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2016 (1) TMI 461 - DELHI HIGH COURT

2016 (1) TMI 461 - DELHI HIGH COURT - [2016] 380 ITR 474 - Taxability of interest earned on funds as income from other sources - Whether the mode and manner of raising funds on which interest is earned, whether by way of loan or through share capital, is a material consideration in deciding the taxability of interest earned - ITAT concurred with the view of CIT(Appeals) that the interest income earned by the assessee in the pre-commencement period could not be stated to be ‘income from other sou .....

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For the foregoing reasons, we do not find that there is any substantial question of law which arises for our consideration and the very issues which are sought to be raised in the present case had been squarely covered by the decision of this Court in Indian Oil Panipat Power Consortium Limited (2009 (2) TMI 32 - DELHI HIGH COURT ). - Decided in favour of assessee - ITA No. 1011/2015 - Dated:- 7-1-2016 - MR BADAR DURREZ AHMED AND MR SANJEEV SACHDEVA, JJ For the Petitioner : Mr Zoheb Hoss .....

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hich need to be determined by this Court :- A. Whether the mode and manner of raising funds on which interest is earned, whether by way of loan or through share capital, is a material consideration in deciding the taxability of interest earned on such funds as income from other sources? B. Whether the earning of interest on surplus funds make it inextricably linked with setting up of the power project? C. Whether the judgment in Tuticorin Alkali Chemicals and Fertilizers Ltd v. CIT (1997) 227 IT .....

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was incorporated on 24.08.2005 to carry on in India or elsewhere the business to generate, receive, produce, improve, buy, sell etc. electric power by establishing thermal power plants, atomic power plants etc.. In the year under consideration, no business activity was carried out by the assessee as the project was under implementation. 4. On scrutiny, the assessment proceedings under Section 143(3) of the said Act were initiated. The Assessing Officer had noted that the assessee had received a .....

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hat it had earned interest on FDRs which were placed with the bank as margin money for procurement of various capital goods for setting up of the power project. The Assessing Officer did not accept the explanation offered by the assessee and made an addition of ₹ 70,75,843/- as income from other sources . 6. Being aggrieved, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). Since the Assessing Officer had placed reliance on the Supreme Court decision in the .....

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05.2012, allowed the assessee s appeal and deleted the said addition. The relevant portion of the Commissioner of Income Tax (Appeals) s order reads as under:- 7.3 Decision I have considered the submission of the appellant and observation of the ASSESSING OFFICER. It is seen that appellant company was in the process of setting up a power project in Orissa. For that appellant had acquired land in F.Y. 2007-08 and spent ₹ 68.62 lacs on purchase of land etc. During the F.Y.2008-09, appellant .....

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f January the appellant gave order for STG Set for ₹ 3510 Lacs and paid advance of ₹ 130 lacs to M/s BHEL. In the month of May 2009, appellant further gave contract to M/s Paharpur Cooling Towers for ₹ 1017 lacs and paid advance of ₹ 10 lacs. These facts established that amount raised as additional share capital from share holders and put in the FDRs was inextricably linked with acquisition of plant and machinery by the appellant company. The additional share capital rais .....

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ital assets. The interest received from such funds which were put in FDRs for temporary period was in the nature of capital receipts and such receipts was required to be set off against the preoperative expenses. In this regard reliance is placed on the decision of Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. vs ITO [20091315 ITR 0255 (DEL). INCOME OR CAPITAL - INTEREST - INTEREST EARNED PRIOR TO COMMENCEMENT OF BUSINESS ON FUNDS BROUGHT IN BY WAY OF SHARE .....

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r treated the interest earned on monies received as share capital by the assessee temporarily placed in a fixed deposit awaiting acquisition of land which had run into legal entanglements on account of title as "Income from other sources". The Commissioner (Appeals) accepted the stand of the assessee that the interest was in the nature of a capital receipt which was liable to be set off against pre-operative expenses. The Tribunal reversed this order. On appeal: Held, allowing the appe .....

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cals and Fertilizers Ltd. vs CITI19971 227 ITR 172(SC) distinguished. The facts of the case laws relied upon by the ASSESSING OFFICER were different, therefore, the same are not applicable to the case of the appellant. The additional share capital raised by the appellant was linked with acquisition of capital assets, therefore, interest received from such capital is capital receipt and same can be adjusted against preoperative expenses. Therefore, the addition made by the ASS1SSING OFFICER of &# .....

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n the facts and circumstances of the case and in lmv in treating the interest income of ₹ 70,75,843/- received on account of bank deposit as capital receipt instead of treating it as. income under head other sources and there by overlooking the ratio laid down in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. 2. The Learned C1T(A) has erred on facts and circumstances of the case and in law in allowing to adjust interest income against preoperative expenses, however assessee ha .....

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share capital from the shareholders and put in fixed deposits was inextricably linked with the acquisition of plant and machinery by the assessee. The Commissioner of Income Tax (Appeals) had also held on facts that the additional share capital raised was for the purposes of acquiring capital assets which were temporarily put in fixed deposits. Advances had been made towards purchase of plant and machinery and orders had been placed. And, awaiting delivery, the funds were temporarily put in fixe .....

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ce on the decision of this Court in Indian Oil Panipat Power Consortium Limited (supra). The facts in that case were quite similar. In that case also monies had been received as share capital by the assessee which were temporarily put in fixed deposits awaiting acquisition of land which had run into legal entanglements on account of title. The question of law which was raised before the Division Bench was: - Whether the Tribunal misdirected itself in law in holding that interest which accrued on .....

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(supra) and that of Bokaro Steel Ltd. (supra). The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals (supra) is that if funds have been borrowed for setting up of a plant and if the funds are surplus‟ and then by virtue of that circumstance they are invested in fixed deposits the income earned in the form of interest will be taxable under the head income from other sources‟. On the other hand the ratio of the Supreme Court judgment in Bokar .....

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s perhaps available 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 .....

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ess Profits Tax; (1958) 34 ITR 368 (SC), and Narain Swadeshi Weaving Mills vs Commissioner of Excess Profits Tax; (1954) 26 ITR 765 (SC). 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 .....

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of the Act. The head income from other sources is a residuary head of income. See S.G. Mercantile Corporation P. Ltd vs CIT, Calcutta; (1972) 83 ITR 700 (SC) and CIT vs Govinda Choudhury & Sons.; (1993) 203 ITR 881 (SC). 5.2 It is 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 a specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought f .....

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nds would have to be treated as income from other sources . On the other hand in Bokaro Steel Ltd (supra) 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. 11. From the above extract, it is evident that the test that is required to be employed is whether th .....

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y perversity in such finding and, therefore, the factual findings have to be taken as those accepted by the Income Tax Appellate Tribunal which is the final fact finding authority in the income tax regime. That being the case, the decision of the Division Bench in Indian Oil Panipat Power Consortium Limited (supra) would squarely apply to the facts of the present case and the Tribunal was right in applying the same. 12. Before parting with this decision, we would, however, like to comment upon a .....

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