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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 ..... 8 - DELHI HIGH COURT) . - ITA No. 1078/Mum/2013 - - - Dated:- 3-10-2017 - SHRI G.S.PANNU, ACCOUNTANT MEMBER AND SHRI RAVISH SOOD, JUDICIAL MEMBER For The Appellant : Shri J.D.Mistry For The Respondent : Shri V.Justin ORDER PER G.S.PANNU, A.M: The captioned appeal filed by the assessee is directed against an order of the CIT(A)-16 Mumbai dated 01/11/2012, pertaining to the assessment year 2008-09, which in turn has arisen from order passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 (in short the Act ) dated 20/12/2010 2. In this appeal, the substantive dispute raised by the assessee is with regard to the nature and taxability of interest earned by the assessee of ₹ 3,09,25,159/- on Fixed Deposits with banks. 3. In brief, the relevant facts are that the appellant is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in hotel business. Its activity includes to own, run, manage and operate various hotels under the brand names such as the Orchids, VITS, Vithal Kamat Original Family Restaurants, etc. In order to part-finance its expansion plans, assessee had borrow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'ble Supreme Court in the case of CIT vs. Bokaro Steel Ltd., 236 ITR 315(SC). It was sought to be contended that in terms of the parity of reasoning laid down by the Hon'ble Supreme Court in the case of Bokaro Steel Ltd. (supra) any interest or other miscellaneous income earned at the stage of construction work, while setting up a business, can be treated as an abatement of the capital cost, so as to reduce the cost of the capital work-in-progress upto the date of the completion of the projects. As an alternative, assessee also raised a plea that if the interest income was to be taxed under the head income from other sources , a corresponding deduction in respect of expenses on issue of FCCBs and interest on FCCBs raised needs to be allowed in accordance with the provisions of section 57(iii) of the Act. 3.1 The Assessing Officer, however, brought to tax the entire interest income of ₹ 3,09,25,159/- as income from other sources following the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra). In doing so, the Assessing Officer also denied the alternate plea of the assessee for allowing of deduction of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is inextricably linked with the process of setting-up a project, one may look at the purpose for which the relevant funds have been raised and in the present context the FCCBs have been raised with the purpose of investment in the ongoing hotel projects only. In support of his submission, the Ld. Representative for the assessee pointed out that factually speaking, the FCCBs could be used only for the purposes of the ongoing hotel project and, therefore, same are inextricably linked with setting-up of the new hotels and, accordingly, any interest earned in the short period pending deployment of such funds in the construction activity is to be viewed as a capital receipt, which would go to reduce the cost of the capital work-in-progress. In support of his submissions, reliance has been placed on the following judgments:- (i) NTPC Sail Power Company (P) Ltd.,(2012) 25 taxmann.com 401(Del) (ii) Indian Oil Panipat Power Consortium Limited vs. ITO 315 ITR 255 (Del) (iii) CIT v. Karnal Co-operative Sugar Mills Ltd., 243 ITR2 (SC) 6. On the other hand, the Ld. Departmental Representative has reiterated the reasoning adopted by the lower authorities, which we have already note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ork-in-progress. Pending deployment of the complete FCCB proceeds, assessee earned interest income by placing the funds in a separate fixed Deposit account with banks, as such funds were to be exclusively used in the new hotel projects. Before the lower authorities, assessee asserted that the interest expenditure and other expenses incurred on issuance of FCCBs has been capitalized in the cost of capital work-in-progress of the new projects, being expenditures which are inextricably linked with setting-up of the new hotel projects. The moot question is whether the interest income earned by the assessee on deposits made with banks out of the FCCB proceeds, awaiting deployment in the construction of the new hotels, is liable to be taxed as the income in isolation or the same is liable to be treated as inextricably linked with setting-up of the new hotel projects, so as to reduce the cost of capital work-in-progress. 8.1 In this context, the stand of the Revenue is that such income is from the deposits placed with bank and not from the construction of the new project and, thus, the same is not inextricably linked with the setting-up of the new hotel projects. The stand of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court in the context of the above arguments observed as under:- 5. In our opinion, the Tribunal has misconstrued the ratio of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra) and that of Bokaro Steel Ltd. (supra). The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals Fertilizers Ltd. s case (supra) is that if funds have been borrowed for setting up of a plant and if the funds are surplus and then by virtue of that circumstance they are invested in fixed deposits the income earned in the form of interest will be taxable under the head Income from other sources . On the other hand, the ratio of the Supreme Court judgment in Bokaro Steel Ltd. s case (supra) to our mind is that if income is earned, whether by way of interest or in any other manner on funds which are otherwise inextricably linked to the setting up of the plant, such income is required to be capitalized to be set off against pre-operative expenses. ........................................................................................................................... 5.2 It is clear upon a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ongoing new hotel projects and it is only during the period awaiting deployment of full funds in the construction of new projects that a part has been placed in the banks, which has yielded impugned interest income. It may be a case of idle funds , as the CIT(A) has put it, but it certainly is not a case of surplus funds, so as to attract the rationale of Tuticorin Alkali Chemicals Fertilisers Ltd. (supra). Because it is only in the interregnum period, pending utilisation in the construction of new projects, that the funds have been put in fixed deposits with banks; but, there is no dispute that such funds have been raised for financing the construction of new projects. It is not the case of the Revenue that the deposits with the bank are not for a temporary period. In such a situation, it is the rationale laid down in the case of Bokaro Steel Ltd. (supra), which is applicable. 8.4 In this context, we may also refer to the fact-situation in the case of NTPC Sail Power Company (P) Ltd., (supra) before the Hon'ble Delhi High Court. In the case of NTPC Sail Power Company (P) Ltd.,(supra), assessee was in the business of running power plant and in terms of its expansion p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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