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TMI Blog2016 (12) TMI 1247X X X X Extracts X X X X X X X X Extracts X X X X ..... rest income. Following the decision of the Hon’ble jurisdictional High Court in the case of VGR Foundation [2007 (6) TMI 158 - MADRAS HIGH COURT ] has held that the assessee is entitled to set off the interest income earned on ICDs from the pre-operative expenditure because the share application money received by the assessee company do not fall under the category of borrowed fund and is inextricably linked with the business of the assessee. Interest received from ICDs the source of which are from share application money which is interest free has to be set off against the pre-operative expenses of the assessee because they are inextricably linked to the setting up of the business of the assessee. Disallowance under section 14A - Held that:- We find merit in the order of the learned Commissioner of Income Tax (Appeals) on this issue. If investments are made in “growth mutual funds” yielding only capital gain/loss which is taxable income under the head ‘Capital Gain”, then the provisions of section 14A will not be applicable because provisions of Section 14A deals with expenditure incurred in relation to income not includible in total income, needless to mention that expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... infrastructure facilities to various telecom/mobile operators filed its return of income for the assessment year 2010-11 on 22.07.2011 admitting income of ₹ 49,06,271/-. The case was selected for scrutiny and notice under section 143(2) was issued to the assessee. Subsequently, the assessment was completed by the learned Assessing Officer under section 143(3) of the Act on 14.03.2013 wherein he made addition of ₹ 18,17,00,903/- under the head income from other source and disallowed the expenditure of ₹ 1,67,51,972/- as deduction invoking the provisions of section 14A of the Act. On appeal, the learned Commissioner of Income Tax (Appeals) deleted the disallowance of ₹ 18,17,00,903/- and remitted back the issue with respect to disallowance made by invoking the provisions of section 14A of the Act. Ground No.1 2: Deduction u/s.57(iii) of the Act and set off of interest income earned on ICD s from pre-operative expenditure :- 4.1. The above mentioned issues are concised by the learned Commissioner of Income Tax (Appeals) in his order is as follows:- During the year, the assessee availed unsecured loans for a total sum of ₹ 4500,02,64,937 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court in Kamal Cooperative Sugar Mills Ltd 's case (243 ITR 2) and Bokaro Steel Ltd case. (iv) Without prejudice to the above, (a) The appellant submit that the Id. AO erred in not allowing expenses u/s.57 of the Act against the interest income treated as the income from other sources. (b) The pre-operative expenses incurred by the appellant consists of the upfront fees, interest on borrowed funds, miscellaneous expenses etc. that ought to be a!!owed while calculating the income chargeable under the head Income from Other Sources u/s.57 of the Act. (c) In the event, it is held that the interest income is revenue receipt that applying the matching principle the expenses incurred for earning the alleged income should be allowed as a deduction in computing such income u/s. 57 of the Act. (d) In this regard, reliance is placed on the following decisions: (i) CIT vs. VGR Foundations (298 ITR 132) (ii) CIT vs. Sasan Power Ltd (18 Taxmann.com, 182) (iii) DCIT v. Jhagadia CooperLtd (ITA No. 1191/AhdI2008) The appellant humbly submits that if the interest is treated as income from other sources, then the expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning 'interest, therefore, in my considered opinion the stipulation of the above provisions are no fulfilled to claim a set off. However, e Id.AR has put forth his arguments in his written submissions stating that the deduction u/s 57(iii) needs to be allowed to be claimed from the interest income received from the term deposits. In support of his claim he has relied on the following decisions - (i) Rajendra Prasad Moody (115 ITR 519) (SC) (ii) Steeleo Gujarat Ltd (99 ITD 408) (IT AT Ahmedabad) (iii) Jhagadia Copper Ltd (ITA NO.3253/Ahd/2008 and 3545/Ahd/2008) In all these cases, especially in the first case, it was held that the claim of s.57(iii) should be taken independently and if such expenditure is otherwise a proper expenditure should not be denied to be claimed just because there was no receipt of income. It says Whatever is a proper outgoing by way of expenditure must be debited irrespective whether there is receipt of income or not. The Courts have felt that the provisions of s.56 57 are independent and the expenditure enumerated u/s 57 cannot be denied to be claimed just because there was no income u/s 56. In other words, the expenditure e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l interest payable to the bank. Section 57(iii) of the Act makes it amply clear that any expenditure incurred for the purpose of earning income which is taxable under the head Income from other source has to be allowed as deduction. In the above case, for the interest income earned by the assessee there is a direct link to the proportional interest paid by the assessee. Therefore, as per section 57(iii) of the Act, the assessee would be entitled to the benefit of deduction with respect to the proportional interest expenditure incurred by the assessee towards earning interest income. Moreover, as pointed out by the assessee the Hon ble Apex Court in the case Bokaro Steels Ltd., reported in 236 ITR 325 has relaxed the decision rendered in the case of Tuticorin Alkalis Chemicals Fertilizers reported in 227 ITR 172 by holding that interest income earned during pre-operative period should go to reduce the expenditure if it is inextricably linked with the setting up of the capital structure of the assessee company. Hence, the decision of the Hon ble Apex Court in Tuticorin Alkalis Chemicals Fertilizers will not be squarely applicable to the case of the assessee. Likewise the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts / hire charges received during pre-production is on capital account. Learned counsel for the assessee also relied on various decisions in support of his case. At the time of hearing he had also filed a copy of the order of this Tribunal in I.T.A. No. 1369/Mds/02, dated November 11, 2002, wherein on identical issue the Tribunal considering the various Supreme Court decisions observed and held as under: '4. The Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. [1997] 227 ITR 172 was considering investment of borrowed funds prior to commencement of business and held that the interest earned was taxable. In Bokaro Steel Ltd. [1999] 236 ITR 315, it was a case of a Government company which during the period of construction of the plant had advanced monies to contractors on which it was earning interest, received rent from quarters let out to employees, received hire charges on plant let out to contractors and received royalty on stones removed from the assessee's lands. The Supreme Court considered all these activities to be intricately connected with the construction activity and accordingly held that interest received, rent received, hire charges and roy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rror or legal infirmity in the order of the Tribunal so as to warrant interference. Hence, no substantial question of law arises for consideration of this court and accordingly the tax cases are dismissed. Consequently, M.P. NO.1 of 2007 in T.C. (A) No. 610 of 2007 is closed. No costs. 4.2.5 In view of the above discussion, it is clear that the appellant is entitled to claim deduction u/s 57(iii) from the interest income earned from the banks on term deposits kept with them during preoperative period. Similarly, the appellant is entitled to set off the interest income earned on ICDs from the preoperative expenditure claimed by the appellant since the interest earned from depositing the share application moneys as ICDs do not fall under the category of borrowed funds .and do not involve payment of interest and are inextricably linked with the business of the appellant. In the result, the disallowance made by the AO is directed to be withdrawn. The ground is allowed. 4.4.3 From the above decisions of the Hon ble jurisdictional High Court, in the case of VGR Foundations and the decision of the Hon ble Apex Court in the case of CIT Vs. Bokaro Steels Ltd., supra, and the de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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