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TMI Blog2017 (5) TMI 1660X X X X Extracts X X X X X X X X Extracts X X X X ..... t in a series of judgments. If the receipts are inextricably connected to the project or construction, then, the amounts are to be set-off to the capital expenditure incurred during the pre-operative stage. The interest on FDs have no connection with the project/construction activity, then the same is to be brought to tax under the head ‘Other Sources’. The order of the CIT(A) has clearly demarcated the distinguishing features of various judgments of Hon'ble Supreme Court and has correctly came to the conclusion that interest on FDs is taxable during the pre-operative period under the head ‘Other Sources’. Respectfully following the jurisdictional High Court judgment as supported by the principles laid down by the Hon'ble Supreme Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the interest earned and interest paid the same ought to have been set off, consequently the addition may be deleted. 5. Your Appellant submits that the CIT(A) ought to have considered the Hon'ble Supreme Court decision in Karnal Co-operative Sugar Mills Ltd 243 ITR 2 (SC) and deleted the addition . 2. Briefly stated, assessee-company is involved in developing, maintaining warehouses and godowns etc., and during the year, the developing of operational facilities for storage of commodities, goods and articles was in progress and assesseecompany has capitalised all expenditures under the head preoperative expenses . Assessing Officer (AO) has noticed that assessee has earned interest income of ₹ 31,52,918/- and had set- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5] (SC) and also the series of judgments following the Bokaro Steel Ltd., Vs. CIT, like CIT Vs. Karnataka Power Corporation [247 ITR 268] (SC) and Bongaigaon Refinery Petrochemicals Ltd., [251 ITR 329] (SC). Ld.CIT(A) analysed the other series of judgments of Hon'ble Supreme Court in the case of CIT Vs. Govinda Choudhury Sons [203 ITR 881] (SC), CIT Vs. Karnal Co-operative Sugar Mills Ltd., [243 ITR 2] (SC) and CIT Vs. Autokast Ltd., [248 ITR 110] (SC). After analyzing the consistent line of reasoning emerged from the case law, Ld.CIT(A) has come to a conclusion that interest is taxable, following the principles laid down by the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., (supra) as conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch i.e., Bongaigaon Refinery and Petrochemicals (supra). The larger Bench of the Hon'ble Supreme Court came to the conclusion that income derived from house property, guest house, charges for equipment and recoveries from the contractors on account of water and electricity supply during the formation period of the business is not chargeable to tax but had to be adjusted against the project cost but interest income was however considered as taxable. Thus, a larger bench of the apex Court after considering the entire case law with regard to receipts of a business prior to its commencement concluded that interest income cannot be adjusted against project cost. In this case the appellant obtained loan ₹ 15,00,00,000/- from Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject and has kept them in short term FDs with another bank, not in the bank from which it has obtained loan. This indicates that the funds are not utilised for the purpose of business in the project construction. Therefore, on facts alone, the set-off cannot be given. The issue of interest earned on FDs of surplus funds are considered by the Hon'ble Supreme Court in a series of judgments. The first of which is the decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., [227 ITR 172] (SC) in which the Hon'ble Supreme Court has confirmed and analysed the taxability of interest earned during the construction period and also held that the same cannot be set-off to the interest paid on borrow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore commencement of the business. The Hon'ble High Court has held that such interest has to be separately treated as income from other sources and cannot be taken as part of the capital structure following the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., Vs. CIT [227 ITR 172] (SC). It was categorically held that interest earned on surplus funds deposited in banks during installation of company, prior to commencement of business, has to be brought to tax as Income from Other Sources u/s. 57. Respectfully following the jurisdictional High Court decision also, the contentions of assessee that this amount has to be adjusted towards capital account cannot be accepted. 5.2. In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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