Rio Tinto India (P) Ltd, v. DCIT circle 15 (1),

ITA 932/DEL/2008 | 2003-2004
Pronouncement Date: 27-08-2010 | Result: Partly Allowed

Appeal Details

RSA Number 93220114 RSA 2008
Bench Delhi
Appeal Number ITA 932/DEL/2008
Duration Of Justice 2 year(s) 5 month(s) 17 day(s)
Appellant Rio Tinto India (P) Ltd,
Respondent DCIT circle 15 (1),
Appeal Type Income Tax Appeal
Pronouncement Date 27-08-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted F
Tribunal Order Date 27-08-2010
Date Of Final Hearing 09-08-2010
Next Hearing Date 09-08-2010
Assessment Year 2003-2004
Appeal Filed On 11-03-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F DELHI BEFORE SHRI C.L. SETHI AND SHRI K.G. BANSAL ITA NO. 1993(DEL)/2004 ASSESSMENT YEAR: 2001-02 ITA NO. 4976(DEL)/2007 ASSESSMENT YEAR: 1999-00 ITA NO. 931(DEL)/2008 ASSESSMENT YEAR: 2000-01 ITA NO. 932(DEL)/2008 ASSESSMENT YEAR: 2003-04 RIO TINTO INDIA PVT. LTD. DEPUTY COMMISSIONER OF INCOME 2 ND FLOOR DLF CENTRE VS. TAX CIRCLE 15(1) NEW DELHI. SANSAD MARG NEW DELHI-1. AND ITA NO. 2419(DEL)/2010 ASSESSMENT YEAR: 2005-06 RIO TINTO INDIA PVT. LTD. INCOME-TAX OFFICER 2 ND FLOOR DLF CENTRE VS. WA RD 15(4) NEW DELHI. SANSAD MARG NEW DELHI-1. PAN-AAACR5591A (APPELLANT) (RESPONDENT) CONTD. PAGE 2 ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 2 APPELLANT BY : SHRI C.S. AGGARWAL & SHRI RAVI PRATAP MALL ADVOCATES RESPONDENT B Y : SHRI RAJNI KANT GUPTA CIT DR ORDER PER K.G.BANSAL : AM THESE APPEALS OF THE ASSESSEE WERE ARGUED IN A CONSOLIDATED MANNER BY THE LD. COUNSEL FOR THE ASSESSEE AND THE LD. DR. THEREFORE A CONSOLIDATED ORDER IS PASSED. ITA NO. 1993(DEL)/2004-A.Y. 2001-02 2. IN THIS APPEAL FILED ON 29.4.2004 THE ASS ESSEE TOOK UP SIX SUBSTANTIVE GROUNDS. THE GROUNDS ARE NARRATIVE OF FACTS AND LAW. ON PERUSING THE SAME IT IS FOUND THAT THE REAL GR IEVANCE OF THE ASSESSEE IS TO THE EFFECT THAT THE LD. CIT(A) ERRED ON THE F ACTS AND IN THE CIRCUMSTANCES OF THE CASE IN -(I) CONFIRMING THAT SERVICES CH ARGES AMOUNTING TO RS. 25 000/- DO NOT REPRESENT THE BUSINESS INCOME OF THE ASSESSEE BUT ARE IN THE NATURE OF INCOME FROM OTHER SOURCES AND (I I) HOLDING THAT THE BUSINESS OF THE ASSESSEE HAS NOT BEEN SET UP IN T HIS YEAR WHEN AS A MATTER OF FACT IT HAD COMMENCED BUSINESS ON 1.1.199 7. IN OTHER GROUNDS IT IS MENTIONED THAT THE LD. CIT(A) ERRED IN NOT FOLL OWING THE PRINCIPLE OF CONSISTENCY. THE REPORT OF THE DIRECTORS SHOW T HAT VARIOUS AGREEMENTS ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 3 HAD BEEN ENTERED INTO FOR RENDERING TECHNICAL SERVICE AND THE BUSINESS WAS CARRIED OUT. THE ASSESSEE HAD PROVIDED TE CHNICAL SERVICES TO ACC RIO TINTO EXPLORATION LTD. (ARTEL FOR SHORT) AND EARNED INCOME THEREFROM. HIS ORDER IS BASED UPON ERRONEOUS OBSE RVATIONS THAT (I) NO BUSINESS ACTIVITY HAS BEEN CARRIED OUT IN THIS YEAR AND (II) NO BUSINESS INCOME HAS BEEN EARNED IN THIS YEAR. IN LETTER DATED NIL THE GROUNDS OF APPEAL WERE MADE MORE SPECIFIC IN WHICH FIVE GROUNDS WERE TAKEN. IT IS INTER-ALIA MENTIONED THAT (I) THE ENTIRE EXPENDITURE OF RS. 10 01 00 279/- SHOULD HAVE BEEN HELD AS BUSINES S EXPENDITURE AND NOT PRE-OPERATIVE EXPENDITURE (II) SERVICE CHARG ES OF RS. 25 000/- AND INTEREST INCOME OF RS. 23 97 742/- SHOULD HAVE B EEN ASSESSED AS BUSINESS INCOME FOR WHICH AN IDENTICAL EXPENDITURE HAS BEEN INCURRED (III) THE ASSESSEE HAD DECLARED AGGREGATE RECEIPTS OF RS . 1 01 23 008/- WHICH WERE IN THE NATURE OF BUSINESS RECEIPTS AND (IV ) THE LOSS AND UNABSORBED DEPRECIATION OF RS. 31 07 79 934/- SHOULD HAVE BEE N SET-OFF. GROUND NO. 3 OF THE MODIFIED GROUNDS WAS AGAIN MODIFIED ON 9.8.2010 TO THE EFFECT- THAT THE LD. CIT(A) ERRED IN UPHOLDING THAT THE BUSINESS HAD NOT COMMENCED AND THAT INCOME DERIVED BY THE AS SESSEE BY WAY OF SERVICE CHARGES RS. 25 000/- AND RS. 23 97 742/- BY WAY OF INTEREST WAS ASSESSABLE UNDER THE HEAD OTHER SOURCES AND OTHERWISE NO EXPENSES WERE ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 4 ALLOWABLE. THAT EVEN OTHERWISE THE SAID INCO ME IS LIABLE TO BE SET-OFF FROM THE BUSINESS LOSS (UNQUOTE). HAVING CONSIDE RED THE VARIOUS GROUNDS WHICH ARE REPETITIVE AND ALSO ARGUMENTATIVE IN NATURE WE ARE OF THE VIEW THAT THE REAL QUESTION BEFORE US IS-WHETHER THE BUSINESS OF THE ASSESSEE HAD BEEN SET UP AND THE INCOME BY WAY OF S ERVICES CHARGES AND INTEREST WAS ASSESSABLE AS PROFITS AND GAINS OF BUSINESS OR PROFESSION? THE APPEAL IS DISPOSED OFF IN THE LIGHT OF AND T O THE EXTENT OF SUBMISSIONS MADE BEFORE US BY THE RIVAL PARTIES. 2.1 IT MAY BE MENTIONED HERE THAT THE APPEAL WA S DISMISSED IN LIMINE ON 15.11.2006 FOR NON-PROSECUTION. THIS ORDER WAS RECALLED ON 5.10.2007 BY RESTORING IT TO ITS ORIGINAL NUMBER . 3. THE FACTS AS MENTIONED IN THE ASSESSMENT ORD ER ARE THAT THE RETURN OF INCOME WAS FILED ON 22.11.2001 DECLARING LOSS OF RS. 8 10 79 280/-. THE ASSESSEE FILED INVOICE OF RS. 25 000/- RAISED O N NORTH MINING LTD. DATED 31.03.2001. ON THE BASIS OF FURTHER ENQUIRIES A ND AFTER CONSIDERING THE SUBMISSIONS IT HAS BEEN MENTIONED THAT (I) THE BUSINESS OF THE ASSESSEE IS TO PROVIDE TECHNICAL AND TECHNOLOGICAL SUPPORT TO INDIAN MINING INDUSTRY; (II) IT RECEIVED RS. 25 000/- FROM NORTH MINING LTD. GROUP; AND (III) THERE ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 5 WAS NO FORMAL AGREEMENT AS BOTH THE ENTITIES WERE WORKING UNDER THE SAME GROUP. IN THE LIGHT OF THESE FACTS IT HA S BEEN CONCLUDED THAT THE ASSESSEE HAS NOT CARRIED OUT ANY BUSINESS AND THE AFORESAID AMOUNT IS TAXABLE UNDER THE RESIDUARY HEAD. IT HAS BEEN FURTHER MENTIONED THAT THIS AMOUNT AND INTEREST INCOME OF RS. 23 97 742/- AGG REGATING TO RS. 24 22 742/- ARE ASSESSABLE UNDER THE RESIDUAR Y HEAD. IT HAS ALSO BEEN MENTIONED THAT FACTS OF EARLIER YEARS WERE IDENTICAL AND THEREFORE THE ASSESSMENTS ARE BEING REOPENED U/S 148. 3.1 AGGRIEVED WITH THE ASSESSMENT ORDER THE ASS ESSEE FILED APPEAL BEFORE THE CIT(APPEALS)-XVIII NEW DELHI WHO DISPOSED IT OFF ON 12.2.2004 IN APPEAL NO. 36/2003-04. BEFORE HIM IT HAS BEEN SUBMITTED THAT THE ASSESSEE IS IN THE BUSINESS OF RENDERIN G TECHNICAL CONSULTANCY AND TRAINING SERVICES IN ALL AREAS OF EXPLORATION DEVELOPMENT AND OTHER ACTIVITIES RELATED TO MINING INDUSTRY. IN THIS BUSINESS IT MAKES AVAILABLE TECHNICAL ASSISTANCE IN THE FORM OF PERSONNEL AND RESOURCES. IT IS ONE OF THE COMPANIES OF RIO TINTO GROUP. THIS GROUP TOOK O VER NORTH MINING LTD. IN THE YEAR 2000. THAT COMPANY MAINTAINED A LI AISON OFFICE IN INDIA. THE LIAISON OFFICE WAS CLOSED AS ITS EXISTENCE AMOUNTED TO DUPLICATION OF EFFORTS. THE ASSESSEE HAS BEEN PROVIDING SERVIC ES TO RIO TINTO GROUP ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 6 COMPANIES IN INDIA. INCOME OF RS. 25 000/- WAS E ARNED BY VIRTUE OF RENDERING SERVICES WHICH WAS IN THE NATURE OF BUSINESS INCOME. THE LD. CIT(A) EXAMINED THE FACTS OF THE CASE AND SUB MISSIONS MADE BEFORE HIM. IT HAS BEEN MENTIONED THAT (I) THE ASSES SEE RECEIVED RS. 25 000/- FOR CLOSING THE LIAISON OFFICE IN INDIA AND (II ) THE ASSESSEE IS CARRYING ON THE BUSINESS OF RENDERING TECHNICAL AND TECHNOL OGICAL SUPPORT TO INDIAN MINING INDUSTRY. IN THE LIGHT OF THESE FACTS IT HAS BEEN HELD THAT THE AMOUNT RECEIVED ON CLOSURE OF THE LIAISON OFFICE IN INDIA CANNOT BE TERMED TO BE BUSINESS INCOME. THUS THE FINDI NGS OF THE AO WERE CONFIRMED ON THIS GROUND. 3.2 IT HAS BEEN FURTHER SUBMITTED TO HIM THAT THE EXPENDITURE INCURRED DURING THE YEAR ON POSTAGE TELEPHONE TELEX TR AVELING AND CONVEYANCE BUSINESS PROMOTION RENT CONSULTANCY ETC. WAS IN THE NORMAL COURSE OF BUSINESS WHICH WAS DEDUCTIBLE IN COMPUTING THE TOTAL INCOME. THE LD. CIT(A) EXAMINED THIS CONTENTION. IT HAS BEEN MEN TIONED THAT THE FINDINGS OF THE AO IN THIS REGARD ARE BASED UPON HIS EARL IER FINDING THAT NO BUSINESS ACTIVITY HAS BEEN CARRIED ON BY THE A SSESSEE AND SERVICE CHARGES ARE TAXABLE UNDER THE RESIDUARY HEAD. THEREFORE IT HAS BEEN HELD THAT THE EXPENSES WERE BEING INCURRED AT THE DEVELOPMENT STAGE AND BUSINESS HAS ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 7 NOT ACTUALLY COMMENCED. THE EXPENDITURE INCURRE D IN SETTING UP OF THE BUSINESS IS NOT DEDUCTIBLE IN COMPUTING THE TOTAL INCOME. THEREFORE THE APPEAL OF THE ASSESSEE WAS DISMISSED ON THIS GROUN D ALSO. 3. BEFORE US THE LD. COUNSEL FURNISHED A BRIEF HISTORY OF LITIGATION IN THIS CASE. IT IS SUBMITTED THAT THE ASSESSME NT ORDER FOR ASSESSMENT YEAR 1998-99 WAS PASSED U/S 143(3) OF THE ACT ON 1.2.2001 IN WHICH THE CLAIM REGARDING ITS CARRYING ON OF THE BUSINESS HAD BEEN ACCEPTED. PARAGRAPH 5.2 OF THAT ORDER (PAGE NOS. 117 AND 11 8 OF THE PAPER BOOK) IN THIS CONNECTION IS REPRODUCED BELOW:- 5.2 THE SUBMISSIONS OF THE ASSESSEE WERE CONSID ERED. THE ASSESSEE ITSELF HAD SUBMITTED THAT SUCH A HEA VY EXPENDITURE WAS INCURRED AS THE YEAR UNDER CONSIDERATION IS THE FIRST YEAR OF OPERATIONS OF THE ASSESSEE AND THAT THE COMP ANY HAD TO PROVE IN THE MARKET THAT IT HAD SUFFICIENT INFRAS TRUCTURE TO PROVIDE SERVICES. FROM THE REPLY OF THE ASSESSE E IT IS INFERRED THAT SUCH EXPENDITURE WAS INCURRED PRI MARILY TO KICK START THE BUSINESS HENCE BENEFIT OF ENDURING NATURE WAS LIKELY TO BE OBTAINED. THEREFORE SUCH EXPENDITUR E CANNOT BE ALLOWED AS A REVENUE EXPENDITURE AS SUCH EXPEN DITURE HAS BEEN INCURRED BY THE ASSESSEE TO CREATE AN INFR ASTRUCTURE FOR FACILITATION OF FUTURE BUSINESS HENCE BENEFIT OF ENDURING NATURE WAS IMPOSED TO BE DERIVED. HOWEVER IT CANNOT BE DENIED THAT SOME EXPENSES WOULD BE REQUIRED UND ER THE STATED HEADS FOR RUNNING THE DAY-TO-DAY BUSINE SS OF THE COMPANY. THEREFORE 20% OF THESE SUMS OF (TOTAL R S. 3 77 18 537/-) I.E. RS. 5 43 707/- IS ALLOWED WHILE COMPUTING THE TOTAL INCOME OF THE ASSESSEE COMPAN Y. THE ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 8 BALANCE AMOUNT OF RS. 3 01 74 830/- IS DISALLOWED AS EXPENSES OF CAPITAL NATURE. 3.1 THE ASSESSEE FILED APPEAL AGAINST THE DISALL OWANCE OF THE EXPENDITURE. THE LD. CIT(A) IN ORDER DATED 20 .11.2001 IN APPEAL NO. 174/2001-02 ACCEPTED THE CLAIM OF THE ASSESSEE . PARAGRAPH 7 OF THAT ORDER (PAGE NOS. 125 AND 126 OF THE PAPER BOOK) IS REPRODUCED BELOW:- 7. I HAVE CAREFULLY EXAMINED THE FACTS AND CIR CUMSTANCES OF THE CASE AND HAVE PERUSED THE DETAILS OF IMP UGNED EXPENSES. THE APPELLANT COMPANY WAS INCORPORATED ON 19.12.1996 AND COMMENCED ITS BUSINESS W.E.F. J ULY 1 1997. IT IS A WHOLLY OWNED SUBSIDIARY OF RIO TINTO GROU P STATEDLY ONE OF THE WORLDS LARGEST MINING COMPANY. SUBS TANTIAL EXPENSES HAVE BEEN INCURRED ON ACCOUNT OF POSTAG E TELEPHONE TELEX TRAVELING AND CONVEYANCE BUSINES S PROMOTION RENT CONSULTANCY ETC. THE GENUINENES S OF THE EXPENDITURE OR ITS RELATION TO THE BUSINESS OF T HE APPELLANT HAS NOT BEEN DOUBTED DURING THE ASSESSMENT PROCEE DINGS. THE INDIVIDUAL ITEMS OF EXPENSES THOUGH SUBSTANTIAL IN AMOUNT HAVE BEEN INCURRED ON BUSINESS OPERATIONS IN THE INITIAL STAGES AND ARE REVENUE IN NATURE. THESE HAVE NOT RES ULTED IN THE CREATION OF AN ASSET OF ENDURING BENEFIT. THE NATURE OF EXPENSES INCURRED ARE SUCH THAT THE BENEFITS DE RIVED THEREFORE CANNOT BE SAID TO BE YIELDING AN ADVA NTAGE OF ENDURING BENEFIT. NO SPECIFIC ITEMS IN THE NATUR E OF CAPITAL EXPENSES HAVE BEEN POINTED OUT IN THE ASSESSMENT O RDER. THE LEGAL POSITION AS LAID DOWN IN VARIOUS DECISIONS OF THE HONBLE COURTS PARTICULARLY THE OBSERVATIONS OF T HE APEX COURT IN EMPIRE JUTE CO. LTD. VS. CIT 124 ITR 1 AS CITED ABOVE INDICATES THAT WHERE THE EXPENDITURE HAS BEEN INCURRED IN CONNECTION WITH THE EFFICIENT DAY T O DAY RUNNING OF BUSINESS ACTIVITIES THE SAME IS TO BE REG ARDED AS REVENUE EXPENDITURE. THE QUANTUM OF EXPENDITURE IS NOT THE ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 9 TEST FOR DETERMINATION OF WHETHER OR NOT ANY EXP ENSES IS DEDUCTIBLE. THE DISALLOWANCE OF 80% OF TOTAL EXP ENDITURE BY THE ASSESSING OFFICER IS ON AD-HOC BASIS WITHOUT SPECIFYING AND ESTABLISHING THAT ANY ENDURING BENEFIT H AS ARISEN TO THE APPELLANT. THE ADDITION OF RS. 3 01 74 830/- M ADE IN THE ASSESSMENT IS WITHOUT ANY PROPER BASIS AND UNSUPPO RTED BY CONCRETE AND SUFFICIENT MATERIAL. THE SAME IS THEREFORE ORDERED TO BE DELETED. THIS GROUND OF APPEAL IS THEREFORE DECIDED IN FAVOUR OF THE APPELLANT. 3.2 THE REVENUE MOVED APPEAL AGAINST THAT ORDER AN D ONE OF THE GROUNDS BEFORE THE TRIBUNAL WAS THAT THE LD. CIT(A) HA S WRONGLY HELD THE DISALLOWANCE OF 50% OF EXPENSES IN TOTAL OF RS. 3 01 71 830/- FOR THE PURPOSE OF BUSINESS. THIS GROUND WAS DISMISSED BY THE TRIBUNAL IN ITA NO. 240(DEL)/2002 PASSED ON 3.11.2007 BY OBSER VING AS UNDER(PAGES 138 AND 139 OF THE P.B):- 7. IN THE INSTANT CASE THE IMPUGNED EXPENDITU RE WAS INCURRED ON ACCOUNT OF POSTAGE TELEPHONE TELEX TRAVELING AND CONVEYANCE ETC. THE GENUINENESS OF WHICH HAS NOT BEEN DOUBTED BY THE ASSESSING OFFICER. UNDISPUTEDLY TH E EXPENSES HAVE ALSO NOT RESULTED INTO CREATION OF ANY CAPI TAL ASSETS NOR IT CAN BE ENVISAGED TO HAVE GIVEN ANY ADVANTAG E OF ENDURING BENEFIT TO THE ASSESSEE. AS THE EXPENDITURE SO I NCURRED ARE REVENUE IN NATURE IRRESPECTIVE OF THEIR QUANTUM THE SAME IS LIABLE TO BE ALLOWED. THUS WE DO NOT FIND ANY IN FIRMITY IN THE ORDER OF CIT(APPEALS) TREATING THE EXPENSES A S REVENUE. BEFORE PARTING WITH THE MATTER IT IS PERTINENT TO BRING ON RECORD THAT WE ARE UPHOLDING THE ORDER OF CIT(A) FOR TREATING THE EXPENDITURE AS REVENUE EXPENDITURE HERE WE A RE NOT DECIDING THE ISSUE REGARDING DATE OF SETTING UP OF BUSINESS OR ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 10 COMMENCEMENT OF BUSINESS AND ALLOWABILITY OF OTHE RWISE OF EXPENSES ACCORDINGLY. 3.3 THE LD. COUNSEL ALSO REFERRED TO PAGE 6 OF T HE PAPER BOOK BEING THE PROFIT AND LOSS ACCOUNT FOR THE PERIOD 19.12.1996 TO 31.03.1998 WHICH SHOWS RECEIPT OF INTEREST OF RS. 22 75 010/-. AFTER DEDUCTION OF EXPENDITURE THE LOSS OF RS. 3 68 19 975/- HAS B EEN CARRIED FORWARD TO THE BALANCE-SHEET. PAGE NOS. 10 AND 11 FURNISH THE DETAILS OF OTHER INCOME PERSONNEL EXPENSES OTHER EXPENSES AND MISCELL ANEOUS EXPENSES FOR THAT PERIOD. THE ASSESSEE HAD ALSO FILED ONE MORE PAPER BOOK VOLUME II CONSISTING OF 54 PAGES. OUR ATTENTION WAS DRA WN TOWARDS PAGE NUMBER 2 OF THE PAPER BOOK WHICH FURNISH BRANCH-WISE B REAK-UP OF THE EXPENSES INCURRED IN THAT YEAR AT BANGALORE DELHI AND BH UVNESWAR OFFICES. THE DETAILS ALSO INCLUDE RECOVERIES MADE FROM ARTE L IN RESPECT OF POSTAGE TELEPHONE TELEX BEING RS. 5 65 000/- IN RESPECT OF BANGALORE OFFICE RS. 17 500/- IN RESPECT OF DELHI OFFICE AND RS. 85 495 /- IN RESPECT OF BHUVNESWAR OFFICE. SIMILAR DETAILS ARE AVAILAB LE ON PAGE NO. 3 REGARDING TRAVELING AND CONVEYANCE EXPENSES. ON THE BASIS OF THESE FACTS IT HAS BEEN CONTENDED THAT IN SO FAR AS VARIOUS EXPENS ES ARE CONCERNED THEY HAVE BEEN SHOWN IN THE PROFIT AND LOSS ACCOUNT ON A NET BASIS AFTER DEDUCTING AMOUNTS RECEIVABLE FROM ARTEL UNDER V ARIOUS HEADS. SUCH ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 11 RECOVERIES AMOUNTED TO SERVICE CHARGES RECEIVED BY THE ASSESSEE LIABLE TO BE TAXED AS BUSINESS INCOME. 3.4 OUR ATTENTION HAS BEEN DRAWN TO ITEM NO. 9 OF THE INDEX OF THE PAPER BOOK WHICH CONTAINS THE DETAILS OF RECOVER IES MADE IN VARIOUS YEARS FROM ASSESSMENT YEAR 1998-99 TO ASSESSME NT YEAR 2005-06 WITH NARRATION. THE INDEX SHOWS RECOVERIES OF RS. 95 6 3 233/- IN THIS YEAR. THIS ITEM IS REPRODUCED BELOW:- S.NO. PARTICULARS FILED BEFORE WHICH AUTHORITY PAGE NO. 9. AGREEMENT ENTERED INTO BY RIO TINTO INDIA PRIVATE LIMITED: WITH ACC-CRA EXPLORATION LIMITED ON JULY 1 1997. AMOUNTS OF REIMBURSEMENTS RECEIVED UNDER THE AGREEMENT ARE AS FOLLOWS: ASSTT. YEAR AMOUNT (RS.) 1998-99 5 225 344 1999-2000 2 840 093 2000-2001 2 912 069 2001-2002 9 563 233 2002-2003 9 931 242 2003-2004 3 652 305 2004-2005 9 608 2005-2006 38 904 FILED DURING THE COURSE OF ASSESSMENT AND APPELLATE PROCEEDINGS 144-157 158-168 ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 12 WITH RIO TINTO TECHNICAL SERVICES ON MARCH 4 1998 AND JUNE 18 1998. WITH CENTRAL INDIA COAL COMPANY LTD. ON MARCH 12 1998. WITH RIO TINTO IRON ORE AUSTRALIA ON SEPTEMBER 1 2006. AMOUNTS OF REIMBURSEMENTS RECEIVED UNDER THE AGREEMENT ARE AS FOLLOWS: ASSTT. YEAR AMOUNT (RS.) 2005-2006 27 789 2006-2007 2 511 511 &169-181 182-190 191-201 3.5 IT IS SUBMITTED THAT THE ACCOUNTS OF THIS YEAR HAVE BEEN MADE UP ON THE SAME BASIS AS IN EARLIER YEARS BY NETTING THE RECEIPTS AND CARRYING OVER THE NET AMOUNT TO PROFIT & LOSS ACCOUNT. THESE ACCOUNTS HAVE BEEN PLACED IN THE PAPER BOOK ON PAGE NUMBERS 45 TO 56. IN PARTICULAR OUR ATTENTION IS DRAWN TO PAGE NO. 51 CONTAINING SCHEDULE REGAR DING OTHER INCOMES AND PERSONNEL EXPENSES. INTEREST IS SHOWN AT RS. 23 9 7 742/- AND MISCELLANEOUS INCOME AT RS. 86 101/- TAKING THE TOTAL INCOME TO RS 24 83 843/-. PERSONNEL EXPENSES HAVE BEEN SHOWN AT RS. 3 26 19 154/- AFTER DEDUCTING A SUM OF RS. 28 80 359/- BEING THE AMO UNT RECOVERED FROM ARTEL. SIMILARLY PAGE 52 CONTAINS THE SCHEDULE OF OTHER EXPENSES ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 13 SHOWING THE EXPENDITURE AT RS. 4 80 45 311/- AFTE R SHOWING RECOVERIES OF RS. 66 82 874/- FROM ARTEL AND RS. 60 149/- FROM RIO TINTO ORISSA MINING LTD. 3.6 THE LD. COUNSEL ALSO REFERRED TO PAGE 423 OF THE PAPER BOOK IN WHICH IT IS INTER-ALIA MENTIONED THAT SERVICE CHARGES OF RS. 25 000/- HAVE BEEN RECEIVED FROM NORTH MINING LTD. CALCUTTA A ND THE INVOICE THEREOF HAS BEEN PLACED ON PAGE 432 OF THE PAPER BOOK. HE ALSO REFERRED TO PAGE 425 OF THE PAPER BOOK BEING THE NOTE ON BUSINESS ACTIVITIES OF THE COMPANY. IT IS INTER-ALIA MENTIONED THAT THE O FFICE OF THE ASSESSEE- COMPANY WAS OPENED IN MID 1997 THE PERSONNEL E MPLOYED THE EQUIPMENTS INSTALLED AND THE SHARE CAPITAL REC EIVED FROM THE PARENT COMPANY. ON 10.03.1998 IT ENTERED INTO A CON TRACT WITH CENTRAL INDIA COAL CO. LTD. (CICCO) FOR BARANJ COAL PROJECT F OR EVALUATION OF THE RESOURCES AND FEASIBILITY OF CARRYING OUT MINING OPERATIONS. HOWEVER THIS PROJECT WAS TERMINATED PREMATURELY DUE TO UNFORE SEEN REASON. IT ENTERED INTO ANOTHER CONTRACT WITH RIO TINTO ORISSA MIN ING LTD. ON 01.06.1998 FOR UNDERTAKING PRELIMINARY FEASIBILITY STUDY TO EVALUATE IRON ORE DEPOSIT AT GANDHAMARDAN AND MALANGATOLI. IT IS PURSUING OP PORTUNITIES IN INDIAN MINING SECTOR AND INFRASTRUCTURE BUSINESS. ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 14 3.7 THE CASE OF THE LD. COUNSEL IS THAT THE FINDI NG REGARDING CARRYING ON OF THE BUSINESS HAS ALREADY BEEN GIVEN BY THE AO IN ASSESSMENT YEAR 1998-99. THERE IS NO MENTION IN THE ORDER THAT AN Y EXPENDITURE DEBITED IN THE BOOKS OF ACCOUNT OF THIS YEAR IS EITHER BOGUS OR NOT DEDUCTIBLE IN COMPUTING THE TOTAL INCOME. THEREFORE IT IS AR GUED THAT THERE IS NO REASON TO COME TO THE CONCLUSION THAT THE ASSESSEE DID NO T CARRY ON ANY BUSINESS IN THIS YEAR OR THAT THE EXPENSES ARE NOT ALLOWABLE IN TOTO. 4. IN REPLY THE LD. DR REFERRED TO THE ORDER OF THE TRIBUNAL FOR ASSESSMENT YEAR 1998-99 (SUPRA). THE RELEVANT P ORTION OF THE ORDER HAS BEEN REPRODUCED BY US. OUR ATTENTION HAS BEEN DRAWN TOWARDS THE OBSERVATIONS THAT BEFORE PARTING WITH THE MATTER IT IS PERTINENT TO BRING ON RECORD THAT WE ARE UPHOLDING THE ORDER OF CIT(A ) FOR TREATING THE EXPENDITURE AS REVENUE EXPENDITURE HERE WE AR E NOT DECIDING THE ISSUE REGARDING DATE OF SETTING UP OF BUSINESS OR COMME NCEMENT OF BUSINESS AND ALLOWABILITY OR OTHERWISE OF THE EXPENSES AC CORDINGLY. ON THE BASIS OF THE OBSERVATIONS IT HAS BEEN ARGUED THAT TH E QUESTION OF BUSINESS BEING SET UP OR COMMENCED IS OPEN. THE LOWER AUTHORITIES HAVE GIVEN A CLEAR FINDING THAT THE BUSINESS HAS NOT COMMENCE D. ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 15 4.1 COMING TO RECOVERY OF EXPENSES IN RESPECT OF PERSONNEL EXPENSES OUR ATTENTION HAS BEEN DRAWN TOWARDS THE NAR RATION IN SCHEDULE IX BEING EXPENSES RECOVERED ON SECONDMENT OF EMPLO YEES TO ARTEL. IT HAS BEEN ARGUED THAT THE NARRATION CLEARLY SHO WS THAT THE EMPLOYEES OF THE ASSESSEE WERE SENT ON DEPUTATION TO ARTEL FOR WHICH THE RECOVERY WAS MADE FROM IT. THEY WERE DOING THE BUSINES S OF THE ARTEL AND NOT THAT OF THE ASSESSEE. SIMILAR RECOVERIES HAVE B EEN MADE IN RESPECT OF OTHER EXPENSES THE NATURE OF WHICH HAS NOT BEE N SPECIFICALLY STATED. HOWEVER IT BECOMES CLEAR THAT THE ASSESSEE HAD INCURRED CERTAIN EXPENSES ON BEHALF OF ARTEL AND RIO TINTO ORISSA MINING LTD. WHICH WAS RECOVERED FROM THEM. SUCH RECOVERIES DO NOT LEAD TO A CONCLUSION THAT THE ASSESSEE CARRIED ON IN BUSINESS IN TH IS YEAR. 5. IN THE REJOINDER IT IS SUBMITTED THAT THE AO HAD RECORDED IN THE ORDER FOR ASSESSMENT YEAR 1998-99 THAT THE BUSINE SS HAD COMMENCED. HOWEVER HE ALLOWED ONLY 20% OF THE EXPENSES INC URRED BY THE ASSESSEE. IT IS FURTHER SUBMITTED THAT SECONDMENT OF THE EMPLOYEES TO THE OTHER GROUP COMPANIES DOES NOT LEAD TO AN INFERENCE TH AT NO BUSINESS WAS CARRIED OUT IN THIS YEAR. IN THIS CONNECTION HE REFERRED TO PARAGRAPH 9 OF ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 16 THE SERVICE AGREEMENT MADE ON 01.07.1997 BETWEEN A CC-CRA EXPLORATION LTD. AND THE ASSESSEE REGARDING PAYMENT OF F EES AND EXPENSES WHICH READS AS UNDER:- 9.1 INVOICE AND ESTIMATE DURING EACH MONTH AFTER THE DATE OF THIS AGREEMEN T THE SERVICE PROVIDER WILL DELIVER THE FOLLOWING TO THE COMPANY: A. AN INVOICE FOR: I) THE CONSULTANCY FEES PAYABLE IN THE SERVICE PR OVIDER UNDER CLAUSE 6 FOR THE PRECEDING CALENDAR MONTH; AND II) THE EXPENSES REIMBURSABLE TO THE SERVICE P ROVIDER UNDER CLAUSES 7 AND 8 FOR THE PRECEDING CALENDAR MO NTH. TOGETHER IN BOTH CASES WITH SUCH BACK-UP INFOR MATION AS THE COMPANY MAY REASONABLY REQUIRE TO SATISFY ITSELF THAT THE CONSULTANCY FEES AND EXPENSES ARE PROPERLY PAYAB LE TO THE SERVICE PROVIDER; AND B. AN ESTIMATE OF THE COMPENSATION AND EXPENSES LIKELY TO BE PAYABLE TO THE SERVICES PROVIDER IN THE THREE MONTHS PERIOD COMMENCING ON THE FIRST DAY OF THAT MONTH. 9.2 WITHIN 28 DAYS OF RECEIPT OF AN INVOICE THE COMPANY WILL PAY TO THE SERVICES PROVIDER OR ITS NOMINE E THE AMOUNT REFERRED TO IN THE INVOICE LESS ANY PORTION OF I T WHICH MAY BE IN DISPUTE. FOLLOWING RESOLUTION OF ANY AMOUNT IN DISPUTE THE AMOUNT RESOLVED AS OWING WILL BE PROMPTLY PAI D. PAYMENT TO THE SERVICES PROVIDER OR ITS NOMINEE WILL BE MA DE TO A BANK ACCOUNT NOMINATED BY THE SERVICES PROVIDER OR SU CH NOMINEE (AS THE CASE MAY BE). ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 17 6. WE HAVE CONSIDERED THE FACTS OF THE CASE AND S UBMISSIONS MADE BEFORE US. THE FACTS OF THE CASE IN RESPECT OF COMMENCEMENT OF BUSINESS ARE THAT THE AO ACCEPTED THE CLAIM OF TH E ASSESSEE IN THE PROCEEDINGS FOR ASSESSMENT YEAR 1998-99 THAT THE BU SINESS HAD COMMENCED. HOWEVER HE ALLOWED ONLY 20% OF THE EXPENSES I NCURRED BY THE ASSESSEE ON THE GROUND THAT THE EXPENDITURE WAS LARGELY I NCURRED ON DEVELOPMENT OF INFRASTRUCTURE FACILITIES. THE LD. CIT(A) ALLOWED THE WHOLE OF THE EXPENDITURE AS REVENUE EXPENDITURE. THE MATTE R WAS AGITATED IN APPEAL. THE TRIBUNAL CAME TO THE CONCLUSION THAT T HE EXPENDITURE WAS INCURRED ON POSTAGE TELEPHONE TELEX TRAVELIN G AND CONVEYANCE ETC. THESE EXPENSES NEITHER CREATED ANY CAPITAL AS SET NOR ENNURED ANY BENEFIT OF ENDURING NATURE TO THE ASSESSEE. TH EREFORE THE FINDING OF THE LD. CIT(A) WAS UPHELD. THE CASE OF THE LD. DR IN THIS RESPECT IS THAT THE TRIBUNAL REFRAINED FROM ANY FINDING REGARDING SETTING UP OF THE BUSINESS OR COMMENCEMENT OF THE BUSINESS. WE HAVE CONSI DERED THIS ARGUMENT. IN OUR OPINION THE OBSERVATIONS OF THE TRIBUNAL C AN ONLY RELATE TO A PERIOD PRIOR TO THE YEAR UNDER CONSIDERATION BEFORE I T. THE REASON IS THAT THE TRIBUNAL HELD THE EXPENDITURE TO BE REVENUE EXP ENDITURE IN THAT YEAR DEDUCTIBLE IN COMPUTING THE TOTAL INCOME. THE F INDING WAS GIVEN IN THE CONTEXT OF THE FACT THAT THE AO HAD ACCEPTED THE CLAIM THAT BUSINESS ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 18 COMMENCED IN THAT YEAR BUT FOR WHICH THE EXPE NSES WOULD HAVE BEEN TREATED AS PRE-OPERATIVE EXPENSES. THEREFORE T HE THREE ORDERS OF THE AO THE LD. CIT(APPEALS) AND HONBLE TRIBUNAL WH EN READ TOGETHER LEAD TO AN IRRESISTIBLE CONCLUSION THAT THE BUSINESS H AD BEEN SET UP IN 1998-99. IN THIS CONNECTION THE AO HAS ALSO MENTIONED IN THE ASSESSMENT ORDER THAT ASSESSMENTS OF EARLIER YEARS ARE BEING RE OPENED U/S 148. IT IS NOT CLEAR FROM THE ORDER WHETHER THE ASSESSMENT F OR ASSESSMENT YEAR 1998- 99 HAS BEEN REOPENED OR NOT WITH A VIEW TO RECORD FRESH FINDING IN THIS MATTER. THE LD. DR HAS NOT MADE ANY SUBMISSION IN THIS REGARD AND THEREFORE THE PRIMA FACIE CONCLUSION IS THAT ASSESSMENT FOR ASSESSMENT YEAR 1998-99 HAS NOT BEEN REOPENED U/S 148. 6.1 ONE OF THE FINDINGS RECORDED IN THE ASSESSME NT ORDER OF THIS YEAR IS THAT THE ASSESSEE FILED INVOICE OF RS. 25 000 /- RAISED ON NORTH MINING LTD. ON 31.3.2001. THIS INCOME HAS BEEN ASSESS ED UNDER THE RESIDUARY HEAD. THE INVOICE HAS BEEN PLACED ON PAGE 432 OF THE PAPER BOOK. IT IS MENTIONED THEREIN THAT THE AMOUNT INDICATED IN THE INVOICE REPRESENTS THE PRICE ACTUALLY CHARGED. SERVICE CHARGES ARE NORMALLY TAXABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFES SION. THEREFORE THE AMOUNT COULD NOT HAVE BEEN BROUGHT TO TAX UNDER THE RESIDUARY HEAD. ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 19 THE AMOUNT IS NOMINAL COMPARED TO THE EXPENSES INCURRED BY THE ASSESSEE. ONE CAN POSSIBLY RAISE DOUBTS RE GARDING COMMENCEMENT OF BUSINESS MERELY ON THE BASIS OF THIS INVOICE. THEREFORE WE WILL HAVE TO GO INTO OTHER ASPECTS OF THE CONDUCT OF BUSINE SS OR OTHERWISE BY THE ASSESSEE. THE MAJOR SUBMISSION OF THE LD. COUNS EL IS BASED UPON THE FACT THAT IT HAS BEEN MAKING DEDUCTIONS FROM THE EXPEN DITURE INCURRED BY IT FOR PROVIDING SERVICES TO OTHER GROUP COMPANIES. I N THIS CONNECTION REFERENCES HAVE BEEN REPEATEDLY MADE TO ITEM NO . 9 OF THE INDEX TO THE PAPER BOOK WHICH SHOWS THE DETAILS OF DEDUCTIONS MADE FROM THE EXPENDITURE INCURRED FOR VARIOUS YEARS FROM A SSESSMENT YEAR 1998-99 TO ASSESSMENT YEAR 2005-06. SUCH DEDUCTIONS STAND AT RS. 95 63 233/- FOR THIS YEAR. THE SERVICE AGREEMENT BETWEEN ACC-C RA EXPLORATION LTD. AND THE ASSESSEE MADE ON 01.07.1997 HAS AL SO BEEN PLACED IN THE PAPER BOOK ON PAGE NOS. 144 TO 157. PARAGRAPH 3.1 OF THE AGREEMENT REGARDING SERVICES IS TO THE EFFECT THAT DUR ING THE TERM OF THIS AGREEMENT THE SERVICE PROVIDER WILL PROVIDE OR PROCURE ITS AFFILIATED CORPORATIONS TO PROVIDE SUCH SERVICES AS MAY REASONABLY BE REQUESTED BY THE COMPANY THROUGH ITS REPRESENTATIVE FROM TIME TO TIME. PARAGRAPH 6 REGARDING CONSULTANCY FEES IS TO THE EFFECT THAT THE SERVICE PROVIDER WILL BE PAID CONSULTANCY FEES BASED ON THE NU MBER OF HOURS WORKED BY ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 20 THE PERSONNEL INCLUDING THE SECONDED PERSONNE L. THE CONSULTANCY FEES WILL BE THE ACTUAL COST INCURRED BY THE SERVICE PROVIDER OR ITS AFFILIATED CORPORATIONS IN RESPECT OF THE PERSONNEL. PARAGR APH 7 REGARDING EXPENSES STATES THAT THE SERVICE PROVIDER WILL BE REIM BURSED ALL REASONABLE EXPENSES INCLUDING THOSE INCLUDED IN THE CONSULTAN CY FEES INCURRED IN RELATION TO PERSONNEL. THE CASE OF THE LD. DR I N THIS REGARD IS THAT REIMBURSEMENT OF THE SALARIES OF SECONDED PERSON NEL DOES NOT LEAD TO AN INFERENCE THAT THE ASSESSEE HAS CARRIED ON A NY BUSINESS. ON THE OTHER HAND THE CASE OF THE LD. COUNSEL IS THAT IT A LSO DOES NOT LEAD TO AN INFERENCE THAT THE ASSESSEE HAS NOT CARRIED ON AN Y BUSINESS. FROM THE FACTS OF THIS YEAR WHICH HAVE BEEN NARRATED IN DETAIL EARLIER IT IS CLEAR THAT THE RECEIPTS OF THE ASSESSEE MENTIONED IN ITEM NO. 9 OF THE INDEX OF THE PAPER BOOK ARE IN THE NATURE OF REIMBURSEMENT WITHOUT ANY ELEMENT OF PROFIT I.E. THE DEDUCTIONS HAVE BEEN MADE ON COST BA SIS. THE LD. COUNSEL HAS NOT POINTED OUT TOWARDS ANY CLAUSE IN THE AGRE EMENT THAT THE SECONDED PERSONNEL ACTED UNDER THE CONTROL AND SUPERVISION OF THE ASSESSEE. THEREFORE WE TEND TO AGREE WITH THE LD. DR TH AT THESE PERSONNEL DID NOT CARRY OUT THE BUSINESS OF THE ASSESSEE BUT CARR IED OUT THE BUSINESS FOR THE ENTITIES TO WHICH THEY WERE SECONDED. THE OTHER REIMBURSEMENTS HAVE ALSO BEEN ON COST BASIS. THEREFORE IN ABSEN CE OF ANY PROFIT ELEMENT IN ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 21 RECEIPTS FROM THE OTHER COMPANIES IT CANNOT BE SAID THAT THE ASSESSEE HAS CARRIED ON ANY BUSINESS OF ITS OWN. STILL THE FACT IS THAT THE ASSESSEE HAS TAKEN ALL STEPS SO AS TO ENABLE IT TO CARRY ON THE BUSINESS. THIS IS CLEAR BECAUSE THE OFFICE HAS BEEN SET UP INFRASTRUCT URE FOR RUNNING THE OFFICE IS IN PLACE PERSONNEL HAVE BEEN EMPLOYED AND EX PENSES HAVE BEEN INCURRED UNDER VARIOUS HEADS. THIS MEANS THAT THE ASSESSEE IS IN A POSITION TO CARRY ON THE BUSINESS IN CASE ANY B USINESS IS RECEIVED. THE ASSESSEE HAS ALSO SHOWN A NOMINAL RECEIPT OF RS . 25 000/- AS SERVICE CHARGES. THUS IT IS CLEAR THAT THE BUSINESS HAS BEEN SET UP. IT IS ANOTHER MATTER THAT TRANSACTIONS WITH GROUP COM PANIES HAVE BEEN CONDUCTED AT COST + ZERO BASIS. THEREFORE VARIO US REVENUE EXPENSES CLAIMED BY IT HAVE TO BE ALLOWED U/S 37(1) EV EN IF NO CUSTOM HAS BEEN OBTAINED FROM OUTSIDE PARTIES. ACCORDINGLY WE ARE OF THE VIEW THAT INCOME OF THE ASSESSEE HAS TO BE COMPUTED UNDER T HE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION IN RELATION TO EXPENSES INCURRED AFTER SETTING UP OF THE BUSINESS. IN OTHER WORDS TH E ASSESSEE IS ENTITLED TO DEDUCTION OF REVENUE EXPENSES DEBITED IN PROFIT A ND LOSS ACCOUNT ON THE BASIS OF VARIOUS PROVISIONS OF THE ACT CONTAINED IN CHAPTER IV D AND DEPRECIATION ON FIXED ASSETS AS PER INCOME-TAX RULES. ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 22 6.2 THERE IS ALSO A QUESTION BEFORE US REGARDIN G FIXATION OF HEAD OF INCOME IN RESPECT OF INTEREST OF RS. 23 97 742/-. ACCORDING TO US THIS QUESTION HAS BECOME OF ACADEMIC INTEREST. THE R EASON IS THAT IN THE SAME YEAR INCOME UNDER THE RESIDUARY HEAD HAS TO BE SET-OFF AGAINST THE LOSS COMPUTED UNDER THE BUSINESS HEAD. NONETHELESS W E ARE INCLINED TO DECIDE THIS ISSUE ALSO ON THE BASIS OF SUBMISSIO NS MADE BEFORE US. IT HAS BEEN MENTIONED EARLIER THAT THE PROFIT AND LOSS ACCOUNT OF THIS YEAR WAS CREDITED WITH AN AMOUNT OF RS. 23 97 742/-. PA GE NO. 51 OF THE PAPER BOOK SHOWS THAT THE INTEREST HAS BEEN RECEIVED O N DEPOSITS WITH BANK. THE ASSESSEE HAS BEEN RUNNING INTO LOSSES AND TH EREFORE IT CANNOT BE SAID THAT THE DEPOSITS IN THE BANK HAVE BEEN MADE OUT OF BUSINESS PROFITS. ADMITTEDLY THE BUSINESS OF THE ASSESSEE IS TO PROVIDE CONSULTANCY SERVICES IN THE FIELD OF MINING. MONEY-LENDING IS NOT THE BUSINESS OF THE ASSESSEE. THE MONEY HAS ALSO NOT BEEN RECEIVED F ROM THE CUSTOMERS ON ACCOUNT OF ANY DELAYED PAYMENT SO AS TO CONSTRU E THAT IT PARTAKES THE CHARACTER OF SERVICE CHARGES. THEREFORE THE AM OUNT IS RIGHTLY TAXABLE UNDER THE RESIDUARY HEAD. ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 23 6.3 THUS IT IS HELD THAT THE ASSESSEE IS ENTIT LED TO COMPUTATION OF BUSINESS LOSS ON THE BASIS OF ITS PROFIT AND LOSS ACCOUNT DEPRECIATION AS PER INCOME-TAX RULES AND INTEREST IS TAXABLE UNDER THE RESIDUARY HEAD. 6.4 ALTHOUGH IT HAS BEEN AGITATED BEFORE US THAT THE WHOLE OF THE EXPENDITURE SHOULD BE ALLOWED IT IS ALSO A MAT TER OF FACT ON RECORD THAT THE EXPENSES HAVE NOT BEEN VERIFIED BY THE AO O R THE LD. CIT(APPEALS) IN DETAIL TO ASCERTAIN WHETHER ANY PART THEREOF HA S BEEN INCURRED FOR ACQUISITION OF A CAPITAL ASSET IT IS IN THE C APITAL FIELD OR IT IS NON- DEDUCTIBLE BY OPERATION OF ANY PROVISION OF THE L AW. THEREFORE WE RESTORE THE MATTER OF COMPUTATION OF INCOME TO THE FILE OF THE AO FOR ASCERTAINING THE TOTAL INCOME OF THE ASSESSEE KE EPING IN MIND OUR FINDINGS MENTIONED ABOVE. NEEDLESS TO SAY THAT THE ASSESS EE WILL BE GRANTED A REASONABLE OPPORTUNITY OF BEING HEARD BY THE AO. ITA NO. 4976(DEL)/2007-A.Y. 1999-00 7. IN THIS APPEAL FILED ON 19.12.2007 12 GROUN DS HAVE BEEN TAKEN UP BY THE ASSESSEE. FOUR GROUNDS ARE IN RESPECT OF VALIDITY OF RE-ASSESSMENT PROCEEDINGS AND EIGHT GROUNDS ARE IN RESPECT OF COMMENCEMENT OF BUSINESS AND COMPUTATION OF BUSINESS LOSS. IN S O FAR AS GROUNDS ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 24 REGARDING COMMENCEMENT OF BUSINESS AND COMPUTATION OF BUSINESS LOSS ARE CONCERNED THOSE ARE SIMILAR TO THE GROUNDS TAKE N IN ITA NO. 1993(DEL)/2004. 7.1 IN REGARD TO THE ASSESSMENT MADE U/S 147 I T IS MENTIONED THAT THE LD. CIT(APPEALS) ERRED IN CONFIRMING THE VALIDIT Y THEREOF WHEN THE INITIATION OF THE PROCEEDINGS WAS MADE MERELY ON CHANGE OF OPINION. IT IS FURTHER MENTIONED THAT THE BUSINESS HAD COMMENCE D IN JULY 1997 AND A CATEGORICAL FINDING WAS RECORDED IN THE APPELLATE ORDER FOR ASSESSMENT YEAR 1998-99 TO THIS EFFECT. THEREFORE THE LD. CIT(A) DID NOT FOLLOW THE RULE OF CONSISTENCY. IT IS ALSO MENTIONED THAT T HE ASSESSEE HAD RELIED ON VARIOUS PRONOUNCEMENTS OF JURISDICTIONAL HIGH COU RT IN THIS MATTER BUT THE LD. CIT(A) ERRED IN RELYING ON THE DECISION I N THE CASE OF MTNL VS. CHAIRMAN CBDT 246 ITR 173 (DEL) IN WHICH THE FACTS WERE COMPLETELY DIFFERENT. 7.2 BEFORE US THE CASE OF THE LD. COUNSEL ON TH E BASIS OF RECORDED REASONS IS THAT THERE WAS MERELY A CHANGE OF OPI NION AS ALL FACTS EXISTED ON RECORD. IN THIS CONNECTION RELIANCE WAS PLA CED ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. BATRA BHATTA CO. LTD. ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 25 IN PARAGRAPH 8 OF THIS JUDGMENT IT IS MENTIONE D THAT THE LOWER APPELLATE AUTHORITIES RETURNED THE CONCURRENT FINDING OF F ACT THAT THERE WAS NO MATERIAL BEFORE THE AO ON THE BASIS OF WHICH HE CO ULD MAINTAIN A BELIEF THAT THE AGRICULTURAL LAND SOLD BY THE ASSESSE E WAS A CAPITAL ASSET. THE EXPRESSION USED BY HIM REQUIRES MUCH DEEPER SCR UTINY INDICATES THAT THE AO WAS EMBARKING UPON MERELY EXPLORATION WITH OUT ANY BELIEF MUCH LESS A BELIEF BASED ON REASON AND MATERIAL. 7.3 IN REPLY THE LD. DR REFERRED TO THE REASO NS RECORDED BY THE AO AND COMMUNICATED TO THE ASSESSEE IN LETTER DATE D 4.2.2005. THE RELEVANT PORTION OF THE LETTER AT PAGE 128 OF THE PAPER BOOK READS AS UNDER:- THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME FOR A.Y. 1999-00 DECLARING NET LOSS OF RS. 15 21 17 660/- ON 24.11.1999. THIS RETURN WAS PROCESSED/ ACCEPTED U/S 143(1) OF THE I.T.ACT 1961 VIDE INTIMATION DATED 25.4.2001. DURING THE COURSE OF ASSESSMENT PROCEEDINGS FOR A .Y. 2001-02 IT WAS OBSERVED BY THE AO AS UNDER:- (III) THAT THE BUSINESS OF THE ASSESSEE IS TO PROV IDE TECHNICAL AND TECHNOLOGY SUPPORT TO THE INDIAN MINING INDUSTR Y. (IV) THERE WAS NO FORMAL CONTRACT/AGREEMENT AS BOTH THE ENTITIES ARE UNDER THE SAME GROUP. IT HAS BEEN HELD BY THE AO THAT THE SERVICE CHAR GES RECEIVED BY THE ASSESSEE COMPANY IS NOT BUSINESS INCOME OF T HE ASSESSEE ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 26 BUT IS INCOME FROM OTHER SOURCES. THE ASSESSME NT MADE ON THE ABOVE LINES FOR A.Y. 2001-02 HAS BEEN UPHELD I N APPEAL BY THE CIT(A) AND ASSESSEES APPEAL DISMISSED. IN VIEW OF THIS FACTUAL AND CORRECT LEGAL POSITIO N PROCEEDINGS U/S 147/148 HAVE BEEN INITIATED FOR THE A.Y. 1999-2 000 AFTER DUE PROCESS OF LAW I.E. RECORDING OF REASONS FOR T AKING RECOURSE TO SUCH ACTION. 7.4 IT HAS BEEN SUBMITTED THAT THESE REASONS C ONFORM TO THE PROVISION CONTAINED IN SECTION 147. IN THIS CONNECTION R ELIANCE WAS PLACED ON THE DECISION OF F BENCH OF DELHI TRIBUNAL IN THE CA SE OF PIONEER OVERSEAS CORPORATION VS. DEPUTY DIRECTOR OF INCOME-TAX ETC . IN ITA NOS. 1868 TO 1871(DEL)/2005 DATED 24.12.2009 A COPY OF WHIC H WAS PLACED BEFORE US. OUR ATTENTION WAS DRAWN TOWARDS PARAGRAPH 22 O F THE ORDER WHICH CONTAIN REASONS FOR ISSUANCE OF NOTICE U/S 148 WHICH READ AS UNDER:- THE A CO. IS IN THE BUSINESS OF RESEARCH AND DEVELOPMENT OF PARENT SEEDS WHICH ARE SUPPLIED TO OTHER COS. SUCH AS SPIC FOR DEPT. OF HYBRID SEEDS WHICH ARE THEN USED BY FARMERS. A CLAIMS THAT ITS INCOME IS AGRICULT URAL INCOME. HOWEVER ASSESSING OFFICER HELD IN A.Y. 98-99 THA T AS INCOME IS BUSINESS INCOME AND NOT AGRICULTURAL INCOME. THE CASE IS IN APPEAL. THE SAME ISSUE NEEDS TO BE EXAMINED THIS YEAR A LSO (TURNOVER THIS YEAR IS RS. 474 91 000 NET PROFIT RS. 376 00 000) I THEREFORE HAVE REASON TO BELIEVE THAT INCOM E OF MORE THAN RS. 1 LAKH HAS ESCAPED TAX. HENCE THE CASE IS FIT FOR REOPENING UNDER SECTION 147 OF THE I.T. ACT 1961. ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 27 7.5 THEREAFTER OUR ATTENTION WAS DRAWN TOWARDS PARAGRAPH 31 OF THE AFORESAID DECISION WHERE IT IS MENTIONED THAT T HE ONLY QUESTION THAT ARISES FOR CONSIDERATION IS WHETHER THERE WAS RELEVANT MATERIAL ON WHICH A REASONABLE PERSON COULD HAVE FORM THE REQUISITE BELIEF. AT THIS STAGE IT IS NOT REQUIRED TO BRING MATERIAL ON RECORD WHICH W ILL CONCLUSIVELY PROVE THAT THE INCOME HAD ESCAPED ASSESSMENT. THEREFO RE IT WAS NOT NECESSARY AT THIS STAGE FOR THE AO TO GIVE A FINDING ON ME RITS OF THE ISSUE AS TO WHETHER THE INCOME WAS AGRICULTURAL INCOME OR BU SINESS INCOME. IT WAS CLARIFIED THAT THE INTIMATION ISSUED U/S 143(1) I S NOT AN ASSESSMENT AND THEREFORE IT COULD NOT BE SAID THAT WHILE ISSUI NG THE INTIMATION THE AO HAD FORMED AN OPINION ON ANY ITEM OF INCOME MEN TIONED IN THE RETURN. THUS THE CONTENTION OF THE ASSESSEE WAS REJECT ED. 7.6 FURTHER RELIANCE WAS PLACED ON THE DECISIO N OF HONBLE SUPREME COURT IN THE CASE OF TUTICORIN ALKAI CHEMICALS & F ERTILIZERS LTD. VS. CIT (1997) 227 ITR 172. THE FINDINGS OF THE HONBL E COURT WERE THAT INTEREST INCOME IS ALWAYS OF A REVENUE NATURE EXCEPT IN SOME EXCEPTIONAL CIRCUMSTANCES. ITS CHARACTER DOES NOT CHANGE BY THE MANNER OF UTILIZATION OF THE INCOME THEREFORE THE QUESTION HAS TO BE DECIDED IN ACCORDANCE ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 28 WITH THE PRINCIPLES OF LAW AND NOT IN ACCORDANC E WITH ACCOUNTANCY PRACTICE. CONSEQUENTLY IT WAS HELD THAT INT EREST EARNED ON SURPLUS MONIES INVESTED DURING THE COURSE OF SETTING UP OF THE BUSINESS LEADS TO EARNING OF INTEREST INCOME WHICH IS LIABLE TO BE TAXED. THIS PRINCIPLE ALSO EMERGES FROM THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. SHRIRAM HONDA POWER EQUIPMENTS (2007) 28 9 ITR 475. ON THE BASIS OF THESE DECISIONS IT WAS ARGUED THAT THE ASSESSEE HAD EARNED ONLY INTEREST INCOME APART FROM SOME OTHER RE CEIPT OF RS. 750/-. INTEREST INCOME WAS LIABLE TO BE TAXED UNDER THE RESIDU ARY HEAD. THUS ANY REASONABLE PERSON WOULD HAVE COME TO A PRIMA FAC IE CONCLUSION THAT THE ASSESSEE DID NOT EARN ANY BUSINESS INCOME AND CO NSEQUENTLY THE CLAIM OF ALLOWANCE OF HUGE EXPENSES WAS NOT DEDUCTIBLE I N LAW. 7.7 WE HAVE CONSIDERED THE FACTS OF THE CASE AN D SUBMISSIONS MADE BEFORE US. IT IS A MATTER OF FACT ON RECORD T HAT PRIOR TO ISSUANCE OF NOTICE U/S 148 NO ASSESSMENT HAD BEEN MADE IN THIS CAS E FOR THIS YEAR. THE RETURN FILED BY THE ASSESSEE HAD BEEN PROCESSED U /S 143(1). THE ORDER OF THE TRIBUNAL RELIED UPON BY THE LD. DR IS BASED UP ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ACIT VS. RAJESH JHA VERI STOCK BROKERS PVT. LTD. (2007) 291 ITR 500 IN WHICH IT HAS INTER- ALIA BEEN HELD THAT NO ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 29 VARIATION CAN BE MADE TO THE INCOME WHILE PROCES SING THE RETURN U/S 143(1) AND THEREFORE THERE IS NO QUESTION OF FO RMATION OF OPINION WHILE PREPARING SUCH AN INTIMATION. SINCE THERE IS N O OCCASION TO FORM OPINION IN SUCH A PROCEEDING THERE WILL ALSO BE NO QUESTION OF CHANGE OF OPINION WHEN PROCEEDINGS ARE SOUGHT TO BE INITI ATED U/S 147. THE FACTS OF THE CASE OF BATRA BHATTA CO. ARE DISTINGUISH ABLE ON TWO GROUNDS-(I) IN THAT CASE SCRUTINY ASSESSMENT HAD BEEN MADE AND THEREFORE THERE WAS OCCASION FOR FORMATION OF OPINION AND (II) THE A O WANTED TO REOPEN THE ASSESSMENT FOR MAKING DEEPER SCRUTINY AND NO PRIM A-FACIE CASE WAS MADE OUT THAT THE INCOME ESCAPED ASSESSMENT. THEREFO RE THE RATIO OF THIS CASE IS NOT APPLICABLE. ON THE OTHER HAND WHILE REC ORDING THE REASONS THE AO REFERRED TO ASSESSMENT PROCEEDINGS FOR ASSESSMEN T YEAR 2001-02. HE RELIED ON HIS FINDINGS IN THAT ASSESSMENT ORD ER WHICH WERE CONFIRMED BY THE LD. CIT(A). THEREFORE THERE WAS A POS ITIVE MATERIAL BEFORE THE AO IN THE FORM OF THE ORDER OF THE LD. CIT(A) THA T THE ASSESSEE HAD CLAIMED EXCESSIVE EXPENSES NOT WARRANTED BY THE FACTS OF THE CASE. THE ASSESSMENT WAS INITIATED U/S 147 TO COMPUTE TH E CORRECT INCOME BY FOLLOWING THE LEGAL PRINCIPLES UPHELD BY THE LD. C IT(A). THEREFORE IT CAN BE CLEARLY SAID THAT HE HAD REASON TO BELIEVE T HAT THE INCOME ESCAPED ASSESSMENT. ACCORDINGLY GROUND NOS. 1 TO 4 A RE DISMISSED. ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 30 8. IN SO FAR AS THE GROUNDS REGARDING COMMENCEME NT OF BUSINESS AND DISALLOWANCE OF BUSINESS LOSS ARE CONCERNED IT I S THE COMMON CASE OF BOTH THE PARTIES THAT THE FACTS ARE IDENTICAL WITH T HE FACTS IN ITA NO. 1993(DEL)/2004 (SUPRA). THEREFORE THE ORDER FOR T HAT YEAR IS MADE APPLICABLE TO THIS YEAR ALSO. IN OTHER WORDS TH E AO IS DIRECTED TO BRING INTEREST INCOME TO TAX UNDER THE RESIDUARY HEAD; AND COMPUTE THE BUSINESS INCOME AFTER ALLOWING DEDUCTION FOR EXP ENSES AND DEPRECIATION AS PER LAW. ITA NO. 931(DEL)/2008-A.Y. 2000-01 9. IN THIS APPEAL THE ASSESSEE HAS TAKEN UP E IGHT GROUNDS DEALING WITH (I) VALIDITY OF REASSESSMENT PROCEEDINGS U /S 147; AND (II) FINDINGS REGARDING COMMENCEMENT OF BUSINESS AND CONSEQUEN TLY THE COMPUTATION OF THE TOTAL INCOME. THE GROUNDS ARE SIMILAR TO THE CONTENTS OF THE GROUNDS TAKEN IN ITA NO. 4976(DEL)/2007 FOR ASSE SSMENT YEAR 1999-00 (SUPRA). THE CASE OF BOTH THE PARTIES IS THAT T HE FACTS OF THIS YEAR AND THE IMMEDIATELY PRECEDING YEAR ARE IDENTICAL. IN V IEW OF THIS COMMON ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 31 POSITION THE ORDER FOR ASSESSMENT YEAR 1999-00 ( SUPRA) IS MADE APPLICABLE TO THE PROCEEDINGS OF THIS YEAR ALSO. ITA NO. 932(DEL)/2008-A.Y. 2003-04 10. IN THIS APPEAL THE ASSESSEE HAS TAKEN UP EIGHT GROUNDS DEALING WITH (I) VALIDITY OF REASSESSMENT PROCEEDINGS U /S 147; AND (II) FINDINGS REGARDING COMMENCEMENT OF BUSINESS AND CONSEQUEN TLY THE COMPUTATION OF THE TOTAL INCOME. THE GROUNDS ARE SIMILAR TO THE CONTENTS OF THE GROUNDS TAKEN IN ITA NO. 4976(DEL)/2007 FOR ASSE SSMENT YEAR 1999-00 (SUPRA). THE CASE OF BOTH THE PARTIES IS THAT T HE FACTS OF THIS YEAR AND THAT YEAR ARE IDENTICAL. IN VIEW OF THIS COMMON POSI TION THE ORDER FOR ASSESSMENT YEAR 1999-00 (SUPRA) IS MADE APPLICAB LE TO THE PROCEEDINGS OF THIS YEAR ALSO. ITA NO. 2419(DEL)/2010-A.Y. 2005-06 11. THE ASSESSEE HAS TAKEN UP SIX GROUNDS IN TH IS APPEAL WHICH DEAL WITH THE ISSUES OF COMMENCEMENT OF BUSINESS AND CO MPUTATION OF THE BUSINESS INCOME. THESE GROUNDS ARE SIMILAR TO T HE GROUNDS TAKEN IN THE APPEAL FOR ASSESSMENT YEAR 1999-00 IN SO FAR AS THE COMPUTATION OF INCOME IS CONCERNED. IT IS THE COMMON CASE OF B OTH THE PARTIES THAT THE ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 32 FACTS OF THIS YEAR AND THAT YEAR ARE IDENTIC AL. IN VIEW OF THIS ADMITTED POSITION OUR ORDER FOR ASSESSMENT YEAR 1999-00 IS MADE APPLICABLE TO THIS YEAR ALSO. 12. LAST PARA: IN THE RESULT: (I) ITA NO. 1993(DEL)/2004 FOR ASSESSMENT YEAR 200 1-02 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES; (II) ITA NO. 4976(DEL)/2007 FOR ASSESSMENT YEAR 19 99-00 IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES; (III) ITA NO. 931(DEL)/2008 FOR ASSESSMENT YEAR 20 00-01 IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES; (IV) ITA NO. 932(DEL)/2008 FOR ASSESSMENT YEAR 200 3-04 IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES; (V) ITA NO. 2419(DEL)/2010 FOR ASSESSMENT YEAR 200 5-06 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. THE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 27T H AUGUST 2010. SD/- SD/- (C.L. SETHI) (K.G.BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE OF ORDER: 27TH AUGUST 2010. SP SATIA ITA NOS. 1993(DEL)/2004 4976/2007 . 931 932/2008& 2419/2010 33 COPY OF THE ORDER FORWARDED TO:- RIO TINTO INDIA PVT. LTD. NEW DELHI. DCIT CIRCLE 15(1) NEW DELHI/ITO WARD 15(4) NEW DELHI. CIT(A) CIT THE DR ITAT NEW DELHI. ASSISTANT REGISTRAR.