ACIT CC 38, MUMBAI V. PIPAVAV SHIPYARD LTD, MUMBAI

ITA 4692/MUM/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 0079 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 1 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 18-04-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 10-07-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: H N SINGH
• Keywords: Business income; Depreciation
• Section: 14A; 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES C, MUMBAI BEFORE SHRI P K BANSAL, VICE PRESIDENT & SHRI PAWAN SINGH, JUDICIAL MEMBER ITA NO. 4692/MUM/2014 ASSESSMENT YEAR : 2008-09 ITA NO. 372/MUM/2015 ASSESSMENT YEAR : 2009-10 ACIT CENTRAL CIRCLE 38 MUMBAI VS. RELIANCE DEFENCE & OFFSHORE ENGINEERING CO. LTD (EARLIER KNOWN AS PIPAVAV SHIPYARD LTD/PIPAVAV DEFENCE & ENGINEERING LTD.) PIPAVA HOUSE, 209, BANK STREET, CROSS LANE 4, FORT, MUMBAI 400 023 PAN AABCP1491L (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI H N SINGH RESPONDENT BY : SHRI YOGESH THAR & MS. RITU PUNJABI DATE OF HEARING : 10. 08 .2017 DATE OF PRONOUNCEMENT : 31 .0 8 .2017 O R D E R PER P K BANSAL, VICE-PRESIDENT: THESE APPEALS HAVE BEEN FILED BY THE REVENUE AGAINS T THE RESPECTIVE ORDERS OF THE CIT(A) DATED 28.03.2014 AND 28.04.14 FOR A.YS. 2008-09 AND 2009-10. 2. IN BOTH THESE YEARS THE REVENUE HAS TAKEN THREE COMMON GROUNDS OF APPEAL ACCEPT THE CHANGE IN FIGURE IN GROUND NO.3. BOTH THE PARTIES AGREED THAT THESE APPEALS BE DECIDED ON THE BASIS OF THE F ACTS INVOLVED IN A Y 2008 - ITA NO.4692/MUM/2014 ITA NO.372/MUM/2015 2 09 AND WHATEVER VIEW IS TAKEN BY THIS TRIBUNAL, SHA LL BE APPLICABLE FOR A Y 2009-10 ALSO. 3. THE GROUNDS OF APPEAL FOR A.Y. 2008-09 READ AS U NDER: 1. 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, THE LD. CIT(A) IS JUSTIFIED IN HOLDING THAT THE BUSINESS OF THE ASSESSEE WAS SET UP DURING THE PREVIOUS YEAR UNDER CONSIDERATION WHILE THE ASSESSEE HAS NOT DONE ANY BUSINESS ACTIVI TY DURING THE PREVIOUS YEAR UNDER CONSIDERATION.' 2. 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCE? ; OF THE CASE AND IN LAW, THE LD. CIT(A) IS JUSTIFIED IN HOLDING THAT THE GENERAL ADMINISTRATIVE EXPENSES ARE DEDUCTIBLE AS REVENUE E XPENSES AND INTEREST INCOME OF THE ASSESSEE IS ASSESSABLE TO TA X AS INCOME FROM BUSINESS AND PROFESSION WHILE THE BUSINESS OF THE A SSESSEE WAS NOT SET UP DURING THE PREVIOUS YEAR UNDER CONSIDERATION .' 3. 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) IS JUSTIFIED IN DELETING THE DISALLOWANCE U/S.14A W.R.T. TO INTEREST EXPENSES OF RS. 49,97,97 ,672/- WHILE THE ASSESSEE HAS NOT MAINTAINED SEPARATE POOL OF FUNDS FOR GENERAL OPERATING EXPENSES AND FOR CAPITAL EXPENSES END INV ESTMENT.' IN GROUND NO.3 FOR A.Y. 2009-10, THE AMOUNT OF ` 49,97,97,672/- BE READ AS ` 58,93,07,820/- 4. GROUND NO.1 RELATES TO THE ISSUE AS TO WHEN THE BUSINESS WAS SET UP. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE I S ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SHIP BUILDING AND SHIP REPAIRING YAR D. IT FILED ITS RETURN OF INCOME FOR A.Y. 2008-09 ON 29.09.2008, DECLARING TO TAL INCOME AT ` 18,27,03,346/- THE ASSESSEE CLAIMED THAT THE BUSI NESS WAS SET UP IN JANUARY 2008. THE ASSESSEE HAS SHOWN INTEREST INCO ME OF ` 27,71,89,925/- ITA NO.4692/MUM/2014 ITA NO.372/MUM/2015 3 AS ITS BUSINESS INCOME AGAINST WHICH IT SET OFF EXP ENDITURE AMOUNTING TO ` 16,15,55,733/- U/S. 37(1) OF THE ACT. THE BANK IN TEREST EARNED BY THE ASSESSEE AMOUNTING TO ` 6,38,28,258/- ON INVESTMENT OF SURPLUS FUNDS FROM SHARE CAPITAL AND MARGIN MONEY FOR ACQUISITION OF F IXED ASSETS WAS TREATED AS INCOME FROM OTHER SOURCES AND SHORT TERM CAPITAL GA INS OF ` 40,25,895/- ON SALE OF MUTUAL FUNDS WAS OFFERED TO TAX. THE ASSES SMENT WAS COMPLETED ON TOTAL INCOME OF ` 27,71,90,000/- BUT THE ASSESSING OFFICER TOOK A VI EW THAT THE BUSINESS HAD NOT COMMENCED DURING THE YEAR AND, THEREFORE, DISALLOWED ALL EXPENSES U/S. 37 OF THE INCOME TAX ACT AS CLAIM ED BY THE ASSESSEE. WHEN THE MATTER WENT BEFORE THE CIT(A), THE CIT(A) TOOK THE VIEW THAT BUSINESS HAD BEEN SET UP DURING THE YEAR. 5. THE LEARNED AR BEFORE US SUBMITTED THE FOLLOWING CHART SHOWING CHRONOLOGY OF EVENTS (ALONG WITH SUPPORTING IN THE FORM OF PAPER BOOK) OF THE SHIP BUILDING PROJECT CARRIED OUT BY THE ASSESSEE: SR. NO. DATE PARTICULARS 1 OCTOBER 17, 1997 COMPANY INCORPORATED (PAGE 34) 2 NOVEMBER 29, 2005 APPLICATION FOR SETTING UP 100% EOU LETTER NO.: PSL/EOU/OS-06/01 (PAGE 538) 3 DECEMBER 07, 2005 SALES TAX REGISTRATION UNDER THE GUJARAT VAT FERN T HE ASSISTANT COMMISSIONER OF COMMERCIAL TAX- GUJARAT. ITA NO.4692/MUM/2014 ITA NO.372/MUM/2015 4 SR. NO. DATE PARTICULARS 4 APRIL 4, 2006 LETTER OF PERMISSION NO. KASEZ/100%EOU/II/39/2005- 06/58 FOR ESTABLISHMENT OF NEW UNDERTAKING UNDER 100% EOU SCHEME FOR MANUFACTURE OF SHIPBUILDING, SHIP REPAIR - (PAGES 53F TO 541) 5 JUNE 6, 2006 GREEN CARD NO. KASEZ/11/2006-07 CERTIFYING THE COMPANY AS A 100% EXPORT ORIENTED UNIT - (PAGES 542 & 543). 6 NOVEMBER 30, 2006 CONTRACT WITH GOLDEN OCEAN GROUP (PAGE 196) 7 DECEMBER 04, 2006 CONTRACT WITH SETAF S.A.S FRANCE (PAGE 252) 8 DECEMBER 04, 2006 CONTRACT WITH ALIISOSS SHIPPING SA (PAGE 318) 9 APRIL 2007 TO FEBRUARY 2008 ADVANCES FROM VARIOUS PARTIES (PAGE 391) 10 FEBRUARY 22, 2007 REQUEST FOR PERMISSION OF CONSTRUCTION FOR SHIPYARD ACTIVITIES (REF: PSL/GMB/0 1/06-07) MADE TO GUJARAT MARITIME BOARD (GMB). - (PAGE 544). 11 MARCH 7, 2007 REPLY FROM GMB (REF NO.: GMB/N/PVT/380(10)/720- 12094) (PAGE 545) 12 MARCH 15,2007 ENTERED INTO TECHNICAL SERVICE AGREEMENT FOR DESIGN OF 74. 5K DWT BULK CARRIER (PAGE 474) 13 APRIL 12, 2007 LETTER FROM GMB RAISING FEW QUERIES ON THE REQUEST - (PAGES 546 & 547) 14 APRIL 19, 2007 CLARIFICATION GIVEN BY PIPAVAV SHIPYARD LTD TO GMB IN RESPONSE TO THEIR LETTER DTD. 12.04.2007 (REF NO.PSL/GMB/03/07-08) (PAGES 548 TO 550) 15 APRIL 16, 2807 LETTER OF PERMISSION NO. K/IM/LQP/173 3/T- 3/1Q17 FOR MANUFACTURE OF FABRICATED BLOCK FOR SHIP BUILDING. 16. JUNE 25, 2007 PERMISSION UNDER SECTION 35(1) OF THE GMB ACT TO START CONSTRUCTION ACTIVITIES FOR THE SHIPYARD PROJECT AT PIPAVAV PORT, RECEIVED FROM GMB (REF NO.: GMB/N/PVT/428/163) - (PAGES 551 & 552). 17 JULY 01, 2007 CENTRAL SALES TAX REGISTRATION (CST) UNDER GUJARAT VAT FROM THE ASSISTANT COMMISSIONER OF COMMERCIAL TAX- GUJARAT ITA NO.4692/MUM/2014 ITA NO.372/MUM/2015 5 SR. NO. DATE PARTICULARS 18. AUGUST'08, 2007 LICENSE FOR PRIVATE BONDED WAREHOUSE U/S 58 AND 65 OF THE CUSTOM ACT 1962 ISSUED BY THE ASSISTANT COMMISSIONER RURAL DIVISION BHAVNAGAR. 19. SEPTEMBER 06, 2007 CENTRAL EXCISE REGISTRATION CERTIFICATE ISSUED B Y THE ASSISTANT COMMISSIONER CENTRAL EXCISE RURAL DIVISIO N BBAVNAGAR. 20. JANUARY 08, 2008 BOND CUM LEGAL UNDERTAKING FOR SPECIAL ECONOMIC ZONE SUBMITTED TO THE DEVELOPMENT COMMISISONER OF KANDLA SPECIAL ECONOMIC ZONE. 21. JANUARY 08, 2008 PERMISSION TO SETUP SEZ FROM THE JOINT DEVELOPMENT COMMISSIONER OF KANDLA SPECIAL ECONOMIC ZONE. 22. JANUARY 08, 2008 LEASE DEED ENTERED WITH E- COMPLEX PRIVATE LIMITED (PAGE 24) 23 JANUARY 17, 2008 TO FEBRUARY 28, 2008 PURCHASE OF STEEL FOR SHIP BUILDING (PAGES 398 TO 4 00) 24. FEBRUARY 11, 2008 COMMENCEMENT OF STEEL CUTTING/FABRICATING ACTIVITY (PAGE 8) 25. FEBRUARY 11, 2008 FACTORY LICENCE OF EOU FROM THE DIRECTOR OF INDUSTR IAL SAFETY AND HEALTH JUNAGADH, GUJARAT. 26. MARCH 10, 2008 CT-3 CERTIFICATE FOR REMOVAL OF EXCISABLE GOODS UND ER BOND FROM SUPERINTEND OF CENTRAL EXCISE MAHUVA, GUJARAT. ON THE BASIS OF THE ABOVE CHART, THE LEARNED AR VEH EMENTLY CONTENDED THAT SINCE THE ASSESSEE HAS STARTED ONE OF THE MAIN ACTI VITY FOR COMMENCEMENT OF THE BUSINESS I.E. PURCHASE OF STEEL FOR SHIP BUILDI NG AS ALSO ENTERED INTO LEASE WITH E-COMPLEX PRIVATE LIMITED IN ADDITION TO THE V ARIOUS ACTIVITIES CONSISTING OF THE RECEIPT OF ORDERS AND RECEIPT OF ADVANCES, T HE BUSINESS OF THE ASSESSEE HAS BEEN SET UP IN JANUARY. IT WAS ALSO CONTENDED THAT THE ASSESSEE IS A SHIP BUILDER AND DURING THE YEAR IT HAD ENTERED INTO SEV ERAL CONTRACTS FOR BUILDING ITA NO.4692/MUM/2014 ITA NO.372/MUM/2015 6 OF SHIP AND PURSUANT TO WHICH THE ASSESSEE RECEIVED ADVANCES AMOUNTING TO ` 687.40 CRORES, WHICH WAS SHOWN UNDER THE HEAD CURR ENT LIABILITIES IN THE BALANCE SHEET. THE ASSESSEE ALSO INCURRED VARIOUS EXPENSES FOR ACTIVITIES TOWARDS COMMENCEMENT OF ITS MAIN ACTIVITY OF SHIP B UILDING. FOR THIS OUR ATTENTION WAS DRAWN TOWARDS DIRECTORS REPORTS AS WE LL AS NOTES TO ACCOUNT FILED WITH THE ANNUAL REPORT DURING THE YEAR REVEAL ED THAT THE ASSESSEE HAD STARTED PREPARATORY ACTIVITY OF SHIP BUILDING WITH PURCHASE OF STEEL CUTTINGS FROM 11.02.2008. IT WAS FURTHER SUBMITTED THAT SHI P BUILDING INDUSTRY WAS QUITE DIFFERENT FROM THE NORMAL MANUFACTURING INDUS TRY, AS IN OTHER MANUFACTURING INDUSTRY THE ACTUAL BUSINESS ACTIVITY BEGINS ONLY AFTER ENTIRE MANUFACTURING PLANT IS IN PLACE, WHEREAS IN SHIP BU ILDING INDUSTRY THE BUSINESS ACTIVITY BEGINS MUCH BEFORE THE CONSTRUCTION ACTIVI TY COMMENCES. THE SHIP BUILDING INDUSTRY WORKS ON MAKE-TO-ORDER PRINCIPL E AND NOT ON OFF THE SHELF AVAILABILITY OF PRODUCTS. NO SHIP OWNER WILL CONST RUCT THE PROJECT UNLESS IT HAS CERTAIN ORDERS IN PLACE. THE ASSESSEE HAD DULY REC EIVED ORDERS PRIOR TO JANUARY AND, THEREFORE, THE BUSINESS WAS DULY SET U P. IT WAS ALSO POINTED OUT THAT ALL NECESSARY PERMISSION FOR SETTING UP OF PLA NT WAS DULY RECEIVED BY THE ASSESSEE. ALTHOUGH THE BUSINESS OF THE ASSESSEE WA S SET UP WHEN THE ORDERS WERE RECEIVED, THE ASSESSEE HAD CONSERVATIVE APPROA CH DECIDED TO CONSIDER SET UP OF BUSINESS WHEN IT STARTED PURCHASING STEEL . RELIANCE IN THIS REGARD WAS PLACED ON THE DECISIONS OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT ITA NO.4692/MUM/2014 ITA NO.372/MUM/2015 7 VS. SARABHAI SONS (P) LTD 90 ITR 318 AND CIT VS. SA URASHTRA CEMENT & CHEMICAL INDUSTRIES LTD. 91 ITR 153. 6. THE LEARNED DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE ASSESSING OFFICER AND TOOK A VIEW THAT DURING THE Y EAR, THE ASSESSEE HAS NOT CONSTRUCTED ANY SHIP OR STARTED CONSTRUCTION OF SHI P, THEREFORE, IT CANNOT BE SAID THAT THE ASSESSEE HAD COMMENCED BUSINESS. 7. WE HAVE HEARD THE PARTIES AND HAVE CONSIDERED TH EIR SUBMISSIONS ALONG WITH THE ORDERS OF THE TAX AUTHORITIES BELOW. FROM THE CHART OF CHRONOLOGICAL EVENTS, WE NOTED THAT THE ASSESSEE HA S ENTERED INTO CONTRACT AND GOT ORDERS FROM GOLDEN OCEAN GROUP ON 30.11.200 6, FROM SETAF S.A.S FRANCE AND ALIISOSS SHIPPING, SA ON 04.12.2006. TH E ASSESSEE HAD RECEIVED ADVANCES FROM VARIOUS PARTIES BETWEEN APRI L 2007 AND FEBRUARY 2008 AMOUNTING TO ` 6,87,40,40,600/-, DETAILS OF WHICH WERE PLACED AT P G 391 OF THE PAPER-BOOK. THE ASSESSEE HAS ALSO REQUE STED FOR THE PERMISSION OF CONSTRUCTION FOR SHIP YARD ACTIVITIES FROM GUJAR AT MARITIME BOARD ON 22.02.2007 AND THE APPROVAL WAS GRANTED TO THE ASSE SSEE U/S. 35(1) OF THE GMB ACT, 1981 VIDE LETTER DATED 25.06.2007, A COPY OF WHICH IS PLACED AT 551 OF THE PAPER-BOOK. NOT ONLY THIS, WE NOTED THAT THE ASSESSEE HAS CARRIED OUT ALL PRIMARY ACTIVITIES, WHICH ARE NECESSARY FOR THE SETTING UP OF BUSINESS. THE ASSESSEE HAS ENTERED INTO TECHNICAL SERVICES AGREEM ENT FOR THE DESIGN OF 74.5K DWT BULK CARRIER ON 15.03.2007; IT GOT CENTRA L SALES TAX REGISTRATION ITA NO.4692/MUM/2014 ITA NO.372/MUM/2015 8 UNDER GUJARAT VAT REGISTERED ON 01.07.2007; LICENSE FOR PRIVATE BONDED WAREHOUSE U/S. 58 AND 65 OF THE CUSTOM ACT, 1962 IS SUED ON 08.08.2007 AND THE CENTRAL EXCISE REGISTRATION ON 06.09.2007. THE ASSESSEE EVEN SUBMITTED BOND CUM LEGAL UNDERTAKING FOR SPECIAL ECONOMIC ZON E TO THE DEVELOPMENT COMMISSIONER OF KANDLA SPECIAL ECONOMIC ZONE ON 08. 01.2008. WE ALSO FIND THAT LEASE DEED WAS ENTERED INTO WITH E-COMPLEX PRI VATE LTD., ON THE SAME DATE WHEN THE PERMISSION TO SET UP SEZ WAS RECEIVED FROM THE COMMISSIONER OF KANDLA SPECIAL ECONOMIC ZONE I.E. 08.01.2008. I T IS ALSO A FACT THAT THE ASSESSEE STARTED PURCHASING STEEL FOR THE SHIP BUIL DING INDUSTRY IN JAN 2008, COPY OF THE DETAILS WERE PLACED BEFORE US AT PAGES 398 TO 400 OF THE PAPER- BOOK. NO DOUBT, THE ASSESSEE HAS COMMENCED COMMERC IAL OPERATION ON 01.04.2009, BUT THAT IS NOT THE DATE WHEN THE BUSIN ESS HAS BEEN SET UP. SETTING UP BUSINESS AND COMMENCEMENT OF BUSINESS AR E TWO DIFFERENT THINGS. EXPENSES PRIOR TO SETTING UP OF BUSINESS ARE NOT AL LOWABLE. THE EXPRESSION FOR THE PURPOSE OF BUSINESS REFERS TO A BUSINESS I.E. BEING CARRIED ON BY THE ASSESSEE. ONCE THE BUSINESS IS SET UP, IT CANNOT B E SAID THAT THE BUSINESS HAS NOT BEEN CARRIED OUT BY THE ASSESSEE. A BUSINES S IS SAID TO HAVE BEEN SET UP WHEN IT IS ESTABLISHED AND READY TO BE COMMENCE. HOWEVER, THERE MAY BE AN INTERVAL BETWEEN A BUSINESS WHICH IS SET UP AND A BUSINESS WHICH IS COMMENCED. THIS HAS BEEN SO HELD BY THE HONBLE BOMBAY HIGH CO URT IN THE CASE OF WESTERN INDIA VEGETABLE PRODUCTS LTD. VS. C IT 26 ITR 151 (BOM). THE RELEVANT TEST, IN OUR OPINION, FOR ALLOWING EXP ENDITURE IS NOT WHEN THE ITA NO.4692/MUM/2014 ITA NO.372/MUM/2015 9 ASSESSEE HAD COMMENCED THE BUSINESS BUT WHEN THE BU SINESS HAS BEEN SET UP. A BUSINESS IS SAID TO BE SET UP WHEN IT IS REA DY TO START THE BUSINESS. THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. SA RABHAI MANAGEMENT CORPORATION LTD. (SUPRA), TOOK A VIEW THAT BUSINESS COMMENCES WHEN THE PROPERTY IS MADE READY AND THE ASSESSEE IS IN A POS ITION TO OFFER SERVICES TO THE LICENSEE IN A CASE OF THE COMPANY, WHOSE BUSINE SS IS TO GIVE PROPERTY ON LEAVE AND LICENSE BASIS, EXPENSES INCURRED THEREAFT ER ARE ALLOWABLE AS A DEDUCTION. WE HAVE ALSO GONE THROUGH THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. SAURASHTRA CEMENT & CH EMICAL INDUSTRIES LTD. 91 ITR 153 (GUJ), ON WHICH THE LEARNED AR HAS VEHEMENT LY RELIED. WE NOTED THAT IN THIS CASE, THE HONBLE GUJARAT HIGH COURT H AS HELD THAT BUSINESS CONNOTES A CONTINUOUS COURSE OF ACTIVITIES. ALL TH E ACTIVITIES WHICH GO TO MAKE UP THE BUSINESS NEED NOT BE STARTED SIMULTANEOUSLY IN ORDER THAT THE BUSINESS MAY COMMENCE. THE BUSINESS WOULD COMMENCE WHEN THE ACTIVITY WHICH IS FIRST IN POINT OF TIME AND WHICH MUST NECESSARILY P RECEDE ALL OTHER ACTIVITIES WHICH HAD STARTED. IN THIS CASE, THE COMPANY WAS FO RMED IN 1956 FOR THE MANUFACTURE AND SALE OF CEMENT. AS A PART OF ITS B USINESS, THE ASSESSEE OBTAINED A MINING LEASE FOR QUARRYING LIMESTONE AND STARTED THE MINING OPERATIONS IN 1958. IT CLAIMED THE EXPENDITURE INC URRED FOR THE PURPOSE OF EXTRACTING LIMESTONE AS ALSO DEPRECIATION AND DEVEL OPMENT REBATE FOR THE MACHINERY INSTALLED FOR THAT PURPOSE FOR A.YS. 1960 -61 AND 1961-62. IT WAS HELD THAT THE ACTIVITIES, WHICH CONSTITUTED THE BUS INESS OF THE ASSESSEE WERE ITA NO.4692/MUM/2014 ITA NO.372/MUM/2015 10 DIVISIBLE INTO THREE CATEGORIES: FIRST, EXTRACTION OF LIMESTONE BY QUARRYING THE LEASE AREA OF LAND FOLLOWED BY MANUFACTURE OF CEMEN T BY USE OF THE PLANT AND MACHINERY AND FINALLY SALE OF MANUFACTURED CEMENT. THESE THREE ACTIVITIES COMBINED TOGETHER CONSTITUTED THE BUSINESS OF THE A SSESSEE. THE ACTIVITY OF QUARRYING THE LEASED AREA OF LAND AND EXTRACTING LI MESTONE CAME FIRST IN POINT OF TIME AND LAID THE FOUNDATION FOR THE SECOND ACTI VITY AND THE SECOND ACTIVITY WHEN COMPLETED LAID THE FOUNDATION FOR THE THIRD AC TIVITY. HENCE, IT WAS HELD THAT THE ASSESSEE COMMENCED ITS BUSINESS WHEN IT ST ARTED THE ACTIVITY OF EXTRACTION OF LIMESTONE IN 1958. THE EXPENDITURE IN CURRED BY THE ASSESSEE IN CARRYING ON THE ACTIVITY OF EXTRACTION OF LIMESTONE AS ALSO DEPRECIATION ALLOWANCE AND DEVELOPMENT REBATE IN RESPECT OF MACH INERY EMPLOYED IN EXTRACTING LIMESTONE WERE HELD TO BE DEDUCTIBLE IN COMPUTING THE TRADING PROFITS OF THE ASSESSEE FOR THE A.Y.S 1960-61 AND 1 961-62. SIMILAR VIEW HAS BEEN TAKEN BY THE HONBLE DELHI HI GH COURT IN THE CASE OF CIT VS. ASPENTECH INDIA (P) LTD . (187 TAXMAN 25) , THAT IN CASE OF SOFTWARE DEVELOPMENT BUSINESS ACTIVITIES START WITH PURSUING OF THE COMPANIES TO GET ORDERS AND ALL ACTIVITIES CARRIED OUT TO GET SUCH O RDERS, BEING INCIDENTAL TO THE BUSINESS ACTIVITIES WOULD BE REGARDED AS FOR THE PU RPOSE OF BUSINESS AND NOT FOR SETTING UP OF BUSINESS. IF THE FACTS OF SAURASHTRA CEMENT & CHEMICAL INDUST RIES LTD (SUPRA), IS APPLIED TO THE FACTS OF THE ASSESSEE, WE ARE OF THE VIEW THAT BUSINESS ITA NO.4692/MUM/2014 ITA NO.372/MUM/2015 11 ACTIVITIES OF THE ASSESSEE CAN BE DIVIDED IN TO VAR IOUS ACTIVITIES SUCH AS THE RECEIPT OF THE CONFIRMED ORDERS, DESIGNING OF THE S HIP, PROCUREMENT OF RAW MATERIALS, ERECTION AND BUILDING OF SHIP, ELABORATE AND COMPREHENSIVE TESTING ANALYSIS AND INSPECTION AND DELIVERY OF THE SHIP. WE NOTED THAT THE ASSESSEE HAS ALSO ENTERED INTO TECHNICAL SERVICE AGREEMENT F OR TECHNICAL ASSISTANCE, GOT VARIOUS PERMISSIONS FOR THE CONSTRUCTION OF SHIP YA RD ACTIVITIES FROM GUJARAT MARITIME BOARD AND ALSO GOT REGISTRATION UNDER THE SALES TAX AS WELL AS EXCISE AND CUSTOMS ACT DONE. THE ASSESSEE HAS STARTED PUR CHASING STEEL FOR SHIP BUILDING ACTIVITY. ALL THESE ACTIVITIES ARE PREPAR ATORY ACTIVITY FOR CONSTRUCTION OF SHIP CARRIED OUT UP TO JANUARY. THESE ACTIVITIE S, IN OUR OPINION, ARE SUCH THAT THE ASSESSEE HAS SET UP BUSINESS. WE, THEREFO RE, DO NOT FIND ANY ILLEGALITY OR INFIRMITY IN THE ORDER OF THE CIT(A). WE ACCORDINGLY DISMISS GROUND NO.1 TAKEN BY THE REVENUE. 8. GROUND NO.2 RELATES TO THE CLAIM OF ADMINISTRATI VE EXPENSES AND CHARGEABILITY OF THE INTEREST INCOME UNDER THE HEAD INCOME FROM BUSINESS. THE FACTS RELATING TO THIS GROUND ARE THAT THE ASSE SSING OFFICER NOTED THAT THE ASSESSEE HAS DEBITED FOLLOWING AMOUNTS OF EXPENDITU RE AGAINST THE INTEREST INCOME [THE ONLY SOURCE OF INCOME]: MATERIAL CONSUM ED ` 159.44 LACS; DIRECT EXPENSES 1785.44 LACS; EMPLOYEE COST ` 502.30 LACS; OPERATIONS & OTHER EXPS. RS 1085.96 LACS; FINANCIAL EXPENSES ` 7.68 LACS AND DEPRECIATION ` 17.71 LACS. IT WAS FURTHER NOTED THAT THE ASSESSEE HAD CAPITALIZED MATERIAL CONSUMED AND DIRECT EXPENSES IN WORK-IN-PROGRESS RE LATING TO SHIP ITA NO.4692/MUM/2014 ITA NO.372/MUM/2015 12 CONSTRUCTION ACTIVITY WHEREAS, CLAIMED DEDUCTION IN RESPECT OF EMPLOYEES COST, OPERATION AND OTHER EXPENSES, FINANCIAL EXPEN SES AND DEPRECIATION AGAINST THE INTEREST INCOME UNDER THE HEAD INCOME FROM BUSINESS. THE ASSESSEE HAS EARNED INCOME ON STAFF LOAN, FD WITH B ANKS, ICD AND OTHER INCOME DURING THE YEAR AT ` .2774.89 LACS. THIS INCOME HAS BEEN TREATED BY THE ASSESSING OFFICER AS INCOME FROM OTHER SOURCES . THUS, THE ASSESSING OFFICER DISALLOWED THE TOTAL EXPENSES OF ` 1615.55/- LACS IN RESPECT OF EMPLOYEES COST, OPERATION AND OTHER EXPENSES, FINAN CIAL EXPENSES AND DEPRECIATION AS THESE EXPENSES HAS BEEN INCURRED BY THE ASSESSEE PRIOR TO THE COMMENCEMENT OF THE BUSINESS AND, THEREFORE, TH ESE EXPENSES SHOULD HAVE BEEN CAPITALIZED. SIMILARLY, THE ASSESSING OF FICER ASSESSED THE INTEREST INCOME OF ` 2771.90/- UNDER THE HEAD INCOME FROM OTHER SOURCE S BECAUSE INCOME HAS BEEN EARNED PRIOR TO THE COMMENCEMENT OF BUSINESS. WHILE DISPOSING OFF GROUND NO.1, WE CONFIRMED THE ORDER O F THE CIT(A) THAT THE BUSINESS WAS SET UP DURING THE YEAR IN JANUARY 2008 . IT IS NOT DISPUTED THAT ALL THESE EXPENSES HAVE BEEN INCURRED BY THE ASSESS EE AFTER THE SET UP OF BUSINESS AS HAS BEEN HELD BY US IN THE PRECEDING PA RAGRAPHS. THE EXPENSES INCURRED AFTER THE SET UP OF THE BUSINESS ARE REVEN UE EXPENSES. WE, THEREFORE, ALLOW THESE EXPENSES AND CONFIRM THE ORD ER OF THE CIT(A). SIMILARLY, THE INTEREST INCOME, WE NOTED HAS BEEN E ARNED BY THE ASSESSEE AS DETAILED BELOW: ITA NO.4692/MUM/2014 ITA NO.372/MUM/2015 13 INTEREST ON STAFF LOAN ` 0.51 LACS INTEREST ON BANK FDS ` 2556.66 LACS INTEREST ON ICD ` 214.73 LACS TOTAL ` 2771.90 LACS THE ASSESSEE HAS EARNED THIS INTEREST AFTER SETTING UP OF THE BUSINESS. INTEREST ON FDS RELATE TO THOSE FDS WHICH ARE KEPT AS GUARANTEE GIVEN BY THE ASSESSEE COMPANY. THE ASSESSEE HAS RECEIVED ADVANC ES OF ABOUT 700 CRORES AGAINST SUPPLY OF 22 PANAMAX BULK CARRIERS. THE AS SESSEE WAS REQUIRED TO REFUND 100% OF THE ADVANCE RECEIVED IN THE EVENT OF A DEFAULT. THE PARTIES THEREFORE INSISTED FOR A BANK GUARANTEE. TO FURNIS H BANK GUARANTEE, THE ASSESSEE HAD TO KEEP SECURITY DEPOSIT BY WAY OF FIX ED DEPOSITS OF THE EQUIVALENT AMOUNT OF THE BANK GUARANTEE FURNISHED. THE ASSESSEE VIDE ITS LETTER DATED 21.12.2010 FURNISHED TO THE ASSESSING OFFICER COMPLETE CO- RELATION OF THE FDS KEPT FOR BANK GUARANTEE AND THE CONSEQUENTIAL RECEIPT OF INTEREST ON FDS. IN VIEW OF THE DECISION OF THE J URISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. PARAMOUNT PREMISES (P) LTD 109 ITR 259 (BOM), WHEREIN IT HAS HELD THAT WHEN AN ASSESSEE WAS REQUIRED TO G IVE A GUARANTEE TO THE BANK IN RESPECT OF THE LAND ON LEASE FOR CONSTRUCTI ON WORK FOR THAT PURPOSE, CERTAIN AMOUNTS WERE KEPT IN FIXED DEPOSITS ON WHIC H THE ASSESSEE EARNED INTEREST. SINCE THE ENTIRE INTEREST SPRANG FROM TH E BUSINESS ACTIVITY OF THE ASSESSEE AND DID NOT ARISE OUT OF ANY INDEPENDENT A CTIVITY, INTEREST INCOME WAS TO BE CONSIDERED AS BUSINESS INCOME. INTEREST SO RECEIVED EARNED BY THE ASSESSEE ON THE FDS KEPT FOR THE PURPOSE OF GUARANT EE AMOUNTING TO ITA NO.4692/MUM/2014 ITA NO.372/MUM/2015 14 ` 2556.66 LACS HAS TO BE ASSESSED AS INCOME UNDER THE INCOME FROM BUSINESS. SIMILAR VIEW HAS BEEN TAKEN BY THE HON BLE PATNA HIGH COURT IN THE CASE OF SHYAM BIHARI VS. CIT 345 ITR 283, WHERE IN IT WAS HELD THAT INTEREST ACCRUED ON SECURITY DEPOSIT WHICH WAS KEPT FOR SECURING CONTRACT WORK WOULD BE ASSESSABLE AS BUSINESS INCOME. WE, THEREFORE, CONFIRM THE ORDER OF THE CIT(A) HOLDING THAT THE INTEREST EARNE D ON FIXED DEPOSIT AMOUNTING TO ` 2556.66/- LACS BE ASSESSED AS BUSINESS INCOME OUT T HE TOTAL INTEREST EARNED BY THE ASSESSEE AMOUNTING TO ` 2771.90/- LACS. THUS, THIS GROUND IS ALSO DISMISSED. 9. GROUND NO.3 RELATES TO THE DELETION OF THE DISAL LOWANCE MADE BY THE ASSESSING OFFICER U/S. 14A WITH RESPECT TO INTEREST EXPENSES AMOUNTING TO ` 49,97,97,672/-. THE ASSESSING OFFICER NOTED THAT CAPITAL WORK-IN-PROGRESS UNDER THE HEAD CURRENT ASSETS HAD CAPITALIZED INT EREST EXPENDITURE AMOUNTING TO ` 49,97,97,672/- TOWARDS INTEREST PAID/PAYABLE OR BO RROWED FUNDS ATTRIBUTABLE TO THE PROJECTS. THE ASSESSING OFFICER WAS OF THE OPINION THAT THE SAID INTEREST HAS TO BE CONSIDERED FOR THE PURPOSE OF DISALLOWANCE UNDER THE PROVISIONS OF RULE 8D(2)(II) OF THE I.T.R ULES, 1962. ACCORDINGLY, THE ASSESSING OFFICER CONCLUDED THE DISALLOWANCE AS PER SECTION 14A(2) READ WITH RULE 8D(2)(II) ON THE SAID AMOUNT TO ` 4,17,83,245/-, WHICH CONSISTS OF THE FOLLOWING: ITA NO.4692/MUM/2014 ITA NO.372/MUM/2015 15 CALCULATION OF INADMISSABLE EXPENSES U/S. 14A AS PE R RULE 8D(2) I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCO ME WHICH DOES NOT FORM PART OF TOTAL INCOME; II) IN CASE WHERE THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRE CTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMP UTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY:- A X B WHERE C A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER T HAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE(I) INCURRED DURING THE PREVIOUS YEAR, B = THE AVERAGE OF VALUE OF INVESTMENT, INCOME FRO M WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPE ARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAS T DAY OF THE PREVIOUS YEAR; C = THE AVERAGE OF TOTAL ASSETS AS APPE ARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; III) AN AMOUNT EQUAL TO ONE HALF PER CENT OF THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SH EET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. I) NIL = RS. NIL II) 499797672 X 1225700000 = RS. 3,56,54,745/- 17181500000 III) AVERAGE INVESTMENT RS. 1225700000 @ 0.50% = RS. 61, 28,500/- TOTAL II) + III) = RS.4,17,83,245/- ITA NO.4692/MUM/2014 ITA NO.372/MUM/2015 16 SINCE THE ENTIRE EXPENDITURE WAS CAPITALIZED, THE A SSESSING OFFICER WAS OF THE VIEW THAT THE DISALLOWANCE WILL ONLY AFFECT THE WOR K-IN-PROGRESS FOR THE PURPOSE OF TAXABLE INCOME FOR THE YEAR. WHEN THE MATTER WENT BEFORE THE CIT(A), THE CIT(A) DELETED THE DISALLOWANCE MADE UN DER RULE 8D(2)(II) WITH REGARD THE INTEREST AMOUNTING TO ` 49,97,97,672/-. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFUL LY CONSIDERED THE SAME. WE NOTED THAT IT IS A FACT THAT THE ASSESSEE HAS CAPITALIZED INTEREST AMOUNTING TO ` 49,97,97,672/-. DURING THE YEAR, THE ASSESSEE HAS NOT CLAIMED DEDUCTION OF THE SAID INTEREST. THIS INTER EST AMOUNT IS DIRECTED CO- RELATED TO ACQUISITION OF FIXED ASSETS AND CAPITAL WORK-IN-PROGRESS. THE SAID INTEREST CANNOT BE CONSIDERED FOR THE PURPOSE OF DI SALLOWANCE U/S. 14A READ WITH RULE 8D(2)(II). AS PER RULE 8D(2)(II), INTERE ST WHICH IS DIRECTLY ATTRIBUTABLE TO ACQUISITION OF FIXED ASSETS OR CAPI TAL WORK-IN-PROGRESS, THE SAME CANNOT BE CONSIDERED FOR THE DISALLOWANCE AS T HE SAME CANNOT TO ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. IN VIEW OF SPECIFIC PROVISION OF RULE 8D(2)(II), WE DO NOT FIND ANY ILLEGALITY IN THE ORDER OF THE CIT(A) AND, HENCE, WE CONFIRM THE ORDER OF THE CIT(A). IN SO FAR AS SUSTENANCE OF DISALLOWANCE OF ` 7,68,000/-, WE NOTED THAT THE ASSESSEE IS NOT IN APPEAL BEFORE US. THEREFORE , WE CANNOT ENTERTAIN THE PLEA OF THE ASSESSEE IN THIS RESPECT OF SUSTENANCE OF DISALLOWANCE THAT SUCH INTEREST CANNOT BE DISALLOWED AS THE INVESTMENT MAD E BY THE ASSESSEE ARE ITA NO.4692/MUM/2014 ITA NO.372/MUM/2015 17 OUT OF ITS OWN FUNDS. WE, THEREFORE, DISMISS GROUN D NO.3 TAKEN BY THE REVENUE. 11. IN THE RESULT, BOTH THE APPEALS FILED BY THE RE VENUE STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST DAY OF AUGUST, 2017. SD/- SD/- (PAWAN SINGH) (P K BANSAL) JUDICIAL MEMBER VICE-PRESIDENT MUMBAI; DATED: 31 ST AUGUST, 2017 SA COPY OF THE ORDER FORWARDED TO : 1. THE APP ELL ANT. 2. THE RESPONDENT. 3. T HE CIT(A), MUMBAI 4. THE CIT 5. DR, C BENCH, ITAT, MUMBAI BY ORDER, #TRUE COPY # ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI