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TMI Blog2011 (3) TMI 309X X X X Extracts X X X X X X X X Extracts X X X X ..... 39. The Assessing Officer treated the amount of interest income which had been set off against the project expenses as income from other sources and disallowed the same to be set off against the cost incurred on the project expenses. It is not in dispute that the assessee had furnished performance guarantee in favour of NHAI to get the contract awarded in its favour and to procure the said guarantee, it had kept the amount in a fixed deposit in the bank. The project was on BOT (Build-Operate-Transfer) basis where the promoters were required to bring in their own funds along with borrowed funds from bank/financial institutions for construction of the project. It is contended that the furnishing of bank guarantee had a direct nexus with the carrying on of the project and, there-fore, the said set off deserved to be allowed. 3. It was contended before the Assessing Officer that the interest on margin money against the said bank guarantee is inextricably linked and intrinsically connected with the execution of the contract awarded to the assessee-company and hence, the interest so received is only incidental to the very execution of the project. The bank guarantee was an operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich are subject to pending allocations ; that the assessee had commenced the operation of the construction of the project ; that furnishing of bank guarantee was the sine qua non for initiation of the project and only on furnishing the bank guarantee, could the assessee enter into the contract for construction of the project ; that it is not a case where surplus funds have been utilized to earn the interest income ; and that it was not the unutilized and surplus money which was deposited by the assessee to earn interest but on the contrary, the activity of depositing money was incidental to the business of the assessee as FDRs were required to be kept to enter into the agreement for commencement of the project and, hence, FDRs with the bank were made with the definite purpose and the interest earned by the assessee on the FDRs must go to reduce the pre-production expenses. The Tribunal also opined that the interest earned by the assessee on the FDRs has intrinsic and inseggregable nexus with the work undertaken and, therefore, the interest earned by the assessee is capital in nature and shall go towards adjustment against the project expenditure and the same cannot be assessed as i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commencement period cannot be given emphasis totally brushing aside the real crux that submission of performance guarantee is the sine qua non for the purpose of entering into business and to sustain the business expediency. 10. At the very outset, we think it appropriate to reproduce the clauses from the concession agreement which deals with performance security : "5. Performance security 5.1 The concessionaire shall for due and faithful performance of its obligation during the construction period provide to NHAI a bank guarantee from any bank in the form set forth in schedule F (the 'performance security') for a sum equivalent to Rs. 150 million (rupees one thousand and fifty million) on or before the date of this agreement. Till such time the concessionaire provides to NHAI the performance security pursuant hereto, the bid security shall remain in full force and effect. Failure of the concessionaire to provide the performance security in accordance with this clause 5.1 shall entitled NHAI to terminate this agreement in accordance with the provision of clause 32.2 without being liable in any manner whatsoever to the concessionaire and to appropriate the bid secur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived as interest, will the interest amount be treated as not his income ? This is not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as he liked. The application of the income for payment of interest could not affect its taxability in any way." (emphasis added) 14. In CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC), the apex court was dealing with the situation wherein a Government company, during the period of construction of plant, had advanced monies to contractors on which it was earning interest and received charges from quarters let out to the employees. It also received hire charges on plant let out to the contractors and received royalty on stones removed from its land. In that factual backdrop, their Lordships referred to the decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. [1997] 227 ITR 172 (SC) and analysed the facts and came to opine thus (page 322) : ". . . That case dealt with the question whether investment of borrowed funds prior to commencement of business, resulting in earning of interest by the assessee would amount to the assessee earning any income. This court held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uled thus (page 3) : "This is, therefore, not a case where any surplus share capital money which is lying idle has been deposited in the bank for the purpose of earning interest. The deposit of money in the present case is directly linked with the purchase of plant and machinery. Hence, any income earned on such deposit is incidental to the acquisition of assets for the setting up of the plant and machinery. In this view of the matter the ratio laid down by this court in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC), will not be attracted. The more appropriate decision in the factual situation in the present case is in CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC)." 16. In Bongaigaon Refinary and Petrochemicals Ltd. v. CIT [2001] 251 ITR 329 (SC), the question that arose for consideration was whether the Tribunal was justified in holding that the items of income derived by the assessee during the formation period for the main business were not taxable income but were to be adjusted against the project cost for the oil refinery and petrochemicals, the main business for which the company was set up. It is worth noting that the High Court h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... much as if the deposits were indeed inextricably linked to the business of the assessee, the question whether the income accruing on the said deposits would constitute business income stands answered by the decisions of the Supreme Court in Bokaro Steel Ltd. [1999] 236 ITR 315 (SC) and Karnal Co-operative Sugar Mills Ltd. [2000] 243 ITR 2 (SC). Both these decisions are in our view sufficient authority for the proposition that where the income in the nature of interest flows from deposits made by the assessee which deposits are in turn inextricably linked to the business of the assessee, the income derived on such deposits cannot be treated as income from other sources." 18. In International Marketing Ltd. v. ITO [2007] 292 ITR 504 (Delhi), following the law in Tuticorin Alkali Chemicals and Fertilizers Ltd. [1997] 227 ITR 172 (SC), it was held that where the authorities below concurrently took the view that the assessee had not carried on any business during the relevant assessment year and that the interest earned by the assessee on surplus funds deposited with different companies was taxable as income from other sources, the view taken could not be faulted with. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's business and also whether it formed a part of the total business income of the assessee. In that case, there was no dispute that the amount received by the assessee was from the amount he had invested in the FDR but there was no actual data whether the said amount was in terms of the agreement or contract of export, whether it was a part of the advance or whether it was part of the surplus at the hands of the assessee-company. In that factual backdrop, the apex court held thus (page 271) : "At page 88 of the paper book the Tribunal holds that the interest income was generated by way of keeping the 'advances' received by the assessee in the course of its regular business activity. We do not know on what basis this observation has been made. It is not clear whether the contract between the parties was examined or not. The High Court while disposing of the matter has also not examined the factual basis. According to the Department, it was the case of surplus being invested in FDR whereas according to the assessee it was the case of advance having been received from the exporter which was invested in FDR for short duration. In view of the absence of factual matrix we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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