Tribunal: Appeal Partially Allowed for Expenditure on Borrowed Funds

The Tribunal partially allowed the appeal, directing the computation and allowance of expenditure proportionate to borrowed funds while taxing interest income earned from non-interest bearing funds. The judgment emphasized the distinction between pre-commencement expenditure and revenue expenditure, highlighting the importance of readiness to undertake commercial transactions in determining the setting up of a business.

---

---

Issues:
1. Disallowance of expenditure treated as pre-commencement expenditure.
2. Whether the business of the assessee was set-up during the relevant assessment year.

Issue 1: Disallowance of Expenditure:
The appeal was filed against the order confirming the disallowance of expenditure by the Ld. AO, treating it as pre-commencement expenditure. The Ld. CIT (A) upheld this decision. The expenditure in question amounted to &8377; 38,11,919/-. The Ld. AO based the disallowance on the grounds that the assessee had not commenced its business during the relevant assessment year. The Ld. AR argued that the expenditure was related to interest and financial expenses attributable to a loan obtained from the bank, and that the business had indeed commenced as staff were recruited, loans were obtained, and administrative expenses were incurred. The Tribunal noted that the assessee had earned interest income but had not conducted any significant business activity other than obtaining a loan, purchasing land, and making certain investments. The Tribunal directed the Ld. AO to compute the expenditure proportionately attributable to borrowed funds and allow it as a deduction under the head "income from other sources."

Issue 2: Setting up of Business:
The primary contention revolved around whether the business of the assessee was set-up during the relevant assessment year. The Ld. DR argued that since the assessee had not purchased any assets except land, machinery, or obtained licenses for the power project, the business could not be considered set-up. The Tribunal referred to various judicial decisions to define the concept of "setting up" a business. It was established that for a business to be considered set-up, it must be ready to undertake commercial transactions. In this case, the Tribunal found that the business was not set-up as the assessee had not equipped itself to start power generation. However, the Tribunal allowed a proportionate deduction of expenditure attributable to borrowed funds while taxing the interest income earned from non-interest bearing funds under the head "income from other sources."

In conclusion, the Tribunal partially allowed the appeal, directing the computation and allowance of expenditure proportionate to borrowed funds while taxing interest income earned from non-interest bearing funds. The judgment emphasized the distinction between pre-commencement expenditure and revenue expenditure, highlighting the importance of readiness to undertake commercial transactions in determining the setting up of a business.

---