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TMI Blog2022 (6) TMI 472X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestments and accordingly, the ld. CIT(A) has not erred in law in holding that receipts in question could not be taxed as income from other sources and short term capital gains . - Decided against revenue. - ITA No. 1938/Ahd/2016 - - - Dated:- 8-6-2022 - Ms. Annapurna Gupta, Accountant Member And Shri Siddhartha Nautiyal, Judicial Member For the Assessee : None For the Revenue : Shri S.S. Shukla, Sr. D.R. ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER: - This is an appeal filed by the Revenue against the order of the ld. Commissioner of Income Tax (Appeals)-11, Ahmedabad in Appeal no. CIT(A)-11/315/CC-1(1)/2015-16 vide order dated 12/04/2016 passed for the assessment year 2013-14. 2. The Revenue has taken the following grounds of appeal:- 1. The Id. C1T(A) has erred in law and on facts in deleting the addition of Rs.3,44,84,982/- made on account of interest on FD and gain of sale of mutual funds invested out of unutilized borrowed fund. 2. On the facts and circumstances of the case, the Ld. Commissioner of Income tax (A) ought to have upheld the order of the Assessing Officer. 3. It is, therefore, prayed that the order of the L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that the funds could not be immediately put to use for the purpose for which they were taken and if the receipt was inextricably linked to be setting up of a project, then it would be capital receipt not liable to tax but ultimately be used to reduce the cost of project: (i) Karnataka Power Corporation 247 ITR 268 (SC) (ii) Indian Oil Panipat Power Consortium Ltd. (2009) 315 ITR 255 (Del.) (iii) NTPC Sail Power Company Pvt. Ltd. ITA 1238/2011 (Del. HC) (iv) Bokaro Steel Limited - 236 ITR 315 (SC) (v) Bongaigaon Refinery and Petrochemical Co. Ltd. 251 ITR 329 (SC) However, Ld. CIT(A) dismissed the assessee s appeal with the following observations: In the present case of the appellant company, as discussed in the foregoing paras, the construction of the project was in progress and there was no commencement of any business activities during the relevant period. The funds were invested in the pre-construction period and income earned therefrom was inextricably linked with the setting up of the capital structure of the assessee- company. Thus, there was direct nexus of the funds and income from interest and mutual funds out of temporary investments. After ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 pre-operative 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. 5.1 Again, the Kolkata Tribunal in the case of Kolkata Metro Rail Corpn. Ltd. [2019] 102 taxmann.com 419 (Kolkata - Trib.) , held that where money given by Government to assessee-joint venture company of Central and State Government for implementation of construction work of metro railway was kept in fixed deposit with a bank before utilisation, interest income earned could not be taxed as income from other sources in hands of assessee. While passing the ruling, the Tribunal made the following observations: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld 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 Bank, will result in the character of the funds being changed, in as much as the interest earned from the bank would have a huge difference 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 section 14 of the Act. The head Income from other sources is a residuary head of income. 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 pre-operative expenses. In the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra) it was found by the auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inion the Tribunal has misconstrued the ratio of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals (supra) and that 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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