TMI Blog2011 (3) TMI 309X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, the interest earned by the assessee is capital in nature and shall go towards adjustment against the project expenditure and the same cannot be assessed as income from other sources - Decided in favour of the assessee - 357 of 2010 - - - Dated:- 11-3-2011 - DIPAK MISRA, MANMOHAN, JJ. JUDGMENT Dipak Misra C. J.- 1. The present appeal preferred under section 260A of the Income-tax Act, 1961 (for brevity "the Act") was admitted on the following substantial question of law : "Whether in the facts and circumstances of the case the Income-tax Appellate Tribunal was justified in deleting the addition of Rs.16,36,039 on the ground that interest earned by the assessee on the fixed deposit receipt being capital in nature cannot be assessed as income from other sources solely on the foundation that the fixed deposit was made for submitting the performance guarantee to the National Highways Authority of India ?" 2. The facts giving rise to the present appeal are that the respondent-asses-see filed its return of income for the assessment year 2003-04 on September 21, 2003 declaring nil income. An order of assessment was framed under section 143(3) on March 29, 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24 (Mad), Phillips Carbon Block Ltd. v. CIT [1982] 136 ITR 205 (Cal), Addl. CIT v. Madras Fertilisers Ltd. [1980] 122 ITR 139 (Mad), CIT v. Jose Thomas [2002] 253 ITR 553 (Ker), CIT v. Parekh Brothers [2002] 253 ITR 43 (Ker), Rani Paliwal v. CIT [2004] 268 ITR 220 (P H) and Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 (SC), came to hold that the appellant had raised the margin money from its own funds available with other organizations and deposited with its bankers with a view to obtain the performance guarantee in favour of NHAI for procuring the project of converting the Delhi Gurgaon Section NH-8 into 8 Lane Highway on BOT basis and, therefore, the interest income earned by the assessee on the deposit of margin money for obtaining the performance guarantee in favour of NHAI was income from other sources and the same could not be allowed to be set off against the project expenses. 6. Being dissatisfied with the order passed by the first appellate authority, the assessee preferred an appeal before the Tribunal and the Tribunal took note of the rival submissions and came to opine that the assessee had received interest on the FDRs and the said interest had been reduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the interest earned by the raised capital in fixed deposit receipts has to be detailed as independent source of income not connected with the construction activities or business of the assessee. The learned counsel has proponed that the Tribunal has failed to appreciate that commencement of commercial production and furnishing of performance guarantee are at two different stages and, hence, procuring the award for the projects is inconsequential. 9. Resisting the aforesaid submissions, it is urged by Mr. S. Krishnan, learned counsel for the respondent, that the very award of the contract to the assessee rested on providing a performance guarantee in terms of the agreement and, therefore, there is an inextricable link between the furnishing of the performance guarantee and the execution of the contract. The pre-requisite of the performance bank guarantee was instrumental in initiation of the project itself, the completion of which could only pave the path of revenue generation for the assessee and, under these circumstances, it could not be treated as simply utilizing the idle and surplus funds in a different manner. It is further contended that furnishing of bank guarantee at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed activity. 13. In Tuticorin Alkali Chemicals and Fertilizers Ltd. [1997] 227 ITR 172 (SC), a three-judge Bench of the apex court was dealing with the issue where the company had surplus funds in its hands and in order to earn income out of the surplus funds, it invested the amount for the purpose of earning interest. The company had borrowed funds, which was not immediately required by the company and the same was kept invested in short- term deposit with banks. In that context, the apex court held as follows (page 183) : "It is difficult to follow this reasoning. If a person borrows money for business purposes but utilises that money to earn interest, however temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. He may or may not discharge his liability to pay interest with this income. Merely because it was utilised to repay the interest on the loan taken by the assessee, it did not cease to be his income. The interest earned by the assessee could have been used for many other purposes. If the asses-see purchased a house or distributed dividend or paid salary to its employees with the money receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the interest paid on borrowed capital. The company was free to use this income in any manner it liked. However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee-company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction." (underlining is ours) 15. In this context, we may refer with profit to CIT v. Karnal Co-operative Sugar Mills Ltd. [2000] 243 ITR 2 (SC) wherein the assessee had deposited money to open a letter of credit for the purchase of the machinery required for setting up its plant in terms of the assessee's agreement with the supplier. It was on the money so deposited that some interest had been earned. In that factual backdrop, the apex court ruled thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oshika Telecom Ltd. [2006] 287 ITR 479 (Delhi), the factual matrix was that the assessee was engaged in the business of operating cellular mobile telephone services. In terms of a licence awarded in its favour for operation of the said services in the States of Uttar Pradesh, Bihar, Orissa and West Bengal, the assessee was required to provide finance and performance bank guarantees to the Department of Telecommunications. The assessee arranged the said bank guarantees from the institutions which, in connection with the furnishing of the guarantees, required deposit of margin money from which he earned the income. The Tribunal treated it as assessable as business income. While dismissing the appeal of the Revenue, this court expressed the following view (page 481) : ". . . The finding of fact recorded by the Commissioner of Income-tax (Appeals) and affirmed by the Tribunal is to the effect that the deposit of the margin money by the assessee with the banks was inextricably linked to the furnishing of the bank guarantees by the assessee to the Department of Telecommunications for obtaining a licence. That finding in our view concludes the controversy inasmuch as if the deposits w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom other sources. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre-operative expenses. In the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. [1997] 227 ITR 172 (SC) it was found by the authorities that the funds available with the assessee in that case were 'surplus' and, therefore, the Supreme Court held that the interest earned on surplus funds would have to be treated as 'Income from other sources'. On the other hand in Bokaro Steel Ltd. [1999] 236 ITR 315 (SC) where the assessee had earned interest on advance paid to contractors during pre-commencement period was found to be 'inextricably linked' to the setting up of the plant of the assessee and hence was held to be a capital receipt which was permitted to be set off against pre-operative expenses." 20. Recently, in CIT v. Producin P. Ltd. [2010] 322 ITR 270 (SC) ; [2010] 191 Taxman 79, the apex court was dealing with the issue whether the interest income received by the assessee on short-term fixed deposit constituted part of the total turnover of the assessee's business and also whether it formed a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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