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TMI Blog2015 (3) TMI 1345X X X X Extracts X X X X X X X X Extracts X X X X ..... interest from the bank deposits and earning of interest was plainly not in the ordinary course of its business and that the interest earned by the assessee was rightly assessed under the head income from other sources. We find that the FAA has clearly and logically distinguished the cases relied upon by the assessee. On the other hand,cases quoted by him, while upholding the order of the AO, fortify our view. He has also analysed the audited accounts and various agreements entered into by the assessee.In our opinion, his order does not suffer from any legal or factual infirmity. Considering the peculiar facts and circumstances of the case for the year under appeal, we decide effective ground of appeal against the assessee. - ITA No.7768/Mum/2014 - - - Dated:- 18-3-2015 - S/Sh. Joginder Singh, Judicial Member Rajendra, Accountant Member For the Appellant : Shri Venugopal C. Nain For the Repondent : Shri Neil Philip ORDER Per Rajendra, A.M. Challenging the order dated 19.12.2014 of the CIT(A)-14, Mumbai, the assessee had raised following grounds of appeal: The learned CIT(A) erred in facts and circumstances of the case and in law in confirming a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s being carried out as an infrastructure project under construction, that the assessee in filing the tax return had adopted the method of offering all the current interest income as income taxable under other sources ,that the method adopted by the assessee company was one of the manner in which taxable income was offered for taxation, that during the course of assessment the assessee company had offered to change the method of offering taxable income by claiming to withdraw the correct income filed in its tax return and reducing the same from the capital WIP, that the change in the method of offering taxable income could not be claimed in the course of assessment and as per law the same was not permitted even by filing of revised return u/s. 139(5) of the Act. Finally, the AO rejected the revised statement of computation of total income and accepted the income as filed in the original return i.e. at ₹ 7,98, 08,216/-. 3.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority (FAA).Before him, it was contended that due to conflicting decisions of Supreme Court, the assessee was not conversant with the complicated provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nting, that it has followed correct method of accounting by adjusting the capital receipt against the CWP and reducing the project cost and charge depreciation on the correct lower CWIP, that the assessee had full right to rectify the mistake by resorting to the avenues provided for it by the Act, that filing revised computation of income was one such avenue, that there was no principle of estoppels against wrong application of law particularly when there were mitigating circumstances for it, that three decisions relied upon by the AO were also not relevant, that they all dealt with revised return of income, that the AO had expressly rejected the revised return and had categorically refused to take cognisance of the revised return, that decisions on revised return had no relevance, that the AO had not brought out any cogent reason for rejecting the contention that interest earned on FD of amounts raised for setting up capital project was to be deducted from CWIP and not to be subjected to tax, that the AO made incorrect statement that assessee opted to claim higher depreciation of capitalisation and change in method of accounting, that the financial statements showed that the it ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the assessee has raised amount of ₹ 400 crores by issue of OFCD which were deposited in the trust account with nationalized bank. 4.1.In order to see if interest due to OFCD had been served, the FAA scrutinised the Audited Annual Accounts, a copy of which had been filed by the assessee.He found that as on 31/03/2010, the secured loan fund stood at ₹ 17,00,85,17,958 whereas unsecured loan stood at ₹ 400 Crores, that against that application of fund showed, pre operative expenditure during construction period (pending allocation) at ₹ 12,24,34,92,917/-as on 31/03/2010,against ₹ 10,02,45,14, 040/- as on 31/03/2009.On analysis of the accounts it was found that Pre-operative Expenditure cons truction period (pending allocation) included expenses on account of loan, insurance, power and fuel, repair and maintenance payment and provision for employees, vehicle expenses, travel and conveyance, lease rent, telephone and postage, advertisement, printing and stationery and audit fee, directors sitting fee, rehabilitation and re-settlement, legal and professional, loss on sale of assets, security expenses misc. depreciation, interest on term loan, OFCD h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was only done with a specific and limited purpose to reduce resultant tariff of the project which was substantial on account of actual accumulated interest on the part loan raised, that the project was not viable and hence financial structure had to be revised in order to achieve financial closer, that the amount was collected through OFCD had been kept in bank since then and had not been utilised for any other purpose, that looking into the facts that construction of the project was not completed it could not be said to be a project under construction, that rather it was a project at the verge of being abundant with. 4.3.FAA also discussed the decisions cited by the assessee. He held that that in the case of Rajputana Trading Co. Pvt. Ltd.(72 ITR 286)it was held that when there was fairly direct and proximate relationship, it would be illogical and irrational to treat profit as having the so called neutral source and not springing out of said business, that in the case of Bokaro Still Ltd.(236 ITR 315)a government company, during the period of construction plan, had advanced moneys to contractors on which it was earning interest and received charges from quarter let out to emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e receipt fell u/s.28 or u/s.56. 4.4.The FAA further held that the assessee-company was claiming to construct the project since 1993,that it had been not able to establish the project even in 2014-15-leave aside implementation of the same in the relevant period to AY.2010-11,that the plea taken by the assessee that the interest was earned on fixed deposit was inextricably linked to the construction was totally unsupported, and imaginary, that the assessee had failed to even given details of work in progress not only for FY.2009-10 but even for earlier AYs., that it was a matter of public knowledge and again the details available on the website that project was in the stage of being shelved with ,that as per news reports a notice had been issued by authorities which was available on website, that as per the note Government and the assessee had signed an Amendatory and Restated Agreement A RA) on 16.09. 2005, that according to the RA the Commercial operation Date (CoD) of the project should have been four years from 09.03.2006, that four-year window expired on 08. 03. 2010. 4.5.Considering those facts, he held that the project itself had not been set up, that the plea of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest earned on convertible bond was taxed as income from other sources. 5.Before us, Authorised Representative (AR)contended that investment was made by the assessee in pursuance of the agreement entered into with various agency, that in later years ITO TDS had issued certificate and had held that no TDS was to be made, that there was no change in accounting policy. He relied upon the cases that were referred to before the FAA. Departmental Representative (DR)supported the order of the FAA and relied upon the case of Tuticorin Alkali Chemicals and Fertilizers Ltd(227ITR172). 6.We have heard the rival submissions and perused the material before us. We find that the dispute between the department and the assessee is that whether the interest income originally offered as income from other sources should be allowed to set off against the interest expenses incurred for project in order to reduce the CWIP i.e. project cost. In other words the interest income received by it should be taxed under section 56 or as income from business and should be allowed to set off against the interest expense. Undisputed facts of the case are that the assessee was in the process of setting up of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee on the amounts deposited with the bank had nothing to do with the construction activities and as such it was taxable income under the head Income from other sources under section 56 of the Act. Since the borrowing by the company was for the purpose of construction and had no relation with the earnings of interest on the deposit, the Income-tax Officer was of the view that the interest paid could not be deducted from the interest received under section 57 of the Act. However, a sum of ₹ 10,000 was allowed which was considered as relatable to the earnings of the income of interest as there were certain administrative expenses incurred by the company. The Tribunal, however, held that the interest was not taxable under section 56 and that the interest received on short-term deposits with banks was to be reduced from the interest payments, while capitalising the various expenditures to capital account. On a reference, the Hon ble Court decided the issue as under: (i)that the interest of ₹ 2,58,089 received on short-term deposits was taxable under section 56; (ii)that the interest received on short-term deposits could not be reduced from the interest p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... XX XX XX XX Mr. Talukdar, learned counsel appearing for the assessee, placing reliance on the following judgments : (1) CIT (Addl.) v. Indian Drugs and Pharmaceuticals Ltd. [1983] 141 ITR 134 (Delhi) ; (2) CIT v. Bokaro Steel Ltd. (No. 1) [1988] 170 ITR 522 (Patna) ; (3) CIT v. Nagarjuna Steels Ltd. [1988] 171 ITR 663 (AP) ; (4) CIT v. Electrochem Orissa Ltd. [1995] 211 ITR 552 (Orissa) ; and (5) CIT v. Maharashtra Electrosmelt Ltd. [1995] 214 ITR 489 (Bom), contended that the view taken by the Tribunal in the face of these authorities was a justifiable view, and should not, therefore, be upset or interfered with. The judgment in Tuticorin Alkali Chemicals and Fertilizers Ltd. s case [1997] 227 ITR 172 (SC) was not available to the Tribunal or the appellate authorities as indeed, it could not be, as it was decided on July 8, 1997, and can only have prospective effect and operation. This necessarily takes me to the question of the jurisprudence of precedents. When the court decides and particularly the apex court, decides that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt are permissible in law or not, the question has to be decided according to the principles of law, and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Income-tax Act (emphasis supplied). Under the Income-tax Act, 1961, the total income of a company is chargeable to tax under section 4. The total income has to be computed in accordance with the provisions of the Act. Section 14 lays down that for the purpose of computation, income of an assessee has to be classified under six heads. It is possible for a company to have six different sources of income, each one of which will be chargeable to income-tax. Profits and gains of business or profession is only one of the heads under which a company's income is liable to be assessed to tax. If a company has not commenced business, there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed. The company may keep the surplus funds in short-term deposits in order to earn interest. Such interests will be chargeable u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by us). From the above decisions it is clear that the bare fact that the assessee deposited money in the bank is itself not sufficient to show that the deposit was made with a view to carrying out the business in the sense of earning profit by investment. Considering the facts of the present case-that there was neither setting up nor commencement of business during the year under consideration,that non commencement of the project is continuing since 1993,that the money raised in form of OFCE was not raised for any construction of project or purchase of plant and machinery or for obtaining any license or letter of credit etc. but was only done with a specific and limited purpose to reduce resultant tariff of the project,that interest earned by the assessee from the nationalised banks had nothing to do with the setting up or commencing of the business, that it was a pure and simple case of accruing of interest income from deposit-we are of the opinion that that the assessee earned the interest from the bank deposits and earning of interest was plainly not in the ordinary course of its business and that the interest earned by the assessee was rightly assessed under the head inco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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