TMI Blog2021 (3) TMI 476X X X X Extracts X X X X X X X X Extracts X X X X ..... l contention of ld. CIT-DR that the bank is creating bank deposits because it is assessee who has itself given standing instructions to the bank, shall also be looked into by ld. CIT(A) while adjudicating appeal denovo. Interest earned by assessee from IVRCL and M.G. Contractors for advances paid for execution of certain work - HELD THAT:- We are also restoring the matter back to the file of ld. CIT(A) with a similar direction as above to look into the terms and conditions of the contract and the deposit made by the assessee with the contractors to see that whether the said deposits were made by assessee to contractors as part of the terms and condition of the contract for construction of the assessee project and if that be so then in that case it is to be held that the interest earned by assessee from said advances to contractors for carrying on said deposits is inextricably linked with the construction activity of the assessee for setting up of the project and hence it will go on to reduce the project. Reference is made to ratio of decision of Hon ble Supreme Court in the case of CIT v. Bokaro Steel Ltd [ 1998 (12) TMI 4 - SUPR EME COURT] which shall than be applicable bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Allahabad (hereinafter called the tribunal ), reads as under : ITA no. 54/Alld/2020 for AY:2015-16 1. The Id. CIT(A) has erred in upholding the addition of ₹ 6,80,71,611 received as interest from banks during the construction period which is in the nature of capital receipt because it pertains to a period when the business of the assessee has not yet commenced and therefore it was liable to be adjusted against pre operative expenses reducing the cost of the project. The same was rightly set off against the interest paid on term loans by the assessee. 2. The ld.. CIT(A) has erred in making the addition of ₹ 1,49,85,443 received as interest on advances given to contractors for construction work because the said receipts are inextricably linked with plant set up activities and hence is in the nature of Capital Receipt and are being set off against Expenditure during construction period. This activity was rather a part and parcel of the constructional activities of the assessee. The source is not independent of, but is rather closely connected and interlinked to the process of setting up of the factory, 3. The Id. Commissioner of Income-tax (Appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven to contractors for construction work because the said receipts are inextricably linked with plant set up activities and hence is in the nature of Capital Receipt and are being set off against Expenditure during construction period, This activity was rather a part and parcel of the constructional activities of the assessee. The source is not independent of, but is rather closely connected and interlinked to the process of setting up of the factory, 3. The Id. Commissioner of Income-tax (Appeals) has erred in law and on facts in upholding the addition of ₹ 7,85,000 and ₹ 82,98,814, being forfeiture of earnest money and other miscellaneous recoveries from contractors, as income from other sources because the said receipts are inextricably linked with plant set up activities and hence is in the nature of Capital Receipt and . are being set off against Expenditure during construction period. This activity was rather a part and parcel of the constructional activities of the assessee. The source is not independent of, but is rather closely connected and interlinked to the process of setting up of the factory. 4. The learned CIT(Appeals) has erred in upholding th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereby condone the delay of 48 days in filing these two appeals by assessee late beyond the time stipulated u/s 253(3) of the 1961 Act. Whence technicalities are pitted against substantial justice, the Courts will lean towards substantial justice as against technicalities unless malafide on the part of tax-payer is at writ large, which in the instant case we find no malafide on the part of the assessee in filing these appeals late with tribunal by 48 days beyond the time provided u/s 253(3) of the 1961 Act. The assessee has shown sufficient cause in filing of these appeals late by 48 days. The assessee being Public Sector undertaking, with a corporate entity having head office at New Delhi, some delay in processing and seeking legal advice on complicated issues can be reasonably foreseeable and this explanation cannot be discarded at threshold, hence we accept bonafide in these two appeals filed by the assessee late beyond the time provided u/s 253(3) of the 1961 Act. The tax-payers are ordinarily not going to gain by delaying the filing of appeal late. So, if the doors of justice are shut to taxpayers at threshold at the stage of admission of appeal on the grounds of technicaliti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the three aforesaid receipts from the expenditure during construction period, and has filed return of income showing Nil Income . The ld. CIT(A) has decided all the aforesaid three issue(s) against the assessee including enhancement of income with respect to interest income from advances to Contractors, and hence the assessee being aggrieved has come in appeal before the Tribunal. At the time of hearing before the Bench, both the ld. counsel as well as ld. CIT. DR brought to the notice of the Bench, that the tribunal has recently passed an appellate order(s) dated 29.01.2021 in ITA No. 175/Alld/2018 for ay: 2013-14 in an appeal filed by assessee, and appellate order in ITA No. 80 177/Alld/2018 for ay s: 2013-14 2014-15 respectively with respect to appeals filed by Revenue for ay: 2013-14 and 2014-15 respectively, and it is claimed that the issues are covered by the decision of tribunal. The aforesaid common orders dated 29.01.2021 for ay: 2013-14 and 2014-15 were passed by Division Bench, of which both of us viz. ld. Judicial Member and ld. Accountant Member were part of the DB who pronounced the aforesaid orders on 29.02.2021. It is also brought to our notice by ld. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est paid on term loans availed for setting up of power plant. The AO relied upon provisions of Section 5 of the 1961 Act and Hon ble Supreme Court decision in the case of Tuticorin Alkali Chemicals and Fertilizers Limited(supra) while rejecting the contentions of the assessee and bringing to tax interest income earned on bank deposits under the head Income from other sources under the provisions of Section 56 of the 1961 Act. The ld. CIT(A) while adjudicating appeal filed by assessee granted relief to the assessee by following decision of tribunal in assessee s own case for earlier years viz. ay: 2009-10 and 2010-11. The ld. CIT(A), thus, followed appellate order dated 16.08.2017 passed by tribunal in assessee s own case for ay s: 2009-10 and 2010-11, in ITA No. 44/Alld/2014 and ITA No. 85/Alld./2016 respectively. We have gone through the appellate order passed by tribunal in assessee s own case for ay s: 2009-10 and 2010-11 and we have observed that in those assessment year s, the tribunal had observed peculiar facts prevailing in those years and has observed that the assessee was setting up a power plant activities like land acquisition, statutory clearances, development of inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration before us. In the present case, the interest was not earned on the surplus funds but were equity contribution by the joint venture of partners for acquisition, construction and setting up of a plant and other infrastructure facilities. The funds kept in the current account of the company were used for on-going construction activity as and when required. The CIT(A) relied upon the case of Bokaro Steel, but the same is not transferred by the bank in short term MODs Accounts in accordance with the account terms and conditions. The said MODs were reversed automatically as and when the assesses withdrew the amounts From account. There was no intention to earn any interest on such funds. The funds were kept in liquid so as to use them as and when required, since, the interest on short term MODs were inextricably link to the construction and acquisition activities in the regular courses of the assessee's activities. The interest was not earned out of the surplus funds so to treat the said income as income from other source is not justified. This claim of the assessee sustains because the equity contribution by the Joint Venture partners cannot be termed as surplus funds be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. In the usual course, interests received by the company from bank deposits and loans would be taxable as income under the head 'Income from other sources' under section 56 of the Income-tax Act, 1961 ('the Act'). It is argued on behalf of the company that it had not yet commenced its business and in any event the income was derived from funds borrowed for setting up the factory of the company and should be adjusted against the interest payable on the borrowed funds. 9. In our judgment neither of the two factors can affect taxability of the income earned by the company. Under the Act, the total income of the company is chargeable to tax under section 4 of the Act. The total income has to be computed in accordance with the provisions of the Act. Section 14 of the Act lays down that for the purpose of computation, income of an assessee has to be classified under six heads: (A) Salaries. (B) Interest on securities. (C) Income from house property. (D) Profits and gains of business or profession. (E) Capital gains. (F) Income from other sources. 10. By an amendment made in 1988, 'interest on securities' has been made charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. This income has been linked pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something, which is often loosely spoken of as 'capital'. 14. In other words, if the capital of a company is fruitfully utilised instead of keeping it idle, the income, thus, generated will be of the revenue nature and not accretion of capital. Whether the company raised the capital by issue of shares or debentures or by borrowing will not make any difference to this principle. If borrowed capital is used for the purpose of earning income, that income will have to be taxed in accor-dance with law. Income is something which flows from the property. Something received in place of the property will be capital receipt. The amount of interest received by the company flows from its investments and is its income and is clearly taxable even though the interest amount is earned by utilising borrowed capital. 15. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on-business source cannot be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plants and machineries even before commencement of business of the assessee. 18. It has been argued that the source from which the company has earned interest is borrowed capital. The company has to pay interest to its creditors on the same borrowed capital. Having regard to the identity of the fund on which interest is earned and interest is payable, the company should be allowed to set off its income against interest payable by it on the same fund. We are of the view that no adjustment can be allowed except in accordance with the provisions of the Act. However desirable it may be from the point of view of equity, this adjustment cannot be made unless the law specifically permits such adjustment. 19. Next it has been argued that according to well-established accountancy practice, the interest earned by the company even before commencement of business from investing borrowed capital will have to be set off against interest payable by the company on that borrowed capital. The argument based on accountancy practice has little merit if such practice can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23. Our attention was drawn to two other decisions where the view of the Andhra Pradesh High Court was followed. In the case of CIT v. Electrochem Orissa Ltd. [1995] 211 ITR 552, the Orissa High Court preferred the view expressed by the Andhra Pradesh High Court to the view expressed by the Madras High Court in Seshasayee Paper Boards Ltd's case (supra) on the ground that the Madras High Court case was based on a finding of fact that there was no direct connection between the interest paid and the interest received. In our view it will not be right to read the judgment in Seshasayee Paper Boards Ltd. 's case (supra)in that way. The Court's finding in Seshasayee Paper Boards Ltd. 's case (supra)was that the interest earned by the assessee from the bank deposits had to be assessed under the head Income from other sources'. Consequently, the interest paid on the borrowings for the purpose of purchase of plants and machineries could not be allowed or adjusted against this income under section 57(iii) nor were such adjustments permissible under section 70 or 71 of the Act because the business of the assessee had not commenced. The Madras High Court catego ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purchased a house or distributed dividend or paid salary of its employees with the money received as interest, will the interest amount be treated as not his income? This is not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as he liked. The application of the income for payment of interest could not affect its taxability in any way. 27. The second reason given by the High Court was that the Institute of Chartered Accountants of India was a recognised authority on accounting principles. This fact has been recognised by this Court in the case of Challapalli Sugars Ltd v. CIT [1975] 98 ITR 167. Therefore, its view has to be respected. 28. It is true that this Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to the principle of capitalising the interest in case the interest is paid on money raised to defray expenses of the construction of any work 6r building or the provision of any plant in contingencies mentioned in that section even though such money constitutes share capital. The same principle, in our opinion, should hold good if interest is paid on money not raised by way or share capital but taken on loan for the purpose of defraying the expenses of the construction of any work or building or the provision of any plant. The reason indeed would be stronger in case such interest is paid on money taken on loan for meeting the above expenses. (p. 175) This Court also relied on an English case in support of this conclusion in Hindsv. Buenos Ayres Grand National Tramways Co. Ltd [1906] 2 Ch. 654. In Hinds' case (supra) dealing with the question of capitalisation of interest paid on loans taken to install electric traction for tram lines, it was held by Warrington, J.: 'Now, what is it that the company are really proposing to do? They are creating a capital asset by means of which they will hereafter earn, or they hope to earn, profits for the company. They are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of decisions of the High Courts, the Privy Council and also this Court. It is well-settled that income attracts tax as soon as it accrues. The application or destination of the income has nothing to do with its accrual or taxability. It is also well-settled that interest income is always of a revenue nature unless it is received by way of damages or compensation. 33. In the premises, we are of the view that the Madras High Court came to a correct decision in the case of Seshasayee Paper Boards Ltd ( supra). The contrary views expressed in the cases of Nagarjuna SteebLtd ( supra), Electrochem Orissa Ltd (supra) and Maharashtra Electrosmelt Ltd s case (supra) are erroneous. 34. We are of the view that the Tribunal has come to a correct decision. The question referred by the Tribunal is in two parts. The first part of the question is answered in the affirmative and in favour of the revenue. The second part of the question is answered in the negative and in favour of the revenue. This ratio of law as laid down by Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizer Limited(supra)was discussed by Hon'ble Supreme Court in subsequent judgm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re in ays:2009-10 and 2010-11 as to whether the surplus funds were deployed by assessee with deposit with banks on which interest income was received or short term deposits were created at the behest of the bank which were automatically credited by bank when the assessee required the funds for the project execution, and the ld. CIT(A) has merely followed the appellate order passed by the tribunal for earlier ay s: 2009-10 and 2010-11 . The power of ld. CIT(A) are co-terminus with the power of the Assessing Officer, and the ld. CIT(A) is duty bound to make enquiries to give finding that facts as are prevalent in the current year are similar/para materia to the facts of the earlier year and hence the appellate order passed by tribunal for earlier year is to be followed. Since there is no clear finding given by the ld. CIT(A) in the fitness of thing it will be appropriate that this issue is restore to the file of ld. CIT(A) for deciding the above issue afresh after considering the facts for impugned assessment year vis- -vis facts prevalent in ay: 2009-10 and 2010-11, and also after considering the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the file of ld. CIT(A) with a similar direction as above to look into the terms and conditions of the contract and the deposit made by the assessee with the contractors to see that whether the said deposits were made by assessee to contractors as part of the terms and condition of the contract for construction of the assessee project and if that be so then in that case it is to be held that the interest earned by assessee from said advances to contractors for carrying on said deposits is inextricably linked with the construction activity of the assessee for setting up of the project and hence it will go on to reduce the project. Reference is made to ratio of decision of Hon ble Supreme Court in the case of CIT v. Bokaro Steel Ltd. [1999] 102 Taxman 94 (SC), which shall than be applicable but, If however, ld. CIT(A) after investigation of the fact is of the view that the aforesaid interest income is earned by assessee on surplus funds deployed by the assessee to earn interest income, then in that situation ratio of decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT [1997] 227 ITR 172 shall be applicable. Similar is the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ranted 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 three receipts are directly connected with or are incidental to the work of construction of its plant undertaken by the assessee. Broadly speaking, these pertain to the arrangements made by the assessee with its contractors pertaining to the work of construction. To facilitate the work of the contractor, the assessee permitted the contractor to use the premises of the assessee for housing its staff and workers engaged in the construction activity of the assessee's plant. This was clearly to facilitate the work of construction. Had this facility not been provided by the assessee, the contractors would have had to make their own arrange- ments and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee has provided these facilities. The same is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 company purchases rented house and gets rent, such rent will be assessable to tax under section 22 as income from house property. Likewise, the company may have income from other sources. The company may also, as in that case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under section 56 of the Act. This Court also emphasised the fact that the company was not bound to utilise the interest so earned to adjust it against the interest paid on borrowed capital. The company was free to use this income in any manner it liked. However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and also there were miscellaneous recoveries from contractors. The commercial operations of the power plant has not yet commenced during the impugned ay and the project was under implementation. Thus, the receipts are inextricably linked to the project and the ratio of decision of Hon ble Supreme Court in the case of Bokaro Steel Ltd. (Supra) shall be applicable and hence we are of the view that these are capital receipt and they cannot be brought to tax and shall go on to reduce the cost of the project . Hence, we reverse the appellate order passed by ld. CIT(A) and allow the appeal filed by the assessee on this issue. Thus, Assessee appeal for ay: 2013-14 is allowed. We order accordingly. Since the facts are para-materia in this year under consideration before us vis- -vis for ay: 2013-14, we are deciding this issue in favour of the assessee and the said receipt on account of forefeiture of EMD which were given by contractors to assessee, on account of non performance of contract during the construction period of the project, are held to be capital receipt which will go on to reduce the project cost. This issue is decided in favour of the asessee and appeal filed by asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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