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TMI Blog2017 (8) TMI 168X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue directed against the order of the Commissioner of Income-tax (Appeals)-I, Bengaluru, dated February 3, 2015 for the assessment year 2011-12. The cross-objections are filed by the assessee-company. 2. Briefly facts of the case are that the assessee is a company duly incorporated under the provisions of the Companies Act, 1956. It is a joint venture company between Bharatiya Reserve Bank Note Mudran Pvt. Ltd. and M/s. Security Printing and Minting Corporation of India Ltd. It is engaged in the business of developing, designing, manufacturing and supplying of currency paper and bank note paper. During the previous year relevant to assessment year under consideration, it is in the process of setting up of plant for manufacture of paper. The assessee filed return of income for the assessment year 2011-12 on September 29, 2011 through e-filing. After processing the return of income, the case was selected for scrutiny by issuing notice under section 143(2) of the Income-tax Act, 1961 ( the Act for short) and the assessment was completed under section143(3) vide order dated June 28, 2013 by the Income-tax Officer, Ward 11(1), Bengaluru, at a total income of ₹ 5,50,78, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time and accordingly invested the same in fixed deposits of short-term. Thus, in my considered opinion the interest earned by the appellant is inextricably linked to its capital expenditure and therefore it is proper to reduce such income from, the preoperative expenses rather than treating it as an item of revenue. 7.3 In the case of Bokaro Steel Ltd. the hon'ble Supreme Court has held as under (headnote) : '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 .' 7.4 The Supreme Court in the case of CIT v. Karnal Co-operative Sugar Mills Ltd. [2000] 243 ITR 2 (SC), has held that where the assessee had deposited money to open a letter of credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eping the money in current account would not yield any interest income. It can therefore, be seen that it is during the course of construction that the monies are kept in deposits with the bank. In these circumstances, in the light of the Supreme Court decisions in the cases of Bokaro Steel Ltd. (supra), Karnal Co- operative Sugar Mills Ltd. (supra) and Karnataka Power Corporation (supra), the claim of the assessee is reasonable and deserves to be accepted.' 8. Now, having regard to the facts brought on record that the bank deposits were made for a short period keeping in mind the commitments of the applicant company from time to time and not with an intention to earn the interest and such interest earned having been inextricably linked with its capital expenditure, I am of the considered opinion that the decision of the hon'ble Supreme Court in the case of Bokaro Steel Ltd. (supra) is applicable to the assessee case and not that of the hon'ble Supreme Court decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. v CIT [1997] 227 ITR 172 (SC). Thus, the interest earned which is earmarked and kept as deposit with banks for capital expenditure has to go to reduce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to the facts of the case. 6. On the other hand, learned counsel for the assessee placed reliance on the order of the Commissioner of Income-tax (Appeals). 7. We heard rival submissions and perused material on record. The short issue that comes up for consideration in the present appeal is whether interest income earned by the assessee during the construction period on bank deposits made out of share application money received by it, is taxable as Income from other sources or it should go to reduce the capital cost of the plant which is being set up by the assessee-company. Undisputedly, the facts are that the said interest income was earned by the assessee-company on bank deposits made out of share capital received by it from the Reserve Bank of India. The share capital was received by the respondent-assessee-company to meet capital expenditure for setting up of the assessee's factory. As the funds were not immediately required, the respondent-assessee made deposits with the bank on which the assessee earned interest. This interest income was treated as abatement of capital cost of the project/factory by the assessee-company in the books of account, whereas the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material on record, we have noticed that the assessee-company is a Government owned company. In order to facilitate infrastructure facilities in various parts of the State of Karnataka, for increasing the export of horticultural produce, a sum of ₹ 10 crores was granted to the asses see. Before the utilisation of this grant amount, it was temporarily kept in fixed deposits and the interest was earned on the said amount. The assessee has placed certain additional evidence before the Tribunal to establish that the Government of Karnataka had specifically directed that interest earned on fixed deposits of grants pending utilisation should be treated as additional grant of the scheme and not to be treated as 'income of the company'. No liberty was provided to the company to make use of that the interest earned on the said amount kept in fixed deposits. Though the assessee- company is engaged in trading in agricultural produce, it has no power to make use of the said grant made by the Government of Karnataka other than for a particular scheme i.e., the said amount cannot be diverted for any other purpose other than for which it was sanctioned as per the Government order d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is implemented as per the guidelines of the Central Government and, therefore, the assessee is only acting as a nodal agency of the Central Government for implementation of these projects. It is not the case of the Revenue that the assessee was carrying on any business or activities of its own while implementing the scheme in question. The unutilised money, during which the project could not be fully implemented, is deposited in a bank to earn interest. That interest earned is also again utilised for the implementation of the mega-city scheme which is also permitted under the scheme. Therefore, in computing the total income of the assessee for any previous year the interest accrued on bank deposits cannot be treated as an income of the assessee as the interest is earned out of the money given by the Government of India for the purpose of implementation of mega-city scheme. Therefore, we do not find any error in the conclusion reached by the Tribunal that there was no income earned by way of interest by the assessee and setting aside the order of the Assessing Officer which is affirmed by the first appellate authority. The finding given by the Tribunal is purely a question of fact. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... originally granted has to be considered as an additional grant and not an income of the assessee-company. As explained by the apex court, in Bongaigaon Refinary and Petrochemicals Ltd.'s case (supra), in Tuticorin's case, the investment in deposits was made by the company during its formative period by investments and in Bokaro Steel Ltd.'s case (supra) the inextricable link between the interest earned and the setup of the plant was established. Thus, in the present case we are of the view that this is not an investment made subsequent to the setting up of the project but this is the unutilised income parked in fixed deposits for a temporary period and inextricable link for the interest earned on the grants and the original grant made by the State Government to set up a project is established as in Bokaro Steel Ltd. case. Respectfully following the ratios of the decisions laid down in the above cases, we hold that even in the present case also, interest earned should only go to reduce the capital cost of the project to be set up by the respondent company and it should not be brought to tax, as the interest is earned on capital account. The appeal of the Revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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