M/s Vodafone Essar South Ltd., New Delhi V. DCIT, New Delhi

ITA 91/DEL/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 74109 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 1 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-02-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 28-01-2014
• Assessment Year: 2003-2004
• Appeal Filed On: 07-01-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SSH R S MEENA; SAMEER SHARMA SR D R ITA NOS
• Assessee Lawyers: SSH SALIL KAPOOR; VIKAS JAIN S
• Keywords: Business income; Depreciation; Opportunity of being heard; Revenue expenditure; Capital expenditure
• Section: 32; 37

Judgement Text

ITA NOS. 875/DEL/2011; 91/DEL/2011 & 4146/DEL/2011 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH H, NEW DELHI BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T.A. NO. 875/DEL/2011 A.Y. : 2003-04 DCIT, CIRCLE 17(1), CR BUILDING, NEW DELHI VS. M/S VODAFONE ESSAR SOUTH LTD., (FORMERLY KNOWN AS HUTCHISON ESSAR SOUTH LTD.) C-48, OKHALA INDL. AREA, PHASE-II, NEW DELHI 110 020 (PAN: AABCB5847L) I.T.A. NO. 91/DEL/2011 A.Y. : 2003-04 M/S VODAFONE ESSAR SOUTH LTD., (FORMERLY KNOWN AS HUTCHISON ESSAR SOUTH LTD.) C-48, OKHALA INDL. AREA, PHASE-II, NEW DELHI 110 020 VS. DCIT, CIRCLE 12(1), NEW DELHI AND I.T.A. NO. 4146/DEL/2011 A.Y. : 2002-03 M/S VODAFONE ESSAR SOUTH LTD., (FORMERLY KNOWN AS HUTCHISON ESSAR SOUTH LTD.) C-48, OKHALA INDL. AREA, PHASE-II, NEW DELHI 110 020 VS. DCIT, CIRCLE 17(1), NEW DELHI FORMERLY: DCIT, CIRCLE 12(1), NEW DELHI (APPELLANT) (APPELLANT) (APPELLANT) (APPELLANT) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) ASSESSEE BY : S/SH. SALIL KAPOOR & VIKAS JAIN, ADVOCATES DEPARTMENT BY: S/SH.R.S. MEENA, CIT(DR) & SAMEER SHARMA, SR. D.R. ITA NOS. 875/DEL/2011; 91/DEL/2011 & 4146/DEL/2011 2 ORDER ORDER ORDER ORDER PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM THESE APPEALS BY THE REVENUE AND ASSESSEE EMANATE OUT OF ORDER OF THE LD. CIT(A) FOR THE RESPECTIVE ASSESSME NT YEARS. SINCE THE APPEALS WERE HEARD TOGETHER AND SOME OF THE ISSUE A RE COMMON, HENCE, THESE ARE BEING CONSOLIDATED AND DISPOSED OF F TOGETHER BY THIS COMMON ORDER. I.T.A. NO. I.T.A. NO. I.T.A. NO. I.T.A. NO. 875/DEL/2011 875/DEL/2011 875/DEL/2011 875/DEL/2011 (A.Y. 200 (A.Y. 200 (A.Y. 200 (A.Y. 2003 33 3- -- -04) 04) 04) 04) REVENUES APPEAL REVENUES APPEAL REVENUES APPEAL REVENUES APPEAL 2. THE GROUND RAISED IS THAT THE LD. CIT(A) HAS ERR ED ON FACTS AND IN LAW BY DELETING THE DISALLOWANCE OF DEPRECIATION OF RS. 1,46,14,147/-, IGNORING THAT, THE CONCERNED ASSETS ON WHICH THE DE PRECIATION HAD BEEN CLAIMED WERE NEVER USED BY THE ASSESSEE DURING THE YEAR FOR THE PURPOSES OF ITS BUSINESS. 3. ON THIS ISSUE AO NOTED THAT ASSESSEE HAS DEBITED VARIOUS SPARES AMOUNTING TO RS. 2,84,24,466/- UNDER THE HEAD FIXED ASSETS WHEREAS THE SAME RELATED TO PURCHASE OF SPARES. AO OPINED THAT FROM THE PERUSAL OF THE DETAILS OF FIXED ASSETS FILE BY THE ASSESSEE IT IS APPARENT THAT ASSESSEE HAS DEBITED VARIOUS SPARES AMOUNTING TO RS. 2,84,24,466/- UNDER THE HEAD FIXED ASSETS WHEREAS T HE SAME ARE RELATED TO PURCHASE OF SPARES. AO TOLD THAT SINCE, THE FIXED ASSETS WERE ACQUIRED FIRST TIME IN THE CURRENT ASSESSMENT YEAR BY THE ASSESSEE AND NEVER USED BY THE ASSESSEE IN THE CURRENT YEAR , IT SHOULD HAVE BEEN SHOWN EITHER AS INVENTORY OR AS CONSUMABLES. THAT SINCE IT IS APPARENT THAT ASSESSEE HAS NEITHER USED THE SPARES AS CONSUMABLES AND NOR USED THE SAME IN THE CURRENT ASSESSMENT YEAR , HENCE, THE AMOUNT OF DEPRECIATION CHARGED ON THE SPARES AMOUN TING TO ITA NOS. 875/DEL/2011; 91/DEL/2011 & 4146/DEL/2011 3 RS. 1,46,14,147/- WAS DISALLOWED AND ADDED BACK TO THE DECLARED INCOME. 4. BEFORE THE LD. CIT(A) ASSESSEE SUBMITTED THAT HAD FOLLOWED ACCOUNTING STANDARD (AS-2) (VALUATION OF INVENTORY) AND AS-10 (ACCOUNTING FOR FIXED ASSETS). IT WAS SUBMITTED THA T ASSESSEE WAS FOLLOWING BY ACCOUNTING PRINCIPLES AND CAPITALIZING THE SPARES WITH FIXED ASSETS AND CLAIMED DEPRECIATION AT THE PRESCRI BED RATE. IN THIS REGARD, ASSESSEE REFEREED TO JURISDICTIONAL HIGH CO URT DECISION IN THE CASE OF CIT VS. INSILCO LTD. 222 CTR 641 (DEL.) ALT ERNATIVELY THE ASSESSEE CLAIMED THAT IF THE DEPRECIATION OF SPARES IS DISALLOWED, THE ASSESSEE SHOULD BE ALLOWED ENTIRE EXPENSES INCURRIN G AMOUNTING TO RS. 2,84,24,466/-. THE LD. CIT(A) CONSIDERED THE ABOVE AND HELD THAT THE APPROACH TAKEN BY THE ASSESSEE IS CORRECT AND DISAL LOWANCE OF DEPRECIATION WAS ORDERED TO BE DELETED. 5. AGAINST THE ABOVE ORDER THE REVENUE IS IN APPEA L BEFORE US. 6. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE R ECORDS. LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE ISSUE INV OLVED IS SQUARELY COVERED IN FAVOR OF THE ASSESSEE BY THE DECISION O F THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. IN SILCO LTD. (SUPRA). WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS AND PERUSE D THE RECORDS. WE FIND THAT THE ASSESSEE HAS FOLLOWED THE PRESCRI BED ACCOUNTING STANDARDS. THE HONBLE JURISDICTIONAL HIGH COURT IN THE DECISION CITED ABOVE HAS REFERRED TO THE ABOVE SAID ACCOUNTING STA NDARD AND OBSERVED IN PARA 16.4 AS UNDER:- 16.4 IT IS CLEAR UPON READING THE PROVISIONS OF ACCOUNTING STANDARDS (AS) 2 AND (AS) 10 THAT, THE OPINION OF T HE COUNCIL OF THE ITA NOS. 875/DEL/2011; 91/DEL/2011 & 4146/DEL/2011 4 ICAI IN RESPECT OF TREATMENT OF MACHINERY SPARES IS BRIEFLY THAT; MACHINERY SPARES WHICH ARE NOT SPECIFIC TO ANY FIXE D ASSET AND CAN BE USED GENERALLY SHOULD BE TREATED AS PART OF INVE NTORY AND CHARGED TO PROFIT AND LOSS ACCOUNT AS AND WHEN THEY ARE CONSUMED DURING THE ORDINARY COURSE OF BUSINESS. ON THE OTH ER HAND, IF THE MACHINERY SPARES ARE OF THE NATURE OF CAPITAL SPAR ES/INSURANCE SPARES WHICH ARE SPECIFIC TO A PARTICULAR ITEM OF F IXED ASSET AND THEIR USE IS IRREGULAR, THEN, THEY SHOULD BE CAPITALIZED SEPARATELY AND DEPRECIATED ON A SYSTEMATIC BASIS OVER A TIME FRAME NOT EXCEEDING THE USEFUL LIFE OF THE FIXED ASSET TO WHICH THEY RE LATE. AS A MATTER OF FACT, IN CASE THE FIXED ASSET TO WHICH THEY RELATE, IS DISCARDED, THE MACHINERY SPARES WILL ALSO HAVE TO BE DISPOSED OF A S THESE SPARES ARE INTEGRAL PARTS OF THE FIXED ASSET. 6.1 FURTHERMORE, IN PARA 17.4 THE HONBLE JURISDICTI ONAL HIGH COURT HAS HELD AS UNDER:- 17.6 IN VIEW OF THE RATIO OF THE JUDGMENTS REFERRE D TO HEREINABOVE WE ARE OF THE CONSIDERED OPINION THAT T HE EXPRESSION USED FOR THE PURPOSES OF BUSINESS APPEARING IN SECTION 32 OF THE ACT ALSO TAKES INTO ACCOUNT EMERG ENCY SPARES WHICH EVEN THOUGH READY FOR USE ARE NOT AS A MATTER OF FACT CONSUMED OR USED DURING THE RELEVANT PERIOD , AS THESE ARE SPARES SPECIFIC TO A FIXED ASSET AND WILL IN AL L PROBABILITY BE USELESS ONCE THE ASSET IS DISCARDED. IN THAT SEN SE, THE CONCEPT OF PASSIVE USER WHICH IS APPLIED BY THE AFOREMENTIONED CASES TO STANDBY MACHINERY WILL BE APPLICABLE TO EMERGENCY/INSURANCE SPARES. ITA NOS. 875/DEL/2011; 91/DEL/2011 & 4146/DEL/2011 5 6.2 FROM THE ABOVE, IT IS CLEAR THAT SPARES WHICH AR E OF CAPITAL SPARES IN NATURE AND ARE SPECIFIC TO A PARTICULAR ITEM OF FIXED ASSETS AND USED IRREGULARLY, THEY SHOULD BE CAPITALISED SEPARATELY AND DEPRECIATED ON A SYSTEMATIC BASIS OVER A TIME FRAME NOT EXTENDING THE USEFUL LIFE OF THE FIXED ASSETS TO WHICH THEY RELATED. FURTHERMORE, A S PER THE RATIO EMANATING FROM THE ABOVE JUDGMENT THE EXPRESSION USE D FOR THE PURPOSE OF BUSINESS APPEARING IN SECTION 32 OF THE ACT ALSO TAKES INTO ACCOUNT EMERGENCY SPARES WHICH EVEN THOUGH READY FOR USE ARE NOT AS A MATTER OF FACT ARE NOT AS A MATTER OF FACT CONSUM ED OR USED DURING THE RELEVANT PERIOD AS THESE ARE SPARES SPECIFIC TO A FIXED ASSETS AND WILL IN ALL PROBABILITY BE USELESS ONCE THE ASSET I S DISCARDED. IN THIS SITUATION, THE CONCEPT OF PASSIVE USER IS ALSO APP LICABLE. WE FIND THAT IN THIS THE NATURE OF THE SPARES ON THE TOUCHSTONE OF ABOVE SAID DECISION HAS NOT BEEN EXAMINED BY THE AUTHORITIES BE LOW. IN OUR CONSIDERED OPINION, FIRST THE NATURE OF THE SPARE HAS TO BE ESTABLISHED AND THEN THE CASE LAW HAS TO BE APPLIED. SINCE TH E NATURE OF SPARES HAS NOT BEEN ESTABLISHED NOR THE SAME WERE EXAMINED, WE REMIT THIS ISSUE TO THE FILES OF THE AO. THE AO SHALL EXAMINE THE ISSUE AFRESH IN LIGHT OF THE CASE LAW FROM JURISDICTIONAL HIGH COUR T AS ABOVE. NEEDLESS TO ADD THAT THE ASSESSEE SHOULD BE GIVEN ADEQUATE OPPORTUNITY OF BEING HEARD. ITA NO. 91/DEL/2011 (A.Y. 2003 ITA NO. 91/DEL/2011 (A.Y. 2003 ITA NO. 91/DEL/2011 (A.Y. 2003 ITA NO. 91/DEL/2011 (A.Y. 2003- -- -04) (ASSESSEES APPEAL) 04) (ASSESSEES APPEAL) 04) (ASSESSEES APPEAL) 04) (ASSESSEES APPEAL) 7. THE GROUNDS RAISED READ AS UNDER:- THE APPELLANT RESPECTFULLY SUBMITS THAT: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LA W, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - XI , NEW DELHI (HEREINAFTER REFERRED TO AS THE 'LEARNED CIT(A)') ITA NOS. 875/DEL/2011; 91/DEL/2011 & 4146/DEL/2011 6 ERRED IN CONFIRMING THE ACTION OF THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(1), NEW DELHI (HEREINAFTER REFERRED TO AS THE' LEARNED AO') IN NO T ALLOWING SET-OFF OF INTEREST EXPENSE INCURRED BY TH E APPELLANT AMOUNTING TO RS 8,093,396 AGAINST THE INTE REST INCOME OF RS 8,100,165. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION O F THE LEARNED AO IN NOT ALLOWING DEDUCTION FOR 'PROVISION FOR NETWORK AND REPAIR EXPENSES' AMOUNTING TO RS 2,862,275/- 3. THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LEARNED CIT(A) ERRED IN ERRED IN CONFIRMING THE ACT ION OF THE LEARNED AO IN NOT ALLOWING DEDUCTION FOR 'RE NT EXPENSES' AMOUNTING TO RS 42,450,0057/- 3.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN NOT CONSIDERING THE C OMPLETE RENTAL DETAILS SUBMITTED BY THE APPELLANT DURING THE COURSE OF APPELLATE HEARING. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE LEARNED AO IN NOT ALLOWING DEDUCTION FOR THE FOLLOW ING PROVISIONS: PROVISION FOR CREDIT VERIFICATION COST RS. 1,141,06 0 PROVISION FOR CONSULTANCY CHARGES RS. 8,63,320 ITA NOS. 875/DEL/2011; 91/DEL/2011 & 4146/DEL/2011 7 PROVISION FOR CAR HIRING CHARGES RS. 9,85,684/- TOTAL RS. 2,990,064 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION O F THE LEARNED AO IN RESTRICTING THE DEDUCTION FOR 'BRAND LAUNCH EXPENSES' TO THE EXTENT 20% AND THEREBY DISALLOWING AN AMOUNT OF RS 84,545 104 ON THE BASIS THAT SUCH EXPEN SES ARE IN THE NATURE DEFERRED REVENUE EXPENDITURE' AL LOWABLE OVER A PERIOD OF 5 YEARS. ALL THE ABOVE GROUNDS ARE WITHOUT PREJUDICE TO EACH OTHER. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, VARY, OMIT OR SUBSTITUTE ANY OF THE AFORESAID GROUNDS OF APPEAL A T ANY TIME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL . THE APPELLANT PRAYS THAT APPROPRIATE RELIEF BE GRAN TED BASED ON THE SAID GROUNDS OF APPEAL AND THE FACTS A ND CIRCUMSTANCES OF THE CASE. 8. APROPOS GROUND NO. 1 DISALLOWANCE OF SET OFF OF INTEREST EXPENSES. ON THIS ISSUE AO NOTED THAT ASSESSEE HAS RECEIVED INTEREST ON LOAN AMOUNTING TO RS. 8100165/- WHICH WAS SET OFF AGAINST INTEREST EXPENSES. AO REFERRED TO THE DECISION OF THE HONB LE APEX COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILIZERS L TUTICORIN ALKALI CHEMICALS AND FERTILIZERS L TUTICORIN ALKALI CHEMICALS AND FERTILIZERS L TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. TD. TD. TD. VS. CIT 227 ITR VS. CIT 227 ITR VS. CIT 227 ITR VS. CIT 227 ITR 172. 172. 172. 172. HE HELD THAT THE TREATMENT BY THE ASSESSEE OF SETTING OFF INTEREST INCOME OF PRE-OPERATIVE PERIOD AGAINST TH E EXPENSES IS NOT ITA NOS. 875/DEL/2011; 91/DEL/2011 & 4146/DEL/2011 8 ALLOWED. HE HELD THAT THE INTEREST EXPENSES WILL FORM PART OF PRE- OPERATIVE EXPENSES PENDING CAPITALIZATION AND THE I NTEREST INCOME WILL BE TAXED SEPARATELY AS INCOME FROM OTHER SOURCES. 9. UPON ASSESSEES APPEAL CIT(A) NOTED THAT DOMINA NT PURPOSE OF THE EXPENDITURE INCURRED MUST BE TO EARN INCOME. HE OBSERVED THAT THERE SHOULD BE NEXUS BETWEEN THE EXPENDITURE INCUR RED AND THE INCOME SOUGHT TO BE EARNED. IN THIS CASE HE HELD T HAT THERE IS NO NEXUS BETWEEN THE EXPENSES INCURRED AND THE INCOME SOUGHT TO BE EARNED. LD. CIT(A) IN THIS REGARD ALSO REFERRED TO THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND TUTICORIN ALKALI CHEMICALS AND TUTICORIN ALKALI CHEMICALS AND TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. FERTILIZERS LTD. FERTILIZERS LTD. FERTILIZERS LTD. VS. CIT 227 VS. CIT 227 VS. CIT 227 VS. CIT 227 ITR 172 ITR 172 ITR 172 ITR 172 AND ACCORDINGLY, LD. CIT(A) AFFIRMED THE ORDER OF THE AO. 10. WE FIND THAT THE ABOVE ISSUE HAS BEEN ADJUDI CATED BY US IN ASSESSEES APPEAL IN ITA NO. 4146//DEL/2011 (A.Y. 2002-03). IN THE SAID ADJUDICATION WE HAD HELD THAT INTEREST EXPENDI TURE INCURRED BY THE ASSESSEE CANNOT BE ADJUSTED AGAINST INTEREST INCOM E EARNED BY THE ASSESSEE UPTO THE DATE OF COMMENCEMENT OF BUSINESS. H ENCE, FOLLOWING THE SAME REASONING, WE HOLD THAT INTEREST EXPENDITURE INCURRED BY THE ASSESSEE DURING THE PRE-OPERATIVE P ERIOD UPTO THE DATE OF THE COMMENCEMENT OF THE BUSINESS CANNOT BE ADJUST ED AGAINST THE INTEREST INCOME EARNED. 11. APROPOS GROUND NO. 2 PROVISION OF NETWORK AND REPAIR EXPENSES. ON THIS ISSUE THE AO HELD THAT SINCE THE PROVISION FOR EXPENSES CANNOT BE TREATED AS REVENUE EXPENDITURE UNDER THE INCOME TAX ACT, THEREFORE, THE AMOUNT OF RS. 2,862,275/- WAS TO B E DISALLOWED. ITA NOS. 875/DEL/2011; 91/DEL/2011 & 4146/DEL/2011 9 12. UPON ASSESSEES APPEAL LD. CIT(A) OPINED THAT T HE PROVISION IS SIMILAR TO A LIABILITY WHICH IS ONLY CONTINGENT IN N ATURE AND HENCE, NOT DEDUCTIBLE. ACCORDINGLY, HE CONFIRMED THE AOS ACT ION. 13. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. WE FIND THAT THE AUTHORITIES BELOW HAVE TOTALLY ERRED IN TREATING THE PROVISION OF EXPENSES NOT ALLOWABLE. IT IS ONLY TH OSE PROVISIONS WHICH ARE CONTINGENT LIABILITY WHICH ARE NOT ALLOWABLE. IN THIS CASE, NO CASE HAS BEEN MADE OUT THAT THE PROVISION MADE BY THE ASS ESSEE FOR NETWORK REPAIR AND MAINTENANCE EXPENSES WAS ONLY A C ONTINGENT LIABILITY. THE FACT OF THE MATTER IS THAT THE PROVIS ION WAS MADE FOR THE REPAIRS IN THIS REGARD AS THE RELEVANT BILLS WERE N OT RECEIVED AND PAYMENT THEREOF WAS NOT MADE UPTO THE CLOSE OF THE AS SESSMENT YEAR. HENCE, IN ACCORDANCE WITH ACCRUAL SYSTEM OF ACCOU NTING, THE PROVISION IN THIS REGARD WAS CREATED. HENCE, THE P ROVISION FOR NETWORK REPAIR AND MAINTENANCE EXPENSES CANNOT BE SAID TO BE A PROVISION MADE FOR CONTINGENT EXPENSES. THERE IS NO CONTINGE NCY IN THE EXPENDITURE TO BE INCURRED IN THIS REGARD. THE EX PENDITURE HAS TO BE INCURRED THOUGH THE EXACT AMOUNT WAS NOT ASCERTAINE D. IN SUCH CIRCUMSTANCES, IN OUR CONSIDERED OPINION, THE SAID DISALLOWANCE HAS TO BE DELETED. ACCORDINGLY, WE SET ASIDE THE ORDERS O F THE AUTHORITIES BELOW AND DECIDE THE ISSUE IN FAVOR OF THE ASSESSEE . 14. APROPOS GROUND NO. 3 DISALLOWANCE OUT OF RENT EXPENSES:- ON THIS ISSUE AO NOTED THAT DURING THE COURSE OF A SSESSMENT PROCEEDINGS THE ASSESSEE WAS ASKED TO FURNISH THE D ETAILS OF RENT PAID. HOWEVER, AO NOTED THAT IN RESPECT OF RENT PAID AMOUN TING TO RS. 4,24,50,057/- THE ASSESSEE HAS NEITHER PROVIDED ADD RESSES NOR PAN NO. OF THE PERSONS TO WHOM RENT WAS PAID. AO HEL D THAT IN ABSENCE ITA NOS. 875/DEL/2011; 91/DEL/2011 & 4146/DEL/2011 10 OF SUFFICIENT INFORMATION THE AUTHENTICITY OF THE RE NT PAID CANNOT BE VERIFIED. HENCE, THE SAME WAS DISALLOWED AND ADDED BACK TO THE DECLARED INCOME. 15. UPON ASSESSEES APPEAL CIT(A) AFFIRMED THE ACTI ON OF THE AO. 16. AGAINST THE ABOVE ORDER THE ASSESSEE IS IN APPE AL BEFORE US. 17. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. LD. COUNSEL OF THE ASSESSEE IN THIS REGARD SUBMITTED TH AT THE COMPLETE DETAILS WITH REGARD TO THE RENT PAYMENT WAS AVAILABL E IN THE PAPER BOOK PAGE NOS. 240-250. HENCE, HE SUBMITTED THAT TH E DISALLOWANCE IN THIS REGARD WAS NOT CALLED FOR. HOWEVER, WE NOTE THAT AO HAD MADE THE DISALLOWANCE IN THIS REGARD, AS SOME OF THE DET AILS WERE NOT AVAILABLE BEFORE THE AO. IN THIS SITUATION, LD. C OUNSEL OF THE ASSESSEE AGREED THAT THE MATTER MAY BE REMITTED TO THE FILE OF THE AO. ACCORDINGLY, WE DIRECT THE AO TO EXAMINE THE DETAIL S AS FURNISHED BY THE ASSESSEE IN THIS REGARD AND DECIDE ACCORDINGLY. NEEDLESS TO ADD THAT THE ASSESSEE SHOULD BE GIVEN ADEQUATE OPPORTUN ITY OF BEING HEARD. 18. APROPOS GROUND NO. 4 DISALLOWANCE OF EXPENSES ON THIS ISSUE AO NOTED THAT THE FOLLOWING PROVISI ONS CANNOT BE TREATED AS ACTUAL REVENUE EXPENDITURE. HENCE, HE DI SALLOWED THE SAME. - PROVISION FOR CREDIT VERIFICATION COST RS. 11,41,06 0/- - PROVISION FOR CONSULTANCY CHARGES RS. 8,63,320/- - PROVISION FOR CAR HIRE CHARGES RS. 9,85,684/- RS. 29,90,064/- ITA NOS. 875/DEL/2011; 91/DEL/2011 & 4146/DEL/2011 11 19. UPON ASSESSEES APPEAL CIT(A) AFFIRMED THE SAME, FOLLOWING THE DECISION ON THE DISALLOWANCE OF NETWORK AND REPAIR EXPENSES AS ABOVE. 20. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. WE FIND THAT THE ISSUE INVOLVED IS IDENTICAL TO BE ONE DEALT WITH REGARD TO THE GROUND NO. 2 AS ABOVE. NOW FOLLOWING THE SAM E REASONING AS IN GROUND NO. 2 ABOVE WE HOLD THAT THE PROVISIONS MADE BY THE ASSESSEE CANNOT BE TREATED AS CONTINGENT LIABILITY WHEN NOTH ING HAS BEEN BROUGHT BY THE REVENUE ON RECORD THAT EXPENDITURE I N THIS REGARD WAS CONTINGENT IN NATURE. THE PROVISION WAS MADE AS THE PAYMENT IN THIS REGARD COULD NOT BE MADE UPTO THE CLOSE OF THE YEAR AS THE BILLS IN THIS REGARD WERE RECEIVED LATE. HENCE, THERE IS NO CONTI NGENCY IN THE EXPENDITURE TO BE INCURRED. ONLY THE EXACT AMOUNT HA S NOT BEEN ASCERTAINED. HENCE, FOLLOWING THE MERCANTILE SYSTEM O F ACCOUNTING SUCH PROVISION CANNOT BE DISALLOWED. ACCORDINGLY, WE SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND DECIDE THE ISSU E IN FAVOR OF THE ASSESSEE. 21. APROPOS GROUND NO. 5 : DISALLOWANCE OUT OF BRAN D LAUNCH EXPENSES. ON THIS ISSUE AO NOTED THAT FROM THE PERUSAL OF COMPUTATION OF INCOME THAT ASSESSEE HAS CLAIMED AN AMOUNT OF RS. 1 0,56,81,379/- AS BRAND LAUNCH EXPENSES AS REVENUE EXPENDITURE. AO OPINED THAT KEEPING IN VIEW THE NATURE OF THE EXPENSES THE SAME ARE TREATED AS DEFERRED REVENUE EXPENDITURE AND 1/5 TH OF THE SAME AMOUNTING TO RS. 2,11,36,275/- IS ALLOWED IN THE CURRENT YEAR AND TH E BALANCE OF RS. 8,45,45,104/- CAN BE AMORTIZED IN THE NEXT FOUR YEAR S. 22. UPON ASSESSEES APPEAL LD. CIT(A) OBSERVED THAT DEMARCATION BETWEEN THE CAPITAL EXPENDITURE AND REVENUE EXPEND ITURE IS VERY THIN. ITA NOS. 875/DEL/2011; 91/DEL/2011 & 4146/DEL/2011 12 LD. CIT(A) HELD THAT ALTHOUGH THE ASSESSEE EXPLAINE D THAT THE EXPENDITURE WAS OF THIS PARTICULAR YEAR, BUT THE FRUITS WILL BE RECEIVED OVER A PERIOD OF ENSUING YEARS. IN THIS REGARD, CIT(A) REFERRED TO THE DECISION OF THE HONBLE APEX COURT IN THE CASE MADR AS INDUSTRIAL MADRAS INDUSTRIAL MADRAS INDUSTRIAL MADRAS INDUSTRIAL INVESTMENT CORPORATION VS. CIT INVESTMENT CORPORATION VS. CIT INVESTMENT CORPORATION VS. CIT INVESTMENT CORPORATION VS. CIT 225 ITR 802 225 ITR 802 225 ITR 802 225 ITR 802. .. . ACCORDINGLY, HE AFFIRMED THE ORDER OF THE AO. 23. AGAINST THE ABOVE ORDER THE ASSESSEE IS IN APPE AL BEFORE US. 24. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE AO HAS HI MSELF TREATED THE SAME EXPENDITURE AS DEFERRED REVENUE EXPENDITURE. AO HAD ALLOWED 20% DURING THE YEAR AND REST IS TO BE SPREAD OVER I N THE SUCCEEDING 4 YEARS. LD. COUNSEL OF THE ASSESSEE IN THIS REGARD S UBMITTED THAT THERE IS NO CONCEPT OF DEFERRED REVENUE EXPENDITURE IN TA XATION LAWS AND EXPENDITURE HAS EITHER TO BE CAPITALISED OR REVENUE . HE HAS SUBMITTED THAT IN THIS CASE THE AO HAS NOT MADE OUT THE CASE THAT THE EXPENDITURE INVOLVED IS CAPITAL IN NATURE. LD. COUN SEL OF THE ASSESSEE SUBMITTED THAT BRAND LAUNCH EXPENSES INCURRED IN T HE PRE-OPERATIVE PERIOD HAS BEEN ADDED TO THE PRE-OPERATIVE EXPENSES . HE FURTHER SUBMITTED THAT THE HONBLE APEX COURT DECISION IN T HE CASE OF MADRAS MADRAS MADRAS MADRAS INDUSTRIAL INVESTMENT CORPORATION VS. CIT. INDUSTRIAL INVESTMENT CORPORATION VS. CIT. INDUSTRIAL INVESTMENT CORPORATION VS. CIT. INDUSTRIAL INVESTMENT CORPORATION VS. CIT. (SUPRA) (SUPRA) (SUPRA) (SUPRA) IS NOT APPLICABLE ON THE FACTS OF THE CASE. IN THIS REGARD, LD. COUNSEL OF THE ASSESSEE REFERRED TO DECISION OF THIS TRIBUNAL IN ACIT VS. G LOBAL HEALTHLINE P LTD. PASSED IN ITA NO. 3319/DEL/2012 VIDE ORDER DATED 7. 9.2012. IN THIS CASE, THE TRIBUNAL HAS HELD AS UNDER:- 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORDS. WE FIND THAT THE CASE LAW RELIED UPON B Y THE ASSESSING OFFICER IN THE CASE OF MADRAS INDUSTRIA L ITA NOS. 875/DEL/2011; 91/DEL/2011 & 4146/DEL/2011 13 CORPORATION LTD. VS. C.I.T. 225 ITR 802 IS NOT APPL ICABLE ON THE FACTS OF THE PRESENT CASE. IN THE AFORESA ID CASE THE SAID CORPORATION ISSUED DEBENTURES IN DECEMBER, 1966 AT A DISCOUNT. THE TOTAL DISCOUNT ON THE ISSUE OF 1.5 CRORES AMOUNTED TO ` 3,00,000/- FOR THE ASSESSMENT YEAR 1968-69. THE COMPANY WROTE OFF ` 12,500/- OUT OF THE TOTAL DISCOUNT OF ` 3,00,000/ - BEING THE PROPORTIONATE AMOUNT OF DISCOUNT FOR THE PERIOD OF SIX MONTHS ENDING 30.6.1967 TAKING INTO ACCOUNT THE PERIOD OF 12 YEARS WHICH WAS A PERIOD OF REDEMPTION AND DISCOUNT FOR ` 3,00,000/- OVER THE PERIOD OF 12 YEARS. IN THESE CIRCUMSTANCES, THE EXPENDITURE WAS HELD TO BE DEFERRED REVENUE EXPENDITURE. HENCE, WE AGREE WITH THE LD. COMMISSIONER OF INCOME TAX (A) THAT THE HONBE APEX COURTS DECISION IN THE CASE OF MADRAS INDUSTRIAL CORPORATION LTD. VS. C.I.T. (SUPRA) DOES NOT HELP T HE CASE OF THE REVENUE. IN OUR CONSIDERED OPINION, T HERE IS NO CONCEPT OF DEFERRED REVENUE EXPENDITURE IN THE INCOME TAX ACT. THE EXPENDITURE IS EITHER REVENUE IN NATURE OR CAPITAL. IF THE EXPENDITURE IS OF RE VENUE NATURE AND IS INCURRED WHOLLY OR EXCLUSIVELY FOR TH E PURPOSE OF BUSINESS AND HAS BEEN INCURRED DURING T HE YEAR, THE SAME IS ALLOWABLE EXPENSES SUBJECT TO CONDITION LAID DOWN IN SECTION 30 TO SECTION 37 OF THE ACT. ACCORDINGLY, WE HOLD THAT THE IMPUGNED EXPENDITURE WAS ALLOWABLE AS REVENUE EXPENDITURE AND HENCE, WE DO NOT FIND ANY INFIRMITY OR ILLEGAL ITY IN ITA NOS. 875/DEL/2011; 91/DEL/2011 & 4146/DEL/2011 14 THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (A). ACCORDINGLY, WE UPHOLD THE SAME. 25. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS. WE FIND THAT THE ASSESSEE IN THIS REGARD HAS INCURRED EXPENDITURE WH ICH ARE IN THE NATURE OF BRAND LAUNCH EXPENSES. WE NOTE THAT THE SAID EXPENDITURE INCURRED UPTO THE PRE OPERATIVE PERIOD HAS BEEN CAP ITALISED AND EXPENDITURE INCURRED AFTER THE OPERATION HAS STARTE D HAVE BEEN DEBITED TO REVENUE. AO IN THIS REGARD, HAS ALLOWE D 20% THEREOF BY TREATING THE SAME AS DEFERRED REVENUE EXPENDITURE. WE AGREE WITH THE CONTENTION OF THE ASSESSEES COUNSEL THAT TH ERE IS NO CONCEPT OF DEFERRED REVENUE EXPENDITURE IN TAXATION LAWS. IN T HE MATTER OF TAXATION, EXPENDITURE IS EITHER TO BE CAPITALIZED OR IS REVENUE IN NATURE. IN THIS CASE THE EXPENDITURE INVOLVED I S REVENUE IN NATURE AND HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR TH E PURPOSE OF BUSINESS. THE AMOUNT HAS ACTUALLY BEEN INCURRED B Y THE ASSESSEE AS SUCH THE SAME IS ALLOWABLE IN THE ENTIRELY. THE C ASE LAW OF THE HONBLE APEX COURT BY THE LD. CIT(A) WAS IN A DIFF ERENT CONTEXT AND HENCE IS NOT APPLICABLE, AS HAS BEEN BROUGHT OUT IN THE TRIBUNAL ORDER AS ABOVE. IN THE BACKGROUND OF THE AFORESAID DISCUS SION AND PRECEDENT, WE SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AN D DECIDE THE ISSUE IN FAVOR OF THE ASSESSEE. ITA NO. 4146 ITA NO. 4146 ITA NO. 4146 ITA NO. 4146/DEL/2011 /DEL/2011 /DEL/2011 /DEL/2011 ( (( (A AA A. .. .Y YY Y. 2002 . 2002 . 2002 . 2002- -- -03) 03) 03) 03) (ASSESSEES APPEAL) (ASSESSEES APPEAL) (ASSESSEES APPEAL) (ASSESSEES APPEAL) 26. THE ISSUE RAISED IS THAT LD. CIT(A) ERRED IN CO NFIRMING THE ORDER OF THE DCIT IN NOT ALLOWING THE SET OFF OF INTEREST EX PENSES INCURRED BY THE ASSESSEE AMOUNTING TO RS. 7,786,301/- AGAINST THE I NTEREST INCOME OF RS. 7,886,987/-. ITA NOS. 875/DEL/2011; 91/DEL/2011 & 4146/DEL/2011 15 27. IN THIS CASE THE BUSINESS OF THE ASSESSEE DID N OT COMMENCE IN THE CONCERNED PREVIOUS YEAR. THE BUSINESS COMMENCE D IN THE SUBSEQUENT FINANCIAL YEAR IN JUNE, 2002. THE ASSES SEE HAD A CREDIT FACILITY WITH HSBC BANK. ASSESSEE SOUGHT A LOAN OF RS. 25 CRORES FROM THE BANK IN DECEMBER, 2001 AND EXTENDED THE SAME AS L OAN TO ITS HOLDING COMPANY VODAFONE ESSAR MOBILE SERVICES LTD. THE LOAN OBTAINED BY THE ASSESSEE WAS INCURRING RATE OF INT EREST @11.16%, WHEREAS ASSESSEE WAS CHARGING INTEREST @11.75% FRO M ITS HOLDING COMPANY. THE TOTAL INTEREST EXPENDITURE INCURRED B Y THE ASSESSEE CAME TO RS. 7,886,987/-. THE ASSESSEE CLAIMED THAT THE INTEREST EXPENDITURE PERTAINED TO EARNING OF INTEREST INCOME AND AFTER REDUCING THESE EXPENSES NET INCOME OF RS. 1,00,690/- WAS OF FERED FOR TAXATION. 28. THE ASSESSING OFFICER WAS NOT AGREEABLE TO TH E AFORESAID TREATMENT BY THE ASSESSEE. HE NOTED THAT ASSESSEE HAS TAKEN A LOAN OF RS. 25 CRORES FOR THE PURPOSE OF ITS BUSINESS. BESIDES OTHER LOANS WERE RAISED BY THE ASSESSEE AND TOTAL OF THE LOAN R AISED AS ON 31.3.2002 WAS RS.598,01,05,218/-. ASSESSING OFFICER HELD THAT THESE LOANS HAVE BEEN RAISED BY THE ASSESSEE FOR BUSINESS PURPOSES AND THE INTEREST LIABILITY ON THIS LOAN IS ALLOWABLE AS BUS INESS EXPENDITURE. THAT SINCE THE ASSESSEE BUSINESS WAS YET TO COMMENC E THIS INTEREST EXPENSES ON THE LOAN RAISED BY THE ASSESSEE ARE PRE -OPERATIVE EXPENSES AND WHICH ARE THEREFORE, LIABLE TO BE CAPI TALISED; THAT SINCE THE ASSESSEE HAD SURPLUS FUNDS, PART OF THIS FUND O F RS. 25 CRORE WAS GIVEN BY THE ASSESSEE TO HOLDING COMPANY; THAT INTER EST RECEIVED ON THIS LOAN WAS ASSESSEES INCOME FROM OTHER SOURCES A ND WAS TO BE ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES. IN THIS REGARD, ASSESSING OFFICER REFERRED TO THE DECISION OF HONB LE APEX COURT IN THE ITA NOS. 875/DEL/2011; 91/DEL/2011 & 4146/DEL/2011 16 CASE OF TUTICO TUTICO TUTICO TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. VS. CIT 227 ITR RIN ALKALI CHEMICALS AND FERTILIZERS LTD. VS. CIT 2 27 ITR RIN ALKALI CHEMICALS AND FERTILIZERS LTD. VS. CIT 2 27 ITR RIN ALKALI CHEMICALS AND FERTILIZERS LTD. VS. CIT 2 27 ITR 172 172 172 172. . . . 29. UPON ASSESSEES APPEAL LD. CIT(A) REFERRED TO H IS DECISION IN ASSESSEES OWN CASE FOR ASSTT. YEAR 2003-04. IN TH E SAID DECISION LD. CIT(A) HAS NOTED THAT THE DOMINANT PURPOSE OF THE EX PENDITURE INCURRED MUST BE TO EARN INCOME THAT THERE SHOULD BE NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE INCOME SOUGHT TO B E EARNED; THAT THERE IS NO NEXUS BETWEEN THE EXPENSES INCURRED AND THE INCOME SOUGHT TO BE EARNED. LD. CIT(A) ALSO REFERRED TO T HE DECISION OF THE HONBLE APEX COURT AS ABOVE AND ACCORDINGLY, HE AFF IRMED THE ACTION OF THE AO. 30. AGAINST THE ABOVE ORDER THE ASSESSEE IS IN APPE AL BEFORE US. 31. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE CASE OF TUTICORIN ALKALI TUTICORIN ALKALI TUTICORIN ALKALI TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. VS. CIT CHEMICALS AND FERTILIZERS LTD. VS. CIT CHEMICALS AND FERTILIZERS LTD. VS. CIT CHEMICALS AND FERTILIZERS LTD. VS. CIT (SUPRA) (SUPRA) (SUPRA) (SUPRA) AS REFERRED ABOVE IS NOT APPLICABLE TO THE FACTS OF THIS CASE. HE SUBMITTED THAT IN THE SAID DECISION CONSIDERED BY THE HONBLE APEX COURT, THE MATTER WAS OF SURPLUS FUNDS. THUS THE LD. COUNSEL OF THE ASSESS EES CLAIM IS NOT THE CASE HERE. LD. COUNSEL OF THE ASSESSEE FURTHE R SUBMITTED THAT ASSESSEE ONLY SEEKS ADJUSTMENTS OF INTEREST EXPENDITU RE INCURRED FROM THE INTEREST INCOME EARNED UNDER SECTION 57(III) OF THE I.T. ACT. 32. LD. DR ON THE OTHER HAND RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. HE SUBMITTED THAT THE DECISION OF THE HON BLE APEX COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. VS. CIT TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. VS. CIT TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. VS. CIT TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. VS. CIT (SUPRA) (SUPRA) (SUPRA) (SUPRA) IS SQUARELY APPLICABLE ON THE FACTS OF THE CASE. ASSESSEE HAS RAISED LARGE AMOUNT OF FUNDS FOR THE PURPOSE OF ESTABLISHME NT OF BUSINESS. IT IS ONLY SURPLUS FUNDS OF RS. 25 CRORE WHICH WAS GI VEN TO THE HOLDING ITA NOS. 875/DEL/2011; 91/DEL/2011 & 4146/DEL/2011 17 COMPANY. HENCE, HE SUBMITTED THAT THE INTEREST EARNED THEREON HAS TO BE OFFERED FOR TAXATION AS INCOME FROM OTHER SOURCES , WITHOUT ANY ADJUSTMENTS OF THE INTEREST EXPENDITURE WHICH WAS IN CURRED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. 33. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS AND PERUSED THE RECORDS. WE NOTE THAT ASSESSEES BUSINESS HAD NOT C OMMENCED DURING THE PREVIOUS YEAR. IT COMMENCED ONLY IN THE SUBSEQ UENT YEAR IN JUNE, 2002. IN DECEMBER, 2001 ASSESSEE HAS TAKEN LOAN FROM T HE BANK AND ASSESSEE GAVE THE SAME TO ITS HOLDING COMPANY. ASS ESSEE HAS ADJUSTED THE INTEREST EXPENDITURE INCURRED IN THIS REGARD WITH THE INTEREST INCOME EARNED AND OFFERED THE BALANCE FOR T AXATION UNDER THE HEAD INCOME FROM OTHER SOURCES. WE FIND THAT ASSES SEE HAS MADE A TOTAL BORROWING OF RS. 598,01,05,218/- UPTO 31.3.2 002. THE ENTIRE AMOUNT OF LOAN WAS UTILISED FOR THE PURPOSE OF SETTI NG UP ESTABLISHMENT OF THE BUSINESS UNDERTAKING. OUT OF THE SAID TOTAL BORROWINGS A SUM OF RS. 25 CRORES WAS ADVANCED TO THE HOLDING COMPANY AN D INTEREST INCOME WAS EARNED THEREON. WE NOTE THAT ASSESSEE IS NOT ENGAGED IN THE BUSINESS OF MONEY LENDING. WE FIND CONSIDERABL E COGENCY IN THE FINDINGS OF THE AUTHORITIES BELOW AND THE CONT ENTION OF THE LD. DR THAT IT WAS SURPLUS FUND AVAILABLE WITH THE ASSESSE E WHICH WAS GIVEN AS LOAN. THE INTEREST EXPENDITURE INCURRED BY THE AS SESSEE ARE LIABLE TO BE CONSIDERED UNDER THE HEAD INCOME FROM OTHER BUS INESS. THE INTEREST INCOME EARNED IS LIABLE TO BE ASSESSED UND ER THE INCOME FROM OTHER SOURCES. HENCE, IN OUR CONSIDERED OPINION, AS SESSEES CLAIM THAT INTEREST EXPENDITURE INCURRED SHOULD BE NETTED OFF AGAINST THE INTEREST INCOME IS NOT SUSTAINABLE. ITA NOS. 875/DEL/2011; 91/DEL/2011 & 4146/DEL/2011 18 34. WE FIND THAT THE HONBLE APEX COURT DECISION IN TUTICORIN ALKALI TUTICORIN ALKALI TUTICORIN ALKALI TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. VS. CIT CHEMICALS AND FERTILIZERS LTD. VS. CIT CHEMICALS AND FERTILIZERS LTD. VS. CIT CHEMICALS AND FERTILIZERS LTD. VS. CIT (SUPRA) (SUPRA) (SUPRA) (SUPRA) IS SQUARELY APPLICABLE TO THE PRESENT CASE. IN THIS DECISION THE HONBLE APEX COURT HAS EXPOUNDED AS UNDER:- HELD, THAT THE COMPANY HAD SURPLUS FUNDS IN ITS HAND S. IN ORDER TO EARN INCOME OUT OF THE SURPLUS FUNDS, IT H AD INVESTED THE AMOUNT FOR THE PURPOSE OF EARNING INT EREST. THE INTEREST THUS EARNED WAS CLEARLY OF REVENUE NAT URE AND WOULD HAVE TO BE TAXED ACCORDINGLY. THE ACCOUNTANTS MIGHT HAVE TAKEN SOME OTHER VIEW BUT ACCOUNTANCY PRACTICE WAS NOT NECESSARILY GOOD LAW. THIS WAS NOT A CASE OF D IVERSION OF INCOME BY OVERRIDING TITLE. THE ASSESSEE WAS ENT IRELY AT LIBERTY TO DEAL WITH THE INTEREST AMOUNT AS IT LIKED . THE APPLICATION OF THE INCOME FOR PAYMENT OF INTEREST WO ULD NOT AFFECT ITS TAXABILITY IN ANY WAY. THE COMPANY COULD NOT CLAIM ANY RELIEF UNDER SECTION 70 OR SECTION 71 SIN CE ITS BUSINESS HAD NOT STARTED AND THERE COULD NOT BE ANY COMPUTATION OF BUSINESS INCOME OR LOSS INCURRED BY T HE ASSESSEE IN THE RELEVANT ACCOUNTING YEARS. IN SUCH A SITUATION, THE EXPENDITURE INCURRED BY THE ASSESSEE FOR THE PURPOSE OF SETTING UP ITS BUSINESS COULD NOT BE ALL OWED AS DEDUCTION, NOR COULD IT BE ADJUSTED AGAINST ANY OT HER INCOME UNDER ANY OTHER HEAD. SIMILARLY ANY INCOME FR OM A NON BUSINESS SOURCE COULD NOT BE SET OFF AGAINST TH E LIABILITY TO PAY INTEREST ON FUNDS BORROWED FOR THE PURPOSE O F PURCHASE OF PLANT AND MACHINERY EVEN BEFORE COMMENCEMENT OF THE BUSINESS OF THE ASSESSEE. ITA NOS. 875/DEL/2011; 91/DEL/2011 & 4146/DEL/2011 19 35. NOW WE FIND THAT ON THE FACTS OF THE PRESENT CA SE THE ABOVE EXPOSITION IS APPLICABLE. HERE, THE ASSESSEE HAS O BTAINED CREDIT FACILITY FOR THE PURPOSE OF ESTABLISHMENT/SETTING UP OF ITS BUSINESS. OUT OF THE ABOVE SUM BORROWED A SUM OF RS. 25 CRORES WAS GIVEN T O THE HOLDING COMPANY. HENCE, THERE IS NO NEXUS BETWEEN THE LOAN OBTAINED AND THE LOAN GIVEN. THE FUNDS OBTAINED WERE FOR THE PURPOS E OF BUSINESS, WHILE THE INTEREST INCOME EARNED WAS INCOME FROM OTHER SOU RCES. IN THIS SITUATION, THE EXPENDITURE INCURRED BY THE ASSESSE E FOR THE PURPOSE OF SETTING UP OF ITS BUSINESS COULD NOT BE ALLOWED AS DEDUCTION, NOR COULD IT SHOULD BE ADJUSTED AGAINST ANY OTHER INCOME NOR ANY OTHER HEAD. SIMILARLY, AS EXPOUNDED ABOVE, ANY INCOME FROM NON-BU SINESS SOURCES COULD NOT BE SET OFF AGAINST THE LIABILITY TO PAY INTEREST ON FUNDS BORROWED FOR THE PURPOSE OF PLANT AND MACHINERY, ET C. EVEN BEFORE THE COMMENCEMENT OF THE BUSINESS OF THE ASSESSEE. 36. THUS, THE CONTENTION OF THE LD. COUNSEL OF THE ASSESSEE THAT ASSESSEE SHOULD BE ALLOWED DEDUCTION FROM THE INTERE ST INCOME EARNED UNDER SECTION 57(III) OF THE I.T. ACT IS NOT SUSTAI NABLE. SECTION 57(III) PROVIDES THAT ANY OTHER EXPENDITURE (NOT BEING IN T HE NATURE OF CAPITAL EXPENDITURE) LAID OUT OR EXPENDED WHOLLY AND EXCLUS IVELY FOR THE PURPOSE OF MAKING OR EARNING ANY INCOME FROM OTHER SO URCE SHOULD BE ALLOWED. AS ALREADY HELD BY US IN THE PRECEDING PA RAGRAPHS THE LOAN WAS OBTAINED BY THE ASSESSEE FOR SETTING UP OF ITS BUSINESS. HENCE, THE INTEREST EXPENDITURE INCURRED FOR SETTING UP OF THE BUSINESS BEFORE THE COMMENCEMENT OF THE BUSINESS ARE TO BE COMPUTED UNDE R THE PRE- OPERATIVE EXPENSES AND ARE TO BE CONSIDERED UNDER I NCOME FROM BUSINESS. HENCE, THE INTEREST INCOME EARNED, WHICH IS FROM THE NON- BUSINESS SOURCE CANNOT BE ADJUSTED AGAINST THE LIAB ILITY TO PAY INTEREST ON FUNDS BORROWED OF SETTING UP OF ITS BUSINESS FOR PURCHASE OF PLANT ITA NOS. 875/DEL/2011; 91/DEL/2011 & 4146/DEL/2011 20 AND MACHINERY ETC. BEFORE THE COMMENCEMENT OF THE BUSI NESS OF THE ASSESSEE. 37. IN THE BACKGROUND OF THE AFORESAID DISCUSSIONS AND PRECEDENT AS ABOVE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A) IN THIS REGARD. ACCORDINGLY, WE AFFIRM THE SAME. 38. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IN ITA NO. 875/DEL/2011 (A.Y. 2003-04) STANDS ALLOWED FOR STATI STICAL PURPOSES AND ASSESSEES APPEAL IN ITA NO. 91/DEL/2011 (A.Y. 2 003-04) STAND PARTLY ALLOWED & IN I.T.A. NO. 4146/DEL/2011 (2002- 03) STAND DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 07/2/2014. SD/- SD/- [ [[ [RAJPAL YADAV RAJPAL YADAV RAJPAL YADAV RAJPAL YADAV] ]] ] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER DATE 07/2/2014 SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: - -- - 1. APPELLANT - 2. RESPONDENT - 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES ITA NOS. 875/DEL/2011; 91/DEL/2011 & 4146/DEL/2011 21