TMI Blog2023 (6) TMI 342X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst bank guarantee, that was given to Indian Oil Corporation and other State entities, is not rebutted by the learned DR. Thus, the issue is squarely covered by the decision of Indian Oil Panipat Powers Consortium Ltd. [ 2009 (2) TMI 32 - DELHI HIGH COURT] . Assessee appeal allowed. - ITA No. 308/DEL/2016 - - - Dated:- 30-5-2023 - SHRI KUL BHARAT, JUDICIAL MEMBER AND SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER For the Assessee : Shri Gaurav Jain, Adv. Shri V.K. Garg, Adv., Shri Sudarshan Ray, Adv. For the Department : Shri Anuj Garg, Sr. DR ORDER PER KUL BHARAT , JM : This appeal, by the assessee, is directed against the order of the learned Commissioner of Income-tax (Appeals)-I, Noida, dated 30.11.2015, pertaining to the assessment year 2012-13. The assessee has raised following grounds of appeal: 1. That the Ld. Assessing Officer (Ld. AO) has erred on facts and in law in assessing a sum of Rs. 1,93,75,802/- being interest income from FDRs during preoperative period as income from other sources. The Ld. AO has erred in not treating the same as capital receipt to be set off against preoperative expenses. The Ld. CIT(A) has erred in sustai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the Act ) was framed vide order dated 27.01.2015. The Assessing Officer while framing the assessment noticed that the assessee in its account has shown pre-operative expenditure of Rs. 54,37,00,000/- and out of which deducted the interest received on short-term deposits with scheduled banks amounting to INR 1,93,75,802/-. The Assessing Officer issued a show cause as to why this amount of INR 1,93,75,802/- may not be treated as income from other sources. The assessee in response thereof filed written submissions and relied upon various case laws. The explanation of the assessee was not found acceptable. Therefore, this amount was added into the income of the assessee under the head income from other sources. Aggrieved against this, the assessee preferred appeal before the learned CIT(Appeals), who also sustained the addition. Now the assessee is in appeal before this Tribunal. 4. Learned counsel for the assessee vehemently argued that the authorities below were not justified in making and sustaining the addition. Learned counsel placed reliance on the judgment of the Hon ble Delhi High Court rendered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The funds deployed in short-term deposits continued to be inextricably linked with the road construction project. The interest received on these deposits was therefore a capital receipt which went to reduce the cost of the project and was rightly credited to the preoperative expenditure. However, the learned assessing officer while making the impugned assessment has assessed the aforesaid interest as income from other sources. 5. It is submitted that the facts of the assessee's case are similar to the facts in Indian Oil Panipat Power Consortium Ltd v. ITO 315 ITR 255 decided by the Hon'ble Delhi High Court. In that case, the issue was as to the treatment to be accorded to the interest earned on monies received as share capital by the assessee which were temporarily put in a fixed deposit awaiting acquisition of land which had run into legal entanglements on account of title. In deciding the issue, the Hon'ble Court observed: We are called upon to really decide as to whether given the facts obtaining in the assessee's case it would be covered by the line of cases which follow the ratio of the decision of the Supreme Court in Tuticorin Alkali Chemicals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. In CIT v. VGR Foundations [2008] 298 ITR 132 (Mad) the Hon'ble Chennai High Court has also held that interest earned from the temporary investment of shareholders' funds was a capital receipt. 7. In the assessee's case the funds temporarily placed in short-term deposits were not surplus funds as was the case in Tuticorin Alkali Chemicals (supra). They were funds required for implementing the project for the production of fertilizer and were therefore inextricably connected with it, as was the case in Indian Oil Panipat Power Consortium (supra). Hence, any interest earned from their temporary investment was a capital receipt which went to reduce the cost of the project and was rightly credited to the preoperative expenditure. Hence, the same cannot be assessed as income from other sources. The case of the assessee is governed by the rule in Bokaro Steel Ltd [1999] 236 ITR 315 (SC) and followed in Indian Oil Panipat Power Consortium Ltd v. ITO 315 ITR 255 (Del) and not by the rule in Tuticorin Alkali Chemicals [199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the logic of this proposition is a bit stretched and obscure. 5) When interest-bearing funds meant for the acquisition of capital assets of business are temporarily invested, the accruing return is not an income but a cost-reduction factor. The Indian Accounting Standard (AS) 16, the International Accounting Standard (IAS) 23, and the US GAAP - all recognize such return as a costreduction factor and, therefore, require that the eligible cost of borrowed funds shall be reduced by any income earned from their temporary investment. 6) It is true that tax law need not always follow the accounting practice. However, a standard- and mandatory- accounting practice should not be discarded unless it is shown to be contrary to or inconsistent with specific provisions or scheme of the Act. Where the income from temporary investment of borrowed funds is less than the cost of borrowed funds, there conceptually is no chargeable income under the Act and hence no conflict with the accounting standard. Where, however, such income is more than the cost of invested funds, the excess may be chargeable under the Act, supervening the accounting standard. 7) It may also be submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome is always of a revenue nature unless it is received by way of damages or compensation. The Ld. CIT(Appeals) sustained the impugned addition by observing as under:- 5. It is undisputed that the business of the assessee has not yet not commenced and the appellant is in the process of setting up of its business which admittedly was formed by way of demerger of a sick industrial unit under the BIFR Scheme under the SICA 1985 from M/s. Duncan Industries Ltd and the business of the demerged enterprise is yet to commence. As the business of the appellant has not yet commenced, the case of the appellant can not be compared with that of any other person in whose case the business is already in existence. The various authorities being referred to by the Id. counsel of the appellant where the business of those persons was already in existence is of no help to the appellant. The only case which can compare with the facts of the case of the appellant is that of the Tuticorin case. In any case, this is nobody s case that a person cannot have income unless its business has commenced. A person under the taxation law can have income before the commencement of the business or even without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e calls for no interference from this authority. The same is therefore confirmed. The appeal of the appellant fails. 9. The same is decided in terms of the above. 8. The learned AR heavily relied on the judgment of the Hon ble Delhi High Court rendered in the case of Indian Oil Panipat Powers Consortium Ltd. Vs. ITO [2009] 315 ITR 255, wherein the Hon ble High Court has examined the entire law and also the judgment of the Hon ble Supreme Court rendered in the cases of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra) and CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315, inter alia, observing as under: 11 In our opinion, the Tribunal has misconstrued the ratio of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals [1997] 227 ITR 172 and that of Bokaro Steel Ltd. [1999] 236 ITR 315. The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals [1997] 227 ITR 172 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome 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. See S. G. Mercantile Corporation P. Ltd. v. CIT [1972] 83 ITR 700 (SC) and CIT v. Govinda Choudhury and Sons [1993] 203 ITR 881 (SC). 13 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 [1999] 227 ITR 172 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the judgments of Hon ble Supreme Court rendered in the cases of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra); and Bokaro Steel Ltd(supra). In the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra), funds were found to be surplus that were deployed in short term deposits, that earned interest thereon which was held to be chargeable under the head income from other sources . But in the case of Bokaro Steel Ltd(supra), 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 capital receipt which was permitted to be set off against the pre-operative expenses. In the light of the judgment of Hon ble Delhi High Court in the case of Indian Oil Panipat Powers Consortium Ltd. (supra), let us examine the facts of the present case, whether the interest earned on term deposits are inextricably linked for revamping/ renovating of sick unit. 10. The assessee company claims that during financial year it was in the process of setting up of a fertilizer manufacturing unit at Kanpur by revamping and renovating a sick ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidering the various ratio of decisions, in para 15 of its order has held as under: 15. Apart from the decision of co-ordinate bench adjudicating the issue in favour of the assessee, we also take notice of the process of reasoning applied by CIT(A) and approve his action affirmatively in so far as interest generated on deposits placed with SBI. The CIT(A) has rightly held that interest income to be of capital nature linked with the process of setting up of its power plant and such receipts would go to reduce the cost of the project which also includes huge interest costs as capitalized. For coming to such conclusion, the CIT(A) has taken cognizance of the decision of the Hon ble Supreme Court in the case of Bokaro Steel Ltd. (supra), Karnataka corporation Sugar Mills Ltd. Bongaigaon Refinery Petro Chemicals Ltd. vs. CIT [2001] 251 ITR 329 which in turn distinguish the decision of the Hon'ble Supreme court in Tuticorin Alkali Chemicals Fertilizers Ltd. (supra). The CIT(A) has observed on facts that assessee kept fixed deposit as margin money with SBI for obtaining bank guarantee to avail term loan facility for the project related works. The margin money kept is 10% of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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