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TMI Blog2021 (7) TMI 321X X X X Extracts X X X X X X X X Extracts X X X X ..... with construction activities which rightly been brought to tax as income under the head income from other sources . Even the ground relating to setting off of interest expenses on borrowed funds U/s 57(iii) against the interest income has been discussed in case of Seshasayee Paper Boards Ltd. [ 1984 (4) TMI 17 - MADRAS HIGH COURT] has decided the same against the assessee. Therefore, respectfully following the same, the interest income has to be brought to tax without allowing any deduction u/s 57(iii) towards interest on borrowed capital. - Decided in favour of revenue. - ITA. No. 302/JP/2020 - - - Dated:- 30-6-2021 - Shri Sandeep Gosain, JM And Shri Vikram Singh Yadav, AM For the Assessee : Shri Anoop Bhatia (CA) For the Revenue : Smt. Monisha Choudhary (JCIT) ORDER PER: VIKRAM SINGH YADAV, A.M. This is an appeal filed by the assessee against the order of ld. CIT(A)-I, Jaipur dated 30.01.2019 relevant for the assessment year 2013-14 wherein the assessee has raised the following ground of appeal:- 1. On facts and in circumstance of the case, the Ld. CIT(A) has grossly erred in confirming the addition made by treating the interest of &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the project. Therefore, to minimize its interest burden, the appellant had parked the interim excess in Short Term Deposit Receipt (STDR) with the said bank only. On such investments the appellant earned interest of ₹ 3,05,432/- during the relevant year. This interest was shown in the profit and loss statement of the relevant year as Pre-operative income . Further since there were substantial pre-commencement (or pre-operative) expenses of ₹ 39.92 lakh hence the aforesaid Pre-operative Income of ₹ 3,05,432/- was adjusted against the Pre-operative Expenses and balance amount of ₹ 35.32 lakh was shown forming part of Capital Work in Progress. 5. It was further submitted that the Ld. CIT(A) as also AO relying on the decision of Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd Vs. CIT (1997) 141 CTR SC 387 and the decision of ITAT Lucknow in the case of ACIT vs. Z Square Shopping Mall P Ltd held the interest earned as being Income from other sources The assessee had placed reliance on decisions of various High Courts as also the decision of Hon ble Supreme court in the case CIT Vs. Bokaro Steel Limited 236 ITR 315 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td vs. CIT reported in 227 ITR 172. 8. It was submitted that in the said case of Tuticorin Alkali Chemicals [1997] 227 ITR 172, it was found by the authorities that the borrowed funds, being surplus and idle, were utilized by the assessee in investing in fixed deposits to earn interest income and, therefore, the Hon ble Supreme Court have held that the interest earned on surplus borrowed funds, would have to be treated as Income from other sources . However, in numerous subsequent judgements of the Hon ble Supreme Court and the Hon ble High Courts, in the cases of : (i) Bokaro Steel Ltd. [1999] 236 ITR 315 (SC); (ii) CIT vs Karnal Co-operative Sugar Mills Ltd 243 ITR 2 (SC); (iii) CIT vs Karnataka Power Corporation 247 ITR 268 (SC); (iv) BongaigaonRefinary And Petrochemicals Ltd. v. Commissioner of Income-Tax, [2001] 251 ITR 329 (SC); (v) Indian Oil Panipat Power Consortium Ltd vs. ITO 315 ITR 255 (Delhi High Court); (vi) CIT vs Jaypee Dsc Ventures Ltd in ITA No. 357/2010 (Delhi High Court);and (vii) PCIT vs Facor Power Ltd (2016) 66 Taxmann.com (Delhi High Court), it has been categorically held that if the income is earned whether by way of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was held to be a capital receipt which was permitted to be set off against preoperative expenses. 10. It was submitted that the ratio of the judgment of the Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals (supra) and that of Bokaro Steel Ltd. (supra), needs to be distinguished in their actual sense as done in the above judgement of the Hon ble Delhi High Court. The real test which permeates through the judgment of the Hon ble 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 Hon ble Supreme Court judgment in Bokaro Steel Ltd. (supra) 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. Therefore, in the case of assessee, the project finance so disbursed in instal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y appellant during the time gap available between project funds disbursed and actual utilization for setting up of business. Therefore, decision in the case of Bokaro Steel limited squarely applies to the facts of the Appellant, and the interest received on STDR may kindly be directed to be netted off against pre-operative expenses capitalized during the pre-construction period and consequently the addition made may kindly be directed to be deleted. 13. Per contra, the ld. DR relied on the decision of Hon ble Supreme Court in case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (supra) as well as decision of the Coordinate Bench in case of Thermal Powertech Corporation India Ltd. vs. DCIT [2017] 81 taxmann.com 168. It was submitted that the Coordinate Bench in the said decision has exhaustively considered and analysed the decision of Hon ble Supreme Court in case of Tuticorim Alkali Chemicals and Fertilizers Ltd. vs. CIT as well as its subsequent decisions in case of CIT vs. Bokaro Steel Limited (supra) and Bongaigaon Refinery and Petrochemicals Ltd vs. ITO 251 ITR 329 (SC) as well as the decision of Hon ble Delhi High Court in case of Indian Oil Panipat Power cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h income and taxed the same by observing as under:- I have carefully considered the reply of the AR of the assessee and not found tenable because in usual course, interests received by the company from bank deposits and loans would be taxable as income under the head income from other sources u/s 56 of the Act,. In the other words, if the capital of a company is fruitfully utilised far income generated will be of revenue nature and not accretion of capital and such interest income will have to be taxed in accordance with law. The interest derived by the assessee company from the borrowed funds which were invested in short-term deposits would be chargeable to tax under the head income from other sources or would go to reduce the interest payable by the assessee on term loan secured by the assessee from financial institutions, which would be capitalized after the commencement of commercial production. in the case of ACT Vs. Z. Square Shopping Mall Pvt. Ltd. the Hon'ble ITAT, Lucknow observed as under:- The assessee invested the borrowed fund in FOR Mutual fund, as there is no need of fund in construction process during that specific period. Therefore, fund inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cies being part of final accounts for FY 2012-13 clearly mentions regarding treatment of pre-operating span as under:- II OTHER NOTES TO ACCOUNT: 1.Pre-operative Span: The company is presently operating in pre-operative span. Therefore, all the expenditure incurred towards executing the project are treated as pre-operative expenditures, the year-end balance of which aggregates to ₹ 35,32,902/- which would be allocated over the completed fixed assets on suitable and rational basis at the time of capitalization. (V) Thus, the accounting policies adopted by the appellant itself mentioning allocation of the pre-operative expenses towards fixed assets and there is no mention of netting of pre-operative income against pre-operative expenses. The appellant is not expected to go beyond the accounting policies adopted by it. (vi) Considering the above facts and judicial pronouncements discussed in the order, no interference is called for and the addition made by the AO is upheld. 16. We have heard the rival contentions and perused the material available on record. Undisputed facts borne out of the records are that the assessee company has availed term loan f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s from the banks and has invested a part of the borrowed funds which were not immediately required in short term deposits with an intention to earn interest ostensibly to reduce the interest liability. The question which arose for consideration before the Coordinate Bench was whether the interest income of ₹ 22,35,48,281/- received by the assessee on temporary deposit of funds with banks was assessable as income of the assessee or it would go to reduce the cost of borrowings. We therefore find that under similar facts and circumstances of the case, the Coordinate Bench has examined the matter of taxability of interest income and has taken into consideration various decisions of the Hon ble Supreme Court as well as decisions of various Hon ble High Courts including the Hon ble Delhi High Court which have also been referred to by both the parties before us. It would therefore be relevant to refer to the findings of the Coordinate Bench which are contained at para 16 to 27 of its order which read as under:- 16. We have considered the rival submissions and also perused the material available on record. Admittedly the assessee is in the process of setting up of power project. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Nagarjuna Steels Ltd. [1988] 171 ITR 663/38 Taxman 229. Accordingly a reference was made to the Apex Court. The Apex Court after examining the facts of the case and the judgment of the Madras High Court in Seshasayee Paper Boards Ltd. (supra) and Andhra Pradesh High Court in Nagarjuna Steels Ltd. (supra) confirmed the judgment of the Madras High Court. The Apex Court has specifically observed as follows at pages 180 and 181 of the Report: It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilizing the borrowed funds as its income. It was rightly pointed out in the case of Kedar Narain Singh v. CIT [1938] 6 ITR 157 (All) that anything which can properly be described as income is taxable under the Act unless expressly exempted . The interest earned by the assessee is clearly its income and unless it can be shown that any provision like section 10 has exempted it from tax, it will be taxable. The fact that the source of income was borrowed money does not detract from the revenue character of the receipt. The question of adjustment of interest payable by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Apex Court has observed as follows: 'Our attention was drawn to two other decisions where the view of the Andhra Pradesh High Court was followed. In the case of CIT v. Electrochem Orissa Ltd. [1995] 211 ITR 552, the Orissa High Court preferred the view expressed by the High Court of Andhra Pradesh to the view expressed by the Madras High Court in Seshasayee Paper and Boards Ltd.'s case [1985] 156 ITR 542 on the ground that the Madras case was based on a finding of fact that there was no direct connection between the interest paid and the interest received. In our view, it will not be right to read the judgment in Seshasayee Paper and Boards Ltd.'s case [1985] 156 ITR 542 (Mad) in that way. The court's finding in Seshasayee Paper and Boards Ltd.s case [1985] 156 ITR 542 (Mad) was that the interest earned by the assessee from the bank deposits had to be assessed under the head Other sources . Consequently, the interest paid on the borrowings for the purpose of purchase of plant and machinery could not be allowed or adjusted against this income under section 57(iii) nor were such adjustments permissible under section 70 or 71 of the Act because the business o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. The Apex Court finally concluded that the view expressed by the Madras High Court in Seshasayee Paper and Boards Ltd. is correct and the views expressed in other cases are erroneous. From the above it is obvious that even though the Apex Court found that the assessee in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra) has not specifically made any claim u/s. 57 of the Act for setting off of the interest received on the FD with interest payment on borrowed fund, the Apex Court after referring to the judgment in the case of Seshasayee Paper and Boards Ltd. (supra) of the Madras High Court found that the claim of the assessee cannot be allowed even u/s. 57(iii) of the Act. In our opinion, the judgment of the Apex Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra) on identical set of facts has answered a similar question against the assessee. Therefore, the interest received by the assessee on temporary deposit of funds which are not required immediately has to be assessed as 'Income from other sources' and it cannot be set off against the interest payable by the assessee on borrowed funds. 20. Admittedly deposit of funds i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;ble Supreme Court has once again reiterated and supported its decision in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra) with regard to the issue of treatment of interest earned on short term deposits made out of borrowed funds during the period prior to the commencement of the business of the assessee. in the case of Bokara Steel Ltd. (supra), that company received certain income from the contractor who was assigned the job of constructing the factory. During the course of construction activities carried on by the contractor, the contractor had availed certain facilities and services from the company and paid certain consideration to the company. The nature of the services and consideration/income received by the company from the contractor are noted as below :- i. Let out of its dwelling units to the contractor which were used for the purpose of housing the workers/labourers and staff for construction work; ii. Hire charges received by the company from the contractor in connection with hiring of the plant and machinery owned by the company to the contractor which were used by the contractor in the construction work iii. Interest received by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examine that issue. (Emphasis supplied) This issue of difference between the treatment of income received from contractor and the interest income received from the banks on account of short term deposits is once again highlighted by Hon'ble Supreme court in the case of Bokara Steel Ltd. (supra) at Para No.7. The relevant portion of the same is reproduced below: The appellant, however, relied upon the decision of this court in Tuticorin Alkali Chemicals Fertilizers Ltd. case (supra). That case dealt with the question whether the investment of borrowed funds prior to commencement of business, resulting in earning of interest by the assessee, would amount to the assessee earning any income. This court held that if a person borrows money for business purposes, but utilises that money to earn interest, however, temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. Merely because he utilised it to repay the interest on the loan taken will not make the interest income as a capital receipt. The department relied upon the observations made in that judgment (at page 179) to the effect that if the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income. (Emphasis supplied) 23. Under the facts and circumstances, it cannot be construed that the interest earned on account of parking the un utilized borrowed funds is inextricably linked with the setting up of the capital structure of the assessee company, inasmuch as such interest income is not received from the contractor to whom the assessee has assigned the construction work of its power project. In view of this, the ratio laid down by Hon'ble Supreme Court in the case of Bokara Steel Ltd. (supra)is not applicable to the facts of the assessee's case. As such, in view of the similar set of facts and circumstances involved in the case of the assessee as well as in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra), the proposition of law laid down by the Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the Delhi High Court in Indian Oil Panipat Power Consortium Ltd. (supra). The Hon'ble Delhi High Court distinguished the judgment of Apex Court in Tuticorin Alkali Chemicals Fertilizers Ltd. (supra) on the ground that the funds in the form of share capital were infused for a specific purpose of acquiring land and 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'. After referring to the judgment of Apex Court in Tuticorin Alkali Chemicals Fertilizers Ltd. (supra), the Hon'ble Delhi High Court found that the interest on surplus funds would have to be treated as 'Income from other sources'. We find that the Madras High Court on another occasion, in South India Shipping Corpn. v. CIT [1999] 105 Taxman 660, considered an identical situation and after referring to the Apex Court judgment in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra) observed s follows at page 31 of the Report: Coming now to the questions that have been referred to us at the instance of the Revenue, these questions are required to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital and there were any end-use restrictions and it was therefore free to use the interest 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 in any manner connected with construction activities which rightly been brought to tax as income under the head income from other sources . 21. Even the ground relating to setting off of interest expenses on borrowed funds U/s 57(iii) against the interest income has been discussed by the Coordinate Bench in decision referred supra and relying on the Hon ble Supreme Court decision in case of Seshasayee Paper Boards Ltd. has decided the same against the assessee. We find that the Hon ble Calcutta High Court in case of Consolidated Fibres and Chemicals Ltd has also taken a similar view and has held as under: 24. We need not dilate on this question because of the distinction we have already made, namely, until the business commences the interest paid on the borrowed capital for acquiring asset is includible in the actual cost within the meaning of Explanation 8 to section 43(1) and it would not be a business expenditure till the asset ..... X X X X Extracts X X X X X X X X Extracts X X X X
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