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TMI Blog2013 (1) TMI 929X X X X Extracts X X X X X X X X Extracts X X X X ..... est of Rs. 6,09,35,544/- during the FY 2007-08. Since the assessee had not commenced business operation, the AO was of the view that the said amount of interest earned on that FDS in banks, is taxable in the hands of the assessee as income under the head 'income from other sources' for the AY 2008-09. As the assessee had not offered the said interest amount for taxation during the course of assessment proceedings, the AO vide his letter dated 18/10/2010, had asked the assessee to explain as to why the said interest earned on fixed deposits in banks should not be taxed, treating as income from other sources. In reply, the assessee submitted that it had obtained secured loan of Rs. 375.04 crores from banks for a multi product special economic zone project. The said loan could not be deployed immediately and was kept in fixed deposits with the banks, so as to earn interest which in effect reduced the actual interest outgo. He further submitted that during the year the company earned interest income of Rs. 6,09,35,544/- on such fixed deposits and it paid interest of Rs. 37,24,56,856/- on the said secured loan. It was further stated that the said amount of interest earned was netted off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in the cases of CIT v. Bokaro Steel (236 ITR 315), CIT vs. Karnataka Power Corporation, (247 I.T.R. 268) and Bongaigaon Refinery and Petro Chemical Co. Ltd. vs. CIT (251 I.T.R. 329). The delhi High Court distinguished the decision of the Apex Court in the case of Tuticorin Alkali Chemicals (227 ITR 172). 7. In the cases of Indian Oil Panipet Power Consortium Ltd 315 ITR 255 the delhi High Court observed: "the funds in the form of share capital were infused for the specific purpose of acquiring land and the development of infrastructure. Therefore the interest earned on funds primarily brought for infusion in the business could not be classified as "Income from other sources". Since the income was earned in a period prior to commencement of business it was in the nature of a capital receipt and was required to be set off against preoperative expenses." 8. The test, therefore, is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the plant. The clue is perhaps available in section 3 of the Act which states that for newly set up business the previous year shall be the period begi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operative expenses. The Delhi High Court found that in the case of Tuticorin Alkali Chemicals [1997] 227 ITR 172 it was found by the authorities that the funds available with the assessee in that case were " surplus" and, therefore, the Supreme Court held that the interest earned on surplus funds would have to be treated as " income from other sources". On the other hand in Bokaro Steel Ltd. [1999] 236 ITR 315 (SC) where the assessee had earned interest on advance paid to contractors during pre-commencement period was found to be "inextricably linked" to the setting up of the plant of the assessee and hence was held to be a capital receipt which was permitted to be set off against pre-operative expenses. 10. The Court was of the view that situation in the case before them is quite similar to the circumstances considered by the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, except here instead of paying interest on funds brought in for specific purpose interest is earned on funds brought in by way of loans share capital for a specific purpose. Could it be said that in the former situation interest could have been capitalized and in the latter situati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner Income Tax 251 I.T.R. 329 (SC) held that such receipts are not income." 10. It is no doubt correct that the proviso to section 36(1)(iii) of the Income Tax Act enacts that any amount of the interest paid towards ("in respect of") capital borrowed for acquisition of an asset or for extension of existing business regardless of its capitalization in the books or otherwise, "for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use" would not qualify as deduction. However, in all these cases, when the interest was received by the assessee towards interest paid for fixed deposits when the borrowed funds could not be immediately put to use for the purpose for which they were taken, this Court, and indeed the Supreme Court held that if the receipt is "inextricably linked" to the setting up of the project, it would be capital receipt not liable to tax but ultimately be used to reduce the cost of the project. By the same logic, in this case too, the funds invested by the assessee company and the interest earned were inextricably linked with the setting up of the power plant. It may be ad ..... X X X X Extracts X X X X X X X X Extracts X X X X
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