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TMI Blog2022 (11) TMI 845X X X X Extracts X X X X X X X X Extracts X X X X ..... xtension of Limitation, In re 438 ITR 296 (SC) read with judgment in Cognizance for Extension of Limitation, In re 432 ITR 206 (SC) dated 08-03-2021 and 421 ITR 314 and the instant cross objections are admitted for disposal on merits. A.Y. 2013-14 : 3. The only issue raised by the Revenue through various grounds is against the granting of deduction of interest expenditure of Rs.6,82,57,053/- u/s 57 of the Income-tax Act, 1961 (hereinafter also called `the Act') against the interest income earned from fixed deposits prior to commencement of business. The assessee in its Cross Objection pleads in alternate for treating the interest income as capital receipt which would reduce the cost of the qualifying assets. 4. Pithily put, the factual panorama of the case is that the assessee is engaged in the business of infrastructure activities, principally, consisting of development of multiproduct and construction. The assessee received a contract from the Government of Maharashtra represented by Public Works Department for improvement of Sion Panvel Special State Highway under Build-Operate-Transfer (BOT) scheme. It is undisputed that the project was completed somewhere in September, 2014 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the borrowing was made. We will examine both the issues independently hereinafter. 6. First is about the granting of deduction by the ld. CIT(A) of the interest expenditure u/s 57(iii) against the interest income offered u/s 56. Section 57(iii) of the Act stipulates for allowing deduction of "any other expenditure (not being in the nature of capital) laid down or expended wholly and exclusively for the purpose of making or earning such income". It is vivid from the mandate of the provision that only such expenditure can be allowed as deduction which is incurred wholly and exclusively for the purpose of earning such income. In the present context, only such expenditure will qualify for deduction which has been incurred for earning interest income on FDRs. When we examine the factual matrix under consideration, it becomes explicitly clear that the funds were borrowed by the assessee for the purpose of development of Sion Panvel State Highway, on which interest was paid. After making the borrowings, the assessee made FDRs out of such funds. The interest paid on borrowings for highway development activity cannot be considered as expenditure incurred for the purpose of earning interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... single composite transaction. In the hue of the above discussion and the binding precedent, we hold that the ld. CIT(A) was not justified in allowing deduction of proportionate interest on borrowing u/s 57(iii) against the interest income earned on FDRs, which was offered by the assessee as chargeable to tax u/s 56 of the Act. The impugned order is overturned on this score. 8. Now, we espouse the point canvassed by the assessee in its cross objection that the interest income earned on FDRs is a 'capital receipt' not chargeable to tax which would reduce the highway development costs including the interest expenditure etc. It is thus seen that the assessee has recorded a shift from its original stand of deduction of interest paid under section 57(iii) against interest earned on FDRs offered as taxable u/s 56 to now treating interest earned as not an income itself under section 56 and consequently claiming set off of such interest income against the interest expenditure and other capital expenditure incurred for which the loan was taken. 9. We are not convinced with the alternate submission of the assessee. It cannot be said that no income chargeable to tax can be earned simply beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factory, on which interest was earned. Such interest income was held to be directly connected with or incidental to the construction work. There cannot be any dispute about the deductibility of interest in such circumstances from the cost of construction. However, in the instant case, the receipt of interest on FDRs has no relation whatsoever with the business of the assessee much less with the improvement of State Highway and both the transactions are independent of each other. 11. The ld. AR also relied on the judgment of the Hon'ble Supreme Court in CIT Vs. Shree Rama Multi Tech Ltd. (2018) 403 ITR 426 (SC) for canvassing a view that interest income should be adjusted against the capital costs for developing highway. In that case, the assessee came out with a public issue and certain share application money was received which was deposited with the bank on which interest was earned. The assessee contended for set off of interest income against the public issue expenses. The Hon'ble Supreme Court accorded its imprimatur to allowing set off of interest income against the public issue expenses. Again, the reason for allowing such set off was that the share application money receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income was held to be separately taxable. The case under consideration falls in the category of Tuticorin (supra) and Autokast (supra) in which no relation of the interest income has been proved with the activity of improving highways for which the loan was taken. We thus hold, that the interest earned by the assessee is chargeable to tax under the head 'Income from other sources' and cannot be allowed set off against the capital work-in-progress. 13. Having held that the assessee is not entitled to set off of interest paid amounting to Rs.6.82 crore against the interest income, and further that interest income of Rs.4.91 crore is chargeable to tax separately, the logical consequence of this is that the interest cost of Rs.6.82 crore would go to increase the amount of capital work-in-progress in the same way as has been the interest paid on bank borrowings not used for purchasing FDRs. To clarify, if, for example, an assessee borrows a sum of Rs.100/- for construction on which interest of Rs.10/- is incurred. Further suppose a sum of Rs.80/- out of such borrowing is utilised for making FDRs which is unconnected with the construction. Total interest of Rs.10/- payable by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1,990/-. It received share premium of Rs.143.97 crore during the year which was claimed as not chargeable to tax. The OCPS were redeemable at a premium of Rs.1,990/- at any time on the option of the investors. The AO called upon the assessee to submit the details regarding valuation of the shares at the FMV. The assessee submitted that the FMV of unquoted equity shares of the company was determined as per Discounted Cash Flow (DCF) method. A Project Appraisal and Information Memorandum prepared by IDFC Capital Ltd., acting in its capacity as placement and distribution agent for the debt facilities of the assessee, was submitted calculating the FMV of the shares at Rs.2,412/- per share. The assessee contended that it received share premium only at Rs.1,990/- per share. The AO computed FMV as per Rule 11UA at Rs.1938.29. The differential amount of Rs.51.71 (Rs.1990 - Rs.1938.29) was multiplied with 7,32,486 number of preferential shares issued to make the addition of Rs.3,74,11,321/- u/s.56(2)(viib) of the Act. The ld. CIT(A) deleted the addition. 18. Section 56(2)(viib) provides that where a company receives any consideration for issue of shares which exceeds its face value, aggre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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