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TMI Blog2017 (5) TMI 903X X X X Extracts X X X X X X X X Extracts X X X X ..... Vs. CIT [1997 (7) TMI 4 - SUPREME Court]. It was categorically held that interest earned on surplus funds deposited in banks during installation of company, prior to commencement of business, has to be brought to tax as ‘income from other sources’ u/s. 57. Respectfully following the jurisdictional High Court decision also, the contentions of assessee that this amount has to be adjusted towards capital account cannot be accepted. - Decided against assessee. - ITA No. 1534/Hyd/2016 - - - Dated:- 26-4-2017 - SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER, AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER For The Assessee : Shri S Raghunathan For The Revenue : Shri P Chandra Sekhar CIT DR. ORDER PER B. RAMAKOTAIAH, AM This is an appeal filed by Assessee against the order of CIT(A)-12, Hyderabad dated 29-07-2016. The main issue which arises for consideration is with reference to charging of tax on the interest received from the temporary fixed deposits from the escrow account out of the barrowed funds committed for project implementation. Assessee has raised various grounds on the issue running to 14 in number on the following 5 points. (a) Whether the interest earned is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the loss cannot be allowed. 3. Aggrieved by the order of Ld. A.O, Assessee preferred an appeal before CIT(A) and vide impugned order Ld. CIT(A) has held against Assessee and hence the present appeal. 4. Ld. Counsel submitted that Assessee has commenced construction of a power plant with a project cost of ₹ 2,400 crores out of which one-fourth is by the promoters and three-fourths are financed by financial institutional investors. Since, there was a delay in scheduled work by the EPC contractor Assessee parked the committed funds in short-term fixed deposits and approved investments out of the escrow account. It was submitted that Assessee has to submit a periodical requirement of funds and the notice of drawl is from the Trust and Retention Account (TRA) which is generally managed by Punjab National Bank (PNB) being one of the ten lenders. As per the TRA agreement the company is required to instruct the account balance the parked committed funds in permitted investments in order to optimize the overall project cost. It was the submission that the interest income received in respect of short-term fixed deposits shall again be deposited in TRA and will reduce the intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Power Ltd., 205 Taxman 56 (Delhi High Court) and the decision of Hon ble Madras High Court in the case of CIT Vs VGR Foundations 298 ITR 132 (MAS). Ld. Counsel also relied on the following cases. 1. CIT Vs Tehri Hydro Development Corporation 183 taxman 246 Utharakhand. 2. Adani Power Ltd., Vs ACIT 61 taxman 365 ITAT Ahmadabad. 3. ACIT Vs NTPC Tamilnadu Energy Company Ltd., 6016/Del/2013 ITAT Delhi. 4. Rail Vikas Nigam Ltd., Vs DCIT 6165/Del/2012, ITAT Delhi. 5. Ld. Counsel further relied on the decision of the coordinate Bench at Hyderabad in the case of Hyderabad Hitech Textile Park Vs ITO in ITA No. 587/Hyd/2016 dated 21-12-2016, wherein the ITAT relied on the rulings of the Hon ble Delhi High Court in the case of Sason Power Ltd., (supra) and Indian Oil Panipat Power consortium Ltd., (supra). 6. In summary, it was argued that no prudent business man would borrow money from bank with higher rate to park in term deposits to earn a low interest and therefore, there is a clear nexus between the source of funds and source of investments, the amounts which was parked in short term deposits with the bank were committed funds and not surplus funds and the investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenditure claimed should be allowed as revenue expenditure and should be set off to the income from other sources. Ld. Counsel placed reliance on the following judgments/decisions. 1. CIT Vs Huge Escorts Communication Ltd., 311 ITR 253 Delhi High Court. 2. CIT Vs Builders and development Ltd, ITA No. 528 529 of 2012 Delhi High Court. 3. Sardar Sarovar Narmada Nigam Ltd., 19 ITR (80) 133 Special Bench Ahmadabad. 4. Reliance Gems and Jewellaries Ltd., Vs DCIT in ITA No. 3855/2013 Mumbai Tribunal. 5. Amani Glob inf ormation Tech India Pvt Ltd., Vs CIT 369 ITR 1 Delhi High Court. 6. CIT Vs Whirlpool of India Ltd., 229 CTR 435 Delhi. 10. It was submitted that the principle of law emerging from the judgments of various High Courts and Tribunals is that the business is continuous course of activities and business can be said to be set up from the date when one of the essential categories of its business activities has started and it is not necessary that all categories of business activities must start either simultaneously or that the last stage must start before it can be said that the business was set up. 11. Alternately it was submitted that the preoperat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eliance on various other decisions relied on by the Ld. Counsel cannot be accepted in view of the authentic pronouncement of the Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd., Vs CIT, principle of which has not been disturbed in any of the orders of the Hon ble Supreme Court. 13. Ld. CIT DR has taken up various paras of the decision of the Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd., Vs CIT, to reiterate that all the issues being agitated by the Ld. Counsel has been answered in the case of Tuticorin Alkali Chemicals Fertilizers Ltd., Vs CIT. He then referred to the decision of the coordinate Bench in the case of Kakinada SEZ Pvt. Ltd., wherein on similar facts the coordinate Bench at Hyderabad has upheld the taxability of interest income on borrowed funds and assessment under the head other sources . It was also further submitted that the same principle was reiterated by the Hon ble Supreme Court in the case of Bongaigaon Refinery and Petro Chemicals Ltd., Vs CIT 251 ITR 329 (SC), Totgars Cooperative Sale Society Ltd. Vs. ITO (2010) 322 ITR 283. Relying on principles laid down by the above judgments, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Omer Khayyam Wineries (P) Ltd. (1979) 120 ITR 859 (AP High Court): In this case, it was held by Hon'ble High court of AP that expenditure incurred up to the date of commencement of the production is of capital in nature and thereaf ter it is of revenue nature and theref ore, any expenditure incurred up to the date of commencement of the production cannot be allowed. ii. K. Sampath Kumar Vs. CIT (1986) 1581TR 25 (Madras High Court): In this case, it is held by Hon'ble Madras High Court that business commences only when production commences and mere purchase and erection of plant and machinery cannot amount to commencement of business. Accordingly, it was ruled that interest paid on capital borrowed for purchase of plant and machinery would not form part of actual cost of plant and machinery and not allowable as business expenditure prior to commencement of the business. iii. CIT Vs. Industrial Solvents and chemicals Pvt. Ltd. (1979) 119ITR 608 (Bombay HC): In this case, Hon'ble Bombay High Court held that expenditure incurred preparatory to commencement of the business is capital expenditure and business can said to have been set up when reasonable quantity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16. We have considered the rival submissions and also perused the material available on record. Admittedly the assessee is in the process of setting up of power project. For the purpose of setting up of the project the assessee has availed funds from banks. Admittedly, the assessee invested a part of the borrowed funds from banks, which was not immediately required in short term deposits with an intention to earn interest ostensibly to reduce the interest liability. The question arises for consideration is whether the interest income of ₹ 22,35,48,281/- received by the assessee on temporary deposit of funds in with banks is assessable as income of the assessee or it would go to reduce the cost of borrowings? In other words, whether the interest amount of ₹ 22,35,48,281/- received by the assessee would be set off against the interest payment of ₹ 127,84,98,794/- on the borrowed funds. As rightly submitted by the learned CIT DR, the Apex Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra) had examined an identical situation. The question which was referred to the Supreme Court is as follows: Whether, on the facts and in the circumstance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ource of income was borrowed money does not detract 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 is not the case here. The assessee may be entitled to capitalise the interest payable by it. But what the assessee cannot claim is adjustment of this expenditure against interest assessable under section 56. Section 57 of the Act 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 of the Act. If that be so, under which other provision of law can the assessee claim deduction or set-off of his income from other sources against interest payable on the borrowed funds? There are specific provisions in the Income-tax Act for setting off loss from one source against income from another source under the same head of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. The claim of the assessee that the interest income received by the assessee would go to reduce the interest payment on borrowed funds was rejected by the Income-tax authorities. However, the Tribunal allowed the claim of the assessee. On a reference to the Madras High Court, after referring to the judgment of the Apex Court in CIT vs. Rajendra Prasad Moody (1978) 115 ITR 519 and various other judgments of the High Courts, found that the borrowing has not been exclusively and solely for the purpose of earning interest in which case alone it should be taken as income which should be deducted from the interest receipt. This judgment of the Madras High Court in Seshasayee Paper and Boards Ltd. (supra) was specifically taken note of by the Apex Court and it was observed that interest paid on borrowings for the purpose of purchase of plant and machinery could not be allowed or adjusted against the income u/s. 57(iii) of the Act. The Apex Court finally concluded that the view expressed by the Madras High Court in Seshasayee Paper and Boards Ltd. is correct and the views expressed in other cases are erroneous. From the above it is obvious that even though the Apex Court found that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of fund is the they are not required immediately for the project. 21. In this regard, it is interesting to note that in all the mentioned decisions by assessee, reliance has been placed on the decision of the Hon'ble Supreme Court in the case of CIT Vs. Bokara Steels (supra). Further, in all such cases, various judicial authorities have tried to differentiate the decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers (supra) with the decision of Hon'ble Supreme Court in the case of Bokara Steels (supra). However, in reality, the proposition of law laid down by Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers has not been overruled or distinguished by Hon'ble Supreme Court in its own decision in the case of Bokaro Steels (supra). On the other hand, in the case of Bokaro Steels Ltd.(supra) the Hon'ble Supreme Court has once again reiterated and supported its decision in the case of Tuticorin Alkali Chemicals Fertilizers(supra) with regard to the issue of treatment of interest earned on short term deposits made out of borrowed funds during the period prior to the commencement of the busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examine this issue and further made a reference that in any case, this question now concluded by the decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers (supra). The relevant portion of the decision at Para No.4 is as under:: During these assessment years, the respondent-assessee had invested the amounts borrowed by it or the construction work which were not immediately required, in short-term deposits and earned interest. It has been held in these proceedings that the receipt of interest amounts to income of the assessee from other sources. The assessee has not filed any appeal (rom this finding which is given against it. In any case, this question is now concluded by a decision of this court in Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (sq. Hence, we are not called upon to examine that issue. (Emphasis supplied) This issue of difference between the treatment of income received from contractor and the interest income received from the banks on account of short term deposits is once again highlighted by Hon'ble Supreme court in the case of Bokaro Steels (supra) at Para No.7. The relevant portion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SC), this court examined the question whether interest paid before the commencement of production by a company on amounts borrowed for the acquisition and installation of plant and machinery would form a part of the actual cost of the asset to the assessee within the meaning of that expression in section 10(5) of the Indian Income Tax Act, 1922 and whether the assessee will be entitled to depreciation allowances and development rebate with ref erence to such interest also. The court held that the accepted accountancy rule f or determining cost of f ixed assets is to include all expenditure necessary to bring such assets into existence and to put them in 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 f ixed 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 recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee derived from house property, its guest house, charges for equipment and recoveries from the contractors on account of water and electricity supply. These items are covered by the decision in Bokaro Steel Ltd.s case (supra). To the extent that it relates to these items, i.e., items excluding interest, the question must be answered in the affirmative and in f avour of the assessee. The order under challenge will stand modified to that extent . 25. Also, it is pertinent to note that in the case of Totgars Cooperative Sale Society Ltd. Vs. ITO (2010) 322 ITR 283, the Hon'ble Supreme Court has once again held that interest earned on investment of surplus funds on hand not immediately required in short term deposits and securities would not fall under business income but income from other sources. 26. We have also carefully gone through the judgment of the Delhi High Court in Indian Oil Panipat Power Consortium Ltd. (supra). The Hon ble Delhi High Court distinguished the judgment of Apex Court in Tuticorin Alkali Chemicals Fertilizers Ltd. (supra) on the ground that the funds in the form of share capital were infused for a specific purpose of acquiring land and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Tuticorin Alkali Chemicals and Fertilisers Ltd (supra). In the facts and circumstances of that case the Hon'ble Supreme Court held that the company cannot claim set off of income under the head other sources against the pre-operative / pre-production expenses to be capitalized in future under the head profits and gains of business or profession inasmuch as in the year under consideration, the business of the assessee had not started and there could not be any computation of business income' or loss incurred by the assessee in the relevant accounting year. It is further held by the Hon'ble Supreme Court that the expenditure incurred by the assessee for the purpose of setting up its business cannot be allowed as deduction, nor can it be adjusted against any other income under any other head. Similarly, any income from a non-business source cannot be set-off against liability to pay interest on funds borrowed for the purpose of establishing the business including purchase of plant and machinery even before commencement of the business of the assessee. 29. While deciding the core issue of taxability of interest earned on short term deposits made out of bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urces of income, each one of which will be chargeable to income-tax. Prof its and gains of business or profession is only one of the heads under which the companys income is liable to be assessed to tax. If a company has not commenced business there cannot be any question of assessment of its profit and gains of business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed. If the company, even before it commences business, invests the surplus f unds in its hands for purchase of land or house property and later sells it at prof it, the gain made by the company will be assessable under the head Capital gains . Similarly, if a company purchases a rented house and gets rent, such rent will be assessable to tax under section 22 as income from house property. Likewise, a company may have income f rom other sources. It may buy shares and get dividends. Such dividends will be taxable under section 56 of the Act. The company may also, as in this case, keep the surplus f unds in short-term deposits in order to earn interest. Such interest will be chargeable under section 56 of the Act. (Emphasis supplied) Aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the value of assets. Therefore in the given facts of the case, we hold that Assessee has only setup the business but has not commenced the business, therefore, the claim of revenue expenditure is not allowable as the provisions of Sec. 28 of the IT Act does not apply. 32. Since the principles laid down by the Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilisers ltd (Supra) a three judge bench decision is followed other cases relied on by assessee do not apply to the facts of the case. We reiterate that the decision of coordinate Bench of Hyderabad in the case of Kakinada SEZ Pvt Ltd (ITA No. 1215/Hyd/2010) has to be followed as the same relied on the principles laid down by the judgment of the Hon ble Supreme Court in Tuticorin Alkali Chemicals Fertilizers Ltd., Vs CIT (supra). 33. As seen from the above, the Hon'ble Supreme Court has clearly laid down the law thati. i. Before the commencement of the business of the assessee, income earned in the form of interest on deposits made with banks out of the funds borrowed from banks and financial institutions which was not immediately required for the purpose of setting up of the business should ..... X X X X Extracts X X X X X X X X Extracts X X X X
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