AMRUTHA POWER PROJECTS PRIVATE LIMITED,HYDERABAD vs. INCOME TAX OFFICER, WARD-1(1), HYDERABAD

The assessee has raised several grounds in its appeal however, the crux of the issue is that the Ld. CIT (A) has erred in confirming the order of the Ld. AO who had disallowed the expenditure of Rs.38,11,919/- by treating it as pre- commencement expenditure and hence it has to be capitalised.

The brief facts of the case are that the assessee is a Private Limited Company engaged in the business of generation of power, filed its return of income, on 24/09/2015 admitting total income of Rs. 19,31,080/- and agricultural income of Rs. 70,270/- . Subsequently, the case of the assessee was taken up for scrutiny under CASS and thereafter assessment was completed U/s. 143(3) of the Act on 25/11/2016 wherein the Ld. AO disallowed the expenditure of Rs. 38,11,919/- on the ground that the assessee had not commenced its business and therefore the expenditure has to be capitalised, and also brought the interest earned by the assessee from bank deposit to tax under the head “income from other sources”. On appeal, the Ld. CIT (A) confirmed the order of the Ld. AO aggrieved by which the assessee is in appeal before us.

During the course of the scrutiny assessment proceedings, the Ld. AO observed that the assessee claimed the following expenditure as deduction: - (i) Miscellaneous Expenditure - Rs. 97,044/- (ii) Auditor’s remuneration Rs. 16,854/- (iii) Interest and financial expenses Rs.36,98,025/- Total Rs. 38,11,923/-

The Ld. AO further observed that the assessee had earned interest income of Rs. 57,42,999/- from the amount deposited in the bank. The Ld. AO further observed that the assessee had not earned any other income other than agricultural income of Rs. 2,20,410/- during the relevant assessment year. Therefore, he opined that the assessee had not commenced its business during the relevant assessment year. Hence, he was of the view that the expenditure incurred by the assessee has to be capitalised and accordingly disallowed the claim of expenditure Rs. 38,11,919/- (sic) Rs. 38,11,923/-. While doing so, he placed reliance on the decision of the Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers ltd (1997). On appeal, the Ld. CIT (A) confirmed the order of the Ld. AO by agreeing with his view. While doing so he relied on various decisions of the higher judiciary and the Tribunal cited in his order.

The Ld. AR vehemently argued before us stating that the amount of Rs. 36,98,025/- was incurred towards interest and financial expenses attributable to the loan obtained from the bank which was deposited in the bank and the assessee had earned interest from those bank deposit. The Ld. AR further argued stating that the assessee had commenced its business because staff were recruited, loan to the extent of Rs. five crores were obtained from bank, and had also incurred administrative and miscellaneous expenses. It was therefore pleaded that the expenditure incurred by the assessee may be treated as revenue expenditure and may not be capitalised. Hence, it was requested that the additions made by the Ld. AO by disallowing the expenditure incurred by the assessee, which was further confirmed by the Ld. CIT (A), may be deleted. The Ld. DR on the other hand vehemently argued in support of the orders of the Ld. Revenue Authorities by stating that the assessee has not commenced its business because the assessee has not purchased any asset except land. The Ld. DR further submitted that the assessee had not purchased any equipment or machinery relating to generation of power. It was also pointed out that the assessee had not even obtained licence to set up the power project. The Ld. DR further vehemently argued stating that for the above stated reasons it could not be said that the business of the assessee is set-up. Hence it was prayed for confirming the Orders of the Ld. Revenue Authorities.

We have heard the rival submissions and carefully perused the materials on record. The assessee has also submitted several paper books and the Ld. AR has also referred to various decisions which have been carefully perused by us. However, in the present case before us the factual aspect of the case is of prime importance. On perusing the financial statements submitted by the assessee for the relevant assessment year, we find that the assessee had earned interest income of Rs. 57,42,999/- and agricultural income of Rs. 2,20,410/-. Further, the aggregate expenditure incurred by the assessee for the relevant assessment year is only Rs. 38,11,923/- other than the expenditure incurred towards agricultural operations of Rs. 1,50,140/-. From the statement of affairs of the assessee company also it is clear that the assessee had not conducted any other activity other than obtaining loan from bank, purchase of land, investment in non-current assets, certain advances & deposits, and receipt towards share capital. Therefore, it is apparent that as pointed out by the Ld. DR the assessee has not installed any plant & machinery for generation of power. Thus, as per the provisions of Section 3 of the Act the business of the assessee company cannot be considered to be set- up. In the decision render by the Hon’ble Bombay High Court in the case Western Vegetable Products vs CIT reported in 26 ITR 151 it was held that the expression ‘setting up’ means, as defined in the Oxford English Dictionary, “to place one foot” or “to establish” and in contradistinction to “commence”. The distinction is that when a business is established and ready to commence business then it can be said that the business is set-up. But before it is ready to commence business it is not set-up. But there may be an interregnum, there may be an interval between which is set-up and a business which is commenced and all expenses incurred after the setting-up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deductions U/s. 37(1) of the Act”. Further, the Hon’ble Gujarat High Court in the case of Saurashtra Cements reported in 91 ITR 170 it was held that “the term business connotes a continuous course of activities. All the activities, which go to make up the business, need not be started simultaneously in order that the business may commence. The business would commence, when the activity which is first in point of time and which must necessarily precede all other activities is started”. It was further held that “in order to determine the question whether, the business of an assessee has commenced or not, it is necessary to consider, what constitutes the business of the assessee''. It was also laid down that “in determining this question arising under fiscal legislation, one must consider what are the activities which constitute such business without being misguided by the loose expressions of vague and indefinite import……….”. In the case of E-funds International DHC reported in 162 Taxmann.1 the Delhi Bench of the Tribunal held that “when the necessary infrastructure was set and the technical employees to render IT services were employed the business of the assessee can be said to be set up”. The Hon’ble Gujarat High Court in the case of Sarabhai Sons reported in 90 ITR 318 it was held that when the land is purchased and the machinery is installed, raw materials were purchased, it can be said that the business of the assessee is set up. The Hon’ble Gujarat High Court in the case of Western India Sea Products reported in 199 ITR 777 has held that “in Marine Processing Industry, acquisition of Godown in anticipation of arrival of fish can be said that the business of the assessee has been set up”. The Delhi Bench of the Tribunal in the case of Akzo Noble in vide order dated 8/8/2008 has held that “where the activities of the assessee company is trading in pains, incorporation of the company and appointment of the Directors whereby the assessee company is in a position to deliver goods it can be said that business of the assessee company is set up. Thus, it is apparent that various higher judiciary and Tribunal has held that the business is considered to be set-up when it is ready to undertake commercial transactions. In the case of the assessee before us, it is evident that the assessee company’s business is not set-up and ready for commercial transactions because the assessee company has not equipped itself to start generation of power during the relevant assessment year. However, coming to the issue before us, We find that the entire expense of Rs. 38,11,923/- is proportionately attributable towards the earning of interest income arising out of borrowed interest-bearing funds and the funds received from other sources such as capital contribution etc., which may or may not be interest-bearing funds aggregating to Rs. 57,42,999/- because there are no other activities conducted by the assessee company during the relevant assessment year for earning income or toward advancing any other objects of the assessee company. Further, when it comes to utilisation of mixed funds of the assessee it is up to the assessee to determine as to which funds are to be deployed for what purpose and what funds are to be treated as retained. That is because the Revenue cannot sit on the shoes of the assessee and decide as to how the assessee has to conduct its business. Hence, we hereby direct the Ld. AO to compute the aggregate expenditure proportionately attributable to borrowed funds as discussed herein above and allow the same as deduction while computing the income of the assessee under the head “income from other source” since the provisions of Section 57(iii) of the Act mandates for the grant of deduction with respect to any revenue expenditure incurred wholly and exclusively for the purpose of earning such income. As regards the interest income earned from the deposits made from non-interest bearing funds are concerned, the same shall be taxable in the hands of the assessee under the head “income from other source” after granting deduction for the proportionate expenditure incurred by the assessee towards Miscellaneous Expenditure & Auditor’s remuneration as discussed herein above. It is ordered accordingly.

In the result, the appeal of the assessee is partly allowed as indicated hereinabove.