ITO, Jaipur v. M/S MAHINDRA WORLD CITY (JAIPUR) LTD, Jaipur

ITA 1170/JPR/2010 | 2007-2008
Pronouncement Date: 22-07-2011 | Result: Partly Allowed

Appeal Details

RSA Number 117023114 RSA 2010
Assessee PAN AAECM4950C
Bench Jaipur
Appeal Number ITA 1170/JPR/2010
Duration Of Justice 9 month(s) 23 day(s)
Appellant ITO, Jaipur
Respondent M/S MAHINDRA WORLD CITY (JAIPUR) LTD, Jaipur
Appeal Type Income Tax Appeal
Pronouncement Date 22-07-2011
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 22-07-2011
Assessment Year 2007-2008
Appeal Filed On 29-09-2010
Judgment Text
1 IN THE INCOME TAX APPELLATE TRIBUNAL JAIPUR BENCH A JAIPUR (BEFORE SHRI R.K.GUPTA AND SHRI N.L.KALRA) ITA NO.1170/ JP/2010 ASSESSMENT YEAR 2007-08 PAN: AAECM 4950 C THE ITO VS. M/S. MAHINDRA WORLD CITY (JAIPUR ) L TD WARD 2(2) 411 NILKANTH TOWER BHAWANI SINGH M ARG JAIPUR C SCHEME JAIPUR (APPELLANT ) (RESPONDENT) DEPARTMENT BY : SHRI SUNIL MATHUR ASSESSEE BY : SHRI RAJEEV SOGANI ORDER PER N.L. KALRA AM:- THE REVENUE HAS FILED AN APPEAL AGAINST THE ORDER OF THE LD. CIT(A)- 1 JAIPUR DATED 08-07-2010 FOR THE ASSESSMENT YEAR 2007-08. 2.1 THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A)-I JAIPUR IS JUSTIFIE D IN:- (I) TREATING THE INCOME EARNED ON FDRS AS BUSINESS INCOME INSTEAD OF INCOME FROM OTHER SOURCES. (II) TREATING THE EXPENDITURE INCURRED AS BUSINESS EXPENSES WHEN THE BUSINESS OF THE COMPANY HAD NOT STARTED DU RING THE YEAR. 2.2 THE ASSESSEE FILED THE RETURN ON 26-10-2007 VID E WHICH LOSS OF RS. 1 25 90 700/- WAS DECLARED. THE ASSESSEE IS A JOINT VENTURE COMPANY 2 BETWEEN RAJASTHAN GOVT THROUGH RIICO AND M/S. MAHIN DRA GROUP AND THE RATIO IN JOINT VENTURE IS TO THE EXTENT OF 26:74. T HE JOINT VENTURE COMPANY WAS INCORPORATED TO DEVELOP SPECIAL ECONOMIC ZONE ( SEZ) AND DOMESTIC TARRIF AREA (DTA) IN JAIPUR CITY IN AN AREA OF 3 00 0 ACRES OF LAND. THE JOINT VENTURE COMPANY HAS ACQUIRED 1000 ACRES OF LAND IN MARCH 2007 ON 99 YEARS OF LEASE FROM RIICO AND THE BALANCE LAND WAS STILL TO BE ACQUIRED. THE ASSESSEE COMPANY WAS REQUIRED TO DO LANDSCAPING OF LAND CONSTRUCTION OF ROADS AND PROVIDE THE FACILITIES OF DRAINAGE SYSTEM SEWERAGE WATER SUPPLY POWER SUPPLY AND OTHER INFRASTRUCTURE FACILITY. 25 ACRES OF LAND CAN BE USED FOR COMMERCIAL CONSTRUCTION IN WHICH THE ASSESSEE C OMPANY WILL CONSTRUCT THE COMMERCIAL COMPLEX AND LEASE OUT THE SAME ON LO NG TERM BASIS TO THE UNITS. THE EXPENSES RELATING TO 25 ACRES OF LAND FO R COMMERCIAL COMPLEX ARE BEING CAPITALIZED BY THE ASSESSEE COMPANY. THE AO N OTICED THAT THE ASSESSEE COMPANY HAS EARNED INTEREST INCOME ON TEMPORARY DEP OSITS IN BANK FDRS. THE AO REQUIRED THE ASSESSEE COMPANY TO EXPLAIN AS TO WHY INTEREST EARNED ON SUCH FDRS BE NOT TAXED UNDER THE HEAD INCOME FRO M OTHER SOURCES IN VIEW OF THE DECISION OF HON'BLE APEX COURT IN THE C ASE OF TUTICORIN ALKALI CHEMICALS FERTILIZERS LTD. 227 ITR 172. THE ASSESS EE IN ITS REPLY STATED THAT THE DECISION OF HON'BLE APEX COURT IN THE CASE TUTI CORIN ALKALI CHEMICALS FERTILIZERS LTD. (SUPRA) IS NOT APPLICABLE AND THE CASE OF THE ASSESSEE IS 3 SQUARELY COVERED BY THE DECISION OF THE HON'BLE BO MBAY HIGH COURT IN THE CASE OF CIT VS LOK HOLDINGS REPORTED AT 308 ITR 35 6. THE AO WAS NOT SATISFIED WITH THE CONTENTION OF THE ASSESSEE. ACCO RDING TO THE AO THE DECISION OF HON'BLE APEX COURT IS APPLICABLE. REFER ENCE HAS ALSO BEEN MADE TO THE DECISION OF HON'BLE APEX COURT IN THE CASE O F BOKARO STEEL LTD. 236 ITR 315L. THE AO ACCORDINGLY TREATED THE INTEREST I NCOME AS INCOME FROM OTHER SOURCES. SINCE NO SALES HAVE BEEN EFFECTED T HEREFORE BUSINESS INCOME HAS BEEN TAKEN AS NIL. 2.3 BEFORE THE LD. CIT(A) IT WAS STATED THAT FACTS IN THE CASE OF TUTICORIN ALKALI CHEMICALS FERTILIZERS LTD. (SUPRA) ARE DIFFE RENT FROM THE FACTS OF THE PRESENT CASE. IN THAT CASE THE BUSINESS OF THE ASSE SSEE WAS NOT COMMENCED AND THE COMPANY WAS IN PROCESS OF CONSTRUCTION OF M ACHINERY. IN THE CASE OF THE ASSESSEE BUSINESS COMMENCED AND THE INTEREST E ARNED OUT OF TEMPORARY SURPLUS FUNDS RAISED FOR ACQUIRING STOCK IN TRADE O F THE COMPANY. THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS L OK HOLDINGS (SUPRA) HAS CONSIDERED THE DECISION OF HON'BLE APEX COURT I N THE CASE OF TUTICORIN ALKALI CHEMICALS FERTILIZERS LTD. (SUPRA) AND HELD THAT THE DECISION OF HON'BLE APEX COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS FERTILIZERS LTD. (SUPRA) IS NOT APPLICABLE. IN THE CASE OF CIT VS LOK HOLDINGS (SUPRA) THE INCOME AROSE OUT OF A RUNNING BUSINESS OF THE A SSESSEE COMPANY. INTEREST 4 WAS EARNED OUT OF SUCH MONEY ACCRUING FROM BUSINESS OF THE ASSESSEE COMPANY AND THE SAME WAS ALSO UTILIZED FOR THE FOR THE PURPOSE OF BUSINESS. THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF LOK HOLDINGS (SUPRA) HELD THAT INTEREST INCOME AROSE OUT OF A RUNNING BUSINES S AND THE INTEREST INCOME SO EARNED WAS ALSO UTILISED FOR THE BUSINESS OF THE COMPANY. HENCE THE INTEREST INCOME SHOULD BE TAXED UNDER THE HEAD BUSI NESS INCOME. THE HON'BLE APEX COURT IN THE CASE OF BOKARO STEEL 236 ITR 315 HELD THAT INTEREST INCOME EARNED ON ADVANCES WHICH ARE INTRIN SICALLY CONNECTED WITH THE BUSINESS IS ASSESSABLE AS BUSINESS INCOME. 2.4 THE LD. CIT(A) AFTER CONSIDERING THE CONTENTION S OF THE LD. AR HELD THAT INTEREST INCOME IS TO BE TREATED AS BUSINESS I NCOME AFTER OBSERVING AS UNDER:- CONTENTION OF THE AR IS CONSIDERED. INTEREST INCOME OF RS. 2560397/- HAS BEEN EARNED ON TEMPORAR Y DEPOSITS IN BANK FDR AND HAS BEEN OFFERED AS INCOME FROM BUSINESS. THE AO HOWEVER HAS TAXED THE INTERE ST INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES RELYING ON THE DECISION OF HON'BLE SC IN THE CASE OF TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. REPOR TED IN 227 ITR 172. THE AR ON THE OTHER HAND HAS RELIED ON THE DECISION OF HON'BLE BOMBAY HC IN THE CASE OF LOCK HOLDINGS 308 ITR 356. IT IS SUBMITTED BY THE A.R. T HAT SHARE CAPITAL ISSUED AS WELL AS BORROWED FUNDS FROM 5 FINANCIAL INSTITUTIONS FOR ACQUIRING OF LAND WERE I NVESTED IN FDR AND INTEREST INCOME WAS EARNED. AGAINST THE INTEREST INCOME INTEREST COST WAS CLAIMED AND RESI DUAL INTEREST COSTS WAS TAKEN TO INVENTORY COST AS WORK IN PROGRESS. IN THE CASE OF TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD.(SUPRA) THE ISSUE WAS WHETHER THE INTEREST EARNED ON SURPLUS FUNDS WAS OF REVENUE NATURE OR CA N BE ADJUSTED AGAINST CARRY FORWARD BUSINESS LOSSES AS T HE BUSINESS WAS YET TO BE STARTED THE HON'BLE APEX COU RT HELD THAT INTEREST EARNED IS OF REVENUE NATURE AND WOULD HAVE TO BE TAXED ACCORDINGLY. THE EXPENDITURE INCUR RED FOR THE PURPOSE OF SETTING UP ITS BUSINESS COLD NOT BE ALLOWED AS DEDUCTION NOR COULD IT BE ADJUSTED AGAI NST ANY OTHER INCOME UNDER ANY OTHER HEAD. THUS THE ISSUE DECIDED WAS NOT WHETHER THE INTEREST INCOME UNDER T HE GIVEN CIRCUMSTANCES SHOULD BE TAXED UNDER THE HEAD INCOME FROM BUSINESS OR UNDER THE HEAD INCOME FROM OTHER SOURCES. THE A.R. HAS RELIED ON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS L OK HOLDINGS (SUPRA) WHEREIN THE ISSUE DECIDED IS WHETH ER INTEREST ON DEPOSITS OF SURPLUS MONEY IS BUSINESS I NCOME OR INCOME FROM OTHER SOURCES. THUS THE CASE IS DIRE CTLY ON THE ISSUE UNDER CONSIDERATION AND THEREFORE DES ERVES ATTENTION. IN THIS CASE THE ASSESSEE FOUND ENGAGE D IN THE BUSINESS OF DEVELOPMENT LF PROPERTY AND IN THE COUR SE OF BUSINESS RECEIVED ADVANCES FROM INTENDING PURCHASER S AND TEMPORARILY INVESTED THE SURPLUS AMOUNT WITH BA NKS 6 AND OTHER FINANCIAL INSTITUTIONS. INTEREST EARNED T HEREON WAS CONSIDERED BUSINESS INCOME AND NOT INCOME FROM OTHER SOURCE. WHILE DECIDING THE ISSUE THE COURT H AS CONSIDERED THE DECISION OF SC IN THE CASE OF TUTICO RIN ALKALI CHEMICALS & FERTILIZERS LTD. (SUPRA) AND CIT VS. BOKARAO STEEL LTD. 236 ITR 315 (SC). THE COURT HAS HELD THAT THE FACTS OF THAT CASE WAS COMPLETELY DIF FERENT THAN THE FACTS IN THE CASE OF TUTICORIN ALKALI CHEM ICALS & FERTILIZERS LTD.(SUPRA). IN THAT THE CASE THE BUSI NESS OF THE ASSESSEE COMPANY HAD NOT COMMENCED AND THEREFOR E THE APEX COURT HELD THAT THERE COULD BE NO INCOME F ROM BUSINESS. APART FROM THIS THE BUSINESS OF THE ASSE SSEE IN THAT CASE OF TUTICORIN ALKALI CHEMICALS & FERTILIZE RS LTD. (SUPRA) WAS MANUFACTURING OF HEAVY CHEMICALS. THE INVESTMENT OF LOANS RECEIVED AND ACCRUING OF INTERE ST THEREFROM WERE NOT A PART OF THE BUSINESS OF THE AS SESSEE COMPANY. IN THE CASE OF LOK HOLDINGS THE COURT OBSERVED THAT THE FACT SITUATION WAS THAT THE INCOM E ADMITTEDLY AROSE OUT OF THE RUNNING BUSINESS OF TH E COMPANY. INTEREST WAS EARNED OUT OF SUCH MONEY ACCRUING FROM THE BUSINESS OF THE COMPANY AND THE S AME WAS ALSO UTILIZED FOR THE PURPOSE OF BUSINESS. IN T HE PRESENT CASE OF THE APPELLANT THE FACTS ARE QUITE SIMILAR TO THE FACTS IN THE CASE OF LOK HOLDINGS. INTEREST WAS EARNED OUT OF THE MONEY BORROWED TO ACQUIRE THE LAN D WHICH IS BUSINESS OF THE APPELLANT COMPANY. THE LAN D SO ACQUIRED HAS BEEN SHOWN AS INVENTORY AND THEREFORE 7 INTEREST INCOME EARNED IS NOTHING BUT BUSINESS INCO ME. THE AO IS THEREFORE DIRECTED TO TREAT THE INTEREST INCOME EARNED ON TEMPORARY BUSINESS FUND AS BUSINESS INCOM E. THE GROUND OF APPEAL IS DECIDED IN FAVOUR OF THE APPELLANT. 2.5 THE LD. CIT(A) ALSO HELD THAT MAJOR ACTIVITY WA S COMMENCED ON 27 TH SEP. 2006 BY ACQUIRING LAND. THEREFORE THE EXPENSE S INCURRED ARE TO BE ALLOWED AS EXPENDITURE. 2.6 BEFORE US THE LD. DR REFERRED TO THE ORDER OF THE AO. THE AO HAS RECODED A FINDING THAT THE BUSINESS HAS NOT COMMENC ED. IN CASE THE BUSINESS HAS NOT COMMENCED THEN INTEREST INCOME IS TO BE TAX ED UNDER THE HEAD INCOME FROM OTHER SOURCES. THE HON'BLE APEX COURT I N THE CASE OF TUTICORIN ALKALI CHEMICALS FERTILIZERS LTD.(SUPRA) HAD AN OCC ASION TO CONSIDER THE CASE IN WHICH TRIAL PRODUCTION WAS COMMENCED ON JUN E 30 1982. THE ASSESSEE EARNED INTEREST FROM THE BANK DEPOSITS FOR THE PREVIOUS YEAR ENDING ON 30 TH JUNE 1981. THE HON'BLE APEX COURT THEREFORE HELD THAT INTEREST INCOME EARNED FOR THE PREVIOUS YEAR ENDING 30 TH JUNE 1981 IS TO BE TAXED UNDER THE HEAD INCOME FROM OTHER SOURCES BECAUSE TH E BUSINESS HAS BEEN COMMENCED IN THE SUBSEQUENT PREVIOUS YEAR. THE ASSE SSEE HAS NOT MADE ANY SALES DURING THE YEAR AND THEREFORE IT CANNOT BE S AID THAT BUSINESS HAS 8 COMMENCED. IN ABSENCE OF COMMENCEMENT OF BUSINESS THE AO WAS JUSTIFIED IN TREATING THE INTEREST INCOME FROM DEPOSITS AS IN COME FROM OTHER SOURCES. 2.7 THE LD. AR HAS FILED THE WRITTEN SUBMISSIONS CO NTAINING 04 PAGES ALONGWITH PAPER BOOK CONTAINING 75 PAGES. THE LD. A R SUBMITTED THAT THE COMPANY RECEIVED CERTIFICATE FOR COMMENCEMENT OF BU SINESS ON 14-11-05 FROM ROC (REGISTRAR OF COMPANIES). ON 07-04-2006 F ORMAL APPROVAL OF SEZ WAS RECEIVED FROM THE MINISTRY OF COMMERCE GO VT. OF INDIA. ON 27- 09-07 LEASE DEED WAS SIGNED WITH RIICO FOR ACQUIRI NG 1000 ACRES OF LAND. ON 11-10-06 MASTER PLANNER FOR THE PROJECT WAS APPO INTED. ON 16-12-06 FOUNDATION STONE OF MAHINDRA WORLD CITY WAS LAID BY THE HON'BLE CHIEF MINISTER OF RAJASTHAN. ON THE VERY SAME DAY OF THE FOUNDATION STONE LAYING MOUS WERE SIGNED WITH INFOSYS TECHNOLOGIES LTD. AND WIPRO FOR LEASE OF LAND IN SEZ. ALL SUCH ACTIVITIES TOOK PLACE DURING THE FINANCIAL YEAR 2006-07. THE LAND ACQUIRED FOR DEVELOPMENT IN SEZ IS STOCK I N TRADE FOR THE COMPANY. THE ASSESSEE COMPANY INCURRED INTEREST EXPENDITURE AMOUNTING TO RS.3 22 71 697/- AND EARNED INTEREST TO THE TUNE OF RS. 25 60 397/-. NET INTEREST EXPENDITURE AMOUNTING TO RS. 2 97 11 300/- WAS INCLUDED IN THE VALUATION OF ITS INVENTORY. OTHER ADMINISTRATIVE AN D MARKETING EXPENSES WERE SHOWN AS LOSS FOR THE YEAR WHICH AMOUNTED TO R S. 1 25 90 700/-. THE LD. AR DREW OUR ATTENTION TO THE ACCOUNTING STANDAR D AS-16 BORROWING 9 COSTS ISSUED BY THE INSTITUTE OF CHARTERED ACCOUN TANTS OF INDIA. AS-16 REQUIRED THE REDUCTION FROM THE INTEREST COST INTER EST EARNED ON TEMPORARY ADVANCES FOR ADDING THE SAME TO QUALIFYING ASSET. T HE QUALIFYING ASSET HAS BEEN DEFINED IN AS-16 AS UNDER:- A QUALIFYING ASSET IS AN ASSET THAT NECESSARILY TA KES A SUBSTANTIAL PERIOD OF TIME TO GET READY FOR ITS INT ENDED USE OR SALE. 2.8 THE LD. AR HAS SUBMITTED THAT LD. CIT(A) HAS RI GHTLY HELD THAT BUSINESS HAS COMMENCED. 2.9 WE HAVE HEARD BOTH THE PARTIES. WHEN BUSINESS I S ESTABLISHED AND IS READY TO COMMENCE BUSINESS THEN IT CAN BE SAID THAT BUSINESS HAS BEEN SET UP. THERE MAY BE AN INTERVAL BETWEEN SETTING UP OF THE BUSINESS AND THE COMMENCEMENT OF THE BUSINESS. A BUSINESS CONSISTS O F SEVERAL ACTIVITIES ONE OF WHICH MUST NECESSARILY PRECEDE OTHER. THE BUSINE SS IS NOTHING MORE THAN A CONTINUOUS COURSE OF ACTIVITIES AND FOR COMMENCEM ENT OF BUSINESS ALL THE ACTIVITIES WHICH GO TO MAKE UP THE BUSINESS NEED NO T BE STARTED SIMULTANEOUSLY IN ORDER THAT BUSINESS MAY COMMENCE. THE BUSINESS WOULD COMMENCE WHEN THE ACTIVITY WHICH IS FIRST IN POINT OF TIME AND WHICH MUST NECESSARILY PRECEDE THE OTHER ACTIVITY IS STARTED. IF THE ACTIVITY OF PURCHASING GOODS STARTS THEN THERE IS A COMMENCEMENT OF BUSINE SS. REFERENCE IS MADE TO 10 THE DECISION OF HON'BLE GUJARAT HIGH COURT IN THE C ASE OF SAURSHTARA CEMENT & CHEMICALS INDUSTRIES LTD. 91 ITR 170 . SECTION 3 OF THE ACT REFERS TO PREVIOUS YEAR. IT IS MENTIONED THAT PREVIOUS YEAR I N RESPECT OF BUSINESS NEWLY COMING INTO EXISTENCE IS PERIOD BEGINNING WITH THE DATE OF SETTING UP OF THE BUSINESS AND ENDING WITH SAID FINANCIAL YEAR. THUS THE INCOME OF BUSINESS WHICH IS NEWLY SET UP IS TO BE TAKEN FROM THE SETTI NG UP OF THE BUSINESS. REFERENCE IS MADE TO THE DECISION OF HON'BLE BOMBA Y HIGH COURT IN THE CASE OF WESTERN INDIA VEGETABLE PRODUCTS LTD. VS CI T 26 ITR 151. THE DECISION OF THE HON'BLE BOMBAY HIGH COURT HAS BEEN APPROVED BY THE HON'BLE APEX COURT IN THE CASE OF CWT VS RAMRAJ SUR GICAL LTD. 63 ITR 478. IN THE CASE OF CIT VS SARARBHAI SONS (P) LTD. 90 ITR 318 (GUJ) THE FACTS WERE THAT THE ASSESSEE APPOINTED GENERAL MANA GER I N 1965. THE ASSESSEE PLACED ORDERS FOR MACHINERY AND EQUIPMENT S AND MACHINERY AND SOME OF MACHINERY AND EQUIPMENTS WERE RECEIVED IN F EB. 1966. THE ASSESSEE ALSO STARTING PLACING ORDERS FOR RAW MATER IAL IN STORES FROM JAN 1966 AND MACHINERIES WERE INSTALLED IN JULY 1966 AND PR ODUCTION WAS COMMENCED. ON THESE BASIS HON'BLE GUJARAT HIGH COU RT HELD THAT SETTING UP OF BUSINESS IS FROM JULY 1966. THE HON'BLE DELHI H IGH COURT IN THE CASE CIT VS HUGHES ESCORTS COMMUNICATION LTD. 311 ITR 2 53 HAD AN OCCASION TO CONSIDER THE DIFFERENCE BETWEEN SETTING UP AND C OMMENCEMENT OF 11 BUSINESS. IN THIS CASE THE PURCHASE ORDER FOR EQUI PMENT WAS IN JULY 1994 AND INSTALLATION OF EQUIPMENT COMPLETED IN MARCH 1995. THE HON'BLE DELHI HIGH COURT HELD THAT BUSINESS IS SET UP IN JULY 19 94. THE EXPENDITURE ON EQUIPMENT IS DEDUCTIBLE IN ASSESSMENT YEAR 1995-96. THE HON'BLE DELHI HIGH COURT IN THE CASE OF WHIRL POOL INDIA LTD. 31 8 ITR 347 HELD THAT BUSINESS IS CONSIDERED TO BE SET UP WHEN THE DIRECT ORS WERE APPOINTED STAFF SUCH AS REGIONAL MANAGER BRANCH MANGER WERE APPOIN TED AND THEIR SALARIES WERE PAID COMPUTERS WERE ACQUIRED AND INS TALLED AND COMPANY WAS READY TO COMMENCE BUSINESS. THE HON'BLE DELHI HIGH COURT IN THE CASE UPHELD THE FINDING OF THE TRIBUNAL IN RESPECT OF CO MMENCEMENT OF BUSINESS THOUGH REVENUE WAS CONTENDING THAT COMMENCEMENT OF BUSINESS WILL BE THE DATE WHEN ACCOUNT WAS OPENED IN THE BANK ON FEB.01 1996. BEFORE THAT DATE THE COMPANY WAS INCURRING EXPENSES THROUGH OT HER TWO COMPANIES. IN THE INSTANT CASE THE ASSESSEE OBTAINED THE TERM LO AN FROM IDFC OF RS. 40.00 CRORES ON 8 TH SEPT. 2006. ON 8 TH SEPT. 2006 THE ASSESSEE RECEIVED THE EQUITY SHARE CAPITAL TO THE EXTENT OF RS. 24.42 CRORES. ON 8 TH SEPT. 2006 THE ASSESSEE PURCHASED 1 000 ACRE OF LAND FOR RS. 61.17 CRORES. THE BALANCE FUNDS ALONGWITH SOME OTHER FUNDS WERE UTILIZED FOR MAKING FDR TO THE EXTENT OF RS. 11.00 CRORES ON 15-09-06. THE LAND IS STOCK I N TRADE OF THE ASSESSEE. THE SETTING UP OF BUSINESS OR COMMENCEMENT OF BUSIN ESS WILL BE FROM THE 12 DATE WHEN THE LAND HAS BEEN PURCHASED. IT IS TRUE T HAT THE LAND WAS TO BE DEVELOPED BEFORE IT WAS TO BE GIVEN ON LEASE. THUS THE EXPENDITURE WHICH HAVE BEEN INCURRED PRIOR TO THE DATE OF SETTING UP OF BUSINESS ARE TO BE CAPITALIZED AND THIS CANNOT BE ALLOWED AS REVENUE E XPENSES. THE INTEREST HAS BEEN EARNED IN RESPECT OF DEPOSITS MADE FROM 15-09- 2006 TO 11-04-07. THESE DETAILS HAVE BEEN FILED AND THEREFORE SUCH I NTEREST HAS BEEN EARNED AFTER THE COMMENCEMENT OF THE BUSINESS. THE ASSESSE E WAS HAVING SURPLUS FUNDS AND SUCH SURPLUS FUNDS WERE IN RESPECT OF ACQ UIRING FURTHER STOCK IN TRADE. SUCH INTEREST FROM SURPLUS FUNDS IS TO BE CO NSIDERED AS BUSINESS INCOME. THE COMMENCEMENT OF BUSINESS IS TO BE TAKEN FROM 08-09-2006 WHEN THE LAND HAS BEEN PURCHASED I.E. WHEN STOCK IN TRADE HAS BEEN ACQUIRED. THE LD. AR HAS RELIED UPON THE ACCOUNTING STANDARDS AS-16. THE HON'BLE APEX COURT IN THE CASE OF TUTICORIN ALKALI CHEMICAL S FERTILIZERS LTD.(SUPRA) HELD THAT QUESTION AS TO WHETHER RECEIPT OF MONEY I S TAXABLE OR NOT OR WHETHER CERTAIN DEDUCTION FROM THE RECEIPTS ARE PER MISSIBLE IN LAW OR NOT. THE QUESTION IS TO BE DECIDED ACCORDING TO THE PRIN CIPLES OF LAW AND NOT IN ACCORDANCE WITH THE ACCOUNTANCY PRACTICES. ACCOUNTI NG PRACTICE CANNOT OVERRIDE ANY PROVISIONS OF THE ACT. HON'BLE APEX CO URT REFERRED TO THE OBSERVATIONS OF THE LORD RUSSEL IN THE CASE OF BSC FOOTWEAR LTD. 77 ITR 13 857 IN WHICH IT WAS POINTED OUT THAT INCOME LAW DOE S NOT MARCH STEPS BY STEP IN FOOTPRINTS OF THE ACCOUNTANCY PRINCIPLES . 2.10 THE ASSESSEE INCURRED THE EXPENSES DURING THE PREVI OUS YEAR ENDING MARCH 2006. DURING FINANCIAL YEAR 2005-06 THE ASS ESSEE HAS DEBITED A SUM OF RS. 75 11 728/- TOWARDS EXPENSES. OUT OF THE EXP ENSES INCURRED IN FINANCIAL YEAR 2005-06 THE ASSESSEE HAS CAPITALIZE D THE EXPENSES TO THE EXTENT OF RS. 74 95 208/-. FOR THE FINANCIAL YEAR 2 006-07 THE ASSESSEE HAS CAPITALIZED THE EXPENSES TO TUNE OF RS. 5 03 09 548 /-. THE INTEREST EARNED HAS BEEN REDUCED FROM DEBIT OF INTEREST .WE ARE NOT HAV ING THE DETAILS OF THE EXPENSES TILL SETTING UP OF THE BUSINESS. IN THE CO MPUTATION OF INCOME THE ASSESSEE HAS ADDED BACK CERTAIN EXPENSES WHICH INCL UDED THE CAPITAL EXPENSES FOR INCREASING SHARE CAPITAL EXPENSES AND THE DEPRECIATION DEBITED IN P & L A/C. SINCE THE ASSESSEE HAS NOT FILED ANY APPEAL AGAINST THE ORDER OF THE LD. CIT(A) THEREFORE THE AMOUNTS WHICH HAVE B EEN ADDED BACK IN THE COMPUTATION OF INCOME CANNOT ALLOWED WHILE ASCERTAI NING THE EXPENSE WHICH ARE TO BE CAPITALIZED UPTO THE DATE OF SETTING UP O F BUSINESS I.E. 08-092006. AFTER THAT DATE THE EXPENSES WILL BE TREATED AS RE VENUE EXPENSES. THE HON'BLE APEX COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS FERTILIZERS LTD.(SUPRA) HAS ALSO OBSERVED THAT IT IS WELL SETTL ED THAT INTEREST INCOME IS ALWAYS OF REVENUE NATURE UNLESS IT IS RECEIVED BY W AY OF DAMAGE OR 14 COMPENSATION. IN CASE THE BORROWINGS HAVE BEEN FOR THE PURPOSE OF ACQUIRING CAPITAL ASSET THEN INTEREST ON SUCH BORROWINGS IS T O BE CAPITALIZED. 2.11 CONSIDERING THE ABOVE DISCUSSIONS WE HOLD THA T THE BUSINESS HAS BEEN SET UP AND COMMENCED FROM SEP. 08 2006. THE EXPENS ES PRIOR TO THAT ARE TO BE CAPITALIZED. THE AO WILL TAKE THE DECISION AS TO WHETHER EXPENSES ARE TO BE CAPITALIZED UNDER THE HEAD PRELIMINARY EXPENSES OR UNDER FIXED ASSETS OR CANNOT BE CAPITALIZED UNDER ANY OF THE TWO HEADS. A FTER SEPT.08 2006 ALL THE REVENUE EXPENSES WILL BE ALLOWED. THE INTEREST EARN ED IS TO BE TREATED AS BUSINESS INCOME. THE AO WILL RECOMPUTE INCOME AS PE R DIRECTION GIVEN ABOVE. 4. IN THE RESULT THE APPEAL OF THE REVENUE IS PAR TLY ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 22-07 -2011. SD/- SD/- (R.K. GUPTA) (N.L. KALRA) JUDICIAL MEMBER ACCOUNTANT MEMBER JAIPUR DATED; 22 /07/2011 *MISHRA COPY FORWARDED TO :- 1. THE ITO WARD 2(2) JAIPUR 2. M/S. MAHINDRA WORLD CITY (JAIPUR LTD. JAIPUR 3. THE LD. CIT BY ORDER 4. THE LD. CIT(A) 5. THE LD.DR 6. THE GUARD FILE (ITA NO.1170/JP /10) A.R ITAT JAIPUR 15 16 17