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TMI Blog2015 (6) TMI 1221X X X X Extracts X X X X X X X X Extracts X X X X ..... company had not started commission operation, no profit and loss account was prepared. From this, Assessing Officer observed that assessee has commenced the business operations. He further noted that Auditor in the Audit report has given following noted in para (E)(ii) Para Assessing Officer page 2/3 4. On the basis of above observations, a show cause notice was issued to the assessee that why interest income from surplus funds should not be taxed in view of the decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers V CIT, 227 ITR 172. In response it was it was mainly stated that funds have been received by the assessee Corporation from Government of Himachal Pradesh against the proposed purchases of transmissions as well as contribution. Since there were certain problems in obtaining NOC from various authorities the funds available with the assessee company could not be utilized and parked in the bank deposits. Therefore, it cannot be said that assessee had surplus funds and in this regard reliance was placed on the decision of Hon'ble Delhi High Court in the case of Indian Oil Panipat Consortium Power ltd, New Delhi before cons Ltd v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee during the assessment year 2008-09 in addition to the share capital had received additional funds of Rs. 12.37 crores from Delhi Jal Board which were shown under the head capital reserve in the Balance Sheet. The issue which arises before us in this regard was whether the interest earned on FDRs in such circumstances could be said to be inextricably linked to the profits and gains of the business and whether the interest income could be set off against the pre-operative expenses, which do not include any expenditure on setting up of the plant. 15. In assessment year 2009-10 the assessee in the Annual Report had declared that though it was implementing number of projects in the State of Himachal Pradesh but none of the said projects had commenced. At page 14 of the Annual Report for the financial year 2008-09 it was declared that Sawkr Kuddh Hydroelectric Project would commence generation of electricity at the end of the year 2012. At page 33 of the Annual Report the auditors had also observed that the Profit & Loss Account had not been prepared as the company had not started the commercial operation. However, statement showing incidental expenditure during the construct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the nature and character of the said receipt/income. Another plea raised by the assessee was that the interest earned on the bank deposits was to be considered as additional equity of the company and the said interest belongs to the State Government and not to the assessee. The assessee in support thereof placed reliance on the Minutes of 15th Meeting of the Board of Directors of the assessee held on 20.2.2009 at Shimla and referred to Item No.2 of the supplementary/additional agenda items dealt with the issue of interest earned/accrued on the amounts received from he State Government as capital. As per the assessee it was decided in the said Board meeting that the interest earned was to be converted into equity from the Himachal Pradesh Government. The CIT (Appeals) under para 4.4 at pages 6 and 7 has reproduced the Item No.2 of the supplementary/additional agenda items recorded in the said minutes wherein the issue of interest earned/accrued on the amounts received from the State Government as equity and amounts received from he Government of Delhi on account of construction of Renuka Dam Project, which in turn have been utilized for making short term deposits with the bank, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned on such deposits is to be reverted back or partake the character of funds allocated to the assessee by way of any agreement or any sanction letter. The learned A.R. for the assessee though sought adjournment on this behalf but he was unable to file any evidence to justify its claim that the said interest earned on FDRs is not the property of the assessee but is the property of the principals who had allocated the said funds to the assessee. In the absence of the same and in view of the facts and circumstances of the case, we find no merit in the plea raised by the assessee. The interest income earned by the assessee during the captioned assessment years is includible as income of the assessee and is to be assessed as income from other sources in the hands of the assessee. Merely because the said interest income in future would be utilized for carrying on the business of the assessee or applied to the projects undertaken by the assessee, does not make the said interest income as capital receipt in the hands of the assessee as the utilization of the income or the receipt does not determine the nature of the receipts. The interest income received by the assessee during the pre-ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s assets of the company and he payments received for such utilization are directly linked with the activity of setting up of the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction." 20. The learned A.R. for the assessee has further placed reliance on decision of the Hon'ble Delhi High Court in Indian Oil Panipat Consortium Ltd. Vs. ITO [(2009) 315 ITR 255 (Del)], in the facts of which the funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. The Hon'ble Delhi High Court held that since interest earned by Indian Oil Panipat Consortium Ltd. was inextricably linked with setting up of the plant of the assessee, it constituted a capital receipt in the hands of the assessee. 21. The CIT (Appeals) had also made a reference to another decision of the Hon'ble Delhi High Court in International Marketing Ltd. Vs. ITO [(2007) 292 ITR 504 (Del)] wherein it was held that interest earned in pre-operative stage of the business to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;ble Supreme Court observed as under: "The assessee was a company incorporated on 3rd Dec., 1971 for the purpose of, inter alia, manufacturing heavy chemicals such as ammonium chloride and soda ash. The trial production of the factories of the company commenced on 30th June, 1982. For the purpose of setting up of the factories, the company had taken term loans from various banks and financial institutions. That part of the borrowed funds which was not immediately required by the company was kept invested in short-term deposits with banks. Such investments were specifically permitted by the memorandum and articles of association of the company. The company had also deposited certain sums with the Tamil Nadu Electricity Board. It had also given interest-bearing loans to its employees to purchase vehicles. Upto the asst. yr. 1980- 81, interests earned by the company from the various loans given by the company and also from the bank deposits were shown as income and was taxed accordingly. For the accounting year ending on 30th June, 1981, (asst. yr. 1982-83), the assessee received a total amount of interest of Rs. 2,92,440. In its return of income filed on 22nd June, 1982, the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of earning interest. The interest thus earned is clearly of revenue nature and will have to be taxed accordingly. The accountants may have taken some other view but accountancy practice is not necessarily good law. This case not a case of diversion of income by overriding title. The assessee was 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." In the detailed discussion while adjudication this matter, the Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, was assessable to tax. The Hon'ble Supreme Court observed that these receipts basically pertain to arrangements made by the assessee with contractors pertaining to the work of construction. To smoothly execute the work, some facilities were extended by the assessee company to the contractors to facilitate the work of construction and thus these receipts have been correctly adjusted by the assessee company against the charges payable to contractors. It was also observed that had the assessee not made these arrangements and had the contractors made these arrangements, charges to the company would have been more. It is significant to note that in this case itself one more issue was there, i.e. interest received from investments made out of borrowed funds which were not immediately required. This interest was held to be taxable by following the decision of M/s Tuticorin Alkali Chemicals & Fertilisers Ltd. v/s. CIT [supra]. In fact, we are reproducing the para given at page-321 of the report- "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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, following its own judgment in of M/s Tuticorin Alkali Chemicals & Fertilisers Ltd. v/s. CIT [1997] 227 ITR 172, allowed the appeal of the Revenue and set aside the judgment of the High Court." Thus, it is clear that whenever interest is received during preproduction stage from short term deposits, same has to be taxed as income from other sources. This decision has been again followed by the Hon'ble Supreme Court in the case of CIT vs. Autokast Ltd. [248 ITR 110]. The head note of this decisions reads as under- "From the decision of the Kerala High Court (see [1998) 229 ITR 789) holding that where the assessee kept the money borrowed from the Industrial Development Bank of India for purchase of plant and machinery in short-term deposits in banks and used it in bill discounting until payment for the plant and machinery, the interest earned on the deposits was not taxable in the hands of the assessee as income from other sources but would go to reduce the actual cost of the plant and machinery. The Department took an appeal to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tricably linked with the setting up of the power plant. Whereas in the case before us, there is no such finding and the funds raised through share capital which were not required for the construction of the training institute has been placed with banks and other companies as short term deposits. 18. As far as the decision in the case of CIT vs. Aspentech India (P) Ltd. [supra] is concerned, again the facts are quite distinguishable. In that case the assessee had claimed expenditure of Rs. 2.53 crores against the meager income of Rs. 4,93,343/-. The assessee was engaged in the business of software development and the expenditure was mainly incurred on account of employee's salary amounting to Rs. 1.72 crores, travelling cost of Rs. 30.61 lakhs and other administrative expenses of Rs. 39.65 lakhs. Thus, it is clear that assessee had already started generating income because receipts were also shown at Rs. 4,93,343/- and the other expenses were claimed as revenue expenditure and were not claimed as reduction from capital expenditure as has been done in the case before us. 19. From the above discussion, it is clear that both the decisions of Hon'ble Delhi High Court are not app ..... X X X X Extracts X X X X X X X X Extracts X X X X
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