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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 ..... learned Commissioner of Income Tax (Appeals) has erred in holding that the assessee is entitled to set off the interest income earned on ICD from the pre-operative expenditure claimed by the assessee since the interest earned from advancing the share application money towards ICD's do not fall under the category of borrowed funds and do not involve any payment of interest and is inextricably linked with the business of the assessee. iii) The learned Commissioner of Income Tax (Appeals) has erred in directing the learned Assessing Officer to verify the claim of the assessee regarding the investment made in "growth mutual funds" amounting to Rs. 1,67,51,972/- which was disallowed by the learned Assessing Officer by invoking the provisions of section 14A of the Act. 3. Brief facts of the case are that the assessee is a subsidiary company of M/s. GTL Infrastructure Ltd., engaged in the business of providing sharable passive 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 Rs. 49,06,271/-. The case was selected for scrutiny and notice under section 143(2) was issued to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he pre-operative interest earned from temporary deployment of funds should be reduced from the project cost and not considered as income chargeable to tax under Sec. 56 of the Act. (ii) It is evident from the assessment order that the above legal principles and findings have not been denied/negated/disputed in the assessment order, however, the only reason for denying the claim of the appellant on the alleged ground that the facts of the aforesaid cases before the Hon'ble Delhi High Court are different from the appellant's own case and therefore, the claim of the appellant has been rejected. (iii) Further, similar view has been taken by the Hon'ble Punjab and Haryana High Court in the case of CIT v. Arihant Threads Ltd (12 Taxmann.com 69) holding that the matter is covered in favour of the assessee by judgments of the Hon'ble Supreme 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 incurre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l to it should be allowed to be set off u/s 57(iii) of the Act. The provisions speak as under- Deductions. 57. The income chargeable under the head "Income from other sources" shall be computed after making the following deductions, namely:- (i) ... (ii) .... (iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose29 of making or earning such income; As seen from the above, the expenditure which is wholly and exclusively related for the purpose of earning income is only allowed to be claimed and set off against such income. In the instant case, the appellant has borrowed money from the banks to run the business but not to give the amount for earning '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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 TC.(A) NO.610 of 2007 is closed. No costs." Thus, going by the decision of VGR Foundations (supra), the interest earned during preoperative period has to be set off u/s 57(iii) of the Act. 4.4.1 From the facts of the case it is evident that out of the bank loan of Rs. 4500.96 crores the unutilized portion of Rs. 1,555 crores was placed in fixed deposit with the bank by the assessee. Therefore, the source of the FD is directly linked to the bank loan obtained by the assessee wherein there is a cost, being the proportional 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 res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rior to the commencement of the business operation against the expenses. The interest income earned prior to the commencement of the business has to be assessed under the head "Income from other sources". Hence, the Assessing Officer is right in assessing the interest income under the head "Income from other sources". Heard counsel. The Tribunal allowed the appeals by following its own earlier order and accepted the contention of the assessee. The Tribunal, in its order, held as follows: "5. Before me learned counsel for the assessee also relied on the decision of the Supreme Court in the case of CITv. Karnataka Power Corporation [2001] 247 ITR 268, wherein it was held that interest receipts / 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be accepted. We accordingly uphold the claim of the assessee and delete the addition of interest made to the income. The legal plea was not insisted upon.'" From a reading of the above, it is seen that the Tribunal has followed the principles enunciated in the Supreme Court judgments in the case of CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 and in the case of Karnataka Power Corporation [2001] 247 ITR 268, and came to the correct conclusion. The Revenue is unable to give any further materials or evidence and also not able to furnish information as to whether they have filed any appeal against their earlier order or not. Under the circumstances, we do not find any error 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. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tments were made in "growth Mutual Funds" as claimed by the Ld.A.R., because the details of such investments were not before the learned Commissioner of Income Tax (Appeals), and if found so, directed the Ld.A.O., to delete the addition made under section 14A of the Act by agreeing with the arguments of the learned Authorized Representative. 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 expenditure incurred in such situation will go to add to the cost of asset wherein provisions of Section 14A of the Act will not be applicable. Since the learned Commissioner of Income Tax (Appeals) has only remitted back the matter to the file of the learned Assessing Officer for verifying the mode of investment and decide according to the above ratio laid down, we do not find it necessary to interfere with his order o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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