Metro business set-up requires operational readiness, while interest on deposits not inextricably linked to the project is taxable.
Metro transport business deductions depend on operational readiness, not actual commencement; planning, financing and construction before infrastructure is ready are preparatory. Section 10(20A) exemption requires an authority constituted by or under law for specified purposes; incorporation under the Companies Act alone does not establish statutory constitution. Expenditure related to constructed or acquired capital assets may be capitalised in their written-down value; qualifying professional and consultancy expenses may be considered for amortisation in the year of set-up. Interest on temporarily deposited project funds is taxable as income from other sources where the deposits lack an inextricable project nexus; deductions require substantiated non-capital expenses incurred wholly and exclusively to earn the interest. Failure to inquire into that connection can justify revision of an assessment that is erroneous and prejudicial to revenue. Rational estimates are permissible where relevant expenses cannot be broken down.
Issues: (i) Whether the government-owned metro company qualified for exemption under section 10(20A); (ii) whether its business was set up during the relevant assessment years so as to permit current-year business expenditure, preliminary expense and depreciation deductions; (iii) whether pre-operative project expenditure could be capitalised or amortised; (iv) whether interest on fixed deposits was business income or a capital receipt adjustable against project cost; (v) whether greater deductions were allowable against the interest income; and (vi) whether revision of the assessments and estimation of allowable expenses were valid.
Issue (i): Whether the government-owned metro company qualified for exemption under section 10(20A).
Analysis: Section 10(20A) required an authority constituted by or under law for the specified purposes. Incorporation under the Companies Act, 1956 was registration under a general law, not statutory constitution. Neither the metro enactments nor a notification was shown to have created the company. Its separate status as an authority was not adjudicated.
Conclusion: The assessee was not entitled to exemption under section 10(20A). Against the assessee.
Issue (ii): Whether its business was set up during the relevant assessment years so as to permit current-year business expenditure, preliminary expense and depreciation deductions.
Analysis: Under sections 3, 28, 32, 35D and 37, readiness to commence business is distinct from actual commencement and determines when business deductions become available. Planning, financing and construction were preparatory to the metro transport business; the infrastructure was not ready for operations during the assessment years in question. A separate consultancy business was not established. The business was set up in financial year 2002-03, shortly before commercial operations.
Conclusion: The business was not set up during assessment years 1996-97 to 2002-03, and the claimed current-year business deductions were unavailable. Against the assessee.
Issue (iii): Whether pre-operative project expenditure could be capitalised or amortised.
Analysis: Professional and consultancy expenses qualifying under section 35D may be considered for amortisation in the year of business set-up. Other expenditure debited to the profit and loss account and directly or indirectly related to constructed or acquired capital assets is eligible for capitalisation in their written-down value.
Conclusion: Qualifying project-related expenditure may be capitalised, and eligible professional and consultancy expenses may be considered for amortisation after set-up. Partly in favour of the assessee.
Issue (iv): Whether interest on fixed deposits was business income or a capital receipt adjustable against project cost.
Analysis: Temporarily unutilised equity and loan funds were deposited to earn interest. The deposits lacked an inextricable nexus with setting up the project merely because the funds were intended for project use. The interest was revenue income assessable under section 56.
Conclusion: The interest was taxable as income from other sources and could not be adjusted against project cost. Against the assessee.
Issue (v): Whether greater deductions were allowable against the interest income.
Analysis: Section 57(iii) permits deduction of non-capital expenditure laid out wholly and exclusively to earn the income. The assessee did not substantiate or segregate the additional expenses claimed. The estimates already allowed were left undisturbed.
Conclusion: No further deduction against the interest income was allowable. Against the assessee.
Issue (vi): Whether revision of the assessments and estimation of allowable expenses were valid.
Analysis: The assessments allowed expenses against interest income without inquiry into their connection with that income. This lack of inquiry made the assessments erroneous and prejudicial to Revenue, rather than reflecting a permissible difference of opinion. The estimates had a rational basis when the assessee could not supply a breakdown of the relevant expenses.
Conclusion: The revisions under section 263 and the estimates of allowable expenditure were valid. Against the assessee.
Final Conclusion: The exemption and current-year business deductions were unavailable, and deposit interest remained taxable, while qualifying project-linked expenditure could be capitalised and eligible expenses considered for later amortisation.
Ratio Decidendi: A business is set up when its operational apparatus is ready to commence its revenue-generating activity; preparatory activities alone do not suffice.