TMI Blog2012 (10) TMI 524X X X X Extracts X X X X X X X X Extracts X X X X ..... tion activity connected to the expansion of the business by way of setting up of a new power generation plant - in favour of assessee. - ITA-1238/2011 - - - Dated:- 17-7-2012 - MR. JUSTICE S. RAVINDRA BHAT, MR. JUSTICE R.V. EASWAR, JJ. For Appellant: Mr. R. Muralidhar with Mr. K.N. Ahuja, Advocates. For Respondent: Mr. Anupam Tripathi, Sr. Standing Counsel with Mr. Sumit Kumar, Advocate. MR. JUSTICE S.RAVINDRA BHAT (OPEN COURT) % The assessee is aggrieved by an order dated 25th April, 2012 of the Income Tax Appellate Tribunal (ITAT) in ITA Nos. 4668-73/Del/2010. The appeal is admitted. The following substantial question of law arises for consideration: Did the Tribunal fall into error in upholding the addition of interest of Rs.3,31,58,000/- earned on deposits and advances made for the new unit being established, instead of being set off/netted off against the interest on borrowed sums utilized for the new unit? With consent of counsel for parties, the appeal was heard finally for disposal. 2. The assessee was incorporated on 8.2.1999 with the paid up capital of Rs.1000/- consisting of 100 shares of Rs.10/- each. Of these, 98 shares were subscribed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the interest earned on deposits kept in relation to the expansion were credited to/reduced from the IEDC. The Assessing Officer treated this interest as income from other sources , relying on the judgment of the Supreme Court in Tuticorin Alkalies Chemicals Fertilizers Ltd. vs. CIT 227 ITR 172 (SC). The assessee s appeal to the Commissioner (Appeals) was accepted. The revenue consequently approached the ITAT, which by the impugned order allowed it, and restored the order of the AO. 4. Learned counsel submitted that the Tribunal fell into serious error in holding that interest income earned out of borrowed funds, temporarily placed in fixed deposits was income and not capital receipt. It was urged that the decision of the Supreme Court in Commissioner of Income Tax v. Bokaro Steel 236 ITR 315, where the character of such receipts was held to be capital in nature as long as the borrowed funds (which constitute the principal) are inextricably connected with the construction activity. It was argued that the reasoning of the Tribunal that the change brought about by the amendment to the Income Tax Act with effect from 1-4-2004, by which interest paid on borrowed capital did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing proviso to this section w.e.f. 1.4.2004 by the Finance Act, 2004, the amount of interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business or profession whether capitalised in the books of account or not, for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. The assessee company was running two power plants. Thereafter a new power plant was to be set up at Bhilai for generation of power. Company raised term loan for setting up this new plant. The separate books of account were maintained for this new unit. The assessee has worked out the amount of interest payable or paid relating to the borrowings utilized for expansion purposes. Similarly, the assessee also worked the earning of interest on the FDRs of surplus fund and interest on margins/advances made for the purpose of expansion. The assessee has adjusted the interest income towards the IEDC (incidental expenses during construction) by adopting the matching principle in respect of the interest earned on the FDRs of surplus fund and margins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquisition of an asset for extension of existing business or profession for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. The assessee has claimed the adjustment of interest against the incidental expenses during construction on the basis of matching principle is also not as per law. As we have stated above, the interest earned on FDRs made from surplus fund and interest earned on margins and advances made for expansion work shall be assessed under the head income from other sources‟. The set off claimed against the incidental expenses during the construction of new plant of which main component of this expense is interest paid on borrowed capital. The netting of interest in the case of CIT vs. Shri Ram Honda Power Equip 289 ITR 475 (Delhi) was allowed only for the purpose of deduction u/s 80HHC in view of provisions of Section 80HHC (3)(baa). In the decision also, the Hon'ble Delhi High Court has clearly held that surplus funds parked with the bank and interest is earned thereon can only be categorized as income from other sources ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) XXX XXX XXX (iii) the amount of the interest paid, in respect of capital borrowed for the purposes of the business or profession : Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. Explanation. Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause; 8. In Tuticorin Alkali Chemicals and Fertilizers Ltd.(supra) the Supreme Court held as follows: "if the company, even before it commences business, invests the surplus funds in its hands for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head Capital gains‟. Similarly, if a company purchases a rented house and gets rent, suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll these cases, when the interest was received by the assessee towards interest paid for fixed deposits when the borrowed funds could not be immediately put to use for the purpose for which they were taken, this Court, and indeed the Supreme Court held that if the receipt is inextricably linked to the setting up of the project, it would be capital receipt not liable to tax but ultimately be used to reduce the cost of the project. By the same logic, in this case too, the funds invested by the assessee company and the interest earned were inextricably linked with the setting up of the power plant. It may be added that the Tribunal has not found that the deposits made as margin monies were not limited to the construction activity connected to the expansion of the business by way of setting up of a new power generation plant. 11. As a result of the above discussion, it is held that the Tribunal and the lower authorities fell into error in holding that the interest earned on fixed deposit of amounts borrowed, which is the subject matter of the present appeal, would have to be treated as revenue receipt. The answer is given in favour of the assessee; the appeal is consequently allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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