Interest on fixed deposits reduced from the capital-work-in-progress considered as non-taxable
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH
The Relevant Text of Order are as follows :
“ 9.From the aforesaid discussion, we find that the assessee has made some income during the period of trial run and the same was adjusted against the pre-operative expenses. The AO rejected the working of assessee and held that the income generated during the trial run income period cannot be adjusted against the preoperative expenses and the same was confirmed by the Ld. CIT(A). However, we observe that it was the condition in the agreement that the trial run has to be carried out before the beginning of commercial operation. The Id. AR drew our attention on pages 17,18,19,20,21 of the Paper Book where the requirement for the trial run was requested before the beginning of actual operation. The purpose of the trial run was to check whether there is any flaw in the system or not so that remedial action can be taken well in time in the event of any flaw in the system. So it is clear that the purpose of the trial run was to check the flaw in the system and not to begin the commercial operations. In the instant case the trial run was successfully completed on dated 13/1/2004 without any flaw in the system. Therefore the commercial operation began immediately thereafter on dated 15/1/2004, Now the question here arises that in case of any flaw caught during the trial run then in that event certainly the commercial operation shall only begin after the removal of the flaw. In view of thi,s the income generated during trial run shall certainly be adjusted against the pre-operative expenses. Having said this we are inclined to reverse the order of the Id. CIT(A) and direct the lower authorities to adjust the trial run income from preoperative expenses of the assessee. We are relying on the judgment of the^ Delhi High Court in the case of Commissioner of Income Tax Vs. Nestor Pharmaceuticals Limited 322 ITR 631 where itwas held that :
“The assessee was in the business of manufacture of pharmaceutical formulation in bulk drugs and supplying drugs to the Government hospitals, institutions besides selling the product in domestic and foreign markets. It claimed the benefit under section 80-IA/80-IB of the Income-tax Act, 1961. It carried out trial production from March 20, 1998. On that basis the Assessing Officer treated the assessment year 1998-99 as the initial year for the benefit claimed and since this benefit was allowable for five years, according to the Assessing Officer, this benefit was admissible from the assessment year 1998-99 to the assessment year 2002-03. The assessee on the other hand claimed the benefit from the assessment years 1999-2000 to 2003-04. The plea of the assessee was that trial production did not amount to manufacture of its products. It was only when commercial production commenced, which, according to the assessee, commenced only in the assessment year 1999-2000 that production commenced. The Commissioner (Appeals) confirmed the order of the Assessing Officer but the Tribunal reversed that order holding that section 80-IA/80-IB of the Act being beneficial legislation, the benefit should be extended to the assessee. It further held that as on March 20,1998, only trial production started which was different from commercial production and the benefit of that section should be allowed in the year in which commercial production started, i.e. in the assessment year 1999-2000 and, therefore, would be extendable up to the assessment year 2003-04. On appeal ;
Held, that the initial assessment year, for the purpose of section 80-IA, was the assessment year relevant to the previous year in which the “industrial undertaking begins to manufacture or produce articles or things”. The trial production began on March 20, 1998, as per the details given in the audit report furnished by the assessee along with its returns of income for the assessment years 2003-04 and 2004-05. There was no dispute that the first sale was made on April 23,1998, which would be the period relevant to the assessment year 1999-2000. Merely because some closing stock was shown as on March 31, 1998, that would not lead to the conclusion that there was commercial production as well. Even for the purpose of trial production material would be needed and there would be production which would result in stock of finished goods. The evidence produced by the assessee was accepted by the tribunal as well, from which it was clear that there was only a trial production in the assessment year 1998-99 and commercial and full-fledged production commenced only in the year 1999-2000. The order of the Tribunal allowing the benefit of deduction under section 80-IA/80IB of the Act from the assessment year 1999-2000 treating it as the initial year of production to the assessment year 2003-04 was correct in law.
The Tribunal held that the assessee had not only produced the goods for trial purposes but there was, in fact, sale of one water cooler and air-conditioner in the assessment year 1998-99 relevant to the previous year/financial year 1997-98. The explanation of the assessee was that this was done to file the registration under the Excise Act as well as the Sales tax Act. The Tribunal held that the sale of one water cooler and one air- conditioner as on March 31, 1998, for the purpose of obtaining registration of excise and sales tax was manufacture within the meaning of section 80-lA. On appeal:
Held, that the assessee had sold one water cooler and one air- conditioner before April, 1998. Thus, the stage of trial production had been crossed and the assessee had come out with the final saleable product which was in fact sold as well. The quantum of commercial sale would be immaterial. With sale of those articles marketable quality was established, more particularly when the assessee failed to show that the dealer returned those goods on the ground that there was any defect in the water cooler or air- conditioner produced and sold by the assessee to the dealer. The Tribunal, in the circumstances, was right that the two types of conditions stipulated in section 80-1 A were fulfilled with the commercial sale of the two items in that assessment year.
Whether the purpose of that sale was to obtain registration of excise or sales tax would be immaterial.”
The Bombay High Court has also decided the similar issue in favour of assessee in the case of CIT Vs. Hindustan Antibiotics Ltd.(1974) 93 ITR 548 (Bom) and relevant extract of the order is reproduced below : “The word “articles” used in the expression “has begun or begins to manufacture or produce articles “in section 15C(2)(ii) must be interpreted regard being had to the object for which the section was enacted. The provision was enacted with a view to encouraging the establishment of new industrial undertakings and the object was sought to be achieved by granting exemption from tax on profits derived from such undertakings during the first five years. The object of the section presupposes that profits are capable of being earned. Hence, until an assessee reaches a stage where it is in a position to decide that a final product which can be ultimately sold in the market can be manufactured it cannot be said to have started manufacture of the articles. If it becomes necessary for an assessee to produce a trial product at an earlier stage to verify whether it can be used ultimately in the manufacture of the final article, the commencement of operation for the manufacture of the trial product would not constitute commencement of manufacture of articles for the purposes of section 15C.
The assessee-company undertook a project for the manufacture of penicillin. It started actual operations for the manufacture of crude penicillin in December 1954. The first samples of crude penicillin were required to be sent to U.S.A. and U.K. for obtaining certificates as to their qualities. The certificates were obtained in June, 1955, and the assessee started regular production of sterile penicillin, the only product that could be sold in the market, in August, 1955. On the question when the manufacture of sterile penicillin had started and whether the assessee was entitled to the exemption under section 15C for the assessment year 1960-61 :
Held, on the facts, that production of articles by the assessee had begun only in August, 1955. The benefit of the exemption under section 15C arose to the assessee for the first time in the assessment year 1956-57 and, therefore, it was entitled to the exemption under section 15C for the assessment year 1960-61 also.”
10. We also further observe that the facts of the case law cited by the AO i.e. Tutikorin Alkali Chemicals & Fertilizers Ltd. (supra) for treating the receipts of trial run as business receipt are different from the facts of the instant case. The Apex Court in the said case has treated the interest income on the surplus fund as income from other sources because there was no nexus between the activity of the assessee and interest income. The assessee has invested idle fund for short period of time before the commencement of the business. There was no connection between interest income and the business of the assessee. The interest income was independent and separate from the business of the assessee. However in the instant case the income generated during trial run is very much connected with the business of the assessee hence the question of recognizing the income does not arise as the commercial operation has not began. In view of above we reverse the order of the Id. CIT(A) and allow the appeal of the assessee.”
9. In view of the above and being consistent with the earlier view taken by the co-ordinate benches of the Tribunal, we are of the view that the income generated during trial run does not arise as the commercial operation of the assessee was not started during the period of trial, thus, the ground of appeal raised by the assessee is allowed.
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