHOLDERS. THE AO THUS APPEARED T O HAVE EVEN DOUBTED THE VERACITY OF THE BOARD RESOLUTION. IN ADDITION HE O BSERVED THAT THE WAIVER APPEARED TO BE A SUO MOTTO WAIVER THOUGH THE ASSESSEE CLAIMED THAT IT WAS DULY DISCUSSED IN THE BOARD MEETING BEFORE PASSING THE R ESOLUTION. THE AO ALSO STATED THAT THERE IS NO JUSTIFICATION FOR THE WAIVE R BECAUSE THE ASSESSEE WAS PAYING INTEREST OF RS.4,484.11 LAKHS ON THE TERM LO ANS, APPARENTLY SUGGESTING THAT THE ASSESSEE CANNOT AFFORD TO WAIVE ANY INTERE ST DUE TO IT. IN THIS VIEW OF THE MATTER, HE BROUGHT A SUM OF RS.67,73,433/- TO T AX FOR THE ASSESSMENT YEAR PAGE - 18 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -18- 2004-2005 AS ACCRUED INTEREST DUE FROM SHALIMAR AND THE SAID INTEREST WAS ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES . IT MAY BE CLARIFIED THAT SINCE THE ASSESSEE DID NOT FURNISH THE QUANTUM OF I NTEREST DUE FROM SHALIMAR FOR THE YEAR ENDED 31-3-2004, THE AO TOOK THE SAID FIGU RE OF RS.67,73,433/- FROM THE RESOLUTION, COPY OF WHICH WAS FURNISHED BY THE ASSESSEE, AS PERTAINING TO THE PERIOD FROM 1-4-2003 TO 31-3-2004. 29. AN APPEAL WAS FILED BY THE ASSESSEE BEFORE THE CIT(A) FOR THE ASSESSMENT YEAR 2004-2005. IN PARA-9.2 OF THE ORD ER OF THE CIT(A) FOR THAT YEAR, HE CONFIRMED THE ASSESSMENT OF THE INTEREST, AGREEING WITH THE REASONS GIVEN BY THE AO. HE ALSO RELIED ON THE JUDGMENTS O F THE SUPREME COURT IN CIT VS. SHIVPRAKASH JANAKRAJ AND CO. PVT. LTD., 222 ITR 583 AND TUTICORIN ALKALIES CHEMICALS AND FERTILIZERS LTD., 227 ITR 17 2 IN SUPPORT OF HIS DECISION. 30. FOR THE ASSESSMENT YEAR 2003-2004 ALSO THE AO H AS ADDED THE IDENTICAL AMOUNT OF RS.67,73,433/- AS INTEREST ACCRUED FROM S HALIMAR AND THE SAME HAS BEEN ASSESSED UNDER THE HEAD INCOME FROM OTHER SOU RCES. 31. THE CONTENTIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE ARE (A) THAT ONCE THE DECISION IS TAKEN DURING THE ACCOUNTING YE AR ENDED 31-3-2004 NOT TO CHARGE ANY INTEREST FROM SHALIMAR OR TO WAIVE THE I NTEREST, NO INTEREST CAN BE SAID TO ACCRUE TO THE ASSESSEE DURING THE RELEVANT ACCOUNTING YEAR; (B) THE REAL INCOME THEORY WOULD COME INTO PLAY AND ONLY THE INT EREST THAT IS ACTUALLY RECOVERED CAN BE BROUGHT TO TAX; (C) AFTER THE ORDE R OF THE CALCUTTA HIGH COURT ON 7-5-2003 APPROVING THE MODIFIED SCHEME OF DE-MER GER, WHICH WILL ALSO TAKE EFFECT FROM 1-4-2000, THE DEBT OF RS.5.39 CRORES DU E FROM SHALIMAR TO THE ASSESSEE IS WIPED OUT RIGHT FROM THE INCEPTION AND THEREFORE NO INTEREST WOULD BE LEGALLY DUE ON THE DEBT. ON THE OTHER HAND, THE LEARNED CIT-DR BESIDES STRONGLY RELYING ON THE ORDER PASSED BY THE CIT(A) AND THE REASONS GIVEN BY HIM IN PARA-9.2 OF HIS ORDER FOR THE ASSESSMENT YEA R 2004-2005, STRONGLY CONTENDED THAT THE RESOLUTION WAIVING THE INTEREST WAS JUST AN AFTERTHOUGHT PAGE - 19 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -19- BECAUSE THE ANNUAL REPORT ON THE ACCOUNTS FOR THE Y EAR ENDED 31-3-2004 PRESENTED IN AUGUST, 2004 DID NOT MENTION ANYTHING ABOUT THE WAIVER. HE THUS CONTENDED THAT THE INTEREST WAS RIGHTLY ASSESSED TO TAX. 32. WE HAVE CAREFULLY CONSIDERED THE FACTS AND THE RIVAL CONTENTIONS. IN OUR OPINION, THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT AFTER THE ORDER OF THE CALCUTTA HIGH COURT ON 7-5-2003, THE E NTIRE DEBT OF RS.5.39 CRORES DUE FROM SHALIMAR TO THE ASSESSEE WAS WIPED OUT FRO M THE INCEPTION AND THEREFORE NO INTEREST COULD BE SAID TO HAVE ACCRUED TO THE ASSESSEE ON AND FROM 1-4-2000 SEEMS TO BE WELL FOUNDED. A PERUSAL OF TH E ABOVE ORDER OF THE HIGH COURT (PAGES 225 AND 226 OF THE PAPER BOOK NO.2 FIL ED FOR THE ASSESSMENT YEAR 2005-2006, IN WHICH THE ORDER HAS BEEN FULLY REPROD UCED) SHOWS THAT THE SCHEDULE WAS SUBSTITUTED IN THE PLACE OF CLAUSE-27 OF THE ORIGINAL SCHEME. THE EXACT WORDS USED IN THE ORDER ARE IT IS ORDERED TH AT THE SCHEME OF ARRANGEMENT BETWEEN THE SAID APPLICANT COMPANIES AND THEIR RESP ECTIVE SHARE HOLDERS BE AND THE SAME IS HEREBY MODIFIED BY SUBSTITUTION OF THE SCHEDULE HEREINBELOW IN PLACE OF EXISTING CLAUSE 27 OF THE SAID SCHEME OF ARRANGEMENT.. THE SCHEDULE WAS THUS PUT IN PLACE OF THE CLAUSE 27 AND SINCE IT WAS BY WAY OF SUBSTITUTION, IT MEANS THAT THE SCHEDULE MUST BE RE AD AS PART OF THE ORIGINAL SCHEME OF THE ARRANGEMENT WHICH TOOK EFFECT FROM 1- 4-2000. UNDER THE SCHEDULE, THE ASSESSEE AS ALREADY NOTED WAS ENTITLE D TO DEDUCT THE AMOUNT OF RS.5.39 CRORES DUE FROM SHALIMAR FOR TRANSFER OF TH E ASSESSEES INTERNATIONAL BUSINESS DIVISION FROM THE AMOUNT OF RS.8 CRORES PA YABLE TO SHALIMAR. IT IS THEREFORE POSSIBLE TO TAKE THE VIEW THAT THE DEBT O F RS.5.39 CRORES STOOD WIPED OUT RIGHT FROM THE INCEPTION OF THE SCHEME OF ARRAN GEMENT AND THEREFORE NO INTEREST BECAME DUE TO THE ASSESSEE FROM 1-4-2000. 33. THE OTHER CONTENTION THAT AFTER THE WAIVER OF T HE INTEREST, NO INTEREST CAN BE ASSESSED ALSO HAS FORCE. THE RESOLUTION WAS PAS SED ON 8-11-2003 AND IT STATED THAT THE INTEREST FOR THE PERIOD FROM 1-4-20 02 TO 17-4-2003 STOOD WAIVED. THIS IS RELEVANT FOR THE APPEAL FOR THE ASSESSMENT YEAR 2004-2005, FOR WHICH THE PAGE - 20 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -20- ACCOUNTING PERIOD ENDED ON 31-3-2004. FOR THE PERI OD FROM 1-4-2003 TO 31-3- 2004 NO INTEREST CAN BE ASSESSED BECAUSE THE RESOLU TION WAIVING THE INTEREST WAS PASSED ON 8-11-2003, THAT IS TO SAY, EVEN BEFOR E THE ACCOUNTING YEAR CAME TO AN END. HOWEVER, FOR THE ASSESSMENT YEAR 2003-2 004, THE RESOLUTION WILL BE OF NO EFFECT BECAUSE IT WAS PASSED AFTER THE END OF THE ACCOUNTING YEAR VIZ. 31- 3-2003. EVEN SO, IN VIEW OF OUR DECISION THAT THE DEBT DUE FROM SHALIMAR GOT WIPED OUT FROM 1-4-2000 BECAUSE OF THE ORDER OF THE CALCUTTA HIGH COURT PASSED ON 7-5-2003, NO INTEREST CAN BE ASSESSED ON ACCRUAL BASIS EVEN FOR THE ASSESSMENT YEAR 2003-2004. 34. THE AO AS WELL AS THE LEARNED CIT-DR HAVE REFER RED TO THE RESOLUTION OF THE BOARD AS AN AFTERTHOUGHT BECAUSE THERE IS NO RE FERENCE TO THE WAIVER OF THE INTEREST IN THE ANNUAL ACCOUNTS FOR THE YEAR ENDED 31-3-2004. A COPY OF THE ANNUAL ACCOUNTS IS PLACED AT PAGES 22-59 OF THE PAP ER BOOK FILED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2004-2005. IT IS TRUE THA T IN THE DIRECTORS REPORT DATED 14-8-2004 (PAGES 34 AND 35 OF THE PAPER BOOK) THERE IS NO REFERENCE TO THE RESOLUTION BUT WE ARE OF THE VIEW THAT MERELY FOR T HIS REASON IT CANNOT BE SAID THAT THE RESOLUTION WAS AN AFTERTHOUGHT. THE RESOL UTION WAS FILED BEFORE THE AO UNDER COVER OF ITS LETTER DATED 7-12-2006 AND IF TH E AO WANTED TO VERIFY THE VERACITY OF THE SAME HE COULD HAVE CROSS-CHECKED WI TH THE OFFICE OF THE REGISTRAR OF COMPANIES OR COULD HAVE DIRECTED THE A SSESSEE TO PRODUCE THE MINUTE BOOK OR THE REGISTER OF RESOLUTIONS MAINTAIN ED BY THE ASSESSEE AS A CONTEMPORANEOUS RECORD. THERE IS NO MATERIAL TO JU STIFY THE CONCLUSION THAT THE BOARD RESOLUTION IS AN AFTERTHOUGHT. 35. IT MAY BE RECALLED THAT THE LEARNED COUNSEL FOR THE ASSESSEE HAD ALSO CONTESTED THE ADDITION OF INTEREST ON THE BASIS OF THE REAL INCOME THEORY. IN OUR HUMBLE UNDERSTANDING, THIS IS ANOTHER FACET OF THE EFFECT OF THE ORDER OF THE CALCUTTA HIGH COURT DATED 7-5-2003 UNDER WHICH A SC HEDULE WAS SUBSTITUTED IN THE PLACE OF CLAUSE 27 OF THE ORIGINAL SCHEME. EVE N IF WE ARE WRONG IN OUR VIEW THAT THE DEBT OF RS.5.39 CRORES DUE FROM SHALI MAR DOES GET WIPED OUT BY PAGE - 21 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -21- REASON OF THE ORDER OF THE HIGH COURT ORDERING THE SUBSTITUTION, FOR ALL PRACTICAL PURPOSES, IT MEANS THAT THE ASSESSEE WAS DUE TO SHA LIMAR A SUM OF RS.2.61 CRORES IN EFFECT, AFTER ADJUSTING THE DEBT OF RS.5. 39 CRORES DUE FROM SHALIMAR AGAINST THE AMOUNT OF RS.8 CRORES PAYABLE BY THE AS SESSEE TO SHALIMAR. EVEN IF ONE WERE TO KEEP BOTH THE ACCOUNTS SEPARATE, THE NE TTING EFFECT OF THE SAME WOULD BE THAT NO AMOUNT WAS PAYABLE BY SHALIMAR TO THE ASSESSEE. IT WOULD BE SOMEWHAT HYPER-TECHNICAL TO VIEW BOTH THE TRANSACTI ONS ARISING OUT OF THE SAME SCHEME OF ARRANGEMENT SEPARATELY AND INSIST ON PAYM ENT OF RS.5.39 CRORES BY SHALIMAR TO THE ASSESSEE BY ONE CHEQUE AND PAYMENT OF RS.8 CRORES BY THE ASSESSEE TO SHALIMAR BY ANOTHER CHEQUE. THUS IN RE AL TERMS, THERE IS NO INDEBTEDNESS BY SHALIMAR IN FAVOUR OF THE ASSESSEE, RATHER IT WOULD BE VICE- VERSA AFTER THE MODIFICATION OF THE SCHEME OF ARRAN GEMENT. THUS EVEN ON GROUNDS OF THE REAL INCOME THEORY, IT WOULD BE INAP PROPRIATE TO SAY THAT THE INTEREST ACCRUED TO THE ASSESSEE. 36. FOR THE ABOVE REASONS, WE AGREE WITH THE ASSESS EES CONTENTION IN ITS APPEAL FOR THE ASSESSMENT YEAR 2003-2004 THAT THE A SSESSMENT OF THE INTEREST OF RS.67,73,433/- WAS NOT JUSTIFIED. GROUND NO.5 IS A CCORDINGLY ALLOWED. THUS, THE APPEAL IS PARTLY ALLOWED. 37. WE NOW TAKE UP THE DEPARTMENTS APPEAL FOR THE ASSESSMENT YEAR 2003- 2004 IN ITA NO.3546/AHD/2008. THE FIRST TWO GROUND S ARE AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES AND IN LA W THE CIT(A) HAS ERRED IN DIRECTING THE AO TO ALLOW CAPITALISATION O F INTEREST EXPENSES OF RS.84.89 CRORES. 2. ON THE FACTS AND CIRCUMSTANCES AND IN LAW THE L D.CIT(A) HAS ERRED IN NOT APPRECIATING THE FACT THAT THE INTERES T EXPENSES WERE NOT ACTUALLY PAID BY THE ASSESSEE AND THE BUSINESS OF T HE ASSESSEE HAS NOT COMMENCED AND THEREFORE THE AO HAS RIGHTLY NOT ALLO WED CAPITALIZATION OF THE INTEREST EXPENSES. THESE GROUNDS ARE IDENTICAL WITH THE GROUNDS TAKEN BY THE DEPARTMENT IN ITS APPEAL FOR THE ASSESSMENT YEAR 2001-2002 IN ITA NO. 3545/AHD/2008. IN OUR PAGE - 22 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -22- DECISION FOR THAT YEAR, WE HAVE, FOR REASONS GIVEN THEREIN, DISMISSED THE GROUNDS AND CONFIRMED THE DECISION OF THE CIT(A) AL LOWING THE CAPITALIZATION OF THE INTEREST EXPENSES. THE FACTS AND THE CONTRO VERSY ARE THE SAME FOR THE YEAR UNDER APPEAL AND ONLY DIFFERENCE IS IN THE QUA NTUM OF THE INTEREST EXPENSES. IN LINE WITH OUR DECISIONS FOR THAT YEAR WE UPHOLD THE DECISIONS OF THE CIT(A) FOR THIS YEAR ALSO AND DISMISS THE GROUN DS. 38. GROUND NOS.3 AND 4 ARE DIRECTED AGAINST THE DEL ETION OF THE ADDITION OF RS.26.95 CRORES MADE BY THE AO ON ACCOUNT OF INTERE ST INCOME. IT IS STATED IN THE GROUND THAT THE INTEREST ACCRUED TO THE ASSESSE E AS PER SECTION 5 OF THE INCOME TAX ACT. FROM THE ANNUAL REPORT THE AO NOTI CED THAT INTEREST OF RS.26,95,48,704/- WAS REDUCED OR WAIVED BY THE FINA NCIAL INSTITUTIONS IN RESPECT OF THE CREDIT FACILITIES GRANTED BY THEM TO THE ASS ESSEE. THE AO PROPOSED TO TREAT THE INTEREST WAIVED AS THE ASSESSEES INCOME. THE ASSESSEE STRONGLY OBJECTED TO THE SAME. IT WAS POINTED OUT THAT THE INTEREST EXPENSES WERE NOT CLAIMED AS A DEDUCTION IN THE EARLIER YEARS, BUT WE RE DEBITED TO THE PREOPERATIVE EXPENSES AND ADDED TO THE COST OF THE ASSETS OR CAP ITAL WORKS-IN-PROGRESS ACCOUNT AND THEREFORE SECTION 41(1) OF THE ACT HAD NO APPLICATION. IT WAS FURTHER POINTED OUT THAT THE INTEREST WAIVED WAS AL SO ACCOUNTED FOR UNDER THE SAME ACCOUNT. THE AO WAS NOT CONVINCED BY THE ASSE SSEES EXPLANATION AND REFERRING TO SECTION 5 OF THE ACT, HELD THAT SINCE THE ASSESSEE HAD THE RIGHT TO RECEIVE THE INTEREST, IT ACCRUED TO HIM AND SHOULD THEREFORE BE ASSESSED ON MERCANTILE BASIS. 39. ON APPEAL, THE CIT(A) NOTICED FROM SCHEDULE-K T O THE AUDITED ANNUAL ACCOUNTS THAT THE INTEREST WAIVED BY THE FINANCIAL INSTITUTIONS WAS REDUCED FROM THE AMOUNT OF PREOPERATIVE EXPENSES CAPITALIZED BY THE ASSESSEE AND THAT IT WAS NOT AS IF THE EXCESS INTEREST WAS CLAIMED EARLIER A S DEDUCTION AND THEREFORE THE WAIVER OR REDUCTION THEREOF WOULD AMOUNT TO A TAXAB LE CLAIM. HE NOTICED THAT THE ASSESSEES BUSINESS HAS NOT COMMENCED AND THAT THE ASSESSEE HAS NOT EVEN PREPARED A PROFIT AND LOSS ACCOUNT. NO INTEREST EX PENDITURE HAS BEEN CLAIMED AS PAGE - 23 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -23- A DEDUCTION. IN THESE CIRCUMSTANCES, HE HELD THAT NEITHER SECTION 41(1), NOR SECTION 5 OR SECTION 56 OF THE ACT WAS APPLICABLE. HE THEREFORE DELETED THE ADDITION. 40. THE REVENUE IS IN APPEAL AND THE LEARNED CIT-DR RELIED ON THE ASSESSMENT ORDER IN SUPPORT OF THE GROUNDS. THE L EARNED COUNSEL FOR THE ASSESSEE RELIED ON THE JUDGMENT OF THE HONBLE GUJA RAT HIGH COURT IN CIT VS. CHETAN CHEMICALS PVT. LTD., (2004) 267 ITR 770. ON A CAREFUL CONSIDERATION OF THE MATTER, WE ARE OF THE VIEW THAT THE DECISION OF THE CIT(A) IS CORRECT. THERE IS NO DISPUTE ABOUT THE FACT THAT THE INTERES T PAYABLE BY THE ASSESSEE TO THE BANKS OR FINANCIAL INSTITUTIONS DURING THE PREOPERA TIVE OR CONSTRUCTION PERIOD WAS CAPITALIZED AND WAS SHOWN AS PART OF THE CAPITA L WORKS-IN-PROGRESS ACCOUNT. SINCE THE BUSINESS HAD NOT COMMENCED, TH E ASSESSEE DID NOT CLAIM THE INTEREST AS AN EXPENDITURE IN ANY OF THE EARLIE R YEARS OR IN THE YEAR UNDER APPEAL. THE REDUCTION OR WAIVER OF THE INTEREST BY THE BANKS OR THE FINANCIAL INSTITUTIONS WAS REDUCED FROM THE CAPITAL WORKS-IN- PROGRESS ACCOUNT. IN THESE CIRCUMSTANCES THE JUDGMENT OF THE HONBLE GUJARAT H IGH COURT SQUARELY APPLIES IN FAVOUR OF THE ASSESSEE. IN THAT CASE IT WAS HELD THAT UNLESS THE EXPENDITURE HAS BEEN ALLOWED AS A DEDUCTION IN THE EARLIER YEARS, ANY BENEFIT OR WAIVER OF THE SAME CANNOT BE ASSESSED UNDER SECTION 41(1) OF THE ACT. SECTION 5 OF THE INCOME TAX ACT WOULD ARISE FOR CONSIDERATI ON ONLY WHEN THE INCOME OF THE ASSESSEE FALLS TO BE COMPUTED UNDER THE PROVISI ONS OF THE ACT. IN THE PRESENT CASE THE BUSINESS OF THE ASSESSEE HAS NOT C OMMENCED AND ALL THE EXPENSES ARE DEBITED TO THE CAPITAL WORKS-IN-PROGRE SS ACCOUNT, AND ANY INCOME CONNECTED TO THE CONSTRUCTION PROCESS IS DEDUCTED F ROM THE ABOVE ACCOUNT. NO TAXABLE INCOME FALLS TO BE COMPUTED. A MERE SAVING OF WHAT IS PAYABLE BY THE ASSESSEE CANNOT BE CONSIDERED AS INCOME EXCEPT UNDE R SECTION 41(1) OF THE ACT WHICH COMES INTO PLAY ONLY WHEN THE BUSINESS INCOME OF THE ASSESSEE FALLS TO BE COMPUTED. RESPECTFULLY FOLLOWING THE JUDGMENT O F THE HIGH COURT CITED ABOVE, WE AFFIRM THE DECISION OF THE CIT(A) AND DIS MISS THE GROUNDS FILED BY THE REVENUE. PAGE - 24 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -24- 41. IN THE RESULT, THE APPEAL OF THE DEPARTMENT IS DISMISSED. 42. ASSESSMENT YEAR 2004-2005. IN THIS YEAR THE APPEAL IS ONLY BY THE ASSESSEE AND THERE IS NO APPEAL FILED BY THE DEPARTMENT. THE ASSESSEES APPEAL IS IN ITA NO.374 1/AHD/2007. 43. THE FIRST GROUND IS DIRECTED AGAINST THE ASSESS MENT OF THE INTEREST OF RS.67,73,433/- AS ACCRUED INTEREST INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. THIS GROUND HAS BEEN DISCUSSED BY US WHI LE DISPOSING OF GROUND NO.5 OF THE ASSESSEES APPEAL FOR THE ASSESSMENT YE AR 2003-2004 IN ITA NO.3254/AHD/2008. FOR THE REASONS STATED THEREIN W E DELETE THE ADDITION AND ALLOW THE GROUND. 44. IN THE COURSE OF THE HEARING BEFORE US, THE ASS ESSEE FILED THE FOLLOWING ADDITIONAL GROUNDS. 1. ALTERNATIVELY AND WITHOUT PREJUDICE, THE CIT(A) HAS ERRED IN NOT APPRECIATING THAT THIS INTEREST INCOME OF RS.67,73, 433/- WOULD GO TO REDUCE THE COST OF THE ASSETS/CAPITAL WORK IN PROGR ESS AS THE APPELLANT HAS NOT COMMENCED ITS BUSINESS ACTIVITIES. 2. IN ANY CASE, THE APPELLANT HAS INCURRED HUGE IN TEREST EXPENDITURE AND THEREFORE THIS INTEREST INCOME OF RS.67,73,433/ - WOULD BE NETTED OFF AGAINST SUCH INTEREST EXPENDITURE. IT IS STATED ON BEHALF OF THE ASSESSEE THAT THE AFO RESAID GROUNDS ARE LEGAL GROUNDS AND ARE RAISED IN THE ALTERNATIVE AND SHOUL D BE ADMITTED IN VIEW OF THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF NATION AL THERMAL POWER CORPORATION, 229 ITR 383. THE LEARNED CIT-DR HOWEV ER OBJECTED TO THE ADMISSION OF GROUND NO.2 ABOVE ON THE GROUND THAT I T WAS NOT RAISED BEFORE THE INCOME TAX AUTHORITIES AND HENCE CANNOT BE RAISED F OR THE FIRST TIME BEFORE THE TRIBUNAL. PAGE - 25 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -25- 45. AS REGARDS THE ADMISSION OF THE ADDITIONAL GROU NDS WE FIND THAT THESE GROUNDS HAVE BEEN SPECIFICALLY RAISED BY THE ASSESS EE IN ITS APPEAL FOR THE ASSESSMENT YEAR 2001-2002 AND 2003-2004 (GROUND NO. 2 AND ITS SUB-GROUNDS) FOR THOSE YEARS. THE OMISSION TO SPECIFICALLY RAIS E THESE ALTERNATIVE GROUNDS IN THE ORIGINAL GROUNDS OF APPEAL SEEMS TO BE ONLY AN OVERSIGHT AS MENTIONED IN THE APPLICATION FILED BEFORE US SEEKING ADMISSION O F THE ADDITIONAL GROUNDS. FURTHER, THERE IS A FINDING RECORDED BY THE CIT(A) IN PARA-9.1 AND 9.1.2 TO THE EFFECT THAT THE ASSESSEE DID NOT COMMENCE COMMERCIA L PRODUCTION DURING THE RELEVANT PREVIOUS YEAR. IN FACT WHILE GIVING A GEN ERAL BACKGROUND IN HIS REPLY TO THE ARGUMENTS OF THE ASSESSEE IN THE APPEAL FOR THE ASSESSMENT YEAR 2004- 2005, THE LEARNED CIT-DR DID POINT OUT THAT THE COM MERCIAL PRODUCTION COMMENCED ONLY IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2007- 2008. IMPLICIT IN THIS IS THE RECOGNITION OF THE P OSITION THAT THE ASSESSEE DID NOT COMMENCE COMMERCIAL PRODUCTION IN THE YEAR UNDER AP PEAL. IF THIS FACT IS NOT DISPUTED, THEN THE FIRST ADDITIONAL GROUND TAKEN AS AN ALTERNATIVE GROUND IS TO BE ADMITTED AS IT INVOLVES NO INVESTIGATION INTO FACTS . ON MERITS, THE GROUND IS ACADEMIC IN THE SENSE THAT WHILE DEALING WITH THE F IRST GROUND TAKEN IN THE ORIGINAL GROUNDS OF APPEAL, WE HAVE AGREED WITH THE ASSESSEE THAT NO INTEREST ACCRUED IN RESPECT OF THE DEBT DUE FROM SHALIMAR IN THE AMOUNT OF RS.5.39 CRORES. ACADEMICALLY IT CANNOT BE QUESTIONED THAT WHEN THE PRODUCTION HAS NOT COMMENCED, THE INTEREST INCOME WOULD GO TO REDUCE T HE COST OF THE ASSETS OR THE CAPITAL WORKS IN PROGRESS. SIMILARLY THE SECOND AD DITIONAL GROUND DOES NOT ARISE FOR CONSIDERATION, SINCE WE HAVE HELD THAT TH E INTEREST INCOME CANNOT BE ASSESSED AT ALL AND THEREFORE THERE IS NO QUESTION OF ALLOWING ANY INTEREST EXPENDITURE AGAINST THE SAME. THE ADDITIONAL GROUN DS ARE ACCORDINGLY DISMISSED AS ACADEMIC. 46. THE SECOND GROUND IS AGAINST THE ADDITION OF BA NK INTEREST OF RS.27,22,358/- UNDER THE HEAD INCOME FROM OTHER SO URCES. THE ASSESSEE REDUCED THE INTEREST FROM THE PREOPERATIVE ACCOUNTS RELATING TO THE COPPER PROJECTS. THE AMOUNTS BORROWED BY THE ASSESSEE FRO M FINANCIAL INSTITUTIONS AND PAGE - 26 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -26- BANKS FOR THE PROJECT WERE DEPOSITED IN THE BANK AS FIXED DEPOSITS. THE CLAIM OF THE ASSESSEE IS THAT THE INTEREST CANNOT BE SEPA RATELY ASSESSED TO TAX AND ALTERNATIVELY IT IS CLAIMED THAT THE INTEREST EXPEN DITURE REFERABLE TO THE DEPOSITS MADE OUT OF BORROWED MONEY SHOULD BE ALLOWED AS A D EDUCTION UNDER SECTION 57(III). THIS GROUND IS IDENTICAL TO THE GROUND NO .2 TAKEN BY THE ASSESSEE IN ITS APPEAL FOR THE ASSESSMENT YEAR 2001-2002. IN THAT YEAR THE ASSESSEE DID NOT OBJECT TO THE ASSESSMENT OF THE INTEREST INCOME BUT CLAIMED INTEREST EXPENDITURE AS DEDUCTION UNDER SECTION 57(III). WE ACCORDINGLY HELD THAT THE AO WOULD QUANTIFY THE INTEREST, IF ANY, REFERABLE TO THE BOR ROWINGS OUT OF WHICH THE DEPOSITS WERE MADE IN THE BANKS AND ALLOW THE SAME AS A DEDUCTION FROM THE INTEREST INCOME. SINCE THE CONTROVERSY IS THE SAME FOR THE YEAR UNDER APPEAL. IN LINE WITH OUR DECISION FOR THE ASSESSMENT YEAR 2 001-2002, WE DIRECT THE AO TO QUANTIFY THE INTEREST, IF ANY, REFERABLE TO THE BORROWINGS OUT OF WHICH THE DEPOSITS WERE MADE IN THE BANKS AND ALLOW THE SAME AS A DEDUCTION AGAINST THE INTEREST INCOME UNDER SECTION 57(III). THE OTHER DIRECTIONS GIVEN BY US IN THAT YEAR WHILE DEALING WITH THE GROUND ARE ALSO REITERA TED. THE GROUND IS THUS PARTLY ALLOWED. 47. THE GROUND NOS.3 AND 4 WHICH ARE RESPECTIVELY D IRECTED AGAINST THE DISALLOWANCE OF THE INTEREST OF RS.44,84,11,000/- O N TERM LOANS BY INVOKING SECTION 43B AND THE NON-ALLOWANCE OF THE DEPRECIATI ON UNDER SECTION 32 OF THE ACT ARE DISMISSED AS NOT PRESSED. GROUND NO.5 IS A GENERAL GROUND AND REQUIRES NO DECISION. 48. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. 49. ASSESSMENT YEAR 2005-2006 ITA NO.3255/AHD/2008 IS AN APPEAL BY THE ASSESSEE A ND ITA NO.3547/AHD/2008 IS AN APPEAL BY THE DEPARTMENT. 50. WE TAKE UP THE ASSESSEES APPEAL FIRST. THE F IRST GROUND AND THE SUB- GROUNDS ARE DIRECTED AGAINST THE ASSESSMENT OF THE INTEREST INCOME OF PAGE - 27 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -27- RS.24,00,143/- UNDER THE HEAD INCOME FROM OTHER SO URCES. IT IS ALSO CLAIMED IN THE GROUNDS THAT THE INTEREST WOULD GO TO REDUCE THE COST OF THE ASSETS OR THE WORK-IN-PROGRESS AS THE ASSESSEE HAS NOT COMMENCED PRODUCTION IN ITS COPPER CATHODE PLANT. IT IS ALSO CONTENDED IN THE ALTERNA TIVE THAT THE INTEREST EXPENDITURE IN SO FAR AS IT RELATES TO BORROWINGS M ADE FOR THE PURPOSE OF MAKING THE BANK DEPOSITS FROM WHICH INTEREST IS EARNED, SH OULD BE ALLOWED AS A DEDUCTION UNDER SECTION 57(III) AGAINST THE INTERES T INCOME. THESE GROUNDS ARE THE SAME AS GROUND NO.2 TAKEN BY THE ASSESSEE IN IT S APPEAL FOR THE ASSESSMENT YEAR 2001-2002 IN ITA NO.3253/AHD/2008. IN LINE WI TH OUR DECISION THEREIN WE REJECT THE ASSESSEES CONTENTION THAT THE INTERE ST CANNOT BE ASSESSED TO TAX BUT DIRECT THE AO TO QUANTIFY THE INTEREST EXPENDIT URE, IF ANY, INCURRED FOR THE PURPOSE OF EARNING THE INTEREST INCOME AND ALLOW TH E SAME AS A DEDUCTION UNDER SECTION 57(III). THE OTHER DIRECTIONS GIVEN BY US WOULD ALSO APPLY TO THE PRESENT YEAR. THUS, THE GROUND IS PARTLY ALLOWED. 51. GROUND NO.2 WHICH IS AGAINST THE ASSESSMENT OF THE DIVIDEND INCOME OF RS.39,375/- AND GROUND NO.3 WHICH IS AGAINST THE AS SESSMENT OF RS.1,68,000/- UNDER THE HEAD INCOME FROM HOUSE PROPERTY ARE DIS MISSED AS NOT PRESSED. 52. GROUND NO.4 AND ITS SUB-GROUNDS ARE DIRECTED AG AINST THE ASSESSMENT OF RS.67,73,433/- AS ACCRUED INTEREST INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. THESE GROUNDS ARE IDENTICAL WITH GROUND NO.5 TAKEN BY THE ASSESSEE IN ITS APPEAL FOR THE ASSESSMENT YEAR 2003-2004 IN ITA NO.3254/AHD/2008. SINCE THE FACTS AND THE CONTROVERSY ARE THE SAME, I N TUNE WITH OUR DECISION FOR THE ASSESSMENT YEAR 2003-2004, WE DELETE THE INTERE ST INCOME AND ALLOW THE GROUNDS. 53. GROUND NO.5 AND ITS SUB-GROUNDS ARE PECULIAR TO THIS APPEAL. IN THESE GROUNDS THE ASSESSEE HAS CHALLENGED THE ADDITION OF RS.3,08,02,701/- AS INCOME FROM TOLLING ACTIVITIES. IT IS CONTENDED IN THE FI RST ALTERNATIVE THAT IF THE ADDITION IS HELD TO BE PROPERLY MADE THE ASSESSEE SHOULD BE GRANTED DEPRECIATION PAGE - 28 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -28- ALLOWANCE AGAINST THE AFORESAID INCOME AND IN THE S ECOND ALTERNATIVE IT IS CLAIMED THAT THE TOLLING INCOME CANNOT BE SEPARATEL Y ASSESSED TO TAX BUT SHOULD GO TO REDUCE THE COST OF THE ASSETS/CAPITAL WORKS-I N-PROGRESS AS THE ASSESSEE HAS NOT COMMENCED PRODUCTION IN ITS COPPER CATHODE UNIT . 54. THE BRIEF FACTS IN THIS CONNECTION MAY BE NOTIC ED. WHILE COMPLETING THE ASSESSMENT IT WAS NOTICED BY THE AO THAT THE ASSESS EE HAD CLAIMED CREDIT FOR TAX DEDUCTED AT SOURCE OF RS.24,20,847/- FROM PAYME NTS RECEIVED FROM M/S.HINDUSTAN COPPER LIMITED. THE AO ALSO NOTICED THAT NO CORRESPONDING INCOME WAS SHOWN BY THE ASSESSEE AS WAS REQUIRED BY SECTION 199 OF THE INCOME TAX ACT. THE ASSESSEE FURNISHED THE RELEVAN T DETAILS INCLUDING THE DETAILS OF THE EXPENSES INCURRED TO EARN THE TOLLIN G INCOME. AFTER OBTAINING CLARIFICATION FROM THE ASSESSEE, THE AO NOTICED THA T THE TOTAL EXPENSES ATTRIBUTABLE TO THE TOLLING INCOME OF RS.18,55,54,2 15/- AMOUNTED TO RS.19,55,81,196/- RESULTING IN THE NET LOSS OF RS.1 ,00,26,982/-. THE AO THEN TOOK THE VIEW THAT THIS WAS AN INCORRECT WAY OF COM PUTING THE TOLLING INCOME AND ASKED THE ASSESSEE TO FURNISH THE DETAILS OF DI RECT EXPENSES FOR EARNING THE TOLLING INCOME. THOUGH THE ASSESSEE FURNISHED A RE PLY DATED 20-12-2007, THE AO TOOK THE VIEW THAT THE REPLY DID NOT CONTAIN THE DETAILS OF THE DIRECT EXPENSES AND THAT THE ASSESSEE WAS ALSO SHIFTING IT S STAND FROM TIME TO TIME. THE ASSESSEE WOULD HAVE ALSO APPEARED TO HAVE STATE D THAT IT HAD CARRIED OUT TRIAL RUN PRODUCTION OF ITS OWN PLANT AND ALSO TRIA L RUN PRODUCTION FOR TOLLING ACTIVITIES. IT MAY BE MENTIONED HERE THAT TOLLING MEANS JOB WORK. THE CONTENTION OF THE ASSESSEE WAS THAT OUT OF THE TRIA L RUN OF ITS OWN PLANT SOME ITEMS WERE PRODUCED WHICH WERE SOLD. THE AO TOOK T HE VIEW THAT TOLLING INCOME CANNOT BE SAID TO BE INCOME FROM TRIAL PRODU CTION AND THAT THE PAYMENT MADE BY HINDUSTAN COPPER LTD. WAS SHOWN AS PAYMENT TO CONTRACTORS/ SUB- CONTRACTORS. HE ALSO NOTED THAT THE ASSESSEE DID N OT PRODUCE THE SALES-TAX RETURN TO SHOW THAT THE JOB WORK RECEIPT WAS INCLUDED AS S ALES. ACCORDING TO THE AO THE TOLLING INCOME SHOWN BY THE ASSESSEE WAS IN FAC T INCOME FROM OTHER SOURCES AS IT WAS NOT THE BUSINESS OF THE ASSESSEE AND ALSO NOT THE MAIN OBJECT PAGE - 29 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -29- OF THE ASSESSEE AS PER THE MEMORANDUM AND ARTICLES OF ASSOCIATION. FURTHER, COMMERCIAL PRODUCTION HAD NOT COMMENCED AND THERE W AS ONLY TRIAL PRODUCTION. FOR THESE REASONS, AND PLACING RELIANC E ON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF TUTICORIN ALKALIES (SU PRA) AND CIT VS. CORRAMANDEL CEMENTS LTD. (SUPRA), THE AO HELD THAT THE TOLLING INCOME SHOULD BE ASSESSED SEPARATELY UNDER THE HEAD INCOME FROM OTHER SOURCES AND CANNOT BE REDUCED FROM THE CAPITALIZED PREOPERATIVE EXPENS ES. 55. SO FAR AS THE EXPENSES FOR EARNING THE TOLLING INCOME WERE CONCERNED THE ASSESSEE APPEARS TO HAVE SUBMITTED SEVERAL WORKINGS ON DIFFERENT OCCASIONS IN THE COURSE OF THE ASSESSMENT PROCEEDINGS. THE AO N OTED THAT IN ALL THE WORKINGS THE ASSESSEE HAS CLAIMED A LOSS WHICH COUL D NOT BE ACCEPTED. HE ALSO REFUSED TO ACCEPT THE PERCENTAGE BASIS OF ALLOCATIN G THE DIRECT EXPENSES. ACCORDING TO HIM, THE INCOME WAS GENERATED OUT OF J OB WORK WHICH WAS DIFFERENT FROM THE MANUFACTURING ACTIVITY. MOREOVE R, THE TOLLING INCOME WAS EARNED ONLY FROM SEPTEMBER, 2004 TO MARCH, 2005 AND THEREFORE THE ASSESSEE CANNOT ALLOCATE THE DIRECT EXPENSES FOR THE ENTIRE YEAR AGAINST THE TOLLING INCOME. THE AO THUS REJECTED THE CALCULATIONS SUBM ITTED BY THE ASSESSEE, THE MAIN OBJECTION BEING THAT THE ASSESSEE DID NOT FURN ISH THE DETAILS OF THE DIRECT EXPENSES TO EARN THE TOLLING INCOME, WITH SUPPORTIN G EVIDENCE. IN THIS VIEW OF THE MATTER, HE DETERMINED THE NET TOLLING INCOME AT RS.18,55,54,215/- AND BROUGHT THE SAME TO ASSESSMENT UNDER THE HEAD INCO ME FROM OTHER SOURCES. 56. THE ASSESSEE APPEALED AGAINST THE ABOVE DECISIO N OF THE CIT(A) AND TOOK UP SEVERAL CONTENTIONS. BRIEFLY STATED THESE CONTENTIONS WERE: A) THAT THE TOLLING INCOME SHOULD BE REDUCED FROM THE CAPITAL WORKS- IN-PROGRESS; B) THE TOLLING RECEIPTS CANNOT BE CONSIDERED AS SALE S INCE THE COPPER CATHODES WERE PRODUCED FROM THE RAW MATERIALS RECEI VED FROM HINDUSTAN COPPER LTD. ON TOLLING BUSINESS. C) CLAUSE (1) OF THE OBJECTS CLAUSE IN THE MEMORANDUM OF ASSOCIATION PERMITTED THE ASSESSEE TO WORK ALL KIND S OF METAL PAGE - 30 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -30- PRODUCTS OF EVERY DESCRIPTION AND THUS THE TOLLING ACTIVITY IS COVERED BY THIS CLAUSE. D) FULL DETAILS RELATING TO THE EXPENSES INCURRED FOR EARNING THE TOLLING INCOME WERE FURNISHED BY THE ASSESSEE. E) SINCE THE PROJECT (COPPER CATHODES) WAS NOT COMMISS IONED DURING THE YEAR AND THERE WAS ONLY A TRIAL PRODUCTION, THE FOCUS OF THE ASSESSEE WAS ON COMPLETING THE PROJECTS AND DUE ATT ENTION WAS NOT PAID TO PROFITABILITY AND THEREFORE IT WAS NOT SURPRISING THAT EVEN IN THE TOLLING ACTIVITY THERE WAS A LOSS AS SH OWN BY THE CALCULATIONS SUBMITTED TO THE AO; F) THE ASSESSMENT OF THE TOLLING INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES IS CONTRARY TO THE INCOME TAX A CT, AS WELL AS THE ACCOUNTING STANDARDS. G) IN ANY CASE, THE EXPENDITURE OF RS.1,97,97,131/- AL LOWED BY THE AO AGAINST THE TOLLING RECEIPTS OF RS.20,53,51,346/ - WAS MEAGRE AND AMOUNTED ONLY TO 9.65% OF THE RECEIPTS. 57. THE CIT(A) NOTED THAT THE ASSESSEE HAD SUBMITTE D DIFFERENT VERSIONS OF EXPENSES BEFORE THE AO WHICH SHOWED LOSS RANGING FR OM RS.1.00 CRORE TO RS.23.75 CRORES WHICH WAS NOT ACCEPTABLE. HE FURTH ER FOUND THAT DUE TO A BLAST IN THE KALD FURNACE IN JUNE, 2004 THE PLANT WAS DYSFUNCTIONAL FOR TWO MONTHS. THE ASSESSEE WAS ALSO FACING ACUTE CASH SHORTAGE AN D IN THESE CIRCUMSTANCES WAS FORCED TO ACCEPT TOLLING WORK SO THAT SOME WORK ING CAPITAL CAN BE GENERATED FOR ITS MAIN BUSINESS. IN THE NEXT YEAR, THE TOLLING RECEIPTS AMOUNTED TO ONLY RS.6 LAKHS. ACCORDING TO THE CIT(A) THE TO LLING WORK WAS DISTINCT FROM THE MAIN BUSINESS AND WAS AKIN TO HIRING OUT THE S EMI-FUNCTIONAL PLANT FOR CONVERSION PROCESS AND THE PROCESSING CHARGES RECEI VED ARE SIMILAR TO RENTAL PAYMENTS. RELYING ON THE JUDGMENT OF THE SUPREME COURT IN TUTICORIN ALKALIES (SUPRA), THE CIT(A) HELD THAT DURING THE P RE-COMMENCEMENT STAGE ONLY THE EXPENSES RELATING TO PRE-PRODUCTION ACTIVI TY CAN BE CAPITALIZED AND TOLLING INCOME HAS TO BE ASSESSED UNDER THE HEAD IN COME FROM OTHER SOURCES. 58. WITH REGARD TO THE QUESTION OF EXPENSES TO BE A LLOWED AGAINST THE TOLLING INCOME, THE CIT(A) HELD THAT THE DIFFERENT VERSIONS SUBMITTED BY THE ASSESSEE WERE BASED ON DIFFERENT ASSUMPTIONS AND IN THE ABSE NCE OF CLEAR DETAILS OF THE EXPENSES THE NEXT BEST ALTERNATIVE WAS TO ESTIMATE THE PROFIT MARGIN FROM PAGE - 31 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -31- COMPARABLE CASES. HAVING HELD SO, HE NOTED THAT FO R THE ASSESSMENT YEAR 2004- 2005, HINDUSTAN COPPER LTD. HAS SHOWN NET PROFIT OF 9.3% FROM ITS MANUFACTURING ACTIVITIES AND 20% FROM JOB WORK ACTI VITIES. KEEPING THIS IN VIEW AND TAKING NOTE OF THE FACT THAT THE ASSESSEE HAD NOT STABILISED ITSELF IN THE BUSINESS, THE CIT(A) HELD THAT IT WOULD BE FAIR TO ESTIMATE THE NET PROFIT FROM THE TOLLING ACTIVITY AT 15% OF THE TOLLING RECEIPTS . THUS, ON TOLLING RECEIPTS OF RS.20,53,51,346/-, THE NET PROFIT WAS ESTIMATED AT 15% I.E. RS.3,08,02,701/-. THE ADDITION WAS SUSTAINED TO THIS EXTENT, AS AGAIN ST RS.18,55,54,215/- MADE BY THE AO. 59. THE MAIN CRITICISM LEVELLED BY THE LEARNED COUN SEL FOR THE ASSESSEE AGAINST THE AFORESAID DECISION OF THE CIT(A) IS THA T THE APPROACH OF THE FIRST APPELLATE AUTHORITY WAS FALLACIOUS BECAUSE IT PROCE EDED ON THE ERRONEOUS ASSUMPTION THAT THE ASSESSEE HAD LET OUT ITS FACTOR Y FOR RENT. IT WAS CONTENDED THAT THE CIT(A) WAS WRONG IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN ASSESSING THE TOLLING INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. IT IS SUBMITTED IN THE ALTERNATIVE AND WITHOUT PREJUDICE THAT THE TOLLING INCOME WOULD GO TO REDUCE THE CAPITAL WORKS-IN-PROGRESS SINCE NO BUSINESS ACTIVITY HAD COMMENCED. IT IS SUBMITTED IN THE ALTERNATIVE THAT IN ANY CASE DEPRECIATION IS ALLOWABLE EVEN ON INCOME EARNED FROM TRIAL PRODUCTI ON AND EVEN IF THE INCOME IS ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURC ES. RELIANCE WAS PLACED ON THE JUDGMENT OF THE HONBLE GUJARAT HIGH COURT A CIT VS. ASHIMA SYNTEX LTD., (2001) 251 ITR 133. 60. THE LEARNED CIT-DR SUBMITTED THAT THERE WAS NO CLAIM MADE BY THE ASSESSEE THAT THE TOLLING INCOME SHOULD BE ASSESSED AS BUSINESS INCOME AT ANY STAGE DURING THE ASSESSMENT PROCEEDINGS. NO SPECI FIC GROUNDS HAVE BEEN RAISED EVEN BEFORE THE TRIBUNAL. HE POINTED OUT FU RTHER THAT THE ASSESSEE HAS NOT PREPARED A PROFIT AND LOSS ACCOUNT WHICH INDICA TES THAT EVEN THE ASSESSEE DID NOT CONSIDER THE TOLLING ACTIVITY AS A BUSINESS ACTIVITY. HE ALSO POINTED OUT THAT THE SAID ACTIVITY WAS CARRIED ON ONLY DURING T HE LATER PART OF THE PREVIOUS PAGE - 32 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -32- YEAR, THAT IS FROM SEPTEMBER, 2004 TO MARCH, 2005 A ND THERE WAS NO SYSTEMATIC, CONTINUOUS AND REGULAR COURSE OF ACTIVI TY SO THAT IT CAN BE CALLED A BUSINESS ACTIVITY. IT WAS FURTHER SUBMITTED THAT T HE ASSESSEE WAS UNABLE TO FURNISH THE CORRECT CALCULATIONS REGARDING THE EXPE NSES INCURRED TO EARN THE TOLLING INCOME AND THERE WERE HUGE VARIATIONS IN TH E WORKINGS FILED BY THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS, ROBBING THEM OF CREDIBILITY. IT WAS POINTED OUT THAT THE ASSESSEE DID NOT MAKE ANY CLAIM FOR THE DEPRECIATION AT ANY STAGE OF THE PROCEEDINGS. THE LEARNED CIT-DR FURTHER POINTED OUT THAT IN GROUND NOS.3 AND 4 OF THE DEPARTMENTS APPEAL FOR T HE SAME YEAR IN ITA NO.3547/AHD/2008, THE DEPARTMENT HAS CHALLENGED THE RELIEF GIVEN BY THE CIT(A) BY REDUCING THE INCOME FROM THE TOLLING ACTI VITY TO RS.3,08,02,701/- AS AGAINST RS.18,55,54,215/- ASSESSED BY THE AO AND SU BMITTED THAT THESE GROUNDS MAY ALSO BE TAKEN UP FOR CONSIDERATION IN THE ASSES SEES APPEAL SINCE THE ISSUE WAS COMMON. IN SUPPORT OF THESE GROUNDS IN THE APP EAL OF THE DEPARTMENT HE CONTENDED THAT THE TOLLING ACTIVITY WAS DONE BY THE ASSESSEE AS A JOB WORK AND IT DID NOT RELATE TO ANY TRIAL RUN AND THUS CANNOT BE CONSIDERED AS BUSINESS INCOME. HE FURTHER CONTENDED THAT THE CIT(A), HAVING HELD T HAT THE ASSESSEE DID NOT FURNISH PRECISE CALCULATIONS REGARDING THE TOLLING ACTIVITY, OUGHT NOT TO HAVE REDUCED THE INCOME BY APPLYING A PERCENTAGE BASIS T O THE GROSS TOLLING RECEIPTS. 61. IN HIS REPLY TO THE ARGUMENTS OF THE LEARNED CI T-DR, COVERING BOTH THE APPEALS, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMI TTED THAT IN ANY CASE AND WITHOUT PREJUDICE, THE REDUCTION OF THE TOLLING INC OME AS ALLOWED BY THE CIT(A) WAS FULLY JUSTIFIED. WITH REFERENCE TO THE ARGUMEN T OF THE LEARNED CIT-DR THAT THE ASSESSEE DID NOT CLAIM DEPRECIATION SPECIFICALL Y, IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT IN THE DETAIL S OF DIRECT EXPENSES TO EARN THE TOLLING INCOME SUBMITTED AS ANNEXURE-I TO THE ASSES SEES LETTER DATED 30-11- 2007 (PAGES 160-161 OF PAPER BOOK NO.1 FOR THE A.Y. 2005-2006), THERE WAS A SPECIFIC CLAIM OF DEPRECIATION TO THE EXTENT OF RS. 6,42,50,189/-. IN ANNEXURE-III TO THE LETTER DATED 20-12-2007 WRITTEN TO THE AO (P AGES 173 AND 183 OF THE ABOVE PAPER BOOK), NO DEPRECIATION WAS MENTIONED UN DER THE HEAD DETAILS OF PAGE - 33 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -33- TRIAL RUN ACCOUNTS HEADS ONLY BECAUSE THIS WAS NOT A PROFIT STATEMENT BUT WAS MERELY A DETAILED WORKING OF THE OPERATIONS DURING THE YEAR AS WAS PRESENTED TO THE BOARD OF DIRECTORS. IN ANY CASE, IT WAS SUBMIT TED THAT IN THE AFORESAID LETTER, IN PARA-3 (PAGE 174 OF THE PAPER BOOK) THE ASSESSEE HAS ALSO REMARKED THAT IN THE AFORESAID STATEMENT, DEPRECIATION AS COMPUTED U NDER THE INCOME TAX RULES HAS NOT BEEN INCLUDED AND IS REQUIRED TO BE ALLOWED IN ADDITION TO THE OTHER EXPENSES. ATTENTION WAS ALSO DRAWN TO PAGE 293 OF THE SAME PAPER BOOK WHICH IS THE STATEMENT OF ACTUAL DIRECT EXPENSES INCURRED FOR CONVERSION OF RAW MATERIALS SUPPLIED BY THE HCL INTO COPPER CATHODES ON JOB WORK BASIS, DULY CERTIFIED BY THE CHARTERED ACCOUNTANTS AND IT WAS P OINTED OUT THAT IN THIS STATEMENT DEPRECIATION ON PLANT WAS CLAIMED AS OVER HEAD EXPENSES. IT WAS THUS POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT A SPECIFIC CLAIM WAS MADE REGARDING ALLOWANCE OF DEPRECIATION. 62. WE HAVE CAREFULLY CONSIDERED THE FACTS AND THE RIVAL CONTENTIONS. THE FIRST QUESTION TO BE CONSIDERED IS WHETHER THE TOLL ING INCOME CAN BE SAID TO HAVE BEEN EARNED PRIOR TO THE COMMENCEMENT OF THE BUSINE SS AND WAS THEREFORE REQUIRED TO BE REDUCED FROM THE COST OF THE PROJECT , WITHOUT SEPARATELY BEING ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES OR UNDER THE HEAD BUSINESS. IT IS SEEN FROM THE ASSESSMENT ORDER T HAT EVEN THE AO HAS STATED THAT THE ASSESSEE HAS NOT STARTED COMMERCIAL PRODUC TION. THE ASSESSEE HAS ALSO STATED IN THE STATEMENT OF FACTS FILED BEFORE THE C IT(A) ALONG WITH THE APPEAL MEMORANDUM IN FORM NO.35 THAT IT IS ALSO AN UNDISP UTED FACTS THAT COMMERCIAL PRODUCTION STARTED ONLY IN THE ASSESSMENT YEAR 2007 -2008 AND NOT IN THE YEAR UNDER CONSIDERATION. IN FACT IT HAS BEEN SPECIFIC ALLY STATED IN PARA-1(B) OF THE STATEMENT OF FACTS THAT THE ASSESSEE STARTED COMMER CIAL PRODUCTION ON 15-5- 2006. IN ITS SUBMISSION MADE BEFORE THE AO ON 24-1 2-2007, IT WAS PLEADED THAT FOR THE PURPOSE OF MAKING TRIAL RUN PRODUCTION , WORKING CAPITAL WAS REQUIRED AND IN THE ABSENCE OF THE REQUIRED WORKING CAPITAL, THE COMPANY UNDERTOOK JOB WORK FOR HINDUSTAN COPPER LTD., WHICH SUPPLIED THE RAW MATERIAL. IT WAS PLEADED THAT THE JOB WORK WAS DIR ECTLY RELATED TO THE SETTING UP PAGE - 34 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -34- OF THE PLANT OF THE COMPANY FOR THE PURPOSE OF TRIA L RUN. IT WAS ACCORDINGLY CLAIMED BY THE ASSESSEE THAT THE JOB WORK OR TOLLIN G RECEIPTS WAS RIGHTLY REDUCED BY IT FROM THE PREOPERATIVE EXPENSES OR CAP ITAL WORKS-IN-PROGRESS ACCOUNT. RELIANCE WAS PLACED BY THE ASSESSEE ON TH E JUDGMENT OF THE SUPREME COURT IN CIT VS. BOKARO STEELS LD., (1999) 236 ITR 315. IN OUR CONSIDERED OPINION THIS JUDGMENT IS APPLICABLE TO THE FACTS OF THE PRESENT CASE. IN THAT CASE, THE COMPANY WAS SET UP TO PRODUCE STEEL. IN THE CO URSE OF CONSTRUCTION OF THE STEEL PLANT AND BEFORE ITS COMPLETION, THE ASSESSEE ADVANCED MONIES TO THE CONTRACTORS AND ALSO RECEIVED RENT FROM QUARTERS LE T OUT TO THE EMPLOYEES OF THE CONTRACTORS. THE ASSESSEE ALSO RECEIVED HIRE CHARG ES ON PLANT AND MACHINERY LET OUT TO THE CONTRACTORS AND ROYALTY ON STONES REMOVE D FROM THE LAND OWNED BY IT. THE ASSESSEE CLAIMED THAT THESE ITEMS OF RECEIPTS W ERE IN THE NATURE OF CAPITAL RECEIPTS WHICH COULD BE SET OFF AGAINST THE CAPITAL EXPENDITURE INCURRED BY THE ASSESSEE IN THE RELEVANT ASSESSMENT YEAR. THE TRIB UNAL AND THE HIGH COURT UPHELD THE ASSESSEES CLAIM AND THE MATTER REACHED THE SUPREME COURT AT THE INSTANCE OF THE REVENUE. IT WAS HELD BY THE SUPREM E COURT THAT THE ACTIVITIES OF THE ASSESSEE IN CONNECTION WITH THE AFORESAID RECEI PTS WERE DIRECTLY CONNECTED TO THE WORK OF CONSTRUCTION OF THE PLANT UNDERTAKEN BY THE ASSESSEE. THE ARRANGEMENT WITH THE CONTRACTORS ENSURED THAT THEIR WORK PROCEEDED WITHOUT ANY FINANCIAL HITCH. THE SUPREME COURT VIEWED THE ARRANGEMENTS BETWEEN THE ASSESSEE AND THE CONTRACTORS AS ARRANGEMENTS WHICH WERE INTRINSICALLY CONNECTED WITH THE CONSTRUCTION OF THE STEEL PLANT. IT WAS THUS HELD THAT THE RECEIPTS WERE NOT INCOME OF THE ASSESSEE FROM ANY I NDEPENDENT SOURCE BUT SHOULD BE REDUCED FROM THE COST OF THE PLANT. IN T HIS CASE THE EARLIER JUDGMENT OF THE SUPREME COURT IN THE CASE OF TUTICORIN ALKAL IES (SUPRA) WAS REFERRED TO AND IT WAS OBSERVED THAT IN THAT CASE THE ASSESSEE BORROWED MONEY FOR ITS BUSINESS BUT UTILISED THE SAME TO EARN INTEREST WHI CH COULD BE USED BY THE ASSESSEE IN WHICHEVER MANNER HE LIKED. IT WAS POIN TED OUT BY THE SUPREME COURT THAT THE INTEREST EARNED BY THE ASSESSEE IN T UTICORIN ALKALIES CONSTITUTED AN INDEPENDENT SOURCE OF INCOME NOT CONNECTED WITH THE CONSTRUCTION ACTIVITIES, PAGE - 35 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -35- WHEREAS IN THE CASE OF THE ASSESSEE IN BOKARO STEEL S (SUPRA) THE UTILISATION OF THE VARIOUS ASSETS OF THE COMPANY AND THE PAYMENTS RECEIVED FOR THE SAME WERE DIRECTLY LINKED WITH THE ACTIVITY OF SETTING UP OF THE STEEL PLANT WHICH WAS THE CAPITAL STRUCTURE OF THE ASSESSEE. IN THE LIGHT OF THESE TWO JUDGMENTS, IF WE EXAMINE THE PRESENT CASE IT SEEMS TO US THAT IT WAS ONLY TO OBVIATE THE NEED FOR WORKING CAPITAL REQUIRED TO PURCHASE RAW MATERIALS TO COMMENCE TRIAL OR TEST RUNS THAT THE ASSESSEE UNDERTOOK JOB WORK FOR HINDU STAN COPPER LTD. BY GETTING THE RAW MATERIALS FROM HINDUSTAN COPPER THE ASSESSEE WAS ABLE TO RUN ITS PLANT AND MACHINERY ON TRIAL RUNS AND THUS TEST THE PRODUCT TURNED OUT. CONDUCTING TRIAL RUNS IS PART OF THE SETTING UP OF THE PLANT (COPPER CATHODE) AND TILL SUCCESSFUL TRIAL RUNS ARE CONDUCTED AND THE PR ODUCT TURNED OUT IS SATISFACTORY AND MEETS THE REQUIRED STANDARDS, IT CANNOT BE SAID THAT THE PLANT, WHICH IS THE CAPITAL STRUCTURE OF THE COMPANY, HAS BEEN SET UP. IN THIS VIEW OF THE MATTER, WE ARE INCLINED TO APPLY, WITH RESPECT, THE JUDGMEN T OF THE SUPREME COURT IN CIT VS. BOKARO STEELS LTD. (SUPRA) TO THE FACTS OF THE PRESENT CASE. ACCORDINGLY, WE HOLD THAT THE TOLLING RECEIPTS WERE RIGHTLY REDUCED BY THE ASSESSEE FROM THE CAPITAL WORKS-IN-PROGRESS ACCOUNT . FOR THE SAKE OF COMPLETENESS WE MAY REFER TO THE COPY OF THE 42ND A NNUAL REPORT FOR THE YEAR ENDED 31-3-2005, PLACED AT PAGES 1 TO 42 OF PAPER B OOK NO.1 FILED BY THE ASSESSEE FOR THIS YEAR. AT PAGE 33, IN PARA-2 UNDE R SCHEDULE-H WHICH EXPLAINS THE SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO TH E ACCOUNTS, IT HAS BEEN STATED THAT AS THE COMMERCIAL PRODUCTION HAS NOT STARTED UPTO THE BALANCE SHEET DATE AND THE EXPENDITURE INCURRED IS EITHER DEBITED TO P RE-OPERATIVE OR DEFERRED REVENUE EXPENDITURE, NO PROFIT AND LOSS ACCOUNT IS PREPARED. PARA-7 AT PAGE 36 OF THE PAPER BOOK GIVES THE DETAILS OF THE CAPITAL WORKS-IN-PROGRESS. ITEM-(E) OF THIS PARAGRAPH AT PAGE 37 OF THE PAPER BOOK GIVES T HE DETAILS OF PRE-OPERATIVE AND TRIAL RUN EXPENSES. AFTER BRINGING FORWARD THE BALANCE FROM THE EARLIER YEAR, ALL SUCH EXPENSES ARE LISTED. THEREAFTER, AL L RECEIPTS WHICH GO TO REDUCE THE PRE-OPERATIVE AND TRIAL RUN EXPENSES HAVE BEEN LISTED. ITEM-28 OF THIS LIST IS PAGE - 36 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -36- TOLLING INCOME-TRIAL RUN AMOUNTING TO RS.2083.53 LAKHS. NOTE NO.11, WHICH IS AT PAGE 38 OF THE PAPER BOOK READS AS UNDER: 11.(A) THE COMPANY IS IMPLEMENTING COPPER PROJECT AT JHAGADIA SINCE LONG AND AT PRESENT IS CONTINUING WITH TRIAL RUN TO PRODUCE COPPER CATHODES. AS SUFFICIENT CAPACITY UTILISATIO N OF PLANT IS NOT ACHIEVED, THE PROJECT IS NOT CAPITALIZED. ON THE S AID PROJECT, THE COMPANY HAS INCURRED PRE-OPERATIVE EXPENSES OF RS.8 5,654.81 LACS (PREVIOUS YEAR : RS.75,324.04 LACS) WHICH INCL UDES BORROWING COST OF RS.82,262.34 LACS (PREVIOUS YEAR : RS.66,075.38 LACS) AND EXPENDITURE IN RESPECT OF SC HEME OF ARRANGEMENT UNDER SECTION 391 TO 394 OF THE COMPANI ES ACT, 1956. THE SAME HAS BEEN SHOWN AS CAPITAL-WORK-IN-P ROGRESS, AT PRESENT. (B) THE COMPANY IS IN PROCESS OF ASCERTAINING THE A MOUNT WHICH CAN BE CAPITALIZED OUT OF PREOPERATIVE AND TRIAL RUN EX PENSES. AS A PART OF TRIAL RUN THE COMPANY HAS RECEIVED CERTAIN INCOME BY THE WAY OF TOLLING CHARGES AND SALES OF PRODUCTS. THE SAME HAS BEEN CREDITED TO PRE-OPERATIVE AND TRIAL RUN EXPENSES. IT WILL THUS BE SEEN THAT THE INCOME BY WAY OF TOLL ING RECEIPTS WAS CONSIDERED AS INCOME FROM TRIAL RUN AND WAS REDUCED FROM THE CAPI TAL-WORKS-IN-PROGRESS ACCOUNT. SINCE WE HAVE HELD THAT THE FACTS OF THE PRESENT CASE ATTRACT THE RATIO OF THE JUDGMENT OF THE SUPREME COURT IN CIT VS. BOK ARO STEELS LTD. (SUPRA) WE HOLD THAT THE TOLLING RECEIPTS WERE RIGHTLY REDU CED BY THE ASSESSEE FROM THE CAPITAL-WORKS-IN-PROGRESS ACCOUNT AND THE DEPARTMEN TAL AUTHORITIES WERE NOT RIGHT IN ASSESSING THE TOLLING INCOME SEPARATELY UN DER THE HEAD INCOME FROM OTHER SOURCES. 63. IN THE VIEW WE HAVE TAKEN AS ABOVE, IT IS NOT N ECESSARY FOR US TO EXAMINE THE FURTHER QUESTION WHETHER THE TOLLING INCOME SHO ULD BE ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES OR UNDER THE HEAD BUSINESS. IT IS ALSO NOT NECESSARY TO ADDRESS THE QUESTION AS TO WHETHER THE ASSESSEE WOULD BE ENTITLED TO CLAIM DEPRECIATION, IRRESPECTIVE OF THE HEAD UND ER WHICH THE TOLLING INCOME IS ASSESSED. THE RESULT IS THAT WE ALLOW THE MAIN GROUND NO.5.2 IN WHICH THE ASSESSEE HAS CLAIMED THAT THE TOLLING INCOME WOULD GO TO REDUCE THE COST OF THE PAGE - 37 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -37- ASSETS/CAPITAL WORK-IN-PROGRESS SINCE THE ASSESSEE HAS NOT COMMENCED COMMERCIAL PRODUCTION. 64. SO FAR AS GROUND NOS.3 AND 4 IN THE DEPARTMENT S APPEAL ARE CONCERNED, THEY ARE AGAINST THE RELIEF GRANTED BY THE CIT(A) I N QUANTIFICATION OF THE TOLLING INCOME. THESE GROUNDS ARE NOW ACADEMIC HAVING REGA RD TO OUR DECISION THAT THE TOLLING INCOME, WHATEVER IT MAY BE, IS TO BE RE DUCED FROM THE CAPITAL WORK- IN-PROGRESS ACCOUNTS AND IS NOT ASSESSABLE SEPARATE LY. THESE GROUNDS IN THE DEPARTMENTS APPEAL ARE ACCORDINGLY DISMISSED AS IN FRUCTUOUS. 65. GROUND NO.6 IN THE ASSESSEES APPEAL IS GENERAL AND REQUIRES NO DECISION. GROUND NO.7 IS AGAINST THE CHARGING OF INTEREST UND ER SECTIONS 234A TO 234D AND THEY ARE CONSEQUENTIAL. GROUND NO.8 IS DIRECTE D AGAINST THE INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271(1)(C). NO AP PEAL IS PROVIDED AGAINST MERE INITIATION OF PENALTY PROCEEDINGS. THE GROUN D IS DISMISSED. 66. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. 67. WE NOW TAKE UP THE DEPARTMENTS APPEAL IN ITA N O.3547/AHD/2008. GROUND NOS.3 AND 4 IN THIS APPEAL ARE DIRECTED AGAI NST THE REDUCTION OR RELIEF GIVEN BY THE CIT(A) IN RESPECT OF THE ADDITION MADE FOR TOLLING INCOME BY THE ASSESSING OFFICER. THESE GROUNDS HAVE ALREADY BEEN CONSIDERED BY US WHILE DISPOSING OF THE ASSESSEES APPEAL IN ITA NO.3255/A HD/2008 WHILE CONSIDERING THE ASSESSEES GROUND NO.5 IN THAT APPEAL. THEY AR E DISMISSED AS ACADEMIC OR INFRUCTUOUS. 68. THAT LEAVES US WITH ONLY THE FIRST TWO GROUNDS WHICH ARE DIRECTED AGAINST THE DECISION OF THE CIT(A) TO ALLOW CAPITALIZATION OF THE INTEREST EXPENSES OF RS.197.48 CRORES. IT IS CLAIMED IN THE GROUNDS TH AT THE CIT(A) FAILED TO APPRECIATE THAT THE INTEREST EXPENSES WERE NOT ACTU ALLY PAID BY THE ASSESSEE AND THE BUSINESS OF THE ASSESSEE HAS NOT COMMENCED AND THEREFORE THE AO HAS RIGHTLY NOT ALLOWED THE CAPITALISATION. IN THE COU RSE OF THE ASSESSMENT PAGE - 38 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -38- PROCEEDINGS, BY LETTER DATED 12-7-2007 THE ASSESSEE CLAIMED THAT INTEREST EXPENSES OF RS.197.48 CRORES INCURRED DURING THE YE AR SHOULD BE ALLOWED AS DEDUCTION UNDER THE HEAD PROFITS AND GAINS OF BUSI NESS OR PROFESSION. WHILE DEALING WITH THIS CLAIM, THE AO OBSERVED THAT IT CA NNOT BE ALLOWED SINCE NO COMMERCIAL PRODUCTION HAD COMMENCED DURING THE YEAR . HE ALSO RELIED ON THE FINDING OF THE CIT(A) IN PARA-9.1.2 OF THE ORDER OF THE CIT(A) FOR THE ASSESSMENT YEAR 2004-2005, TO THE EFFECT THAT THE D EDUCTION FOR INTEREST CANNOT BE ALLOWED SINCE COMMERCIAL PRODUCTION HAD NOT STAR TED. THE AO ALSO GAVE SEVERAL OTHER REASONS IN PAGE-5 OF THE ASSESSMENT O RDER. ULTIMATELY, THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF THE INTEREST WAS N OT ALLOWED. THE ASSESSEE FILED AN APPEAL AGAINST THE ASSESSMENT ORDER BEFORE THE CIT(A) AND IN GROUND NOS.5 AND 6 BEFORE HIM CLAIMED THE INTEREST AS DEDU CTION ALLOWABLE UNDER SECTION 43B. THESE GROUNDS WERE DEALT WITH BY THE CIT(A) IN PARA-7 OF HIS ORDER. IN THE COURSE OF THE APPEAL PROCEEDINGS IT SEEMS TO HAVE BEEN ARGUED BEFORE THE CIT(A) THAT THE AO WAS WRONG IN NOT ALLO WING CAPITALIZATION OF THE INTEREST EXPENSES. THIS EMERGES OUT OF PARA-(II), (III) AND (IV) AT PAGE 10 OF THE ORDER OF THE CIT(A). TAKING NOTE OF THE ARGUMENT T HE CIT(A) IN PARA-7.7 OF HIS ORDER HELD AS UNDER: 7.7 I HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTI ONS AND FACTS OF THE CASE. IN MY APPELLATE ORDER FOR A.Y.2004-05 AFTER APPRAISING ALL THE FACTS IT WAS HELD THAT THE COMMERCIAL PRODUCTION HA S NOT STARTED. SINCE THE BUSINESS HAS NOT COMMENCED AND NO BUSINESS INCO ME HAS BEEN COMPUTED AND NO INTEREST ON TERM LOANS HAS BEEN CLA IMED AS DEDUCTION, THE INVOCATION OF SECTION 43B BY ASSESSING OFFICER IS ERRONEOUS. IN FACT THERE IS NO CONTROVERSY RELATING TO CLAIM OF INTERE ST EXPENSES PAID/PAYABLE. SAVE FOR MISCELLANEOUS AND INTEREST INCOME ETC. WHICH IS NOT TO BE NETTED AGAINST THE INTEREST EXPENSES, AS DECIDED IN EARLIER GROUNDS OF APPEAL, REST OF SUCH EXPENSES ARE TO BE CAPITALIZED IN LINE WITH THE EXPLANATION 8 TO SECTION 43(1). THE DIREC TIONS BY ASSESSING OFFICER THAT THESE EXPENSES MAY NOT BE CAPITALIZED ARE THUS MISPLACED AND NOT CORRECT. THUS THE INTEREST EXPENSES IS NOT AN ALLOWABLE EXPENDITURE FOR THE YEAR UNDER CONSIDERATION BUT TH E AO WAS NOT JUSTIFIED IN NOT ALLOWING THE CAPITALIZATION OF SUC H EXPENSES. GROUND NO.5 IS DISMISSED AND GROUND NO.6 IS ALLOWED. PAGE - 39 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -39- TAKING OBJECTION TO THE AFORESAID DECISION OF THE C IT(A), IT IS CONTENDED BEFORE US BY THE LEARNED CIT-DR THAT THE CIT(A) HAD NO JUR ISDICTION TO DECIDE THE ISSUE OF CAPITALIZATION OF THE INTEREST WHEN THERE WAS NO DECISION BY THE AO ON THE POINT AND THERE WAS NO SPECIFIC GROUND TAKEN BY THE ASSESSEE BEFORE THE CIT(A). IT IS SUBMITTED THAT ALL THAT THE AO STATE D WAS THAT THE ASSESSEE WAS NOT ENTITLED TO THE DEDUCTION OF THE INTEREST AND THAT HE DID NOT FURTHER HOLD THAT EVEN CAPITALIZATION OF THE SAME CANNOT BE ALLOWED. IT IS CONTENDED THAT THE DECISION OF THE CIT(A) IS BASED ON ERRONEOUS ASSUMP TIONS AND WAS UNCALLED FOR AND SHOULD BE REVERSED. IT IS POINTED OUT THAT IN HIS ORDER FOR THE ASSESSMENT YEAR 2004-2005, THE CIT(A) REJECTED THE CLAIM FOR C APITALIZATION OF THE INTEREST AGAINST WHICH THE ASSESSEE DID NOT FILE ANY APPEAL TO THE TRIBUNAL. 69. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE POWERS OF THE CIT(A) WHILE HEARING AN APPEAL WE RE CO-TERMINOUS WITH THOSE OF THE AO AS HELD BY THE SUPREME COURT IN THE CASE OF KANPUR COAL SYNDICATE, 53 ITR 225 AND THEREFORE WHEN THE ISSUE WAS RAISED BEFORE HIM BY THE ASSESSEE IN THE COURSE OF THE HEARING OF THE AP PEAL, IT WAS OPEN TO THE CIT(A) TO ADJUDICATE UPON THE SAME. IT WAS THEREFO RE SUBMITTED THAT THE CIT(A) COMMITTED NO WRONG IN DECIDING THE ISSUE AND ALSO DECIDING IT IN FAVOUR OF THE ASSESSEE SINCE EVEN THE AO HAS NOT DI SPUTED THE FACT THAT THE ASSESSEE HAS NOT COMMENCED COMMERCIAL PRODUCTION IN THE RELEVANT PREVIOUS YEAR. 70. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTI ONS. IT IS TRUE THAT THE ASSESSEE DID NOT FILE ANY APPEAL AGAINST THE DECISI ON OF THE CIT(A) IN PARA-9.1.4 OF HIS ORDER FOR THE ASSESSMENT YEAR 2004-2005, THO UGH AN APPEAL WAS FILED BY THE ASSESSEE IN RESPECT OF OTHER POINTS IN ITA NO.3 741/AHD/2007. IN THIS PARAGRAPH THE CIT(A) HELD THAT THE INTEREST ON THE TERM LOAN IS ALLOWABLE UNDER SECTION 43B. AT THE SAME TIME, HE ALSO OBSERVED TH AT THE ASSESSEE HAS WRONGLY CAPITALIZED THE INTEREST. SINCE THE INTEREST WAS B EING ALLOWED AS A DEDUCTION, THERE WAS NO QUESTION OF THE ASSESSEE FILING AN APP EAL AGAINST THE DECISION OF PAGE - 40 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -40- THE CIT(A) NOT TO ALLOW CAPITALIZATION OF THE INTER EST BECAUSE THAT DECISION WAS ONLY ACADEMIC. HOWEVER, FOR THE ASSESSMENT YEAR 20 05-2006 WHICH IS NOW UNDER APPEAL, THE FIRST QUESTION IS WHETHER THE CIT (A) HAD THE JURISDICTION TO DECIDE THIS ISSUE OF CAPITALIZATION OF THE INTEREST IN THE ABSENCE OF ANY SPECIFIC DECISION BY THE AO ON THE POINT. HERE WE ARE INCL INED TO AGREE WITH THE LEARNED COUNSEL FOR THE ASSESSEE IN HIS CONTENTION THAT THE CIT(A) HAD THE JURISDICTION IN VIEW OF THE JUDGMENT OF THE SUPREME COURT CITED SUPRA. FURTHER, THE POINT REGARDING THE CAPITALIZATION OF THE INTEREST, THOUGH IT MAY NOT HAVE BEEN RAISED IN THE GROUNDS OF APPEAL FILED BEF ORE THE CIT(A), IT WAS TAKEN BEFORE HIM IN THE COURSE OF THE APPEAL PROCEEDINGS AS IS CLEAR FROM PARA-7.2 OF HIS ORDER AND SECTION 250(5) OF THE ACT EMPOWERS TH E CIT(A) TO ALLOW THE ASSESSEE AT THE TIME OF THE HEARING OF THE APPEAL T O GO INTO ANY GROUND OF APPEAL NOT SPECIFIED IN THE GROUNDS OF APPEAL, IF HE IS SA TISFIED THAT THE OMISSION OF THE GROUND FROM THE FORM OF APPEAL (FORM NO.35) WAS NOT WILLFUL OR UNREASONABLE. THE CIT(A) WAS THEREFORE PERFECTLY JUSTIFIED IN EXE RCISING HIS POWERS UNDER THE AFORESAID PROVISION OF LAW AND IN ADJUDICATING THE ISSUE OF CAPITALIZATION OF THE INTEREST. 71. SO FAR AS THE MERITS OF THE DECISION OF THE CIT (A) ARE CONCERNED, IT MAY BE RECALLED THAT IN GROUND NO.1.2 IN THE ASSESSEES APPEAL FOR THE SAME YEAR IN ITA NO.3255/AHD/2008, THE ASSESSEE HAD CLAIMED THAT THE INTEREST EXPENDITURE OF RS.197.48 CRORES SHOULD BE NETTED OFF AGAINST TH E INTEREST INCOME OF RS.24,00,143/- . WHILE DEALING WITH THIS GROUND WE HAVE HELD IN PARA-50 (SUPRA) THAT THE INTEREST EXPENDITURE WHICH WAS INC URRED BY THE ASSESSEE IN RESPECT OF BORROWINGS MADE FOR THE PURPOSE OF MAKIN G THE DEPOSITS WITH THE BANKS/FINANCIAL INSTITUTIONS FROM WHICH INTEREST WA S EARNED MAY BE QUANTIFIED BY THE AO AND ALLOWED AS A DEDUCTION UNDER SECTION 57(III) OF THE ACT. IN LINE WITH OUR DECISION, THE INTEREST EXPENDITURE, OUT OF THE CLAIM OF RS.197.48 CRORES, WHICH IS FOUND NOT ALLOWABLE AS PER OUR DIR ECTIONS WILL BE CAPITALIZED AND ADDED TO THE COST OF THE ASSETS/CAPITAL WORKS-I N-PROGRESS SINCE THE BUSINESS OF THE ASSESSEE HAS NOT COMMENCED DURING THE RELEVA NT PREVIOUS YEAR EVEN PAGE - 41 M/S.JHAGADIA COPPER LTD. VS. DCIT, BHAURCH -41- ACCORDING TO THE AO. THE GROUNDS TAKEN BY THE DEPA RTMENT ARE THUS PARTLY ALLOWED, SUBJECT TO THE ABOVE REMARKS. 72. IN THE RESULT, THE APPEAL OF THE DEPARTMENT IS PARTLY ALLOWED TO THE EXTENT INDICATED ABOVE. 73. TO SUM UP, THE ASSESSEES APPEALS BEING ITA NOS .3741/AHD/2007, 3253/AHD/2008, 3254/AHD/2008 AND 3255/AHD/2008 ARE PARTLY ALLOWED. THE DEPARTMENTS APPEALS BEING ITA NOS.3545 AND 3546/AH D/2008 ARE DISMISSED AND THAT OF ITA NO.3547/AHD/2008 IS PART ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT 13 TH NOVEMBER, 2009. SD/- SD/- (N.S. SAINI) ACCOUNTANT MEMBER (R.V.EASWAR) VICE-PRESIDENT PLACE : AHMEDABAD DATE : 13-11-2009 COPY OF THE ORDER FORWARDED TO: 1) : ASSESSEE 2) : RESPONDENT 3) : CIT(A) 4) : CIT CONCERNED 5) : DR, ITAT. BY ORDER DR, ITAT, AHMEDABAD