TMI Blog2022 (11) TMI 845X X X X Extracts X X X X X X X X Extracts X X X X ..... he making of FDRs on which the interest income chargeable to tax under the head `Income from other sources was earned. As decided in UNITED WIRE ROPES LTD. [ 1978 (7) TMI 40 - BOMBAY HIGH COURT] the interest paid on loan could not be set off under s. 57(iii) against interest earned on deposits, in the absence of any evidence that the two transactions were so integrated as to be regarded a single composite transaction. In the hue of the above discussion and the binding precedent, we hold that the ld. CIT(A) was not justified in allowing deduction of proportionate interest on borrowing u/s 57(iii) against the interest income earned on FDRs, which was offered by the assessee as chargeable to tax u/s 56 of the Act. The impugned order is overturned on this score. Cross objection that the interest income earned on FDRs is a capital receipt not chargeable to tax which would reduce the highway development costs including the interest expenditure etc. - distinction between the cases in which the transaction resulting into income is connected with the other activity for which capital was borrowed on which interest is paid - HELD THAT:- We are not convinced with the alternate subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the DCF method and determined the valuation of share at Rs.2,412/-. As against that the shares were issued only at premium of Rs.1,990/-. Since the AO has not found out any flaw in the calculation done by the IDFC Capital Limited under DCF method, the same has to be accepted. We, therefore, affirm the view taken by the ld. CIT(A) on this score. - ITA Nos. 489 and 249/PUN/2018 And C.O. Nos. 48 & 49/PUN/2022 (Arising out of ITA Nos.489 & 249/PUN/2018 - - - Dated:- 16-11-2022 - Shri R.S. Syal, Vice President And Shri Partha Sarathi Chaudhury, Judicial Member For the Assessee : Shri Rahul Hakani And Shri Shashi Bekal For the Revenue : Shri Sardar Singh Meena and Shri M.G. Jasnani ORDER PER R.S. SYAL, VP : These two appeals by the Revenue and equal number of Cross Objections by the assessee pertain to the assessment years 2013-14 2014-15. Since common issues and overlapping grounds are raised in these appeals and Cross Objections, we are, therefore, proceeding to dispose them off by this consolidated order for the sake of convenience. 2. There is a delay of 322 days in filing the cross objections by the assessee. An affidavit has been filed attribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned the assessment order by holding that such interest was deductible u/s.57(iii) because the assessee had utilized borrowed funds for investment in fixed deposits. Aggrieved thereby, the Revenue has come up in appeal before the Tribunal. 5. Having heard the rival submissions and gone through the relevant material on record, it is pertinent to note that the assessee did not commence the business during the year under consideration and also the next year as well. The assessee made certain borrowings from bank for the purpose of developing and improving Sion Panvel State Highway under BOT scheme. Since the amount borrowed was not immediately required for the improvement work, the assessee s parked a larger chunk of such borrowing in the fixed deposits and earned interest thereon. The moot point for determination from the Revenue s perspective is whether the interest paid on borrowings can be allowed as deduction against the interest income earned. This pre-supposes, firstly, the taxability of interest on FDRs as income under the head Income from other sources u/s 56 as was also suo motu offered by the assessee and then the granting of deduction for interest expenditure u/s 57( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n deduction u/s 57(iii) fails. We are confronted with a situation in which the borrowing was made for developing highway. The FDRs were purchased for utilization of idle funds. Such FDRs were not required to be made as a condition precedent for having letter of credit or furnishing of guarantee for doing any activity connected with the highway development. In such circumstances, it becomes glaring that the proportionate interest expenditure on borrowing for highway development has no relation with the making of FDRs on which the interest income chargeable to tax under the head `Income from other sources was earned. 7. The Hon ble jurisdictional High Court in CIT Vs. United Wire Ropes Ltd. (1980) 121 ITR 762 (Bom.) considered almost similar facts in a case in which the assessee received interest on the amounts kept in short term deposits with various banks which was assessed as Income from other sources . The assessee paid interest in respect of loan which it had obtained. Deduction of interest paid on loan exceeded the interest received and hence, nothing was offered for taxation. The AO did not accept the assessee s contention. When the matter finally came before the Hon bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evised return was filed claiming that interest expenditure was required to be capitalized and hence the interest income was not exigible to tax as it would reduce prior period expenses. The AO as well as the Tribunal rejected the assessee s contention. When the matter finally came before the Hon ble Supreme Court, their Lordships held that: The company may also, as in this case, keep the surplus fund in short-term deposits in order to earn interest. Such interest will be chargeable u/s.56 . To similar effect is the judgment of the Hon ble Apex Court in CIT Vs. Autokast Ltd. (2001) 248 ITR 110 (SC) laying down that Interest earned on short-term deposit of amount borrowed for setting up business is assessable to tax in the hands of assessee as income from other sources. 10. Reliance of the ld. AR on CIT Vs. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) is misplaced. In that case, the assessee, prior to commencement of business and during the construction and erection phase, charged rent from its contractors for housing of their workers engaged in construction of assessee s factory and also earned interest on advances made to contractors. This amount was claimed as capital receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income is connected with the other activity for which capital was borrowed on which interest is paid. If the connection is established between the two, then such income qualifies for set off. Like the case of Bokaro (supra), in which rent and interest received from contractors was connected with the construction activity and in the case of Shree Rama Multi Tech (supra), in which FDRs were statutorily required to be made for issuing share capital. It is in such circumstances that the income cannot be taxed as such but reduces the cost incurred. If no connection is established between the income and expenditure, then such income is required to be taxed separately. Like the case of Tuticorin (supra) and Autokast (supra), in which interest was earned from the deposit of idle funds and the making of FDRs had no relation with the purpose for which the loan was taken. Such a distinction can be more appropriately appreciated with the judgment of the Hon ble Supreme Court in Bongaigaon Refinery Petrochemicals Ltd. Vs. CIT (2001) 251 ITR 329 (SC) , in which the assessee derived income towards charges for equipment and recoveries from the contractors on account of water and electri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Both the sides are consensus ad idem that the facts and circumstances of this issue are similar to those of the immediately preceding year. The ld. DR, referring to the relevant portions of the assessment order, submitted that the assessee categorically admitted before the AO that the borrowings made for the purpose of improvement of the highway were utilized for the purpose of making the FDRs. This fact is otherwise also apparent from the facts noted for the preceding year. Following the view taken hereinabove, we overturn the impugned order on this score and hold that the interest income earned on FDRs is chargeable to tax as `Income from other sources without any deduction of interest expenditure. Further, such interest income will not be set off against the interest expenditure on borrowings or other pre-operative expenses. However, such interest expenditure would increase the amount of capital work-in-progress. The respective grounds raised by the Revenue in its appeal are allowed and by the assessee in its cross objection are dismissed. 16. The only other issue which survives in the appeal of the Revenue is against the deletion of addition of Rs.3,74,11,321/- made by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as determined the FMV on the basis of Discounted Cash Flow method, which is one of the accepted methods of valuation of shares. Considering the fact that the project of improving highways itself was at incomplete phase, it is this method which can be more appropriately applied vis- -vis the NAV method. The assessee submitted a report prepared by IDFC Capital Ltd. valuing the shares under the Discounted Cash Flow method at Rs.2,412/- per share. The AO in the instant case did not find out anything amiss in the report, but simply went ahead by considering the FMV at Rs.1,990/- under Rule 11UA. 19. At this stage, a useful reference can be made to the judgment of the Hon ble jurisdictional High Court in Vodafone M-Pesa Limited Vs. PCIT (2018) 256 Taxman 240 (Bom.) . In that case, the AO raised the demand by changing method of valuation of shares issued at premium from the Discounted Cash Flow to Net Asset Value (NAV) method. The Hon ble High Court, ruling in favour of the assessee, held that the AO is undoubtedly entitled to scrutinize the valuation report and determine a fresh valuation either by himself or by calling for a final determination from an independent valuer to confron ..... X X X X Extracts X X X X X X X X Extracts X X X X
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