TMI Blog2021 (5) TMI 390X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Act. Earlier the interest was earned from fixed deposits and in this AY the assessee has given some advances to others also and could not respond to our query during the course of hearing. Exercising the powers u/s 254 of the IT Act and relying on the decision of Bombay High Courts full Bench decision in the case of Ahmedabad Electricity CO. Ltd [ 1992 (4) TMI 29 - BOMBAY HIGH COURT] , we observed that section 254 involving the statutory expression may pass such orders as it thinks fit confers widest possible jurisdiction on the Tribunal. AO and the Sr. DR has discussed this issue and facts of the case in detail and has relied on the decision of the Hon ble Apex court in the case of Tuticorin Alkali [ 1997 (7) TMI 4 - SUPREME COURT] . We support and restore the order of the AO and quash the order passed by the CIT(A). AO has rightly treated the interest received during the construction period from the money parked as fixed deposits and interest on advance as income from other sources and netting off of capital expenditure from the interest has rightly been disallowed. In support of our above decision, we rely on the judgements of ITAT, Delhi Special Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,29,33,633/- towards interest on such advances and interest of ₹ 70,32,913/- from Cosmos Bank on FDRs. 2.1 The AO completed the assessment u/s 143(3) of the Act determining the total income of the assessee at ₹ 3,29,33,633/- by treating the interest income as income from other sources. 3. When, the assessee preferred an appeal before the CIT(A), the CIT(A) following the decision of ITAT in assessee s own case for AY 2014-15 in ITA No. 1608/Hyd/2017, dated 31/05/2018, allowed the appeal of the assessee. 4. Aggrieved by the order of CIT(A), the revenue is in appeal before the ITAT. 5. The only issue in this appeal is whether interest income on fixed deposits received by the assessee is capital in nature and whether pre commencement of expenses can be set off against interest income. 6. Before us, the ld. CIT-DR has filed written submissions, which are as under: 3. In this regard it is respectfully submitted that the crux of the issue is whether the funds kept in FDs were inextricably linked with the project or not. There is a difference between funds kept in FD at the instance of any statutory authority or were kept due to Gods Will. If the funds are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... public issue) in bank deposits for a short. period is assessable under the head 'Income from other sources'. 29. The ratio is binding on us and therefore) we are of the opinion the stand taken by the AD merits our acceptance. For the said reasons, we uphold the views of the revenue. Accordingly) qrounds 5 to 9 are dismissed. 5. The Hon'ble ITAT also place reliance on the decision of Facer Facor Power Ltd. In the case of FACOR, the assessee was engaged in generating electric power. It kept margin money in form of fixed deposits for procurement of various capital goods for setting up of power project. It was held that the interest earned on said deposits would be in nature of capital receipt not liable to tax. The facts of the case as seen above are clearly distinguishable on facts and law. This is not the case of assessee where funds were kept as margin money, but only surplus funds were invested in FD. 6. It is prayed that the above facts be kindly be taken into consideration as such arguments were not placed before in the assessee's own case for earlier years. 7. The ld. AR has relied on the order of the CIT(A) and submitted that since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee has given some advances to others also and could not respond to our query during the course of hearing. Exercising the powers u/s 254 of the IT Act and relying on the decision of Bombay High Courts full Bench decision in the case of Ahmedabad Electricity CO. Ltd., Vs. CIT [1993] 199 ITR 351 (Bom), we observed that section 254 involving the statutory expression may pass such orders as it thinks fit confers widest possible jurisdiction on the Tribunal. 8.1 The ld. AO and the Sr. DR has discussed this issue and facts of the case in detail and has relied on the decision of the Hon ble Apex court in the case of Tuticorin Alkali, Bokaro Steels Ltd. and other cases. We support and restore the order of the AO and quash the order passed by the CIT(A). The ld. AO has rightly treated the interest received during the construction period from the money parked as fixed deposits and interest on advance as income from other sources and netting off of capital expenditure from the interest has rightly been disallowed. In support of our above decision, we rely on the judgements of ITAT, Delhi Special Bench Third Member case in the case of National Thermal Power Vs. IAC, [1988] 24 ITD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing interest paid was deducted leaving the net interest income of ₹ 1,07,29,848. According to the Revenue this net interest income was taxable under the head 'Other sources' and it was in fact taxed in that manner for the first two assessment years 1977-78 and 1978-79, whereas the assessee sought to contest that this amount was not taxable at all and that the entire amount was to be capitalised thereby reducing the cost of construction. Only at the stage of the Tribunal for the assessment year 1978-79, this point was raised by way of an additional ground but it was not admitted [vide National Thermal Power Corpn. v. IAC [1985] 12 ITD 99 (Delhi) (SB)]. For the subsequent two assessment years the assessee challenged the view of the Revenue from the beginning and the matter was agitated right up to the stage of the Tribunal. The Tribunal by its order dated 28th February, 1984 upheld the action of the Revenue. Earlier two Special Benches of the Tribunal referred to below had accepted a similar point as that of the assessee. The Division Bench of the Tribunal, relying on certain decisions of the High Court, did not follow the view taken by the two Special Benches of the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n favour of the Revenue in the assessee's own case for the earlier assessment years 1979-80 and 1980-81. In support he referred to a Third Member order in the case of Export House v. ITO [1985] 13 ITD 687 (Asr.). He contended that the principle of res judicata, as he put it, would be attracted and the larger Bench had no power to overrule the view of the Division Bench taken for the assessment years 1979-80 and 1980-81. His second objection was about the question framed for the consideration of the larger Bench viz. it was different from the assessee's ground of appeal No. 2 which merely stated that the sum of ₹ 1,07,29,848 was not income at all. He submitted that in that ground there was neither any reference to there being no surplus fund nor to the taxability of interest income under the head 'Income from other sources'. The assessee's learned counsel, Shri R. Ganesan, however, took the same stand as he had taken while seeking the constitution of a larger Bench. 4. After considering the objections of the learned Departmental Representative, we find no merit in them. His arguments were based on a misconception that the larger Bench was constituted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, Limited under the head Income from business and there is no dispute between the parties on this point. It is equally undisputed that the assessee's major activity of producing electricity by setting up super thermal power stations at four places had not begun and all the four thermal power stations were in various stages of construction in the accounting year under consideration. The Inspecting Asstt. Commissioner (Asstt.) in that background brought to tax the net interest income of ₹ 1,07,29,848 under the head 'Income from other sources.' Similarly he taxed the miscellaneous income of ₹ 49 lakhs, which comprised the following: 1.Liquidated damages recovered from contractors, 2.Rent recovered from contractors and employees, 3.Receipt from sweeping cement, 4.Recovery of overhead charges on account of issue of material to contractors/suppliers, 5.Workshops service charges for repair and maintenance received from contractors, 6.Recovery of overhead charges on issue of diesel, etc., 7.Other receipts of miscellaneous nature. The assessee, on the other hand, in part III of the return had claim ed this income to be exemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the main object III(A)(1) in the Memorandum of Association of NTPC, which is reproduced below: III. Development of Thermal Power (A)(1). To plan, promote and organise an integrated and efficient development of Thermal Power in all its aspects including planning, investigation, research, design and preparation of preliminary, feasibility and definite project reports, construction, generation, Operation and maintenance of Thermal Power Stations and Projects, transmission, distribution and sale of power generated at Thermal Stations in accordance with the national economic policy and objectives laid down by the Central Government from time to time. He next referred to the fact that the Government of India was providing capital from time to time on the basis of the report given about the requirement of funds by the assessee and that In the accounting year under consideration, the Government further provided a loan of ₹ 47.94 crores so as to finance the construction of power plants. He invited our attention to the Annual printed accounts for the year 1980-81 to say that the company had drawn up no profit and loss account and had transferred the expenditure in excess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e agreement on the full amount of the obligation. Under such arrangements, funds are often temporarily invested pending their requirement. Occasionally, interest-bearing compensating balances are required, It is appropriate to offset such investment income against the associated borrowing costs in determining the capitalisation rate. Shri Ganesan explained that this paragraph referred to the method of capitalisation of borrowing costs and determining the capitalisation rate. In regard to the other pamphlet 'Guidance Note on Treatment of Expenditure During Construction Period', he referred to paragraph 17.11 at page 32, which is reproduced below: 17.11 During the construction period, a project may earn income from miscellaneous source for example, share transfer fees, interest income, income from hire of equipment or assets and Income from sale of products manufactured during the period of test runs and experimental production. It is recommended that such income should be set off against the related items of expenditure so that only the net amount of the expenditure is capitalised or treated as deferred revenue expenditure, as the case may be. In either case, con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntly earned, nor could it be subjected to tax under the head 'Income from other sources'. He emphasised that the purpose for which money was given by the Government was important and that in the construction period all the transactions of the assessee would be governed by that purpose and it is that purpose which should be taken into account while considering the taxability of the interest income. It was pointed out that it was obvious that the entire money given by the Government could not be disbursed in one single day and it had to be utilised by and by as per the requirements of setting up the power plants and till the money was so utilised wholly, the amount not so utilised had to be kept for safety reasons and in the process, it earned some interest as it was kept in short-term call deposits usually for a period of two weeks at a time. According to Shri Ganesan the income from interest so derived, was to be set off against construction expenditure 'as it went to abate the capital cost of the projects. Another argument put forward in the same vein was that funds having been placed at the disposal of the company by the Government for the construction work in hand, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which was being set it, was also contended that the observations of the Delhi High Court were based on the Calcutta High Court's decision in CIT v. Ajmera Industries (A) Ltd. [1976] 103 ITR 245 and they were not binding on the Tribunal, such a question not being for decision before the Delhi High Court. 10. Shri Ganesan next submitted that the various authorities of the High Courts relied upon by the Tribunal in its order for the earlier two assessment years were clearly distinguishable and did not in terms deal with the issue raised by him in this appeal. He submitted that neither of the four authorities, viz., Madhya Pradesh State Industries Corpn. Ltd. v. CIT [1968] 69 ITR 824 (MP), Traco Cable Co. Ltd. v. CIT [1969] 72 ITD 503 (Ker.), Addl. CIT v. Madras Fertilisers Ltd. [1980] 122 ITR 139 (Mad.) and Collis Line (P.) Ltd. v. ITO [1982] 135 ITR 390 (Ker,) dealt with the question posed herein. It was also submitted. that the Special Bench of the Tribunal at Madras in the case of Arasan Aluminium Industries (P.) Ltd. (supra) had considered the Madras High Court's decision in Madras Fertilisers Ltd.'s case (supra) and had held that that decision did not apply to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s against the assessee but according to Shri Ganesan the High Court had not considered the accountancy practice, which is prevalent as shown by him in his arguments earlier and having ignored that, the High Court had not correctly followed the ratio of the Supreme Court's decision in Challapalli Sugars Ltd.'s case (supra). 12. Shri Ganesan also raised an alternative plea in respect of the interest amount of ₹ 26,03,245 received from the contractors on advances and interest on loans advanced to employees, which was included in the amount of ₹ 1,07,29,848. It was his contention that these two items of interest receipts were inextricably linked with the construction activity and fell within the ratio of Delhi High Court's decision in the case of Indian Drugs Pharmaceuticals Ltd. ( supra). He explained that advances were given to contractors to expedite the construction work as per the booklet of the N.T.P.C. containing the general conditions of contract for civil works. A copy of that booklet was filed and our attention was invited to page 48 and Schedule 'A' appearing at page 76. It was submitted that according to the contents at page 48 the N.T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to touch a few aspects. He emphasised that amounts were borrowed by the assessee to set up the plant and machinery and for setting up of the plant and machinery and the earning of interest from surplus funds not immediately required for that activity constituted one single transaction, which was inextricably mixed up. He further submitted that whether borrowings were used Immediately or later on, the activity of earning of interest sprang from the same borrowings and the factum of earning of interest should not be dissociated from the purpose of borrowing. It was argued that earning of interest would have only reduced the liability for anticipated payment of interest, which in any event had to be capitalised and by the process of deduction, the quantum of interest to be capitalised would only be reduced. The attempt to decrease the amount of interest to be capitalised should not be regarded as a source created for earning income much less income for taxation purposes. Shri Bajoria very fairly conceded that the issue arising in his assessee's case was decided against him by the Calcutta High Court in CIT v. New Central Jute Mills Co. Ltd. [1979] 118 ITR 1005. 14. After ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make deposits in India but had come to carry. on business and that the income earned by depositing spare funds in the banks and earning interest thereon would also be business income and for the purpose of set off of brought forward business loss from the earlier assessment years, it could not be treated as separate from business income. He also contended that the Madras and Karnataka High Court decisions in Seshasayee Paper Boards Ltd.'s case (supra) and Cap Steel Ltd.'s case (Supra) did not consider or deal with the aspect of seeing the true nature of the transaction. In regard to the Madras High Court's decision Shri Vaish submitted that the High Court did not consider the Supreme Court's decision in Challapalli Sugars Ltd.'s case (supra) and another Supreme Court decision in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52 . According to Shri Vaish in the light of the Supreme Court's decision in India Cements Ltd.'s case (supra) the purpose for which money was borrowed was not relevant even when the context in that case related to pre-setting up period and therefore the Madras High Court could not look into the purpose of borrowings to concl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er two assessment years and the relevant paragraphs and relied upon its findings which were in favour of the Revenue. He next joined issue on the argument of Shri Ganesan that there were no surplus funds. He invited our attention to page 148, Schedule 'E', of the printed balance sheet of the assessee to show that the assessee was maintaning two separate types of accounts with banks, namely (i) balances with the Scheduled Banks in current accounts amounting to ₹ 13.12 crores; (ii) short-term deposits with Scheduled Banks amounting to ₹ 45 lakhs. He referred to a comparative statement at page 5 of the paper book of the Revenue showing surplus funds available with the assessee for the assessment years 1979-80 to 1981-82. It was submitted that all through the assessee had kept a certain portion of the moneys available to it in the current accounts with banks and kept another portion of the moneys in short-term deposits with the banks. From this doployment of funds, it was argued that it was clear that funds surplus to the immediate needs or anticipated immediate needs were put into short-term deposit accounts. Shri Sharma also referred to a letter dated 23-3-81 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y that the funds of the assessee were not made up exclusively of borrowed funds but included income derived from consultancy services, miscellaneous income of ₹ 49 lakhs, hire charges of ₹ 35.65 lakhs and interest receipts of ₹ 26.03 lakhs from contractors and employees and all these funds got intermixed with the capital provided and loan funds and it could not be said that the funds going into short-term deposits were only the funds supplied by the Government for construction activity. He also claimed that maximum funds of the assessee remained at Delhi where there was no construction activity and again according to him large funds at Delhi were surplus funds and because of such funds, loans could be given to the contractors and employees. He contended that it was not correct to say on the part of the assessee that surplus funds could only result from income and that what is meant by surplus funds are funds not required immediately for construction purposes. He referred to para 8.1 of the pamphlet 'Guidance Note on Treatment of Expenditure During. Construction Period' which referred to earning of interest from the temporary investment of surplus funds pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not arise from the act of borrowal of funds. In regard to the concept of surplus funds being put into banks, he referred to the ancillary object B 14 of the Memorandum of Association (reproduced in para 10 above). It, Was also submitted that the assessee's counsel Shri Ganesan could not contend that ancillary object B 14 was not activated. It was pointed out that against the finding of the Tribunal on this point in its order for the preceding two assessment years, the assessee had moved a miscellaneous application in respect of which the order is at page 82 of the assessee's paper book. It was submitted that the Tribunal had overruled those objections and the clause has therefore to be considered to have been put in operation and further there is no material brought before this Bench to prove that the position in that regard has undergone a change for the assessment year under appeal. It was also contended that the argument about the compliance with the requirements of the ompanies Act, 1956 for activating this ancillary object by passing a special resolution before acting on it, is of no assistance as it is not a conclusive circumstance and that the assessee may violate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Courts had decided that question of head of income in respect of the taxability of interest income to be 'Other sources' and not Business . He contended that the High Courts therefore had held that income from interest by the investment of surplus funds was from an independent source unconnected with the business to be set up and therefore it was to be taxed under the head 'Income from other sources'. He contended that the direct decision in favour of the Revenue was of the Karnataka High Court in Cap Steel Ltd.'s case (supra). He finally submitted that the view taken by the Delhi High Court in the case of Indian Drugs Pharmaceuticals Ltd. (supra) if correctly read and understood, was in favour of the Revenue and also in consonance with the views of a large number of other High Courts. He submitted that what the assessee's counsel called an obiter dictum in the decision of the Delhi High Court in Indian Drugs Pharmaceuticals, Ltd.'s case (supra) was a necessary finding of the High Court which could not be brushed aside by saying that that was not the issue before it. Regarding the ratio and dicta of a judgment, he cited the Madras High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. ITO [1984] 9 ITD 690, Sree Vadivambigai Textiles (P.) Ltd. v. Third ITO [1985] 11 ITD 125, First ITO v. Grahalakshmi Co. [1985] 11 ITD 711 and Export House's case (supra) in that regard. 21. In regard to the submissions of the counsel for the interveners, Shri Sharma submitted that their arguments did not go further than those of Shri Ganesan about which he had already made his submissions. 22. Now we take up the submission of the other Departmental Representative Smt. Archana Ranjan in respect of accountancy principles and practice referred to by the assessee's counsel Shri Ganesan. She submitted that it was clear from a perusal of the two pamphlets filed by Shri Ganesan that no final accountancy practice in respect of the taxability of interest income by investing surplus funds in the construction phase of a business to be set up had been shown to exist. In this connection she invited our attention to paras 6 and 7 of the pamphlet 'International Accounting Standard-Capitalisation of Borrowing Cost', which mentioned the views held for and against capitalisation of borrowing costs. So far as the other pamphlet Issued by the Research Committee of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e accorded to interest income derived from short-term deposits out of surplus funds. Paragraph 17.11 of the same pamphlet-quoted below-was cited to contend that even the Institute of Chartered Accountants of India had two views on the point in the matter of capitalising or treating the expenditure as deferred revenue expenditure: 17.11 During the construction period, a project may earn income from miscellaneous sources for example, share transfer fees, interest income, income from hire of equipment or assets and income from sale of products manufactured during the period of test runs and experimental production. It is recommended that such Income should be set off against the related items of expenditure so that only the net amount of the expenditure is capitalised or, treated as deferred revenue expenditure, as the case may be. In either case, consideration may have to be given to the question of providing for the income-tax liability on such income (paragraph 8.2). In regard to paragraph 11.4 of the same pamphlet-already quoted above-it was the argument of the learned Departmental Representative that this was merely in the nature of a suggestion and the question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surplus moneys to be assessable under the head 'Income from other sources'. In other words it was. submitted that the Delhi High Court was giving illustrations to show that all receipts in the construction phase of a business to be set up will not always be capital receipts. It was next pointed out that the Karnataka High Court in the case of Cap Steel Ltd. ( supra) had considered the import of the Supreme Court's decision in the case of Challapalli Sugars Ltd. ( supra) and the safeguard provided therein and dealt with the argument of the principle of accountancy raised before it on the basis of another pamphlet issued by the Research Committee of Institute of Chartered Accountants of India by the name Study on Expenditure During Construction Period . The High Court rejected the principle recommended by the Institute of Chartered Accountants of India by observing that it could not be taken advantage of by the assessee since it appeared to be contrary to the statutory taxability of interest income and that under the Income-tax Act, interest earned or interest income accrued to the assessee, whether out of borrowed money or out of one's own capital was liable to tax. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the binding authority of the Delhi High Court in Indian Drugs Pharmaceuticals Ltd.'s case (supra ) was in the assessee's favour. Shri Ganesan finally submitted that the Chartered Accountants' literature generally takes the same view as he had advocated and the Delhi High Court had also taken the same view in the Indian Drugs Pharmaceuticals Ltd.'s case (supra). 24. Shri Sharma on behalf of the Revenue pointed out that the decision of Delhi High Court in the case of State Trading Corpn. of India Ltd. (supra) was not applicable to the facts of the assessee's case and the grant-in-aid was received by the STC which was a one time payment. 25. After bestowing our best consideration and considering the catena of authorities cited by both the sides and the interveners, we are inclined to uphold the stand of the Revenue which is indeed supported by the views of several High Courts. Certain important questions that arise in this case are-(i) Whether the assessee had surplus funds which it invested in short-term deposits to earn interest; (ii) whether an independent source of income had come into being giving rise to interest income; and (iii) whether there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be put by the learned counsel for the assesses is hence not convincing. 27. The next aspect to be considered is, whether the income from interest on short-term deposits arises from an independent source of income or as Shri Ganesan put it, arises from the source of borrowing the funds or contribution of funds by the Government of India. Here also the stand of assessee is difficult to accept. The source of interest income earned from short-term deposits taken from scheduled banks is the contract with the banks to advance the money on interest which is a conscious decision taken by the assessee. The two modes of keeping the funds received from the Government is apparent from the balance-sheet of the assessee which shows separately cash balances maintained in current accounts with the scheduled banks and the short-term deposits taken. In fact once the funds contributed by way of sharecapital or the loan granted by the Government of India reach the hands of the assessee they become the property of the assessee and the assessee is at liberty to utilise and hold those in the manner it liked prior to their being finally utilised for the main object of setting up of thermal power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, there was no question of computing its business income. The assessee-company had invested its paid up share capital and loans obtained from the Industrial Credit and Investment Corporation and the Export and Import Bank of Washington in banks as deposits and received interest. It adjusted the interest payable on its loans against the interest received for assessment. The ITO held that so far as the interest earned by the assessee on call deposits of share capital was concerned, it was liable to tax under the head Other sources'. He, however, did not tax the interest on all deposits made out of investment of borrowed money as the interest received was less than the interest paid. In appeal the AAC held that the entire interest income irrespective of its origin had to be assessed only under the head 'Other sources' and directed the ITO to bring that amount to tax accordingly. On further appeal the Tribunal took the view that as the business had not been started and the assessee was in pre-production stage, any earning of income should be viewed from the point of view of reduction in the commitments and that all interest payments incurred during the precommencemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be set off against the interest payable on the borrowings. The ITO held that the gross interest payable should be capitalised along with other expenses and that the interest earned was not deductible. The AAC held that the interest was deductible in computing the total income of the assessee, but the net interest should not be capitalised. The Tribunal held that the net interest should be capitalised. Prom the facts noted in the report of the case, it is seen that ITO had brought to tax the interest income and did not allow the set off of interest payable against the Income from interest. The controversy about non-adjustment of interest paid against the interest received went for the consideration of the High Court, before whom the plea of accountancy practice or rule was also raised so as to set off the interest income against the interest paid. The High Court negatived the plea of accountancy practice and held that only the gross amount of interest paid on borrowings had to be capitalised in view of Supreme Court decision in Challapalli Sugars Ltd.'s case (supra). This case rejects the plea of accountancy practice in a direct manner after taking note of the safeguards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Shri Ganesan could not. be said to be emerging from its decision. This precaution is exercised by the courts to ensure a clear understanding. of Its decision and to circumvent its misapplication by widening the scope of the proposition laid down. It is not a case of any obiter dicta. No doubt an illustration is given by the High Court, but this is there only to explicitly elucidate the ratio it is seeking to lay down. Thus the illustration given cannot be considered to be either obiter dicta or non-relevant for the purpose of the case. It is in this light that the High Court in Ajmera Industries (P.) Ltd.'s case (supra) and the illustration given by it should be read. The High Court had clearly laid down that such interest income would certainly be assessable under the head 'Income from other sources'. 32. Relying upon the above authorities we are fortified in our view that the interest earned by the assessee by taking short term call deposits with the scheduled bank from time to time was income liable to tax under the head 'Income from other sources'. 33. We may next consider the two other Delhi High Court authorities, which the counsel for the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conscious act to invest them in short-term deposits with a view to earn interest. Immediately a question would arise - whether this utilisation of funds had given rise to any independent source of income. Again it may also be pointed out that under the scheme of the Income-tax Act, 1961 the income arising from a particular source, attracts tax liability, the moment it arises under the mercantile system of accounting, and the charge that gets fastened to such accrued income cannot disappear by any consideration of subsequent utilisation of such income. 35. Shri Ganesan had laid great stress on there being an establ- ished practice of accountancy for capitalising the interest income received from short-term deposits during the period of construction. He relied on two pamphlets for this contention. In the pamphlet entitled 'International Accounting Standard' what has been discussed is the question of capitalisation of borrowing costs. After noting the views for and against such capitalisation the pamphlet discusses the methods of capitalising the borrowing costs and in that connection a reference has been made to the capitalisation rate. It is stated that where funds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er stated there that in either case consideration may have to be given to the question of providing for the income-tax liability on such income. Besides this, there are other recommendations about the treatment of other expenditure and depreciation on assets during the construction period but we are not concerned with them. 37. From the above discussion it appears that there is an established accountancy practice about the capitalisation of expenditure like payment of interest towards the cost of assets and there is also a guideline for showing the income earned during the construction period separately in the accounts and also for making tax provision for such income. There is also a recommendation for setting off income against related items of expenditure so that only the net amount of the expenditure is capitalised. However, it is a thing quite different from the set off of interest income against the cost of construction as a whole as this expenditure cannot be considered to be related to this interest income. The accountancy practice, as is evident from these pamphlets, does not support the contention of Shri Ganesan in so far as it relates to interest on short-term bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the construction phase of the projects of the business to be set up by the assessee company. The ratio of the decision of Delhi High Court in the case of Indian Drugs Pharmaceuticals Ltd. (supra), in our view, is attracted to this amount which will go to reduce the cost of construction and therefore will not be liable to tax. Consequently in our opinion only the amount of interest earned from scheduled banks on short term deposits taken from time to time, amounting to ₹ 96.90 lacs can be taxed as income from other sources. We reduce the figure taken by the assessing officer from ₹ 1,07,29,848 to ₹ 96.60 lacs and partly allow the contention of the assessee. 40. After disposing of the major ground of appeal No. 2 referred for the consideration of the larger bench, we take up the other grounds of appeal. Ground of appeal No. 1 merely states that the authorities below should have determined the total income at NIL . Nothing was said on behalf of the assessee in respect of this ground and it is, therefore, a consequential ground which anticipates the relief claimed through several other grounds of appeal. This is, therefore, rejected. 41. Ground Nos. 3 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Special Bench of the Tribunal for the assessment year 1978-79 and the Division Bench of the Tribunal for the preceding two assessment years have decided this point against the assessee. It is worth pointing out that the arguments now made before us were also made before the Special Bench when it was contended before it by the assessee's counsel that it is sufficient if the machinery or plant is ready for use. The Special Bench of the Tribunal has noted this argument in paragraph 19 of the order of the Tribunal, but rejected it and upheld the view taken by the CIT (Appeals). It may also be pointed out that assessee's income from hire charges is offered for assessment under section 56(2)(ii). That clause of subsection (2) of section 56 provides for the taxability of income from machinery and plant belonging to the assessee and let on hire under the head 'Income from other sources' only if the income is not chargeable to Income-tax under the head Profits and gains of business or profession . In this case deduction for depreciation would be admissible under section 57(ii) in accordance with the provisions of section 32(2) of the Act. Section 32(1) requires tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction of part of expenditure claimed. He invited our attention to the order of the CIT (Appeals) dated 23-2-1985 for the assessment year 1982-83 at pages 112 and. 113 of assessee's paper book. He submitted that at least the same treatment may be accorded to the assessee for the assessment year under appeal. 45. Shri D.K. Sharma contended for the revenue that the assessee having neither furnished any information/evidence before the Inspecting Assistant Commissioner (Assessment) or Commissioner of Income-tax (Appeals), he cannot now come forward. for any relief before the Tribunal. He also referred to the fact that the issue had been decided against the assessee by the Tribunal for the preceding two assessment years and prayed for taking of the same view. 46. After considering the rival submissions and taking particular note of the fact that the lower. authorities rejected the assessee's plea for this deduction in toto, denying to the assesses any appreciation of its stand even on the basis of broad probabilities of the situation and the commercial reality and. further taking note of the fact that the Commissioner of Income-tax (Appeals) for the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7,499.14 6. Recovery of overhead charges on issue of diesel etc. 4,46,698.55 7. Earnest money forfeited 47,000.00 8. Other receipts of Misc. nature (sale of radhi, scraps, old and un- serviceable items). 4,28,066.26 Total: 48,99,767.69 It was his contention that all these items of income were closely connected and inter-linked with the process of setting up the thermal plants and fell within the ratio of Delhi High Court decision in the case of Indian Drugs Pharmaceuticals Ltd. (supra). According to him these receipts were on capital account and were to abate the capital cost of construction of assessee company's projects. 49. The learned Departmental Representative submitted that rent recovered from contractors and employees, liquidated damages received from contractors were a matter of discretion and due to the exercise of such discretion the income had resulted and the situation as stated by the Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal in the earlier portions. At the time of hearing of those Special Bench appeals, we all felt that the matter was fully covered by the decision of the Supreme Court in the case of Challapalli Sugars Ltd. (supra) by which decision the Supreme Court pronounced that accounting practices and guidelines issued by the Institute of Chartered Accountants of India could be relied upon in arriving at the actual cost for the purposes of the Income-tax Act. But now I find that subsequent to the decisions of the Special Benches, two High Courts have expressed a contrary view. The Karnataka High Court in the case of Cap Steel Ltd. ( supra) after considering the Supreme Court decision in the case of Challapalli Sugars Ltd. ( supra) expressed the view that the decisions would have no application to a case of this nature. The Karnataka High Court clearly laid down the rule that interest received on short-term deposits during construction period constitutes income of the assessee and is liable to be taxed as income and could not be deducted from the cost of construction. In view of this direct decision of the Karnataka High Court, I felt that the view expressed by the earlier Special Benches wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has held on similar issue, as under: 6. We are now left with the second issue of interest income addition of ₹ 26,45,20,127/- treated as 'income from other sources' in both the lower proceedings. Ld.CIT(A) detailed discussion to this effect reads as under: 5.1 During the course of assessment proceedings, it is noticed by the Assessing Officer, that the assessee has not yet commenced its business activities. Further the assessee has received bank interest on fixed deposits amounting to ₹ 26,45,20,127/- which was reduced from interest paid to banks. 5.2 The assessee was asked to explain why the interest income should not be taxed under the head income from other sources in view of the Apex court decision in the case of Turicorin Alkali Chemicals and Fertilizers Limited Vs. CIT 227 ITR 0172, In response, the assessee stated that the company has availed term loans, which were pending for utilization, these funds were invested in mutual funds and fixed deposits. Income earned on such short term investments was reduced from the capitalization cost. This treatment was in accordance with the accounting standard 16. The Appellant took reliance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ords had no hesitation in holding that the accounting practice for calculating Its profit followed by the assessee and accepted by the Revenue for 30 years could not be treated as sanctioned by law and was not acceptable for the purpose of computation of taxable income. 5.6. In the case of M/s.Bokaro Steel Ltd. (supra), different assessment years were involved, however on the issue of treatment of interest received on the short-term deposit, the Hon'ble Supreme Court has held as under: 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. .............. In any case, this question is now concluded by a decision of this Court in Tuticorin Alkali Chemicals Fertilizers Ltd. VS. CIT (1997) 141 CTR (SC) 387 : (1997) 227 ITR 172 (SC). Hence, we are not called upon to examine that issue. 5.7. As far as the facts of the present case are concerned, it is not a case of the assessee where the deposits h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch borrowed money can be capitalized and added to the cost of the fixed assets which have been created as a result of such expenditure. The Court concluded in favor of the Revenue. The expenditure assessee has failed to establish that it was its purpose that utilized amount received on loan for earning interest. It cannot be said that the assessee has established nexus between the deposit and the loan taken. e) Addl.CIT Vs. Madras Fertilizers Ltd [1980] [122 ITR 139J(Mad.) : In' this case, the issue raised was whether the interest received was wholly and exclusively in connection of business. The borrowing itself was not for the purpose of depositing the money and earning, interest, only for the purpose of putting up the plant and purchasing the capital goods. Hence, the interest paid to the loan amount cannot have any direct connection with the deposit of the amount and with the interest earned. The case also referred to Smt. Padmavati Jaykrishna Vs. CIT (1975) 101 ITR 153 (Guj.) f) M/S Traco Cable Company Limited Vs. CIT [19691 [72 ITR 503](Ker.) : In this case, the court held that receipt of income by interest was only incidental or consequential on the deposit. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee even during the construction period on the short-term deposit kept with the bank is assessable as an income . I) CIT Vs. Universal Electro Graphite Limited [1989] [197 ITR 465], wherein it related to interest on Fixed deposits and let a payment of call money prior to setting up of business showing no nexus or relation with a capital expenditure, reduction was refused. m) International Marketing limited Vs. ITO Ors. [2007] [292 ITR 504] (Del.) held that if no business had been transacted there was no question of allowing any expenses in relation thereto. 5.9. Based on the above decisions, I consider interest income of ₹ 26, 45,20,127/- earned by the appellant is to be assessed under the head 'Income from other sources'. Having decided that, the issue of set off of business losses (interest payable on long term borrowings) against the income from other sources (interest received on short term deposit during pre-operative period), as contended by the Appellant, cannot be allowed u/s 72. Hence, the Assessing Officer is right in holding the interest income on short term deposits which is to be assessed under Income from Other Sources and not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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