TaxTMI 
TaxTMI 
TaxTMI 
2009 (11) TMI 919
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....y take up ITA No.3253/Ahd/2008 which is an appeal filed by the assessee. The first ground which is against the reopening of the assessment under Section 147 of the Income Tax Act is dismissed as not pressed. 5. The second ground, together with its sub-grounds, reads as under: "2. The Ld.CIT(A) has erred in law and on facts in confirming the action of the AO in adding a sum of ₹ 93,47,688/- being the interest income earned by the appellant. 2.1 Alternatively and without prejudice, ld.CIT(A) has erred in not appreciating that this interest income would go to reduce the cost of the assets/capital work-in-progress as the appellant has not commenced its business activities. 2.2 In any case, the appellant has incurred huge interest expenditure of ₹ 123.74 crores and therefore this interest income of ₹ 93,47,688/- would be netted off against such interest expenditure." The brief facts relating to these grounds may be noticed. It was noticed by the Assessing Officer that the assessee had not included the interest of ₹ 93,47,688/- in the return. He therefore called upon the assessee to furnish the details of the same and also explain why it should not be a....
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....erest of ₹ 84,64,578/- was received on short term deposits kept out of temporarily unutilised borrowed funds during the construction stage of the project and was also reduced from "the capital work in progress account". It was also contended that the cases cited by the AO were distinguishable on facts in as much as in those cases the assessees had deposited the surplus funds whereas in the present assessee's case the deposits were made out of borrowed amounts which were not immediately required by the assessee. In the alternative it was contended that the assessee was entitled to the deduction of the interest of ₹ 123.74 crores paid, from the interest received, under Section 57(iii) of the Act. Another contention put forth before the CIT(A) was that the AO was not right in disallowing the interest payment on the ground that the commercial production had not commenced. It was in this connection pointed out that the assessee was an existing company engaged in the business of manufacture and sale of phosphor bronze wire cloth, stainless steel wire cloth, dandi roles, brackets and auxiliaries, water shovers, EDM wires and dryers screens, brass/bronze wires, copper and coppe....
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....to reduce the cost of the assets/ capital work in progress since no business had been commenced in the relevant previous year. In the alternative it is contended that in any case the interest of ₹ 123.74 crores paid by the assessee should be adjusted or netted against the interest income. The learned counsel for the assessee did not contend before us that the interest income of ₹ 93,47,688/- cannot be taxed under the head "income from other sources", but the only contention advanced before us is that the interest expenditure should be adjusted against the interest receipts by virtue of section 57(iii) of the Act. He clarified that the assessee's contention is not that the entire interest expenditure of ₹ 123.74 crores should be allowed as a deduction and that the assessee would be properly entitled only to the allowance of interest incurred to earn the interest income of ₹ 93,47,688/-. To this extent it was submitted that ground no.2.2 stands modified. In support of the claim for allowance of interest expenditure incurred by the assessee to earn the interest income of ₹ 93,47,688/-, the learned counsel for the assessee relied on the order of the Ahmeda....
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....g the pre-commencement period cannot be assessed as income and held that there was no material to show that the interest earned was inextricably linked to the setting up of the plant. Accordingly, the contention was rejected and the assessment of the interest as income from other sources was upheld. The alternative contention that the expenditure incurred for earning the interest should be allowed as a deduction under Section 57(iii) was also considered by the Tribunal in para-13 to 15. The Tribunal noted that the interest income in the case before them was received on the deployment of the entire funds raised by issue of partly convertible debentures and therefore "….. the expenditure incurred in relation to the issue of said debentures and interest paid thereon were expended for the purpose of earning of interest income of ₹ 1,08,40,072/- during the year under consideration and, therefore, the same has to be deducted for computing the income assessable under the head "income from other sources". In the light of this order of a co-ordinate bench, which is binding on us, we have to hold in the present case that the interest paid by the assessee to earn the interest inc....
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....lty proceedings under Section 271(1)(c) and section 271B of the Act. 14. In the result, the appeal is partly allowed. 15. We now take up the appeal of the department in ITA No.3545/Ahd/2008. There are two grounds but the issue involved is the same. The grounds are to the effect that the CIT(A) erred in directing the AO to allow capitalisation of the interest expenditure of ₹ 123.74 crores. It is also contended that in directing the AO to capitalize the interest, he failed to appreciate that the interest was not actually paid by the assessee and the business had not commenced. The department wants the order of the Assessing Officer on the above points to be restored. 16. In support of the appeal, it was contended by the learned CIT-DR that the assessment was completed under section 144 of the Act because the assessee did not furnish the relevant details. Our attention in this connection was drawn to page-7 of the assessment order where in the second subparagraph of para-8 the AO has clearly stated that the assessee has not furnished the details of interest actually paid nor was the tax audit report filed. The AO has also observed that the profit and loss account was not dra....
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....ed above to the effect that why the claim for capitalization of interest should not be disallowed. He therefore invoked section 43B and also referred to the fact that the assessee did not commence the production and disallowed the claim of capitalization. While dealing with the ground no.2 in the assessee's appeal, we have held that out of the interest claim of ₹ 123.74 crores, the interest relating to the earning of the interest income of ₹ 93,47,688/- should be allowed as a deduction under section 57(iii). We had also directed the AO to quantify such interest. In dealing with the present ground, we therefore make it clear at the outset that the entire interest claim of ₹ 123.74 crores cannot be capitalized and only that part, if any, which remains after the AO gives effect to our decision in respect of ground no.2 in the assessee's appeal can be considered for capitalization. 19. With this clarification, we proceed to discuss the present ground. The capitalization of the interest paid and inclusion of the same in the capital workPage in-progress account would mean that the interest would become part of the cost of the project and the assets thereof on which the....
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....this rider, the decision of the CIT(A) is affirmed and the appeal of the department is dismissed. 20. Assessment Year 2003-2004: ITA No.3254/Ahd/2008 is an appeal filed by the assessee and ITA No.3546/Ahd/2008 is an appeal filed by the department. 21. We first take up the assessee's appeal. The first ground in this appeal challenges the jurisdiction of the Assessing Officer to reopen the assessment under Section 147. The ground was not pressed at the time of hearing and is accordingly dismissed. Similarly, ground nos.3 and 4 which are respectively directed against the addition of ₹ 26,250/- as dividend earned by the assessee and ₹ 4,50,000/- under the head "income from house property" are also dismissed as not pressed. 22. Ground No.6 relates to the treatment of a sum of ₹ 18,29,618/- which was received by the assessee on sale of scrap generated during the construction process of the project. The assessee reduced the capital works-in-progress by the aforesaid amount and did not offer the same to tax on the ground that the production had not commenced and the proper treatment to be given to such a receipt was to reduce the capital works-in-progress by the said ....
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....es Ltd. more interest than what was stated to be due from that company and therefore there was no question of any interest accruing to the assessee. In Ground no.5.2 the contention is that in any event the debt from Shalimar was itself doubtful of recovery and therefore the interest did not accrue. Finally in ground no.5.3 it is contended that in any event the interest said to have accrued to the assessee would go to reduce the cost of the asset/capital works-in-progress and cannot be brought to tax as income since the assessee has not commenced its business activities. 25. It is noticed from para-7 to 7.4 of the order of the CIT(A) that he has decided the grounds against the assessee following his decision on the same point for the assessment year 2004-2005. The appeals for the assessment year 2004-2005 are also before us. Elaborate arguments were advanced by both the sides when the appeal for that year was heard. It was agreed by both the parties that substantially the same arguments would be relevant for the present year also in respect of this ground. Therefore, we would refer to the arguments of both the sides taken before us in the appeals for the assessment year 2004- 2005.....
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....assets to the demerged undertaking and any other costs, charges, levied, duties or expenses in relation to or in connection with or incidental to the scheme or the implementation thereof as agreed to by the Lead Institution to the extent of ₹ 8 crores, shall be borne and paid for by SWIL and any sum over and above ₹ 8 crores shall be borne and paid by the Resulting Company." In their order dated 7-5-2003 in the aforesaid company applications/petitions, the Calcutta High Court permitted the parties to modify the clause 27 of the scheme of arrangement by a schedule, the schedule itself being as under: " Schedule above referred to "Stamp Duty, premium payable to Maharashtra Industrial Development Corporate (MIDC), mutation cost relating to transfer of assets of the demerged undertakings to the Resulting Company and all other costs, charges, duties, levies or expenses in relation to or in connection with or incidental to the Scheme or the implementation thereof shall be born and paid by the Resulting Company alone, SWIL shall not be liable for the said expenses or any part thereof. SWIL shall however pay a sum of ₹ 8 crores to the Resulting Company in discharge of....
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.... In the course of the assessment proceedings for the assessment year 2004-2005 the assessee was asked to submit the ledger accounts of Shalimar. It appears that the assessee submitted the ledger account only for the financial year 2002-2003 and did not submit the account for the year ended 31-3-2004. In the written submissions filed by the AO the assessee referred to the Resolution passed in the Board meeting to waive the interest payable by Shalimar and submitted that in view of the resolution, no interest was charged from Shalimar for the year ended 31- 3-2004. The Assessing Officer was not satisfied with the correctness of the assessee's stand. According to him Shalimar was due to pay interest at the rate of 12% on the amount of ₹ 5.39 crores due to the assessee as per the agreement dated 14-1-2002 and there was no provision in the agreement for waiver. Further the assessee was following the mercantile system of accounting and therefore the interest due is assessable to tax. There is no mention of the waiver in the directors' report annexed to the annual accounts for the year ended 31-3-2004 which was submitted to the shareholders in August, 2004. Had there been a resoluti....
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....bt of ₹ 5.39 crores due from Shalimar to the assessee is wiped out right from the inception and therefore no interest would be legally due on the debt. On the other hand, the learned CIT-DR besides strongly relying on the order passed by the CIT(A) and the reasons given by him in para-9.2 of his order for the assessment year 2004-2005, strongly contended that the resolution waiving the interest was just an afterthought because the annual report on the accounts for the year ended 31-3-2004 presented in August, 2004 did not mention anything about the waiver. He thus contended that the interest was rightly assessed to tax. 32. We have carefully considered the facts and the rival contentions. In our opinion, the contention of the learned counsel for the assessee that after the order of the Calcutta High Court on 7-5-2003, the entire debt of ₹ 5.39 crores due from Shalimar to the assessee was wiped out from the inception and therefore no interest could be said to have accrued to the assessee on and from 1-4-2000 seems to be well founded. A perusal of the above order of the High Court (pages 225 and 226 of the paper book no.2 filed for the assessment year 2005-2006, in which....
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....e assessment year 2004-2005. It is true that in the directors' report dated 14-8-2004 (pages 34 and 35 of the paper book) there is no reference to the resolution but we are of the view that merely for this reason it cannot be said that the resolution was an afterthought. The resolution was filed before the AO under cover of its letter dated 7-12-2006 and if the AO wanted to verify the veracity of the same he could have cross-checked with the office of the Registrar of Companies or could have directed the assessee to produce the minute book or the register of resolutions maintained by the assessee as a contemporaneous record. There is no material to justify the conclusion that the board resolution is an afterthought. 35. It may be recalled that the learned counsel for the assessee had also contested the addition of interest on the basis of the real income theory. In our humble understanding, this is another facet of the effect of the order of the Calcutta High Court dated 7-5-2003 under which a schedule was substituted in the place of clause 27 of the original scheme. Even if we are wrong in our view that the debt of ₹ 5.39 crores due from Shalimar does get wiped out by reaso....
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.... decisions for that year we uphold the decisions of the CIT(A) for this year also and dismiss the grounds. 38. Ground Nos.3 and 4 are directed against the deletion of the addition of ₹ 26.95 crores made by the AO on account of interest income. It is stated in the ground that the interest accrued to the assessee as per section 5 of the Income Tax Act. From the annual report the AO noticed that interest of ₹ 26,95,48,704/- was reduced or waived by the financial institutions in respect of the credit facilities granted by them to the assessee. The AO proposed to treat the interest waived as the assessee's income. The assessee strongly objected to the same. It was pointed out that the interest expenses were not claimed as a deduction in the earlier years, but were debited to the preoperative expenses and added to the cost of the assets or capital works-in-progress account and therefore section 41(1) of the Act had no application. It was further pointed out that the interest waived was also accounted for under the same account. The AO was not convinced by the assessee's explanation and referring to section 5 of the Act, held that since the assessee had the right to receive t....
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....e income falls to be computed. A mere saving of what is payable by the assessee cannot be considered as income except under section 41(1) of the Act which comes into play only when the business income of the assessee falls to be computed. Respectfully following the judgment of the High Court cited above, we affirm the decision of the CIT(A) and dismiss the grounds filed by the revenue. 41. In the result, the appeal of the department is dismissed. 42. Assessment year 2004-2005. In this year the appeal is only by the assessee and there is no appeal filed by the department. The assessee's appeal is in ITA No.3741/Ahd/2007. 43. The first ground is directed against the assessment of the interest of ₹ 67,73,433/- as accrued interest income under the head "income from other sources". This ground has been discussed by us while disposing of ground no.5 of the assessee's appeal for the assessment year 2003-2004 in ITA No.3254/Ahd/2008. For the reasons stated therein we delete the addition and allow the ground. 44. In the course of the hearing before us, the assessee filed the following additional grounds. "1. Alternatively and without prejudice, the CIT(A) has erred in not appre....
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....erest income would go to reduce the cost of the assets or the capital works in progress. Similarly the second additional ground does not arise for consideration, since we have held that the interest income cannot be assessed at all and therefore there is no question of allowing any interest expenditure against the same. The additional grounds are accordingly dismissed as academic. 46. The second ground is against the addition of bank interest of ₹ 27,22,358/- under the head "income from other sources". The assessee reduced the interest from the preoperative accounts relating to the copper projects. The amounts borrowed by the assessee from financial institutions and banks for the project were deposited in the bank as fixed deposits. The claim of the assessee is that the interest cannot be separately assessed to tax and alternatively it is claimed that the interest expenditure referable to the deposits made out of borrowed money should be allowed as a deduction under Section 57(iii). This ground is identical to the ground no.2 taken by the assessee in its appeal for the assessment year 2001-2002. In that year the assessee did not object to the assessment of the interest incom....
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....ply to the present year. Thus, the ground is partly allowed. 51. Ground No.2 which is against the assessment of the dividend income of ₹ 39,375/- and ground no.3 which is against the assessment of ₹ 1,68,000/- under the head "income from house property" are dismissed as not pressed. 52. Ground No.4 and its sub-grounds are directed against the assessment of ₹ 67,73,433/- as accrued interest income under the head "income from other sources". These grounds are identical with ground no.5 taken by the assessee in its appeal for the assessment year 2003-2004 in ITA No.3254/Ahd/2008. Since the facts and the controversy are the same, in tune with our decision for the assessment year 2003-2004, we delete the interest income and allow the grounds. 53. Ground No.5 and its sub-grounds are peculiar to this appeal. In these grounds the assessee has challenged the addition of ₹ 3,08,02,701/- as income from tolling activities. It is contended in the first alternative that if the addition is held to be properly made the assessee should be granted depreciation allowance against the aforesaid income and in the second alternative it is claimed that the tolling income cannot ....
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....ticorin Alkalies (supra) and CIT Vs. Corramandel Cements Ltd. (supra), the AO held that the tolling income should be assessed separately under the head "income from other sources" and cannot be reduced from the capitalized preoperative expenses. 55. So far as the expenses for earning the tolling income were concerned the assessee appears to have submitted several workings on different occasions in the course of the assessment proceedings. The AO noted that in all the workings the assessee has claimed a loss which could not be accepted. He also refused to accept the percentage basis of allocating the direct expenses. According to him, the income was generated out of job work which was different from the manufacturing activity. Moreover, the tolling income was earned only from September, 2004 to March, 2005 and therefore the assessee cannot allocate the direct expenses for the entire year against the tolling income. The AO thus rejected the calculations submitted by the assessee, the main objection being that the assessee did not furnish the details of the direct expenses to earn the tolling income, with supporting evidence. In this view of the matter, he determined the net tolling ....
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....supra), the CIT(A) held that during the pre-commencement stage only the expenses relating to pre-production activity can be capitalized and tolling income has to be assessed under the head income from other sources. 58. With regard to the question of expenses to be allowed against the tolling income, the CIT(A) held that the different versions submitted by the assessee were based on different assumptions and in the absence of clear details of the expenses the next best alternative was to estimate the profit margin from comparable cases. Having held so, he noted that for the assessment year 2004- 2005, Hindustan Copper Ltd. has shown net profit of 9.3% from its manufacturing activities and 20% from job work activities. Keeping this in view and taking note of the fact that the assessee had not stabilised itself in the business, the CIT(A) held that it would be fair to estimate the net profit from the tolling activity at 15% of the tolling receipts. Thus, on tolling receipts of ₹ 20,53,51,346/-, the net profit was estimated at 15% i.e. ₹ 3,08,02,701/-. The addition was sustained to this extent, as against ₹ 18,55,54,215/- made by the AO. 59. The main criticism leve....
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....for consideration in the assessee's appeal since the issue was common. In support of these grounds in the appeal of the department he contended that the tolling activity was done by the assessee as a job work and it did not relate to any trial run and thus cannot be considered as business income. He further contended that the CIT(A), having held that the assessee did not furnish precise calculations regarding the tolling activity, ought not to have reduced the income by applying a percentage basis to the gross tolling receipts. 61. In his reply to the arguments of the learned CIT-DR, covering both the appeals, the learned counsel for the assessee submitted that in any case and without prejudice, the reduction of the tolling income as allowed by the CIT(A) was fully justified. With reference to the argument of the learned CIT-DR that the assessee did not claim depreciation specifically, it was submitted by the learned counsel for the assessee that in the details of direct expenses to earn the tolling income submitted as annexure-I to the assessee's letter dated 30-11- 2007 (pages 160-161 of paper book no.1 for the A.Y.2005-2006), there was a specific claim of depreciation to the ex....
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.... pleaded that the job work was directly related to the setting up of the plant of the company for the purpose of trial run. It was accordingly claimed by the assessee that the job work or tolling receipts was rightly reduced by it from the preoperative expenses or capital works-in-progress account. Reliance was placed by the assessee on the judgment of the Supreme Court in CIT Vs. Bokaro Steels Ld., (1999) 236 ITR 315. In our considered opinion this judgment is applicable to the facts of the present case. In that case, the company was set up to produce steel. In the course of construction of the steel plant and before its completion, the assessee advanced monies to the contractors and also received rent from quarters let out to the employees of the contractors. The assessee also received hire charges on plant and machinery let out to the contractors and royalty on stones removed from the land owned by it. The assessee claimed that these items of receipts were in the nature of capital receipts which could be set off against the capital expenditure incurred by the assessee in the relevant assessment year. The Tribunal and the High Court upheld the assessee's claim and the matter reac....
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....ghtly reduced by the assessee from the capital works-in-progress account. For the sake of completeness we may refer to the copy of the 42nd Annual Report for the year ended 31-3-2005, placed at pages 1 to 42 of paper book no.1 filed by the assessee for this year. At page 33, in para-2 under schedule-H which explains the significant accounting policies and notes to the accounts, it has been stated that "as the commercial production has not started upto the balance sheet date and the expenditure incurred is either debited to pre-operative or deferred revenue expenditure, no profit and loss account is prepared". Para-7 at page 36 of the paper book gives the details of the capital works-in-progress. Item-(e) of this paragraph at page 37 of the paper book gives the details of pre-operative and trial run expenses. After bringing forward the balance from the earlier year, all such expenses are listed. Thereafter, all receipts which go to reduce the pre-operative and trial run expenses have been listed. Item-28 of this list is "tolling income-trial run" amounting to ₹ 2083.53 lakhs". Note no.11, which is at page 38 of the paper book reads as under: "11.(a) The Company is implementi....
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....s to be reduced from the capital workin- progress accounts and is not assessable separately. These grounds in the department's appeal are accordingly dismissed as infructuous. 65. Ground no.6 in the assessee's appeal is general and requires no decision. Ground no.7 is against the charging of interest under Sections 234A to 234D and they are consequential. Ground No.8 is directed against the initiation of penalty proceedings under Section 271(1)(c). No appeal is provided against mere initiation of penalty proceedings. The ground is dismissed. 66. In the result, the appeal of the assessee is partly allowed. 67. We now take up the department's appeal in ITA No.3547/Ahd/2008. Ground Nos.3 and 4 in this appeal are directed against the reduction or relief given by the CIT(A) in respect of the addition made for tolling income by the Assessing Officer. These grounds have already been considered by us while disposing of the assessee's appeal in ITA No.3255/Ahd/2008 while considering the assessee's ground no.5 in that appeal. They are dismissed as academic or infructuous. 68. That leaves us with only the first two grounds which are directed against the decision of the CIT(A) to allow cap....
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....). The directions by Assessing Officer that these expenses may not be capitalized are thus misplaced and not correct. Thus the interest expenses is not an allowable expenditure for the year under consideration but the AO was not justified in not allowing the capitalization of such expenses. Ground No.5 is dismissed and ground no.6 is allowed." Taking objection to the aforesaid decision of the CIT(A), it is contended before us by the learned CIT-DR that the CIT(A) had no jurisdiction to decide the issue of capitalization of the interest when there was no decision by the AO on the point and there was no specific ground taken by the assessee before the CIT(A). It is submitted that all that the AO stated was that the assessee was not entitled to the deduction of the interest and that he did not further hold that even capitalization of the same cannot be allowed. It is contended that the decision of the CIT(A) is based on erroneous assumptions and was uncalled for and should be reversed. It is pointed out that in his order for the assessment year 2004-2005, the CIT(A) rejected the claim for capitalization of the interest against which the assessee did not file any appeal to the Tribun....