2012 (9) TMI 300 - AT - Income Tax

Tribunal allows appeal, deems post-commencement expenses deductible, impacting income classification

Sardar Sarovar Narmada Nigam Ltd. Versus Assistant Commissioner of Income-tax, Gandhinagar Circle

Sardar Sarovar Narmada Nigam Ltd. Versus Assistant Commissioner of Income-tax, Gandhinagar Circle - [2012] 19 ITR 133 Issues Involved:1. Whether the business of the assessee has commenced.2. Whether interest income is taxable under the head 'Income from other sources.'3. Whether interest expenses can be claimed as a deduction under Section 57(iii) of the Income Tax Act.4. Whether the assessee is an authority within the meaning of Section 10(20A) of the Income Tax Act and thus exempt from tax.5. Miscellaneous issues related to the computation of income and depreciation.Detailed Analysis:1. Whether the business of the assessee has commenced:The Tribunal had to decide if the business of the assessee, a company established by the Government of Gujarat for executing the Sardar Sarovar Project, had commenced. The assessee claimed that its business commenced from the first year of construction. The Tribunal examined the facts, including the supply of water through partially completed canals during the year under consideration. The Tribunal concluded that the business of the assessee was set up on 21.02.2001 when water was supplied through the main canals. This conclusion was based on the principle that business commences when the first activity necessary for the business is started, even if the entire project is not completed.2. Whether interest income is taxable under the head 'Income from other sources':The Tribunal held that the interest income earned by the assessee on funds temporarily invested in banks should be taxed under the head 'Income from other sources.' This conclusion was based on the fact that the funds were borrowed for the purpose of constructing the project and not for earning interest income.3. Whether interest expenses can be claimed as a deduction under Section 57(iii) of the Income Tax Act:The Tribunal examined whether the interest expenses incurred on borrowed funds, which were temporarily invested to earn interest income, could be deducted under Section 57(iii) of the Act. The Tribunal held that such interest expenses could not be allowed as a deduction because the borrowings were made for the purpose of constructing the project, not for earning interest income.4. Whether the assessee is an authority within the meaning of Section 10(20A) of the Income Tax Act and thus exempt from tax:The assessee claimed that it was an authority constituted in India and thus its income was exempt under Section 10(20A) of the Act. The Tribunal referred to the previous year's order where the CIT(A) held that the assessee was not an authority constituted under Section 10(20A). The Tribunal upheld this conclusion, stating that the assessee did not provide sufficient evidence to support its claim.5. Miscellaneous issues related to the computation of income and depreciation:The Tribunal addressed various other issues raised by the assessee, including the computation of income under the head 'Profit and Gains of Business or Profession' and the allowance of depreciation on assets used during the year. The Tribunal concluded that these issues did not require adjudication due to its decision that the business of the assessee had commenced and the revenue expenses incurred after that date should be allowed as deductions.Conclusion:The Tribunal allowed the appeal of the assessee, holding that the business had commenced on 21.02.2001. Consequently, all revenue expenses incurred after this date were allowable as deductions, resulting in a loss under the head 'Income from Business,' which could be set off against the interest income. This decision rendered the other issues raised by the assessee moot.