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TMI Blog2017 (3) TMI 1038X X X X Extracts X X X X X X X X Extracts X X X X ..... that the interest from advances paid to contractor by the assessee for the purpose of facilitating the work of construction is incidental to the work of construction of plant undertaken by the assessee and receipt accruing from the said advances was held to be capital receipt and not income of the assessee from other independent sources. The deposit has been given by the assessee in order to avail electricity so that the construction of the project is facilitated. In our opinion, the assessee has advanced money which is connected to construction of plant and therefore, we are not in agreement with the conclusion drawn by the ld.CIT(A). Therefore, respectfully following the ratio laid down above we set aside the order of the ld. CIT(A) and direct the AO to treat the interest as capital receipt by deleting the disallowance. - Decided in favour of assessee. Disallowance of interest expenditure on the borrowings claimed as deduction against the interest income from the fixed deposits - Held that:- As decided in assessee's own case for AY:2009-2010 we find that there is a direct nexus of funds of the borrowed capital with the Fixed Deposits in question partly. The interest paid on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xus between the borrowed funds and the interest earned thereon and whether such expenditure was laid out or expended wholly and exclusively for the purpose of making or earning such income. The assessee vide letter dated 25.10.2012 submitted that the said interest was received from PGVCL on security deposit of ₹ 14.78 crores which was deposited with the said company for the purpose of availing the electricity to be used in the construction of plant and was rightly credited under the head work-in-progress following the ratio laid in the decision of the Hon‟ble Supreme Court in the case of Bokaro Steel Ltd (supra). The assessee also relied on some other decisions namely Karnal Co-op Sugar Mills Ltd V/s CIT (2001) 118 Taxman 489(SC), Indian Oil Panipal Power Consortium Ltd V/s ITO (2009) 315 ITR 255 (Del HC) and NTPC Sail Power Company(P) Ltd V/s CIT (2012) 25 taxman 401 as incorporated in para 5 of the assessment order. The AO rejected the contentions raised by the assessee during the assessment proceedings and treated the said interest of ₹ 88,72,800/- from PGVCL as the income under the head Income from other sources and taxed accordingly by framing the assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be the complete law declared by the Hon‟ble Apex Court. Therefore, it is necessary to analyze the facts of that case. In that case, that the assessee had entered into supplementary agreements with contractors under which the assessee had made certain advances to the contractors on interest to enable them to execute large scale construction work smoothly for assessee company. These arrangements primarily meant for payment in advance of amounts of the contractors' bills for which the assessee company had charged interest and this interest income was later on adjusted against the' dues of the contractors. At the Cost of repetition. it is worth to reiterate that the said interest receipts were adjusted against the charges payable to the contractors and had gone to reduce the cost of construction and. therefore, in light of such peculiar facts of that case, the Hon'ble Apex Court held the same as capital receipts and not income of the assessee from any independent source. Such peculiar facts as existed in that case did not match with the facts of the instant case. Here, the instant appellant had placed security deposit to avail of electricity from the Electricity Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the work of the contractors proceeded without any financial hitches as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts are arrangements which are intrinsically connected with the construction of its steel plant. The receipts have been adjusted against the charges payable to the contractors and have gone to reduce the cost of construction. They have, therefore, been rightly held as capital receipts and not income of the assessee from any independent source. 6. .. 7. The appellant, however, relied upon the decision of this Court in Tuticorin Alkali Chemicals Fertilizers Ltd.'s case (supra). That case dealt with the question whether the 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 that if a person borrows money for business purposes, but utilises that money to earn interest, however, temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. Merely because he utilised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income. (emphasis supplied) 4.3.1 The underlined findings of the Hon'ble Apex Court in the aforesaid case clearly spell out the distinguishing facts of that case as compared to the present case. In no way, facts of the present case can be equated with those the case relied upon by the appellant. To be precise, in the case of Bokaro Steel Limited, the advances were given to contractors to enable him to complete the Construction work and the interest earned on the said advances was adjusted against the payments to be made to the said contractors. In that case, the assessee was not entitled to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as High Court in above mentioned case of Pandian Chemicals Limited (which is confirmed by Hon‟ble Supreme Court discussed as above ) had held as under (233 ITR 497 MAD) A study of various case laws clearly indicates that a restricted meaning is given when the Legislature uses the expression, derived from in section 80HH. Though the assessee had necessarily to make the deposit with the Electricity Board for running the industry and the power supply would not be made without the deposit in favour of the Electricity Board, the income derived from the deposit with the Electricity Board could not be said to have been derived from the industrial undertaking. The intermediate source of interest was the deposit itself, and the effective source of the genealogy of the source of the interest income was the deposit and not business, as the industrial undertaking was removed by one step from the source of income for the interest. (emphasis supplied) 4.3.3 In my humble view, the facts of the instant case are the same and identical to those of Pandian Chemicals Limited as decided by the Hon‟ble Madras High Court and subsequently approved by the Hon'ble Apex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hing from the revenue character of the receipt. The question of adjustment of interest payable by the company against the interest earned by it will depend upon the provisions of the Act. The expenditure would have been deductible as incurred for the purpose of business if the assessee's business had commenced. But that was not the case in the instant case. The assessee may be entitled to capitalise the interest payable by it. But what the assessee could not claim was adjustment of this expenditure against interest assessable under section 56. Section 57 sets out in its clauses (i) to (iii) the expenditures which are allowable as deduction from income assessable under section 56. It is not the case of the assessee that the interest payable by it on term loans is allowable as deduction under section 57. There are specific provisions in the Act for setting off of loss from one source against income from another source under the same head of income (section 70), as well as setting off of loss from one head against income from another (section 71). In the facts of this case, the company could not claim any relief since its business had not started and there could not be any c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g cement - It borrowed money to purchase capital equipments and for setting up its business - It deposited share application money received by it and part of borrowed money with a bank as short-term deposit and earned interest - Deducting interest earned on deposit from interest paid on borrowings assessee treated balance interest paid as part of capital, cost of building, plant and machinery - Assessing Officer held that interest received was taxable under section 56 and same could not be deducted from interest paid as part of capital , cost of building plant and machinery-AO held that interest received was taxable under section 56 and same could not be deducted from interest paid-Commissioner affirmed this order. - Tribunal held that interest received was not taxable under section 56 and was to be reduced from interest payment while capitalising various expenditures to capital account - Whether interest received by assessee was taxable under section 56 - Held, yes - Whether interest received could be deducted from interest paid while borrowing was for purpose of construction and had no relation with earning of interest - Held, no - Whether, though interest received on short-ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f assets created as a result of such expenditure, and, therefore, interest income had to be taxed as income from other sources - Held, yes 8. CIT V/s Mimraj Manmal Ruia [1972] 84 ITR 673 (BOM.) Section 57 of the Income-tax Act, 1961 [Corresponding to section 12(2) of the Indian Income-tax Act, 1922] Income from other sources Deductions Assessment year 1959-60 Assessee, a speculator in cotton and shares, also derived income from salary, properties and dividends Whether assessee was not entitled to deduction under section 12(2) of 1922 Act in respect of overdraft interest paid to bank from his dividend income as assessee could not establish that borrowing by way of overdraft from bank was for purpose of acquiring shares and earning dividend income Held, yes Whether where existence of a connection between amount borrowed and shares purchased by assessee would not be sufficient to attract application of section 12(2) of 1922 Act Held, yes 9. CIT V/s United Wire Ropes Ltd [1980] 121 ITR 762 (BOM.) Section 57 of the Income-tax Act, 1961 Income from other sources Deductions Assessment year 1963-64 Assessee-company received interest on am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ources' and could not be reduced from capital expenditure - Held, yes - Whether Tribunal was also right in not adjusting project report expenses against interest received on ground that expenditure claimed was specifically allowable under section 35D - Held, yes 12. Positive Packaging Industries Ltd. v. ITO [2010] 125 ITD 212 (MUM.) Section 56 of the Income-tax Act, 1961 - Income from other sources - Chargeable as - Assessment year 1996-97 - Assessee-company was to set-up a factory for manufacturing flexible packaging material - It applied for a loan from IDBI - In course of assessment, Assessing Officer noticed that assessee had earned interest on fixed deposits - Assessee‟s case was that interest accrued on deposits which had been kept with IDBI as a pre-requirement for obtaining a loan - Assessing Officer rejected assessee‟s claim and brought interest income to tax under head Income from other sources‟ - Commissioner (Appeals) upheld assessment order - On instant appeal, it was seen that as per terms of agreement entered into between assessee and IDBI, assessee was required to bring promoters contribution and unsecured loan in its business an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... native, save and except confirming he action of the AO and hence no interference is called for and in result, the same stands confirmed. Thus, ground no.2 of appeal stands dismissed. 5. The ld. AR vehemently submitted before us that the ld. CIT(A) has erred in law and on facts by dismissing the appeal of the assessee by not appreciating the facts in correct perspective . The ld. AR argued that the assessee has deposited ₹ 14.78 crores with PGVCL f or the purpose of availing the electricity for the construction of power plant and therefore it was purely security deposits for the purposes of capital works and by no stretch of imagination could be treated as revenue in nature. The ld. AR argued that the assessee is a special purpose vehicle and was doing construction of 4000 MW power plant at Mundra, Kutch, Gujarat and in order to take the electricity from Paschim Gujarat Vij Co.Ltd deposited a security deposit of ₹ 14.78 crores as per the condition for supply of electricity and therefore the interest received on the said security deposit was in the nature of capital receipt and should not be brought to tax under the head income from other sources while re-iterating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingly brought to tax. In the first appellate proceeding, the ld.CIT(A) upheld the finding of the AO on this issue. The assessee is engaged in the business of special purpose vehicle and during the assessee was engaged in the construction of electricity plant at Mundra, Gujarat and he security deposit was given purely to avail the electricity for the purpose of construction of plant which by no stretch of imagination would be treated as revenue in nature as the sole purpose behind the advancing security was to avail electricity for the construction purpose and therefore inextricably linked with the construction of the plant. We also find that the similar issue arose in the assessment year 2009-10 and the FAA decided the issue in favour of the assessee and the appeal filed by the revenue before the ITAT was also dismissed by the Tribunal. Thus, it is clear from para 12 of the said order that the assessee has received interest on ₹ 14.78 crores placed as security deposit with PGVCL, which was decided in favour of the assessee by the Bench in I.T.A. No.512/M/2013 (AY:2009-2010) and others by dismissing the appeal of the revenue. 8. In the case of Bokaro Steel Ltd (supra), the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the assessee is identical. For the sake of brevity, we reproduce the relevant portion of the order as under : 8. We have heard both the parties and perused the orders of the Revenue Authorities as well as the relevant material placed before us. On hearing both the parties, we are of the opinion that the issue of source of funds was deliberated by the AO / CIT (A), which is now made clear by the Ld Counsel before us. All the papers are found in the form of paper book. We find that there is a direct nexus of funds of the borrowed capital with the Fixed Deposits in question partly. The interest paid on a loan taken to avoid premature encashment of the Fixed Deposit is deductible against the interest earned on the Fixed Deposit as held by the ITAT, Agra Bench in the case of Raj Kumari Agarwal vs. DCIT vide ITA No.176/Agra/2013 (AY 2008-2009), dated 18.7.2014. Having decided on the issue of nexus of funds and the allowability of the interest expenses against the interest income, the remaining issue is about the interest rate of 7.81% applied by the AO in determining the interest expenses. In our opinion, this requires revisit of the issue to the file of the AO. Assessee must d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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