TMI Blog2014 (12) TMI 1378X X X X Extracts X X X X X X X X Extracts X X X X ..... ny which have not been adversely commented upon by the authorities below. Therefore, the reliance of the Assessing Officer on the decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs. CIT [ 1997 (7) TMI 4 - SUPREME COURT ] was totally misplaced. It is clear that the funds with the assessee, even if temporarily used for savings/short term deposits, but the earning of the interest were directly connected with work of construction of the project employed by the assessee - earning of interest could not be treated as income from other sources, since the income was earned in the period prior to commencement of the business and it was the nature of capital receipt and was required to be set off against pre-operative expenses. We, therefore, set aside the orders of authorities below and delete the addition. Appeal of the assessee is allowed. - ITA No. 857/CHD/2012 - - - Dated:- 31-12-2014 - Shri Bhavnesh Saini, Judicial Member And Shri T.R. Sood, Accountant Member For the Appellant Shri Vishal Mohan. For the Respondent Shri S.K. Mittal. ORDER Per Bhavnesh Saini, JM This appeal by assessee is directed against the order of ld. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst the interest payable on PFC loan so as to reduce the cost of the project. 4. It was contended that all the expenses including interest on loan incurred during construction stage are eligible for capitalization i. e. to be a part of the asset created and are eligible for depreciation. This would mean that in the converse case, where interest is earned, it should be an abatement of capital cost so as to reduce the capital base for depreciation purpose. 5. The appellant placed reliance on the case of Indian Oil Panipat Power Consortium Ltd., Vs ITO (2009) 315 ITR 255 (Delhi) and the Apex Court judgment in the case of Bokaro Steel Ltd. It was argued that the above view was also confirmed in the case of CIT Vs Jaypee DSC Ventures by Delhi High Court in its decision dated 11/03/2011. 6. It was argued that during the execution of hydroelectric projects, for meeting out the construction cost, there is always a time lag between the receipt of funds and its utilization in the construction of the project giving rise to temporary surplus funds, and to ensure the effective fund management, these temporary surplus funds are kept in short term bank deposits. Here also, the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 3.80 Crores. Against the total interest amounting to ₹ 1,19,32,956/-, assessed as income from other sources, assessee had earned ₹ 76,82,346/- from SBI and ₹ 41,42,448/- from PNB. Regarding the deposit with PNB, it was argued that these funds were also kept in short term deposits for meeting contractor liability, 8. It was further mentioned that work at UHL project site remained suspended for almost 6 months due to rescinding of HRT and intake works which resulted in availability of short term funds, and for ensuring effective management of funds the same were kept in short term deposits. 9. The appellant also submitted the copies of the supporting documents in the form of terms procedure of payments executed between the H.P.S.E.B. and BHEL, the correspondence of M/s BHEL on the issue of fund requirement and payment against dispatches, the correspondence of State Bank of India, Joginder Nagar regarding the issue of the letter of credit in favour of M/s BHEL and the certificate of the SBI, Joginder Nagar regarding the interest accrued on the captioned FDRs. 10. The ld. CIT(Appeals), considering the explanation of the assessee, deleted part additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gly it is held that the interest of ₹ 36,26,063/- earned by the appellant Corporation is incidental to the acquisition of asset for the setting up of the plant and machinery. The addition of interest income to the extent of ₹ 36,26,063/- is, therefore, directed to be deleted. 4.1 The appellant has argued that the interest income is not assessable to tax u/s 56 of the Act as income from other sources because the funds available were inextricably linked to the setting up of the power project and, therefore, the decision of the Hon'ble Delhi High Court in the case of Indian Oil Panipat Consortium Ltd. (supra) was squarely applicable to its case. However, the said argument of the appellant is not found to be convincing. A close reading of the judgment of the Hon'ble Delhi High Court supra makes it clear that the Hon'ble Court has heavily relied upon the case of CIT Vs. Bokaro Steel Ltd. 236 ITR 315JSC). With due respect to the Hon'ble Court, it is observed that the facts of the case of Bokaro Steel Ltd. have not been appreciated in the right perspective. In the case of Bokaro Steel Ltd., the process of constructing and erecting the plant had long been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be said that the interest earned to this extent was on account of surplus funds lying idle, which were deposited in the bank for the purpose of earning interest. The facts of the appellant's case in this regard squarely match with the facts of the case of Karnal Co-op. Sugar Mills Ltd. supra and, therefore, the decision of the Hon'ble Supreme Court rendered in the said case is fully applicable to the case of the appellant Corporation. Accordingly it is held that the interest of ₹ 36,26,063/- earned by the appellant Corporation is incidental to the acquisition of asset for the setting up of the plant and machinery. The addition of interest income to the extent of ₹ 36,26,063/- is, therefore, directed to be deleted. 4.1 The appellant has argued that the interest income is not assessable to tax u/s 56 of the Act as income from other sources because the funds available were inextricably linked to the setting up of the power project and, therefore, the decision of the Hon'ble Delhi High Court in the case of Indian Oil Panipat Consortium Ltd. (supra) was squarely applicable to its case. However, the said argument of the appellant is not found to be convin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciation of facts. 4.2 The appellant's reliance on the case of CIT V. Jaypee DSC Ventures supra is also misplaced. In this case the interest was earned by the company on a fixed deposit given in the form of a bank guarantee which was furnished as a condition precedent to entering into the contract. The investment was not made by the assessee company of its own volition, but the same was made under compulsion and was, therefore, inextricably linked with its project of construction. Accordingly the Hon'ble Court had held that the interest earned on such a fixed deposit had to go to reduce the pre-production expenses and was not assessable as income from other sources. 4.3 The facts of the appellant's case need to be examined in the light of the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. supra, as has rightly been done by the Ld. Assessing Officer. It is an established principle that income tax is attracted at the point when the income is earned. The total income of the appellant company is chargeable to tax u/s 4 of the I. T.Act. Since the appellant company had not commenced any business, there was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 though the interest amount is earned by utilising 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. It was rightly pointed out in the case of Kedar Narain Singh V. CIT [1938] 6 ITR 157 (All) that anything which can properly be described as income is taxable under the Act unless expressly exempted . The interest earned by the assessee is clearly its income and unless it can be shown that any provision like section 10 has exempted it from tax, it will be taxable. The fact that source of income was borrowed money does not detract 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 provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee received lesser interest as against more interest paid to the financial institution. Therefore, there was no intention on the part of the assessee to earn any interest on short term deposits. 12. On the other hand, ld. DR relied upon orders of the authorities below. 12(i) On consideration of the above facts and material on record, we do not find any justification to sustain the findings of the authorities below. It is not in dispute that assessee corporation is a government company promoted by H.P. State Electricity Board Ltd. The assessee has admittedly not started commercial operation in the year under consideration and was still in the pre-operative stage. The assessee claimed that it has no surplus funds but the finding of the authorities below was that assessee earned interest on surplus funds. The accounts of the assessee placed on record clearly support the submission of the assessee that there were no surplus funds available with the assessee. The assessee also claimed that its funds were temporarily employed for short term deposits for efficiently and effectively use of its funds so as to reduce the total cost of the project. The ld. CIT(Appeals) also par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... truction of its steel plant. The receipts had been adjusted against the charges payable to the contractors and had gone to reduce the cost of construction. They had, therefore, been rightly held as capital receipts and not income of the assessee any independent source. 12(ii) The Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. V ITO 315 ITR 255 (Delhi) held as under : The assessee-company was incorporated in pursuance of a joint venture entered into between Indian Oil Corporation and M of Japan to set up a power project. In order to effectuate the purpose for which the joint venture was conceived, share capital was contributed by these two corporations which included ₹ 20 crores by way of additional share capital. The Assessing Officer treated the interest earned on monies received as share capital by the assessee temporarily placed in a fixed deposit awaiting acquisition of land which had run into legal entanglements on account of title as Income from other sources . The Commissioner (Appeals) accepted the stand of the asses- see that the interest was in the nature of a capital receipt which was liable to be set off against pre- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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