TMI Blog2015 (10) TMI 2016X X X X Extracts X X X X X X X X Extracts X X X X ..... n surplus funds parked with bank and in mutual funds are not inextricably linked with the construction of shopping malls, multiplex and other associate activities, etc. Therefore, the aforesaid interest earned on mutual funds by the assessee cannot be capitalized and have been rightly treated by the Revenue as income from other sources. We accordingly set aside the order of the ld. CIT(A) and restore that of the Assessing Officer. - Decided in favour of revenue. Sale of wastages - revenue v/s capital receipt - Held that:- It is not clear from the orders of the lower authorities whether sale of wastage was at all generated during the construction activities or connected or inextricably linked with the construction of shopping mall and multiplexes. If it is sale of waste materials generated during the course of construction activities, it would reduce the cost of project; otherwise it would also be revenue receipt. With these directions, we restore the matter to the file of the Assessing Officer to verify the nature of sale of wastage material. We accordingly set aside the order of the ld. CIT(A) in this regard and restore the matter to the Assessing Officer to examine the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olely dependent upon borrowed funds. The assessee-company has borrowed loans to meet capital obligation and expenditure as and when required. As it takes some routine time between contractual and its execution, funds borrowed were temporarily deposited for that period and earned interest out of it. It has reduced the borrowing cost and project cost, therefore, the payment of interest on borrowed fund, interest received on fund deposited in bank for intermediate period, are part of capital cost and is distinguished from idle funds. It was further contended that net off interest is a part of capital expenditure and by no stretch of imagination, such interest earned on borrowed fund be called as revenue income. He has placed reliance upon the judgment of the Hon ble Apex Court in the cases of CIT vs. Bokaro Steels Ltd., 102 Taxman 94 and CIT vs. Karnal Cooperating Sugar Mills Ltd., 118 Taxman 489. 4. The ld. CIT(A), being convinced with the explanations of the assessee, has deleted the addition having observed that in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (supra), the facts were entirely different and in that case the assessee-company was an industrial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces and is exigible to tax. 6. When the ld. D.R. was confronted with the judgment of the Hon ble Apex Court in the case of CIT vs. Bokaro Steels Ltd. (supra), she has urged that in the case of CIT vs. Bokaro Steels Ltd., the loan was advanced to the workers/contractors and whenever investment of the idle or borrowed funds are inextricably linked with the commercial/ commencing of the project activities of the assessee, the interest earned thereon may be capital receipt and would reduce the cost of capital investment, but in the instant case borrowed funds were not put in FDRs with the bank on account of any business/commercial exigency. Therefore, the interest earned thereon certainly be income from other sources in the light of the judgment of the Hon ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (supra) and the judgment of the Hon ble jurisdictional High Court in the case of CIT vs. Indo Gulf Fertilizer and Chemicals Corporation Ltd. (supra). 7. The ld. counsel for the assessee, on the other hand, has filed written submission stating therein that the assessee-company had no idle/surplus fund in hand to park with bank to earn interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions with the Banks, it had to accept the proposal of the bank that on one hand they will disburse the loan and on the other hand keep these funds invested in Fixed Deposit for the intervening period. But in order to support these contentions, no documentary evidence in the form of letters of the bankers was filed either before the Assessing Officer or even before the Tribunal. Therefore, the contention of the assessee that the borrowed funds were put in FDRS under pressure of the Banks, cannot be accepted. 9. Now the controversy revolves around an issue whether the receipt of interest on borrowed funds put in FDRs with the bank was capital receipt or revenue receipt. On this issue, the assessee has placed heavy reliance upon the judgments of the Hon ble Apex Court in the case of CIT vs. Bokaro Steels Ltd. (supra) and CIT Vs. Karnal Cooperating Sugar Mills Ltd. (supra); whereas the ld. D.R. has placed heavy reliance upon the judgment of the Hon ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (supra). Therefore, we are of the view that before adjudicating the nature of receipt, we have to examine all these judgments and the ratio laid down b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors can affect taxability of the income earned by the company. Under the Act, the total income of the company is chargeable to tax under section 4 of the Act. The total income has to be computed in accordance with the provisions of the Act. Section 14 of the Act lays down that for the purpose of computation, income of an assessee has to be classified under six heads: The computation of income under each of the above six heads will have to be made independently and separately. There are specific rules of deduction and allowances under each head. No deduction or adjust- ment on account of any expenditure can be made except as provided by the Act. The basic proposition that has to be borne in mind in this case is that it is possible for a company to have six different sources of income, each one of which will be chargeable to income-tax. Profits and gains of business or profession is only one of the heads under which the company s income is liable to be assessed to tax. If a company has not commenced business, there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business, its i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness if the assessee s business had commenced. But that is not the case here. The assessee may be entitled to capitalise the interest payable by it. But what the assessee cannot claim is adjustment of this expenditure against interest assessable under section 56. Section 57 of the Act sets out in its clauses (i) to (iii) the expenditures which are allowable as deduction from income assessable under section 56. It is not the case of the assessee that the interest payable by it on term loans is allowable as deduction under section 57. There are specific provisions in the Act for setting off of loss from one source against income from another source under the same head of income (section 70), as well as setting off of loss from one head against income from another (section 71). In the facts of this case, the company cannot claim any relief under any of these two sections, since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting year. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business cannot be allowed as deduction, nor can it be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -company to let out plant and machinery to others. The assessee-company permitted its use only to its own contractors for the construction work done by the contractors for the assessee-company. The Tribunal has found that the assessee-company charged hire charges for such use of plant and machinery in order to cover the maintenance and wear and tear of the plant and machinery belonging to the assessee. (4) The assessee-company allowed the contractors to use the stones lying on the assessee s land for construction work. The stones lying on the assessee-company s land were the capital assets of the assessee-company. The assessee charged the contractor a certain amount by way of royalty for excavation and use of these stones for construction work. 12. The Tribunal had held that all these amounts received by the assessee have gone to reduce the cost of construction, as these were in the nature of capital receipts which can be set off against the capital expenditure incurred by the assessee during the relevant assessment years. This view of the Tribunal was upheld by the Hon ble High Court and the Revenue has approached the Hon ble Apex Court raising a dispute about the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of construction. They have, therefore, been rightly held as capital receipts and not income of the assessee from any independent source. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These were receipts of a capital nature and cannot be taxed as income. The same reasoning would apply to royalty received by the assessee- company for stones, etc., excavated from the assesseecompany s land. The land had been allowed to be utilised by the contractors for the purpose of excavating stones to be used in the construction work of assessee s steel plant. The cost of the plant to the extent of such royalty received is reduced for the assessee. It is, therefore, rightly taken as a capital receipt. 13. Again in the case of CIT V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan for setting up new plant and separate books of account were maintained for the same. For financing the expansion plan, the assessee-company raised additional capital of ₹ 45,000 lakhs during the year. The assessee-company earned total interest receipts of ₹ 616.73 lakhs during the year. The interest was earned on temporary deposits from the surplus funds and on the deposits made with banks by way of margin or giving advances, etc. for the purpose of expansion. Such interest earned was of ₹ 331.58 lakhs. The balance or difference, of interest of ₹ 285.15 lakhs, which had been admitted as a normal income, did not relate to expansion work. The interest earned on the surplus fund by way of margins or giving advances for the purpose of expansion was adjusted to the incidental expenses during construction. The interest was adjusted on account of the matching principle since the interest earned on deposits kept in relation to the expansion were credited to/reduced from the incidental expenses during construction (IEDC). The Assessing Officer treated this interest as income from other sources , relying upon the judgment of the Hon ble Apex Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant. 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 allowed. 16. Similar was the position in the case of Indian Oil Panipat Power Consortium Ltd. vs. Income Tax Officer, 181 taxman 249 (Delhi), in which the assessee company was incorporated in pursuance of a joint venture entered into between Indian Oil Corporation and Marubeni Corporation of Japan to set-up a power project and in order to effectuate the purpose, a joint venture was conceived. The joint venture partners contributed share capital which includes the sum by way of additional share capital. The said funds were required for purchase of land and development of infrastructure, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if it is of a revenue nature under any of the heads provided under section 14 in Chapter IV of the Act. For an income to be classified as income under the head profit and gains of business or profession it would have to be an activity which is in some manner or form connected with business. The word business is of wide import which would also include all such activities which coalesce into setting up of the business. Once it is held that the assessee s income is an income connected with business, which would be so in the present case, in view of the finding of fact by the CIT(A) that the monies which were inducted into the joint venture company by the joint venture partners were primarily infused to purchase land and to develop infrastructure then it cannot be held that the income derived by parking the funds temporarily with Tokyo Mitsubishi Bank, will result in the character of the funds being changed, inasmuch as, the interest earned from the bank would have a hue different than that of business and be brought to tax under the head income from other sources . It is well-settled that an income received by the assessee can be taxed under the head income from other sources ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et some interest on these deposits with the bank. The issue before the Hon ble High Court was that whether the amount of interest and miscellaneous receipts were not exigible to tax in the hands of the assessee-company as income from other sources. The Hon ble High Court having examined the issue in detail in the light of various judicial pronouncements has categorically held that the plea of the assessee that the interest earned by the assessee on such loan is to be set off against the interest payable on loan given for the purpose of construction cannot be accepted, as no adjustment can be allowed in accordance with the provisions of the Act. 19. From a perusal of the aforesaid various judicial pronouncements on the issue, it has been crystal clear that only that interest income earned on short term deposit, etc. would be capitalized or set off against pre-operative expenses, if it is inextricably linked with the setting up of plant or project. In the light of these legal propositions, now we proceed to examine the facts of the case. 20. In the instant case, the assessee has raised loans and borrowed funds from different persons to set up shopping malls, multiplexes and ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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