TMI Blog2017 (12) TMI 1353X X X X Extracts X X X X X X X X Extracts X X X X ..... d, therefore, the Assessee is a SPV formed by the Government of India and Government of West Bengal as per the guidelines; there is no profit motive as the entire fund entrusted and the interest accrued therefrom on deposits in bank though in the name of the Assessee has to be applied only for the purpose of welfare of the State as provided in the guidelines. Therefore, considering the factual position discussed above, we are of the view that the Assessee has rightly set off the interest income against the preoperative expenses in its books of accounts and therefore we confirm the order passed by the ld CIT(A). - Decided against revenue - ITA No.1362/Kol/2015 And 49/Kol/2016 - - - Dated:- 22-12-2017 - SHRI S. S. VISWANETHRA RAVI, JM AND DR. A. L. SAINI, AM For The Appellant : Shri Arindam Bhattacharjee, Addl. CIT For The Assessee : Shri Vikash Singhal. ORDER Per Dr. Arjun Lal Saini, AM: These captioned two appeals filed by the Revenue,pertaining to Assessment Year 2010-11,aredirected against the order passed by the ld Commissioner of Income Tax (Appeals)-1,Kolkata,which in turn arise out of assessment orders passed by the Assessing Officer u/s 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecution of the construction work for Metro Railway. Hence, interest accrued out of investment made in the Banks from the said borrowed Loan, were treated as capital receipts and accordingly accounted for in the accounts of the company. During the assessment proceedings, the assessing officer asked the assessee company, as to why interest income on short-term deposits with banks should not be taken as revenue receipts and taxed accordingly. In response to the question asked by theAssessing officer, the assessee company had replied that since the principal amount of borrowed loan obtained from Govt. authorities were capitalized hence the interest accrued on investment with Bank deposits out of the said fund were also taken as capital receipts and accordingly accounted for in the accounts. However, the assessing officer rejected the contention of the assessee company and held that the interest so received from Bank deposits should be taken as income from other sources . Therefore, the AO treated the interest so received from Bank deposits under the head income from other sources . 6. Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of production by a company. It was observed, that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. 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 borrowed money can be capitalized and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up of its plant and machinery; such receipts will go to reduce the cost of its assets. These are receipts of capital nature and cannot be taxed as income. During the appellate proceedings, the assessee company cited the judgment in the case of CIT v. Karnataka Urban Infrastructure Development and Finance Corporation (2006) 284 ITR 582 (Kar), wherein it was held that interest on short term deposits with banks made out of funds received from Central and State Governments for development of infrastructure projects and the implementation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the construction period, so that, the net off expenditure is carried over to balance Sheet under the head Capital-Work-in Progress. We are of the view that the Ld CIT(A) has rightly dealt with the issue and reversed the findings of the AO who had treated the interest earned at ₹ 54,86,324/- as income from other sources . We note that the ratio of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals [1997] 227 ITR 172 and that of Bokaro Steel Ltd. [1999] 236 ITR 315. The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals [1997] 227 ITR 172, 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 Boknro Steel Ltd. [1999] 236 ITR 315, 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 requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 [1997] 227 ITR 172 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. [1999] 236 ITR 315 (SC) 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. The very purpose of constitution of the Assessee was to act as a Special Purpose Vehicle (SPV) created by the Govt of India and Govt. of West Bengal in the form of Joint Venture with equal equity participation for implementation of rapid transport infrastructure in Kolkata. Both the Central and the State Governments are to provide requi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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