TMI Blog2020 (11) TMI 172X X X X Extracts X X X X X X X X Extracts X X X X ..... (10) TMI 656 - ITAT CUTTACK ] in which the issue of share application money were pending for allotment has been remitted back to the file of AO. Before the AO the assessee has also offered it as a business income in the form of written submissions, which has been incorporated by the AO in the assessment order. We found substance on the submission of the ld. CIT-DR. As the issue being similar to the case of Haridaspur Paradip Railway Company Ltd.(supra), therefore, we also remit the issue to the file of AO on the same directions given therein along with some additional direction to the AO for examination as to whether the income which has been transferred into the reserve and surplus account and its utilization, either for revenue purpose or for capital expenditure. The AO is also directed to decide the issue as per law after providing reasonable opportunity of being heard to the assessee. The assessee is also directed to avoid taking any unnecessary adjournment and cooperate with the AO for early disposal of the case. Appeals of the assessee are allowed for statistical purposes. - ITA No. 384 And 385/CTK/2019 - - - Dated:- 3-11-2020 - Shri C.M. Garg, JM And Shri L.P. Sahu, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the time of hearing of the appeal. 6. For these and among other grounds to be urged at the time of hearing, adequate relief as may be deemed fit be granted in the matter. 4. The grounds raised in both the appeals are same to the grounds taken before the CIT(A) for both the assessment years under consideration. However, the interest on mobilization advance amounting to ₹ 45,84,391/- for the assessment year 2014-2015 has been deleted by the CIT(A) in spite of the assessee has challenged this issue before us. As per our considered opinion, this issue is not required to adjudicate, hence, this ground of appeal for the assessment year 2014-2015 is dismissed. Now, we have to decide the issue involved regarding addition of interest on FDR and Flexi deposit amounting to ₹ 1,08,02,969/- and ₹ 3,85,82,206/-, respectively for both the above assessment years. 5. First we shall take up appeal of the assessee in ITA No.384/CTK/2019 for the assessment year 2013-2014, wherein the assessee has raised sole issue of disallowance of interest on FDR Flexi deposit treating the same as revenue receipt. 6. Brief facts of the case are that the assessee is a public lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Further, the Hon ble Karnataka High Court on a similar issue in the case of PCIT v. M/s Banknote Paper Mill India Pvt. Ltd. in ITA 690/2017 held that this issue is ex facie covered by the decision of the jurisdictional High Courts or even the Hon ble Supreme Court of India. Thus, no substantial question of law arises in the present case and the Appeal filed by the Revenue is without merit and liable to be dismissed. 3. The Hon ble Karnataka HC in the above case has relied on the order of the Tribunal. Wherein, the Tribunal held that the interest income earned by the Assessee Company on bank deposits made out of share capital received by it from the Reserve Bank of India could not be taxed as Income from Other Sources as the said interest income was earned prior to commencement of operations of the company during the construction period. Brief facts of the case 4. The assessee is a Joint Venture Company of Rail Vikas Nigam Limited, Jindal Steel and Power and Bushan Limited, incorporated in the year 2009. The assessee was incorporated as a Special Purpose Vehicle (SPV) to construct a New Rail Line between (Budhapank) Angul and (Baghupal) Sukida. Copy of M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest on FDR and Flexi Deposit 3,85,82,206/- 2. Interest on Mobilisation advance 45,84,391/- 13. That, the additions mentioned above were made on the ground that assessee has not commenced its business operation and therefore, the Interest earned by it is taxable under the head' Income from Other Sources'. AO also relied on the decision of Tuticorin Alkali Chemical and Fertilizers Ltd. v. CIT (Relevant findings of AO are at Page 7, Para 6) 14. Aggrieved by the above additions, the assessee preferred an appeal before the CIT (A). The ld. CIT (A) deleted the addition of Interest received on Mobilisation advance relying on the order passed by the Tribunal (ITA No. 197/CTK/2016) in the assessee s own case for the AY 2012-13.Copy of ITAT order is placed at PB Pg. 66-75 15. However, the CIT (A) confirmed the addition of Interest on FDR and Flexi Deposit relying on the decision of Tuticorin Alkali Chemical and Fertilizers Ltd. (Relevant findings of CIT (A) are at Para 4, Pg. 7) 16. Challenging the order of CIT (A), the assessee in appeal before your Honors. Submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Delhi High Court after analyzing the ratio in the case of Tuticorin Alkali Chemicals and Bokaro Steel Ltd simultaneously, held that the Interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources. Relevant para of Judgment are reproduced hereunder: It is clear upon a perusal of the facts as found by the authorities below that the funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. Therefore, the Interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources. Since the 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 (supra) 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 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the judicial precedence and the facts and circumstances of the present case, are of the substantive opinion that if the assessee company receives any amount which is inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. Hence such receipts are capital in nature and cannot be taxed as income under income from other sources. The assessee company was formed to set up a mining project and the process of setting up was got delayed and deposits of share capital amount received from the share applicants with the bank in the form of fixed deposits for short term, is to be considered as inextricably linked with the process of setting of its plant and machinery. Accordingly, we hold that the Interest earned by the assessee should not be treated as income from other sources and we allow the grounds of appeal of the assessee. Therefore, the appeal of the assessee for assessment year 2011-2012 is allowed. c) POSCO INDIA PVT. LTD VERSUS , DCIT ITA Nos. 186 and 460/CTK/2011, 461/CTK/2011 and held as under: Para 5 In the instant case, it was clear upon a perusal of the facts as found by the authorities bel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of NATIONAL CO-OPERATIVE DEVELOPMENT CORPORATION v. CIT in CIVIL APPEAL NOS. 5105-5107 OF 2009, dated 11.09.2020 held that interest income generated on the idle funds which is applied in the business of the assessee company is to be treated as a business income thus, fall under the head of Profits and Gains of Business or Profession and not under Income from Other Sources. Relevant findings of the order are as under: 23. We are in agreement with this view taken by the High Court, as the only business of the appellant-Corporation is to receive funds and then to advance them as loans or grants. The interest income arose on account of the fund so received and it may not have been utilised for a certain period of time, being put in fixed deposits so that the amount does not lie idle. That the income generated was again applied to the disbursement of grants and loans. The income generated from interest is necessarily inter- linked to the business of the appellant-Corporation and would, thus, fall under the head of profits and gains of business or profession . There would, therefore, be no requirement of taking recourse to Section 56 of the IT Act for taxing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wrong in the past that wrong thing need not to be followed in subsequent years 37. Without prejudice to the above, it is also submitted that it also a settled law if anything was going wrong in the past that wrong thing need not to be followed in subsequent years. This is so because an error cannot be allowed to be perpetuate forever. 38. In this regard reliance has been placed on the following decisions:- i. CIT v British Paints India Ltd in 188 ITR 44 (SC) ii. ANUP SHARMA v. CIT, ITA No. 161/CHD/2012 iii. Rohitasava Chand [2008] 306 ITR 242 (Delhi) iv. Meeraj Estate Developers vs DCIT [2014] 44 taxraann.com 431 (ITAT, Agra) 39. Thus, even if, the assessee has wrongly considered interest income as income from other sources in the AY 2012-13, such wrong treatment may not be accepted in the subsequent years. Thus, in the light of the above, it is submitted that the addition made by the Ld. AO and sustained by the CIT (A) holding that Interest earned on FDR Flexi deposits is of revenue nature, is bad in law and therefore may kindly be deleted. The ld. AR further submitted that the arguments advanced in case of M/s Haridaspur Par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the issue of share or debentures. If the money lying idle is put into FDs, then interest income so earned would be revenue in nature chargeable to tax. v.) The assessee had raised share application monies for the purpose of laying down railway line. But, due to non-utilization of funds, fixed deposits were made out of the said funds. Thus the interest income in respect of surplus funds, not required for business immediately and deposited in bank for short period was to be assessed as income from other sources . In that sense of the matter, the said funds were not in use for business purposes. The purpose of parking such funds in the bank was obviously for safety and security and ready use of the funds as and when there arose business needs of the assessee. Thus, the earning of interest income could not be dominant or business intention of the assessee. In this regard, the judgment relied upon by assessee in the case of Indian Oil Panipat Power Consortium Ltd. Vs. ITO (315 ITR 255) (Delhi) which dealt with the interest receipts earned prior to the commencement of business, was held to be distinguishable on facts since it was not known if the interest receipts were earned p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fully installed and the project became operational and the order was executed, it could not be said that the business had been set up. In view of the fact that the assessee was in the process of setting up an institute for training of people in film line but the building for such training institute was under construction during the year and not even a single student was taken up for the training purposes, it was clear that business was not set up and there was no question of claiming any expenditure. It was also contended that in any case, expenditure incurred, which was on revenue account, should had been adjusted against the interest income. Such expenditure could not be allowed as business expenditure because the business had not commenced. However, if any expenditure was incurred for earning interest income, it could have been allowed under section 57. In the result, assessee's appeals were dismissed. vii.) In the case of CIT Vs. Bokaro Steel Ltd. (236 ITR 315), the assessee-company was in the business of manufacturing of steel. For the purpose of construction of the plant, the assessee company gave advances to its contractors and earned interest from such advances, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, Tal. Panhala, Dist. Kolhapur Vs. ITO in ITA No.1804/PN/2012 dated 31.12.2013 for AY 2008-09 wherein the Jurisdictional ITAT i.e. Honourable Pune Tribunal decided against the assessee. In the cited case, the assessee was a Co-operative Society, registered under Societies Act proposed to set-up a spinning mill. In addition to share capital contributed by its members, the assessee also received an amount of ₹ 10,04,00,000/- from the State Government through account payee cheque on the IDBI Bank. This amount was invested in various banks as the assessee was yet to commence production activities owing to the fact that construction of the project was under way and machineries were yet to be acquired. As a result, the assessee earned interest of ₹ 41,83,517/- on the above sum. The assessee filed its return of income on 31.03.2009 declaring total income at Nil. The case was selected for scrutiny and consequently an order u/s. 143(3) of Income Tax Act was passed whereby interest received from nationalized banks amounting to ₹ 41,83,517/- was brought to tax which was confirmed by the CIT(A). The observations of the Honourable Pune ITAT are reproduced under: After g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lized which was evident that funds given by the Government of Maharashtra as their contribution towards share capital was deposited with various banks primarily as the same was idle fund lying with the assessee pending development of land and construction of factory building and erection of spinning mill. Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. Vs. CIT (1997) 227 ITR 172 (SC) has held that in case 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 . The assessee has not made out the case that the deposits were kept with bank for setting up of a factory. In fact it was surplus fund which was kept with the bank on which the assessee earned interest. The ratio of Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. is squarely applicable and interest earned by the assessee during construction period on deposits kept with the nationalized bank is assessable as income from other sources as done by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck to the file of AO with the following observations :- 4. Ld. AR has reiterated the submissions made before the lower authorities and he has also relied on number cases and filed his written submissions :- This issue is squarely covered by the decision of the Hon'ble Cuttack Tribunal in the case of DCIT v. M/s Radhikapur (West) Coal and Mining Pvt. Ltd., I.T.A. Nos.396/397CTK/2018, dated 21.10.2019. Wherein the Hon'ble Tribunal, after relying on the order of Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. 315 ITR 255, held that interest earned on funds primarily brought for infusion in the business activity could not be termed as income from other sources. Further, the Hon'ble Karnataka High Court on a similar issue in the case of PCIT v. M/s Banknote Paper Mill India Pvt. Ltd. in ITA 690/2017 held that this issue is ex facie covered by the decision of the jurisdictional High Courts or even the Hon'ble Supreme Court of India. Thus, no substantial question of law arises in the present case and the Appeal filed by the Revenue is without merit and liable to be dismissed. The Hon'ble Karnataka HC in the above case h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the expenses of the project, and it is inextricably linked with the process of construction of Railway Line. Accordingly, the assessee treated the said income as a capital receipt. That, the assessee filed its return of income for AY 2014-15 on 27.09.2014, declaring nil income. Copy of Acknowledgement of ROI along with the Computation of Income is at PB Pg. 1-2. That, the case was selected for scrutiny assessment and notice u/s 143(2) 142(1) of the Act, were issued to the assessee. The Ld. AO asked the assessee to explain why the interest on mobilization advances and Fixed Deposit should not be treated as income from other sources instead of a capital receipt. That, in compliance with the same, the assessee produced the books of accounts and other relevant documents. Moreover, assessee explained that Mobilization advance and Interest of FD are inextricably linked with the setting up of the Railway Line. Therefore, the same should not be treated as Income from Other Sources, and accordingly, it must be viewed as capital receipt going to reduce the cost of construction. Copy of reply submitted by the assessee is at PB Pg. 41-44 Subsequently, AO complet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It may also be noted that, as per the construction agreement, RVNL shall charge interest at the Average Prime Lending Rate, if any expenditure is incurred out of its own funds. (Relevant PB Pg. 28, Para 11.5 of the construction Agreement). Thus, the whole cost of the project is to be financed by the assessee company Accordingly, the assessee company issued share capital which is unquestionably utilized for construction of Railway Line. Further, small amount of funds are also parked in various banks in the form of term deposit on which assessee received interest which is also expended to meet day to day cost of the project. It is pertinent to note that there is no allegation of AO or CIT (A) that the share capital of the assessee company was being used for any other purpose other than the construction of Railway Line. It is submitted that since the assessee company is incorporated only for construction of Railway Line, therefore it is not free to utilize the funds for any purpose except for Railway Project. Moreover, there is no allegation of AO regarding the utilization of funds for any other purpose, and lastly, the interest income from FD was earned in a pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst pre-operative expenses. Thus, applying the aforesaid Judgment of Delhi High Court in the facts of the present case, it can be appreciated that here also interest income is earned on funds which are inextricably linked to the setting up of the Rail Line. Therefore, such income is required to be capitalized to be set off against pre-operative expenses. It may also be noted that the above Judgement of Delhi High Court has been followed by the Coordinate Bench of ITAT Cuttack in the following cases. The Hon'ble ITAT Cuttack, on similar facts after considering the decision of Apex Court in the case of Tuticorin Alkali Chemical and Fertilizers Ltd. v. CIT, a) DCIT v. M/s Radhikapur (West) Coal and Mining Pvt. Ltd., I.T.A. Nos.396/397CTK/2018, dated 21.10.2019 From the above observations of the CIT(A), we find that CIT(A) while dealing with the issue has observed that in the case of Indian Oil Panipat Power Consortium Ltd. v. ITO 315 ITR 255, the Hon'ble High Court held that the interest earned on FDs was capital receipt liable to be set off against pre-operative expenses, and could not be taxed as income from other sources. In their Judgment, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ior to commencement of business, it was in the nature of capital receipt and, hence, was required to he set off against pre-operative expenses. d) ACIT, v. M/S. POSCO INDIA PVT LTD. AND VICE-VERSA ITA No.155 122/CTK/2017, C.O.No.07 And 08/CTK/2017 the interest on fixed deposits are not taxable under income from other sources and, accordingly, we uphold the findings of the CIT (A) and dismiss the ground of appeal taken by the revenue for both the assessment years. e) M/S. KALINGA COAL MINING PVT. LTD., VERSUS ACIT ITA No. 123 and 279/CTK/2010 The learned Counsel has been able to establish that there was no surplus insofar as it was the share capital received as application money pending allotment which was poured in for the purchase/acguisition of land which would entitle the assessee to commence business of excavating coal in accordance with the Rules and Regulations governed by the State undertakings namely, IDCO and OMC. We have perused the correspondences lying with the assessee to clarify the stand taken for the purpose of starting business which reguired the assessee to park funds in the bank simultaneously incurring pre-operative expenses to the magnitud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess activity. The activity from which the income is derived must have a set purpose. The business activity of the appellant-Corporation is really that of an intermediary to lend money or give grants. Thus, the generation of interest income in support of this only business (not even primary) for a period of time when the funds are lying idle, and utilised for the same purpose would ultimately be taxable as business income. Thus, in the view of above submission and judicial pronouncements, it is submitted that the interest earned on FDR Flexi deposits should reduce the cost of its assets since these are the receipts of capital nature and could not be taxed as income from other sources^ Thus, in the light of the above, it is submitted that the addition made by the Ld. AO and sustained by the CIT (A) holding that interest earned on FDR Flexi deposits is of revenue nature, is bad in law and therefore may kindly be deleted. Apart from the above, he has also filed copy of fixed deposit receipts containing pages No.1 to 8 and copy of balance sheet containing page No.9 to 11, which all are placed on record. He has also filed paper book containing pages 54 and submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the applicants except POSCO Ltd. The details are as under :- 4. Share application money pending allotment (Amount inRs.) Particulars As at 31st March, 2014 As at 31st March, 2013 (a) Rungta Mines Ltd. 300,000,000 300,000,000 (b) Essel Mining and Industries Ltd. . 299,750,000 299,750,000 (c) Paradip Port Trust 510,000,000 275,000,000 (d) MSPL Ltd.. 150,000,000 150,000,000 (e) Jlndal Steels Power Ltd. 50,000,000 50,000,000 (f) steel Authority of India Ltd. 50,000,000 50,000,000 (g) POSCO Ltd, 275,000,000 275,000,000 (h) IDCO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs. ii) whether the company has followed the relevant rules/provisions of the Companies Act in this regard. iii) if the shares have not been allotted within 60 days from the date of receipts then the discloser policy in the balance sheet, whether it should be treated as current liability or otherwise and treatment in the books of account of the company. iv) use of share application money during pendency for allotment. v) applicability of company deposit rules and its classification in the balance sheet utilization of interest or interest on such deposit and taxability as per the Income Tax Act, 1961. vi) the fixed deposit is a short term fixed deposit or long term fixed deposit and/or auto renewal system in the bank and after maturity the utilization of the interest. Ld. AR of the assessee could reply only the date of allotment of shares as per balance sheet note No.4.2, which is 29.05.2014 and the rest were remained unanswered. Therefore, the ld. AR submitted that let the AO may examine the above questions which are unanswered. 8. Considering the submissions of both the sides and with the consent of both the parties for sending back to the file ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
