TMI Blog2017 (10) TMI 1087X X X X Extracts X X X X X X X X Extracts X X X X ..... iness, has to be brought to tax as ‘income from other sources’ u/s. 57. - Decided against assessee. Since it has been held that the assessee has not commenced its business, we direct the AO to capitalize the expenditure and direct him to allow depreciation thereon after commencement of its business. Nature of income - earning interest income on the temporary parking of equity funds - business income OR income from other sources - Held that:- We have already directed while dealing with Ground No.5 that the expenditure incurred by the assessee be capitalized and depreciation thereon is to be allowed. The treatment to be given to the interest earned on temporary parking of equity funds has actually not been considered by the authorities below. This is a legal ground and can be raised at any point of time as held by the Hon'ble Supreme Court in the case of Hon'ble Supreme Court in the case of NTPC Ltd. (1996 (12) TMI 7 - SUPREME Court). In view of the same, we deem it fit and proper to admit the additional ground of appeal and remand the issue to the file of the AO for consideration in accordance with the law. The assessee is also directed to produce the additional evidence in su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in law in as much as in relation to expenses claimed as deductions, it has disallowed the same without examining when the business of the Appellant was setup and fails to appreciate that expenses incurred can be claimed as deductions from income/as losses from the date of setup of business and not from date of commencement of business and is hence liable to be quashed/ remanded for proper examination of the matter. 2. The Ld. AO has erred on facts by considering ₹ 5,30,86,825/- as expenses claimed as deductions from income in the Return of Income ( ROI ) whereas the expenses so claimed in the ROI is actually ₹ 5,31,74,059/- [net of expenses not claimed towards Provision for Gratuity (Rs.2,11,681/-) and Provision for Leave Encashment (Rs.3,23,049/-)]. 3. That the Ld. AO as well as Ld. DRP have grossly erred in facts and law by disallowing depreciation of ₹ 24,19,903/- (included in the total expenses disallowed of ₹ 530,86,825/-) without appreciating that the assets to which this amount relates had been put to use during the assessment year 2012-13 and the Appellant was, therefore, entitled to claim deduction of depreciation at applicable rates an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds from banks. Admittedly, the assessee invested a part of the borrowed funds from banks, which was not immediately required in short term deposits with an intention to earn interest ostensibly to reduce the interest liability. The question arises for consideration is whether the interest income of ₹ 22,35,48,281/- received by the assessee on temporary deposit of funds in 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 ₹ 22,35,48,281/- received by the assessee would be set off against the interest payment of ₹ 127,84,98,794/- on the borrowed funds. As rightly submitted by the learned CIT 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 short term deposits with banks would be chargeable to tax under the head 'Income from other sources' or would go to reduce the interest paya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 71). In the facts of this case the company cannot claim any relief under either of these two sections, since its business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the Act.' In view of the observation of the Apex Court, it is obvious that the Apex Court is conscious of the provision of section 57(iii) and it was held that when the assessee borrowed the funds for business, the interest earned on short term deposit of such funds cannot be allowed as deduction. 19. We have carefully gone through the judgment of the Madras High Court in Seshasayee Paper Boards Ltd. (supra). The assessee company invested its paid-up share capital and loans obtained from banks and received interest inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for the purpose of establishing the Power project. So long as the assessee uses the funds in the process of setting up of the project, we can say that the assessee has utilised the funds for the purpose of business. In this case the assessee has deposited the funds in FD for a temporary period, since the same was not required immediately. As observed by the Madras High Court in the case of Seshasayee Paper and Boards Ltd. (supra) which was approved and confirmed by the Apex Court in Tuticorin Alkali Chemicals Fertilizers Ltd. (supra) the interest earned by the assessee by investing the borrowed fund which was not required immediately in fixed deposit has nothing to do with the actual borrowing. The payment of interest has no connection with the receipt of interest. Admittedly the borrowing has not been made for the purpose of earning interest income in which case alone the interest received by the assessee can be deducted from the interest payable. In view of the judgment of the Madras High Court in the case of Seshasayee Paper and Boards Ltd. (supra) and the judgment of the Apex Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra), we are unable to uphold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were used for the purpose of construction work of the factory by the contractor; and iv. Royalty received by the company from the contractor in connection with permitting the contractor to excavate/mine the stones from the land owned by; the company which were used in the construction activity of the company. In this connection, the Hon'ble Supreme Court held that the income received by the company ie. from the contractor under various sources mentioned above is inextricably linked with the setting up of the factory building/capital structure of the company and, therefore, such income has to be treated as capital receipt going to reduce the cost of construction of the assessee company. 22. However, in the same case of Bokara Steel Ltd. (supra), there was an issue with regard to treatment of interest income received by the company on short term deposits made with banks out of the amounts borrowed by it for the construction work which were not immediately required. On this issue, the AO treated the interest received as income of the assessee from other sources and brought to tax accordingly. However, as observed by the Hon'ble Supreme Court, the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head 'Capital gains'. Similarly, if a company purchases rented house and gets rent, such rent will be assessable to tax under section 22 as income from house property. Likewise, the company may have income from other sources. The company may also, as in that case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under section 56 of the Act. This court also emphasized the fact that the company was not bound to utilise the interest so earned to adjust it against the interest paid on borrowed capital. The company was free to use this income in any manner it liked. However, while interest earned by investing borrowed capital in short-term deposits is an independent Source of income not connected with the construction activities or business activities of the assessee the same cannot be said in the resent case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24. Further, a clear-cut differentiation between treatment of interest income from short term deposits made out of borrowed funds and other categories of income received during the period prior to the commencement of business, more so, income received from the contractor undertaking the work of set up of the business of the assessee, has once again been made out by the Hon'ble Supreme Court in its later decision in the case of Bongaigaon Refinery and Petrochemicals Ltd. (supra). In this judgment, the Hon'ble Supreme Court has reiterated the law that excluding interest derived by the assessee during the period prior to the commencement of business, other items of income such as hire charges for it equipment and recoveries from contractors on account of water and electricity charges shall be adjusted against the project cost or the business of oil refinery and petro chemicals. As such, in regard to interest income earned prior to commencement of the business, it is once again reiterated by the Hon'ble Supreme Court as income under other sources by reiterating the law laid down in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra). The relevant portion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of the Supreme Court in the case of Tuticorin Alkali Chemicals and 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. 27. In view of this judgment of the Madras High Court and the judgment of the Apex Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra), and other judgments of Hon'ble Supreme court, in our opinion, the judgment of the Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. (supra) and other case relied on by Ld. Counsel in his arguments may not be applicable to the facts of this case. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case the company cannot claim any relief under either 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 adjusted against any other income under another 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 plant and machinery even before commencement of the business of the assessee. (Emphasis supplied) The Hon'ble Supreme Court reiterated the same fact of non-commencement of business and its decision that until and unless the company commences its business, there cannot be any question of assessment of income of the assessee under profits and gains of business or profession . However, the Hon'ble Supreme Court laid down the law that any income earned which would fall under the other heads of income such as capital gains , house property , income from other sources etc. are subjec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of view of equity. this adjustment cannot be made unless the law specifically permits such adjustment. Next, it has been argued that according to well-established accountancy practice the interest earned by the company even before the commencement of business from investing borrowed capital will have to be set off against interest payable by the company on that borrowed capital. The argument based on accountancy practice has little merit, if such practice cannot be justified by any provision of the statute or is contrary to it. (Emphasis supplied) 30. Further, the distinction between set up and commencement was also explained by Ld. CIT Dr in his arguments. We agree with the same. The following case law relied also support the Revenue stand. i. Omer Khayyam Wineries (P) Ltd. (supra) ii. K. Sampath Kumar (supra) iii. Industrial Solvents chemicals (P.) Ltd. (supra) iv. Sponge Iron India Ltd. (supra) v. Ramaraju Surgical Cotton Mills Ltd. (supra) vi. Travancor - Cochin Chemicals (P.) Ltd. (supra) vii. Electron India (supra) 31. Respectfully following the principles laid down as discussed above, we are of the opinion tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra). It was categorically held that interest earned on surplus funds deposited in banks during installation of company, prior to commencement of business, has to be brought to tax as 'income from other sources' u/s. 57. Respectfully following the jurisdictional High Court decision also, the contentions of assessee that this amount has to be adjusted towards capital account cannot be accepted . 6. Since the facts and circumstances of the case before us are similar, respectfully following the above decision of the Coordinate Bench, Grounds 1 to 4 are rejected. 7. Ground No.5 is the alternate ground to Grounds 2 to 4 and since it has been held that the assessee has not commenced its business, we allow this ground of appeal and direct the AO to capitalize the expenditure and direct him to allow depreciation thereon after commencement of its business. Ground No.5 is accordingly treated as allowed for statistical purposes. 8. In addition to the above, the assessee vide letter dated 24.05.2017 has raised the following additional grounds of appeal: 1. The assessee was served draft order of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the project as income from other sources when, in fact, this should have been treated as a reduction of the capital cost of the project. 8. Under these circumstances, assessee further prays for permission to submit additional evidence in support of the additional ground of appeal at the time of hearing. PRAYER The Hon'ble Bench may kindly permit the assessee to agitate the aforesaid additional ground of appeal and also to adduce additional evidence in support of such ground . 9. It is stated by the ld Counsel for the assessee, that the assessee had offered the interest income arising from temporary parking of equity funds in Fixed Deposits as business income, whereas the AO proposed to treat it as income from other sources in his draft assessment order. It is stated that the assessee did not agitate before the DRP because the assessee had been advised that the interest income is taxable under the head income from other sources by virtue of the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilisers Ltd. v Commissioner of Income Tax (1997) Supp (1) SCR 528, but subsequent thereto, the judgment of the Hon&# ..... X X X X Extracts X X X X X X X X Extracts X X X X
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