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TMI Blog2020 (11) TMI 172X X X X Extracts X X X X X X X X Extracts X X X X ..... ded the similar issue in the case of M/s Haridaspur Paradip Railway Company Limited [ 2020 (10) TMI 656 - ITAT CUTTACK ] in which the issue of share application money were pending for allotment has been remitted back to the file of AO. Before the AO the assessee has also offered it as a business income in the form of written submissions, which has been incorporated by the AO in the assessment order. We found substance on the submission of the ld. CIT-DR. As the issue being similar to the case of Haridaspur Paradip Railway Company Ltd.(supra), therefore, we also remit the issue to the file of AO on the same directions given therein along with some additional direction to the AO for examination as to whether the income which has been transferred into the reserve and surplus account and its utilization, either for revenue purpose or for capital expenditure. The AO is also directed to decide the issue as per law after providing reasonable opportunity of being heard to the assessee. The assessee is also directed to avoid taking any unnecessary adjournment and cooperate with the AO for early disposal of the case. Appeals of the assessee are allowed for statistical purposes. - Shri C.M. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd among other grounds to be urged at the time of hearing, adequate relief as may be deemed fit be granted in the matter. 4. The grounds raised in both the appeals are same to the grounds taken before the CIT(A) for both the assessment years under consideration. However, the interest on mobilization advance amounting to ₹ 45,84,391/- for the assessment year 2014-2015 has been deleted by the CIT(A) in spite of the assessee has challenged this issue before us. As per our considered opinion, this issue is not required to adjudicate, hence, this ground of appeal for the assessment year 2014-2015 is dismissed. Now, we have to decide the issue involved regarding addition of interest on FDR and Flexi deposit amounting to ₹ 1,08,02,969/- and ₹ 3,85,82,206/-, respectively for both the above assessment years. 5. First we shall take up appeal of the assessee in ITA No.384/CTK/2019 for the assessment year 2013-2014, wherein the assessee has raised sole issue of disallowance of interest on FDR Flexi deposit treating the same as revenue receipt. 6. Brief facts of the case are that the assessee is a public limited company filed its return of income electronically on 26.09.2013 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. M/s Banknote Paper Mill India Pvt. Ltd. in ITA 690/2017 held that this issue is ex facie covered by the decision of the jurisdictional High Courts or even the Hon ble Supreme Court of India. Thus, no substantial question of law arises in the present case and the Appeal filed by the Revenue is without merit and liable to be dismissed. 3. The Hon ble Karnataka HC in the above case has relied on the order of the Tribunal. Wherein, the Tribunal held that the interest income earned by the Assessee Company on bank deposits made out of share capital received by it from the Reserve Bank of India could not be taxed as Income from Other Sources as the said interest income was earned prior to commencement of operations of the company during the construction period. Brief facts of the case 4. The assessee is a Joint Venture Company of Rail Vikas Nigam Limited, Jindal Steel and Power and Bushan Limited, incorporated in the year 2009. The assessee was incorporated as a Special Purpose Vehicle (SPV) to construct a New Rail Line between (Budhapank) Angul and (Baghupal) Sukida. Copy of MOU entered between Rai Vikas Nigam Limited, Jindal Steel and Power and Bushan Limited is enclosed at PB Pg. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is taxable under the head' Income from Other Sources'. AO also relied on the decision of Tuticorin Alkali Chemical and Fertilizers Ltd. v. CIT (Relevant findings of AO are at Page 7, Para 6) 14. Aggrieved by the above additions, the assessee preferred an appeal before the CIT (A). The ld. CIT (A) deleted the addition of Interest received on Mobilisation advance relying on the order passed by the Tribunal (ITA No. 197/CTK/2016) in the assessee s own case for the AY 2012-13.Copy of ITAT order is placed at PB Pg. 66-75 15. However, the CIT (A) confirmed the addition of Interest on FDR and Flexi Deposit relying on the decision of Tuticorin Alkali Chemical and Fertilizers Ltd. (Relevant findings of CIT (A) are at Para 4, Pg. 7) 16. Challenging the order of CIT (A), the assessee in appeal before your Honors. Submissions 17. In the present case, assessee incorporated as Joint Venture Company of Rail Vikas Nigam Limited, Jindal Steel and Power and Bushan Limited to construct of a New Rail Line work between (Budhapank) Angul and (Baghupal) Sukida. Copy of MOU entered between Rai Vikas Nigam Limited, Jindal Steel and Power and Bushan Limited is enclosed at PB Pg. 27 18. Further, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of share capital were infused for a 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 pre-operative expenses. In the case of Tuticorin Alkali Chemicals (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 (supra) where the assessee had earned Interest on advance paid to contractors during pre-commencement 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. 26. Thus, applying the aforesaid Judgment of Delhi High Court in the facts of the present case, it can be appreciated that here al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of setting up was got delayed and deposits of share capital amount received from the share applicants with the bank in the form of fixed deposits for short term, is to be considered as inextricably linked with the process of setting of its plant and machinery. Accordingly, we hold that the Interest earned by the assessee should not be treated as income from other sources and we allow the grounds of appeal of the assessee. Therefore, the appeal of the assessee for assessment year 2011-2012 is allowed. c) POSCO INDIA PVT. LTD VERSUS , DCIT ITA Nos. 186 and 460/CTK/2011, 461/CTK/2011 and held as under: Para 5 In the instant case, it was 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 a 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 he set off against pre-operative expenses. d) ACIT, v. M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and then to advance them as loans or grants. The interest income arose on account of the fund so received and it may not have been utilised for a certain period of time, being put in fixed deposits so that the amount does not lie idle. That the income generated was again applied to the disbursement of grants and loans. The income generated from interest is necessarily inter- linked to the business of the appellant-Corporation and would, thus, fall under the head of profits and gains of business or profession . There would, therefore, be no requirement of taking recourse to Section 56 of the IT Act for taxing the interest income under this residuary clause as income from other sources. In our view, to decide the question as to whether a particular source of income is business income, one would have to look to the notions of what is the business activity. The activity from which the income is derived must have a set purpose. The business activity of the appellant-Corporation is really that of an intermediary to lend money or give grants. Thus, the generation of interest income in support of this only business (not even primary) for a period of time when the funds are lying idle, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra) 39. Thus, even if, the assessee has wrongly considered interest income as income from other sources in the AY 2012-13, such wrong treatment may not be accepted in the subsequent years. Thus, in the light of the above, it is submitted that the addition made by the Ld. AO and sustained by the CIT (A) holding that Interest earned on FDR Flexi deposits is of revenue nature, is bad in law and therefore may kindly be deleted. The ld. AR further submitted that the arguments advanced in case of M/s Haridaspur Paradip Railway Company Limited Vs. DCIT in ITA No.383/CTK/2019, order dated 12.10.2020 may be treated the same in both these cases also. 10. On the other hand, ld. DR relied on the others of authorities below and also filed his written submissions as under :- i.) This is assessee's appeal against the appellate order dated 16.09.2019 u/s. 250 of the Income Tax Act passed by CIT(A)-1, Bhubaneswar. The solitary issue in this appeal relates to taxation of interest income of ₹ 3.85 crores earned on FDs kept in banks which has been reduced by the assessee from the capital WIP. This interest income is different from interest income of ₹ 45.84 lakhs received on mobilizati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as and when there arose business needs of the assessee. Thus, the earning of interest income could not be dominant or business intention of the assessee. In this regard, the judgment relied upon by assessee in the case of Indian Oil Panipat Power Consortium Ltd. Vs. ITO (315 ITR 255) (Delhi) which dealt with the interest receipts earned prior to the commencement of business, was held to be distinguishable on facts since it was not known if the interest receipts were earned prior to 'set up' too. vi.) The judgment of the Hon'ble Mumbai High Court in the case of Shree Krishna Polyster Ltd. Vs. Dy. CIT (274 ITR 21) is relied upon wherein it was held the income earned by the assessee by investing surplus money in bank deposits for a short period was assessable under the head 'Income from other sources'. vii.) In the case of Whistling Woods International Ltd. Vs. ITO (16 taxmann.com 242), the assessee-company was incorporated to establish research and training institute-cum-integrated studio for training people in film line. During relevant assessment year, the project was under construction and there were no allied activities. The assessee, however had received inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not commenced. However, if any expenditure was incurred for earning interest income, it could have been allowed under section 57. In the result, assessee's appeals were dismissed. vii.) In the case of CIT Vs. Bokaro Steel Ltd. (236 ITR 315), the assessee-company was in the business of manufacturing of steel. For the purpose of construction of the plant, the assessee company gave advances to its contractors and earned interest from such advances, which were adjusted against the charges payable to the contractors, thus utilizing the interest amount to reduce the cost of construction. The assessee company was in process of constructing and erecting its plant; the company was charging rent from its contractor for workers and staff employed by contractor for the construction work of company. Further, there were hire charges for plant and machinery given to contractors for use in construction work of the company. Similarly, there were interest income from advances made to contractors and royalty from excavation. The earlier three receipts were adjusted against charges payable to contractor and had gone to reduce the cost of construction. Based on these facts, the Hon'ble Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 41,83,517/- on the above sum. The assessee filed its return of income on 31.03.2009 declaring total income at Nil. The case was selected for scrutiny and consequently an order u/s. 143(3) of Income Tax Act was passed whereby interest received from nationalized banks amounting to ₹ 41,83,517/- was brought to tax which was confirmed by the CIT(A). The observations of the Honourable Pune ITAT are reproduced under: After going through the rival submissions and material on record, we find that the issue is with regard to the treatment of the interest earned of ₹ 41,83,517/- on bank deposit for tax purpose. According to the Assessing Officer, only interest received from cooperative bank is exempt u/s.80(P) and interest income received from nationalized banks will be taxable in the assessee s hand. The Assessing Officer did not agree with the contention of the assessee that the amount received from government was kept in nationalized bank as per instructions from state government, accordingly, charged to tax interest of ₹ 41,83,517/-. The cooperative society was set up on 09.12.1993. After collection of funds from the members towards their share of capital (₹ 1,41 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for setting up of a factory. In fact it was surplus fund which was kept with the bank on which the assessee earned interest. The ratio of Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. is squarely applicable and interest earned by the assessee during construction period on deposits kept with the nationalized bank is assessable as income from other sources as done by the Assessing Officer. This view is fortified by the decision of Hon ble Supreme Court in the case of CIT Vs. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC). Accordingly, we are not inclined to interfere in the findings of CIT(A) who has rejected the appeal of assessee holding that interest earned on deposit kept with bank was taxable u/s.56 of I.T. Act. The same is upheld. In the result, appeal filed by the assessee is dismissed . In view of above facts circumstances, the appeal of the assessee needs to be rejected. Apart from the above written submissions, ld. DR also submitted that the arguments advanced in the case of M/s Haridaspur Paradip Railway Company Limited Vs. DCIT in ITA No.383/CTK/2019, order dated 12.10.2020, shall be treated as same in this case also. He further submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India Pvt. Ltd. in ITA 690/2017 held that this issue is ex facie covered by the decision of the jurisdictional High Courts or even the Hon'ble Supreme Court of India. Thus, no substantial question of law arises in the present case and the Appeal filed by the Revenue is without merit and liable to be dismissed. The Hon'ble Karnataka HC in the above case has relied on the order of the Tribunal. Wherein, the Tribunal held that the interest income earned by the Assessee Company on bank deposits made out of share capital received by it from the Reserve Bank of India could not be taxed as Income from Other Sources as the said interest income was earned prior to commencement of operations of the company during the construction period. Brief facts of the case The assessee is a Joint Venture Company of- - Rail Vikas Nigam Limited; - Government of Orissa - Paradip Port Trust, - Rungta Mines Ltd; - Essel Mining Industrial Ltd. - Jindal Steel Power Ltd; The assessee was incorporated as a Special Purpose Vehicle (SPV) by the Joint Venture Partners to complete the project, i.e. construction of a New Railway Line between Haridaspur to Paradeep in Orissa. Copy of MOU entered between the j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould not be treated as Income from Other Sources, and accordingly, it must be viewed as capital receipt going to reduce the cost of construction. Copy of reply submitted by the assessee is at PB Pg. 41-44 Subsequently, AO completed the assessment assessing the total income at ₹ 3,89,83,258/- and its passed order u/s 143(3) of the Act, dated 28.12.2016 making the following addition- Sr. No. Particulars Amount (Rs.) 1. Interest on FDR and Flexi Deposit 3,27,79,005 2. Interest on Mobilization advance 62,04,253/- That, the additions mentioned above were made on the ground that assessee has not commenced its business operation and therefore, the interest earned by it is taxable under the head' Income from Other Sources'. AO also relied on the decision of Tuticorin Alkali Chemical and Fertilizers Ltd. v. CIT. (Relevant findings of AO are at Page 11, Para 5 of AO's order) Aggrieved by the above additions, the assessee preferred an appeal before the CIT (A). The Id. CIT (A) deleted the addition of interest received on Mobilization advance relying on the order passed by the Tribunal (ITA No. 83/CTK/2016), dated 09.10.2017 in the assessee's own case for the AY 2010-11. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital receipt. The Id. CIT (A) has misconstrued the ratio of the Judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and held that the income earned by the assessee is not a capital receipt. It may kindly be noted that the Hon'ble Delhi HC has interpreted the aforesaid judgement of Apex Court in the case of Indian Oil Panipat Power Consortium Ltd v. ITO. [2009] 315 ITR 255. Further, the Hon'ble High Court in the said case considered another Judgement of Supreme Court in Bokaro Steel Ltd. Wherein the Supreme Court held 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. Finally, the Delhi High Court after analyzing the ratio in the case of Tuticorin Alkali Chemicals and Bokaro Steel Ltd simultaneously, held that the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources-Relevant para of Judgment are reproduced hereunder: It is clear upon a perusal of the facts as found by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court in the cases of Tuticorin Alkali Chemicals Fertilizers Ltd. and Bokaro Steel Ltd. The case of the assessee appears to be squarely covered by the decision of the Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. b) MJSJ Coal Limited v. ITO, I.T.A. NOS.429/CTK/2016, 68/CTK/2017 And 107/CTK/2018, dated 31.08.2018. Para 12 the interest earned on funds primarily brought for infusion in the business activity cannot be termed as income from other sources, whereas the interest income on bank deposits earned by the assessee company to commencement of its business is in the nature of capital receipt and accordingly be set off against pre-operative expenses. We considering the judicial precedence and the facts and circumstances of the present case, are of the substantive opinion that if the assessee company receives any amount which is inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. Hence such receipts are capital in nature and cannot be taxed as income under income from other sources. The assessee company was formed to set up a mining project and the process of sett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een placed on the following decisions wherein the decision of Indian Oil Panipat Power Consortium Ltd v. ITO has been followed : Bongaigaon Refinery and Petrochemicals ltd. v. CIT 251ITR 329 (SC); NTPC Sail Power co. Pvt. Ltd. v. CIT in ITA No. 1238/2011 (DELHI HC); PCIT v. M/S. NTPC Tamil Nadu Energy Co. Ltd., ITA 233/2018 CM APPL.7162/2018, ITA 234/2018 CM APPL.7163/2018; Solarfield Energy Pvt. Ltd. v. ITO, ITA No. 5189/Mum/2016; BTW-Atlanta Transformers India Pvt. Ltd. v. ACIT, ITA Nos. 1642 1643/Ahd/2018; ITO, v. CMDC ICPL Coal Ltd, ITA No. 271/RPR/2014; M/s Saville Hospital Research Centre PVT. Ltd. v. ITO ITA No. 491/JP/2018 It may also be noted that recently the Hon'ble Supreme Court in the case of NATIONAL CO-OPERATIVE DEVELOPMENT CORPORATION v. CIT in CIVIL APPEAL NOS. 5105-5107 OF 2009, dated 11.09.2020 held that interest income generated on the idle funds which is applied in the business of the assessee company is to be treated as a business income thus, fall under the head of 'Profits and Gains of Business or Profession and not under Income from Other Sources. Relevant findings of the order are as under: 23. We are in agreement with this view taken by the High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deposit is an income from other sources and case laws relied on by the authorities below are squarely applicable in the present case. He further submitted that the MOU was signed for construction of railway lines on 16.08.2009 and still the works are under construction and he further submitted that the assessee has received interest and how it has been utilized and it can be verified from the bank accounts of the assessee. Therefore, it need to be verified the utilization of the interest as to whether it has been utilized for the revenue purpose or for the construction of the project. He also submitted that the share application money is kept pending for allotment at the year ending 31.03.2014. He also made analysis of the balance sheet and submitted that the huge amounts have been kept by the assessee in liquid form in the bank by way of investments as FD. Therefore, it is clear that the intention of the assessee is to earn interest on investment in fixed deposit and no advances were made to the contractor. Therefore, ld. CIT-DR requested that the matter should go back to the AO for verification. 6. After hearing both the sides and perusing the entire material available on record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.2 Subsequent to Balance Sheet date on 29.05.2014, the company has issued 42,74,50,000 equity shares of ₹ 10/- each at par against the share application money pending allotment as on 31.03.2014 to all the applicants, except POSCO Ltd. (at 4(g) above) due to non-fulfillment of certain conditions by them. 7. From the above it is clear that the assessee company is a public limited company and the share application money was kept pending for allotment for a long time. In this regard, we specifically asked questions to the ld. AR of the assessee on the following certain points which are as under :- i) Date of receipt of share application money allotment to shareholders. ii) whether the company has followed the relevant rules/provisions of the Companies Act in this regard. iii) if the shares have not been allotted within 60 days from the date of receipts then the discloser policy in the balance sheet, whether it should be treated as current liability or otherwise and treatment in the books of account of the company. iv) use of share application money during pendency for allotment. v) applicability of company deposit rules and its classification in the balance sheet utilization of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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