TMI Blog2020 (2) TMI 73X X X X Extracts X X X X X X X X Extracts X X X X ..... al expenditure under the head other expenses - HELD THAT:- In this case, the Ld.CIT(A) after considering the nature of expenditure and its relevance for maintaining the corporate status of the assessee has allowed director s fees and audit fees on the ground that the above mentioned expenses are required to be incurred to maintain the corporate status of the assessee. The balance expenditure has been disallowed, on the ground that they are not related to maintaining the corporate status of the assessee. The assessee has furnished details of expenditure, as per financial statements prepared for the year. Ongoing through, the nature of expenditure debited into the profit and loss account under the head other expenses, we find that they are all general expenses, which are not directly related to maintain the corporate status of the assesee. Therefore, we are of the considered view that the Ld.CIT(A) was right in allowing only director s fees and audit fees out of total expenditure debited under the head other expenditure and disallowed balance amount, on the ground that they are not related maintaining the corporate status of the assessee. Insofar as, alternate ground of the assese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the interest income. 5. On the facts and circumstances the appellant prays that the sum of ₹ 2,48,92,602/- being the interest payment may be allowed as deduction against the interest of ₹ 75,96,711/- treated as the income chargeable to tax under the head income from other sources. 6. Without prejudice to ground 1 to 5 the appellant prays that if the sum of ₹ 75,96,711/- is taxed under the head income from other sources and if deduction of interest payment is not allowed to be set off against the said income then the sum of ₹ 2,48,92,602/- may be added to the capital work-in-progress as the appellant has reduced the said amount while computing the capital work-in-progress. 7. On the facts and circumstances of the case the appellant prays that the Learned Commissioner Of Income tax (Appeals) has erred in allowing the deduction of ₹ 2,90,600/-u/s. .37(1) as against the claim of the appellant of ₹ 3,78,373/-. The appellant prays that appellant be granted deduction of ₹ 35.87,773/- us. 37(1). 8. Without prejudice to Ground No. 7 if the claim of deduction of ₹ 35,87,773/- is not accepted then me said sum of Res. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the head income from other sources. The relevant findings of the AO are as under:- 5.6 The submissions made by the assessee has been carefully perused and considered but the same are found untenable. At the outset, it needs not be mentioned that the assesse has placed emphasis on the facts that the interest has been earned on the borrowed funds on which it has paid interest. Since, the interest is paid by the assesse, as per its submission, is entitled for deduction u/s 57(iii) of the Income Tax Act, 1961. The edifice of the submission of the assesse is founded on wrong notion. At this point of time, it needs to be mentioned that by virtue of the law laid down by the Hon ble Supreme Court in the case of CIT vs. Dr.V.P. Gopinathan 248 ITR 449 (SC) the assessee does not become entitled for deduction u/s 57(iii) in the back drop of facts of the case. In the case before the Hon ble Supreme Court in the case of CIT vs. Dr. V.P. Gopinathan 248 ITR 449(SC) the assessee doe sot become entitled for deduction u/s 57(iii) in the back drop of facts of the case. In the case before the Hon ble Supreme Court the respondent raised loan against his FD with the bank on which it was required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al question that crops up is that as to why the impugned amount of ₹ 75,96,711/- has not been shown in the P L Account as receipts following the dictum of various court pronouncements. Instead, the assessee while taking this income under the head Income from other sources has conveniently reduced the same amount from the interest income being expenses incurred for earning interest income. This act of the assesee is totally not in consonance with the provisions of sec. 57(iii) of the Income Tax Act, 1961. 5.11 Now the second most important question that arises from the facts of the case is that whether the interest so earned by the assessee is to be taxed under the head income from other sources or assessee is entitled for reduction of such interest earning from WIP as done by the assessee. In this context, the assessee in its submission has placed reliance on the decision of the Hon ble Supreme court in the case of CIT vs. Bokaro Steel Ltd. The facts of the case before the Hon ble Supreme Court and the facts of the assessee s case are distinguishable in as much as in that case the project was not in progress and therefore this ruling does not provide any aid or assist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for tax and was reduced from the work-inprogress. The Hon ble Supreme Court rejected assessee s claim and ruled that the income earned by the assessee requires to be brought to tax under the head Income from Other sources.. 5.15 In the back drop of above comparative facts there is no iota of doubt that in the instant case the ruling of Supreme Court in the case of Tuticorin Alkali chemicals Fertilizers Ltd. Vs. CIT 27 ITR 172 (SC) squarely gets applied. There are plethora of pronouncements wherein identical decision was pronounced by the court few of which are listed herein under: Whistling Woods International Ltd. ( 16 Taxmann 242 (Mum) (2011) Where assesee was in process of setting up of business, interest earned by it by deploying surplus fund would be assessed under the head ' Dy.CIT vs. Allied Construction 106 TTJ 595 (Del. SB) Interest on deposit is different and separate from assesee contract business. There is nexus between the earning on exist or continue without pressure or continuity of other. Interest is independent sources of income and to be taxed as income form other sources. A.C.Nielson Research Services (P) ltd. Vs. Addl. CIT 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inked with the project or not, but interest so earned is assessable under the head income from other sources. Therefore, he opined that there is no error in the findings of the Ld. AO in assessing interest income from time deposits under the head income from other sources. Insofar as, alternative ground taken by the assessee for deduction of certain expenses, including interest paid against income from other sources being interest earned from fixed deposits, the Ld.CIT(A) held that interest payable on the amount borrowed for the business purpose cannot be adjusted against the interest income, which has been considered as income from other sources. The Ld.CIT(A) has also rejected the alternative ground taken by the assessee regarding increase in value of capital work-in-progress. Similarly, the Ld.CIT(A) has admitted additional ground filed by the assessee claiming deduction for certain expenditure amounting to ₹ 38,78,373/-, on the ground that said expenditure has been incurred wholly and exclusively for the purpose of business, but allowed partial relief to the assessee and out of total expenditure of ₹ 38,78,378/-, he has allowed a sum of ₹ 2,90,600/- being d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds is no longer a res-integra . The co-ordinate bench of ITAT, Mumbai G bench in assessee s own case for AY 2011-12 had considered an identical issue and after considering relevant facts and also by following another co-ordinate bench decision, in the case of Infrastructure Development Company of Rajasthan Ltd. vs DCIT (supra) held that interest earned from time deposits kept out of surplus funds available to the assessee out of project funds is deductable from the capital working progress. The relevant findings of the Tribunal are as under:- ISSUES No. 1:- 4. We have heard the argument advanced by the Ld. Representative of the parties and perused the record. The Ld. Representative of the assessee has argued that the interest from deposit is required to be treated as business income in accordance with law and in this regard the Ld. Representative of the assessee has placed reliance upon the law settled by the different authorities cited as Indian Oil Panipat Power Consortium Ltd. Vs. ITO reported in 181 Taxmann page 249, 315 ITR 255 (Delhi High Court), Bokaro Steel Ltd. 236 ITR pg. 315 (SC), The Road Infrastructure Development Company of Rajasthan Ltd. ITA. No. 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of the assessee that it had to keep some surplus funds in hand in order to meet the maintenance requirements of the roads. In these set of facts, we are of the view that there were business exigencies in keeping the funds in fixed deposits and hence there is merit in the contentions of the assessee that interest income earned on those fixed deposits is assessable as income from business. In the case of Lok Holdings (supra), the assessee therein collected advances from the customers who intended to purchase the flats in the properties as developed by the assessee. Since the construction was going on, the surplus funds available with the assessee out of the advances so received was deposited in Fixed deposits. The Hon ble jurisdictional Bombay High Court, after considering the decision of Hon ble Supreme Court rendered in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd (supra), held that the interest income is assessable under the head Income from business. 5. In the similar circumstances, the Hon ble ITAT Jaipur Bench in the case of ITA. No. 628/JP/2014 title as Infrastructure Development Company of Rajasthan Ltd. Vs. DCIT dated 11.08.2016 has held that the inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tments and is its income and is clearly taxable even though the interest amount is earned by utilising borrowed capital. It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilising the borrowed funds as its income. The company was at liberty to use the interest income as it liked it was under no obligation to utilise this interest income to reduce its liability to pay interest to its creditors. It could re-invest the interest income in land or shares, it could purchase securities, it could buy house property, it could also setup another line of business, it might even pay dividends out of this income to its shareholders. There was no overriding title of anybody diverting the income at source to pay the amount to the creditors of the company. It is well-settled that tax is attracted at the point when the income is earned Taxability of income is not dependent upon its destination or the manner of its utilization. It has to be seen whether at the point of accrual, the amount is of the revenue nature and if so, the amount will have to be taxed. It is true that the Supreme Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for the wear and tear on the machinery. The advances which the assessee made to the contractor to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitches as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts were arrangements which were intrinsically connected with the construction of its steel plant. The receipts had been adjusted against the charges payable to the contractors and had gone to reduce the cost of construction. They had, therefore, been rightly held as capital receipts and not income of the assessee from any independent source. 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 capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee received any amounts which were inextricably linked with the process of setting up its plant and mach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the date of its setting up can be taxed if it is of a revenue nature under any of the heads provided under section 14 in Chapter IV of the Act. For an income to be classified as income under the head profit and gains of business or profession it would have to be an activity which is in some manner or form connected with business. The word business is of wide import which would also include all such activities which coalesce into setting up of the business. See Mazagaon Dock Ltd. v. CIT EPT [1958] 34 ITR 368 (SC), and Narain Swdeshi Weaving Mills v. CEPT [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 that the income derived by parking the funds temporari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 In our view the situation in the instant case is quite similar except here instead of paying interest on funds brought in for specific purpose interest is earned on funds brought in by way of share capital for a specific purpose. Could it be said that in the former situation interest could have been capitalized and in the later situation it cannot be capitalized. To test the principle we could extend the example, that is, would our answer be any different had assessee passed on the interest to the respective shareholders. If not, then in our view the only conclusion possible is that interest earned in the present circumstances ought to be capitalized. 7. In view of the discussion above, in our opinion the Tribunal misdirected itself in applying the decision of the Supreme Court in Tuticorin Alkali Chemicals Fertilizers Ltd.'s case (supra ) in the facts of the present case. In our opinion on account of the finding of fact returned by the CIT(A) that the funds infused in the assessee by the joint venture partner were inextricably linked with the setting up of the plant, the interest earned by the assessee could not be treated as income from other sources. In the result we ans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 (Delhi) following the decision in case of Indian Oil Panipat Power Consortium Ltd. (supra), has held as under: 11. From the above extract, it is evident that the test that is required to be employed is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the same. In the present case, findings of fact have been returned by the Commissioner of Income Tax (Appeals) and have been confirmed by the Income Tax Appellate Tribunal to the effect that the funds were inextricably connected with the setting up of the power plant of the assessee. The learned counsel for the revenue has also not been able to point out any 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 Ltd. (supra) would squarely apply to the facts of the present case and the Tribunal was right in applying the same. 13. In the present case, there is a finding of fact that the mon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the interest received in the period prior to commencement of business was in the nature of capital receipt and hence was required to be set off against the pre-operative expenses. The assessee has already set off the interest income against the preoperative expenses which is titled as project development expenditure . In view of above, we are of the opinion that the interest income of ₹ 1,35,87,158/- as well as ₹ 1,64,07,481/- was a capital receipt not chargeable to tax during the year under consideration. Accordingly, Ground Nos. 1 of the assessee's appeal is allowed. 2.17 Further, we drawn guidance from the decision of Hon ble Rajasthan High Court in case of Commissioner of Income-tax-I v. Kansara Modler Ltd. [2012] 20 taxmann.com 641 (Raj.) wherein it was held that: 13. In that view of the matter, what we are required to consider is, as to whether the Tribunal was legally justified in not applying the judgment rendered in Tuticorin's case (supra), or that, the Tribunal was justified in applying the judgments given in Bokaro Steel, and Karnal Cooperative Sugar Mill's case. If this question were to come originally before us, perhaps we might ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. 2.19 The facts in the instant case are pari materia with the facts of the Indian Oil Panipat (supra) and the ratio decidendi of Hon ble Delhi High Court in that case will squarely apply to the facts of the assessee. In the instant case, undisputedly, the funds have been borrowed for the specific purpose of execution of the mega road projects and as per the loan agreement executed between the consortium of bankers and the assessee dated 23.11.2005, all the disbursements shall be deposited in the trust and retention account which shall be subject to strict control and verification by the Senior lenders and all disbursements shall be utilised solely for the purposes of implementation of the project and no other purpose. The funds are thus inextricably linked to the setting up of the mega road projects and interest earned on such borrowed funds infused in the business could not be classified as income from other sources. We also note a distinguishing feature in the instant case that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l the facts and circumstances, we are of the view that the finding of the CIT(A) is not justifiable hence the same is hereby ordered to be set aside and we treat the interest income as business income of the assessee. 9. In this view of the matter and consistent with view taken by the co-ordinate bench, we are of the considered view that interest earned from time deposits kept in banks out of surplus funds of project is rightly reduced from capital work-in-progress. Therefore, we direct the Ld. AO to delete additions made towards interest income under the head income from other sources. 10. The next issue that came up for our consideration from ground No.7 and 8 of assessee appeal is disallowances of expenses u/s 37(1) of the I.T.Act, 1961. The assessee had incurred total expenditure under the head other expenses of ₹ 38,78,373/-. The said expenditure was debited into profit and loss account and was not treated as a part of capital work-in-progress, while filing the return of income. The assesse had disallowed the same, while computing the income under the head income from business and profession. Even before the Ld. AO, the assesee has not made any claim for deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red to be incurred to maintain corporate status of the assessee. In this case, the Ld.CIT(A) after considering the nature of expenditure and its relevance for maintaining the corporate status of the assessee has allowed director s fees of ₹ 70,000 and audit fees of ₹ 2,20,600/-, on the ground that the above mentioned expenses are required to be incurred to maintain the corporate status of the assessee. The balance expenditure has been disallowed, on the ground that they are not related to maintaining the corporate status of the assessee. The assessee has furnished details of expenditure, as per financial statements prepared for the year. Ongoing through, the nature of expenditure debited into the profit and loss account under the head other expenses, we find that they are all general expenses, which are not directly related to maintain the corporate status of the assesee. Therefore, we are of the considered view that the Ld.CIT(A) was right in allowing only director s fees and audit fees out of total expenditure debited under the head other expenditure and disallowed balance amount, on the ground that they are not related maintaining the corporate status of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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