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2015 (10) TMI 2016 - ITAT LUCKNOW

2015 (10) TMI 2016 - ITAT LUCKNOW - TMI - Expenditure set off against interest income - whether the receipt of interest on borrowed funds put in FDRs with the bank was capital receipt or revenue receipt? - Held that:- In the instant case, the assessee has raised loans and borrowed funds from different persons to set up shopping malls, multiplexes and associated activities related thereto. In between construction period, funds were parked with the bank in fixed deposits and/or in mutual funds. Th .....

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uired at the relevant point of time in construction activities, the same were parked with bank to earn interest. Therefore, the interest earned on 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 s .....

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, 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 of sale of waste material in terms indicated above and treat it accordingly. - Decided in favour of revenue for statistical purposes. - ITA No.659, .....

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d raised in I.T.A. No. 659/LKW/2013 as under:- That the ld. CIT(A) has erred in law and on facts in allowing the relief of ₹ 17,28,644/- without appreciating the facts that no expenditure can be set off against interest income during the construction period as held by the Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (1997) 227 ITR 172. 2. The facts in brief on the impugned issue borne out from the record are that the assessee-company was inco .....

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he interest income as income from other source, as the construction was not complete during the impugned assessment years and the expenses incurred by the assessee were capitalized as preoperative expenses. Accordingly addition was made. 3. The assessee preferred an appeal before the ld. CIT(A) with the submission that the judgment of the Hon ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (supra) is applicable only when interest income can be treated as rev .....

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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 t .....

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s. But in the instant case, there is no surplus or idle funds lying with the assessee-company. He, however, defined that the surplus fund would mean availability of funds over and above required funds and in the present case, had the funds available to the assessee were over and above total cost of project of ₹ 115 crores, then there might have been a case of surplus funds available with the assessee. He further observed that the assessee s case would rather be covered by the decision of H .....

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tual cost and where there is both payment and receipt of such interest, it follows that it will have to be necessarily netted with net amount of interest representing interest on borrowing. The ld. CIT(A) accordingly deleted the addition in all the three years. 5. Aggrieved, the Revenue is in appeal before the Tribunal. Besides placing reliance upon the judgment of the Hon ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (supra), the ld. D.R. Smt. Nidhi Singh .....

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f interest and receipts were exigible to tax in the hands of the assessee-company as income from other sources. The ld. D.R. has further contended that whereever the assessee earned interest, even on the borrowed funds during the precommencement period, the same is to be treated as income from other sources 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 CI .....

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e 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 b .....

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Fund were directly linked with purchase of plant, machineries, equipment etc. Hence, any income earned on such deposit was incidental to the acquisition of assets for setting up of the Plant & Machinery etc., therefore, interest earned has been rightly held to be capital receipt. The ld. counsel for the assessee, besides placing reliance upon the order of the ld. CIT(A), has also placed reliance upon the following judgments/orders: 1. CIT Vs. Karnal Cooperating Sugar Mills Ltd. (2008), 118 T .....

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ld.). 9. CIT vs. Jaypee DSC Ventures Ltd., I.T. Appeal No.357 of 2010 (Delhi). 8. Having carefully examined the orders of the lower authorities and the documents placed on record in the light of the rival submissions, we find that the assessee-company was engaged in construction of Multiplex-cum-Shopping Malls and it has borrowed funds for construction of Multiplex-cum-shopping Mall. In due course, it purchased a land but due to various problems and sanctions required, the project got delayed at .....

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and 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 wit .....

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eipt, we have to examine all these judgments and the ratio laid down by the Hon ble Apex Court therein. 10. In the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (supra), the assessee-company during construction/establishment of its factory before commencement of manufacturing activities invested funds borrowed for the purpose of setting up of factory in short term deposit with the bank and earned interest thereon. In its return, assessee disclosed interest earned as income from .....

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ssee s claim. In view of the conflicting decisions of various High Courts on the issue, the Tribunal made a reference to the Hon ble Apex Court under section 257 of the Income-tax Act, 1961 (hereinafter called in short the Act ) and the Hon ble Apex Court has adjudicated the nature of receipt in the light of different propositions put forth before them and the Hon ble Apex Court has concluded that the expenditure incurred by the assessee for the purpose of setting up of its business should not b .....

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ived by the company from bank deposits and loans would be taxable as income under the head Income from other sources under section 56 of the Income-tax Act, 1961 ( the Act ). It is argued on behalf of the company that it had not yet commenced its business and in any event the income was derived from funds borrowed for setting up the factory of the company and should be adjusted against the interest payable on the borrowed funds. Neither of the two factors can affect taxability of the income earn .....

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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 q .....

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will be assessable to tax under section 22 of the Act as income from house property. Likewise, a company may have income from other sources. It may buy shares and get dividends. Such dividends will be taxable under section 56. The company may also, as in this case, keep the surplus fund in short-term deposits in order to earn interest. Such interest will be chargeable under section 56. In the instant case, the company has chosen not to keep its surplus capital idle, but has decided to invest it .....

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. Income is something which flows from the property. Something received in place of the property will be capital receipt. The amount of interest received by the company flows from its investments and is its income and is clearly taxable even though the interest amount is earned by utilising borrowed capital. It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilizing the borrowed funds .....

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for the purpose of business 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 .....

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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 adjusted against any other income under any other head. Similarly, any income from a non-business source cannot be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plants and machineries even before commencement of business of the assessee .....

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d by the Government of India and its object was to construct and own an integral iron and steel works. During the assessment years under consideration, the work of construction of the company s factory and installation of the plant was in the process of completion and the company had not started any business. It has received certain receipts which are as under:- (1) The company had given to the contractors quarters for the residence of the staff and workers employed by the contractors who had be .....

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rs, thus, did not have to raise funds from outside agencies. For the assessee-company, this arrangement primarily meant payment in advance of the amounts of the contractors bills for which the assessee-company had charged interest. This interest was later adjusted against the dues of the contractors. (3) For the purpose of the construction work, the assessee had given on hire certain plant and machinery to the contractors. Against the letting of plant and machinery, the assessee received from th .....

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he 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 capit .....

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ncurred 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 and 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. The relevant observations of the Hon ble Apex Court are extracted hereunder for the sake of reference:- The activities of th .....

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sessee s plant. This was clearly to facilitate the work of construction. Had this facility not been provided by the assessee, the contractors would have had to make their own arrangements and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee has provided these facilities. The same is true of the hire charges for plant and machinery which was given by the assessee to the contractors for the assessee s construction work. The receipts .....

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trinsically connected with the construction of its steel plant. The receipts have been adjusted against the charges payable to the contractors and have gone to reduce the cost 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 bo .....

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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 Vs. Karnal Cooperating Sugar Mills Ltd. (supra), the assessee had deposited money to open Letter of Credit for purchase of machinery required f .....

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o reduce the cost of asset. 14. Though reference was made on the other judgments of the Hon ble Apex Court in the case of CIT vs. Karnataka Power Corporation (supra) and CIT vs. U.P. State Industrial Development Corporation (supra), but on perusal we find that these judgments are not directly on the issue; whereas in the judgment of Hon ble Allahabad High Court in the case of M/s Phoenix Lamps India Ltd. vs. CIT (supra), it has been held that where the assessee invested share application money r .....

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and without plant and machinery, the factory cannot be established. Hence income earned on such deposit is incidental to acquisition of assets for setting up of the plant and machinery. While dealing with the issue, the jurisdictional High Court has examined the judgment of the Hon ble Apex Court in the case of CIT vs. Bokaro Steels Ltd. and CIT vs. Karnal Cooperating Sugar Mills Ltd.; CIT vs. Bokaro Steels Ltd.; Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT and Jaypee DSC Ventures Li .....

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terest 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 advanc .....

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vs. CIT (supra). The matter was travelled to the Hon ble High Court and the Hon ble High Court has examined the issue in the light of various judgments of the Hon ble Apex Court in the case of CIT vs. Bokaro Steels Ltd.; CIT vs. Karnal Cooperating Sugar Mills Ltd.; Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT and Bongaigaon Refinary And Petrochemicals Ltd. vs. CIT (supra) and various judgments of the different High Courts and has held that provisions of section 36(1)(iii) of the Act e .....

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nextricably linked with the setting up of the plant, the interest earned would be capitalized and would reduce the cost of the project. The relevant observation of the Hon ble High Court is extracted hereunder for the sake of reference:- 10. It is no doubt correct that the proviso to section 36(1)(iii) of the Income Tax Act enacts that any amount of the interest paid towards ( in respect of) capital borrowed for acquisition of an asset or for extension of existing business regardless of its capi .....

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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 expan .....

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at 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 develop .....

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remain available when required for purchase of land and infrastructure development and hence the interest earned was inextricably linked with the setting up of the power plant. He, therefore, following the judgment of the Hon ble Apex Court in the case of Bokaro Steel Ltd. (supra) directed the Assessing Officer to delete the addition and consider the same for capitalization towards preoperative expenses. On Revenue s appeal, the Tribunal reversed the findings of the ld. CIT(A) and the matter was .....

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by the assessee could not be treated as income from other sources. The relevant observations of the Hon ble High Court are extracted hereunder for the sake of reference:- 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 available in section 3 of the Act which states that for newly set-up business the previous year shall be the p .....

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n 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 .....

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It is well-settled that an income received by the assessee can be taxed under the head income from other sources only if it does not fall under any other head of income as provided in section 14 of the Act. The head income from other sources is a residuary head of income. In the instant case, it was clear upon a perusal of the facts as found by the authorities below that the funds in the form of share capital were infused for specific purpose of acquiring land and the development of infrastructu .....

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HAI to get the contract awarded in its favour and to procure the said guarantee, it had kept the amount in a fixed deposit in the bank, on which interest income was earned which was set off against project expenses. The Assessing Officer treated the interest received by the company as income from other sources and the matter reached before the Hon ble High Court and the Hon ble High Court has held that the performance guarantee by way of bank guarantee was required for faithful performance of it .....

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the contrary, the amount of interest was earned from fixed deposits which were kept in the bank for furnishing the bank guarantee. Therefore, it has inextricable nexus with securing the contract. Accordingly the interest earned by the assessee cannot be held to be income from other sources. 18. In the case of CIT vs. Indo Gulf Fertilizer and Chemicals Corporation Ltd. (supra), the assessee-company received certain loans which were remained lying with the bankers and the company managed to get s .....

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able 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, n .....

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