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TMI Blog2017 (11) TMI 849X X X X Extracts X X X X X X X X Extracts X X X X ..... s, VITS, Vithal Kamat Original Family Restaurants, etc. In order to part-finance its expansion plans, assessee had borrowed funds by way of Foreign Currency Convertible Bonds (FCCBs) in the earlier financial year ending 31/03/2007, which aggregated to Rs. 79,56,00,000/-. The assessee undertook its expansion plan, in terms of which it was seeking to construct 100 more guest rooms to the existing rooms at The Orchid Hotel, Mumbai and was also putting up a new hotel at Pune, Fort Jhadav Gadh and another hotel at Himachal Pradhesh (Baddi). Such expansion was partly financed by the FCCBs raised by the assessee. It has been canvassed before the lower authorities as well as before us that the aforesaid borrowings were put to use in setting-up of new hotel projects, including hotel Fort Jhadav Gadh at Pune and the additional rooms in the existing Orchid hotel at Mumbai. It transpires that pending full deployment of the funds in the ongoing projects, assessee had placed the funds in bank deposits, which earned interest income of Rs. 3,09,25,159/-. Simultaneously, assessee had incurred expenses on the issue of FCCBs as well as interest on borrowings. The said expenditure was relatable to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so, the Assessing Officer also denied the alternate plea of the assessee for allowing of deduction of interest and other expenses paid on FCCBs under section 57(iii) of the Act. 4. In appeal before the CIT(A), assessee made varied submissions on facts and in law, primarily reiterating what was submitted before the Assessing Officer. The CIT(A) has affirmed the decision of the Assessing Officer and noted that the reliance placed by the assessee on the judgment of the Hon'ble Supreme Court in the case of Bokaro Steel Ltd. (supra) was misplaced and that the case of the assessee was to be decided in the light of the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). According to the CIT(A), the judgment of the Hon'ble Supreme Court in the case of Bokaro Steel Plant is applicable in a situation where assessee was to earn amounts, which are inextricably linked with the process of settingup of its project. According to the CIT(A), in the present case, the interest earned is on deposits made in the bank is out of "idle funds" and that in such a situation the judgment of the Hon'ble Supreme Court in the case of Tutico ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive has reiterated the reasoning adopted by the lower authorities, which we have already noted in the earlier paras and is not being reproduced for the sake of brevity. Apart therefrom, the Ld. Departmental Representative pointed out that the interest income in question was earned from the deposits placed with the bank and not from the ongoing construction of the hotel projects and, therefore, the ratio of the judgment of the Hon'ble Supreme Court in the case of Bokaro Steel Ltd. (supra) has been rightly not applied by the lower authorities. It is further pointed out that the onus to establish that there is an inextricable link between the income in question and the ongoing construction of hotel project is on the assessee which has not been discharged by the assessee. 7. In reply, the Ld.Representative for the assessee reiterated the reliance on the ratio laid down by the Delhi High Court in the cases of NTPC Sail Power Company (P) Ltd.,(supra) and Indian Oil Panipat Power Consortium Limited (supra). With regard to the linkage between the impugned interest income and the ongoing hotel project the Ld. Representative for the assessee explained that assessee has demonstrated the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed with the setting-up of the new hotel projects. The stand of the assessee is to the contrary and it is emphasised that the FCCBs have been raised for the purpose of investment in the new hotel projects and, therefore, the interest earned is inextricably connected to the setting-up of the new hotel projects. 8.2 In this context, we may refer to the judgment of Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Limited (supra), which has explained the judgments of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and Bokaro Steel Ltd. (supra). In the case before the High Court, assessee was a joint venture between two Corporations to set-up a power project and with that objective both joint venture partners contributed the share capital. The assessee had temporarily put such funds in fixed deposits with bank and earned interest thereon and claimed that the interest income was in the nature of capital receipt liable to be set-off against the pre-operative expenses, whereas the Revenue sought to tax it as 'income from other sources'. The assessee had claimed that the funds were required for purchase of lan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ................................ 5.2 It is clear upon a perusal of the facts as found by the authorities below that the funds in the form of share capital were infused for a 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 have been 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 capital receipt and hence was required to be set off against pre-operative expenses. In the case of Tuticorin Alkali Chemicals & Fertilisers Ltd., 227 ITR 172 (SC) 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., 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nning power plant and in terms of its expansion plan, it proposed to set-up a new unit. For the said purpose, it raised Term loans and the interest relatable to the borrowings utilized for expansion purpose was capitalized as the cost of construction. The assessee also earned interest on temporary deposits of surplus funds and interest on margins/ advances made for the purposes of expansion; and, such interest income was adjusted against the cost of construction of the new project. In this background also, the Hon'ble High Court held that the funds invested by the assessee and interest earned were inextricably linked with the setting-up of the power plant and, therefore, it negated the stand of the Revenue of treating such interest income as a revenue receipt. The fact-situation before us is similar and therefore the issue has to be decided in the manner in which the Hon'ble Delhi High Court has resolved the controversy. Thus, in the instant case also, it has to be deduced that interest on FCCB funds temporarily placed in fixed deposits awaiting deployment in the construction of new projects is a capital receipt, since the FCCB proceeds are "inextricably linked" with the constr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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