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TMI Blog2021 (2) TMI 778X X X X Extracts X X X X X X X X Extracts X X X X ..... r interest paid which is y l inked with the said interest earned during pre-operative period related to the sole project being implemented. The Ld. CIT(A) has erred in sustaining the view of the Ld. AO. 3. That the treatment of the said interest from FDRs as income from other sources rather than in assessing the same as capital receipt to be set off against pre-operative expenses is contrary to binding Accounting Standards. As such too, the addition as made and as sustained by Ld. CIT(A) is liable to be deleted. 4. That the FDRs are intrinsically linked to the essential funds for the sole object of setting up the project involved in accordance also with the binding provisions of related agreements. As such too, the interest paid and earned have nexus and it is only the net interest which would have been capable of being considered for adjustment, if any. There is no positive net interest and as such too there is no income capable to being assessed as interest income. 5. That the assessment of the said income from interest on FDRs during pre-operative period as income from other sources is contrary to the facts and law and is based on ignoring or not appreciating the submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose of earning interest. The interest thus earned was clearly of revenue nature and would have to be taxed accordingly. The accountants might have taken some other view but accountancy practice was not necessarily good law. This was not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as it liked. The application of the income for payment of interest would not affect its taxability in any way. The company could not claim any relief under section 70 or section 71 since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting years. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business could not be allowed as deduction, nor could it be adjusted against any other income under any other head. Similarly any income from a non-business source could not be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee." 19. In the case of Bokaro Steel Ltd. (supra), th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the acquisition of assets for the setting up of the plant and machinery. The interest was a capital receipt, which would go to reduce the cost of asset." 21. In the case of Karnataka Power Corporation (supra), their Lordships of Hon'ble Apex Court, following the decision of Bokaro Steel Ltd. (supra), held as under:- "...also, (i) that the Tribunal was right in law in upholding the order of the Commissioner (Appeals) who deleted the addition of Rs. 1,30,44,518/- being interest receipts and hire charges from contractors by holding that the same were in the nature of capital receipts which would go to reduce capital cost." 22. In the case of Bongaigaon Refinery & Petrochemicals Ltd. (supra), the Hon'ble Apex Court, after considering the decision of Bokaro Steel Ltd. (supra), held as under:- "reversing the decision of the High Court in relation to these items of income, that these items of receipts were not taxable income but were to be adjusted against the project cost for the business of oil refinery and petrochemicals." 23. That the Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. (supra), after considering the decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eshi Weaving Mills vs. CEPT (1954) 26 ITR 765 (SC). Once it is held that the assessee's income is an income connected with business, which would be so in the present case, in view of the finding of fact by the CIT(A) that the monies which were inducted into the joint venture company by the joint venture partners were primarily infused to purchase land and to develop infrastructure then it cannot be held that the income derived by parking the funds temporarily with Tokyo Mitsubishi Bank, will result in the character of the funds being changed, in as much as the interest earned from the bank would have a hue different than that of business and be brought to tax under the head 'Income from other sources'. It is well-settled that an income received by 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. See S.G. Mercantile Corporation (P) Ltd. vs. CIT1972 CTR (SC) 8 : (1972) 83 ITR 700 (SC) and CIT vs. Govinda Choudhury & Sons (1994) 116 CTR (SC) 61 : (1993) 203 ITR 881 (SC). 5.2 It is clear upon a pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rces. 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 preoperative expenses." That, the ratio of the above finding of the Hon'ble Delhi High Court would be squarely applicable to the facts of the assessee's case, because admittedly in the case under appeal before us the share capital as well as loans were raised for the specific purpose of setting up of the power generation plants. The business of the assessee has not been commenced and therefore, as per above decision, the interest received in the period prior to commencement of business was in the nature of capital receipt and hence was required to be set off against the pre-operative expenses. The assessee has already set off the interest income against the preoperative expenses which is titled as "project development expenditure". In view of above, we are of the opinion that the interest income of Rs. 1,35,87,158/- as well as Rs. 7,91,51,306/- was a capital receipt not chargeable to tax during the year under consideration. Accordingly, Ground Nos. 2 and 4 of the assessee's appeal are allowed." 8.1 T ..... 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