TMI Blog2022 (11) TMI 588X X X X Extracts X X X X X X X X Extracts X X X X ..... , the findings of the ld. CIT(A) in treating interest as income from other sources is not only erroneous but against the facts of the case in hand as explained hereinabove. We direct the Assessing Officer to consider the interest as part of capital receipt to be deducted from the cost of project. Disallowance being 1/5 of preliminary expenses u/s 35D - HELD THAT:- It is true that the said claim was made during the assessment proceedings for Assessment Year 2007-08 wherein the Assessing Officer denied the claim of expenses but the CIT(A) allowed 1/5th of the expenses u/s 35D of the Act. It is equally true that once the claim has been allowed in the initial assessment year, the said claim cannot be denied in the subsequent assessment years on identical set of facts. We find that the expenditure was incurred by the assessee towards fees paid to the Registrar of Companies and the said expenditure was incurred in Assessment Year 2007-08 and since it has been considered as preliminary expenses in the said assessment year and since 1/5th of the same has been allowed u/s 35D of the Act, balance has to be allowed in the subsequent four assessment years following the ratio of SHAS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s factually incorrect. 2.6 That the learned CIT(A) has further failed to appreciate that an amount of Rs. 46,446/- was earned on account of interest on auto sweep fixed deposits which establishes and beyond doubt that the amounts were inextricably linked with the cost of project and could not have been held as not inextricably linked. 3 That the learned CIT(A) has further erred in sustaining a disallowance of Rs. 8,97,700/- being l/5th of Rs. 44,88,500/- as preliminary expenses. In sustaining the aforesaid disallowance, the learned CIT (A) has failed to appreciate that the aforesaid sum had been allowed by the learned CIT(A) himself for the preceding two assessment years and was allowable expenditure. 3.1 That the learned CIT(A) has failed to appreciate that the expenditure incurred of Rs.44,88,500/- represented expenditure incurred for registration of amendment of the Memorandum of Association and not for the purpose of issue of shares. It is therefore prayed that the addition sustained by the learned CIT(A) of Rs. 23,31,717/- be deleted and in the alternative it be held that the expenditure incurred by way of interest is to be allowed as deduction. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther explained that in order to construct hotel building it had imported various items from abroad for which different letter of credits were got executed and certain bank guarantees were also taken by the assessee for the purpose of construction activity and in order to secure the bank for issue of letter of credit and for bank guarantees, the assessee had to deposit an amount stated under the head Cash and Bank Balance as deposit account. Therefore, the interest earned on such deposit is directly linked to the business of the assessee and in fact, to the project and pre-operative expenses of the assessee. 11. Reply/explanation of the assessee did not find any favour with the Assessing Officer who was of the firm belief that the interest income is to be assessed as business income or as income from other sources and referring to the decision of the Hon'ble Supreme Court in the case of Tuticorn Alkalies 227 ITR 192 addition of Rs. 46,92,827/- was made by the Assessing Officer. 12. Addition was challenged before the ld. CIT(A). Contentions were reiterated. 13. After examining the facts and the submissions, the ld. CIT(A) was convinced that the interest earned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities 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. 's case (supra) where the assessee had earned interest on advance paid to contractors during precommencement period was found to be 'inextricably linked' to the setting up of the plant of the assessee and hence was held to be a capital receipt which was permitted to be set off against pre-operative expenses. 6.1 In our view the situation in the instant case is quite similar except here instead of paying interest on funds brought in for specific purpose interest is earned on funds brought in by way of share capital for a specific purpose. Could it be said that in the former situation interest could have been capitalized and in the later situation it cannot be capitalized. To test the principle we could extend the example, that is, would our answer be any different had assessee passed on the interest to the respective shareholders. If not, then in our view the only conclusion possible is that interest ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er dated 09.12.2011, allowed the claim of the assessee and directed the Assessing Officer to allow 1/5th of the expenses under section 35D of the Act. 25. Similar was the claim in Assessment Year 2008 09. 26. The ld. CIT(A) observed that while deciding the appeal for Assessment Year 2007 08, his predecessor did not discuss any reasoning for deciding the matter in favour of the assessee. The ld. CIT(A) was also not convinced with the claim that in rest of 4 assessment years, deduction is automatic and should have been allowed to the assessee in the normal course of assessment proceedings. Referring to the decision of the Hon'ble Delhi High Court in the case of Hindustan Insecticides Ld 116 taxman 406, the CIT(A) rejected the plea of the assessee. 27. Before us, the ld. counsel for the assessee vehemently stated that since the 1/5th of the expenses have been allowed u/s 35D of the Act, for Assessment Year 2007 08, similar claim in subsequent assessment years cannot be denied to the assessee. Strong reliance was placed on the decision of the Hon'ble Bombay High Court in the case of Paul Brothers 216 ITR 548, Sourashtra Cement and of Chemicals Industries Ltd 123 ITR 66 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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