Assessee Appeals Partly Allowed, Business Commencement, Income Classification, Deductions Disallowed

The appeals filed by the assessee were partly allowed. The business was considered to have commenced during the previous year. The classification of interest income as business income was remanded back to the AO for reevaluation. The issue of income from mutual funds was decided in favor of the revenue. Deduction of business expenses and expenses related to interest/other income were restored to the AO for verification. Disallowance under Section 14A read with Rule 8D was deleted due to the absence of exempt income. The claim of deduction of interest expenditure under Section 57(iii) was allowed. The issue of interest capitalized to work in progress was remanded to the AO for further examination.

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Issues Involved:
1. Whether the business of the assessee had commenced during the previous year under consideration.
2. Whether the interest income should be assessed under the head 'income from other sources' or 'business income'.
3. Whether the income from mutual funds should be assessed under the head 'Short Term Capital Gains'.
4. Deduction of expenses debited to the Profit & Loss Account incurred wholly and exclusively for the business.
5. Deduction of expenses incurred in relation to earning of Interest Income/Other income.
6. Allowance of interest expenditure claimed under section 57(iii) of the Income Tax Act, 1961.
7. Disallowance under section 14A read with rule 8D.
8. Confirmation of disallowance of Rs. 27,32,67,125/- out of interest capitalized to work in progress (WIP).

Issue-wise Detailed Analysis:

Issue No. 1: Commencement of Business
The assessee challenged the finding that it had not started the business during the previous year. The Tribunal referred to its previous decision for A.Y. 2003-04, where it was held that the business was set up as the company was actively engaged in development activities, had obtained necessary approvals, and commenced various operations. Consequently, it was held that the business commenced in A.Y. 2003-04, and thus, for the current year, the business is considered commenced. This issue was decided in favor of the assessee.

Issue No. 2: Interest Income Classification
The assessee contended that the gross interest income should be treated as business income. The Tribunal referred to its earlier decision where it was directed that the purpose of the deposit, utilization of funds, and the nexus between interest earned and interest paid should be examined afresh by the AO. The matter was remanded back to the AO to decide the controversy afresh following the guidelines provided. The finding of the CIT(A) was set aside.

Issue No. 3: Income from Mutual Funds
This issue was not pressed by the assessee’s representative and thus was decided in favor of the revenue against the assessee.

Issue No. 4: Deduction of Business Expenses
The assessee challenged the disallowance of expenses debited to the profit & loss account. Since the business was considered commenced in A.Y. 2003-04, the deduction of expenses incurred wholly and exclusively for the business should be allowed. The AO was directed to verify the facts and allow the claim in accordance with the law. This issue was restored to the AO.

Issue No. 5: Deduction of Expenses Related to Interest/Other Income
Similar to Issue No. 4, the assessee challenged the disallowance of expenses related to earning of interest income/other income. The AO was directed to verify the facts and allow the claim in accordance with the law. This issue was restored to the AO.

Issue No. 7: Disallowance under Section 14A read with Rule 8D
The Tribunal noted that the assessee did not earn any exempt income during the year under consideration. Citing the jurisdictional High Court decision in PCIT v/s Rivian International Pvt. Ltd., it was held that no disallowance under section 14A r/w rule 8D can be made in the absence of exempt income. The disallowance made by the AO and sustained by the CIT(A) was deleted.

Revised Ground No. 5: Deduction of Expenses
This issue was similar to Issue No. 4 and was restored to the AO to allow the claim in accordance with the law after verification of facts.

Revised Ground No. 6: Allowance of Interest Expenditure under Section 57(iii)
The assessee’s alternative claim for deduction under section 57(iii) of the Act was discussed. The Tribunal held that since the interest earned on ICDs is to be treated as business income, the interest expenditure claimed by the assessee has to be allowed. The alternative claim under section 57(iii) became redundant, and the claim of deduction under section 57(iii) of the Act was allowable.

ITA No. 4853/M/2014:
The facts and issues in this appeal were similar to those in ITA No. 4852/M/2014. The findings and directions given in ITA No. 4852/M/2014 were applied mutatis mutandis to this appeal. Additionally, the issue of disallowance of Rs. 27,32,67,125/- out of interest capitalized to WIP was addressed. The Tribunal set aside the finding of the CIT(A) and restored the issue to the AO for de novo examination.

Issue No. 9 & 10:
These issues were general in nature and did not require adjudication.

Conclusion:
The appeals filed by the assessee were partly allowed. The order was pronounced in the open court on 01/03/2021.

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