M/s Rubber Park India (P) Ltd., Cochin v. DCIT, Ernakulam

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH COCHIN BEFORE S/SHRI N.R.S.GANESAN JM AND SANJAY AROR A AM I.T.A NO.703/COCH/2005 1277/COCH/2004 & 289 & 290/ COCH/2007 ASSESSMENT YEARS: 1999-2000 2000-01 2001-02 & 2002-03 M/S. RUBBER PARK (P) LTD. 5 TH FLOOR PENTA TOWER KALOOR KOCHI-17. [PAN:AABCR 7840R] VS. THE DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-1(3) ERNAKULAM. (ASSESSEE-APPELLANT) (REVENUE- RESPONDENT) I.T.A NOS. 147 & 148/COCH/2007 ASSESSMENT YEARS: 1999-2000 & 2000- 01 THE ASSISTANT COMMISSIONER OF INCOME-TAX CIRCLE 1(3) ERNAKULAM. VS. M/S. RUBBER PARK (P) LTD. 5 TH FLOOR PENTA TOWER KALOOR KOCHI-17. [PAN:AABCR 7840R] (REVENUE-APPELLANT) (ASSESSEE - RESPONDENT) ASSESSEE BY SHRI R.RAJASEKHARAN & SHRI IYPE JOHN CA REVENUE BY MS. S. VIJAYAPRABHA JR.DR DATE OF HEARING 15/11/2011 DATE OF PRONOUNCEMENT 03/02/2012 O R D E R PER SANJAY ARORA AM: THESE ARE A SET OF SIX CROSS APPEALS I.E. BY THE ASSESSEE AND THE REVENUE IN RESPECT OF ITS ASSESSMENTS FOR ASSESSMENT YEARS (A. Y.) 1999-2000 2000-01 2001-02 AND 2002-03 UNDER SECTION 143(3) OF THE INCOME-TAX ACT 1961 (`THE ACT HEREINAFTER). I.T.A. NOS.703& ORS. /COCH/2005 M/S. RUBBER PARK(INDIA) PVT. LTD. VS ACIT EKM 2 2. THE APPEALS RAISING COMMON ISSUES WERE HEARD TO GETHER AND ARE BEING DISPOSED OF VIDE A COMMON CONSOLIDATED ORDER. WE SHALL REC OUNT THE FACTS AND IN THE CHRONOLOGICAL ORDER FOR THE SAKE OF CONVENIENCE AN D BETTER UNDERSTANDING. 3.1 THE ASSESSEE IS A JOINT VENTURE COMPANY (INCORP ORATED ON 10-12-1997) PROMOTED BY THE RUBBER BOARD AND KERALA INDUSTRIAL INFRASTRU CTURE DEVELOPMENT CORPORATION (KINFRA) WITH EQUAL EQUITY PARTICIPATION FORMED W ITH THE PRINCIPAL OBJECT OF SETTING UP AND DEVELOPMENT OF INDUSTRIAL PARKS WITH ALL INFRAS TRUCTURAL FACILITIES FOR RUBBER AND RUBBER-WOOD BASED INDUSTRIES. AS A FIRST STEP 59.1 2 ACRES OF LAND WAS TAKEN ON LEASE VIDE LEASE AGREEMENT DATED 08-02-1999 AND M/S. C.P. KUK REJA ASSOCIATES PVT. LTD. NEW DELHI APPOINTED AS ARCHITECTS. TENDER FORMS FOR TH E WORK OF SITE DEVELOPMENT INCLUDING CONSTRUCTION OF ROADS BUILDINGS ETC. WERE INVITED AND CONTRACT AWARDED TO ONE M/S. M.K.ABRAHAM AND CO. ON 24-09-1999. AS ON 31-03-2001 M/S. M.K. ABRAHAM & CO. HAS RAISED BILLS AMOUNTING TO ` 191.38 LAKHS ON THE ASSESSEE-COMPANY FOR THE WORK D ONE BY THEM. FURTHER DURING THE YEAR THE COMPANY HAD TAKEN ANOTHER 43 ACRES OF CONTIGUOUS LAND ON A 99 YEAR LEASE AS ALSO AWARDED WORK FOR C ONSTRUCTION OF 110/11 K.V. 12.5 M.V.A. SUB-STATION WATER SUPPLY ARRANGEMENTS ETC. ASSTT. YEAR 2001-02 3.2 IT FILED ITS RETURN OF INCOME FOR A.Y. 200 1-02 ON 30-10-2001 AT AN INCOME OF ` 73.39 LAKHS. DURING THE COURSE OF THE ASSESSMENT P ROCEEDINGS IT WAS OBSERVED THAT IT HAD EARNED INTEREST ON FIXED DEPOSITS WITH BANK DUR ING THE RELEVANT YEAR AT ` 109.89 LAKHS BESIDES MISCELLANEOUS INCOME (FROM THE SALE OF TEND ER FORMS AND SALE OF TREES) IN THE SUM OF ` 4.07 LAKHS. FURTHER IT HAS RETURNED THE SAME AS B USINESS INCOME CLAIMING DEDUCTION FOR A TOTAL OF ` 68.71 LAKHS ON ACCOUNT OF BUSINESS EXPENDITURE OFF ERING THE BALANCE TO TAX. THE ASSESSING OFFICER (AO) WAS OF THE VIEW THAT THE INTEREST INCOME AS WELL AS THE MISCELLANEOUS INCOME WAS LIABLE TO BE ASSESSED AS I NCOME FROM OTHER SOURCES WHICH WOULD ONLY ENTITLE DEDUCTION IN RESPECT OF EXPENSES ALLOWABLE U/S. 57 IN VIEW OF THE DECISION BY THE APEX COURT IN THE CASE OF VIJAYA LAXMI SUGAR MILLS LTD. VS. CIT (1987) 191 ITR 641 (SC) AND TUTICORIN ALKALIES AND FERTILISERS VS. CIT (1997) 227 ITR 172 I.T.A. NOS.703& ORS. /COCH/2005 M/S. RUBBER PARK(INDIA) PVT. LTD. VS ACIT EKM 3 (SC). THE ASSESSEES CLAIM FOR ALLOWANCE OF THE DE PRECIATION WAS ALSO NEGATED AT NIL ON THE BASIS THAT NO BUSINESS ACTIVITY HAD BEEN UNDERT AKEN DURING THE YEAR. ACCORDINGLY HE BROUGHT THE ENTIRE INCOME OF ` 113.46 LAKHS TO TAX AS INCOME FROM OTHER SOURCES. IN APPEAL THE LD. CIT(A) FOUND THAT IT WAS AN ADMITTE D POSITION THAT NO BUSINESS ACTIVITY HAD BEEN CARRIED OUT DURING THE RELEVANT PREVIOUS YEAR AND ALL THE ACTIVITIES UNDERTAKEN WERE ONLY IN THE NATURE OF SETTING UP OF BUSINESS SO AS TO ACHIEVE THE OBJECTS AS LAID DOWN. THE PROVISION OF S. 71(1) WHICH WAS PRESSED BEFORE HI M I.E. CONSIDERING THAT THE INTEREST INCOME IS ASSESSABLE AS INCOME FROM OTHER SOURCES WOULD COME INTO PLAY ONLY ONCE THE BUSINESS ACTIVITIES PER ANY OF THE CLAUSES 1 2 & 3 OF CLAUSE IIIA OF THE MEMORANDUM OF ASSOCIATION (MOA) WERE EXECUTED. THE VARIOUS STEPS TAKEN WERE ONLY PRE-OPERATIVE IN NATURE. THE DECISIONS IN THE CASE OF CIT VS. SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD. 91 ITR 170 (GUJ.) AND PREM CONDUCTORS PVT. LTD. VS. CIT 108 ITR 654 (GUJ.) WERE HELD AS DISTINGUISHABLE AND NOT APPLICABLE IN THE FACTS OF THE CASE. WITH REFERENCE TO THE ASSESSEES CONTENTION THAT ITS TAX LIABILITY HAD BE EN ASCERTAINED FOR A.Y.2000-01(THOUGH U/S. 143(1) ON 25-03-2002) BY NETTING THE BUSINESS EXPENSES CLAIMED IN THE SUM OF ` 24.87 LAKHS SO THAT THE SAME WOULD ALSO BE VALID FOR THE CURRENT YEAR HE DIRECTED THE AO TO ADOPT THE SAME VIEW AS FOR THE CURRENT YEAR AFTER VERIFICATION OF THE REVENUES STAND FOR THAT YEAR BY RECOURSE TO A REMEDIAL ACTION U/S. 148 OF THE ACT. AN ASSESSMENT U/S. 143(1)(A) SHOULD OR OUGHT NOT TO IN HIS VIEW RES ULT IN THE LOSS OF REVENUE. THE ASSESSMENT ORDER DATED 30-10-2003 WAS ACCORDINGLY C ONFIRMED BY HIM VIDE IS ORDER DATED 06-09-2004. AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US. A.Y. 2002-03 THE AO LIKEWISE DISALLOWED THE ASSESSEES CLAIM FO R EXPENDITURE MADE AT AN AGGREGATE OF ` 43.82 LAKHS INCLUDING DEPRECIATION (AT ` 18.46 LAKHS) AS BUSINESS EXPENDITURE AND BROUGHT THE ENTIRE AMOUNT OF INTER EST AND OTHER INCOME (I.E. IN RESPECT OF SALE OF TREES AND TENDER FORMS AT ` 1.65 LAKHS) OF ` 91.05 LAKHS TO TAX AS FROM OTHER SOURCES PLACING RELIANCE ON A NUMBER OF DECISIONS BY THE JU RISDICTIONAL HIGH COURT REFERRED TO IN PARA 4 AND 5 OF HIS ORDER BESIDES THAT BY OTHER HI GH COURTS AS WELL AS BY THE APEX COURT IN THE CASE OF CIT VS. DR. V.P. GOPINATHAN (2001) 248 ITR 449 (SC). I.T.A. NOS.703& ORS. /COCH/2005 M/S. RUBBER PARK(INDIA) PVT. LTD. VS ACIT EKM 4 IN APPEAL THE ASSESSEE FOUND FAVOUR WITH THE LD. CIT(A) IN THAT THE APPELLANT HAD COMMENCED ITS BUSINESS ACTIVITY AS SOON AS IT TOOK POSSESSION OF LAND ON 08-02-1999 AND STARTED DEVELOPMENT WORK ON THE SAID LAND RELYING ON THE DECISIONS IN THE CASE OF SAURASHTRA CEMENT & CHEMICAL INDUSTRIES (SUPRA) AND PREM CONDUCTORS PVT. LTD. (SUPRA). THE LEASEHOLD LAND WAS ONLY THE ASSESSEE S STOCK-IN-TRADE WHICH WAS BEING DEVELOPED FOR CONVERTING THE SAME INTO PLOTS FOR AL LOTMENT IN THE RUBBER INDUSTRIAL PARK. RELIANCE FOR THE PURPOSE WAS PLACED BY HIM ON THE D ECISION IN THE CASE OF RAJA J. RAMESWAR RAO VS. CIT (1961) 42 ITR 179 (SC) RELIED UPON BY THE ASSESSE ES COUNSEL BEFORE HIM AND WHEREIN IT HAS BEEN HELD THAT WHEN A PERSON ACQUIRES LAND WITH A VIEW OF SELLING IT LATER AFTER DEVELOPING IT HE WAS CARRYI NG ON AN ACTIVITY RESULTING IN PROFIT AND SUCH BUSINESS ACTIVITY COULD ONLY BE DESCRIBED AS B USINESS VENTURE. FURTHER IN HIS VIEW THE EXPENDITURE AMOUNTING TO ` 5 9 32 893/- BEING CLAIMED AS BUSINESS EXPENDITURE COULD NOT BE ALLOWED SET OFF AGAINST INTEREST AND OTHER I NCOME ASSESSABLE UNDER CHAPTER IV-F. THIS IS AS THE PROFITS AND GAINS OF BUSINESS OR PRO FESSION (OR FOR THAT MATTER EVEN UNDER THE HEAD `INCOME FROM OTHER SOURCES) WOULD STAND TO BE COMPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY E MPLOYED BY THE APPELLANT IN VIEW OF S. 145(1) OF THE ACT. IN THE INSTANT CASE THE ASSESS EE WAS RECOGNIZING INCOME FROM THE SAID ACTIVITY ON THE PROJECT COMPLETION BASIS AS WOULD BE APPARENT FROM ITS ANNUAL ACCOUNTS I.E. THE OPERATING STATEMENT (PROFIT AND LOSS ACCO UNT) AND THE BALANCE SHEET AND STATEMENT OF AFFAIRS WHICH CLEARLY REVEALED THAT THE ENTIRE DIRECT AND INDIRECT EXPENDITURE WAS BEING BOOKED BY THE COMPANY AS CAPITAL EXPENDITURE OR AS CURRENT ASSETS. THE QUESTION WAS NOT IN HIS VIEW WHETHER THE CAPITALIZATION OF LAND IS BY WAY OF A CAPITAL ASSET OR STOCK-IN- TRADE AS IN EITHER CASE THE REVENUE WOULD STAND TO BE RECOGNIZED ONLY AS PER THE REGULAR METHOD OF ACCOUNTING AND PER WHICH THE ASSESSEE IS FOLLOWING THE PROJECT COMPLETION METHOD AS AGAINST PERCENTAGE COMPLETION METHOD. AL L THE COSTS INCLUDING THE INDIRECT COSTS BEING INCURRED ONLY TOWARD PROJECT COMPLETIO N WOULD STAND TO BE ALLOWED ONLY WHEN THE PROJECT IS COMPLETED AND THE PLOTS SOLD. ACCORDINGLY THE ASSESSEES CLAIM FOR SET OFF OF EXPENDITURE OF ` 59.33 LAKHS AS BUSINESS EXPENDITURE AGAINST INCOME FROM OTHER SOURCES WAS REJECTED BY HIM VIDE ORDER DATED 24.02. 2005. AGGRIEVED THE ASSESSEE IS IN APPEAL. I.T.A. NOS.703& ORS. /COCH/2005 M/S. RUBBER PARK(INDIA) PVT. LTD. VS ACIT EKM 5 A.Y. 1999-2000 & 2000-01 THE ASSESSEES RETURNS WHICH WERE EARLIER ACCEPTE D U/S. 143(1) WERE RE-OPENED FOR ASSESSMENT BY ISSUE OF NOTICES U/S. 148 AND FO R THE SAME REASONS AS FOR THE SUCCEEDING YEARS I.E. A.Y. 2001-02 AND 2002-03 I.E. THAT T HE INCOME EARNED WHICH WAS PRIMARILY BY WAY OF INTEREST ON BANK FIXED DEPOSITS WAS ASSE SSBLE ONLY AS INCOME FROM OTHER SOURCES ADMITTING OF NO ALLOWANCE OF THE EXPENDIT URE BEING CLAIMED THERE-AGAINST MADE AT ` 7.10 LAKHS AND ` 24.87 LAKHS RESPECTIVELY FOR THE TWO CONSECUTIVE YE ARS WHICH WAS ACCORDINGLY DISALLOWED VIDE ORDERS U/S. 143(3) R.W. S. 147 OF EVEN DATE I.E. 30-12-2005. THE ASSESSEE CARRIED THE MATTER IN APPEAL WHEREAT THE LD. CIT(A) REJECTED THE ASSESSEES CLAIM FOLLOWING HIS PREDECESSOR (FOR A.Y. 2002-03 ) TO HOLD THAT THE INTEREST INCOME WAS A PRE-OPERATIVE INVESTMENT INCOME AND THUS RI GHTLY ASSESSED AS INCOME FROM OTHER SOURCES. SO HOWEVER THE ASSESSEE WAS ENTITLED TO CLAIM 18% THEREOF AS DEDUCTION U/S. 57(III); THE COCHIN BENCH OF THE TRIBUNAL HAVING AL LOWED DEDUCTION OF EXPENDITURE IN RESPECT OF SUCH INCOME AT 30% OF THE GROSS INTEREST BY WAY OF REASONABLE EXPENDITURE THERE-AGAINST VIDE HIS COMMON ORDER FOR TWO CONSEC UTIVE YEARS DATED 12-12-2006. AGGRIEVED BOTH THE PARTIES ARE IN APPEAL. THE REVE NUE IS AGGRIEVED BY THE ALLOWANCE OF CLAIM FOR EXPENDITURE IN VIEW OF THE PROVISIONS OF S. 56 AND 57 OF THE ACT. PLACING RELIANCE ALSO ON THE DECISION IN THE CASE OF SARAF TEXTILE INDUSTRIES V. CIT 217 ITR 507 (RAJ.). THE ASSESSEE IMPUGNS THE SAME ON THE BASIS THAT THE ENTIRE EXPENDITURE WOULD MERIT BEING SET OFF; ITS BUSINESS HAVING COMMENCED IN TERMS OF THE DECISION IN THE CASE OF SAURASHTRA CEMENT & CHEMICAL INDUSTRIES (SUPRA) AS AGAINST RESTRICTING THE ALLOWANCE OF EXPENDITURE AT THE RATE OF 18% OF THE GROSS INCOME. THE ASSESSEE ALSO CHALLENGES THE IMPUGNED ORDERS ON THE GROUND OF RE-OPENING AS BEIN G BAD IN LAW AS THERE WAS FULL AND COMPLETE DISCLOSURE OF ALL MATERIAL FACTS PER THE R ETURNS OF INCOME AND THE ASSESSMENTS HAD ATTAINED FINALITY IN VIEW OF THE NON-ISSUE OF T HE NOTICE U/S. 143(2) OF THE ACT. 4. WE HAVE HEARD THE PARTIES AND PERUSED THE MAT ERIAL ON RECORD AS WELL AS THE CASE LAW CITED. I.T.A. NOS.703& ORS. /COCH/2005 M/S. RUBBER PARK(INDIA) PVT. LTD. VS ACIT EKM 6 4.1 IT COULD BE NECESSARY FOR THE PURPOSE OF ADJUD ICATING THE PRESENT SET OF APPEALS TO FORMULATE AND RELATE THE QUESTION/S THAT ARISE/S FO R CONSIDERATION AND THEN PROCEED TO ANSWER THE SAME. THE PRIMARY FACTS ARE BY AND LARG E UNDISPUTED. THE FIRST QUESTION THEREFORE THAT ARISES IS WHETH ER THE DATE OF COMMENCEMENT OF BUSINESS IS AT ALL RELEVANT IN DECIDING THE ISSUE WHICH IS DEDUCTIBILITY IN LAW OF THE EXPENDITURE IN THE NATURE OF ADMINISTRATIVE EXPENDITURE CLAIMED B Y THE ASSESSEE-COMPANY AS REGULAR BUSINESS EXPENDITURE. THIS IS AS FIRSTLY ONLY SU CH EXPENDITURE AS NOT DIRECTLY RELATING TO THE ACQUISITION OF OR THE IMPROVEMENT TO THE ASSETS UNDER CONSTRUCTION STANDS CLAIMED IN THE OPERATING STATEMENT WHILE THAT SO RELATING HAV ING BEEN CAPITALIZED AS A PART OF FIXED ASSETS; THE TOTAL INVESTMENT ON WHICH AS ON 31-03-2 002 IS AT ` 11.95 CRORES. SECONDLY AND WITHOUT DOUBT IF THE ASSESSEE HAS COMMENCED BUSINE SS THE CLAIMED EXPENDITURE WOULD DEFINITELY WARRANT DEDUCTION U/S 37(1) AS REGULAR B USINESS EXPENDITURE THE SCOPE OF THE EXPRESSION FOR THE PURPOSE OF BUSINESS BEING WIDE IN AMPLITUDE [REFER: COMMISSIONER OF INCOME-TAX VS BIRLA COTTON SPINNING AND WEAVING MIL LS LTD (1971) 82 ITR 166 (SC)]. THE SAID QUESTION THUS INDEED ARISES. AND WHICH LE ADS TO THE NEXT QUESTION: WHAT IS THE DATE OF COMMENCEMENT OF THE ASSESSEES BUSINESS? 4.2 AT THE VERY OUTSET THOUGH WE MAY CLARIFY TH AT THE ISSUE WITH REGARD TO THE ASSESSMENT OF INTEREST INCOME ON BANK DEPOSITS AS I NCOME FROM OTHER SOURCES IS NOT IN ISSUE I.E. IN TERMS OF THE GROUNDS AND THE CONTEN TIONS RAISED. THIS MATTER SHOULD EVEN OTHERWISE BE CONSIDERED AS SETTLED IN VIEW OF THE D ECISION IN THE CASE OF VIJAYA LAXMI SUGAR MILLS LTD VS COMMISSIONER OF INCOME-TAX (1991) 191 ITR 641 (SC) AND TRACO CABLE COMPANY LTD VS COMMISSIONER OF INCOME-TAX (1969) 72 ITR 503 (KER) RELIED UPON INTER ALIA BY THE REVENUE WITH THE ASSESSING OFFICER CITING (IN THE ASSESSMENT ORDERS FOR ASSESSMENT YEARS 2001-02 AND 2002-03) AB OUT ANOTHER DOZEN DECISIONS PRIMARILY BY THE HONBLE JURISDICTIONAL HIGH COURT INCLUDING CIT VS DR V.P. GOPINATHAN (SUPRA) BY THE APEX COURT. IN FACT THE HONBLE JU RISDICTIONAL HIGH COURT HAS SPECIFICALLY CLARIFIED THE SAME WHILE DISPOSING THE ASSESSEES W RIT PETITION (W.P. NO.438 OF 2005 DT 06-01-2005 / COPY OF RECORD) CHALLENGING THE ASSESS MENT FOR ASSESSMENT YEAR 2001-02 (PER ORDER U/S 143(3) DATED 30-10-2003 CONFIRMED B Y APPELLATE ORDER DATED 06-09-2004) I.T.A. NOS.703& ORS. /COCH/2005 M/S. RUBBER PARK(INDIA) PVT. LTD. VS ACIT EKM 7 RELYING ON THE DECISION BY IT IN THE CASE OF COCHIN REFINERIES. THE ASSESSEES ONLY CASE AND FOR WHICH THE HONOURABLE COURT ALSO DIRECTED CO NSIDERATION BY THE REVENUE (ON THE PETITIONER MOVING IT U/S 154) IS THE COMPUTATION OF INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION AND SECONDLY SET OFF OF BUSINESS LOSS IN VIEW OF THE NON ABSORPTION OF THE IMPUGNED EXPENDITURE UNDER THAT H EAD OF INCOME AGAINST POSITIVE INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES U /S 71 OF THE ACT. NO SUCH APPLICATION AS IS APPARENT HAS BEEN PREFERRED BY THE ASSESSEE AS IN THAT EVENT IT WOULD BE INCUMBENT ON THE A.O. TO PASS AN ORDER WITHIN ONE M ONTH THEREOF AS FURTHER DIRECTED BY THE HONBLE COURT. THE REASON FOR THE SAME IS THAT THE HONBLE COURT WAS THOUGH INCORRECTLY GIVEN TO UNDERSTAND BY AND ON THE ASSE SSEES BEHALF THAT THE ONLY REASON FOR THE NON ALLOWANCE OF THE SAID EXPENDITURE BY THE RE VENUE IS IN VIEW OF THE ENTIRE INCOME I.E. THE BANK INTEREST NETTED BY THE IMPUGNED EXPEN DITURE BEING RETURNED BY THE ASSESSEE AS BUSINESS INCOME SO THAT IN VIEW OF A TECHNICAL OMISSION IN NON RETURNING THE CLAIM OF BUSINESS EXPENDITURE UNDER THE APPROPRIATE HEAD OF INCOME SHOULD NOT IMPEDE THE ASSESSEES CAUSE. 4.3 TURNING TO THE QUESTION SET OUT EARLIER THE FI RST THING THAT WOULD REQUIRE BEING ADDRESSED FOR THE PURPOSE IS AS TO WHAT CONSTITUTES THE ASSESSEES BUSINESS. THE MAIN OBJECT CLAUSES OF ITS MEMORANDUM OF ASSOCIATION (MO A) WHICH THOUGH IS NOT CONCLUSIVE OF THE MATTER EVEN AS CLARIFIED BY THE APEX COURT IN BENGAL & ASSAM INVESTORS LTD VS CIT (1966) 59 ITR 547 (SC); ORIENTAL INVESTMENT CO LTD VS COMMISSIONER OF INCOME-TAX (1957) 32 ITR 644 (SC) READS AS UNDER: III. A. THE MAIN OBJECTS TO BE PURSUED BY THE COM PANY ON ITS INCORPORATION ARE: 1. TO PROMOTE AND PROVIDE FOR BY SUCH MEASURES AS THE COMPANY SHALL THINK FIT THE DEVELOPMENT OF RUBBER AND RUBBER WOO D BASED INDUSTRIAL SECTOR IN THE COUNTRY INCLUDING THE SETTING UP AND DEVELOPMENT OF INDUSTRIAL INFRASTRUCTURE PARKS RELATING TO RUBBER. 2. TO ACQUIRE / PURCHASE LAND FREEHOLD OR LEASEHOLD AND UNDERTAKE DEVELOPMENT THEREOF DEVELOP ALL OTHER INFRASTRUCTU RE FACILITIES INCLUDING POWER WATER TRANSPORTATION CONDUCIVE FOR THE DEV ELOPMENT OF I.T.A. NOS.703& ORS. /COCH/2005 M/S. RUBBER PARK(INDIA) PVT. LTD. VS ACIT EKM 8 INDUSTRIES BASED ON RUBBER AND RUBBER WOOD AND SELL LEASE OR OTHERWISE DISPOSE OF THE DEVELOPED PLOTS AND OTHER FACILITIES INCLUDING BUILT UP STRUCTURES THEREON TO ENTREPRENEURS. 3. TO UNDERTAKE AND ASSIST IN AND ENCOURAGE SCIENTIFIC TECHNOLOGICAL AND ECONOMIC RESEARCH AND DEVELOPMENTAL ACTIVITIES FOR IMPROVING THE QUALITY AND VALUE ADDITION TO RUBBER AND RUBBER WOO D PRODUCTS AND TO TAKE SUCH MEASURES FOR THE GROWTH OF EXPORT OF PROD UCTS BASED ON RUBBER AND RUBBER WOOD FROM INDIA. IN PURSUANCE OF ITS OBJECTS CHARTER THE ASSEESSEE- COMPANY HAS UNDERTAKEN A PROJECT OF PROVIDING INFRASTRUCTURE FACILITIES FOR SETTING UP RUBBER AND RUBBER-WOOD BASED INDUSTRIES IN KERALA. THE COMPANY ENTERED INTO AN AGREEMENT ( MOU) WITH KINFRA (A STATUTORY CORPORATION CONSTITUTED BY THE GOVERNMENT OF KERALA (GOK) UNDER THE KERALA INDUSTRIAL INFRASTRUCTURE DEVELOPMENT ACT 1993) ON 26-12-1997 FOR SETTING UP AN INDUSTRIAL PARK AT IRAPURAM 12 KILOMETRES FROM PERUMBAVOOR IN ERNAKUL AM DISTRICT. LAND ADMEASURING 59.12 CRORES WAS LEASED THERETO BY KINFRA FOR AN I NITIAL PERIOD OF 99 YEARS ON 08-02- 1999 FOR SETTING UP A RUBBER PARK BY DEVELOPING LA ND CONSTRUCTING ROADS BUILDINGS AND OTHER COMMON FACILITIES VIZ. POWER & WATER SUPPLY SEWAGE AND DRAINAGE SYSTEM INCLUDING STORM WATER DISPOSAL POLLUTION CONTROL S YSTEMS FOR EFFLUENT / SOLID WASTE DISPOSAL TELE- COMMUNICATION LINES ETC. (`PROJECT HEREINAFTER). THE PROJECT COST WAS ENVISAGED AT ` 36.61 CRORES THOUGH LATER REVISED TO ` 31.88 CRORES. THE LAND WAS TO BE DIVIDED INTO PLOTS TO BE SUBLEASED TO THE ENTREPREN EURS FOR SETTING UP SUCH RUBBER AND RUBBER BASED INDUSTRIES. THE TERMS AND CONDITIONS OF THE JOINT VENTURE AGREEMENT DATED 26-12-1997 AS WELL AS THE DIRECTIONS BY THE GOK IN RELATION TO THE LEASE OF LAND WERE TO APPLY TO THE SAID LEASE AS WELL AS TO THE SUB-LEAS ES TO BE EFFECTED BY THE ASSESSEE- COMPANY. THE ASSESSEE VIDE AGREEMENT DATED 31-05- 1999 APPOINTED C.P. KUKREJA NEW DELHI AS ARCHITECTS FOR THE PROJECT THE SCOPE OF W HOSE ACTIVITIES INCLUDED DESIGN OF THE PROJECT AND SUPERVISING ITS CONSTRUCTION INCLUDING ALL ARCHITECTURAL AND ENGINEERING SERVICES BESIDES ADVISORY FUNCTION ON TECHNICAL AN D NON TECHNICAL MATTERS INCLUDING AWARD OF CONTRACTS FOR VARIOUS INDIVIDUAL WORKS AND COST CONTROL. M/S M.K. ABRAHAM & CO PERUMBAVOOR WERE APPOINTED AS CONTRACTORS VIDE AGREEMENT DATED 12-11-1999. THE ENTIRE WORK FOR A 110 / 11 KV SUB-STATION AND ANCIL LARY WORKS WAS AWARDED TO BSES LTD I.T.A. NOS.703& ORS. /COCH/2005 M/S. RUBBER PARK(INDIA) PVT. LTD. VS ACIT EKM 9 VIDE AGREEMENT DATED 20-12-2000. SIMILARLY FOR WA TER SUPPLY CONTRACT WAS FINALIZED WITH HINDUSTAN STEEL WORKS CONSTRUCTIONS LTD KOLKA TTA ON 23-02-2001. ANOTHER 47.88 ACRES OF LAND WAS ACQUIRED ON LEASE DURING AS STAT ED THE FINANCIAL YEAR 2000-01. VIDE THEIR REPORT DATED 21-12-2002 THE BOARD OF DIRECTO RS (BOD FOR SHORT) REPORTED THAT THE DEVELOPMENT WORK OF PHASE I OF THE PROJECT WAS COMP LETED AND THE CONSTRUCTION OF THE SUB-STATION HAVING BEEN COMPLETED AND SANCTION OF ITS ENERGISATION BEEN OBTAINED APPLICATION FOR LICENCE TO DISTRIBUTE POWER WITHIN THE PARK HAD BEEN MADE TO THE APPROPRIATE AUTHORITY. DEVELOPMENT WORK FOR PHASE II WAS PROCEEDING SATISFACTORILY AND HAD REACHED 90% COMPLETION. 4.4 THE PHYSICAL ACTIVITIES WHICH ARE NOT IN DISPU TE HAVE BEEN DELINEATED IN SOME DETAIL AS THE QUESTION AS TO WHEN THE ASSESSEES B USINESS COMMENCED OR WAS SET UP IS A PURE MATTER OF FACT. WE OBSERVE THAT THE HIGHER CO URTS OF LAW ARE IN AGREEMENT ON THE ISSUE HAVING DECIDED THE DIFFERENT CASES BEFORE TH EM ON THE BASIS OF ITS FACT SITUATION. ONE OF THE EARLIER IF NOT THE EARLIEST DECISION I N THE MATTER IS IN THE CASE OF WESTERN INDIA VEGETABLE PRODUCTS LTD VS CIT (1954) 26 ITR 151 (BOM). FACED WITH THIS QUESTION THE HONBLE COURT HELD THAT WHAT IS RELEVANT FOR THE PU RPOSE OF LAW IS THE SETTING UP OF BUSINESS AND NOT ITS COMMENCEMENT. A BUSINESS CAN B E SAID TO BE SET UP WHEN IT IS ESTABLISHED OR READY FOR COMMENCEMENT. IT EMPHASIZE D THIS DIFFERENCE WHICH MAY OBTAIN IN A GIVEN CASE AS ONCE THE BUSINESS IS SET UP AN Y EXPENDITURE INCURRED FOR ITS PURPOSE WOULD QUALIFY AS A DEDUCTIBLE BUSINESS OUTGOING I. E. EVEN IF THERE IS NO ACTUAL COMMENCEMENT OF BUSINESS AS THE FACT SITUATION WAS IN THAT CASE THERE BEING AN INTERREGNUM BETWEEN THE SETTING UP OF BUSINESS AND ITS ACTUAL COMMENCEMENT. ALL THE EXPENDITURE INCURRED OVER THIS INTERVAL WOULD BE AL LOWABLE AND ONLY THAT INCURRED PRIOR TO THE SETTING UP WAS IMPERMISSIBLE. A BUSINESS COULD NOT BE COMMENCED UNLESS IT IS SET UP WHICH WOULD IMPLY TO ESTABLISH OR TO PLACE ON FO OT IN CONTRADISTINCTION TO TO COMMENCE. THE BASIS OF THE HONBLE COURTS DECISIO N WAS THAT THE PREVIOUS YEAR IS DEFINED AS THE DATE FROM WHICH A BUSINESS (OR A SOU RCE OF INCOME) IS SET UP. THE DECISION WAS NOTED WITH APPROVAL IN CWT VS RAMARAJU SURGICAL COTTON MILLS LTD (1967) 63 ITR 478 (SC). IN THAT CASE EXPLAINING THE DIFFERENCE BETWEEN THE TWO EXPRESSIONS I.E. I.T.A. NOS.703& ORS. /COCH/2005 M/S. RUBBER PARK(INDIA) PVT. LTD. VS ACIT EKM 10 COMMENCEMENT AND SET UP IT WAS CATEGORICALLY H ELD BY THE APEX COURT THAT A UNIT CANNOT BE SAID TO HAVE BEEN SET UP UNLESS IT IS REA DY TO DISCHARGE THE FUNCTION FOR WHICH IT IS BEING SET UP. IT IS ONLY WHEN THE UNIT HAS BEEN PUT IN SHAPE TH AT IT CAN START FUNCTIONING AS A BUSINESS OR A MANUFACTURING ORGANIZATION AND IT CAN BE SAID THAT IT (UNIT) HAS BEEN SET UP. THE DECISION CLARIFIES THE MATTER BEYOND ANY D OUBT. THOUGH RENDERED IN THE CONTEXT OF ESTABLISHMENT OF A UNIT THE DIFFERENCE IS INCON SEQUENTIAL IN VIEW OF ITS RATIONALE AS WELL AS ITS RATIO. FIRSTLY WHAT THE HONBLE COURT EXPLA INS IS THE MEANING OF THE TWO EXPRESSIONS WHICH THUS ARE EQUALLY VALID WHEN CONSIDERED IN R ELATION TO ANYTHING OTHER THAN AN INDUSTRIAL UNIT (FACTORY) WHICH WAS UNDER REFERENC E IN THAT CASE. SECONDLY BUSINESS WITH WHICH WE ARE CONCERNED IN THE INSTANT CASE IS ONLY FOR THE REASON THAT IT CONSISTS A SOURCE OF INCOME AS INDEED AN INDUSTRIAL UNIT IS. RATHER AS WOULD BE OBSERVED THE HONBLE COURT SIGNIFIES THE SETTING UP OR ESTABL ISHMENT AGAIN NOTING THE EQUIVALENCE OF THESE TWO TERMS AS A STATE WHERE IT COULD FUNC TION AS A BUSINESS. THAT IS THE RELIANCE BY THE REVENUE ON THE SAID CASE IS BOTH CONTEXTUALL Y AND CONCEPTUALLY VALID. 4.5 WHAT THUS THE APEX COURT HOLDS AS OF RELEV ANCE IS THE FUNCTIONAL TEST. SIMILAR VIEW WAS TAKEN UP BY THE HONBLE GUJARAT HIGH COURT IN COMMISSIONER OF INCOME-TAX VS SARABHAI SONS PVT LTD 90 ITR 318 (GUJ). RELYING ON THE AFORE-CITED DEC ISIONS IT HELD THAT OBTAINING LAND ON LEASE FROM GIDC PLACING ORD ERS FOR MACHINERY AND RAW MATERIALS WERE MERELY OPERATIONS FOR SETTING UP OF BUSINESS. THESE PREPARATIONS WENT ON UPTO JULY 1966 WHEN THE MACHINERY WAS INSTALLED AND PRODUCTIO N COMMENCED. THE REVENUE EXPENDITURE WAS THEREFORE ALLOWABLE FROM THAT DAT E. THE MATTER CAME UP BEFORE THE APEX COURT IN YET ANOTHER CASE IN COMMISSIONER OF INCOME-TAX VS SARABHAI MANAGEMENT CORPORATION LTD (1991) 192 ITR 151 (SC) ANOTHER DECISION RELIED U PON BY THE REVENUE AND ALSO BY THE ASSESSEE. AFFIRMING THE DECISION O F THE HONBLE GUJARAT HIGH COURT [REPORTED AT 102 ITR 25 (GUJ)] THE APEX COURT UPHE LD THE APPLICABILITY OF THE FUNCTIONAL TEST I.E. WHEN THE RESPONDENT COMPANY WAS IN A PO SITION TO OFFER THE SERVICES TO THE LICENCEES. THE ASSESSEE (IN THAT CASE) CLAIMED THA T DATE TO BE OCTOBER 01 1964 AND CLAIMED VARIOUS EXPENSES FROM THAT DATE. THE COMPA NY WAS FOUND TO HAVE PUT THE BUILDING ACCOMMODATION AND LANDS AND GARDENS INTO P ROPER SHAPE AND SET UP THE I.T.A. NOS.703& ORS. /COCH/2005 M/S. RUBBER PARK(INDIA) PVT. LTD. VS ACIT EKM 11 APPURTENANT SERVICES SO THAT THE PROPERTY COULD BE GIVEN ON LEAVE AND LICENCE BASIS ITS AVOWED BUSINESS FROM THAT DATE AND WHICH WAS THU S THE RELEVANT DATE. IT COULD THUS BE SAID TO BE READY TO COMMENCE BUSINESS FROM THE SAID DATE SINCE WHICH IT COULD LEGITIMATELY CLAIM ALL BUSINESS EXPENSES IRRESPECTI VE OF REVENUE GENERATION. IT WOULD NOT BE CORRECT TO TREAT THE BUSINESS AS HAVING COMMENCE D ONLY WHEN THE LICENCEES OR LESSEES OCCUPIED THE PREMISES AND STARTED PAYING RENT. THO UGH WITHOUT REFERENCE TO THE DECISION IN THE CASE OF WESTERN INDIA VEGETABLE PRODUCTS LTD VS COMMISSIONE R OF INCOME-TAX (SUPRA) A MARKED SIMILARITY BOTH ON FACTS AND IN RATIONALE CHARACTERIZES THE TWO CASES. 4.6 THE ASSESSEE HAS RELIED ON THE DECISION IN THE CASE OF COMMISSIONER OF INCOME-TAX VS SAURASHTRA CEMENT & CHEMICAL INDUSTRIES (SUPRA). IN THE FACTS OF THAT CASE THE PROMOTER HAD OBTAINED A MINING LICENCE AND ALSO THE LICENCE FOR MANUFACTURING CEMENT PRIOR TO THE COMPANYS INCORPORATION ON 11-06-1956. THE COMPANY STARTED MINING OPERATIONS IN APRIL 1958 AND CLAIMED EXPENDITURE FOR THE PURPOSE OF EXTRACTING LIME STONE AS ALSO DEPRECIATION ON THE MACHINERY INVOLV ED FOR ASSESSMENT YEARS 1960-61 AND 1961-62 (THE RELEVANT PREVIOUS YEARS ENDING ON 30-0 6-1959 AND 30-06-1960 RESPECTIVELY). THE SAME WAS DISALLOWED ON THE BASI S THAT THE COMPANYS BUSINESS HAD NOT COMMENCED. THOUGH QUARRYING LIME STONE WAS WITHIN THE OBJECT CLAUSES OF THE COMPANYS MOA IT DID NOT ENGAGE IN THAT BUSINESS AND QUARRIED AND EXTRACTED THE LIME STONE ONLY AS A RAW MATERIAL FOR THE MANUFACTURE OF CEMENT. IT WAS IN THIS CONTEXT THAT THE QUESTION OF COMMENCEMENT OF BUSINESS AROSE WHICH W AS ANSWERED IN THE AFFIRMATIVE CONFIRMING THE ALLOWANCE OF THE IMPUGNED EXPENDITUR E BY THE TRIBUNAL WHICH ANALYSED THE ASSESSEES BUSINESS AS COMPRISING THERE DISTINC T STAGES I.E. (1) EXTRACTION OF LIME STONE BY QUARRYING LEASE LAND; (2) TO MANUFACTURE CEMENT AND; (3) SALE OF MANUFACTURED CEMENT. THE SECOND AND THIRD CATEGORIES HAD NOT CO MMENCED IN THE YEARS UNDER REFERENCE; THE MANUFACTURE OF CEMENT STARTING ONLY IN OCTOBER 1960. APPROVING THE DECISION BY THE TRIBUNAL IT WAS HELD THAT THE COMP ANYS BUSINESS CONSISTS OF THE CONTINUOUS PROCESS OF THREE ACTIVITIES SO THAT IT SHOULD BE CONSIDERED AS COMMENCED WHEN THE FIRST ACTIVITY WAS STARTED WITH A VIEW TO EMBARK UPON THE SECOND AND THIRD ACTIVITIES. THE DECISION IN THE CASE OF WESTERN INDIA VEGETABLE PRODUCTS LTD VS I.T.A. NOS.703& ORS. /COCH/2005 M/S. RUBBER PARK(INDIA) PVT. LTD. VS ACIT EKM 12 COMMISSIONER OF INCOME-TAX (SUPRA) AND CWT VS RAMARAJU SURGICAL COTTON MILLS LTD (SUPRA) WERE DISTINGUISHED BY THE HONBLE COURT. T HE PROPOSITION LAID DOWN IN THE FORMER CASE IS THAT THERE IS A DISTINCTION BETWEEN SETTING UP AND COMMENCEMENT OF BUSINESS AND THAT WHEN THE BUSINESS IS ESTABLISHED AND IS READY TO BE COMMENCED IT CAN BE SAID TO HAVE BEEN SET UP. THE SAME WAS HOWEVER DISTINGUISHED ON THE BASIS OF DIFFERENCE IN FACTS AS ULTIMATELY EACH DECISION MUST DEPEND ON ITS PECULIA R FACTS. IF SO BOTH THE SAID DECISIONS COULD HARDLY BE CONSIDERED AS LAYING DOWN ANY RATIO FOR BEING FOLLOWED. IN FACT BOTH THE REFERRED DECISIONS I.E. BY THE HONBLE BOMBAY HIG H COURT AND THE APEX COURT (SUPRA) WERE RELIED UPON BY THE GUJARAT HIGH COURT ITSELF I N THE CASE OF COMMISSIONER OF INCOME- TAX S SARABHAI SONS PVT LTD (SUPRA) WHICH DECISION IS IN THE CONTEXT OF BUSI NESS IN CONTRADISTINCTION TO AN INDUSTRIAL UNIT ON WHICH BASIS THE HONBLE HIGH COURT (IN SAURASHTRA CEMENT & CHEMICALS INDUSTRIES CASE) DIS TINGUISHED THE DECISION BY THE APEX COURT IN CWT VS RAMARAJU SURGICAL COTTON MILLS LTD (SUPRA). WE HAVE ALREADY NOTED THAT THE SAID DIFFERENCE BECOMES IMMATERIAL WHEN THE BUS INESS CONSISTS OF A SINGLE SOURCE OF INCOME THE INCOME FROM THE CARRYING ON OF WHICH IS TO BE COMPUTED. IN FACT EVEN IN THE CASE OF MORE THAN ONE BUSINESS EACH CONSTITUTING A SEPARATE SOURCE OF INCOME INCOME FROM EACH SOURCE IS TO BE SEPARATELY COMPUTED SO T HAT THE QUESTION OF THE SAID SOURCE BE IT AN INDUSTRIAL UNIT OR ANY OTHER BEING ESTABLISH ED OR SET UP WOULD ARISE AS ONLY IN THAT CASE THE EXPENDITURE BEING CLAIMED COULD BE CONSIDE RED AS HAVING BEEN INCURRED IN THE COURSE OF CARRYING ON THE SAME AND INCOME THERE-FR OM COMPUTED U/S. 28 OF THE ACT. REFERENCE IN THIS CONTEXT COULD BE MADE WITH PROFIT TO THE DECISION IN ASHOKE MARKETING LTD VS COMMISSIONER OF INCOME-TAX 208 ITR 94 (CAL) RELIED UPON BY THE REVENUE. FURTHERMORE THE DECISION IN THE CASE OF CWT VS RAMARAJU SURGICAL COTTON MILLS LTD (SUPRA) WOULD APPLY AS THE ASSESSEE-COMPANY (IN TH E INSTANT CASE) IS ADMITTEDLY UNDERTAKING A PROJECT. ALL THE ACTIVITIES PRIOR TO ITS SET UP AS UNAMBIGUOUSLY EXPLAINED THEREIN ARE PRE-OPERATIVE IN NATURE I.E. AS OPER ATIONS FOR THE ESTABLISHMENT OF THE BUSINESS. IN FACT THE DIFFERENCE BETWEEN READY T O COMMENCE AND COMMENCED IS ONLY TECHNICAL OR ACADEMIC AS ONCE THE BUSINESS IS ESTA BLISHED ALL THE EXPENSES INCURRED IN RELATION THERETO ARE DEDUCTIBLE IRRESPECTIVE OF TH E ACTUAL COMMENCEMENT OF BUSINESS. FOR EXAMPLE A MANUFACTURING COMPANY THOUGH IN A POSIT ION TO START COMMERCIAL PRODUCTION I.T.A. NOS.703& ORS. /COCH/2005 M/S. RUBBER PARK(INDIA) PVT. LTD. VS ACIT EKM 13 ABSTAINS FROM DOING SO IN VIEW OF MARKET VOLATILITY OR FOR LACK OF ORDERS FOR SUPPLY. THE POSITION WOULD BE AKIN TO WHERE THE PRODUCTION IS T EMPORARILY SUSPENDED DUE TO AN ADVERSE SITUATION THOUGH THAT WOULD NOT IMPACT THE ALLOWABILITY OF THE EXPENDITURE INCURRED. 4.7 THE PRINCIPAL ISSUE ARISING IN THESE APPEALS CA N THUS BE SAID TO BE DECIDED ON THE BASIS OF FUNCTIONALITY. THIS IS THE ONLY AND UNMIS TAKABLE VIEW THAT EMANATES FROM THE READING OF THE VARIOUS DECISIONS REFERRED TO AND CI TED BEFORE US. WE MAY THEREFORE ANSWER THE QUESTION AS TO THE BUSINESS AS POSED EAR LIER. THE SAME WITHOUT DOUBT FOR THE RELEVANT YEARS IS THE SETTING UP OF AN INDUSTRIAL PARK FOR SALE / LEASE TO ENTREPRENEURS IN PURSUANCE TO OBJECT III(A)(2) OF ITS MAIN OBJECTS. THIS WOULD BE ANALOGOUS TO THE ACQUISITION OF LAND BUILDING PLANT AND MACHINERY AND OTHER NECESSARY FACILITIES FOR OR IN RESPECT OF A MANUFACTURING BUSINESS EVEN AS CLARIF IED BY THE APEX COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX VS SARABHAI MANAGEMENT C ORPORATION LTD (SUPRA) . THE SAME THUS CAN BE SAID TO BE COMMENCED ONLY WHEN T HE COMPANY IS IN A POSITION OR READY TO DELIVER POSSESSION OF THE PLOTS IN THE INDUSTRIA L PARK DULY EQUIPPED WITH ALL THE AMENITIES I.E. WHAT IT SETS OUT TO DO. WHERE SO THE BUSINESS HAS BEEN SET UP AND CAN BE SAID TO HAVE BEEN COMMENCED IRRESPECTIVE OF THE AL LOTMENT OF PLOTS WHICH COULD BE EVEN MADE IN ANTICIPATION AND MAY EITHER PRECEDE OR SUC CEED THE SAID POINT OF TIME. 4.8 TURNING TO THE FACTS OF THE CASE WE FIND THAT VIDE ITS REPORT DATED 21-12-2002 THE BOARD OF DIRECTORS OF THE ASSESSEE COMPANY COMMENT ING ON THE PRESENT STATUS OF THE PROJECT STATE THAT PHASE I OF THE PROJECT IS COMPL ETE THOUGH THE LICENCE FOR DISTRIBUTION OF POWER IS AWAITED. AS IT APPEARS THEREFORE ALL TH AT REMAINS FOR AN ENTREPRENEUR TO SET UP HIS UNIT ON A PLOT IN THE INDUSTRIAL PARK BEING DEV ELOPED BY THE ASSESSEE IS ACCESS TO POWER WITHOUT WHICH OF COURSE THE SAME CANNOT BE . IF THE GRANT OF THE SAID LICENCE AS WHERE THE ASSESSEE HAS COMPLIED WITH ALL THE PRE-RE QUISITES AND IN PRINCIPLE SANCTION FOR THE REQUISITE POWER STANDS ALREADY OBTAINED IS ONL Y A MATTER OF PROCEDURE ENTAILING A SHORT PERIOD OF TIME WE CONSIDER THAT THE COMPANY CAN BE SAID TO BE READY TO COMMENCE BUSINESS AS ON THAT DATE WHICH THOUGH FALLS BEYO ND THE CLOSE OF THE LATEST OF THE I.T.A. NOS.703& ORS. /COCH/2005 M/S. RUBBER PARK(INDIA) PVT. LTD. VS ACIT EKM 14 ASSESSMENT YEARS UNDER REFERENCE I.E. 31-03-2002. WE SAY SO AS THOUGH FOR A PART OF THE TOTAL LAND COVERED BY THE PROJECT THE PROJECT IS C OMPLETE FOR THE LAND COMPRISED IN PHASE I AND THE COMPANY IN A POSITION TO OFFER THE NECES SARY INFRASTRUCTURE FACILITIES TO ENTREPRENEURS ITS CUSTOMERS THEREAT. IN FACT EVEN BY 15/05/2002 THE DATE OF THE EARLIER DIRECTORS REPORT WATER SUPPLY WORK AT SIT E B (IN PHASE I) HAD NOT BEEN COMPLETED AND SANCTION FOR THE ENERGISIATION OF THE SUB STATI ON NOT OBTAINED. AS SUCH CLEARLY THEREFORE THE ASSESSEE COMPANY HAS NOT COMMENCED I TS BUSINESS BY 31-03-2002. ACCORDINGLY THE ASSESSEE IS NOT ENTITLED TO A SET OFF OF THE ADMINISTRATIVE EXPENDITURE INCURRED AS BUSINESS EXPENSES U/S 71(1) OF THE ACT. WE DECIDE ACCORDINGLY. 4.9 WE MAY NEXT ANSWER THE VARIOUS ARGUMENTS AS W ELL AS THE GROUNDS RAISED BY THE PARTIES IN RELATION TO THIS ISSUE. ONE OF THE ASSE SSEES ARGUMENTS IS THAT THE REVENUE HAVING NOT APPEALED AGAINST THE APPELLATE ORDER FOR THE ASSESSMENT YEAR 2002-03 WHICH ALSO FORMS THE BASIS OF THE ASSESSMENT FOR ASSESSME NT YEARS 1999-2000 AND 2000-01 AND WHEREBY THE LD.CIT(A) HAS HELD THAT THE BUSINESS CO MMENCED IN SEPTEMBER 1999 WHEN THE DEVELOPMENT WORK OF LAND AND CONSTRUCTION OF IN FRASTRUCTURE FACILITIES STARTED THE SAID FINDING HAS BECOME FINAL. AS SUCH THE ONLY DISPUT E OR THE BONE OF CONTENTION BETWEEN THE PARTIES IS THE TREATMENT TO BE GIVEN TO THE IMP UGNED EXPENDITURE WHICH HE HOLDS AS NOT ALLOWABLE IN VIEW OF THE ACCOUNTING METHOD BEIN G FOLLOWED. WE ARE UNABLE TO AGREE. FIRSTLY THE ARGUMENT COULD BE ADVANCED ONLY IF THE ASSESSMENT FOR ASSESSMENT YEAR 2001- 02 HAD ALSO BEEN SIMILARLY DECIDED. FOR THAT YEAR THE FIRST APPELLATE AUTHORITY HAS CLEARLY HELD THAT THE VARIOUS STEPS TAKEN BY THE COMPANY A S DETAILED AT PARAGRAPHS 2 & 3 OF HIS ORDER WERE ONLY PREOPERATIVE IN NATURE AND ON THE TOTALITY OF THE PROGRESS MADE IT CANNOT BE SAID THAT THE COMPANY HAD COMMENCED BUSINESS WH ICH WOULD ONLY BE WHEN IT IS ABLE TO EXTEND THE BENEFITS TO ITS INTENDED BENEFICIARIE S CUSTOMERS ETC. IT IS IN VIEW OF THIS FINDING WHICH NO DOUBT THE ASSESSEE AGITATES AND T HE REVENUE SUPPORTS THAT THIS ISSUE IS ALIVE AND CONTESTED BETWEEN THE PARTIES. THE SAME W OULD NECESSARILY REQUIRE OF US TO ISSUE A FINDING AS TO THE DATE OF THE COMMENCEMENT OF BUSINESS IN THE PRESENT CASE OR AT LEAST THE BASIS FOR ITS DETERMINATION AND WHICH WO ULD BE VALID FOR ALL THE YEARS UNDER REFERENCE. ALSO IT IS WELL SETTLED THAT THE TRIBUN AL IS FULLY COMPETENT TO DETERMINE THE I.T.A. NOS.703& ORS. /COCH/2005 M/S. RUBBER PARK(INDIA) PVT. LTD. VS ACIT EKM 15 ACTUAL ISSUE ARISING FOR DETERMINATION IN APPEAL A S ALSO ALLOW TO RELIEF ON A GROUND DIFFERENT FROM THAT BEING URGED BEFORE IT. IT IS W ELL-SETTLED THAT IT IS THE CORRECT LEGAL POSITION THAT IS RELEVANT AND NOT THE VIEW THAT TH E PARTIES MAY TAKE OF THEIR RIGHTS IN THE MATTER [ CIT V. C. PARAKH & CO. (INDIA ) LTD . (1956) 29 ITR 661 (SC); KEDARNATH JUTE MFG. CO. LTD. V. CIT (1971) 82 ITR 363 (SC)]. 4.10 THE ASSESSEES NEXT PLEA IS THAT `BUSINESS OUGHT TO BE CONSIDERED AS COMMENCED AT LEAST FROM THE YEARS FROM WHICH IT STARTS SELLIN G TENDER FORMS REPORTING INCOME THERE- FROM WHICH ALSO STANDS ALONG WITH OTHER MISCELLAN EOUS INCOME ASSESSED AS INCOME FROM OTHER SOURCES U/C. IV-F. THE SAME MORE SO IN LIGHT OF THE FOREGOING DISCUSSION COULD HARDLY MERIT A NOD. THE SAID ACTIVITY COULD A T BEST BE CONSIDERED AS INDEED IT IS AN ADJUNCT AND INCIDENTAL TO THE OTHER PREPARATORY ACT IVITIES BEING UNDERTAKEN BY THE COMPANY FOR THE SETTING UP FOR LEASE INDUSTRIAL PLO TS IN THE RUBBER PARK. IS IT NECESSARY THAT THE APPLICATIONS ARE INVITED FROM ENTREPRENEURS ONL Y AFTER ALL THE FACILITIES ARE IN PLACE? THOUGH PRIMARILY A DECISION FOR THE MANAGEMENT TO T AKE IN FACT CALLING FOR THE SAME EARLIER COULD PROVIDE ESSENTIAL INPUTS FOR THE PROJ ECT MANAGEMENT VIZ. ENABLE ASSESSMENT OF THE LATENT DEMAND FOR THE PLOTS; THEIR POWER AND OTHER INFRASTRUCTURAL REQUIREMENTS; THE SIZE PROFILE WHICH WOULD IN TURN HELD DESIGN THE L AND SPACE TO BE PUT UP FOR LEASE ETC. THAT THE SAID ACTIVITY GENERATES SOME INCOME WHICH THOUGH MAY NOT CORRESPOND WITH THE GROSS SALE VALUE (AS THERE WOULD BE SOME COST ASSOC IATED THEREWITH IF ONLY IN THE FORM OF THE PRINTING STATIONERY AND ADVERTISEMENT PUBLICIS ING THE FORMS BEING ON TAP) IS OF NO CONSEQUENCE. ASSUMING AN EQUIVALENT COST AND WHICH STANDS DEBITED TO THE OPERATING STATEMENT (P&L ACCOUNT) TOWARD WHICH NO PLEA STAN D MADE THOUGH THERE WOULD BE NO NET INCOME SO THAT THE ADJUSTMENT REQUIRED WOULD B E TO REDUCE THE SAID INCOME FROM THAT ASSESSED U/C. IV-F. ON THE OTHER HAND ASSUMING A N ET INCOME THE SAME BEING INEXTRICABLY RELATED TO THE PROJECT COST THE LATTE R WOULD REQUIRE BEING REDUCED TO THAT EXTENT AS ALSO WOULD BE THE CASE IN RESPECT OF INC OME BY WAY OF SALE OF TREES. EITHER WAY THEREFORE THE SAME CANNOT BE ASSESSED AS INCOME. R EFERENCE IN THIS CONTEXT BE MADE TO THE DECISIONS IN THE CASE OF COMMISSIONER OF INCOME-TAX VS BOKARAO STEEL LTD (1999) 236 I.T.A. NOS.703& ORS. /COCH/2005 M/S. RUBBER PARK(INDIA) PVT. LTD. VS ACIT EKM 16 ITR 315 (SC) APPLYING THE DECISION IN CHELLAPALLI SUGARS LTD VS COMMISSIONER OF INCOME-TAX (1975) 98 ITR 167 (SC). 4.11 THE NEXT CLARIFICATION IN VIEW OF OUR HOLDING THE ASSESSEE COMPANY TO HAVE NOT COMMENCED BUSINESS UP TO 31-03-2002 IS THE IRRELEV ANCE OF THE FINDING BY THE LD.CIT(A) WITH REGARD TO THE ASSESSEE FOLLOWING THE PROJECT C OMPLETION METHOD. THE LAND AND OTHER INFRASTRUCTURE FACILITIES BEING ACQUIRED BY THE ASS ESSEE ARE NOT MEANT FOR SALE / DISPOSAL BY THE ASSESSEE SO THAT THE SAME DO NOT CONSTITUTE IT S STOCK-IN-TRADE. THE SAME ARE TO BE RETAINED AND YIELD THE ASSESSEE A REGULAR STREAM O F INCOME WHICH THOUGH MAY NOT BE SPREAD EVENLY OVER THE YEARS OF THE SUB-LEASE AS W HERE THE ASSESSEE RECOUPS THE BULK OF ITS COST UPFRONT BY WAY OF LEASE PREMIUM. THE DECIS ION IN THE CASE OF RAJA J. RAMESWAR RAO VS. CIT (SUPRA) IS THUS NOT APPLICABLE IN THE FACTS OF THE CASE. FURTHER HIS FINDINGS IN RESPECT THERETO AS ALSO QUA THE COMMENCEMENT OF BUSINESS STAND VACATED IN VIE W OF OUR FINDINGS SUPRA EVEN AS HE HAS CLARIFIED THAT IN VI EW OF THE METHOD OF ACCOUNTING FOLLOWED THE PROJECT COST WHETHER CONSIDERED AS S TOCK-IN-TRADE OR NOT WOULD STAND TO BE CARRIED FORWARD AND ALLOWED SET OFF ONLY WHEN THE INCOME IS RECOGNIZED BY THE ASSESSEE. CONTINUING FURTHER IN OUR VIEW THE ASSESSEE HAS C ORRECTLY CAPITALIZED IN ITS ACCOUNTS ALL THE DIRECT AND INDIRECT COSTS AS RELATABLE TO THE F IXED ASSETS I.E. TOWARDS THEIR ACQUISITION OR CONSTRUCTION 4.12 THE NEXT ISSUE ARISING IS THE VALIDITY OF THE REOPENING PROCEEDINGS FOR ASSESSMENT YEARS 1999-2000 AND 2000-01 BEING CHALLENGED BY TH E ASSESSEE WHOSE APPEALS ARE THOUGH BARRED BY 32 DAYS. WE ANSWER THE SAME AFTER ADMITTING THE APPEALS BY CONDONING THE DELAY BEING SUITABLY EXPLAINED. THE ASSESSEE S CHALLENGE RESTS ON THE BASIS THAT FULL AND COMPLETE PARTICULARS HAD BEEN FURNISHED PER THE RETURN/S OF INCOME AND ASSESSMENT U/S 143(1) HAD BECOME FINAL IN THE ABSENCE OF ISSUE OF NOTICE U/S 143(2). THE NOTICE U/S 148 STANDS ISSUED ON 10-09-2004 AND 24-08-2004 FOR THE TWO CONSECUTIVE YEARS RESPECTIVELY. THE SAME AS SUCH IS WITHIN FOUR YEAR S FOR ASSESSMENT YEAR 2000-01. ALSO THE CONSIDERATION OF TRUE AND FULL DISCLOSURE WHIC H WOULD SAVE ACTION U/S 148 BEYOND FOUR YEARS AND THUS OBTAINS FOR ASSESSMENT YEARS 1 999-2000 IS APPLICABLE ONLY IN CASE OF I.T.A. NOS.703& ORS. /COCH/2005 M/S. RUBBER PARK(INDIA) PVT. LTD. VS ACIT EKM 17 ASSESSMENT U/S 143(3) OF THE ACT WHILE ADMITTEDLY THE RETURNS OF BOTH THESE YEARS WERE ONLY PROCESSED U/S 143(1). THE NON ISSUE OF NOTICE U/S 143(2) IS OF NO CONSEQUENCE AND WOULD NOT IMPUGN AN ACTION U/S 148 WHERE THE INGRED IENTS OF SECTION 147 ARE OTHERWISE FULFILLED [REFER: ACIT VS RAJESH JHAVERI STOCK BROKERS PVT LTD (2007) 291 ITR 500 (SC)]. THE INCOME ESCAPING ASSESSMENT FOR ASSESSMENT YEAR 1999-2000 IS CLEARLY IN EXCESS OF RS.1 LAKH THE THRESHOLD LIMIT FOR REOPENING BEYOND FOUR YEARS (BUT WITHIN SIX YEARS). ACCORDINGLY ACTION U/S 147 IS LEGALLY VALID FOR BO TH THE YEARS. 4.13 NEXT WE CONSIDER THE REVENUES GRIEVANCE Q UA THE ALLOWANCE OF IMPUGNED EXPENDITURE AGAINST BANK INTEREST INCOME WHICH STA NDS ALLOWED BY THE LD.CIT(A) ON THE BASIS THAT THE SAME WORKS TO 18% OF THE INTEREST F OLLOWING THE DECISION BY THE TRIBUNAL IN THE CASE OF COCHIN INTERNATIONAL AIRPORT LTD VS ASSIST.COMMISS IONER OF INCOME-TAX ERNAKULAM (IN ITA NO.45 & 46/COCH/2000 DATED 30-01-2004). T HE REVENUE CONTESTS THE SAME PLACING RELIANCE ON TRACO CABLE COMPANY LTD (SUPRA) AND SARAF TEXTILE INDUSTRIES VS COMMISSIONER OF INCOME-TAX 217 ITR 507 (RAJ). WE FIND THAT THE ASSESSEES CLAIM IS NOT TENABLE AT ALL. FIRSTLY A S CLARIFIED IN THE FOREGOING PART OF THIS ORDER WITH REFERENCE TO THE DECISION BY THE HONBL E JURISDICTIONAL HIGH COURT IN THE ASSESSEES OWN CASE (W.P. NO.438 OF 2005 DATED 06-0 1-2005) THE ONLY ISSUE IS THE NON SET OFF OF BUSINESS LOSS AGAINST POSITIVE INCOME UN DER CHAPTER IVF U/S 71(1) OF THE ACT (REFER PARAGRAPH 4.2). THAT BEING THE CASE WE ARE UNABLE TO SEE AS TO HOW THE SAID ADMITTED BUSINESS EXPENDITURE IS NOW BEING CLAIMED AS LAID OUT WHOLLY AND EXCLUSIVELY FOR EARNING BANK INTEREST SO AS TO BE DEDUCTIBLE U /S 57(III) QUA WHICH THERE IS NO FINDING BY THE FIRST APPELLATE AUTHORITY IN ANY THE YEARS AND WHICH CLAIM WHERE ADMITTED BY HIM WOULD HAVE REQUIRED A REMISSION TO THE A.O. I.E. AFTER SATISFYING HIMSELF THAT A PRIMA FACIE CASE IS MADE OUT. WE ARE AWARE THAT THE ASSESSEE IS A COMPANY SO TH AT SOME EXPENDITURE ON MAINTAINING ITS STATUS (AS A CORPORATE ENTITY) WOUL D HAVE TO BE NECESSARILY INCURRED. NO ARGUMENT IN THIS REGARD WAS RAISED EVEN AS THE SAM E WOULD ALSO REQUIRE A FINDING AS REGARDS THE INCURRING OF SUCH EXPENDITURE AS WELL AS ITS EXTENT AND WHICH CANNOT BY ITS VERY NATURE BE EITHER FIXED OR HAVE ANY FIXED PARAM ETER MUCH LESS WITH REGARD TO THE I.T.A. NOS.703& ORS. /COCH/2005 M/S. RUBBER PARK(INDIA) PVT. LTD. VS ACIT EKM 18 INCOME BEING EARNED. SO HOWEVER IT IS APPARENT A S WELL AS ADMITTED THAT THE BULK OF THE ECONOMIC ACTIVITY TO SUPPORT WHICH THE SAID REVENU E EXPENDITURE IS BEING INCURRED AS WELL AS DOMINANT PURPOSE FOR WHICH THE COMPANY EXIS TS AND HAS FUNCTIONED FOR THE RELEVANT YEARS IS THE SET UP OF THE INDUSTRIAL PAR K. AS SUCH IN OUR CONSIDERED VIEW NO PART OF THE SAME WOULD QUALIFY FOR DEDUCTION U/S. 5 7 THE LAW ON WHICH IS WELL SETTLED AND FOR WHICH THE REVENUE HAS RELIED ON THE DECISIONS O N THE CASE OF VIJAYA LAXMI SUGAR MILLS LTD (SUPRA); TUTICORIN ALKALIES AND FERTILISERS (SUPRA); AND DR V.P. GOPINATHAN (SUPRA) APART FROM A HOST OF DECISIONS OF THE HONO URABLE JURISDICTIONAL HIGH COURT. REFERENCE IN THE CONTEXT IS ALSO MADE TO THE DECISI ON IN THE CASE OF SARABHAI SONS PVT LTD VS COMMISSIONER OF INCOME-TAX (1993) 201 ITR 464 (GUJ). WE DECIDE ACCORDINGLY. 4.14 THE ONLY ISSUE THAT SURVIVES IS WHETHER ANY PA RT OF THE IMPUGNED EXPENDITURE WOULD QUALIFY TO BE A DIRECT OR INDIRECT COST WARR ANTING BEING CAPITALIZED AS PART OF THE PROJECT COST. WE ARE AGAIN ACUTELY AWARE THAT NO SUCH CLAIM HAS BEEN MADE BY THE ASSESSEE WHO HAS THROUGHOUT MAINTAINED THE SAME TO BE REVENUE EXPENDITURE. ALSO THE ASSESSEES ACCOUNTS ARE AUDITED BY A REPUTED FIRM O F AUDITORS FOLLOWING WELL ACCEPTED ACCOUNTING PRINCIPLES. SO HOWEVER WE OBSERVE THA T THE COMPANY HAS CLAIMED ARCHITECTS FEE AT RS.7 85 241/- FOR ASSESSMENT YEA R 2001-02 AND WHICH IS OSTENSIBLY ONLY A DIRECT COST OF CONSTRUCTION. WE HAVE ALREAD Y NOTED (REFER PARA 4.10) THAT THE INCOME FROM SALE OF FORMS AND TREES CAN NOT BE TREA TED AS INDEPENDENT OF THE PROJECT AND EVEN IF NO COSTS ARE ATTRIBUTABLE THERETO (WHICH IS IMPRACTICAL) OR SUCH COSTS STAND ALREADY CAPITALIZED AS PART OF THE PROJECT COST (AND NOT IN CLUDED IN THE IMPUGNED ADMINISTRATIVE EXPENDITURE) THE SAME CANNOT BE ASSESSED AS INCOME . FURTHER WE ALSO OBSERVE A DIFFERENCE IN THE AMOUNTS CLAIMED FOR TWO YEARS I. E. ASSESSMENT YEAR 2001-02 AND 2002- 03. WHILE THE ASSESSEES CLAIM FOR ASSESSMENT YEAR 2001-02 IS AT RS.68 71 306 ITS ACCOUNTS DISCLOSE AN EXPENDITURE OF RS.39.47 LAKHS ONLY INCLUDING THE ARCHITECTS FEES AFORESAID AND DONATION FOR RS.1 LAKH. SIMILARLY FOR ASSESSMENT YEAR 2002-03 WHILE THE EXPENDITURE DISALLOWED BY THE ASSESSING OFFICER AND CONFIRMED BY THE APPELLATE ORDER IS AT RS.43 81 588 THE ASSESSEE AGITATES THE SAME AT RS. 59 32 893 PER ITS GROUNDS OF APPEAL BEFORE US AS WELL AS BEFORE THE FIRST APPELLATE AUT HORITY WHOSE ORDER IS SILENT ON THE I.T.A. NOS.703& ORS. /COCH/2005 M/S. RUBBER PARK(INDIA) PVT. LTD. VS ACIT EKM 19 MATTER. THESE ASPECTS WOULD REQUIRE BEING LOOKED I NTO AND WHICH HAVE ADMITTEDLY NOT BEEN BY ANY AUTHORITY. WE ACCORDINGLY RESTORE THE MATTER TO THE FILE OF THE AO TO ALLOW THE ASSESSEE AN OPPORTUNITY FOR VERIFICATION OF THE ASSESSEES CLAIMS IF ANY QUA AND LIMITED TO THESE ASPECTS. THE ONUS TO JUSTIFY WITH EVIDENCE HOWEVER OF A PART OF THE IMPUGNED EXPENDITURE INCURRED BY THE ASSESSEE AS HA VING IN FACT BEEN INCURRED FOR THE PROJECT SO AS TO ADD TO ITS VALUE/COST AND THUS MERIT CAPITALIZATION WOULD ONLY BE ON THE ASSESSEE. WE DECIDE ACCORDINGLY. 5. IN THE RESULT THE ASSESSEES APPEALS FOR ALL TH E YEARS ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES WHILE THE REVENUES APPEALS FO R ASSESSMENT YEARS 1999-2000 AND 2000-01 ARE ALLOWED FOR STATISTICAL PURPOSES. . SD/- SD/- (N.R.S.GANESAN) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: ERNAKULAM DATED: 3RD FEBRUARY 2012 GJ COPY TO: 1. M/S. RUBBER PARK (P) LTD. 5 TH FLOOR PENTA TOWER KALOOR KOCHI-17 2. THE DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-1( 3) ERNAKULAM. 3. THE ASSISTANT COMMISSIONER OF INCOME-TAX CIRCL E-1(3) ERNAKULAM 3. THE COMMISSIONER OF INCOME-TAX (APPEALS)-II KOC HI 4. THE COMMISSIONER OF INCOME-TAX KOCHI 5. D.R. I.T.A.T. COCHIN BENCH COCHIN. 6. GUARD FILE . BY ORDER ( ASSISTANT REGISTRAR) ITAT COCHIN BENCH