1. In this appeal by the assessee in which the assesses has taken four grounds before us. The first issue and second issue are inter-connected, the issue being whether the interest earned from deposits with bank during the course of construction of the factory as income assessable under the head 'Income from other sources' and whether the interest paid on the loans borrowed for purposes of construction, is allowable as a deduction or not.
2. Mr. C.L. Jhanwar. the learned counsel for the assessee, filed the copy of this Tribunal's order in the assessee's own case for the assessment year 1979-80 dated 9-5-1985 and submitted that the issue is fully covered in favour of the assessee it has been held that the interest earned during the course of construction has to be deducted from the cost of construction and cannot be treated as income.
3. On the other hand, the learned senior departmental representative's argument was that the Tribunal in the order filed by the assessee has placed reliance on two Special Bench decisions--one of which was from the Madras High Court in CIT v. Seshasayee Paper & Boards Ltd. [1985] 156 ITR 542 has again considered its earlier decision in Addl. CIT v.Madras Fertilisers Ltd. [1980] 122 ITR 139 (Mad.) and has specifically answered this very issue and has held that the interest earned during the course of construction is assessable as income from other sources and that the interest paid on borrowal cannot be allowed for the reason that the borrowal was not for earning of the income but for construction of the factory. He also referred to the decision of the Karnataka High Court in Karnataka Forest Plantations Corporation Ltd. v. CIT [1985] 156 ITR 275, which has considered the identical issue and has come to identical conclusion as that of the Madras High Court. He, therefore, pleaded that the decision in the assessee's own case needs to be given a rethinking in the light of the recent decisions of the two High Courts.
4. We have given careful considerations to the arguments of both the parties. This Bench in its order dated 9-5-1985 has followed the two Special Bench decisions in the case of Arasan Aluminium Industries (P.) Ltd. v. First ITO [1982] 1 ITD 10 (Mad.) and also the case of Nagarjuna Steels Ltd. v. ITO [1983] 3 ITD 796 (Hyd.) where the identical issue was considered by the learned Members and it was held that interest earned while the construction activity is still in progress is not assessable as income as till the construction is completed the entire activity of the company is concentrated only on construction as such and, therefore, all expenses go to increase the cost and all income, if any, go to reduce the cost. The Madras Special Bench has considered the decision of the Madras High Court in Madras Fertilisers Ltd.'s case (supra) and had taken a contrary view.
4.1 The Madras High Court in the case of Seshasayee Paper & Boards Ltd. (supra) had again considered this very issue, which is before us. Their Lordships expressed that interest earned by the assessee on investment in call deposits with banks could be separately under the head 'Income from other sources' and do not go to reduce the cost of construction.
The Karnataka High Court in Karnataka Forest Plantations Corporation Ltd.'s case (supra) on identical issue expressed that the interest earned is liable to be assessed as income from other sources and that the interest paid on borrowals having no relation whatsoever with the investment of earning of income, cannot be allowed to be deducted.
4.2 In view of these two recent decisions of two High Courts and there being no other contrary decision and in view of the Bombay High Court decision in the case of CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589, and in the absence of any contrary decision, to a decision of one or more High Courts they are the law of the land, we have no alternative but to respectfully follow the decisions of these two High Courts and take a contrary view to the one already taken on the same set of facts on the assessee's own case for an earlier year. For these reasons we are compelled to take a contrary view and respectfully following the Madras High Court and the Karnataka High Court decisions, we uphold the order of the Commissioner (Appeals) that interest earned on deposits have been rightly assessed as income from other sources and that interest paid on borrowed monies are not to be deducted as they do not come within the ambit of Section 57(1)(iii) of the Income-tax Act, 1961 ('the Act').
5. In the result, ground Nos. 1 and 2 are decided in favour of the department and against the assessee.
6. The next issue in this appeal is regarding a claim of expenditure of Rs. 2,84,157 and also another item of Rs. 36,342. The first of the amounts have been claimed as expenses on the ground that the assessee, which is being established for purposes of manufacturing of cement and also has been given licence for extraction of minerals from mines has commenced the extraction from the mine of the various minerals.
According to the assessee, the extraction activity is an independent activity, which has already been started in the year under review.
7. On behalf of the assessee, it was submitted that the minerals so extracted, no doubt, become the basic raw materials for manufacture of cement, but these are in the nature of independent activity as such which has no relation whatsoever whether or not the construction activity is going on or completed. It was argued that the claim of the assessee has been negatived by placing reliance on the Gujarat High Court decision in CIT v. Sarabhai Sons (P.) Ltd. [1973] 90 ITR 318. It was further argued that the department has refused to accept the claim of the assessee though the Gujarat High in CIT v. Saurashtra Cement & Chemical Industries Ltd. [1973] 91 ITR 170 on identical facts has come to the conclusion that the moment the assessee started extraction of lime stones from mines, to that extent the business of the assessee has commenced and, therefore, expenditure incurred in extraction of lime stone is allowable as business expenditure.
8. Before us, reliance was also placed in Prem Conductors (P.) Ltd. v.CIT [1977] 108 ITR 654 (Guj.), CIT v. Ralliwolf Ltd. [1980] 121 ITR 262 (Bom.) and also in the case of Instrumentation Ltd. [IT Appeal No. 1304 (Jp.) of 1979 dated 30-10-1980].
9. The argument of the learned departmental representative, on the other hand, was a novel one as according to him, expenditure would follow income and not viceversa for the reason that Section 28 gives the nature of income and Section 29 indicates the computation of income while the expenses from Section 30 onwards follow He also relied on the Bombay High Court decision in Metropolitan Springs (P.) Ltd. v. CIT [1981] 132 ITR 893 for the proposition that a trial production does not by itself mean that there has been any commencement of business activity. According to him, the extraction of lime is nothing but procurement of raw material and, therefore, mere procurement of raw material cannot be held to mean that business has commenced especially when the construction of the entire plant is still in progress.
10. We have given careful considerations to the arguments of the parties. In the case of Sarabhai Sons (P.) Ltd. (supra), the Gujarat High Court has held that placing of orders for raw materials and machinery does not mean that the business has commenced. This was considered by their Lordships of the Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. (supra). In this case, the facts and claim were identical with the present case before us. In that case also the extraction of lime stone from the mines were done while the cement plant, etc., were still under construction. The department had referred to the decision of that High Court in Sarabhai Sons (P.) Ltd's case (supra). Their Lordships in the present case have made the following observations : Then reliance was placed on behalf of the revenue on a recent decision given by this Court on 21st July, 1972, in Income-tax Reference No. 85 of 1970. That decision raised the question as to when a certain business carried on by the assessee could be said to have been set up : whether it was set up prior to 31st March, 1966, or subsequent to that date. The Tribunal had found that it was set up prior to 31st March, 1966, and the question was whether this finding of the Tribunal could be said to be unreasonable or perverse or contrary to evidence or based on no evidence at all. We held on the facts of that case that it was impossible for the Tribunal to have come to the decision that the business was set up by the assessee prior to 31st March, 1966, and the decision of the Tribunal was contrary to evidence or based on no evidence at all. We fail to see how a decision given on one set of facts can bind us to reach a similar decision on a totally different set of facts. There is nothing in this decision which would deflect us from the view which we are otherwise inclined to take. (p. 178) After making the said observation, their Lordships came to the conclusion that extraction of lime stone being one of the activities of the assessee which has been done meant the assessee commencing the business to that extent and that expenditure incurred by the assessee in carrying on the activity of lime stone as also the depreciation allowance and development rebate in respect of the machinery employed in extracting lime stone were deductible in computing the trading profits of the assessee.
11. The case law relied on by the learned departmental representative, i.e., the case of Metropolitan Springs (P.) Ltd. (supra) and the issue in that case was about the claim of relief under Section 15C of the Indian Income-tax Act, 1922, i.e., as an industrial undertaking, which is similar to Section 80J of the 1961 Act. This case would have no application to the present issue before us for the reason that in Section 80J the words used are that the industrial undertaking which begins to manufacture. In that case their Lordships held that trial production does not mean that the assessee had begun to manufacture and, therefore, had laid emphasis that the relief is related to from the period when the assessee had begun to manufacture. The issue before us is not the claim under Section 80J but in connection with the expenditure incurred on extraction of lime stone as to whether they are allowable as business expenditure or not. Their Lordships of the Gujarat High Court in Saurashtra Cement & Chemical Industries Ltd's case (supra) had upheld the observation of the Tribunal about the business of the assessee consisting of three stages. The first stage was procurement of raw materials, the second stage was manufacture of cement and the third was the sale of manufactured cement. They further observed that the three stages together constituted the business of the assessee. They further observed that all the three stages could not be commenced simultaneously. According to them, the first stage had to be commenced earlier so that by the time the plant and the machinery are installed, which materials would be ready for commencement of the process of manufacture and this has been done with a view that the plant and machinery are not kept idle for want of raw materials. They went on to observe that extraction of lime stone, which constituted the first stage of business was as an important activity of the business as utilisation of lime stone in the manufacture of cement and the business of the assessee must, therefore, be held to have commenced when the assessee started the first stage of business by extraction of lime stone. They further observed each one of the activities constituted an integral part of the business of the assessee. They observed why then can it not be said that the assessee commenced its business when it started the first of these activities The activity of quarrying the leased area of land and extracting lime stone from it was as much an activity in the course of carrying on the business as the other two activities of manufacture of cement and sale of manufactured cement.
The business could not in fact be carried on without this activity.
This activity 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. The business consisted of a continuous process of these three activities and when the first activity was started with a view to embarking upon the second and the third activities, it clearly amounted to commencement of the business.
It may be that the whole business was not set up when the activity of quarrying the leased area of land and extracting lime stone was started. But as pointed out above, business is nothing more a continuous course of activities and all the activities which go to make up the business need not be started simultaneously in order that the business may commence. Their Lordships further observed by taking an example of a business of a trader, who purchases and sells goods. They observed the assessee must necessarily purchase goods in order to be able to sell them and purchase of goods must, therefore, necessarily precede their sale. Can it be said in such a case that when the assessee purchases goods for the purpose of sale, he does not commence his business Is it necessary that he must start the activity of selling goods before he can be said to have commenced his business We have to consider the question as to when an assessee can be said to have commenced business from a comtnonsense point of view. We have to ask ourselves the question as to when a businessman would regard a business as being commenced Would he not consider a business as having commenced when an essential activity of that business is started The argument of the revenue seeks to confound the commencement of a business with the establishment of the business as a whole and carrying on of all the activities of the business. This confusion is the result of a loose description of the business of the assessee as a business of manufacture and sale of cement. The revenue says that when the business is of manufacture and sale of cement, how can the assessee be said to have commenced the business when the manufacture has not started This argument suffers from the fault of over simplification and ignores the true nature of the activities which constitute the business of the assessee. We are of the view that as soon as an activity in the course of carrying on the business, or which, in other words, is a business activity, is started, the assessee must be held to have commenced the business. To take any other view would not only be illogical but also irrational. In the ultimate paragraph, their Lordships observed that the Tribunal was right in taking the view that the expenditure incurred by the assessee in carrying on the activity of extraction of lime stone as also depreciation allowance and development rebate in respect of machinery employed in extracting lime stone were deductible in computing the trading profits of the assessee.
11.1 The facts in the present case being identical and in the light of the detailed finding given by their Lordships of the Gujarat High Court on identical facts and circumstances and there being no contrary decision to the one considered, we respectfully following the decision of the Gujarat High Court hold that the claim of the assessee in respect of expenditure incurred on extraction of lime stone amounting to Rs. 2,84,157 is allowable as a business expenditure and also the amount of Rs. 36,342 is also allowable under Section 35E of the Act as relatable to expenditure on prospecting for certain minerals.
12. The last issue is in connection with the levy of interest under Section 217 of the Act which would be consequential to the various grounds considered above, which we direct the ITO to recalculate after giving effect to this order.