1992 (10) TMI 67 - HC - Income Tax

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 ... Entitlement to deduction of the administrative expenses and exploration and mining expenses from out of its interest income - Commencement of Business - Whether, the Tribunal was justified in directing the Income-tax Officer to consider, to the extent admissible, the claim of the assessee for setting off of interest received on short-term deposits against unadjusted expenditure for the assessment years 1976-77, 1977-78, 1978-79 and 1979-80 ? - HELD THAT:- The assessee-company was incorporated on March 18, 1975. The certificate for commencement of the business was issued on March 31, 1975. From a perusal of the memorandum and articles of association of the assessee-company, it is clear that the main objects are not only to produce, manufacture, purchase, refine, import, export, sell and deal in naturally occurring ores and agglomerated iron ores, pre-reduced forms of iron such as sponge iron, all forms and/or by-products thereof, etc., but also to search for, get, work, make merchantable, sell and deal in naturally occurring iron ore, minerals and substances, etc. Having regard to the findings of the Tribunal mentioned above, it is evident that the works relating to the construction of plant and installation of machinery for establishing the factory for sponge iron, were in progress during the relevant years and the machinery was awaited and that the work had not commenced. What is, however, debated is that, as the search for iron ore has commenced and as that is also one of the main objects of the company, the expenditure incurred for that purpose must be allowed as a deduction. Alternatively, it is submitted that the business of the company fell into three stages: The first stage relates to exploration of iron ore which are suitable for production of sponge iron for non-cooking coal, in the second stage falls the actual mining operations and the third stage is said to be production of sponge iron. As the first activity commenced in the period relevant to the assessment years 1975-76 and 1976-77, the business has commenced and the expenditure is deductible. Mere inclusion of a business in the main objects clause in the memorandum of association is not enough to conclude that the business has commenced to lay claim for deduction of expenses ; the business pursuant to the objects clause should have been started to justify the claim. In the instant case, evidence of starting the exploration for raw material is lacking. The initial test of raw material stores found at Bayyaram was done in the Metallurgical Lab and other laboratories and, for the purposes of exploration, the services of the Mineral Development Corporation, A. P. Mining Corporation National Mineral Development Corporation, were also commissioned in the years 1976 to 1979. These activities cannot be treated as doing search for iron ore material by the assessee-company. They can only be treated as preliminary activities for purposes of establishing and setting up the business of production of sponge iron. For these reasons, the submission fails. We accordingly answer the first limb of the first question by saying that the business of the assessee had not commenced during the period in question. It was observed that the scheme of the Income-tax Act is that income-tax is one tax and that section 6 of the Indian Incometax Act, 1922, classifies the taxable income under different beads for the purpose of computation of the net income of the assessee. For the purpose of computation of the income, interest on securities is separately classified, but income by way of interest on securities does not cease to be part of the income from business if the securities are part of the trading assets. It is thus clear that when the securities formed part of the trading assets, the interest that accrued on them was treated as income. Therefore, the carried forward loss was allowed to be set off against the income from securities in the succeeding years. In the instant case, it cannot be said that the capital was part of the trading assets of the assessee. In the instant case, we have held above that the business had not commenced and it cannot be said that, in the course of the business, the assessee was earning interest on deposits. Therefore, we are of the view that the interest income cannot be treated as business income. Thus, we hold that the assessee is not entitled to the deduction of the administrative expenses and exploration and mining expenses from out of its interest income. Claim to set off interest received on short-term deposits against the unadjusted expenditure for the four assessment years in question. - We do not see any illegality in the direction given to the Income-tax Officer to consider the claim of the assessee for set off of interest received on short-term deposits against unadjusted expenditure to reduce the capital cost to the extent admissible. he question is, therefore, answered in the affirmative and in favour of the assessee. 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 ExpensesThe 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 ExpenditureThe 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.