TMI Blog2023 (2) TMI 1055X X X X Extracts X X X X X X X X Extracts X X X X ..... itted investments. By respectfully following the terms of agreement assessee has made the investment through permitted investments and earned the interest income. The relevant data are submitted by the assessee as part of the Paper Book. It clearly shows that the operation of funds are relating to the same project as well as the interest earned through permitted investments are also part of the same project. As held in the above said case the interest earned by the assessee through Due Account and permitted investment are part of the same project and accordingly, we direct the AO to allow the interest earned by the assessee as capital income and should be reduced from the capital work-in-progress of the project. Accordingly, Ground raised by the assessee are allowed. - ITA NO. 1507/MUM/2019 - - - Dated:- 2-1-2023 - SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER AND SHRI SANDEEP SINGH KARHAIL, HON'BLE JUDICIAL MEMBER For the Assessee : Shri Manish Chulawala For the Department : Smiti Samant ORDER PER S. RIFAUR RAHMAN (AM) 1. This appeal is filed by the assessee against order of Learned Commissioner of Income Tax (Appeals) 8, Mumbai [hereinafter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1,92,11,960) 5. Assessing Officer observed from the computation of income that assessee after adding back depreciation as per books and interest on delayed TDS and claiming depreciation as per the Act. The assessee company declared loss for the year at ₹.1,91,63,769/-. He observed that assessee has not earned any income from its normal business activity and the entire income credited of ₹.9,28,09,550 in the statement of profit and loss is on account of interest only. He observed that the expenditure claimed by the assessee to the extent of ₹.11,20,21,510 as business expenditure. Based on the above observation Assessing Officer issued notice u/s.142(1) of the Act dated 10.11.2016 directing the assessee to submit the following information: - 1) It is seen from the audited financial statements that you have taken loans amounting to ₹.2147.49 crores for the project. Out of total interest on this loan, an amount of ₹.210,06,03,172 has been debited in Profit Loss Account. 2) Depreciation of ₹.28,19,490 has been charged to Profit Loss Account. 3) Other expenses of ₹.105,98,848 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer was requested to treat interest paid and charged to Profit and Loss Account as deduction from interest earned and charged under head income from Other Sources. 7. After considering the submissions of the assessee, Assessing Officer rejected the same and observed that entire income credited in the Profit and Loss Account is nothing but other income and the same has no direct relation to the main business activity of the assessee company. Further, he observed that it is undisputed fact that the assessee company has not derived any income from its business operations and as per its own admission it had considered majority of expenditure as Work-in-Progress and claimed part of expenditure totaling to ₹.11,20,21,510 as revenue expenditure. The assessee nowhere in the explanation justified its action, but has emphasized that the expenditure needs to be allowed against the interest income in the event interest income is treated as 'Income from Other Sources'. Here, the assessee appears to have ignored the basic fact that the entire expenditure debited in Profit and Loss Account i.e., finance and other expenditure is not wholly and exclusively incurred for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hemicals Fertilizers Ltd. vs. Commissioner of Income Tax (1997) 141 CTR SC 387. Here we wish to point out that the aforesaid judicial precedent is for the assessment year 1982-83. There are certain changes in the Act itself after the said assessment year which one needs to consider before coming to any conclusion to decide on the case. We are providing our point wise submission distinguishing the Tuticorin Alkali Chemicals Fertilizers Ltd. vs. Commissioner of Income Tax (1997) 141 CTR SC 387 in a point wise manner. 1. Therefore said judicial precedent ( Tuticorin Alkalies ) clearly states that the case was for assessment year 1982-83. In that case, Income Tax Act, 1961 as amended till 1982 has been considered. There are important amendments such as amendment to section 145 with respect to notified Accounting standards and amendment with respect to 56(2)(id) with respect to charging of interest on securities to Income from other sources other than actually charged to Profit and loss Accounts. We need to consider Income Tax Act, 1961 ( the Act ) as it stands on 1st April, 2013. 2. Section 56(2)(id) of the Act states as follows: Income by way of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in below: Administration and other general overhead expenses are usually excluded from the cost of fixed assets because they do not relate to a specific fixed asset. However, in some circumstances, such expenses as are specifically attributable to construction of a project or to the acquisition of a fixed asset or bringing it to its working condition, may be included as part of the cost of the construction project or as a part of the cost of the fixed asset , You honour will appreciate that major cost has been capitalized. Only cost which specifically relates to Administration and other general overhead expenses are rightly debited to profit and loss Account. Part of Advisory expenses are used for Administrative activities and hence, the same has been debited to profit and loss account. Your honour is requested to consider that the effects are correctly given in the books of accounts and in computation of total income and is based on Income Tax Act, as amended after the judicial pronouncement of Tuticorin Alkalies . Further, Para 10 of the Borrowing Cost Accounting Standard 16: To the extent that funds are borrowed specifically for the purpose of obtaining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of expansion was adjusted to the incidental expenses during construction. The interest was adjusted on account of the matching principle since the interest earned on deposits kept in relation to the expansion were credited to/reduced from the incidental expenses during construction (IEDC). The Assessing Officer treated this interest as income from other sources relying upon the judgment of the Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra). The matter was travel led to the Hon'ble High Court and the Hon'ble High Court has examined the issue in the light of various judgments of the Hon'ble Apex Court in the case of Bokaro Steel Ltd. (supra); Kamal Co-operating Sugar Mills Ltd.'s case (supra); Tuticorin Alkali Chemicals Fertilizers Ltd.'s case (supra) and Bongaigaon Refinery Petrochemicals Ltd's case (supra) and various judgments of the different High Courts and has held that provisions of section 36(1)(iii) of the Act enacts that any amount of the interest paid towards (in respect of) capital borrowed for acquisition bran asset or for extension of existing business regardless of its capitalization i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corporated in pursuance of a joint venture entered into between Indian Oil Corporation and Marubeni Corporation of Japan to setup a power project and in order to effectuate the purpose, a joint venture was conceived. The joint venture partners contributed share capital which includes the sum by way of additional share capital. The said funds were required for purchase of land and development of infrastructure, but due to legal entanglements with respect to title of land, they were temporarily put axed in Bank and interest was earned thereon. It claimed that said interest was capital receipt and therefore it should be set-off against pre-operative expenses, but the Assessing Officer has treated the same as income from other Source. On appeal, the Id. CIT(A) categorically held that the funds were placed in fixed deposit so that liquidity was ensured and money would remain available when required for purchase of land and infrastructure development and hence the interest earned was inextricably linked' with the setting up of the power plant. He, therefore, the judgment of the Hon'ble Apex Court in the case of Bokaro Steel Ltd. (supra) directed the Assessing Officer to dele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me derived by parking the funds Temporarily with Tokyo Mitsubishi Bank, will result in the character of the funds being changed, inasmuch as, the interest earned from the bank would have a due different than that of business and be brought to tax under the head 'income from other sources'. It is well-settled that an income received by the assessee can be taxed under the head income from other sources only if it does not fall under any other head of income as provided in section 14 of the Act. The head income from other sources is a residuary head of income. In the instant case, it was 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 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. 7. Further to this, we would like to mention the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of Rs. 9,28,09,550/- made by the assessing officer on account of income from other source ignoring the fact that the assessee agrees to capitalize the interest income received from the FDR's thereby reducing the cost of fixed assets. 5. Without prejudice to ground no. 3, the learned Commissioner of Income Tax, (Appeals) erred in not allowing corresponding expenditure u/s 57 (iii) while treating the income under the head Income from Other Sources . 6. That the explanations given, evidence produced and material available on record has not been properly considered and judicially interpreted. 13. At the time of hearing, Ld. AR brought to our notice Page No. 27 of the Ld.CIT(A) order and submitted that Ld.CIT(A) has relied in the case of Tuticorin Alkali Chemicals Fertilizers Ltd (supra) and observed that the assessee company had surplus funds and in order to earn interest income, it parked the surplus funds in the Fixed Deposit. The Hon'ble Apex Court decided the issue in favour of the department and moot question in deciding whether the interest income should be treated as income from other sources or not, depends upon the fact as to whether the funds which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m Other Sources but as Income from Business as the interest income earned on Fixed Deposits is from funds which are inextricably linked with project funds. It can be seen from para 9 of the above paper book that the main argument of the appellant before Hon'ble ITAT is that (a) the assessee was constrained to keep the funds in fixed deposits; and (b) the appellant is not at liberty to use the interest so earned as per its will and discretion unlike the case in Tuticorin Alkali Chemicals and Fertilizers relied upon by the A.O. and CIT(A). 4.1 Technical issue: The appellant has enclosed copy of the loan agreement at Annexure-F filed in the above paper book to support its above claim. During the course of hearing, the undersigned had raised this issue that the above plea of the appellant and the document in the paper book being relied upon does not seem to have been brought/filed before the A.O. as the assessment order does not deal with the same (please refer the assessment order dealing with the above addition) and the appellant has not certified in the paper book filed before ITAT that the documents in the same have been filed before the lower authorities, as per Rule 18 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rin Alkali Chemicals and Fertilizers relied upon by the A.O. and CIT(A). 5.2 Therefore, the moot point involved is whether the interest income from Fixed Deposits can be considered as income from other sources or as income from business because the FDs are made from funds inextricably linked to the project funds. Merely because the funds have been borrowed for the purpose of the project does not mean that the funds are inextricably linked to the project and therefore the interest resulting from the deposits in fixed deposit should be treated as Income from Business and not from Income from Other Sources. The appellant has also stated that as per the loan agreement at Annexure F of paper book it was clear that the money disbursed by the banker could be used only for the purposes specified therein which was monitored by the bankers/lenders. All the disbursements are deposited in the Escrow Account which is subject to strict control and verification by the lenders and all disbursements are to be utilized solely for the purpose of implementation of the project and no other purpose. The funds are thus in inextricably linked to the setting up of the mega road project and interest e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the receipt of interest amounts to income of the assessee from other sources. The assessee has not filed any appeal from this finding which is given against it. In any case, this question is now concluded by a decision of this court in Tuticorin Alkali and Fertilizers Ltd. vs. CIT (1997) 227 ITR 172. Hence we are not called upon to examine that issue . 5.4 In light of the above decision, in this case wherein also the funds were borrowed for the construction work, the plea of the appellant that merely because the funds from the FDs are made are borrowed for project the interest income from the same should be held as income from business as the same are inextricably linked to the project funds should not be accepted. Moreover, the above decision is pronounced in 1999. 5.5 The appellant has also stated in its written submission before ITAT that A distinguishing feature in the instant case is that the assessee is not at liberty to use the interest so earned as per its will and discretion unlike the case in Tuticorin Alkali Chemicals and Fertilizers and the interest has to be used solely for the purpose of implementation of the specified project only . However, it may k ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deposit by relying on the decision of the Tuticorin Alkali Chemicals Fertilizers Ltd (supra). After careful consideration we noticed that Assessing Officer no doubt disallowed the expenditure claimed by the assessee as part of the capital work-in-progress, however, he rejected the claim of the assessee that the income earned by the assessee is part of the above project and also he has not considered the fact that it is not a pre-operative expenditure rather it is a pre-commencement of the project. There is a considerable difference between these two. Further, we observe that the Coordinate Bench has considered the similar issue in the case of Hazaribagh Expressway Ltd., v. ITO (supra) and relevant findings are as under: - 8. We have heard both the parties, perused the materials available on record and gone though orders of the authorities below. We find that the issue involved in the present appeal regarding taxability of interest earned from time deposits, whether it is taxable under the head income from other sources or it can be reduced from capital work-in-progress, when the funds are inextricably linked with project funds is no longer a res-integra. The co-ordinate benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in question. The law relied by the Ld. Representative of the assessee has decided this controversy by holding this fact that the interest income is in connection with the business exigency, therefore, the same is liable to be treated as business income. In the case decided by Hon ble ITAT D Bench in ITA. No. 663/M/2015 The Hon ble ITAT has treated the said income as income from business. The relevant para no. 5 is reproduced as under.: - 5. Having heard rival submissions, we are of the view that there is merit in the later submissions made by Ld A.R. From the financial statements, we notice that the assessee has borrowed loans for executing the project and the amount of loan outstanding as on 31.3.2010 stand at Rs.824.73 crores. The loan taken from banks alone stands at Rs.503.29 crores. It is an admitted fact that the term loans have to be repaid in fixed installments and hence there is merit in the contentions of the assessee that it was constrained to keep the funds in fixed deposits to earn interest, which will meet a portion of interest burden of bank loans. Further, we find merit in the contentions of the assessee that it had to keep some surplus funds in hand in or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can affect taxability of the income earned by the company the total income of the company is chargeable to tax under section 4. The Total income has to be computed in accordance with the provisions of the Act. Section 14 lays down that for the purpose of computation, income of an assessee has to be classified under six heads. In the instant case, the company had chosen not to keep its surplus capital idle, but had decided to invest it fruitfully. The fruits of such investment will clearly be of the revenue nature. If the capital of a company is fruitfully utilised instead of keeping it idle, the income thus generated will be of the revenue nature and not accretion of capital Whether the company raised the capital by issue of shares or debentures or by borrowing will not make any difference to this principle. If borrowed capital is used for the purpose 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 interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lizers Ltd. (supra), held as under: The activities of the assessee in connection with first three receipts were directly connected with or were incidental to the work of construction of its plant undertaken by the assessee. Broadly speaking, these pertained to the arrangements made by the assessee with its contractors pertaining to the work of construction. To facilitate the work of the contractor, the assessee permitted the contractor to use the premises of the assessee for housing its staff and workers engaged in the construction activity of the assessee's plant. This was clearly to facilitate the work of construction. Had this facility not been provided by the assessee, the contractors would have had to make their own arrangements and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee had provided these facilities. The same was true of the hire charges for plant and machinery which was given by the assessee to the contractor for the assessee's construction work. The receipts in this connection also went to compensate the assessee for the wear and tear on the machinery. The advances which the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 the Supreme Court judgment in Bokaro Steel Ltd.'s case (supra) to our mind is 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. 5.1 The test, therefore, to our mind 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 plant. The clue is perhaps available in section 3 of the Act which states that for newly set-up business the previous year shall be the period beginning with the date of setting up of the business. Therefore, as per the provision of section 4 of the Act which is the charging section income which arises to an assessee from the date of setting of the business but prior to commencement is chargea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra) 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.'s case (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 hence was held to be a capital receipt which was permitted to be set off against preoperative expenses. 6. There is another perspective from which the present issue can be examined. Under section 208 of the Companies Act, 1956 a company can pay interest on share capital which is issued for a specific purpose to defray expenses for construction of any work and which cannot be made profitable for a long period subject to certain restrictions contained in subsections (2) to (7) of section 208. This section was specifically noted by the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. 6.1 In our view the situation in the instant case is quite simil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve a commonality about their nature and character. The appellant cannot treat them differently. Commitment Advances and interest paid and received had reference to bidding process and linked to the project/purpose for which the respondent was set up. In view of the factual matrix, interest received on unutilized commitment advances cannot be taxed as revenue income and interest paid on commitment advance treated as a capital expense. This will be contradictory. The entire expenditure for inviting bids etc. and even documentation was paid to PFC. The amounts received from the prospective bidders on account of sale of tender documents was also transferred to PFC. As noticed above, Revenue has not challenged and has accepted the order of the tribunal deleting addition of Rs. 1,35,81,234/paid by the respondent-assessee to PFC for preparation of tender documents. In view of the factual matrix, the tribunal has rightly followed the ratio in Indian Oil Panipat power Consortium Ltd.'s case (supra). 2.15 In a recent decision, the Delhi High Court in case of Pr. Commissioner of Income-tax v. Facor Power Ltd. [2016] 66 taxmann.com 178 (Delhi) following the decision in case of Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). After considering these two decisions of the Hon'ble Apex Court and also some other decisions of the Hon'ble Apex Court, their Lordships of the Delhi High Court arrived at the conclusion 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 the 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 the pre-operative expenses. That, the ratio of the above finding of the Hon'ble Delhi High Court would be squarely applicable to the facts of the assessee's case, because admittedly in the case under appeal before us the share capital as well as loans were raised for the specific purpose of setting up of the power generation plants. The business of the assessee has not been commenced and therefore, as per above decision, the interest received in the period prior to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set of judgment, by following the other line of reasoning. From the above, it is evident that there are two sets of judgments of Hon'ble Supreme Court, proceeding on different lines of reasoning s. The Hon ble Delhi High Court in case of Indian Oil Panipat Consortium Ltd (supra) has considered and interpreted the decisions of Hon ble Supreme Court in case of Tuticorin Alkali Chemicals Fertilizers (supra) as well as Bokaro Steel ltd (supra). After analyzing both the decisions of Hon ble Supreme Court, it held that the test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals Fertilizers Ltd.'s case (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 the Supreme Court judgment in Bokaro Steel Ltd.'s case (supra) to our mind is that if income is earned, whether by way of interest or in any other manner on funds which are otherwise 'inextricably linked&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been incorporated for setting up of infrastructure facilities being construction of toll road between Hazaribag and Ranchi which is under construction. The assessee earned the interest income upon the borrowed funds of Rs.46,03,457/- which was deducted from the borrowing cost to arrive at the figure of capital work-in-progress of Rs.1,86,25,83,284/-. The promoters of the company had introduced money by way of share capital and also obtained credit facilities from the banks and institutions. The total funds were exclusively meant for use for setting up of the infrastructure facility. The lenders disbursed the funds at specified intervals and the said funds were required to be used for the purpose of setting up of the project. Needless to say that the on account of the time difference, the funds may lies with the bank resultantly earning the interest income in dispute. These funds were deposit in the bank for a short period for the purpose of utilizing the same in the project. Eventually, raising the interest is clearly on account of business exigency. Taking into account, all the facts and circumstances, we are of the view that the finding of the CIT(A) is not justifiable hence t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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