TMI Blog2015 (7) TMI 1370X X X X Extracts X X X X X X X X Extracts X X X X ..... For the Appellant : Shri Ashwani Kumar Garg. For the Respondent : Smt. Rajinder Kaur, DR. ORDER Bhavnesh Saini, Member (J) 1. This appeal filed by the assessee is directed against the order of learned Commissioner of Income Tax (Appeals), Panchkula dated 16.5.2014 for assessment year 2009-10, challenging the order of learned CIT (Appeals) in treating the interest of ₹ 1,76,06,556/- on FDRs as income from other sources. 2. The brief facts of the case are that the assessee has taken up a project of NHAI for broadening of section of National Highway 22. However, during the year under consideration, the company has not commenced any commercial activity as the project was under construction. All the construction cost and related expenses have been capitalized. The assessee company filed its return of income on 27.09.2009 declaring total income of ₹ 1,76,06,556/-. Later, the revised return was filed by the assessee on 29.03.2011 declaring NIL income. The Assessing Officer completed the assessment under section 143(3) at an income of ₹ 1,76,06,560/- by treating the interest income as income from other sources. 3. During the course of assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative expenditure. However, the AO while making the impugned assessment has assessed the aforesaid interest as income from other sources. The appellant relied upon following judgments:- i) Indian Oil Panipat Power Consortium Ltd. vs. ITO : 315 ITR 255 (Del) ii) CIT vs. Bokaro Steel Ltd. : 236 ITR 315 (SC) 6. The assessee further submitted that in view of the ratio of the judgment of the Hon'ble Supreme Court in the case of Bokaro Steel Ltd. (supra), if the 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 plan, such income is required to be capitalized to be set off against preoperative expenses. In the case of the assessee, the funds temporarily placed in bank deposits were not surplus funds as was in the case in Tuticorin Alkali Chemicals Fertilizers Ltd. (supra). They were funds required for implementing the road construction project and were, therefore, inextricably connected with it, as was the case in India Oil Panipat Consortium (supra). Hence, any interest earned therefrom was a capital receipt which went to reduce the cost of the project and was rightly cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plant undertaken by the company. This was to facilitate the work of construction. As this facility not been provided by the company the contractor would have to make their own arrangements and this would have been reflected in the charges on the contractor for the construction work. Thus, the Hon'ble Supreme Court gave the finding that the three receipts being intrinsically connected with construction of assessees's plant would be capital receipt and not income of company from any independent sources. Similar was the finding by Hon'ble High Court of Delhi in the case of Indian Oil Panipat Consortium Ltd. (supra). 6.2 On the other hand, the facts of the instant case is similar to the facts in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra) where the Hon'ble Supreme Court held that interest earned on short term investment of funds borrowed for setting up of factory during construction of factory and before commencement of business has to be assessed as income from other sources and it cannot be said that interest income is not taxable on ground that it would go to reduce interest on borrowed amount which would be capitalized. The decision of Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to this principle. If borrowed capital is used for the purpose of earning income, that income will have to be taxed in accordance 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 through the interest amount is earned by utilizing 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 utilizing the borrowed funds as its income. The interest earned by the assessee was clearly its income and unless it could be shown that any provision like section 10 had exempted it from tax, it will be taxable the fact that the source of income was borrowed money did not detract anything from the revenue character of the receipt. The question of adjustment of interest payable by the company against the interest earned by it will depend upon the provisions of the Act. The expenditure would have been deductible as incurred for the purpose of business if the assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttracted 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. 6.3 In view of the facts of the case and finding of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra) which is fully applicable on the facts of instant case, I am in agreement with the AO that the interest income earned by the assessee company is taxable as income from other sources. The interest income is separately chargeable to tax under the head 'income from other sources'. The earning of income cannot be said to be 'intrinsically linked' to the borrowed fund for the construction of project. Thus, the grounds of appeal are dismissed. 7. In result, appeal is dismissed. 8. The learned counsel for the assessee reiterated the submissions made before the learned CIT (Appeals) and submitted that the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. Vs. CIT (supra) do not apply to the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not be classified as income from other sources . The learned CIT (Appeals) also discussed the facts of CIT Vs. Bokaro Steel Ltd. (supra) in his findings and correctly noted that the facts of these cases relied upon by the assessee are clearly distinguishable. The learned CIT (Appeals) also considered the similar facts in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. Vs. CIT (supra) and rightly followed this decision of the Hon'ble Supreme Court for dismissing the appeal of the assessee. In the case of Tuticorin Alkali Chemicals Fertilizers Ltd. Vs. CIT (supra), it was held that the assessee had surplus funds in its hands. In order to earn income out of the surplus funds, it had invested the amount for the purpose of earning interest. Therefore, interest was held to be revenue in nature and would have to be taxed. Since the findings of fact recorded by the learned CIT (Appeals) have not been rebutted through any material that the assessee had surplus funds which were utilized for making term deposits, therefore, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the business and whether the interest income could be set off against the pre-operative expenses, which do not include any expenditure on setting up of the plant. 15. In assessment year 2009-10 the assessee in the Annual Report had declared that though it was implementing number of projects in the State of Himachal Pradesh but none of the said projects had commenced. At page 14 of the Annual Report for the financial year 2008-09 it was declared that Sawkr Kuddh Hydroelectric Project would commence generation of electricity at the end of the year 2012. At page 33 of the Annual Report the auditors had also observed that the Profit Loss Account had not been prepared as the company had not started the commercial operation. However, statement showing incidental expenditure during the construction period was prepared. During the assessment year 2009-10 the explanation of the assessee before the Assessing Officer is reproduced at page 3 of the assessment order in which the assessee had explained that on the one hand the State Government of Himachal Pradesh had contributed funds to the assessee as share capital for use in construction of several power generation projects and sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee held on 20.2.2009 at Shimla and referred to Item No. 2 of the supplementary/additional agenda items dealt with the issue of interest earned/accrued on the amounts received from he State Government as capital. As per the assessee it was decided in the said Board meeting that the interest earned was to be converted into equity from the Himachal Pradesh Government. The CIT (Appeals) under para 4.4 at pages 6 and 7 has reproduced the Item No. 2 of the supplementary/additional agenda items recorded in the said minutes wherein the issue of interest earned/accrued on the amounts received from the State Government as equity and amounts received from he Government of Delhi on account of construction of Renuka Dam Project, which in turn have been utilized for making short term deposits with the bank, was taken up and after discussion with the tax consultant, the Managing Director informed in the meeting that the advance tax is to be paid on such interest. The CIT (Appeals) has reproduced the relevant portion of the Minutes of Meeting and the same are not being reproduced for the sake of brevity. The assessee has filed copy of the said meeting at pages 72 to 84 of the Paper Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roperty of the principals who had allocated the said funds to the assessee. In the absence of the same and in view of the facts and circumstances of the case, we find no merit in the plea raised by the assessee. The interest income earned by the assessee during the captioned assessment years is includible as income of the assessee and is to be assessed as income from other sources in the hands of the assessee. Merely because the said interest income in future would be utilized for carrying on the business of the assessee or applied to the projects undertaken by the assessee, does not make the said interest income as capital receipt in the hands of the assessee as the utilization of the income or the receipt does not determine the nature of the receipts. The interest income received by the assessee during the pre-operation period is assessable as income from other sources in the hands of the assessee in view of the ratio laid down by the Hon'ble Supreme Court in Tuticorin Alkali Chemicals Fertilizers Ltd. Vs. CIT (supra). The Hon'ble Supreme Court (supra) held as under: If a person borrows money for business purpose but utilizes that money to earn interest, however t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20. The learned A.R. for the assessee has further placed reliance on decision of the Hon'ble Delhi High Court in Indian Oil Panipat Consortium Ltd. Vs. ITO : (2009) 315 ITR 255 (Del), in the facts of which the funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. The Hon'ble Delhi High Court held that since interest earned by Indian Oil Panipat Consortium Ltd. was inextricably linked with setting up of the plant of the assessee, it constituted a capital receipt in the hands of the assessee. 21. The CIT (Appeals) had also made a reference to another decision of the Hon'ble Delhi High Court in International Marketing Ltd. Vs. ITO : (2007) 292 ITR 504 (Del) wherein it was held that interest earned in pre-operative stage of the business to be taxable in the hands of the assessee. 22. The CIT (Appeals) vide para 11 had held that the fact situation in that case was very similar to the case before Hon'ble Delhi High Court in International Marketing Ltd. Vs. ITO (supra) and where surplus funds were parked with different companies and the Hon'ble High Court applied the ratio laid do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany had taken term loans from various banks and financial institutions. That part of the borrowed funds which was not immediately required by the company was kept invested in short-term deposits with banks. Such investments were specifically permitted by the memorandum and articles of association of the company. The company had also deposited certain sums with the Tamil Nadu Electricity Board. It had also given interest-bearing loans to its employees to purchase vehicles. Upto the asst. yr. 1980-81, interests earned by the company from the various loans given by the company and also from the bank deposits were shown as income and was taxed accordingly. For the accounting year ending on 30th June, 1981, (asst. yr. 1982-83), the assessee received a total amount of interest of ₹ 2,92,440. In its return of income filed on 22nd June, 1982, the company disclosed the said sum of ₹ 2,92,440 as Income from other sources . It also disclosed business loss of ₹ 3,21,802. After setting off the interest income against business loss, the company claimed the benefit of carry forward of net loss of ₹ 29,360. The company later on realised its mistake and on 26th Dec., 1984, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The assessee was at liberty to deal with the interest amount as it liked. The application of the income for payment of interest would not affect its taxability in any way. The company could not claim any relief. Under section 70 or section 71 since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting years in such a situation, the expenditure incurred by the assessee for the purpose of setting up its business could not be allowed as deduction, nor could it be adjusted against any other income under any other head. Similarly any income from a non-business source could not be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee. In the detailed discussion while adjudication this matter, the Hon'ble Supreme Court had also observed at page 179 as under: The basic proposition that has to be borne in mind in this case is that it is possible for a company to have six different sources of income, each one of which will be chargeable to income tax. Profits and gains o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee company to the contractors to facilitate the work of construction and thus these receipts have been correctly adjusted by the assessee company against the charges payable to contractors. It was also observed that had the assessee not made these arrangements and had the contractors made these arrangements, charges to the company would have been more. It is significant to note that in this case itself one more issue was there, i.e. interest received from investments made out of borrowed funds which were not immediately required. This interest was held to be taxable by following the decision of M/s. Tuticorin Alkali Chemicals Fertilisers Ltd. vs. CIT [supra]. In fact, we are reproducing the para given at page-321 of the report- During these assessment years, the respondent assessee had invested the amounts borrowed by it for the construction work which were not immediately required, in short-term deposits and earned interest. It has been held in these proceedings that the receipt of interest amounts to income of the assessee from other sources. The assessee has not filed any appeal from this finding which is given against it. In any case, this question is now concluded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1997] 227 ITR 172, allowed the appeal of the Revenue and set aside the judgment of the High Court. Thus, it is clear that whenever interest is received during preproduction stage from short term deposits, same has to be taxed as income from other sources. This decision has been again followed by the Hon'ble Supreme Court in the case of CIT vs. Autokast Ltd. [248 ITR 110]. The head note of this decisions reads as under- From the decision of the Kerala High Court (see (1998) 229 ITR 789) holding that where the assessee kept the money borrowed from the Industrial Development Bank of India for purchase of plant and machinery in short-term deposits in banks and used it in bill discounting until payment for the plant and machinery, the interest earned on the deposits was not taxable in the hands of the assessee as income from other sources but would go to reduce the actual cost of the plant and machinery. The Department took an appeal to the Supreme Court, the Supreme Court reversed the decision of the High Court holding that the interest was taxable in the hands of the assessee. This judgment has been rendered on November 21, 2000 i.e., much after the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the training institute has been placed with banks and other companies as short term deposits. 18. As far as the decision in the case of CIT vs. Aspentech India (P) Ltd. [supra] is concerned, again the facts are quite distinguishable. In that case the assessee had claimed expenditure of ₹ 2.53 crores against the meager income of ₹ 4,93,343/-. The assessee was engaged in the business of software development and the expenditure was mainly incurred on account of employee's salary amounting to ₹ 1.72 crores, travelling cost of ₹ 30.61 lakhs and other administrative expenses of ₹ 39.65 lakhs. Thus, it is clear that assessee had already started generating income because receipts were also shown at ₹ 4,93,343/- and the other expenses were claimed as revenue expenditure and were not claimed as reduction from capital expenditure as has been done in the case before us. 19. From the above discussion, it is clear that both the decisions of Hon'ble Delhi High Court are not applicable to the facts of the assessee's case before us. Thus, it is clear that in the case before us, assessee was still constructing the building for the institute ..... X X X X Extracts X X X X X X X X Extracts X X X X
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