Income and expenses of pre-commencement period

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: Before a business entity commences its operations, funds may be temporarily parked in short-term deposits with a view to earn interest. At the same time, certain revenue expenses need to be incurred, which are not allowed to be deducted prior to the commencement of business. Specified expenses covered under section 35-D of the Income-tax Act "the Act", 1961 are permitted to be amortised over a period of five years from the year in which the business is commenced.

For a new project, monies may be brought in by promoters and raised by way of loans. An interesting issue, which arises for determination is whether the interest payable on the loans received would be deductible under section 57 of the Act against the interest earned on the temporary parking of surplus funds.

In CIT v Karnataka Power Corporation (247 ITR 268), it was held by the apex Court that interest receipts/hire charges received during pre-production period is on a capital account. In Tuticorin Alkali Chemicals and Fertilizers Ltd v CIT (227 ITR 172), the Supreme Court considered the investment of borrowed funds prior to commencement of business and held that the interest earnable was taxable.

In CIT v Bokaro Steel Ltd (236 ITR 315), a government company, which during the period of construction of the plant had advanced monies to contractors on which it was earning interest, received rent from quarters let out to employees. It also received hire charges on plant let out to contractors and received royalty on stones removed from its land.

The Supreme Court considered all these activities to be intricately connected with the construction activity and accordingly held that interest received, rent received, hire charges and royalty, etc, would be reduced from the cost of the assets. Such receipts would not be treated as income. A similar view was expressed by the Supreme Court in CIT v Kamal Co-operative Sugar Mills Ltd (243 ITR 2). An identical view was also taken by the Supreme Court in Bongaigaon Refinery and Petrochemicals Ltd v CIT (251 ITR 329) and CIT v Karnataka Power Corporation (247 ITR 268).