Business not commenced; interest on short-term deposits not business income; possible set-off by reducing capital cost

HC held that the assessee's business had not commenced during the relevant assessment years, as activities undertaken were only preliminary steps for establishing a sponge iron plant and did not constitute commencement of the business objects in the memorandum. Consequently, the interest earned on short-term deposits could not be treated as business income, and the assessee was not entitled to deduct administrative, exploration or mining expenses from such interest income. However, HC upheld the Tribunal's direction to the Assessing Officer to consider, to the extent legally admissible, the assessee's claim for setting off the interest received on short-term deposits against unadjusted expenditure by reducing the capital cost, answering that issue in favour of the assessee.

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Issues Involved:
1. Commencement of Business and Deduction of Expenses.
2. Set-Off of Interest Income Against Unadjusted Expenditure.

Summary:

Issue 1: Commencement of Business and Deduction of Expenses
The first question addressed whether the assessee commenced its business and thus was entitled to deduct administrative and exploration expenses from its interest income. The court examined various precedents to determine the commencement of business, distinguishing between setting up and actual commencement. The Tribunal found that the assessee was engaged in preliminary activities such as construction and installation of machinery, which did not amount to the commencement of business. The court concurred, stating that mere inclusion of business activities in the memorandum of association does not suffice; actual business activities must commence. The court concluded that the business had not commenced during the relevant period and thus, the assessee was not entitled to the claimed deductions.

Issue 2: Set-Off of Interest Income Against Unadjusted Expenditure
The second question considered whether the interest received on short-term deposits could be set off against unadjusted expenditure. The Tribunal had directed the Income-tax Officer to consider the assessee's claim for capitalisation of interest income, noting that administrative expenses with a nexus to earning interest might qualify for deduction. The court approved this observation but clarified that the set-off must be related to specific expenditures, following the Division Bench decision in CIT v. Derco Cooling Coils Ltd. The court affirmed the Tribunal's direction with this qualification, allowing the set-off to the extent admissible.

Conclusion:
The court answered the first question in the negative, ruling in favor of the Revenue, and the second question in the affirmative, subject to the specified clarification, ruling in favor of the assessee.

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