To operate the Metro Rail System commercially, the assessee is required to place the necessary infrastructure in place and the assessee is also given the obligation of planning, building and making the system operational. In order to plan the system, the assessee is required to set up an administrative office and also is required to design the system and call for tenders for building the necessary infrastructure. As seen from the Director’s report placed in the paper book, the assessee had acquired the land and had paid the compensation to the displaced land owners and has also initially awarded contract to one company, but later on due to certain circumstances cancelled the contract and had called for tenders from various international bidders and finally awarded the contract to L&T Ltd. Therefore, it is clear that the assessee has taken all the necessary steps to facilitate the building of Metro Rail System. Since the assessee has taken steps in furtherance of its main objects, it cannot be stated that the assessee has not commenced its business. Even from the perusal of the expenditure debited to the P&L A/c which has been disallowed by the AO, it is seen that most of it relates to the administrative office of the assessee and not for manufacturing or making the system operational.
Relevant Extract of ITAT Order
3. Brief facts of the case are that the assessee is a Special Purpose Vehicle company formed on behalf of the Govt. of Andhra Pradesh for interacting with the BOT Developer for setting up and operation of prestigious project of “Metro Rail Development” in Hyderabad. It filed its return of income for the A.Ys 2010-11 & 2011-12 admitting ‘Nil’ income. Subsequently, the revised returns of income were filed and during the scrutiny proceedings u/s 143(3) of the Act, the AO noticed that the assessee had admitted income from (i) Govt. grant (ii) Interest on deposits and (iii) other incomes. He also observed that the assessee claimed administrative expenditure, M.D ‘s remuneration and preliminary expenses written off as business expenditure. The AO observed that the assessee company is an intermediary between the Govt. of A.P. and L&T Construction for the prestigious project of Metro Rail Development in Hyderabad and that the assessee company is still in the process of constructing the infrastructure. Therefore, he was of the opinion that the assessee company has not yet started its business and the expenditure claimed is pre-operative expenditure which cannot be allowed. He also observed that the assessee has earned interest income on bank deposits and also earned other income out of activities which are not part and parcel of the business activities of the assessee and also that the expenditure debited to the P&L a/c has no connection with the earning of the above incomes. Therefore, a show cause notice was issued to the assessee. The assessee submitted its detailed reply vide letter dated 21.01.2013, according to which, the assessee was incorporated mainly to plan, build and commercially operate/facilitate building and commercial operation of various mass transit systems and that the first limb of the activities does not generate any revenue as it is only to develop or facilitate to develop the transport systems. It was submitted that for the years under consideration, the assessee company had undertaken only the first mentioned limb of the activity i.e. developing or facilitating the development of the transport system and therefore, the assessee has in fact commenced its business. However, the AO was not convinced with the assessee’s contentions and held that the core objective of the assessee is to commercially operate the mass transit system and since it has not yet started its core activity, it cannot be construed that the assessee has commenced its business. Further, he also observed that the income shown in the P&L A/c is not generated from the business activity of the assessee. Therefore, he treated the business income returned by the assessee as “income from other sources”. As regards the expenditure incurred by the assessee, the AO held that the same has to be disallowed as it has no connection with the earning of the income returned by the assessee. Aggrieved, the assessee preferred an appeal before the CIT (A) who confirmed the order of the AO and the assessee is in second appeal before us.
4. The learned Counsel for the assessee, Shri P.S.R.V.V. Surya Rao, reiterated the submissions made by the assessee before the authorities below and submitted that the main objective of the assessee was to develop or to facilitate the development of the mass transit system and in accordance with the said objective, the assessee has acquired the land and paid compensation to various displaced land owners. He has also drawn our attention to the Director’s report wherein it was reported that the tenders were called for and the contract has been awarded to L&T Infrastructure Ltd for building the Mass Transit System. Thus, according to the assessee, it has commenced its business of planning and also has facilitated the development of the mass transit system and has incurred expenditure for achieving its objects. He has also drawn our attention to the details of expenditure incurred by the assessee, which is at page 51 of the Paper Book, to demonstrate that most of the expenditure is in the nature of the administrative expenditure. He also submitted that the assessee had to float tenders and has incurred expenditure for execution of such procedures and has also earned income by issuing the tender documents. Therefore, clearly the nexus between the earning of the income from issuance of RSQs and also business expenditure for floating the tenders has been established by the assessee. He also submitted that the purpose of Govt. grant to the assessee was only to implement the plan of development of infrastructure for the Mass Transit System and as seen from the balance sheet of the assessee, the government grant from the earlier years has reduced which only establishes that the assessee has commenced its business activities. According to him, the assessee has utilized the Govt. grants only for the purpose for which they have been granted by the Govt. As far as the interest income on deposits is concerned, the learned Counsel for the assessee submitted that the assessee has deposited the unutilized Govt. grants in short term deposits in order to reduce the operation cost and not to earn interest income and therefore, the interest income is also directly linked to the business activities of the assessee and is to be treated as business income.
5. As regards the additional ground of appeal, the learned Counsel for the assessee submitted that the same arises out of the assessment and as the entire income has been treated as ‘income from other sources’ and the assessee through the additional ground is only an alternative ground seeking that if the business income returned by the assessee is treated as income from other sources, then the expenditure relatable to earning of such income should also be allowed u/s 57 of the Act. He therefore, prayed that the additional ground of appeal be admitted and adjudicated.
6. The learned DR, on the other hand, supported the orders of the authorities below. She submitted that the main object of the assessee company was not only to set up the infrastructure facility but is also to operate the mass transit She submitted that the assessee was yet to operate the metro rail system in Hyderabad and also derive income/revenue therefrom. Therefore, according to her, the expenditure incurred by the assessee prior to the operation of the metro rail system, is to be treated as pre-operative expenditure and capitalized. She also placed reliance on the decision of the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd vs. CIT, reported in 227 ITR 172 for the proposition that where the unused and surplus funds are deposited by the assessee with the Banks, the interest income derived therefrom cannot be treated as business income.
7. Having regard to the rival contentions and the material on record, we find that the assessee is a special purpose vehicle formed by the Govt. of Andhra Pradesh for bringing into existence the Metro Rail System in Hyderabad. As seen from the Memorandum of Association of the assessee company, the main objects are as under:
” A. Main objects to be pursued by the Company on its incorporation:-
1. To plan, build and commercially operate and I or facilitate building and commercial operation of mass transit systems for Hyderabad and for any other area by constructing, facilitating construction, taking over, leasing, either on its own or otherwise, and by building new transit routes of any mode or a combination of modes, with all attendant infrastructural facilities.
2. To provide and / or facilitate provision of multi modal transportation services including owning, licensing and operating bus routes, passenger and goods carriers, other road vehicles and other modes of transport, and providing seamless transportation services.
3. To commercially exploit and/or facilitate commercial exploitation of land and air space and other available or handed over resources for optimal utilization of their potential.
4. To undertake and/or facilitate road capacity improvement works such as new roads, road widening, parallel roads. slip roads, junction improvements, bridges, road over bridges, road under bridges, flyovers, signalization, bus bays, parking facilities, foot over bridges and sub ways.
5. To undertake and/or facilitate Transit oriented developmental activities on its own or on behalf of the central and or state government or any organizations belonging to or under the direct or indirect control of the central, state or local governments, to encourage dispersed growth and transit oriented development.
6. To run taxicabs, lorries, busses, cars, trucks, station wagons, airplanes, airships, motors, railways. rail motors, vessels, boats and all other vehicles of whatsoever kind propelled by electricity, gas, gasoline, compressed air, steam, manual power, mechanized power, oil, crude oil, atomic or other energy, or by whatsoever other means from one place to another (whatsoever) for the purpose of carrying, conveying transporting goods, animals, passengers, merchandise or other things, for the efficient running of the mass transit system.
8. Further, on perusal of the other objects which are incidental or ancillary to the attainment of the above main objects, the assessee is required to acquire, buy, sell for the purposes or provide or facilitate investment or resale of land so as to develop real estate, shopping malls in and around railway station and elsewhere and carry on such other activities. Thus, the assessee may either build the transport system by itself or act as facilitator for the building of such system and also to run or facilitate to run, operate or facilitate to operate the system on commercial lines. To operate the Metro Rail System commercially, the assessee is required to place the necessary infrastructure in place and the assessee is also given the obligation of planning, building and making the system operational. In order to plan the system, the assessee is required to set up an administrative office and also is required to design the system and call for tenders for building the necessary infrastructure. As seen from the Director’s report placed in the paper book, the assessee had acquired the land and had paid the compensation to the displaced land owners and has also initially awarded contract to one company, but later on due to certain circumstances cancelled the contract and had called for tenders from various international bidders and finally awarded the contract to L&T Ltd. Therefore, it is clear that the assessee has taken all the necessary steps to facilitate the building of Metro Rail System. Since the assessee has taken steps in furtherance of its main objects, it cannot be stated that the assessee has not commenced its business. Even from the perusal of the expenditure debited to the P&L A/c which has been disallowed by the AO, it is seen that most of it relates to the administrative office of the assessee and not for manufacturing or making the system operational.
9. Similar issue had come up before the Hon’ble Kerala High Court in the case of CIT vs. Kerala Infrastructure Investment Fund Board wherein the question was as to whether the assessee therein who was to finance infrastructural projects and has raised funds but had not advanced any funds, has commenced its business or not?. It was held that the answer to such questions will depend upon the facts of each case. The Hon’ble High Court has also considered the judgment of the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd vs. CIT (cited Supra) and at Para 3 of its order has held as under:
“3. The only question to be considered is whether the assessee can be said to have commenced business before actual advancing of any fund for any infrastructure project. Standing counsel relying on the decision of the Supreme Court in Tuticorin Alkali Chemicals & Fertilisers Ltd. ’s case (supra), contended that the case herein is similar to the facts of the case decided by the Supreme Court because as in that case, income earned by the assessee is interest income on deposits made prior to the commencement of business, that is advancing of amounts for infrastructure projects. We are unable to accept the contention of standing counsel that facts in Tuticorin Alkali Chemicals & Fertilisers Ltd. ’s case (supra) apply to this case, because that was a case where the company was engaged in manufacture of heavy chemicals and before starting business, it applied surplus fund in short-term deposits and earned interest, which is obviously not out of any business carried on by it. Admittedly that company was not engaged in financing and on the other hand it was an industrial company engaged in manufacture. Therefore, interest earned by it can never be income from business, more so when such interest is earned from deposits made even prior to commencement of production by the company. However, facts of this case are entirely different because the activity of the respondent is financing for infrastructure projects. In fact, it raised fund towards working capital through public borrowings by issue of bonds. Admittedly, interest earned by the respondent is on deposits of borrowed funds retained in Treasury accounts and in other Bank accounts. The question as to whether the assessee has commenced business or was carrying on business will depend upon the facts of each case. Infrastructure projects themselves are very few and respondent can fund the project only when it conforms to assessee ’s norms for eligibility. The fund required for infrastructure projects is substantial and, therefore, fund has to be first raised before identifying the project to be funded. Therefore, in our view, raising of fund for project financing itself is commencement of business because fund raised is nothing but working capital to be applied for business purposes. Respondent cannot be expected to immediately advance fund because only after projects are identified and their eligibility is proved, in accordance with the norms of the respondent, they can fund a project. However, respondent cannot be expected to keep the interest bearing borrowings idle without any returns, which will lead to heavy loss. Therefore, necessarily respondent had to deploy available fund in short-term deposits to earn interest which is to be utilised for paying interest to the bond holders and to meet the administrative cost. May be months, or years, may take for funding projects. Therefore it, cannot be said that business can be said to commence only after first project is financed. In our view, the business commenced when the respondent raised fund from public through bonds issued and when they were ready with the fund to deploy for infrastructure projects which is the business of the respondent. Therefore, in our view, deposit of funds in Banks and Treasury is nothing but an activity done in the course of business and, consequently, interest earned is income from business. Since the assessee is a financing company, the interest earned by it on the funds raised through public borrowings cannot be compared to the interest earned on business like manufacturing industries and, therefore, the decision of the Supreme Court relied on by the department is not applicable to the facts of this case. Therefore, the first appellate authority as well as the Tribunal have rightly held that the assessee is entitled to all the deductions available in the computation of business income.
We, therefore, uphold the orders of the Tribunal confirming the order of the first appellate authority. Consequently, departmental appeals are dismissed”.
10. In the case before us also, the assessee had acquired the land and paid compensation to the displaced land owners and has floated tenders and awarded the contract for building the infrastructure. Thus, the assessee has started its activity of planning and building the Mass Transit System. As observed by the Hon’ble High Court in the above case, infrastructure projects take time to be completed and the assessee can operate the Metro Rail System only after the infrastructure is built. Thus, in our opinion, the assessee has started its business of planning the Mass Transit System, i.e. first limb of its activity.
11. Further, the Hon’ble Gujarat High Court in the case of CIT vs. Gujarat Ports Infrastructure & Development Co. Ltd reported in (2012) 20 com10 (Guj.) has considered similar issue at length and at Paras 10 to 17 has held as under:
“10. Having thus heard learned counsel for the parties and having perused the documents on record, we find that the main objects outlined in the Memorandum of Association for which the respondent company was incorporated included besides others to undertake and carry on the business of promoting, organizing, managing and developing in the State of Gujarat and elsewhere minor and major ports, ship-yards, jetties, harbours and docks as well as to set up warehouses, godowns, open plots etc. appertaining to any dock. It also included the object of setting up infrastructural facilities, utilities, conveniences and amenities including roads, buildings, warehouses etc. relating to cargo-handling, ship-building, ship-repairing and ship-breaking. Besides these another main object for which the company was incorporated was to undertake, promote, develop, aid and assist all types, kinds and forms of port related activities and also to undertake, render and provide all types of services in all matters relating to ports, jetties, harbours, docks and ship-yards. It also included the object of promoting, developing, upgrading and assisting all types, kinds and forms of works, undertakings, projects or enterprises and carrying on port related activities in the State of Gujarat and elsewhere by investment in such bodies in the form of equity participation, preference participation, subscription of other securities or through any other form of financial assistance or participation and to invest the capital of the company; the money raised or borrowed by the company.
11. To achieve such main objects, the Articles of Association also listed objects incidental and ancillary to the attainment of the main objects, one of them being to work and act as agents of the Government, Municipal local Boards, Railway Contractors and suppliers.
12. Bearing in mind these main and ancillary objects of the company, we would need to peruse the materials on record. We have perused the company’s profile presented by the company before the Assessing Officer during the course of the assessment. It emerges that the company entered into collaboration with Adani Port Limited (“APL” for short) and set up a joint venture company called Gujarat Adani Port Limited in which the respondent company had 26% equity share. General public, foreign investors etc. held 49% equity share, remaining 25% equity share was held by APL. During the year relevant to assessment year 2001-02, the company had investment of 15 crores in APL. Besides thus carrying out joint venture activities with APL, the assessee had also undertaken various other activities, as can be seen from its communication dated 26.5.2004 to the Commissioner (Appeals) and had actively participated in the management of the said company.
13. From the documents on record, we further notice that the respondent company had, in consultation with the Government, participated in development of Mundra Port.
14. On the basis of such materials, if we revert back to the decision of the Tribunal under challenge we notice that the Tribunal had come to the conclusion that the assessee had set up its business. We are of the opinion that the Tribunal committed no error. As already noted, the main objects of the company included wide variety of subjects principally concerned with the development of minor ports in and outside State of Gujarat. This could be done by acting as promoters, organizers, managers and developers of the ports or also through entering into joint venture undertaking. The subsidiary objective, incidental to the main objects also envisaged the company to work and act as agent of the Government, Municipal Local Boards, Railway Contractors etc.
15. In furtherance of such objects, principal as well as ancillary, the assessee company having entered into a joint venture with another company, which was developing ports at Mundra, it cannot be stated that the business of the company was not set up.
16. It is not in dispute that any expense incurred prior to the setting up of a business would not be a permissible deduction. In the case of Prem Conductors Pvt. Ltd. v. CIT  108 ITR 65, the Division Bench of this Court relying on and referring to the decision of the Bombay High Court in the case of Western India Vegetable Products Ltd. v. CIT  26 ITR 151 observed that for deciding when a company could be said to have set up its business, what the Court has to consider is whether the business of the assessee consists of different categories and whether the activity, which was started earlier is said to have been the essential part of the business activity of the assessee. The Court held and observed as under:-
“Thus, it is clear in the light of the decisions of this High Court in Saurashtra Cement and Chemical Industries’ case  91 ITR 170 (Guj) and Sara bhai Management corporation Ltd. ‘s case  102 ITR 25 (Guj) that what the court has to consider is, whether the business of the assessee consists of different categories and whether the activity which was started earlier than the actual commencement of the production in the instant case could be said to have been an essential part of the business activity of the assessee. The company can be said to have set up its business from the date when one of the categories of its business activity is started and it is not necessary that all the categories of its business activities must start either simultaneously or that the last stage must start before it can be said that the business was set up. Again, as Bhagwati C.J. Has emphasized in Saurashtra Cement and Chemical Industries’ case  91 ITR 170 (Guj), the test to be applied is as to when a businessman would regard a business as being commenced and the approach must be from a commonsense point of view.”
17. In view of the above judicial pronouncement, the findings of the Tribunal and our observations made hereinabove, we see no reason to interfere. We may also notice that in the earlier years, the case of the assessee that it had set up the business was not questioned by the Assessing Officer”.
18. In view of the above judgments and also in view of the fact that the Revenue has not disallowed the business expenditure claimed by the assessee in the earlier two years, we are of the opinion that the assessee has commenced its business and the expenditure has to be allowed as business expenditure.
13. Coming to the nature of the income earned by the assessee, we find that it consists of (i) Govt. grant (ii) Interest on deposits and (ii) other income. The govt. has released the grant for carrying out the objects of the assessee and therefore, the govt. grant has to be considered as the business receipts of the assessee. The interest on deposits is the interest earned by the assessee on deposits made by the assessee of the unutilized funds as short term deposits. It is thus clear that the funds are for business purposes of the assessee and when they are not immediately needed, instead of keeping them idle, the assessee is parking them in short term deposits. The funds received by the assessee are for the purpose of the business of the assessee but it is for commercial exploitation of the unused funds, that they are parked as short term deposits. Therefore, we hold that interest income is business income. The decision of the Hon’ble Supreme Court in the case of Tutocorin Alkali Chemicals & Fertilizers Ltd (Supra) is not applicable to the facts of the case before us. The Hon’ble Supreme Court in the case of SA Builders reported in 288 ITR (1) S.C. has held that where the interest bearing funds are advanced without interest for commercial expediency, then the interest paid on such borrowings is to be allowed. Applying the said principle of commercial expediency in a counter situation, where the assessee earns interest on its business receipts which are temporarily not required for business, and are parked in banks for earning of interest in order to reduce the cost, then the same attains the nature of business income.
14. As regards the other income is concerned, we find that the details of the other incomes are given in Schedule VIII which is placed at Page 51 of the Paper Book and on perusal of the same, we find that the income is derived from sale of RSQ and RSB documents. The RSQ & RSB documents are the tender documents and are, therefore, inexplicably linked with the business of the assessee and therefore, the receipt on sale of such documents also has to be treated as business income. The details of the other miscellaneous income is not given before us, therefore, we are inclined to treat the miscellaneous income as “income from other sources”. The AO is therefore, directed to compute the business income in accordance with the directions given above and allow the intra head set off in accordance with the law. The assessee’s grounds of appeal as well as additional ground of appeal are treated as partly allowed.
15. In the result, assessee’s appeals for both the A.Ys are treated as partly allowed.
Order pronounced in the Open Court on 24th March, 2017.