TMI Blog2019 (11) TMI 1653X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of setting up of a plant or acquisition of capital asset then the funds have to be inextricably linked with the activities of the plant and if such funds have been put in FDRs, then interest received will be a capital receipt and cannot be taxed as income from other sources. Thus we hold that once the ECB loan which is to be utilized for capital expenditure only, then, any interest earned on funds temporarily parked in FDRs is inextricably linked with the setting up of hotel of the assessee, which is to be held as capital receipts only and is permitted to be set off against the capital expenditure. The decision of CIT (A) is in line with the judicial precedence and therefore, the impugned order of the ld. CIT (A) is upheld. Consequently, the appeal of the Revenue is dismissed. - ITA No. 6597/Del/2016 - - - Dated:- 29-11-2019 - SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI A.N. MISHRA, ACCOUNTANT MEMBER For the Appellant : Sh. Saras Kumar, Sr. DR For the Respondent : Sh. Vinod Kumar Bindal Ms. Rinki, Advocates ORDER Per Amit Shukla, J.M.: The aforesaid appeal has been filed by the Revenue against the impugned order dated 23.09.2016 passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly for the purpose of acquisition of fixed assets/capital expenditure which was temporarily parked in FDRs till the time it was used for fixed assets and capital expenditure strictly in compliance to the RBI Instructions. The assessee had earned interest income of ₹ 4.03 crores on the said FDRs, which was netted of against the interest paid of ₹ 13.38 crores and only the net amount of interest of ₹ 9.35 crores was added to the preoperative expenses pending capitalization, which fact was also disclosed in Note-9 attached to the balance sheet. In this year, out of amount of ₹ 82.37 crores received as ECB loan, only an amount of ₹ 33.70 crores could be spent on renovation and refurbishment of hotel and was considered as Capital WIP till the year end. 4. The ld. Assessing Officer observed that the assessee company has not carried out any business activities during the year and after considering the entire facts and submissions of the assessee, he held that there is no difference whether there is direct nexus or proximity of relationship between the bank loan and the FDRs; and whether the assessee company was forced to keep the loan funds in FDR as per R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch was raised before the Division Bench was whether the Tribunal misdirected itself in law in holding that interest which accrued on funds deployed with the bank could be taxed as income from other sources and not as capital receipt liable to be set of against pre-operative expenses. The Division Bench considered the decisions of the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd and held that if 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 plant, such income is required to be capitalized to be set off against pre-operative expenses. It is evident that the test that is required to be employed is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the same. In the present case, findings of fact have been returned by the CIT(A) and have been confirmed by the IT AT to the effect that the funds were inextricably connected with the setting up of the power plant of the assessee. The counsel for the revenue has also not been able to point out any perversity in such find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he judgment of Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd.(supra) to tax the interest earned on FDRs as income from other sources on the facts of the present case. This precise issue had came up in the case of Indian Oil Panipat Power Consortium Ltd. (supra), wherein explaining the principle laid down in the decision of Tuticorin Alkali Chemicals and Fertilizers Ltd., Bokaro Steel Ltd. and Challapalli Sugars Ltd. (supra), the Hon ble Jurisdictional Court held that the test which permeates through the judgment in Tuticorin Alkali Chemicals (supra) is that, if funds have been borrowed for setting up of a plant and if the funds are surplus and then by virtue of that circumstance they are invested in fixed deposits, the income earned in the form of interest will be taxable under the head income from other sources . On the other hand, the ratio of Supreme Court judgment in Bokaro Steel Ltd. (supra) is that if income is earned whether by way of interest or in any other manner or the funds, which are otherwise inextricably linked with setting up of a plant, such income is required to be capitalized to be set off against preoperative expenses. Afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oration Pvt. Ltd. vs CIT, Calcutta; (1972) 83 ITR 700 (SC) and CIT vs Govinda Choudhury Sons.; (1993) 203 ITR 881 (SC). 5.2 It is clear upon a perusal of the facts as found by the authorities below that the funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre-operative expenses. In the case of Tuticorin Alkali Chemicals (supra) it was found by the authorities that the funds available with the assessee in that case were surplus and, therefore, the Supreme Court held that the interest earned on surplus funds would have to be treated as income from other sources . On the other hand in Bokaro Steel Ltd (supra) where the assessee had earned interest on advance paid to contractors during pre-commencement period was found to be inextricably linked to the setting up of the plant of the assessee and he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it idle, the income thus generated, will be of a revenue nature and not accretion of capital. 13. In the present case, there is a finding of fact that the money placed in the fixed deposit was inextricably linked with the setting up of the power plant. Thus, the revenue generated on account of interest on the said fixed deposits would be in the nature of a capital receipt and not a revenue receipt. This case has been decided on the basis of this principle and not on the basis that the source of the funds was through raising of share capital and not through borrowings. 8. The sequitor of the judgment of Hon ble Supreme Court and Hon ble jurisdictional High Court is that if the funds have been raised for the purpose of setting up of a plant or acquisition of capital asset then the funds have to be inextricably linked with the activities of the plant and if such funds have been put in FDRs, then interest received will be a capital receipt and cannot be taxed as income from other sources. Respectfully following the aforesaid principle, which is applicable on the facts of the present case also, we hold that once the ECB loan which is to be utilized for capital expenditure only, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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