TMI Blog2015 (6) TMI 1221X X X X Extracts X X X X X X X X Extracts X X X X ..... 2014 of CIT(A), Shimla. 2. In this appeal the assessee has raised the following ground:- 1. That in the facts and circumstances of the case the Ld. CIT(A) Shimla is not justified in upholding the addition of ₹ 1,28,80,767/- in respect of interest on short term deposits treating the same as income from other sources. The said addition is not sustainable in the eyes of law. 3. After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that Assessee Company was incorporated as an Undertaking of Government of Himachal Pradesh in April 2008 to strengthen transmission network of facilitation of evacuation of power from generating plants. Since the company had not started commission operation, no profit and loss account was prepared. From this, Assessing Officer observed that assessee has commenced the business operations. He further noted that Auditor in the Audit report has given following noted in para (E)(ii) Para Assessing Officer page 2/3 4. On the basis of above observations, a show cause notice was issued to the assessee that why interest income from surplus funds should not be taxed in view of the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets with the assessee as on 1.4.2007 and the entire assets except for some office equipments were received on merger from he amalgamating companies. The assessee had not made any investment in assets to set up power plant during the said year. The incidental expenditure incurred during the year were in the nature of administrative expenses, apart from some nominal expenses on survey and investigation and consultancy fee. The process of setting up of power plant had not commenced during the relevant year. The Assessing Officer further noted that the bank deposits were made not only from the share capital but also from the funds of the amalgamating companies, which in turn were transferred to the assessee on merger. The assessee during the assessment year 2008-09 in addition to the share capital had received additional funds of ₹ 12.37 crores from Delhi Jal Board which were shown under the head capital reserve in the Balance Sheet. The issue which arises before us in this regard was whether the interest earned on FDRs in such circumstances could be said to be inextricably linked to the profits and gains of the business and whether the interest income could be set off agains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect on behalf of Central Government. Since both the projects had not commenced, the funds lying with the assessee were parked in short term deposits in the bank and interest earned thereupon. The taxability of such interest in the hands of the assessee is the question raised in the present appeal. The taxability of a particular receipt or income is to be determined in accordance with the nature and character of the receipt/income. There is no merit in the plea of the assessee that since the income earned is to be utilized in a particular manner, the same partakes the character of a capital receipt. The receipt is whether capital or revenue in nature, is to be determined in line with the provisions of Income Tax Act and also keeping in mind the nature and character of the said receipt/income. Another plea raised by the assessee was that the interest earned on the bank deposits was to be considered as additional equity of the company and the said interest belongs to the State Government and not to the assessee. The assessee in support thereof placed reliance on the Minutes of 15th Meeting of the Board of Directors of the assessee held on 20.2.2009 at Shimla and referred to Item No.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame may not be utilized for the said purpose during the year of its grant and may be reallocated in the succeeding year. However, the said grant orders are silent about the utilization of those funds by the assessee during the intervening period i.e. from the date of allotment to its utilization. The assessee during both the years under appeal had admittedly not commenced its activities and the money which it had received from the H.P. State Government and from Delhi Jal Board on behalf of Government of Delhi was utilized for making short term deposits in bank on which interest was earned. 18. During the course of hearing, the learned A.R. for the assessee was asked to produce any agreement or any letter to the effect that the interest earned on such deposits is to be reverted back or partake the character of funds allocated to the assessee by way of any agreement or any sanction letter. The learned A.R. for the assessee though sought adjournment on this behalf but he was unable to file any evidence to justify its claim that the said interest earned on FDRs is not the property of the assessee but is the property of the principals who had allocated the said funds to the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances to the contractors, the assessee was paid some interest. The company was also receiving hire charge on the plant and machinery let out to the contractors and housing quarters leased to the employees. The Hon'ble Supreme Court held that the ratio of Tuticorin Alkali Chemicals and Fertilizers Ltd., supra, was not applicable to such facts. The relevant extract from the judgment of the Hon'ble Supreme Court in the case of Bokaro Steel Ltd., supra, is as under: However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income and not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilization of various assets of the company and he payments received for such utilization are directly linked with the activity of setting up of the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction. 20. The learned A.R. for the assessee has further placed reliance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure does not make the receipts as capital receipts in the hands of the assessee. 24. The Mumbai Bench of the Tribunal in Whistling Woods International Ltd. Vs. ITO (supra) had considered similar issue and also adjudicated the submissions made therein that the principles laid down by the Hon'ble Supreme Court in Tuticorin Alkali Chemicals Fertilizers Ltd. Vs. CIT (supra) had been diluted by the Hon'ble Supreme Court while deciding the case in CIT Vs. Bokaro Steel Ltd. (supra) and other cases. The relevant paras are as under: 12. We have considered the rival submissions carefully in the light of the material on record as well as decisions cited by the parties. In the case of M/s Tuticorin Alkali Chemicals Fertilisers Ltd. v/s. CIT [supra] the Hon'ble Supreme Court observed as under: The assessee was a company incorporated on 3rd Dec., 1971 for the purpose of, inter alia, manufacturing heavy chemicals such as ammonium chloride and soda ash. The trial production of the factories of the company commenced on 30th June, 1982. For the purpose of setting up of the factories, the company had taken term loans from various banks and financial instit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of ₹ 1,08,336. The assessee filed its return in which it claimed that the interest income of 1,08,336 should go to 13 reduce the pre- production expenses including the interest and finance charges which would ultimately be capitalised. The Income-tax Officer rejected the assessee s claim that the interest income was not exigible to tax. The view of the ITO was upheld by the CIT[A] . The company s further appeal to the Income Tax Appellate Tribunal was dismissed. In view of the conflict of decisions between the Madras and Andhra Pradesh High Courts., the Tribunal referred the question regarding taxability of income, directly to the Supreme Court . On the above facts, it was held as under: The company had surplus funds in its hands. In order to earn income out the surplus funds, it invested the amount for the purpose of earning interest. The interest thus earned is clearly of revenue nature and will have to be taxed accordingly. The accountants may have taken some other view but accountancy practice is not necessarily good law. This case not a case of diversion of income by overriding title. The assessee was at liberty to deal with the interest amount as it liked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d gains of business, then such income has to charged to tax under that particular head. 13. The ld. counsel of the assessee had vehemently argued that this principle was diluted by Hon'ble Supreme Court while deciding the issue in the case of Bokaro Steel Ltd. [supra], Karnal Co-operative Sugar Mill Ltd. [supra] and CIT vs. Karnataka Power Corporation [supra]. But having read these judgments very carefully, we find that the ld. DR is right that in these later three decisions were rendered because of distinguishable facts. In the case of Bokaro Steel Ltd. [supra], the issue was whether rent received from contractors against houses given for staff of contractors, machine hire charges received from machines given by the assessee company and interest received 15 from contractors on advances made by the assessee company to such contractors, was assessable to tax. The Hon'ble Supreme Court observed that these receipts basically pertain to arrangements made by the assessee with contractors pertaining to the work of construction. To smoothly execute the work, some facilities were extended by the assessee company to the contractors to facilitate the work of construction and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 518 being interest receipts and hire charges from contractors by holding that the same are in the nature of capital receipts which would go to reduce capital cost ? From the question itself it is clear that in this case the issue was regarding interest receipts and hire charges from the contracts and that is why the principle laid down in Bokaro Steel Ltd. [supra] was followed. 16. We further find that Hon'ble Supreme Court has again followed the decision of M/s Tuticorin Alkali Chemicals Fertilisers Ltd. v/s. CIT [supra] in the case of CIT vs. Coromandal Cements Ltd. [234 ITR 412]. In this case the head note reads as under: Against the judgment of the Andhra Pradesh High Court refusing to call for a reference of the question whether the Tribunal was right in holding that interest earned on short-term bank deposits during the pre-production stage could not be treated as income from other sources and should go towards the project cost, the Revenue filed an appeal to the Supreme Court. The Supreme Court, following its own judgment in of M/s Tuticorin Alkali Chemicals Fertilisers Ltd. v/s. CIT [1997] 227 ITR 172, allowed the appeal of the Revenue and set asi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Limited vs. ITO [supra], it was observed by the Hon'ble Delhi Court at placitum as under: 4. It is important to note that the Tribunal without holding that the finding of fact of the Commissioner of Income-tax (Appeals), that the interest earned was inextricably linked with the setting up of the power plant reversed the decision of the Commissioner of Income-tax (Appeals)by making a bald observation that the deposit of share capital has no or very remote connection with setting up of plant and machinery . The Tribunal further observed that it was an independent income earned in a similar fashion as was the case in Tuticorin Alkali Chemicals [1997] 227 ITR 172 (SC). From the above, it is clear that there was already a finding by the first appellate authority that interest earned was inextricably linked with the setting up of the power plant. Whereas in the case before us, there is no such finding and the funds raised through share capital which were not required for the construction of the training institute has been placed with banks and other companies as short ter ..... 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