TMI Blog2020 (10) TMI 1091X X X X Extracts X X X X X X X X Extracts X X X X ..... nds (short term temporary deposits) - claim of capitalizing interest received by assessee from short term deposit (herein after referred as STD ) of unutilized borrowed funds - HELD THAT:- Utilization of the funds available with the assessee is strictly governed by the objects set up by the Articles of Association of company. A perusal of the object clause indicates that there is no scope for the assessee to utilize any funds available for any purpose other than that stated in the Articles of Association - interest earned on the deposits had to be mandatorily invested in the project/business of the assessee and in the facts as discussed we note that interest from borrowed funds temporarily deposited in banks [STD] is inextricably linked to the setting up of the plant. Hence, the interest from the borrowed funds has been rightly capitalized and set off against the pre-operative expenses and, therefore, we rely on the decision of the Hon ble Supreme Court in Bokaro Steels Ltd. and Karnataka Power Corporation (supra), hold that the interest earned from the borrowed funds/STD which is inextricably linked to the setting up of the plant need to be treated as a capital receipt. - I.T. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f income. It is already well settled that there is no estoppel against the statute. Reliance in this regard is placed on the decision of the Hon'ble Calcutta High Court in the case of Maynak Poddar (HUF) vs WTO reported in (2003) 262 ITR 633 (Cal). It is also well settled that the revenue cannot take advantage of ignorance of the provisions of the Act on the part of the assessee and on the contrary, the revenue is expected to educate the assessee and not to deprive the legitimate deductions which is otherwise entitled for the assessee. Hence respectfully following these principles and the judicial precedents relied upon we hold that the interest income on deposits earned in the sum of ₹ 1,18,85,987/- for the Asst Year 2009-10 (raised by way of additional ground) out of equity funds, shall have to be treated only as capital receipt as the same is inextricably linked with the business of the assessee and linked with the capital structure of the assessee company. Hence the Id AO is directed to delete the said addition. Accordingly the Additional Ground raised by the assessee for the Asst. Year 2009-10 is allowed. 3. Thereafter, he drew our attention to para 7.6 whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Debt 2691 Equity 1269 Total 8920 Assessment year Interest on deposits of Equity fund (INR) Interest on deposits of Capital Subsidy (INR) Interest on deposits of borrowed funds (INR) 2011-12 2,05,56,952 4,44,08,838 3,83,20,744 2012-13 3,70,32,106 7,84,98,238 53,87,231 2013-14 81,89,914 17,82,62,093 1,83,76,376 2014-15 - 12,12,72,134 16,79,15,802 2015-16 5,09,18,852 1,90,39,000 Assessment Year Date of filing of ROI Amount of Returned income (INR) Amount of Assessed income u/s. 143(3) (INR) Amount of income after giving effect to order of Ld. CIT(Appeals) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der of the ld. CIT(A) and, therefore, we sustain his action and dismiss the revenue appeal for all the assessment years i.e. AYs 2011-12 to 2015-16. 7. Coming to the assessee s appeal. We note that the AO and the Ld. CIT(A) has disallowed the claim of capitalizing interest received by assessee from short term deposit (herein after referred as STD ) of unutilized borrowed funds by relying on the decision of the Hon ble Supreme Court in Tuticorin Alkali Chemicals Fertilizers Ltd. (supra), Bokaro Steels Ltd.(supra) and Bongaigaon Refinery Petrochemicals Co. Ltd. (supra). The Ld. CIT(A) has quoted the relevant portion of the order of the Hon ble Supreme Court in the case of Bongaigaon Refinery Petrochemicals Co. Ltd (supra) and held as under: The case of Bongaigaon Refinery Petrochemicals Co. Ltd. (supra) is squarely in favour of revenue. Question before the Hon ble Court and relevant parts of the judgment of Hon ble Court is reproduced below: Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the items of income derived by the assessee during the formation period for the main business, were not taxable income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term deposit of the borrowing funds was adjusted with the capital work in progress . The Ld. AR drew our attention to page 160 of the paper book for AY 2011-12 from where it is noted that the assessee has not prepared P L Account for this year even though it was incorporated on 08.01.2007. And since no commercial activity has started and only from February, 2016, the project has been set up and commenced operation only from AY 2016-17, so up to AY 2015-16 no P L Account was prepared by the assessee. We note that in the case of Chellapali Sugars ltd. Vs. CIT 98 ITR 167 the Hon ble Supreme Court examined the question whether interest paid before the commencement of production by a company on amount borrowed for the acquisition and installation of plant and machinery would form part of the actual cost of the asset to the assessee within the meaning of expression of section 10(5) of the Income Tax Act, 1922 and whether the assessee will be entitled to depreciation allowance and development rebate with reference to such interest also. The Hon ble Supreme Court held that the accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the question which is relevant in this case before us; As noted from the question of law framed by the Hon ble Supreme Court in Karnataka Power Corporation (supra), we note the question was whether interest receipt and hire charges from contractors are in the nature of capital receipts. Thus, we note that the Hon ble Supreme Court in Karnataka Power Corporation (supra) has held in favour of the assessee by following the ratio laid in CIT Vs. Bokaro Steels Ltd. (supra) wherein the Hon ble Supreme Court has held as under : 5. We will take the first three heads under which the assessee has received certain amounts. These are the rent charged by the assessee to its contractors for housing workers and staff employed by the contractor for the construction work of the assessee including certain amenities granted to the staff by the assessee. Secondly, hire charges for plant and machinery which was given to the contractors by the assessee for use in the construction work of the assessee, and thirdly, interest from advances made to the contractors by the assessee for the purpose of facilitating the work of construction. The activities of the assessee in connection with all these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l structure of business and were held to be capital in nature. We agree with this view taken by the Delhi High Court. 7. The appellant, however, relied upon the decision of this Court in Tuticorin Alkali Chemicals Fertilizers Ltd.'s case (supra). That case dealt with the question whether the investment of borrowed funds prior to commencement of business, resulting in earning of interest by the assessee, would amount to the assessee earning any income. This Court held that if a person borrows money for business purposes, but utilises that money to earn interest, however, temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. Merely because he utilised it to repay the interest on the loan taken will not make the interest income as a capital receipt. The department relied upon the observations made in that judgment (at page 179) to the effect that if the company, even before it commences business, invests surplus funds in its hands for 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income.[Emphasis given by us] 11. We note that in Bokaro Steel ltd. (supra), the Hon ble Supreme Court has clearly distinguished the ratio laid in Tuticorin Alkali (supra) at para 7 and laid down the ratio that if income is earned whether by way of interest or in any other manner or the funds, which are otherwise inextricably linked with setting up of a plant, such income is required to be capitalized to set off against pre-operative expenses. And we note that in the case of Bongaigaon Refinery (supra) since the Hon ble High Court has held that the interest from surplus fund was taxable (revenue receipt), therefore, the Hon ble Supreme Court did not accept the claim of the assessee and in that case the Hon ble High Court had followed the ratio of the Hon ble Supreme Court in Tuticorin Alkali (supra). The ld. AR of the assessee drew our attention to the peculiar facts case of Tuticorin Alkali (supra) and drew our attention to page no. 239 para 21 wherein the Hon ble Supreme court has taken note of the peculiar facts of the case wherein that asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l and borrowed funds are similarly parked in short term deposits in banks and on which interest income is received. We note that the assessee received clarifications from the MoCF (dated 11-Aug-2010 and 15-Feb-2012) regarding the treatment of the interest earned from parking of Capital Subsidy. The MoCF clarified that such interest shall be treated as part of Capital subsidy and it will correspondingly reduce the amount of capital subsidy which is sought from the Government (page nos. 24-25 of paper book for AY 2011-12). The assessee has accordingly claimed such interest income as capital receipt i.e. part of capital subsidy itself. Similarly, the interest earned on parking of equity capital and on borrowed funds have been similarly claimed as capital receipts, being linked with the construction and setting up of the plant and factories of the assessee. 12. We also note that the utilization of the funds available with the assessee is strictly governed by the objects set up by the Articles of Association of company. A perusal of the object clause indicates that there is no scope for the assessee to utilize any funds available for any purpose other than that stated in the Artic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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