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TMI Blog2018 (9) TMI 1935X X X X Extracts X X X X X X X X Extracts X X X X ..... me in the project. Eventually, raising the interest is clearly on account of business exigency. Taking into account, all the facts and circumstances, we are of the view that the finding of the CIT(A) is not justifiable hence the same is hereby ordered to be set aside and we treat the interest income as business income of the assessee. - Decided in favour of the assessee Allowance of revenue expenses - HELD THAT:- On appraisal of the order passed by the CIT(A), we noticed that the CIT(A) has not decided the issue on the basis of this fact that the same was not raised before the AO. Anyhow this issue is required to be adjudicated in accordance with law. In the said circumstances, we set aside the finding of the CIT(A) and the issues are required to be adjudicated at the end of the CIT(A) in the interest of justice in accordance with law by giving an opportunity of being heard to the assessee. Accordingly, these issues are decided in favour of the assessee against the revenue. - I.T.A. No.3667/Mum/2016 - - - Dated:- 12-9-2018 - SHRI B. R. BASKARAN, AM AND SHRI AMARJIT SINGH, JJ. Appellant by: Shri Dilip V. Lakhani (AR) Respondent by: Shri Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n progress. 6. On the facts circumstances of the case the appellant prays that the appellant is not liable to pay interest u/s 234B of Income Tax Act, 1961 and the levy of the said interest be deleted. 3. The brief facts of the case are that the assessee filed his return of income on 29.09.2011 declaring total income to the tune of Rs.Nil. Thereafter the case was selected for scrutiny under CASS. Notices u/s 143(2) 142(1) of the Act were issued and served upon the assessee. The assessee company is engaged in infrastructure business and a special purpose vehicle (SPV) promoted by IL FS Transportation Networks Ltd. The company has entered into a Concession Agreement on 16.06.2010 with the National Highways Authority of India for rehabilitation, strengthening and four lining of Jorabat Shillong section of NH-40 in the state of Assam and Meghalaya on BOT basis. Under the year of consideration, the project of the assessee company was in process and the company did not commence his business. The expenditure has been shown under capital work in progress. On verification, the assessee company have received the interest upon the deposit to the tune of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot commence its business. All the expenses have been shown under capital work in progress. The assessee took the loan for the project and kept its fund with Bank of India which was utilized thereafter, therefore, the Bank of India credited the interest in favour of the assessee company which is in question. The law relied by the Ld. Representative of the assessee has decided this controversy by holding this fact that the interest income is in connection with the business exigency, therefore, the same is liable to be treated as business income. In the case decided by Hon ble ITAT D Bench in ITA. No. 663/M/2015 The Hon ble ITAT has treated the said income as income from business. The relevant para no. 5 is reproduced as under.: - 5. Having heard rival submissions, we are of the view that there is merit in the later submissions made by Ld A.R. From the financial statements, we notice that the assessee has borrowed loans for executing the project and the amount of loan outstanding as on 31.3.2010 stand at ₹ 824.73 crores. The loan taken from banks alone stands at ₹ 503.29 crores. It is an admitted fact that the term loans have to be repaid in fixed installm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead Income from other sources' under section 56. It was argued on behalf of the company that it had not yet commenced its business and in any event if the income was derived from funds borrowed for setting up the factory of the company, it should be adjusted against the interest payable on the borrowed funds. Neither of the two factors can affect taxability of the income earned by the company the total income of the 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. In the instant case, the company had chosen not to keep its surplus capital idle, but had decided to invest it fruitfully. The fruits of such investment will clearly be of the revenue nature. If the capital of a company is fruitfully utilised instead of keeping it idle, the income thus generated will be of the revenue nature and not accretion of capital Whether the company raised the capital by issue of shares or debentures or by borrowing will not make any difference to this principle. If borrowed capital is used for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome has nothing to do with its accrual or taxability. It is also wellsettled that interest income is always of a revenue nature unless it is received by way of damages or compensation. 2.12 In the case of Bokaro Steel Ltd. (supra), the Hon'ble Supreme Court, after considering the decision of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra), held as under:- The activities of the assessee in connection with first three receipts were directly connected with or were incidental to the work of construction of its plant undertaken by the assessee. Broadly speaking, these pertained to the arrangements made by the assessee with its contractors pertaining to the work of construction. To facilitate the work of the contractor, the assessee permitted the contractor to use the premises of the assessee for housing its staff and workers engaged in the construction activity of the assessee's plant. This was clearly to facilitate the work of construction. Had this facility not been provided by the assessee, the contractors would have had to make their own arrangements and this would have been reflected in the charges of the contractors for the construction work. Instead, the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tio of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd.'s case (supra) and that of Bokaro Steel Ltd. (supra). The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals Fertilizers Ltd.'s case (supra ) is that if funds have been borrowed for setting up of a plant and if the funds are 'surplus' and then by virtue of that circumstance they are invested in fixed deposits the income earned in the form of interest will be taxable under the head 'income from other sources'. On the other hand the ratio of the Supreme Court judgment in Bokaro Steel Ltd.'s case (supra) to our mind is that 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, 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught 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 was in the nature of capital receipt and hence was required to be set off against pre-operative expenses. In the case of Tuticorin Alkali Chemicals Fertilisers Ltd. (supra) it was found by the authorities that the funds available with the assessee in that case were 'surplus' and, therefore, the Supreme Court held that the interest earned on surplus funds would have to be treated as 'income from other sources' . On the other hand in Bokaro Steel Ltd.'s case (supra) where the assessee had earned interest on advance paid to contractors during precommencement 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 constr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance, which had been paid to PFC. This is not a case of surplus funds, which were available and investment were made in fixed deposits to earn interest. The interest paid to the power procurement utilities on commitment advances was capitalized. Interest paid and interest received were inextricably linked and have a commonality about their nature and character. The appellant cannot treat them differently. Commitment Advances and interest paid and received had reference to bidding process and linked to the project/purpose for which the respondent was set up. In view of the factual matrix, interest received on unutilized commitment advances cannot be taxed as revenue income and interest paid on commitment advance treated as a capital expense. This will be contradictory. The entire expenditure for inviting bids etc. and even documentation was paid to PFC. The amounts received from the prospective bidders on account of sale of tender documents was also transferred to PFC. As noticed above, Revenue has not challenged and has accepted the order of the tribunal deleting addition of ₹ 1,35,81,234/-paid by the respondent-assessee to PFC for preparation of tender documents. In view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court is in fact the law which emerges as per the decision of Hon'ble Apex Court. Therefore, in our opinion, the CIT(A) was not justified in ignoring the decision of Hon'ble Delhi High Court by simply mentioning that the issue is covered by the decision of Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra). After considering these two decisions of the Hon'ble Apex Court and also some other decisions of the Hon'ble Apex Court, their Lordships of the Delhi High Court arrived at the conclusion it is clear upon a perusal of the facts as found by the authorities below that the funds in the form of share capital were infused for the specific purpose of acquiring land and the development of infrastructure. 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 was in the nature of capital receipt and hence was required to be set off against the pre-operative expenses. That, the ratio of the above finding of the Hon'ble Delhi High Court would be squarely appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lines of reasoning s, and both stand on their own logical footing, and in that event, if the learned Tribunal has accepted one line of reasoning, supported by one set of judgments, it cannot be said, that the learned Tribunal was legally not justified in following the decision, as followed by it, simply because it might have been possible, or might be more appropriate to follow the other set of judgment, by following the other line of reasoning. 2.18 From the above, it is evident that there are two sets of judgments of Hon'ble Supreme Court, proceeding on different lines of reasonings. The Hon ble Delhi High Court in case of Indian Oil Panipat Consortium Ltd (supra) has considered and interpreted the decisions of Hon ble Supreme Court in case of Tuticorin Alkali Chemicals Fertilizers (supra) as well as Bokaro Steel ltd (supra). After analyzing both the decisions of Hon ble Supreme Court, it held that the test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals Fertilizers Ltd.'s case (supra ) is that if funds have been borrowed for setting up of a plant and if the funds are 'surplus' and then by virtue of that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m other sources . Hence, ground no. 1 of the assessee is allowed. 3. In ground No.2, the assessee has challenged the action of the Ld.AO in double taxation of interest income of ₹ 1,64,07,481/-. 6. In the above mentioned law, the Hon ble ITAT has discussed the law relied by the Ld. Representative of the assessee. The facts are not distinguishable at this stage also. In the instant case, the assessee company has been incorporated for setting up of infrastructure facilities being construction of toll road between Hazaribag and Ranchi which is under construction. The assessee earned the interest income upon the borrowed funds of ₹ 46,03,457/- which was deducted from the borrowing cost to arrive at the figure of capital work in progress of ₹ 1,86,25,83,284/-. The promoters of the company had introduced money by way of share capital and also obtained credit facilities from the banks and institutions. The total funds were exclusively meant for use for setting up of the infrastructure facility. The lenders disbursed the funds at specified intervals and the said funds were required to be used for the purpose of setting up of the project. Need ..... X X X X Extracts X X X X X X X X Extracts X X X X
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