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TMI Blog2021 (9) TMI 757X X X X Extracts X X X X X X X X Extracts X X X X ..... sited in the General Proceedings Account as per clause 8.2 (c)(iii) r.w.s. clause 8.5. Both the parties have not brought to our notice about the use of amount deposited in General Proceedings Account. If the said account is to be treated with parity to the Escrow account, then, the assessee is liable to tax on income received in the year in which the assessee is eligible to utilize the disputed amount. In view of the above observations, we remit the issue back to the file of the AO with a direction to examine the issue as per pages 8 to 14 of the paper book filed by the assessee before us. Thus, the ground raised by the assessee on this issue is treated as allowed for statistical purposes. Disallowance of interest on late payments of TDS - grievance of the revenue authorities is that the appellant has deducted TDS but not remitted to the Government Account within the stipulated time for which the appellant had to pay penal interest which has been claimed by the appellant as business expenditure - HELD THAT:- As assessee has not remitted the TDS amounts within stipulated time and paid interest on TDS, which is not allowable expenditure u/s. 37(1) of the Income Tax Act, 1961. At ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a delay; supported by cogent reasons, deserves to be condoned so as to make way for the cause of substantial justice. We accordingly hold that revenue's impugned delays are neither intentional nor deliberate but due to the circumstances beyond its control. The same stands condoned. Cases are now taken up for adjudication on merits. 2. The grounds raised in these appeals are common, therefore, the grounds raised in AY 2122/Hyd/2018 are as under: 1. The order of Ld. CITCA) confirming the AO's Order is erroneous in law, contrary to facts, probabilities of the case and against the principles of equity and natural justice. 2. The Ld. CITCA) erred in treating interest earned on unutilized funds amounting to ₹ 87,73,686/-, which were inextricably linked for the purposes of developing highway as taxable income, kept in accordance with NHAI mandate with no liberty to utilize at free discretion and which was reduced from cost of project, relying on case laws which are easily distinguishable on facts. 3. The Ld. CITCA) erred in disallowing the expenditure treating the same as taxable income amounting to ₹ 17,03,927/- being amount paid towards Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore this is as per generally accepted accounting procedure and as per provisions of Income tax Act as such investments were made out of temporary unutilized funds during the course of road development activity. 7.1. After considering the assessee's reply, the Assessing Officer concluded that the assessee company deposited the surplus funds in the various Banks Mutual funds, and earned Interest income amounting to ₹ 87,73,686/-. In this case, the deposits made were not for giving Bank guarantee/Margin money deposit. The ideal funds lying with the company were deposited as fixed deposits in the various Banks Mutual funds. The Assessing Officer concluded that the deposits were not compulsion to the assessee company, hence the interest received on this deposits were not Business Income to the Company and taxable under the head Other source of Income to the company. The Assessing Officer relying on the decision of the Apex Court in the case of M/s. Tuticorin Alkali Chemicals and Fertilizers Ltd. treated the total interest income received from various Banks Mutual funds of ₹ 87,73,686/- as Other source of Income , and also not allowed any expenditure a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esign, build, finance, operate and transfer of infrastructural facilities like roads etc. under DBFOT system. 'It is also submitted that originally the work was allocated to the Consortium of BSCPL Infrastructure Limited and C C Construction Limited and later on the SPV was formed by the consortium member as was required by the NHAI, the SPV is specifically formed to ensure that the funds are utilized exclusively for the stated purpose. Since, the appellant's operations are in work in progress and also using the funds as per the terms of agreement with NHAI as there is a time gap between the supply of material put to use for construction and the payment schedule as such temporarily deposited in banks and earned interest of ₹ 29,60,558/- for AY 2013-14 ₹ 23,60,589/- for AY 2014-15 as stipulated under mandate as per the terms of the agreement with NHAI as there is no discretion/power to the appellant and needs to be wholly and exclusively used for the purpose of BOT which reads as under; (i) the borrower shall instruct the escrow bank in a certificate signed by its financial officer from time to time to invest amounts deposited and Lying in any sub-account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epay 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 company, even before it commences business, invests surplus funds in its hands for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head 'Capital gains'. Similarly, if a company purchases rented house and gets rent, such rent will be assessable to tax under section 22 as income from house property. Likewise, the company may have income from other sources. The company may also, as in that case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under section 56 of the Act. This Court also emphasized the fact that the company was not bound to utilise the interest so earned to adjust it against the interest 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 activiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the present case is directly linked with the purchase of plant and machinery. Hence, any income earned on such deposit is Incidental to the acquisition of assets for the setting up of the plant and machinery. In this view of the matter the ratio Laid down by this Court in Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT [1997] 227 ITR 172, will not be attracted. The more appropriate decision in the factual situation in the present case is in CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC). The appeal is dismissed. There will be no order as to costs. 2.4 The position of capitalizing interest income was further comprehensively analyzed in the recent decision of Hon'ble Supreme Court in [2018] 403 ITR 426 CIT Vs. Shree Rama Multi Tech Ltd., where in while dismissing the appeal held as under: (Copy of order enclosed) The common rationale that is followed in all these judgment is that if there is any surplus money which is lying idle and it has been deposited in the bank for the purpose of earning interest then it is liable to be taxed as income from other sources but if the income accrued is merely incidental and not the prime purpose of doing the act in questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capacity of joint venture of Central Government and State Government - Assessee obtained money from Central Government and State Government for execution of construction work for project Assessee parked money so received in bank during unutilized period and interest was earned - Assessing Officer treated interest so earned to be an income of assessee under head 'income from other sources' and brought same to tax - Whether entire fund entrusted and interest accrued therefrom on deposits in bank though in name of assessee had to be applied only for purpose of welfare of State - Held, yes - Whether, therefore, interest earned on bank deposit could not be brought to tax under head income from other sources in hands of assessee - Held, yes [Para 8] 2.6 A digest of the above case laws reveals that if: i) if the income accrued is merely incidental and not the prime purpose of doing the act in question which resulted into accrual of some additional income, and ii) company is not free to use this income in any manner it liked then the income is not liable to be assessed and is eligible to be claimed as deduction. 2.7 In the instant case, the appellant is bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 403 ITR 426 (SC) CIT v Shree Rama Multi Tech. Ltd. wherein clearly held that interest accrued on account of deposit of share application money is not taxable income. Copy of order is already part of record in Paper book Page No. 15 to 19. Further similar views was upheld by various high courts in (2020) 422 ITR, Pg:-244 (P H) order Dt-03.02.2020, CIT v. PUNJAB POLICE HOUSING CORPORATION; (2009) 355 ITR, Pg:-255 (Del) order Dt-26.02.2009, INDIAN OIL PANIPAT POWER CONSORTIUM LTD v. ITO and (2016) 380 ITR, Pg:-474 (Del) order Dt-07.01.2016, PCIT v. FACOR POWER LTD (Copies of orders enclosed) along with other recent Tribunal judgments in (2020) 189 DTR, Pg:-46 (Mum) order Dt-05.02.2020, ACIT v. LOOP TELECOM LTD; (2019) 178 ITO, Pg:-659 (Mum) order Dt-20.03.2019, KARANJA TERMINAL LOGISTICS (P) LTD. V. DCIT and (2016) 158 ITO, Pg:-909 (Luck) order Dt:-26.02.2016, PRAYAGRAJ POWER GENERATION CO LTD V. ITO copies of which are enclosed as paper book. 3. Further in all the judgments relied by department, there is no mandate or escrow agreement/account which restrict the funds usage impose compulsions and hence are not applicable to the facts of the instant case. Thus in view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ething which flows from the property. Something received in place of the property will be capital receipt. The amount of interest received by the company flows from its investments and is its income and is clearly taxable even though the interest amount is earned by utilising borrowed capital. 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 utilising the borrowed funds as its income. The interest earned by the assessee was clearly its income and unless it could be shown that any provision like section 10 had exempted it from tax, it will be taxable. The fact that the source of income was borrowed money did not detract anything from the revenue character of the receipt. The question of adjustment of interest payable by the company against the interest earned by it will depend upon the provisions of the Act. The expenditure would have been deductible as incurred for the purpose of business if the assessee's business had commenced. But that was not the case in the instant case. The assessee may be entitled to capitalise the interest payable by it. But what the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompensation. In the case of Berco Underwritings (India) Pvt. Ltd. (decision dated 17/06/2013 in ITA.. 0: 1678/Hyd/2012), the jurisdictional Bench of Hon'ble IT AT examined the matter in detail. In the said decision, Hon'ble ITAT discussed on the order of preference of binding precedents and followed the decisions of Hon'ble AP High Court in the cases of Sponge Iron India Ltd. and Raasi Cement Ltd. 8. In the case of Consolidated Fibres and Chemicals Ltd. (273 ITR 353), the Hon'ble Calcutta High Court examined the issue of deduction of interest incurred by the assessee from the interest income at length and held as under: 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 is first put to use and until the business commences the interest received on investment of unutilised funds will not be a business income, when such interest, until the business commences, is in the nature of capital expenditure and is eligible for being capitalised. The purpose of the borrowing was for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir being finally utilised for the main object of setting up of thermal power plants. The fact that funds were borrowed initially lost its importance when the issue to be considered was the manner in which these funds were utilized and the taxability of the income resulting therefrom. There are a number of authorities of the High Courts to show that in the case of a business yet to be set up, interest earned by placing surplus funds in short-term deposits with the banks, arises from an independent source, i.e., a source independent from the business to be set up. There is an established accountancy practice about the capitalisation of expenditure like payment of interest towards the cost of assets and for showing the income earned during the construction period separately in the accounts and also of making tax provision for such income and, further, for setting off income against related items of expenditure so that only the net amount of the expenditure is capitalised However, it is a thing quite different from the set off of interest income against the cost of construction as a whole as this expenditure cannot be considered to be related to this interest income. The accountancy p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be set off against pre-operative expenses. 13. In this case, it is the appellant's contention that, it is bound by the Escrow Agreement to mandatorily invest the idle funds in the permitted investments and income from such investments shall be utilized towards reducing the project cost and not for any other purpose. The appellant has submitted that it is not at liberty to spend these funds and this income accrued is only incidental to the prime purpose, i.e. complying with terms of the escrow agreement without which business cannot be functioned. The contention of the appellant is clearly not borne out be facts. Kind attention of the Bench is drawn to Pages 8 to 10 of the Paper Book dated: 02.5.2019 submitted on 03.5.2019 submitted by the appellant wherein; copy of the Concession Agreement of NHAI stating Article 31 of the said agreement on 'Escrow Account' has been submitted. Article 31.2 of the Agreement talks of 'Deposits into Escrow Account' and Article 31.3 discussed 'Withdrawals during Concession Period'. Relevant portion of Article 31.3 is reproduced below for ease of reference: 31.3 Withdrawals during Concession Period 31.3.1 The C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 2(3), Vs Kolkata Metro Rail Corpn. Ltd. 102 Taxmann.com 419 (Kol-Trib) Assessee here is a government company in the form of v. Kolkata joint venture of Government of India and Government of West Bengal. It has been pointed out that the funds from the Central and State Govts. Flow directly to the assessee company as equity and Subordinate Debt/Loans. The objective is to create and maintain a fund for the development of infrastructural assets on a continuing basis and therefore the assessee is a SPV formed by the Govt. of India and Govt. of West Bengal as per the guidelines; there is no profit motive as the entire fund entrusted and interest accrued therefrom on deposits in bank through in the name of the assessee has to be applied only for the purpose of welfare of State as provided in the guidelines. The facts of the case are totally different to that of the appellant. In addition to above, he relied on the orders of lower authorities and written submissions, he vehemently argued the case and submitted that the case laws relied by the ld. AR is distinguishable on facts of the present cash on hand. 11. We have considered the rival submissions and perused the material on r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee had claimed expenditure on the following: 1. Interest on TDS (Professional) ₹ 804/- 2. Interest on TDS (194A) ₹ 68,399/- 3. Interest on TDS (Civil work) ₹ 5,84,769/- 4. Interest on TDS (Salaries) ₹ 2,730/- 5. Income Tax ₹ 10,47,225/- Total ₹ 17,03,927/- 12.1. According to the AO, since the above expenses were not an allowable expenditure u/s. 37 of the Act, disallowed ₹ 17,03,927/- : and added to the total income of the assessee 13. Before the CIT(A), the appellant submitted that the interest on TDS is nothing but a compensatory nature for delay payment of TDS termed as Interest on TDS and not in the nature of penal interest or penalty and is not a prohibited expenditure as envisaged under the ambit of explanation section 37(1). The appellant submitted that the question of disallowing this expenditure and levying tax on it does not arise as it was not at all claime ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd exclusively for the purpose of business carried on by the assessee. The interest payment is neither an offence or nor prohibited under Income Tax Act, 1961. The interest on TDS is not in penal nature but it's a compensating in the nature for delay deposit of TDS to the credit of Govt. ii) The Hon'ble Apex Court in the case of Lachmandas Mathura Vs. CIT reported in 254 ITR 799 held that the interest on arrears of tax is compensatory in nature and not penal. The relevant extract of the judgment is reproduced below:- The High Court has proceeded on the basis that the interest on an-ears of sales tax is penal in nature and has rejected the contention of the assessee that it is compensatory in nature. In taking the said view the High Court has placed reliance on its Full Bench's decision in Saraya Sugar Mills (P.) Ltd. v. CIT [1979] 116 ITR 387 (All.) The learned counsel appearing for the appellant-assessee states that the said judgment of the Full Bench has been reversed by the larger Bench of the High Court in Triveni Engg. Works Ltd. v. CIT [1983] 144 ITR 732 (All.) (FE), wherein it has been held that interest on arrears of tax is compensatory in nature and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both the parties and also we are of the view that the facts pari materia contained in the present case are distinguishable from the facts contained in the judgements/orders relied on by the assessee. In the case of Lachmandas Mathura vs CIT, 254 ITR 799 and the decision of IT AT Kolkata Bench in the case of DCIT, Circle 3(1), Kolkata vs Narayani Ispat Pvt. Ltd(ITA No. 2127/Kol/2014) wherein facts were relating to liabilities of interest on arrears of Sales Tax, however, on the contrary we rely on the decision of IT AT Mumbai Bench in the case of DNV GL AS (Formerly known as DET Norske Veritas AS) vs ADIT (International Taxation) (ITA No. 4687/Mum/2016 dated 31-05-2017) wherein it was held as under:- 3. We have heard the rival contentions and gone through the facts and circumstances of the case. Brief facts are that me (sic).-\.0 perusing the profit and loss account noticed that the assessee bas paid an amount of ₹ 73,913/- being interest on delayed payment of TDS and he required the assessee to explain as to why the same should nor be disallowed. The assessee claimed that the TDS relates to payment to various traders and the same in connection and for the purpose of bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 5 i.e. the income tax paid by the assessee of an amount of ₹ 10,47,225/- is also not allowable as per section 37(1) of the Act. Therefore, following the said decision of the Jaipur bench, we uphold the order of the CIT(A) in confirming the disallowance of ₹ 17,03,927/- made by the AO on account of interest paid by the assessee on TDS/Income-tax. Thus, this ground of appeal of the assessee is dismissed. 16. In ITA No. 547 548/Hyd/2018, the assessee has raised four grounds of appeal, out of which 1 4 are general in nature, hence, need no adjudication. 17. As regards ground No. 2 in both the appeals, relating to interest earned as 'other source of income' is similar to ground No. 2 raised in ITA No. 2122/Hyd/2018. Therefore, following the decision taken vide para No. 11 (supra), this ground is allowed for statistical purposes in both the appeals. 18. As regards ground No. 3 in both the appeals, relating to credit for TDS is not allowed, the facts as taken from ITA No. 547/Hyd/2018 are that the AO observed that the assessee had claimed credit for TDS to the tune of ₹ 13,02,893/-. Out of this ₹ 2,96,061/- pertains to the interest received ..... X X X X Extracts X X X X X X X X Extracts X X X X
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