TMI Blog2020 (3) TMI 1194X X X X Extracts X X X X X X X X Extracts X X X X ..... his ground of appeal is dismissed. Whether interest income earned from temporary deposit of the fund brought by way of share capital are inextricably linked to setting up of manufacturing facilities and same should be considered as capital in nature and should be reduced from the cost of the project? - HELD THAT:- Once it has been considered that assessee has not commenced its business, therefore, the interest income earned by the assessee prior to the commencement of the business is required to be treated as capital receipt - See INDIAN OIL PANIPAT POWER CONSORTIUM LIMITED, NEW DELHI VERSUS INCOME TAX OFFICER [ 2009 (2) TMI 32 - DELHI HIGH COURT] We consider that the impugned interest receipt by the assessee company is related to the prior period to commencement of business which is in nature of capital receipt and was required to be set off against pre-operative expenses. Therefore, first ground of appeal of the assessee for treating expenses to the amount as revenue expenditure is dismissed. However, the alternative ground of appeal of the assessee for treating the interest income earned on fixed deposit pertaining to prior period commencement of business is allowed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment order. In his written submission, the assessee has briefly stated that the company was incorporated on 13th March, 2012 and the revenue expenses have been incurred for day to day running of the company in order to meet the operational cost. It was also stated that expenses have not been incurred directly or indirectly attributable to cost of new asset. The assessee has also referred various judgments in its submission made before the assessing officer. The assessing officer has not accepted the submission of the assessee. The assessing officer has stated that assessee had not shown any operational income since its inception, therefore, claim of allowability of operational expenditure cannot be allowed. The assessing officer has also stated that it can be verified from point no. 4.0 of the 3CD report wherein it was mentioned that details regarding turnover/gross profit etc. for the previous year and preceding years were not available as the assessee was neither engaged in manufacturing nor in trading activities. The assessing officer has also stated that by point No. 1(c)(ii) of the annexure to auditor s report, a statutory auditor had reported that assessee company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contended that during the year the assessee has started construction of the factory incurred various expenses for day to day running of the company and earned interest income from fixed deposits. The ld. counsel has submitted that concept of commencement of business and set off of business are two different concepts and expenditure incurred post set up of business and prior to commencement of business are allowable expenses. The assessee has placed reliance on the following pronouncements:- - Western India Vegetable Products Limited v. CIT (1954) 26ITR151 (Bombay HC) - CIT vs. Samsung India Electronics Limited (2013) 356 ITR 354 (Delhi HC) - CIT v. Hughes Escorts Communications (2007) 165 Taxman 3i8(Delhi HC) - CIT vs. Saurashtra Cement Chemical Industries Ltd. (1973) 91 ITR 170 (Gujarat HC) The ld. counsel has submitted that assessee company has obtained necessary regulatory registration and approval required for commencement of its business and also set up its administrative office and recruited employees for the purposes of business. The assesee company has also incurred expenses of foreign travel of its employees for selection of vendors for plant and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure made by the assessing officer is upheld, then, the interest income prior to the commencement of business should be treated as capital receipt, the ld. CIT(A) has dismissed this ground of the assessee stating that assessing officer has not adjudicated upon the nature of interest income and this ground was not arised from the order of assessment. The assessee company has pointed out that it has set up its business and it has undertaken the following activities:- (i) Obtained necessary regulatory registration and approval required for commencement of its business (ii) Set up administrative office and recruited employees for the purpose (ii) Incurred expenses for foreign travelling of its employees for selection of vendors for plant and machinery (iv) Entered into agreement with its parent company for licensing of technical know-how in relation to manufacturing process. (v) Sent its employees to parent office to undertake manufacturing and procurement process. After perusal of the material on record, we observe that it is not substantiated with relevant evidences that business has been set up. We have also gone through the judicial pronouncements referred by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Delhi wherein it is held that funds invested by assessee company and interest earned were inextricably linked with setting up new power plant and therefore, interest earned shall be treated as capital interest receipt not to tax. We have also gone through the judicial pronouncement referred by the ld. counsel in the case of CIT vs. Petronet LNG (2011) 10 taxman.com 257 Delhi wherein it is held that interest earned on fund which ought to be utilised for purchase of capital asset/setting up of business should be treated as capital receipt not exigibe to tax under the head income from other sources. In addition to above, the ld. counsel has also referred the various decisions of the Co-ordinate Benches of the ITAT in the case of Adani Power Ltd. vs. ACIT (2015) 61 taxman.com 335 (Ahmedabad Tri) wherein it is held that interest receipt related to prior period to commencement of business was in nature of capital receipt and was required to be set off against pre-operative expenses. The Co-ordinate Bench of the ITAT in the case of ITO Adani Power Naharatra Ltd. ITA No.2401/Ahd/2014 dated 13th Dec, 2018 has held that similar interest income is to be treated as capital expenditure. Then, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9; 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. [1999] 236 ITR 315 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 preoperative expenses. 5.1 The test, therefore, to our mind 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 plant. The clue is perhaps available in s. 3 of the Act which states that for newly set up business the previous year shall be the period beginning with the date of setting-up of the ITA No. 2755/Ahd/2011 Adani Power Ltd vs. ACIT AYs 2008-09 business. Therefore, as per the provision of s. 4 of the Act which is the charging section income which arises to an assessee from the date of setting of the business but prior to commencement is chargeable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rin 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, (underlined ours to supply emphasis) 24. From the above, it is evident that the Hon'ble Delhi High Court has considered and interpreted the decisions of Hon'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 me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the light of the above facts and after considering the various judicial pronouncements of the Hon ble High Courts and Co-ordinate Benches of the ITAT as cited above, we consider that the impugned interest receipt by the assessee company is related to the prior period to commencement of business which is in nature of capital receipt and was required to be set off against pre-operative expenses. Therefore, first ground of appeal of the assessee for treating expenses to the amount of ₹ 2,33,36,037/- as revenue expenditure is dismissed. However, the alternative ground of appeal of the assessee for treating the interest income earned on fixed deposit pertaining to prior period commencement of business is allowed by treating the impugned interest income as capital receipt which is adjusted against pre-operative expenses of the assessee. Therefore, the alternative ground of appeal of the assessee is allowed. 9. In the result, the appeal of the assessee is partly allowed. ITA No. 1643/Ahd/2018 for A.Y. 2014-15 10. This appeal of the assessee is based on similar issue and identical facts to the ITA No. 1642/Ahd/2018 for A.Y. 2013-14 as adjudicated above in this ord ..... X X X X Extracts X X X X X X X X Extracts X X X X
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