TaxTMI 
TaxTMI 
2009 (4) TMI 806
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....duced in para 4 of the assessment order, pointed out that in view of the Madhya Pradesh Government and Madhya Pradesh Electricity Board failure to honour the Power Purchase Agreement entered into in 1997 particularly with respect to security package, the power project at Pithampur (Indore) got frustrated. It was further pointed out that the financial position of Madhya Pradesh Electricity Board had deteriorated to an extent that it had failed to give Escrow Security Package even to independent power producers (IPPS) to whom, it had agreed to provide, which was even confirmed by the Hon'ble Supreme Court. Thus, the implementation of project was not within the control of the company and, therefore, it had to abandon the project. Accordingly, the pre-operative expenses of Rs. 2,43,96,772/- incurred on the project had been written off for the A.Y. 2002-03 as revenue expenditure. It was pointed out that the total expenditure of Rs. 2,43,96,772/-comprised of expenses of administrative nature, such as traveling, professional & legal expenses, salaries and allowances, etc, as apparent from the details of such expenditure. Accordingly, the expenses had been re-classified as revenue expe....
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....s no previous year under the head business income. Accordingly, there was no question of computing business income/loss and, therefore, there was no question of allowing any expenses. iv) Since the expenditures incurred in earlier years were capitalized, the loss if any, on frustration of project could only be treated as capital loss and could not be allowed as deduction. 4. At the time of hearing, Learned Counsel for the assessee narrated the facts as noted earlier and pointed out that a Power Purchase Agreement (PPA) had been executed on 18th November, 1997 with Madhya Pradesh Electricity Board (MPEB) in terms of the Government of India, Privatisation of Power Project Scheme, 1991 for implementing the Diesel based power project at Pithampur, Indore, Madhya Pradesh. He submitted that one of the modes of payment by MPEB for supply of power by the company was that the payments to be made through Escrow Bank Account. In the said Escrow Account, the amounts to be collected by MPEB from its customers for supply of power were to be credited. MPEB had signed power purchase agreement with a number of independent power producers (IPPS) for setting up of Speed Power Projects in ....
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....ovide which was even confirmed by the Hon'ble Supreme Court. Hence, the implementation of the project was not within the control of the company. The assessee company, therefore, left with no other option but to abandon the project. 7. Learned Counsel for the assessee submitted that under such circumstances, the expenses which had been treated as preoperative had to be reclassified as revenue expenditure in the A.Y. 2002-03. Learned Counsel submitted that the first issue is whether the business of the assessee was set up or commenced during the period under consideration. He referred to the decision of the Hon'ble Gujarat High Court in the case of CIT v. Saurashtra Cement & Chemical Industries Ltd. 91 ITR 170 (Guj), wherein, it has been held that the business is nothing more than a continuous course of activities and all the activities which go to make up the business need not be started simultaneously in order that the business may commence. He further relied on the decision of the Hon'ble A.P. High Court in the case of CIT v. Sponge Iron India Ltd. 201 ITR 770 (AP), wherein, it was held that there is a distinction between setting up of business and commencement of b....
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....e business must be said to have commenced. 8. Learned Counsel submitted that in the present case, the assessee company had already set up its business long before the assessment years under consideration and had carried on and completed all the activities and had done the business for the following reasons: i) The company got incorporated in 1995. ii) The assessee raised capital and deposited Rs. 9,33,29,600/- on 11.8.1998 with MPEB as a security deposit pursuant to Madhya Pradesh Electric Board's letter dated 24.3.1998. iii) The assessee submitted its offer to Madhya Pradesh Electric Board. iv) All the formalities for setting up business were completed. Tender was submitted. The profits were to be shown on completed project basis. Thus, the business activity for the commencement of the business had practically started since the very date of incorporation and further activities of depositing security amount of Rs. 9,33,29,600/- with the Madhya Pradesh Electricity Board. v) During the year project had to be abandoned and on date of abandonment, the profit and loss account was worked out which resulted into the claim of expenses of ....
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..... 1998-99 onwards. Learned Counsel submitted that merely because the assessee had classified the expenditure as preoperative expenses could not be of consequence keeping in view the supervening circumstances of abandonment of project in the assessment year under consideration. 9. Learned D.R. relied on the order of the CIT(A) and submitted that since assessee had to abandon the project before its being set up the expenses were rightly classified as preoperative expenses and hence, capital in nature. Therefore, they could not be reclassified as business expenses in the year under consideration. 10. We have considered the rival submissions and perused the record of the case. The controversy in the present case is two folds. Firstly, whether the business of the assessee could be said to have been set up on 18.11.1997, which was the date of agreement with MPEB. Secondly, if the answer to first issue is in affirmative, whether the expenses once classified as capital expenditure in earlier years, could be treated as business expenditure in the year of abandonment of project. As regards the first issue, it is well settled law that whether the business is set up or not, depends on fa....
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....tter No. 07/11/IPC/1006 dt. 24th July 1998 as mentioned in the written submissions filed by assessee placed on record. The assessee had undertaken this venture in pursuance to liberalized government policy which could not be implemented on account of change in policy decision itself and, therefore, it could not be said that the assessee's business had been set up because setting up implies that assessee is only few steps away from formal commencement of business. In this regard, we may refer to some decisions relied upon by Learned Counsels for the assessee: 11. In the case of CIT v. Saurashtra Cement and Chemical Industries Ltd. (supra), the facts were that the assessee company was formed in 1956 for the manufacture and sale of cement. As part of its business, the assessee obtained a mining lease for quarrying limestone and started the mining operations in 1958. It claimed the expenditure incurred for the purpose of extracting limestone as also depreciation and development rebate for the machinery installed for that purpose for the assessment year 1960-61 and 1961-62. It was held that the activities which constituted the business of the assessee were divisible into three ca....
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....oms, etc. In pursuance to this object, the assessee acquired a bungalow on 28.3.1964 and thereafter carried out work for residential purposes, etc and claimed that it was in a position to offer services to licenses on and from October, 1, 1964. Accordingly, it claimed the deduction in computing its profits of expenditure incurred between October 1, 1964 and March 31, 1965. The Income tax Authorities and Tribunal took the view that the assessee could not be said to have been ready to commence business prior to May 1, 1965, the date on which it gave on leave and licence basis a part of the building The Hon'ble High Court reversed the decision of the Tribunal. Under these facts, the Hon'ble Supreme Court affirmed the findings of the Hon'ble High Court that business commenced from 1 October, 1964. This case is clearly distinguishable on facts. 15. The view taken by us is fortified by the decision of Hon'ble Gujarat High Court in the case of CIT v. Western India Seafood (P) Ltd. (supra). In this case the assessee was a private Ltd. Co. which carried on the business of processing of marine products. The A.Y. was 1972-73. In the return filed by the assessee, it, inter-a....
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....ence, has taken the view that the assessee's business could be said to have been established and set up on and after August 15, 1970, and, therefore, whatever expenses the assessee incurred could be said to have been incurred towards the said business and, therefore, can be said to be rightly deducted under Section 37 of the Act. Hon'ble Gujarat High Court upheld the findings of Tribunal observing at page 784 as under: In the light of the aforesaid settled legal position, therefore, it is easy to visualize that for the setting up of the business of processing marine products, the assessee, during the assessment year in question, had to make all preparations and had also to provide on the spot the necessary infrastructure. Even conceding that entering into advance contracts with fishermen for collection of fish during the monsoon season may not be taken as a first step towards the setting up of business, at least from August 15, 1970, when the assessee acquired a godown where the processing of marine products could start when fish became available after the monsoon, it can be said that that was the starting point of the setting up of the business of processing ma....
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....ome from other sources as against the assessee's claim of treating the same as income from business and also disallowed the assessee's claim of set off of business loss observing that during the A.Y. 2002-03, assessment was completed Under Section 143(3) computing the total income of Rs. 39,55,741/- as against returned loss of Rs. 2,62,45,564/-. Since there was no assessed loss of A.Y. 2002-03, the set off of business loss of A.Y. 2002-03 could not be allowed. Out of the assessee's claim of expenditure of Rs. 3,98,314/-, the Assessing Officer allowed Rs. 85,948/- on account of bank charges treating the same as being incurred for earning of interest income and disallowed the balance. 20. Learned CIT(A) upheld the Assessing Officer's action treating the interest income under the head "income from other sources", inter alia, observing that since no business had commenced as such, the interest earned on deposit with MPEB could not be held to be the business income. He also referred to the decision of Learned CIT(A) for A.Y. 2002-03 in assessee's own case and pointed out that expenses were treated as capital in nature on the basis of the reasoning that the expendi....
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....lhi High Court in the case of CIT v. Indian Drugs and Pharmaceuticals Ltd. 141 ITR 134 (Del) following the decision in the case of Challapalli Sugars (supra) and later on approved by the Hon'ble Supreme Court in the case of Bokaro Steel Ltd. 236 ITR 315 (SC), wherein, it was held that if the assessee received amount during the construction period which are inextricably linked with the process of setting up its plant and machinery such receipts will go to reduce the cost of its assets. 24. Learned Counsel submitted that the department's reliance on the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. 227 ITR 172 (SC) was not correct in the present set of facts because the Hon'ble Supreme Court had held that receipts on interest and misc. receipts of pre-commencement period were assessable as income from other sources on the ground that the assessee was free to use the funds in any manner like. But in the present case, the assessee gave security deposit for the purpose of business and not for earning the interest. He submitted that the facts in the present case are similar to the Bokaro Steel (supra). He further referred to the decision of the Hon'ble Suprem....