Income Tax Appellate Tribunal - Mumbai
Acit Cc 38, Mumbai vs Pipavav Shipyard Ltd, Mumbai on 31 August, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "C", MUMBAI
Before Shri P K Bansal, Vice President &
Shri Pawan Singh, Judicial Member
ITA No. 4692/Mum/2014 Assessment Year : 2008-09
ITA No. 372/Mum/2015 Assessment Year : 2009-10
ACIT Central Circle 38 Reliance Defence & Offshore
Mumbai Engineering Co. Ltd
Vs. (Earlier known as Pipavav
Shipyard Ltd/Pipavav Defence
& Engineering Ltd.)
Pipava House, 209,
Bank Street, Cross Lane 4,
Fort, Mumbai 400 023
PAN AABCP1491L
(Appellant) (Respondent)
Appellant By : Shri H N Singh
Respondent By : Shri Yogesh Thar & Ms. Ritu Punjabi
Date of Hearing : 10.08.2017 Date of Pronouncement : 31.08.2017
ORDER
Per P K Bansal, Vice-President:
These appeals have been filed by the Revenue against the respective orders of the CIT(A) dated 28.03.2014 and 28.04.14 for A.Ys. 2008-09 and 2009-10.
2. In both these years the Revenue has taken three common grounds of appeal accept the change in figure in ground no.3. Both the parties agreed that these appeals be decided on the basis of the facts involved in A Y 2008 - 2 ITA No.4692/Mum/2014 ITA No.372/Mum/2015 09 and whatever view is taken by this Tribunal, shall be applicable for A Y 2009-10 also.
3. The grounds of appeal for A.Y. 2008-09 read as under:
1. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in holding that the business of the assessee was set up during the previous year under consideration while the assessee has not done any business activity during the previous year under consideration."
2. "Whether on the facts and in the circumstance?; of the case and in law, the Ld. CIT(A) is justified in holding that the general administrative expenses are deductible as revenue expenses and interest income of the assessee is assessable to tax as income from business and profession while the business of the assessee was not set up during the previous year under consideration."
3. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in deleting the disallowance u/s.14A w.r.t. to interest expenses of Rs. 49,97,97,672/- while the assessee has not maintained separate pool of funds for general operating expenses and for capital expenses end investment."
In ground no.3 for A.Y. 2009-10, the amount of ` 49,97,97,672/- be read as ` 58,93,07,820/-
4. Ground no.1 relates to the issue as to when the business was set up. The brief facts of the case are that the assessee is engaged in the business of development of ship building and ship repairing yard. It filed its return of income for A.Y. 2008-09 on 29.09.2008, declaring total income at ` 18,27,03,346/- The assessee claimed that the business was set up in January 2008. The assessee has shown interest income of ` 27,71,89,925/- 3 ITA No.4692/Mum/2014 ITA No.372/Mum/2015 as its business income against which it set off expenditure amounting to ` 16,15,55,733/- u/s. 37(1) of the Act. The bank interest earned by the assessee amounting to ` 6,38,28,258/- on investment of surplus funds from share capital and margin money for acquisition of fixed assets was treated as income from other sources and Short Term Capital Gains of ` 40,25,895/- on sale of mutual funds was offered to tax. The assessment was completed on total income of ` 27,71,90,000/- but the Assessing Officer took a view that the business had not commenced during the year and, therefore, disallowed all expenses u/s. 37 of the Income tax Act as claimed by the assessee. When the matter went before the CIT(A), the CIT(A) took the view that business had been set up during the year.
5. The learned AR before us submitted the following chart showing chronology of events (along with supporting in the form of paper book) of the ship building project carried out by the assessee:
Sr. No. Date Particulars
1 October 17, Company Incorporated (page 34)
1997
2 November 29, Application for setting up 100% EOU Letter No.:
2005 PSL/EOU/OS-06/01 (page 538)
3 December 07, Sales Tax Registration under the Gujarat VAT fern the
2005 Assistant Commissioner of Commercial Tax- Gujarat.
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ITA No.372/Mum/2015
Sr. No. Date Particulars
4 April 4, 2006 Letter of permission No. KASEZ/100%EOU/II/39/2005-
06/58 for establishment of new undertaking under 100% EOU scheme for manufacture of shipbuilding, ship repair - (Pages 53f to 541) 5 June 6, 2006 Green Card No. KASEZ/11/2006-07 certifying the Company as a 100% Export Oriented Unit - (Pages 542 & 543).
6 November 30, Contract with Golden Ocean group (Page 196) 2006 7 December 04, Contract with SETAF s.a.s France (Page 252) 2006 8 December 04, Contract with ALIISOSS Shipping SA (Page 318) 2006 9 April 2007 to Advances from various parties (Page 391) February 2008 10 February 22, Request for permission of construction for shipyard 2007 activities (Ref: PSL/GMB/0 1/06-07) made to Gujarat Maritime Board (GMB). - (Page 544).
11 March 7, 2007 Reply from GMB (Ref No.: GMB/N/PVT/380(10)/720- 12094) - (Page 545) 12 March Entered into Technical Service Agreement for design of 15,2007 74. 5K DWT Bulk Carrier (Page 474) 13 April 12, 2007 Letter from GMB raising few queries on the request -
(Pages 546 & 547) 14 April 19, 2007 Clarification given by Pipavav Shipyard Ltd to GMB in response to their letter dtd. 12.04.2007 (Ref No.PSL/GMB/03/07-08) (pages 548 to 550) 15 April 16, 2807 Letter of permission no. K/IM/LQP/1733/T-
3/1Q17 for manufacture of fabricated block for ship building.
16. June 25, 2007 Permission under Section 35(1) of the GMB Act to start construction activities for the shipyard project at Pipavav Port, received from GMB (Ref No.: GMB/N/PVT/428/163) - (Pages 551 & 552).
17 July 01, 2007 Central Sales Tax registration (CST) under Gujarat VAT from the Assistant Commissioner of Commercial Tax-
Gujarat
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ITA No.372/Mum/2015
Sr. No. Date Particulars
18. August'08, License for Private Bonded Warehouse u/s 58 and 65 of
2007 the custom act 1962 issued by the assistant
Commissioner Rural Division Bhavnagar.
19. September Central Excise registration certificate issued by the
06, 2007 assistant Commissioner Central Excise Rural Division
Bbavnagar.
20. January 08, Bond Cum Legal Undertaking for Special
2008 Economic Zone Submitted to the Development
Commisisoner of Kandla Special Economic Zone.
21. January 08, Permission to setup SEZ from the Joint
2008 development Commissioner of Kandla Special Economic
Zone.
22. January 08, Lease Deed entered with E- Complex Private Limited
2008 (Page 24)
23 January 17, Purchase of steel for ship building (pages 398 to 400)
2008 to
February 28,
2008
24. February 11, Commencement of steel cutting/fabricating activity 2008 (Page 8)
25. February 11, Factory licence of EOU from the director of Industrial 2008 safety and Health Junagadh, Gujarat.
26. March 10, CT-3 Certificate for removal of Excisable goods under 2008 bond from Superintend of Central Excise Mahuva, Gujarat.
On the basis of the above chart, the learned AR vehemently contended that since the assessee has started one of the main activity for commencement of the business i.e. purchase of steel for ship building as also entered into lease with E-Complex Private Limited in addition to the various activities consisting of the receipt of orders and receipt of advances, the business of the assessee has been set up in January. It was also contended that the assessee is a ship builder and during the year it had entered into several contracts for building 6 ITA No.4692/Mum/2014 ITA No.372/Mum/2015 of ship and pursuant to which the assessee received advances amounting to ` 687.40 crores, which was shown under the head current liabilities in the balance sheet. The assessee also incurred various expenses for activities towards commencement of its main activity of ship building. For this our attention was drawn towards Directors Reports as well as notes to account filed with the annual report during the year revealed that the assessee had started preparatory activity of ship building with purchase of steel cuttings from 11.02.2008. It was further submitted that ship building industry was quite different from the normal manufacturing industry, as in other manufacturing industry the actual business activity begins only after entire manufacturing plant is in place, whereas in ship building industry the business activity begins much before the construction activity commences. The ship building industry works on 'make-to-order' principle and not on 'off the shelf' availability of products. No ship owner will construct the project unless it has certain orders in place. The assessee had duly received orders prior to January and, therefore, the business was duly set up. It was also pointed out that all necessary permission for setting up of plant was duly received by the assessee. Although the business of the assessee was set up when the orders were received, the assessee had conservative approach decided to consider set up of business when it started purchasing steel. Reliance in this regard was placed on the decisions of Hon'ble Gujarat High Court in the case of CIT 7 ITA No.4692/Mum/2014 ITA No.372/Mum/2015 vs. Sarabhai Sons (P) Ltd 90 ITR 318 and CIT vs. Saurashtra Cement & Chemical Industries Ltd. 91 ITR 153.
6. The learned DR, on the other hand, relied on the order of the Assessing Officer and took a view that during the year, the assessee has not constructed any ship or started construction of ship, therefore, it cannot be said that the assessee had commenced business.
7. We have heard the parties and have considered their submissions along with the orders of the tax authorities below. From the chart of chronological events, we noted that the assessee has entered into contract and got orders from Golden Ocean Group on 30.11.2006, from SETAF s.a.s France and ALIISOSS Shipping, SA on 04.12.2006. The assessee had received advances from various parties between April 2007 and February 2008 amounting to ` 6,87,40,40,600/-, details of which were placed at pg 391 of the paper-book. The assessee has also requested for the permission of construction for ship yard activities from Gujarat Maritime Board on 22.02.2007 and the approval was granted to the assessee u/s. 35(1) of the GMB Act, 1981 vide letter dated 25.06.2007, a copy of which is placed at 551 of the paper-book. Not only this, we noted that the assessee has carried out all primary activities, which are necessary for the setting up of business. The assessee has entered into technical services agreement for the design of 74.5K DWT Bulk Carrier on 15.03.2007; it got Central Sales Tax Registration 8 ITA No.4692/Mum/2014 ITA No.372/Mum/2015 under Gujarat VAT registered on 01.07.2007; license for private bonded warehouse u/s. 58 and 65 of the Custom Act, 1962 issued on 08.08.2007 and the Central Excise registration on 06.09.2007. The assessee even submitted bond cum legal undertaking for Special Economic zone to the Development Commissioner of Kandla Special Economic Zone on 08.01.2008. We also find that Lease deed was entered into with E-Complex Private Ltd., on the same date when the permission to set up SEZ was received from the Commissioner of Kandla Special Economic Zone i.e. 08.01.2008. It is also a fact that the assessee started purchasing steel for the ship building industry in Jan 2008, copy of the details were placed before us at pages 398 to 400 of the paper- book. No doubt, the assessee has commenced commercial operation on 01.04.2009, but that is not the date when the business has been set up. Setting up business and commencement of business are two different things. Expenses prior to setting up of business are not allowable. The expression "for the purpose of business" refers to a business i.e. being carried on by the assessee. Once the business is set up, it cannot be said that the business has not been carried out by the assessee. A business is said to have been set up when it is established and ready to be commence. However, there may be an interval between a business which is set up and a business which is commenced. This has been so held by the Hon'ble Bombay High Court in the case of Western India Vegetable Products Ltd. vs. CIT 26 ITR 151 (Bom). The relevant test, in our opinion, for allowing expenditure is not when the 9 ITA No.4692/Mum/2014 ITA No.372/Mum/2015 assessee had commenced the business but when the business has been set up. A business is said to be set up when it is ready to start the business. The Hon'ble Supreme Court in the case of CIT vs. Sarabhai Management Corporation Ltd. (supra), took a view that business commences when the property is made ready and the assessee is in a position to offer services to the licensee in a case of the company, whose business is to give property on leave and license basis, expenses incurred thereafter are allowable as a deduction. We have also gone through the decision of Hon'ble Gujarat High Court in the case of CIT vs. Saurashtra Cement & Chemical Industries Ltd. 91 ITR 153 (Guj), on which the learned AR has vehemently relied. We noted that in this case, the Hon'ble Gujarat High Court has held that business connotes a continuous course of activities. All the activities which go to make up the business need not be started simultaneously in order that the business may commence. The business would commence when the activity which is first in point of time and which must necessarily precede all other activities which had started. In this case, the company was formed in 1956 for the manufacture and sale of cement. As a part of its business, the assessee obtained a mining lease for quarrying limestone and started the mining operations in 1958. It claimed the expenditure incurred for the purpose of extracting limestone as also depreciation and development rebate for the machinery installed for that purpose for A.Ys. 1960-61 and 1961-62. It was held that the activities, which constituted the business of the assessee were 10 ITA No.4692/Mum/2014 ITA No.372/Mum/2015 divisible into three categories: first, extraction of limestone by quarrying the lease area of land followed by manufacture of cement by use of the plant and machinery and finally sale of manufactured cement. These three activities combined together constituted the business of the assessee. The activity of quarrying the leased area of land and extracting limestone came first in point of time and laid the foundation for the second activity and the second activity when completed laid the foundation for the third activity. Hence, it was held that the assessee commenced its business when it started the activity of extraction of limestone in 1958. The expenditure incurred by the assessee in carrying on the activity of extraction of limestone as also depreciation allowance and development rebate in respect of machinery employed in extracting limestone were held to be deductible in computing the trading profits of the assessee for the A.Y.S 1960-61 and 1961-62.
Similar view has been taken by the Hon'ble Delhi High Court in the case of CIT Vs. Aspentech India (P) Ltd.(187 Taxman 25) , that in case of software development business activities start with pursuing of the companies to get orders and all activities carried out to get such orders, being incidental to the business activities would be regarded as for the purpose of business and not for setting up of business.
If the facts of Saurashtra Cement & Chemical Industries Ltd (supra), is applied to the facts of the assessee, we are of the view that business 11 ITA No.4692/Mum/2014 ITA No.372/Mum/2015 activities of the assessee can be divided in to various activities such as the receipt of the confirmed orders, designing of the ship, procurement of raw materials, erection and building of ship, elaborate and comprehensive testing analysis and inspection and delivery of the ship. We noted that the assessee has also entered into technical service agreement for technical assistance, got various permissions for the construction of ship yard activities from Gujarat Maritime Board and also got registration under the Sales tax as well as Excise and Customs Act done. The assessee has started purchasing steel for ship building activity. All these activities are preparatory activity for construction of ship carried out up to January. These activities, in our opinion, are such that the assessee has set up business. We, therefore, do not find any illegality or infirmity in the order of the CIT(A). We accordingly dismiss ground no.1 taken by the Revenue.
8. Ground no.2 relates to the claim of administrative expenses and chargeability of the interest income under the head 'Income from business'. The facts relating to this ground are that the Assessing Officer noted that the assessee has debited following amounts of expenditure against the interest income [the only source of income]: Material consumed ` 159.44 lacs; Direct expenses 1785.44 lacs; Employee cost ` 502.30 lacs; Operations & Other Exps. Rs 1085.96 lacs; Financial expenses ` 7.68 lacs and Depreciation ` 17.71 lacs. It was further noted that the assessee had capitalized material consumed and direct expenses in work-in-progress relating to ship 12 ITA No.4692/Mum/2014 ITA No.372/Mum/2015 construction activity whereas, claimed deduction in respect of employees cost, operation and other expenses, financial expenses and depreciation against the interest income under the head 'Income from business'. The assessee has earned income on staff loan, FD with banks, ICD and other income during the year at `.2774.89 lacs. This income has been treated by the Assessing Officer as 'Income from other sources'. Thus, the Assessing Officer disallowed the total expenses of ` 1615.55/- lacs in respect of employees cost, operation and other expenses, financial expenses and depreciation as these expenses has been incurred by the assessee prior to the commencement of the business and, therefore, these expenses should have been capitalized. Similarly, the Assessing Officer assessed the interest income of ` 2771.90/- under the head 'Income from other sources' because income has been earned prior to the commencement of business. While disposing off ground no.1, we confirmed the order of the CIT(A) that the business was set up during the year in January 2008. It is not disputed that all these expenses have been incurred by the assessee after the set up of business as has been held by us in the preceding paragraphs. The expenses incurred after the set up of the business are revenue expenses. We, therefore, allow these expenses and confirm the order of the CIT(A). Similarly, the interest income, we noted has been earned by the assessee as detailed below:
13ITA No.4692/Mum/2014 ITA No.372/Mum/2015
Interest on staff loan ` 0.51 lacs Interest on bank FDS ` 2556.66 lacs Interest on ICD ` 214.73 lacs Total ` 2771.90 lacs
The assessee has earned this interest after setting up of the business. Interest on FDs relate to those FDs which are kept as guarantee given by the assessee company. The assessee has received advances of about 700 crores against supply of 22 Panamax bulk carriers. The assessee was required to refund 100% of the advance received in the event of a default. The parties therefore insisted for a bank guarantee. To furnish bank guarantee, the assessee had to keep security deposit by way of Fixed Deposits of the equivalent amount of the bank guarantee furnished. The assessee vide its letter dated 21.12.2010 furnished to the Assessing Officer complete co- relation of the FDs kept for bank guarantee and the consequential receipt of interest on FDs. In view of the decision of the jurisdictional High Court in the case of CIT vs. Paramount Premises (P) Ltd 109 ITR 259 (Bom), wherein it has held that when an assessee was required to give a guarantee to the bank in respect of the land on lease for construction work for that purpose, certain amounts were kept in fixed deposits on which the assessee earned interest. Since the entire interest sprang from the business activity of the assessee and did not arise out of any independent activity, interest income was to be considered as business income. Interest so received earned by the assessee on the FDs kept for the purpose of guarantee amounting to 14 ITA No.4692/Mum/2014 ITA No.372/Mum/2015 ` 2556.66 lacs has to be assessed as income under the 'Income from business'. Similar view has been taken by the Hon'ble Patna High Court in the case of Shyam Bihari vs. CIT 345 ITR 283, wherein it was held that interest accrued on security deposit which was kept for securing contract work would be assessable as business income. We, therefore, confirm the order of the CIT(A) holding that the interest earned on Fixed Deposit amounting to ` 2556.66/- lacs be assessed as business income out the total interest earned by the assessee amounting to ` 2771.90/- lacs. Thus, this ground is also dismissed.
9. Ground no.3 relates to the deletion of the disallowance made by the Assessing Officer u/s. 14A with respect to interest expenses amounting to ` 49,97,97,672/-. The Assessing Officer noted that capital work-in-progress under the head 'Current Assets' had capitalized interest expenditure amounting to ` 49,97,97,672/- towards interest paid/payable or borrowed funds attributable to the projects. The Assessing Officer was of the opinion that the said interest has to be considered for the purpose of disallowance under the provisions of Rule 8D(2)(ii) of the I.T.Rules, 1962. Accordingly, the Assessing Officer concluded the disallowance as per section 14A(2) read with Rule 8D(2)(ii) on the said amount to ` 4,17,83,245/-, which consists of the following:
15ITA No.4692/Mum/2014 ITA No.372/Mum/2015
CALCULATION OF INADMISSABLE EXPENSES U/S. 14A As per Rule 8D(2)
i) The amount of expenditure directly relating to income which does not form part of total income;
ii) In case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely:-
A x B Where C A = amount of expenditure by way of interest other than the amount of Interest included in clause(i) incurred during the previous year, B = The average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year;
C = The average of total assets as appearing in the
balance sheet of the assessee, on the first day and the last day of the
previous year;
iii) an amount equal to one half per cent of the average of the value
of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year.
i) Nil = Rs. Nil
ii) 499797672 X 1225700000 = Rs. 3,56,54,745/-
17181500000
iii) Average Investment
Rs. 1225700000 @ 0.50% = Rs. 61,28,500/-
Total ii) + iii) = Rs.4,17,83,245/-
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Since the entire expenditure was capitalized, the Assessing Officer was of the view that the disallowance will only affect the work-in-progress for the purpose of taxable income for the year. When the matter went before the CIT(A), the CIT(A) deleted the disallowance made under Rule 8D(2)(ii) with regard the interest amounting to ` 49,97,97,672/-.
10. We have heard the rival submissions and carefully considered the same. We noted that it is a fact that the assessee has capitalized interest amounting to ` 49,97,97,672/-. During the year, the assessee has not claimed deduction of the said interest. This interest amount is directed co- related to acquisition of fixed assets and capital work-in-progress. The said interest cannot be considered for the purpose of disallowance u/s. 14A read with Rule 8D(2)(ii). As per Rule 8D(2)(ii), interest which is directly attributable to acquisition of fixed assets or capital work-in-progress, the same cannot be considered for the disallowance as the same cannot to attributable to any particular income or receipt. In view of specific provision of Rule 8D(2)(ii), we do not find any illegality in the order of the CIT(A) and, hence, we confirm the order of the CIT(A).
In so far as sustenance of disallowance of ` 7,68,000/-, we noted that the assessee is not in appeal before us. Therefore, we cannot entertain the plea of the assessee in this respect of sustenance of disallowance that such interest cannot be disallowed as the investment made by the assessee are 17 ITA No.4692/Mum/2014 ITA No.372/Mum/2015 out of its own funds. We, therefore, dismiss ground no.3 taken by the Revenue.
11. In the result, both the appeals filed by the Revenue stands dismissed.
Order pronounced in the open court on 31st day of August, 2017.
Sd/- Sd/-
(Pawan Singh) (P K Bansal)
JUDICIAL MEMBER VICE-PRESIDENT
Mumbai; Dated: 31st August, 2017
SA
Copy of the Order forwarded to :
1. The Appellant.
2. The Respondent.
3. The CIT(A),Mumbai
4. The CIT
5. DR, 'C' Bench, ITAT, Mumbai
BY ORDER,
#True Copy #
Assistant Registrar
Income Tax Appellate Tribunal, Mumbai