TMI Blog2016 (9) TMI 957X X X X Extracts X X X X X X X X Extracts X X X X ..... its will and discretion unlike the case in Tuticorin Alkali Chemicals & Fertilizers (1997 (7) TMI 4 - SUPREME Court) and the interest has to be used solely for the purposes of implementation of the specified projects only. The impunged interest receipt of ₹ 35,39,479/- on such borrowed funds relates to the mega road projects/stretches which were under construction and the completed road projects/stretches upto the date of commencement of commercial operations. Therefore, the interest received prior to commencement of commercial operations of the specified mega road projects will be in the nature of capital receipt and will be required to be set off against the pre-operative expenditure capitalized under the head “Capital work in progress” and the same cannot be brought to tax under the head “income from other sources”. - Decided in favour of assessee Double taxation of interest income - Held that:- From the perusal of the CIT(A)’s order it is noted that the interest income of ₹ 1,64,07,481/- was reduced from the interest expenditure debited in the P&L account in other words the interest expenditure has been shown net of interest income of ₹ 1,64,07,481/-. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f which are as under: Project Name Status as on 31.03.2009 (i) Phalodi to Pachpadra (PR-1) 15-Jun-07 (ii) Pachpadra to Ramji Ki Gol (PR-2) 28-Dec-2007 (iii) Hanumangarh to Ratangarh (HK-1) 28-Feb-08 (iv) Ratangarh to Kishangarh (HK-2) 28-Feb-08 (v) Alwar to Sikandra (AS) 31-Aug-2008 (vi) Lalsot to Kota (LJ-1) 15-Dec-2008 (vii) Baran to Jhalawar (LJ-2) 15-Apr-2008 2.1 The first ground is with regard to considering interest earned on shortterm receipts (STR) prior to commercial operations of the roads, as income from other sources rather than reducing it from the capital cost of construction of the roads. To implement and execute the project, loans were sanctioned and disbursed by a consortium of banks. Once the assessee commenced commercial opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On appeal, the Ld. CIT(Appeals) in para 4.4.1 to 4.4.4 at page 5 to 7 of his order observed that: (4.4.1) I have perused the facts of the case, the assessment order, submissions of the appellant and the case laws cited by the assessing Officer and the appellant. The appellant has relied upon the case of CIT vs. Bokaro Steels Ltd. 236 ITR 316 (SC) to emphasize the point that the interest income earned on Short term Fixed Deposit receipts was inextricably linked with the setting up of the project in this case construction of the Road. It has been stated by the appellant that the Assessing Officer has wrongly applied the case law of Tuticorin Alkali Chemicals Fertilizers Ltd. because in that case the assessee was liberty to use the interest income in any manner it so desired. In the case of Tuticorin Alkali Chemicals Fertilizers Ltd. the Supreme Court has clearly stated that interest income generated prior to commencement of business, however temporarily it is to be taxed under the head Income from other sources, unless there is a case of diversion of income by overriding title. It has therefore, to be examined in this case as to diversion by overriding title on the intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest income prior to the commencement of operation was not before the Hon ble Sup0reme court in this case. The issue which has been adjudicated upon in this case is whether(i) certain receipts upon the utilization of its assets viz. rent received from the contractor for the resident of workers employed by the contractor (ii) interest on advances given on hire to the contractor for the purposes of construction of the factory, could be separately taxed as income (whereas the assessee had reduced it receipts from the cost of construction. The Supreme Court held that these receipts were inextricably linked with the activity of setting up of the steel plant and therefore, were capital receipts which could not be taxed separately as income. The issues adjudicated upon in this case are totally different from the present case. (4.4.4) In view of the above discussion, it is held that interest on fixed deposit receipts amounting to ₹ 1,99,46,955/- is to be taxed under the head income from other sources, in view of the judgement of the Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. which has further been reaffirmed in the case of Bokaro steels Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e current account or it could be converted into any other account like short term deposit, etc. To our mind, the interest earned on keeping that money with the same bank and merely changing the nature of deposit cannot be constituted as utilization of funds other than the object for which it was sanctioned and disbursed and for all practical purposes more particularly as decided by number of judicial pronouncement that real income should be taxed and actual expenditure should be allowed stating all the interest earned out of disbursed amount is well within four walls of calculating the cost, which is to be capitalized. 2.7 The ld AR further submitted that as stated in Para 7.1.2 of the Loan Agreement, it is very clear that the money disbursed by the Bankers could be used for the purposes specified therein and all the amount was kept in Trust and Retention Account which was monitored by the banker/lenders. As Para 7.1 of the Loan Agreement and the nature of Trust and Retention Account states how, when and where this money can be utilized. The situation would have been different, if this money would have been invested in some security or was given as loan to someone else or wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he usual course, interest received by the company from bank deposits and loans would be taxable as income under the head Income from other sources' under section 56. It was argued on behalf of the company that it had not yet commenced its business and in any event if the income was derived from funds borrowed for setting up the factory of the company, it should be adjusted against the interest payable on the borrowed funds. Neither of the two factors can affect taxability of the income earned by the company the total income of the company is chargeable to tax under section 4. The Total income has to be computed in accordance with the provisions of the Act. Section 14 lays down that for the purpose of computation, income of an assessee has to be classified under six heads. In the instant case, the company had chosen not to keep its surplus capital idle, but had decided to invest it fruitfully. The fruits of such investment will clearly be of the revenue nature. If the capital of a company is fruitfully utilised instead of keeping it idle, the income thus generated will be of the revenue nature and not accretion of capital Whether the company raised the capital by iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Courts, the Privy Council and also this Court. It is well-settled that income attracts tax as soon as it accrues. The application or destination of the income has nothing to do with its accrual or taxability. It is also wellsettled that interest income is always of a revenue nature unless it is received by way of damages or compensation. 2.12 In the case of Bokaro Steel Ltd. (supra), the Hon'ble Supreme Court, after considering the decision of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra), held as under:- The activities of the assessee in connection with first three receipts were directly connected with or were incidental to the work of construction of its plant undertaken by the assessee. Broadly speaking, these pertained to the arrangements made by the assessee with its contractors pertaining to the work of construction. To facilitate the work of the contractor, the assessee permitted the contractor to use the premises of the assessee for housing its staff and workers engaged in the construction activity of the assessee's plant. This was clearly to facilitate the work of construction. Had this facility not been provided by the assessee, the contractors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hemicals Fertilizers Ltd. (supra) and Bokaro Steel Ltd. (supra) at length, held as under:- 5. In our opinion the Tribunal has misconstrued the ratio of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd.'s case (supra) and that of Bokaro Steel Ltd. (supra). The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals Fertilizers Ltd.'s case (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 Bokaro Steel Ltd.'s case (supra) to our mind is that if income is earned, whether by way of interest or in any other manner on funds which are otherwise 'inextricably linked' to the setting up of the plant, such income is required to be capitalized to be set off against pre-operative expenses. 5.1 The test, therefore, to our mind is whether the activity which is taken up for setting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for infusion in the business could not have been classified as income from other sources. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre-operative expenses. In the case of Tuticorin Alkali Chemicals Fertilisers Ltd. (supra) it was found by the authorities that the funds available with the assessee in that case were 'surplus' and, therefore, the Supreme Court held that the interest earned on surplus funds would have to be treated as 'income from other sources' . On the other hand in Bokaro Steel Ltd.'s case (supra) where the assessee had earned interest on advance paid to contractors during precommencement 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. 6. There is another perspective from which the present issue can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve held that in view of the factual position quoted above the decision of the Supreme Court in CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 / 102 Taxman 94 was applicable as the Commitment Advance, which had been paid to PFC. This is not a case of surplus funds, which were available and investment were made in fixed deposits to earn interest. The interest paid to the power procurement utilities on commitment advances was capitalized. Interest paid and interest received were inextricably linked and have a commonality about their nature and character. The appellant cannot treat them differently. Commitment Advances and interest paid and received had reference to bidding process and linked to the project/purpose for which the respondent was set up. In view of the factual matrix, interest received on unutilized commitment advances cannot be taxed as revenue income and interest paid on commitment advance treated as a capital expense. This will be contradictory. The entire expenditure for inviting bids etc. and even documentation was paid to PFC. The amounts received from the prospective bidders on account of sale of tender documents was also transferred to PFC. As noticed above, Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Apex Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra) as well as Bokaro Steel Ltd. (supra). The conclusion of the Delhi High Court is in fact the law which emerges as per the decision of Hon'ble Apex Court. Therefore, in our opinion, the CIT(A) was not justified in ignoring the decision of Hon'ble Delhi High Court by simply mentioning that the issue is covered by the decision of Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra). After considering these two decisions of the Hon'ble Apex Court and also some other decisions of the Hon'ble Apex Court, their Lordships of the Delhi High Court arrived at the conclusion 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 the specific purpose of acquiring land and the 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. Since the income was earned in a period prior to commencement of business, it was in the nature of capital receipt and hence was r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticorin's case (supra). 14. Therefore, when there are two sets of judgments of Hon'ble Supreme Court, proceeding on different lines of reasoning s, and both stand on their own logical footing, and in that event, if the learned Tribunal has accepted one line of reasoning, supported by one set of judgments, it cannot be said, that the learned Tribunal was legally not justified in following the decision, as followed by it, simply because it might have been possible, or might be more appropriate to follow the other set of judgment, by following the other line of reasoning. 2.18 From the above, it is evident that there are two sets of judgments of Hon'ble Supreme Court, proceeding on different lines of reasonings. The Hon ble Delhi High Court in case of Indian Oil Panipat Consortium Ltd (supra) has considered and interpreted the decisions of Hon ble Supreme Court in case of Tuticorin Alkali Chemicals Fertilizers (supra) as well as Bokaro Steel ltd (supra). After analyzing both the decisions of Hon ble Supreme Court, it held that the test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals Fertilizers Ltd.'s case (supra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capitalized under the head Capital work in progress and the same cannot be brought to tax under the head income from other sources . Hence, ground no. 1 of the assessee is allowed. 3. In ground No.2 , the assessee has challenged the action of the Ld.AO in double taxation of interest income of ₹ 1,64,07,481/-. 3.1 The ld AR submitted that the ld. CIT(A) upheld the order of the ld. AO regarding the taxation of interest capitalized as well as deducted from the interest expenditure debited into P L account as income from Other Sources to the extent of ₹ 1,99,46,955/- in spite of giving clear cut finding in the para 4.1 of his order , which has resulted into addition of s. 1,64,07,481/- twice as assessee himself has deducted the same amount from the expenditure incurred under the head interest paid and net amount was shown as expenditure in the Profit and Loss account of the year. Hence ₹ 1,64,07,481/- has been considered two times as income and subjected to income tax twice. 3.2 From the perusal of the CIT(A) s order it is noted that the interest income of ₹ 1,64,07,481/- was reduced from the interest expenditure debited in the P L account in oth ..... X X X X Extracts X X X X X X X X Extracts X X X X
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