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TMI Blog2017 (11) TMI 1815X X X X Extracts X X X X X X X X Extracts X X X X ..... of the power plant. Following the same judgement, we hold that the interest income derived in the sum of ₹ 18,88,559/- from deposits invested out of borrowed funds, would be liable to tax under the head income from other sources, which would be in line with the decision of the Hon ble Apex Court in the case of Tuticorin Alkali Chemicals. Deposits were invested with bank for obtaining Bank Guarantees in favour of Customs Department which is inextricably linked with the business of setting up of steel plant of the assessee. Hence the ratio laid down in the decisions in the case of CIT vs Bokaro Steel Ltd [ 1998 (12) TMI 4 - SUPREME COURT] ; CIT vs Karnal Co-operative Sugar Mills Ltd [ 1999 (4) TMI 7 - SUPREME COURT] ; and Bongaigaon Refinery Petrochemicals Ltd vs CIT [ 2001 (7) TMI 4 - SUPREME COURT] would be squarely applicable to the instant case and hence the interest income derived thereon would only go to reduce the project cost of steel plant and hence had to be construed as capital receipt. Accordingly, the grounds raised in this regard by the assessee are allowed - I.T.(SS).A Nos. 29 & 30/Kol/2014 - - - Dated:- 15-11-2017 - Shri Aby. T. Varkey, JM AND Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the same was intimated to erstwhile AO vide letter dated 31.8.2009. 3.1. M/s Electrosteel Casting Ltd is the related party of the assessee. A search and seizure operation u/s 132 of the Act was conducted on 19.3.2009 at the premises of Electrosteel Casting Ltd, wherein certain documents / details in relation to the assessee were seized by income tax department. Based on the documents seized thereon, proceedings u/s 153C were initiated on the assessee and assessee vide its letter dated 23.8.2011 submitted that the revised return filed on 31.8.2009 should be treated as a return filed in response to notice issued u/s 153C of the Act. The assessee furnished the details / explanation as desired by the ld AO in the assessment proceedings. The assessee earned interest income of ₹ 3,69,36,403/- in the Asst Year 2008-09 as below:- Particulars Interest Interest Total Received Accrued Interest Income Interest on FD with SBI CAG Branch from temporarily parked Money out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 s. 14 of the Act. The head Income from other sources is a residuary head of income. In the instant case since the interest income is chargeable under the head Business and Profession hence the same cannot be chargeable to tax under the head Income from Other Sources . Reliance in this regard is placed on the following decisions: 6. The Hon'bIe Supreme Court in Commissioner of Income-tax Vs Govinda Choudhury Sons reported in (1994) 74 Taxman 331(SC) has held as follows: This brings us to a consideration of the second question. The sum of ₹ 2,77,692 was received by the assessee as interest on the amounts which were determined to be payable by the assessee in respect of certain contracts executed by the assessee and in regard to the payments under which there was a dispute between the two parties. The assessee is a contractor. Its business is to enter into contracts. In the course of the execution of these contracts, it has also to face disputes with the State Government and it has also to reckon with delay in pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits. 8. The Hon'ble Calcutta High Court in Eveready Industries India Limited Vs. CIT reported in (2010) 323 ITR 312 (Cal) has held as follows: The assessee earned interest on such short-term fixed deposits made out of the business funds available with the assessee before they were utilized for actual business and, therefore, the same was incidental to the business activity of the assessee-company and interest on such short-term deposit must be treated as business income. The assessee, a tea growing and manufacturing company, was left with surplus funds. The assessee invested such surplus funds in short-term deposits to exploit the business funds of the company and earned interest. Therefore, the interest income of the assessee is business income and not income from other sources (Emphasis Added) 9. The Hon'ble Madras High Court in Commissioner of Income-tax Vs. South India Shipping Corpn. Ltd reported in (1996) 87 Taxman 23 (Mad) has held as follows: Taking into consideration the above rulings of the Supreme Court and of this Court, we are of the considered view that a sum representing interest from London brokers, other interest and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. for setting up the plant. The funds were placed in fixed deposit so that the liquidity was ensured and money would remain available when required for setting up the plant and hence is inextricably linked with the setting up of the plant. Since, the income was earned prior to commencement of business it is in the nature of capital receipt and is required to be set off against pre-operative expenses. 3.3. The assessee further placed reliance on the following decisions in support of its contentions:- a) Decision of Hon ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Limited vs Income Tax Officer reported in (2009) 315 ITR 255 (Del) b) Decision of Hon ble Delhi High Court in the case of CIT vs Petronet LNG Ltd reported in 2011-TIOL-316-HC-DEL-IT 3.4. The assessee further submitted that the decision of the Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilisers Limited vs CIT reported in (1997) 227 ITR 172 (SC) has been subsequently distinguished by the Hon ble Supreme Court in CIT vs Bokaro Steel Ltd reported in (1999) 236 ITR 315 (SC) ; CIT vs Karnataka Power Corporation reported in (2001) 247 ITR 268 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrowed by the assessee for the acquisition and installation of plant and machinery forms part of the actual cost . 3.6. Based on the aforesaid judgments, the assessee pleaded that it is evident that the rule of accountancy should be adopted in absence of any contrary statutory provisions in the Act and pleaded that the interest income is to be construed as a capital receipt eligible to be set off against the expenses incurred prior to commencement of production and would go to reduce the total project cost. 3.7. Without prejudice to the aforesaid submissions, it was submitted that the assessee had earned interest income of ₹ 18,88,559/- out of amount invested sourced out of term loans and has incurred expenses of ₹ 41,36,849/- towards interest paid on term loan for earning interest income. Hence as per section 57 of the Act, the expenses which are not in the nature of capital expenditure and has been laid out or expended wholly and exclusively for the purpose of making or earning interest income can be claimed as deductible expense in computing income from other sources. Thus interest expenses of ₹ 41,36,849/- incurred for earning interest income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interest earned from the short term deposits will have to be taxed as revenue receipts, and only strengthens the view point taken by me, citing the Tuticorin Alkali Chemicals Fertilizers Ltd. decision in the process. C) On the other hand, the decision of CIT vs Karnal Co- operative Sugar Mills Ltd.(243 ITR 2) seeks to differentiate between deposits from idle/surplus funds and those that have to be compulsorily made in the process of investment in machinery.etc., viz.. interest from deposits that have a lien tag. In this context, it is seen that out of the interest received of ₹ 3,69,36,403/- during the previous year, there is no portion that can be apportioned as interest received by virtue of business investments, and hence, the entire amount of interest received is being treated as interest from idle/surplus funds and is being taxed as income from other sources. D) The Bongaigaon Refinery Petrochemicals Ltd. decision has been needlessly quoted by the assessee, since the extract of the decision relied upon by the assessee says that The High Court has already held that the interest income derived by the assessee during its formative period w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arged by the assessee to its contractors for housing workers and staff employed by the contractor for construction work of the assessee, secondly, hire charges for plant and machinery which was given to the contractors by the assessee for use in the construction work of the assessee, and thirdly, interest from advances made to the contractors by the assessee for facilitating the work of construction. With reference to aforesaid three types of receipts, it was held that the amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These receipts are of capital nature and cannot be taxed as income. However, with reference to the interest earned on short term deposits made out of the surplus funds which were not immediately required, the Hon'ble Supreme Court observed as under: During these assessment years, the respondent - assessee had invested the amounts borrowed by it for the construction work which were not immediately required, in short-term deposits and earned interest. It has been held in these proceedings that the receipt of interest amounts' to income of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o as income from other sources. However, in appeal, the said amount of interest of 331.58 lakhs was held to be inextricably linked with the project of the assessee being the interest on margin money and advances and, therefore, capital in nature which would go to reduce the cost of the project. In the case of appellant company, the facts are distinguishable as no amount of interest was received by the company on account of deposits for margin or advances for the purpose of its setting up of steel plant. Thus, the decision relied upon by the appellant is not applicable in its case. Similarly, other judicial decisions relied upon by the appellant are also distinguishable on facts. 5.2 The ld CITA observed that the ratio laid down by the Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals supra would suit the facts of the instant case more appropriately and accordingly upheld the addition made by the ld AO. The ld CITA also observed that it is immaterial as to whether the investment was made in short term deposits out of shareholders funds or the borrowed funds. The interest received on such short term deposits would be taxable under the head income from other so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Interest Total Received Accrued Interest Income Interest on FD with SBI CAG Branch from temporarily parked Money out of equity funds 1,92,73,564 1,57,74,280 3,50,47,844 Interest on FD with SBI CAG Branch from temporarily parked Money out of Term Loan funds 18,88,559 18,88,559 1,92,73,564 1,76,62,839 3,69,36,403 6.1. It is not in dispute that the assessee had voluntarily offered the aforesaid interest income of ₹ 3,69,36,403/- as income from other sources in the original return of income and paid taxes accordingly. Later in the revised return, it had withdrawn the same by stating that the said interest income would only go to reduce the total project cost of the steel plant as the funds utilized for making investments in deposits were only business funds which remained unutilized by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s stipulated in the bid one of the financial criteria in Request For Selection (RFS) document requires a newly incorporated company to have the required net worth connected to the capacity of the power project. Thus, as per the precondition, the assessee was required to have the net worth of ₹ 60 crore. Since, the assessee was not having the required net worth it had to infuse fund for enabling itself to meet the qualification criteria and for this purpose, assessee's parent company KESPPL stepped in and invested fund in acquiring 98,500 equity shares and 1,00,000 compulsorily convertible preference shares of the assessee company, thereby, enabling the assessee to have the required net worth. Thus, as could be seen, the infusion of fund was integrally and inextricably connected with the setting-up of the power project. As evident from the facts on record, out of the funds available with the assessee from issue of equity shares an amount of ₹ 40 crore was temporarily parked in fixed deposit with HDFC Bank Ltd. on 1st March 2012, since, wasn't immediately required for implementation of the power project. It is also evident that the assessee only on 29th May 2012, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the Hon'ble Supreme Court in Bokaro Steels Ltd. (supra) was followed by the Hon'ble Delhi High Court in Indian Oil Panipat Power Consortium Ltd. (supra). The facts of this case are, the assessee a joint venture company was to set-up a power project to effectuate the purpose for which joint venture was created. The joint venture partners contributed share capital which included a sum by way of additional share capital. The said fund, though, was required for purchase of land and development of infrastructure, however, due to legal entanglement with regard to title of land, the funds were temporarily invested in fixed deposit with bank earning interest thereon. The assessee claimed such interest as capital receipt and set it off against pre-operative expenditure. However, the Assessing Officer assessed the interest as income from other sources. The learned Commissioner (Appeals) having found that interest earned was inextricably linked with the setting-up of the power plant allowed the claim of the assessee following the decisions of the Hon'ble Supreme Court in Bokaro Steels Ltd. (supra). However, while deciding Department's appeal, the Tribunal followed the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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. 5.1. The test, therefore, 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 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 which is the charging section, income, which arises to an assessee from the date of setting up of the business but prior to commencement, is chargeable to tax, depending on whether it is of a revenue nature or a 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. For an income to be classified as an income under the head 'profits and gains of business or profession', ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reme 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 subsection (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 of constructing any work or building or the provision of any plant in contingencies mentioned in that section, the sum so paid by way of interest may be charged to capital as part of the cost of construction of the work or building or the provision of the plant. The above provision thus gives statutory recognition to the principle of capitalizing the interest in case the interest is paid on money raised to defray expenses of the construction of any work or building or the provision of any plant in contingencies mentioned in that section even though such money constitutes share capital. The same principle, in our opinion, should hold good if interest is paid on money not raised by way of share capital but taken on loan for the purpose of defraying the expenses of the construction of any work or building or the provision any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee for the Asst Year 2008-09 are partly allowed. 7. Now let us come to the grounds raised in the Asst Year 2009-10. The issue involved in this appeal is similar to Asst Year 2008-09. The assessee during the Asst Year 2009- 10 had earned interest income on deposits as under:- Particulars Interest Interest Total Received Accrued Interest Income Interest on FD with SBI CAG Branch from temporarily parked Money out of equity funds 1,79,65,828 1,79,65,828 (A) Interest on FD with SBI CAG Branch from temporarily parked Money out of Term Loan funds 2,42,96,798 2,42,96,798 (B) Interest on FD as lien for Bank Guarantee in favour of Customs 1,83,36,986 51,47,810 2,34,84,796 (C ) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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