TMI Blog2010 (12) TMI 1183X X X X Extracts X X X X X X X X Extracts X X X X ..... it on OD to the bank, deducted from the interest received by it on the short-term FD, the assessee is entitled to deduction of the same from its business income. Therefore, we do not find any infirmity in the order of the lower authority. Accordingly, the same is confirmed. In the result, the appeal of the assessee stands dismissed. - <!--[if gte mso 9]> <![endif]--> <!--[if gte mso 9]> Normal 0 false false false EN-IN X-NONE <![endif]--><!--[if gte mso 9]> ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not deposited in the FD has to be capitalised. 3. The learned representative for the assessee further placed his reliance on the judgement of the Delhi High Court in Indian Oil Panipat Power Consortium Ltd. vs. ITO (2009) 181 Taxman 249 (Delhi) and submitted that the Delhi High Court after referring to the judgement of the Apex Court in Tuticorin Alkali Chemicals Fertilizers Ltd. vs. CIT, 227 ITR 172 and CIT vs. Bokaro Steel Ltd. (1999) 236 ITR 315 found that the funds in the form of share capital were infused for a specific purpose of acquiring land and development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as 'Income from other sources'. Therefore, according to the learned representative for the assessee the income which was earned prior to commencement of business is in the nature of capital receipt and, therefore, it has to be set off against the pre-operative expenses. In view of the judgement of the Delhi High Court, according to the learned representative for the assessee, the judgement of the Apex Court in Tuticorin Alkali Chemicals Fertilizers Ltd. (supra) may not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (supra) has no application to the facts of this case. 7. On the contrary, Smt. Vasundhara Sinha, the learned DR submitted that admittedly the assessee borrowed funds for setting up of SEZ project. The borrowed fund which was not immediately required was invested in FD for the purpose of earning interest. Referring to the judgement of the Apex Court in Tuticorin Alkali Chemicals Fertilizers Ltd. (supra) the learned DR pointed out that in the case before the Apex Court also the assessee borrowed funds for the purpose of setting up of a factory from banks and financial institutions and the borrowed funds not immediately required were kept invested in short term deposit with banks. The question before the Supreme Court was whether the interest derived by the assessee from the borrowed funds which were invested in short term deposit with banks would be chargeable to tax under the head 'Income from other sources' or would go to reduce the interest payable by the assessee on the term loan secured by the assessee from financial institutions which would be capitalised after commencement of commercial production. Therefore, according to the learned DR the grounds of appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted a part of the borrowed funds from banks which was not immediately required in FD with an intention to earn interest. During the assessment year under consideration the assessee has paid ₹ 16.99 crores as interest on the borrowed funds and also received ₹ 3.09 crores as interest on the funds deposited with banks from the borrowed funds which were not required immediately. The question arises for consideration is whether the interest income of ₹ 3.09 crores received by the assessee on temporary deposit of funds in FD with banks is assessable as income of the assessee or it would go to reduce the cost of borrowings? In other words, whether the interest amount of ₹ 3.09 crores received by the assessee would be set off against the interest payment of ₹ 16.99 crores on the borrowed funds. As rightly submitted by the learned DR the Apex Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra) had examined an identical situation. The question which was referred to the Supreme Court is as follows: Whether, on the facts and in the circumstances of the case, interest derived by the assessee from borrowed funds which were invested in sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The question of adjustment of interest payable by the company against the interest earned by it will depend upon the provisions of the Act. The expenditure would have been deductible as incurred 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 it on term loans is allowable as deduction under section 57 of the Act. If that be so, under which other provision of law can the assessee claim deduction or set-off of his income from other sources against interest payable on the borrowed funds? There are specific provisions in the Income-tax Act for setting off loss from one source against income from another source under the same head of income (section 70), as well as setting off loss from one head against income from another (section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s finding in Seshasayee Paper and Boards Ltd.s case [1985] 156 ITR 542 (Mad) was that the interest earned by the assessee from the bank deposits had to be assessed under the head Other sources . Consequently, the interest paid on the borrowings for the purpose of purchase of plant and machinery could not be allowed or adjusted against this income under section 57(iii) nor were such adjustments permissible under section 70 or 71 of the Act because the business of the assessee had not commenced. The Madras High Court (see [1985] 156 ITR 542) categorically held : In this case, admittedly, the borrowing has not been made exclusively and solely for the purpose of earning interest in which case alone it should be taken as an income which should be deducted from the interest receipts. An assessee-company may have raised its capital by issue of shares or debentures or by borrowing. But when that capital or a portion of it was utilised for whatever reason, even for a short period, to earn interest, that interest must be treated as revenue receipt and will have to be taxed accordingly. Any set off or deduction of any expenditure can only be made in accordance with the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the assessee that the Supreme Court has no occasion to examine the claim of the assessee u/s. 57(iii) is misconstrued. In our opinion, the judgement of the Apex Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra) on identical set of facts has answered a similar question against the assessee. Therefore, the interest received by the assessee on temporary deposit of funds which are not required immediately has to be assessed as 'Income from other sources' and it cannot be set off against the interest payable by the assessee on borrowed funds. 13. The learned representative for the assessee has taken one more argument that the purpose of borrowal of the funds is immaterial. Once the assessee borrowed funds for the purpose of business it can be used either as a working capital or for the purpose of purchasing plant and machinery. Merely because the loan was taken for the purpose of purchase of plant and machinery there is no prohibition under the Income-tax Act for using the same for other purposes. So long as the assessee borrowed funds for the purpose of business it can be used for the purpose of business in any manner. Admittedly deposit of fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort: Coming now to the questions that have been referred to us at the instance of the Revenue, these questions are required to be answered in favour of the Revenue and against the assessee, in view of the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals an Fertilizers Ltd. (1997) 227 ITR 172, wherein the apex court, inter alia, held that in view of section 57(iii) of the Income-tax Act, interest paid on overdraft obtained for the purpose of business could not be deducted from the interest earned on monies kept in fixed deposits as such income derived by way of interest on fixed deposits was to be taxed under the head 'Income from other sources'. We, however, make it clear that though the assessee may not be entitled to have interest paid by it on overdraft to the bank, deducted from the interest received by it on the short-term fixed deposits, the assessee is entitled to deduction of the same from its business income. 15. In view of this judgement of the Madras High Court and the judgement of the Apex Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra), in our opinion, the judgement of the Delhi High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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