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TMI Blog2015 (7) TMI 193X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. At the outset, Ld. A.R. submitted that it was a covered case and Ld. CIT(A) has decided the issue relying upon the two case laws which were in favour of the assessee. Whereas, Ld. D.R. immediately interrupted and argued that the surplus funds which have been earned, were liable to tax as 'income from other sources'. He further argued that Ld. CIT(A) did not verify regarding direct connection with the surplus funds vis-à-vis setting up of projectc& therefore, income earned on fixed deposits could not be set off against preoperative expenses and was rightly assessed by the Assessing Officer as income from other sources. Reliance in support was placed on the case law of Swarup Vegetable Products Ltd. reported in 98 TTJ 420 (Del.) whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l of the company was Rs. 2000 crores. By end of financial year 31-03-2008 the assessee company had raised Rs. 380,00,00,000/-. These funds were essentially utilized during the initial period of construction from A.Y. 2004-05 to A.Y. 2008-09 for conducting survey, investigation & preliminary expenses, for purchasing land (1002.19 acres), for infrastructure development work and for disbursement as advance to the contractors engaged for construction of power plant etc. There was also some litigation for acquisition of land. The assessing officer treated Rs. 42,06,774/-chargeable to tax u/s 56 of the Act as 'Income from other sources' relying on the decision of the apex court in the case of CIT vs. Tuticorin Alkali and Chemicals & Ferti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity towards sundry creditors (Rs.23.52 crores) are far more than the funds lying in bank (Rs.3.34 crores), it cannot be said that there are surplus funds available with the company. Hon'ble Supreme Court in Bokaro Alkali Chemicals and Fertilizers Ltd. after considering the decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. held that; "However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilization of various assets of the company and the payments received for such utilization are directly linked with the activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom other sources. 8.1.4 In identical issue in the case of NTPC Sail Power Company (P) Ltd. VS. CIT in ITA No. 1238, Hon'ble Delhi High Court in its decision on 17/07/2012 held that:- "It is no doubt correct that the proviso to section 36 (I) (iii) of the Income Tax Act enacts that any amount of the interest paid towards ("in respect of') capital borrowed for acquisition of an asset or for extension of existing business regardless of its capitalization in the books or otherwise, "for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use" would not qualify as deduction. However, in all these cases, when the interest was received by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nked" to the setting up of the project and the fact that no surplus funds are also available with the appellant company, therefore, such income is required to be capitalized to be set off against the pre operative expenses. As such the A.O. is not justified in adding the sum of Rs. 36,06,774/- as income for other source u/s 56. 8.2 Regarding the forfeited earnest money deposit of Rs. 6 lakhs, the sum represents earnest money deposited to carryon contract for construction of approach road to the project site. The said sum was forfeited for non performance by the contractor. Therefore, the forfeited sum is inextricably linked to the setting up of the project and is required to be capitalized to be set off against the pre operative expenses. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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