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TMI Blog2019 (4) TMI 1284X X X X Extracts X X X X X X X X Extracts X X X X ..... The decision of the Delhi High Court in the case of Indian Oil Panipat Power Consortium Limited vs. ITO [ 2009 (2) TMI 32 - DELHI HIGH COURT] is not applicable to the facts of the assessee s case before us. Thus, it is clear that in the case before us, assessee was still at the pre-commencement stage and during this phase, the assessee had raised equity funds which was invested in fixed deposits of the Banks as well as the holding company and the assessee had earned interest on the same. The same has to be taxed as income from other sources in the light of the decision of the Hon'ble Supreme Court in the case of M/s Tuticorin Alkali Chemicals Fertilisers Ltd. vs. CIT (supra). Because the shareholder of the company was in a position to pass resolution or issue any letter, it cannot change the character of the source of the income.The business was not set up during the relevant previous year and the interest earned from the Bank deposits is to be assessed as income from other sources and it cannot be set off against the capital expenditure. Ground of appeal of the assessee is dismissed. Unless and until the machinery of the project is fully installed and the project be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade by him. 3. The facts of the case are that the assessee company is a subsidiary of M/s. HLL Lifecare Limited. It was set up by the Government of India for thepurpose of developing Integrated Vaccine Complex. The assessee had not commenced commercial operations and the assessee was in receipt of interest income from deposits in Bank as well as from Holding Company amounting to ₹ 4,17,75,000/-. The assessee had claimed that the interest income was capital receipt to be set off against the expenditure incurred during this period. The Assessing Officer considered the issue of taxability of interest income earned prior to commencement of business and held that interest income is taxable under the head income from other sources . The Assessing Officer held that expenditure incurred by the assessee for the purpose of setting up its business cannot be allowed as deduction nor could it be adjusted against any other income under any other head. 4. On appeal, the CIT(A) placed reliance on the judgment of the Supreme Court in the case of Sitaldas Tirathdas, 41 ITR 367 where principles in respect of diversion by overriding title had been laid down. The relevant part of the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee, the letter of the Ministry is only obligation to apply interest income for the objectives of the assessee and the same cannot be treated as diversion by overriding title. Further, the CIT(A) relied on the decision of the ITAT, Delhi in the case of Mussoorie Dehradun Development Authority, 22 taxmann.com 93 wherein it was held that the memorandum issued by the State Government only regulates how the funds so collected are to be incurred for the fulfilment of its objects and which sector has to be given preference and thus, it only suggests application of income. In the light of the above decisions, the CIT(A) held that there was no merit in the ground raised by the assessee that the interest income was not taxable in view of the guidelines issued by the Government and the same was dismissed. 4.2 The CIT(A) observed that during the financial year 2013-14, in the Audit Report Note; 10, Notes to financial statements for the period ended 31-03-2013, in Sl. No. 1.7 to 1.9, the Auditors have stated that: No Profit and Loss account has been prepared since the company is yet to commence commercial operations and the project is under construction stage ..., Unutilized s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y/guidelines for any funds provided by the Government of India, any income earned out of such funds provided for any specific purpose, it should be utilized only for the purpose for which such funds were given. 5.1 It was submitted that the accounts were also audited by C AG and there were no adverse comments from them for the method of accounting followed by the assessee. 5.2 The Ld. AR submitted that in the order dated 23.03-2018 for the AY 2014- 15, the CIT (Appeals) upheld the action of the Assessing Officer on the following ground: Taxability of interest income to my understanding depends upon whether the assessee was authorized to temporarily park the surplus fund and to earn interest thereon or not. In a situation where the assessee had received grant from the Government and received interest on a temporary parking on the instruction of the Government then the interest so received being part of the grant should not be taxed as income. But, if the grant is temporarily parked without specific direction/instruction from the Government then the interest earned cannot be incidental to the set purpose and thereby shall necessarily be brought to tax as income from othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SC) dismissed the appeal again, on the ground that the guidelines issued by Govt. of India does not result in diversion of income by overriding title. According to the ld. AR, the issue in this case was maintenance payment to wife and children under consent decree and the Apex court held that since for paying such maintenance no charge on the property was created, this was not diversion at source but only application of income to discharge an obligation which decision is not applicable to the facts of the present case, since in the case of the assessee, there is specific direction from the Govt. of India to utilize the interest earned by way of depositing the equity funds for the purpose of the vaccine project only and not for any other purpose. In the case of the assessee, since the interest can be utilized only for the purpose of setting up the vaccine project and it does not have the liberty to utilize the funds for any other purpose, it was diverted before it reached them. Hence this is a clear case of diversion by overriding title. The CIT(Appeals) had also relied on the decision of the ITAT Hyderabad in the case of Thermal Powertech Corporation India Ltd. vs. DCIT in ITA No.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w Delhi Dated the 14th June, 2018 To, The Chief Executive Officer, M/s. HLL Biotech Limited, SR No: 192 195, Tirumani Village, Chengalpattu-603 001. Subject: Utilization of interest earned on equity funds of ₹ 274.88 crore-reg. Sir, The undersigned is directed to refer to your letter dated 22nd January, 2018. The GOI has infused ₹ 285 Crore towards equity funds through HLL Lifecare Limited for establishing Integrated Vaccine Complex at Chengalpattu out of which ₹ 274.88 Crores paid in cash and 100 acre of land in kind with a valuation of ₹ 10.12 Cr. As a general policy any income earned out of funds provided by GOI for any specific purpose, must be utilized only for the purpose for which such funds are released. 2. It is clarified that any interest earned by way of depositing the said equity funds in Banks or otherwise form part of funds for establishing the Integrated Vaccine Project at Chengalpattu, Chennai and to be utilized for the purpose of the project only and not for any other purpose. This issues with the approval of JS(HPE). Yours faithfully, Sd/- ( Soma S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year relevant to the asst. yr. 1982-83, it had incurred a sum of ₹ 1,13,06,068 as and by way of interest and finance charges, which had to be capitalised along with other pre-production expenses. In other words, according to the assessee, the interest income of ₹ 2,92,440 was not exigible to tax. The ITO rejected the assessee s claim that the interest income was not exigible to tax. The view of the ITO was upheld by the CIT(A). The company s further appeal to the Tribunal was dismissed. We are also concerned in this case with the asst. yr. 1983-84. During the previous year relevant to this assessment year, the assessee had received interest income of ₹ 1,08,336. The assessee this assessment year, the assessee had received interest income of ₹ 1,08,336. The assessee filed its return in which it claimed that the interest income of 1,08,336 should go to reduce the pre- production expenses including the interest and finance charges which would ultimately be capitalised. The Income-tax Officer rejected the assessee s claim that the interest income was not exigible to tax. The view of the ITO was upheld by the CIT(A) . The company s further appeal to the Income Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d later sells it at profit, the gain made by the company will be assessable under the head Capital gains . Similarly, if a company purchases a rented house and gets rent, such rent will be assessable to tax under s. 22 as income from House property. Likewise, a company may have income from other sources. It may buy shares and get dividends. Such dividends will be taxable under s. 56 of the Act. The company may also, as in this case, keep the surplus fund in short-term deposits in order to earn interest. Such interests will be chargeable under s. 56 of the Act. Thus, it is clear from the above discussion that if whenever an assessee is in the process of setting up of the business, if any, income arises under any of the heads except under the head profits and gains of business, then such income has to charged to tax under that particular head. 7.3 The Ld. AR had vehemently argued that this principle was diluted by the Supreme Court while deciding the issue in the case of Bokaro Steel Ltd. (supra). In the case of Bokaro Steel Ltd. (supra), the issue was whether rent received from contractors against houses given for staff of contractors, machine hire charges received fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts and in the circumstances of the case, the Tribunal is right in law in upholding the order of the CIT(A) who deleted the addition of ₹ 1,30,44,518 being interest receipts and hire charges from contractors by holding that the same are in the nature of capital receipts which would go to reduce capital cost ? From the question itself it is clear that in this case the issue was regarding interest receipts and hire charges from the contracts and that is why the principle laid down in Bokaro Steel Ltd. [supra] was followed. 7.5 We further find that the Supreme Court had again followed the decision of M/s Tuticorin Alkali Chemicals Fertilisers Ltd. vs. CIT (supra) in the case of CIT vs. Coromandal Cements Ltd. [234 ITR 412]. In this case, the relevant portion reads as under: Against the judgment of the Andhra Pradesh High Court refusing to call for a reference of the question whether the Tribunal was right in holding that interest earned on short-term bank deposits during the pre-production stage could not be treated as income from other sources and should go towards the project cost, the Revenue filed an appeal to the Supreme Court. The Supreme Court, fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Tribunal further observed that it was an independent income earned in a similar fashion as was the case in Tuticorin Alkali Chemicals [1997] 227 ITR 172 (SC). From the above, it is clear that there was already a finding by the first appellate authority that interest earned was inextricably linked with the setting up of the power plant. Whereas in the case before us, there is no such finding and the funds which were required for the construction of the vaccine plant had been placed with Banks and the holding company as short term deposits. 7.7 From the above discussion, it is clear that the decision of the Delhi High Court in the case of Indian Oil Panipat Power Consortium Limited vs. ITO (supra) is not applicable to the facts of the assessee s case before us. Thus, it is clear that in the case before us, assessee was still at the pre-commencement stage and during this phase, the assessee had raised equity funds which was invested in fixed deposits of the Banks as well as the holding company and the assessee had earned interest on the same. The same has to be taxed as income from other sources in the light of the decision of the Hon'ble Supreme Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Tuticorin Alkali Chemicals Fertilisers Ltd. vs. CIT (1997) 227 ITR 172, we are not going to consider the other judgments relied upon by the Ld. AR. Accordingly, this ground of appeal of the assessee is dismissed. 8. The next issue is with regard to set off of business loss against the addition made by the Assessing Officer. 8.1 The facts of the case are that the Assessing Officer held that the assessee could not claim any relief by way of setting off of business loss since the business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting year 2012-13. In such a situation, the Assessing Officer held that the expenditure incurred by the assessee for the purpose of setting up its business could not be allowed as deduction or could it be adjusted against any other income under any other head. 8.2 On appeal, the CIT(A) confirmed the findings of the Assessing Officer. 8.3 Against this, the assessee is in appeal before us. 8.4 We have heard the rival submissions and perused the record. As discussed earlier, the business of the assessee was not set up and it had not commenced commer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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