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TMI Blog2018 (9) TMI 344X X X X Extracts X X X X X X X X Extracts X X X X ..... a, CITDR ORDER Per Shri Pavan Kumar Gadale, JM : These are the appeals filed by the assessee against the separate orders of CIT(A)-1 3, Bhubaneswar, dated 28.04.2016, 04.11.2016 04.12.2017 passed in I.T.Appeal Nos.0120/2014-15, 0472/15-16 and 0254/16-17, for the assessment years 2011-2012, 2013-2014 2014- 2015. 2. Since issues the above appeals are common, therefore, they are heard together and disposed off by this consolidated order. For the sake of convenience we shall take up assessee s appeal i.e. ITA No.429/CTK/2016 for assessment year 2011-2012 and the grounds and facts mentioned therein, wherein the assessee has raised the following grounds of appeal :- GROUND OF APPEAL We are not agreeing with the computation of tax on interest earn by company made by assessing officer. During the assessment, the cases we submitted to justify our claim (as mentioned in statement of facts) has not been paid any emphasis for deciding the case by the A.0 and CIT (Appeal- 3),Bhubaneswar. On the other hand the A.0 and CIT (Appeal-3) finally imposed his decision based on the facts of Alkali Tuticorin Chem. And fertilizers ltd. in which it h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6, HC Delhi 3- ITO Vs Facor Power Ltd(TTAT Delhi VTTA No.4300/DEL/2012,Date of Decision: 10.06.2015. 4- CIT Vs. Jaypee DSC Ventures ltd. ITA 357/2010 HC Delhi 5- CIT Vs Saraswati kunj Co. op Housing Building Society( 2006 287 ITR 22) HC Delhi 6- CIT Vs Arihant Thread ltd.(2011)-49 DTR(T H 251) 7- CIT Vs NTPC Sail Power Co. Ltd. ITS 1238/2011 HC Delhi 8- CIT v. Govinda Choudhury and Sons (1993) 203 ITR 881 (SC) 9- CIT v. Madhya Bharat Energy Corporation Ltd. (2011)337ITR 389 (Del) 10- Indian Oil Panipat Power Consortium Ltd. v. ITO (2009) 315 ITR 255 (Del) 1 l-Mazagaon Dock Ltd v. CIT/Excess Profits Tax (1958) 34 ITR 368 (SC), 12- Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax (1954) 26 ITR 765 (SC) 13- S.G. Mercantile Corporation P. Ltd v. CIT (1972) 83 ITR 700 (SC). The imposed demand is prejudicial and offers unnecessary hardship on us, since our affairs is still lying on the verge of development only, we do not have commenced yet. We have the valid reason for taking that interest earned (Rs 91,56,600.00 and TDS of ₹ 12,72,540.00,Tax Demand of ₹ 22,33,130.00) is for ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in our case the operations is still lying in the developmental phase and therefore our plea shall be accepted and necessary refund shall be processed in the said case (i.e. A.Y.2011-12).( The latest case is attached for your reference CIT Vs FACOR POWER LTD ITA 1011/2015, Jdg.07-01-2016, HC Delhi ) Therefore the tax refund claimed ₹ 35,05,670.00 (as TDS of ₹ 12,72,540.00 and Tax demand paid of ₹ 22,33,130.00) on interests earned is of capital nature . This is inextricably linked to the setting up of the business (please refer the case of Bokaro Steel Ltd. (1999) 236 ITR and the latest decision of Pr. CIT Vs FACOR POWER LTD ITA 1011/2015, Jdg.07-01-2016, HC Delhi ) and shall be refunded to us , because such income is to be treated as capital receipt is required to be capitalized and to be set off against pre-operative expenses. As in our case the operations is still lying in the developmental phase and therefore our plea shall be accepted and necessary refund shall be processed in the said case (i.e. A.Y.2011-12). Hope above ground of appeal is valid for taking the matter in appeal. 3. Brief facts of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utilized for the mining developments and incurring of capital expenditures after obtaining clearance from the Central Government and State Government and other agencies. The ld. AR mentioned that the mining operations are in the developmental phase and supported the submissions with judicial decisions and prayed for allowing the appeal of the assessee. 7. Contra, ld.DR relied on the order of lower authorities. 8. We have heard rival submissions and perused the material on record. The sole matrix of the disputed issue is with respect of assessing the interest on bank deposits under income from other sources. In the present case we find the AO in the assessment proceedings observed that the company was formed to set up a mining project and the process of setting up is got delayed and utilization of share capital in bank deposits cannot be considered as inextricably link with the process of setting of its plant and machinery. In appellate proceedings, the CIT(A) confirmed the addition on the ground that the primary objective of holding the share capital as investment is for purpose of deriving interest income in absence of commencement of business, where the contentions of ld. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... original assessment. The verification of the said Annexure reveals that the Respondent had earned the interest income on FDRs placed with the bank, however, the period for which such FDRs were placed and the specific period of the interest earned was not found to have been mentioned. Under the circumstances, it was not possible to identify as to what portion of interest earned on FDRs was relating to the period prior to the allotment of shares or after the allotment of shares. Keeping in view the specific guidelines of the Tribunal in this regard and in the absence of specific working of interest for pre-allotment and post-allotment, the claim of the Respondent was not allowed and added to the total income under the head income from the other sources as was declared in the original return of income filed by the Respondent. 9. Coming back to the facts of the case, we may reiterate that the Respondent was statutorily required to keep share application money in the separate account till the allotment of shares was completed. Interest earned on such separately kept amount was to be adjusted towards expenditure for raising share capital. We are, therefore, of the opinion that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as income from other sources but if the income accrued is merely incidental and not the prime purpose of doing the act in question which resulted into accrual of some additional income then the income is not liable to be assessed and is eligible to be claimed as deduction. Putting the above rationale in terms of the present case, if the share application money that is received is deposited in the bank in light of the statutory mandatory requirement then the accrued interest is not liable to be taxed and is eligible for deduction against the public issue expenses. The issue of share relates to capital structure of the company and hence expenses incurred in connection with the issue of shares are to be capitalized because the purpose of such deposit is not to make some additional income but to comply with the statutory requirement, and interest accrued on such deposit is merely incidental. In the present case, the Respondent was statutorily required to keep the share application money in the bank till the allotment of shares was complete. In that sense, we are of the view that the High Court was right in holding that the interest accrued to such deposit of money in the bank is liabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In order to effectuate the purpose for which joint venture was conceived, share capital was contributed by Indian Oil Corporation and Marubeni Corporation of Japan which included ₹ 20 crores by way of additional share capital. 3.2 To be noted that the assessee had taken a stand before the Assessing Officer that these funds were required primarily for purchase of land and development of infrastructure. However, due to legal entanglements with respect to title of land, which the Haryana Government was to acquire for the assessee, in the interregnum, the funds acquired by way of share capital were put in a fixed deposit with the Tokyo Mitsubishi Bank by the assessee. 3.3 The assessee earned interest in the sum of ₹ 1,65,75,906 in assessment year 2001-02 and ₹ 1,54,62,098 in the assessment year 2002-03. As mentioned hereinabove the Assessing Officer applied the ratio of the judgment of the Supreme Court in Tuticorin Alkali Chemicals Fertilizers Ltd.'scase (supra) and the judgment of the Supreme Court in the case of CIT v. Autokast Ltd. [2001] 248 ITR 110 and held that the interest which accrued to the assessee was assessable under the head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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. 5.1 The test, therefore, to our mind 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 beginning with the date of setting up of the business. Therefore, as per the provision of section 4 of the Act which is the charging section income which arises to an assessee from the date of setting of the business but prior to commencement is chargeable to tax depending on whether it is of a revenue nature or capital receipt. The income of a newly set-up business, post the date of its setting up can be taxed if it is of a revenue nature under any of the heads provided under section 14 in Chapter IV of the Act. For an income to be classified as income under the head profit and gains of bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se (supra) 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. 6. There is another perspective from which the present issue can be examined. Under section 208 of the Companies Act, 1956 a company can pay interest on share capital which is issued for a specific purpose to defray expenses for construction of any work and which cannot be made profitable for a long period subject to certain restrictions contained in sub-sections (2) to (7) of section 208. This section was specifically noted by the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. The Supreme Court went on to observe as follows: We have already referred to section 208 of the Companies Act which makes provision for payment of interest on share capital in certain contingencies. Clause (b) of sub-section (1) of that section provides that in case interest is paid on share capital issued for the purpose of raising money to defray the expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordinate bench of the Tribunal in the case of POSCO-India Pvt. Ltd. Vs. DCIT, ITA Nos.186,462 461/CTK/2011, dated 14.02.2013, where the Tribunal has observed that, the head income from other sources is a residuary head of income. In the present case, on perusal of the facts and application of judicial decisions, there share capital were infused in the company for a specific purpose of acquiring land and the development of infrastructure and 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 in the nature of capital receipt and, hence, set off against pre-operative expenses. The observations of the Tribunal at para 5 read as under :- 5. We have heard the rival parties and perused the material available on record. On our careful consideration of the facts and circumstances of case as brought on record by the authorities below, we are inclined to find the contention of the learned Counsel of the assessee appropriate to the extent that it was never a change of stance on the facts remaining the same begi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness or profession it would have to be an activity which is in some manner or form connected with business. The word business is of wide import which would also include all such activities which coalesce into setting up of the business. Once it is held that the assessee's income is an income connected with business, which would be so in the present case, in view of the finding of fact by the Commissioner of Income-tax (Appeals) that the monies which were inducted into the joint venture by the Koreans were primarily infused to purchase land and to develop infrastructure then it cannot be held that the income derived by parking the funds temporarily with Bank, will result in the character of the funds being changed, inasmuch as, the interest earned from the bank would have a hue different than that of business and be brought to tax under the head Income from other sources . It is well-settled that an income received by the assessee can be taxed under the head Income from other sources only if it does not fall under any other head of income as provided in section 14 of the Act. The head Income from other sources is a residuary head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 56 of the Income-tax Act . Subsequently Hon'ble Apex Court in the case of CIT v. Bokaro Steel Ltd (supra) held - However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction. Merits for consideration as brought on record for the AYs in appeal before us are as under : Particulars. As on 31.3.2006 As on 31.3.2007 As on 31.3.2008 1. Share Capital 22500.00 22500.00 22500.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... karo Steel Ltd (supra) was whether the business of the assessee was to claim the expenditure incurred for earning of such interest having been adjusted against the other expenses incurred rather leans in favour of the assessee to the extent that the interest was inextricably linked to the expenditures incurred which project cost did not require further approval but was taking time which time earned interest to the assessee when recoding expenditure have been claimed from the interest earned for consideration of 10% thereof was not to be disturbed at all. In this view of the matter, we are of the considered view that for the Assessing Year 2008-09 the interest cannot be taxed as income from other sources in the hands of the assessee and therefore, the subsequent disallowance of expenses claimed at 10% to earn that income has been infused in the total project cost cannot be disallowed insofar as the whole of the income has been capitalized was rightly considered for revision by the assessee before the Assessing Officer filing NIL return. The appeal for the Assessment Year 2008-09, therefore, is allowed on the basis of facts and figures brought on record by the Assessing Officer as we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the form of fixed deposits for short term, is to be considered as inextricably linked with the process of setting of its plant and machinery. Accordingly, we hold that the interest earned by the assessee should not be treated as income from other sources and we allow the grounds of appeal of the assessee. Therefore, the appeal of the assessee for assessment year 2011-2012 is allowed. 13. Now, we shall take up the appeals of the assessee in ITA No.68/CTK/2017 ITA No.107/TK/2018. Similar grounds have been raised by the assessee in its appeals for the assessment years 2013- 2014 2014-2015, wherein the sole grievance of the assessee is that the CIT(A) erred in treating the interest income to be taxed under income from other sources. We have already decided the issue in favour of the assessee while considering the appeal of the assessee in ITA No.429/CTK/2018 for the assessment year 2011-2012, wherein we have held that interest income earned by the assessee could not be treated as income from other sources. Therefore, our observations in the aforesaid appeal for the assessment year 2011-2012, shall apply mutatis mutandis to the appeals of the assessee for assessment years 2013- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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