TMI Blog2013 (9) TMI 533X X X X Extracts X X X X X X X X Extracts X X X X ..... talized 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, holds true for the income insofar as once having identified that the income from interest is from the Banks where the share capital was parked was to not earn interest to be balanced interest on capital borrowed. - I.T.A. Nos. 186 and 460/CTK/2011, 461/CTK/2011 - - - Dated:- 14-2-2013 - Shri K. K. Gupta And Shri K. S. S. Prasad Rao,JJ. For the Appellant : Shri A. K. Sabat, B. K. Mohapatra, ARs For the Respondent : Shri N. K. Neb, DR ORDER These appeals for the Assessment Years 2006-07, 2007-08 and 2008-09 are from the assessee raising the solitary issue with respect to taxability of interest income whether could be taxed as "income from other sources" when the amount held in the Fixed Deposits was on the basis of share capital infused by the assessee being a Foreign Company without the interference of Section 92CA whether could be considered on the basis of case laws ennunciated by the Hon'ble Apex Court in the case of Tuticorin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt potential of 500-odd families. Infact to minimize displacement, POSCO had revised project layout in excess of 50 times, and the private dwellings are located in the peripheral fringe area of the project land layout plan. It was expected that the Government Land could be transferred to start the project work within a year of MoU itself due to which with immediate effect Rs.225 Crore was brought by POSCO by way of Share Capital. Collector, Jagatsinghpur cancelled 942.25 acres out of previously sanctioned 1135.8 acres due to forest land and issued fresh sanction order for 193.55 acres covering some villages. Hurdles were faced at the proposed project site from the beginning itself. Land earmarked for the project was initially thought to be non-forest land but was found to be forest land later, requiring making of a forest diversion proposal and clearance for forest diversion. Although the "Government of Orissa" had proclaimed 1,102.225 hectares (2,723.8 acres) of Government land in November 2005 and had published notifications u/s - 4 (1) of LA Act, 1894 for acquisition of 438 acres of private land in May 2006. However the after-effects of incidents of Kalinganagar (Orissa), Singur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tructure facilities development and the same was kept in short term deposits with Bank which yielded interest. Arising out of above factors, level of activity being lower than anticipated, funds obtained as share capital for initial setting up of the Plant (first by obtaining of land, mining rights and creation of infrastructure) were temporarily deposited in term deposits with banks earning interest so as to reduce the overall cost of setting up of the Project. In fact during Project implementation period, as the business is yet to be set up, as can be seen from the audited accounts filed, NO profit and loss Account is prepared by POSCO, and only a statement of Expenditure during Construction Account is prepared in which the entire interest from Bank is shown as reduction from cost of Expenditure during Construction/ Project implementation and the net amount is carried over in Balance Sheet for future capitalization. The interest earned on temporary deposits coming out of share capital brought in for initial acquisition of land and creation of infrastructure in setting up of the Project is inextricably and directly linked to such setting up of the Integrated Steel Plant / Project. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid approval has not been received till 30.12.2010, as is evidenced from a news item in "Times of India" Bhubaneswar edition dtd. 30.12.2010 with the caption 'Decision on Posco by Jan end: Ramesh' which states as under: "New Delhi: A final decision on South Korean giant Posco's proposed $12 billion steel plant in Orissa would be taken by January end, environment minister Jairamsaid on Wednesday. I am confident that by the end of January, we will have complete clarity on the on this,' the minister told reporters in New Delhi. Ramesh said the ministry has received all the information regarding the project, which seeks diversion of 1253.225 hectares of forest land for establishment of integrated steel plant and captive port in Jagatsinghpur district. The project is under scanner of the ministry for alleged violation of green laws." From this it is very clear that as on 30.12.2010 the project has not got approval of Govt. of India. Since the project was not approved as late as on 30.12.2010, the question of approval as on 31.03.2006 would not arise. Without the crucial approval the integrated steel plant cannot be set up. In the case of Indian Oil Panipat Power Consortium Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s hinself Shown the income as income from other sources and there is no link, let alone inextricable link, between the amount deposited in the bank and the proposed unapproved steel plant, no merit is found in this additional ground no.1 and the same is dismissed. Additional ground no.2: Additional ground no.2 states that based on the decision of the Indian Oil Panipat Power Consortium Ltd. V. ITO (supra) the aforesaid interest income of Rs.6,37,44,444/- is of capital receipts and hence being not taxable and is to be excluded from the total income. The appellant has misinterpreted the ratio of Indian Oil Panipat Power Consortium Ltd V ITO (supra) The case is clearly distinguishable on the facts and ratio of the said case is not at all applicable to the appellant company. In Indian Oil Panipat Power Consortium Ltd. V. ITO (supra) the company was a joint venture company with a public sector company. All the clearances required for setting up of power project was obtained by the company. Based on the facts of that company, the CIT(A) has held that there is an inextricable link between interest earned and setting up of the power plant. Here, as we have already discussed in detail in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the end of the day at no point of time can fingers be raised that the project cost which are to be allowed under the provisions of Section 35D or Section 35E to be amortized for a period of five to 10 years whether could be subjected to be considered on the basis of accounting thereof insofar as the decision of Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd v. CIT (supra) had categorically identified the surplus to be rendered as income under the head "residual" as income from other sources. He submitted that the learned CIT(A) was also submitted the distinction between the decisions of Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd v. CIT (supra) and CIT v. Bokaro Steel Ltd (236 ITR 315) when the facts and circumstances of the assessee's case are squarely applicable as per the decision of Hon'ble Delhi High Court in the case of India Oil Panipat Power Consortium Ltd v. ITO (315 ITR 255). He submitted that in that case Indian Oil Corporation (IOCL) and Marubeni Corpn., Japan, formed a joint venture company, Indian Oil Panipat Power Consortium Ltd (IOPPCL) for setting up a power project. During the implementation of po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be examined. Under section 208 of the Companies Act, 1956 a company can pay interest on share capital which is issued for a specific purpose to defray expenses for construction of any work and which cannot be made profitable for a long period subject to certain restrictions contained in sub-sections (2) to (7) of section 208. This section was specifically noted by the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 . The Supreme Court went on to observe as follows: "We have already referred to section 208 of the Companies Act which makes provision for payment of interest on share capital in certain contingencies. Clause (b) of sub-section (1) of that section provides that in case interest is paid on share capital issued for the purpose of raising money to defray the expenses of constructing any work or building or the provision of any plant in contingencies mentioned in that section, the sum so paid by way of interest may be charged to capital as part of the cost of construction of the work or building or the provision of the plant. The above provision thus gives statutory recognition to the principle of capitalizing the interest in case the interest is pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by Apex Court, Tuticorin Alkali's case has also been referred and discussed in detail. In the above said the Indian Oil Panipat (IOP) case both Bokaro Steel's case and Tuticorin Alkali's case have been taken into account and considered by the Hon'ble Delhi High Court. 3.2. The learned Counsel of the assessee continued that as per the learned CIT(A) since the assessee-POSCO has not obtained approval / permission (the same is factually incorrect) therefore, according to him, there is no direct connection between funds and setting up of the steel plant project and so there cannot be any link between the money brought in and the unapproved project (Alleged and factually incorrect), since the project has not got the statutory approvals, it cannot deploy funds for setting up of the project. POSCO has brought in share capital which has no direct nexus with the proposed unapproved project and therefore, the share capital is to be considered as "excess" and hence the funds brought in for the purpose of setting up of the steel plant are purely "surplus" and there is no linkage between the proposed unapproved steel plant and the funds. If the clearances are not received then the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T, Cuttack Bench, vide order dt. 21.04.2011 in the case of M/s. Kalinga Coal Mining Pvt. Ltd. Vs. ACIT in ITA No.123 279 / CTK/2011 has held that interest earned on bank deposit is not taxable. The learned Counsel of the assessee further contended that the judgment of the Hon'ble Delhi High Court dated 17.07.2012 in the case of NTPC SAIL Power Company Pvt. Ltd. Vs CIT reported in ITAT online.org (copy filed) also supports the case of the assessee. In view of the above, the Interest from Bank is to be treated as not taxable being a capital receipt. 3.4. In respect of the AYs 2006-07 and 2007-08, the learned Counsel of the assessee submitted that for the AYs 2006-07 and 2007-08, the facts are similar to AY 2008-09. In fact the learned CIT(A) has only followed his own order for A.Y 2006-07. Moreover, the learned CIT(A) has passed the orders for A.Y 2006-07 receiving the remand report from Assessing Officer. Accordingly, the learned Counsel of the assessee submitted that for the Assessment Years 2006-07 and 2007-08, it is proper to restore the matter to the file of Assessing Officer to pass orders denovo as per law keeping in view the principles decided for Assessment Year 2008-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessing Officer requiring no reference to be made to the Transfer Pricing Officer under the provisions of Section 92CA. In other words, no business income has been generated by the assessee. The expenditure claimed therefore was only for the purpose of setting up the project envisaged and there is no method for balancing interest, if any, passed on to the share holders on account of dividend or business income by the assessee. The test, therefore, to our mind is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the plant. The clue is perhaps avail-able in section 3 of the Act which states that for newly set up business the previous year shall be the period beginning with the date of setting up of the business. Therefore, as per the provision of Section 4 of the Act which is the charging section income which arises to an assessee from the date of setting of the business but prior to commencement is chargeable to tax depending on whether it is of a revenue nature or capital receipt. The income of a newly set up business, post the date of its setting up can be taxed if it is o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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, holds true for the income insofar as once having identified that the income from interest is from the Banks where the share capital was parked was to not earn interest to be balanced interest on capital borrowed when the assessee's own funds were being utilised for the purpose of incurring the project cost which took undue delay due to Government and other interference. In the case of Tuticorin Alkali Chemicals Fertilizers Ltd v. CIT (supra), Hon'ble Apex Court has held - "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, such rent will be assessable to tax under section 22 as income from house property. Likewise, a company may have income from other sources................. The company may also, as in that case, ke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of assessments for no fault of the assessee appellant. We are therefore inclined to hold that the learned Counsel of the assessee has submitted a bulk Paper Book which inter alia correlates to earning of interest on the amounts deposited in the Banks to be utilised for the purpose of business of the assessee as per the project envisaged and as per the project approved by the Government of Orissa but taken time due to reason beyond the assessee's control insofar as sanction and authorization have taken its toll when the fact finding is whether capitalization by reducing the preoperative expenses could be isolated for the purpose of taxation as income from other sources following the case laws annunciated by Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd v. CIT (supra) when again Hon'ble Apex Court have clarified the stand in the case of CIT v. Bokaro Steel Ltd (supra) was whether the business of the assessee was to claim the expenditure incurred for earning of such interest having been adjusted against the other expenses incurred rather leans in favour of the assessee to the extent that the interest was inextricably linked to the expenditures ..... X X X X Extracts X X X X X X X X Extracts X X X X
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