9911796707
TMI Blog2021 (7) TMI 321X X X X Extracts X X X X X X X X Extracts X X X X ..... t prays that addition so made deserves to be deleted. Without prejudice and in the alternate- 3. On facts and in the circumstances of the case Ld. CIT(A) has grossly erred in not allowing the corresponding interest borne by the appellant on the borrowed funds, which were utilized in making the short term deposits. Appellant prays that such expenditure being incurred 'in relation to earning of said interest income', deserves to be allowed as deduction from income treated as 'income from other sources'." 2. In ground Nos. 1 and 2, the assessee has challenged the addition by treating the interest of Rs. 3,05,430/- received on STDR made in the pre-commencement period as being income from other sources. 3. In this regard, the ld AR submitted that the assessee company was registered with the objective to carry out the business of cultivators, growers, processors, producers, manufacturers, importers, exporters, buyers, sellers, traders, agents, and dealers in products or by-products of chemical, lac, sheliac, resin, gum, tannin, cutch, guar seeds, guar splits, guar meal, guar gum, guar powder, industrial and household gums and all sort of forest produce and produce of soil and trees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d advanced money to contractors on which it was earning interest, received rent from quarters let out to employees and had received hire charges on plant let out to contractors also royalty on stones removed from its land. As against this, the appellant had invested funds in TDRs, thus the case of Tuticorin Alkali Chemicals and Fertilizers Ltd was directly applicable to the appellant. Appellant humbly submits that this observation is vague and not relevant, as what is to be differentiated is the nature / character of funds that were utilized to earn such income, whether these funds invested were inextricably linked to the business of assesseee or were surplus and idle funds, which by the way were invested to earn certain income. Thus, the observation that since the assessee utilized the term loan to invest in term deposit, the ratio of decision in the case of Bokaro Steel shall not apply is absolutely vague, and deserves to be ignored. 7. The ld AR further submitted that it is not uncommon for the newly incorporated business enterprises and 'start-ups' to temporarily park their share capital contributions and/or borrowed funds in Bank Fixed Deposits or other similar investment ave ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Bokaro Steel Ltd. (supra). The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals (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. (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. 5.2. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce deserve to be capitalized. 11. It was further submitted that the ld. CIT(A) while confirming the addition made by ld.AO has observed at para 3.1.2 clause (v) that "the accounting policies adopted by the appellant itself- mentions allocation of the pre-operating expenses towards fixed assets and there is no mention of netting off of pre-operative income against pre-operative expenses. Thus, the appellant is not expected to go beyond the accounting policies adopted by it." In this regard, it was submitted that the said accounting policy duly quotes the amount of pre-operating expenses to be capitalized at Rs. 35,32,902/- which is arrived at after netting off the income earned during the pre-operative span and thus duly supports the version of appellant that the interest on STDR was indeed a pre-operative income, earned on funds parked during the idle time-span of pre-construction period and thus deserves to be capitalized and prays accordingly. 12. In respect of ground no. 3, the ld AR submits that in the event such interest is held to be income from other sources then the interest accrued on such borrowed funds, invested in STDR may kindly be allowed to be deducted from intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treatment of interest received from contractor and interest income received from the banks on account of short term deposits was again discussed by the Hon'ble Supreme Court in case of Bokaro Steel Ltd at para 7 of its decision and it was held that "the company, may also in that case keep the surplus funds in short terms deposits in order to earn interest and such interest will be chargeable under section 56 of the Act. This Court also emphasized the fact that the company was not bound to utilize the interest so earned to adjust against the interest paid on borrowed capital. The company was free to use this income in any manner it liked" and therefore interest earned by investing borrowed capital in short term deposit is an independent source of income not connected with construction activities. It was accordingly submitted that the decision of CIT vs. Bokaro Steel Limited as relied upon by the ld. AR in fact supports the stand taken by the Revenue and is consistent with the earlier decision in case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT. 14. Regarding the issue of claim of interest paid against such interest income u/s 57(iii) of the Act, the ld DR has relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounts that the company commenced its commercial production on 30th Nov, 2013. Regarding capitalization of preoperative expenses, the notes on accounts reads as under:- 2. Capitalization & pre-operative expenses: All the fixed assets have been capitalized on the date of commercial production, i.e., 30th of November, 2013 (except vehicle & computer), since this date has been construed to be the date of put to use for all the assets. Pre-operative expenses incurred till 30th of November, 2013 have been apportioned to the fixed assets of the company on value wise pro-rata basis on the same date. Expenses incurred during the implementation period of the project and during trial runs have been capitalized, whereas income earned out of trial runs have been netted from pre-operative expenses." (iii) The appellant mainly relied on the judgment of Hon'ble Apex Court in the case of CIT vs. M/s Bokaro Steel Ltd. [1999] 236 ITR 315 (SC). However, the facts of the appellant case are different from the case of M/s Bokaro Steel Ltd. [In CIT v Bokaro Steel Ltd (Supra), a government company, which during the period of construction of the plant had advanced money to contractors on which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deposit receipts with the bank and the interest so received will go to reduce pre-operative expenses and cannot be taxed as "income from other sources" as has been done by the Assessing Officer and confirmed by the ld. CIT(A). In the alternate, it has been contended that interest on borrowed funds to the extent invested in STDR may be allowed to be deducted from interest income u/s 57(1)(iii) of the Act. In support of its contention, the assessee has relied on the decision of Hon'ble Supreme Court in case of Bokaro Steel Limited and the decision of Hon'ble Delhi High Court in case of Indian Oil Panipat Power Construction Ltd. 18. Per contra, the ld. DR submitted that the surplus funds were invested in short terms deposits in order to earn interest income and such interest income has rightly been brought to tax as chargeable under the head 'income from other sources" and there is no basis for claim of interest expenditure under section 57(1)(iii) of the Act. The ld DR has relied on the decision of Hon'ble Supreme Court in case of Tuticorin Alkali Chemicals and Fertilizers Ltd. as well as decision in case of Bokaro Steel Limited and submitted that there is no inconsistency in these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee would be set off against the interest payment of Rs. 127,84,98,794/- on the borrowed funds. As rightly submitted by the learned CIT DR, the Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) had examined an identical situation. The question which was referred to the Supreme Court is as follows: "Whether, on the facts and in the circumstances of the case, interest derived by the assessee from borrowed funds which were invested in short term deposits with banks would be chargeable to tax under the head 'Income from other sources' or would go to reduce the interest payable by the assessee on the term loan secured by the assessee from financial institutions which would be capitalised after commencement of commercial production?" 17. In the case before the Apex Court, the assessee for the purpose of setting up of a factory has taken term loans from various banks and financial institutions. A part of the borrowed fund which was not immediately required by the assessee was kept invested in short term deposits with banks. The assessee claimed before the Assessing Officer that the interest of Rs. 2,92,440 received on the term deposit wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is allowable as deduction under section 57 of the Act. If that be so, under which other provision of law can the assessee claim deduction or set-off of his income from other sources against interest payable on the borrowed funds? There are specific provisions in the Income-tax Act for setting off loss from one source against income from another source under the same head of income (section 70), as well as setting off loss from one head against income from another (section 71). In the facts of this case the company cannot claim any relief under either of these two sections, 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 year. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business cannot be allowed as deduction, nor can it be adjusted against any other income under any other head. Similarly, any income from a non-business source cannot 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." 18. No doubt, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made in accordance with the provisions of the Act.' In view of the observation of the Apex Court, it is obvious that the Apex Court is conscious of the provision of section 57(iii) and it was held that when the assessee borrowed the funds for business, the interest earned on short term deposit of such funds cannot be allowed as deduction. 19. We have carefully gone through the judgment of the Madras High Court in Seshasayee Paper Boards Ltd. (supra). The assessee company invested its paid-up share capital and loans obtained from banks and received interest income. The interest income received by the assessee was adjusted towards the interest payable on its loan. Accordingly the interest received by the assessee was not offered as income for taxation. The claim of the assessee that the interest income received by the assessee would go to reduce the interest payment on borrowed funds was rejected by the IncomeITA tax authorities. However, the Tribunal allowed the claim of the assessee. On a reference to the Madras High Court, after referring to the judgment of the Apex Court in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 and various other judgments of the High Courts, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot required immediately in fixed deposit has nothing to do with the actual borrowing. The payment of interest has no connection with the receipt of interest. Admittedly the borrowing has not been made for the purpose of earning interest income in which case alone the interest received by the assessee can be deducted from the interest payable. In view of the judgment of the Madras High Court in the case of Seshasayee Paper and Boards Ltd. (supra) and the judgment of the Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), we are unable to uphold the contention of the assessee. The distinction sought to be made by categorising the funds as committed funds and surplus funds, in our view, cannot be accepted as in both the events the nature of fund is the they are not required immediately for the project. 21. In this regard, it is interesting to note that in all the mentioned decisions by assessee, reliance has been placed on the decision of the Hon'ble Supreme Court in the case of Bokara Steel Ltd. (supra). Further, in all such cases, various judicial authorities have tried to differentiate the decision of Hon'ble Supreme Court in the case of Tut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... going to reduce the cost of construction of the assessee company. 22. However, in the same case of Bokara Steel Ltd. (supra), there was an issue with regard to treatment of interest income received by the company on short term deposits made with banks out of the amounts borrowed by it for the construction work which were not immediately required. On this issue, the AO treated the interest received as income of the assessee from "other sources" and brought to tax accordingly. However, as observed by the Hon'ble Supreme Court, the assessee had accepted the same and not filed any appeal against such finding and decision of lower authorities before Supreme Court. In view of this, Hon'ble Supreme Court made a mention in its judgement at Para No.4 stating that "we were not called upon to examine this issue" and further made a reference that in any" case, this question now concluded by the decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). The relevant portion of the decision at Para No.4 is as under:: "During these assessment years, the respondent-assessee had invested the amounts borrowed by it or the construction wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest paid on borrowed capital. The company was free to use this income in any manner it liked. However, while interest earned by investing borrowed capital in short-term deposits is an independent Source of income not connected with the construction activities or business activities of the assessee the same cannot be said in the resent case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up 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. In the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC), this court examined the question whether interest paid before the commencement of production by a company on amounts borrowed for the acquisition and installation of plant and machinery would form a part of the actual cost of the asset to the assessee within the meaning of that expression in section 10(5) of the Indian Income Tax Act, 1922 and whether the assessee will be entitled to depre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r items of income such as hire charges for it equipment and recoveries from contractors on account of water and electricity charges shall be adjusted against the project cost or the business of oil refinery and petro chemicals. As such, in regard to interest income earned prior to commencement of the business, it is once again reiterated by the Hon'ble Supreme Court as income under "other sources" by reiterating the law laid down in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). The relevant portion of - the said decision of Hon'ble Supreme Court is reproduced below: "The High Court has already held that the interest income derived by the assessee during its formative period was taxable income. What remains for consideration is the income which the assessee derived from house property, its guest house, charges for equipment and recoveries from the contractors on account of water and electricity supply. These items are covered by the decision in Bokaro Steel Ltd.s case (supra). To the extent that it relates to these items, i.e., items excluding interest, the question must be answered in the affirmative and in favour of the assessee. The order under ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee is entitled to deduction of the same from its business income." 27. In view of this judgment of the Madras High Court and the judgment of the Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), and other judgments of Hon'ble Supreme court, in our opinion, the judgment of the Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. (supra) and other case relied on by Ld. Counsel in his arguments may not be applicable to the facts of this case. In view of the above discussion, we do not find any infirmity in the order of the lower authority. Accordingly, the same is confirmed." 20. Drawing support from the analysis so done by the Coordinate Bench of various authorities on the subject, with which we find no reason but to follow and endorse, we agree with the contention advanced by the ld. DR that in the instant case, the matter is squarely covered against the assessee by the series of decisions of Hon'ble Supreme Court in case of Tuticorin Alkali Chemicals & Fertilizers Ltd., Bokara Steel Ltd. as well as Bongaigaon Refinery and Petrochemicals Ltd. In the instant case, the assessee company has invested borrowed funds, availab ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
