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TMI Blog2023 (9) TMI 1617X X X X Extracts X X X X X X X X Extracts X X X X ..... borrowed funds. The assessee is a construction corporation under the State, engaged in the construction of buildings for the Police Department. The construction is carried on by the Corporation with grants given by the Government. The grants given by the Government are parked in fixed deposits which earned interest. It has to be emphasized that the assessee is not carrying out the construction for the purpose of setting up of business or for expansion of a business; but is engaged in the activity of construction itself, with the funds made available by the Government. The interest income earned from the grants made by the Government for the purpose of construction of buildings for the Police Department can only be treated as income from ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) of the Act, which is with respect to interest paid on borrowed capital for the purpose of business or profession, there is no such factual ground raised herein. - HONOURABLE THE CHIEF JUSTICE K. VINOD CHANDRAN, CJ AND HONOURABLE MR. JUSTICE PARTHA SARTHY, J For the Petitioner: Mr. Prakash Sahay, Advocate For the Respondent: Mr.Archana Sinha @ Archana Shahi, Sr. SC, Income Tax CAV JUDGMENT (Per: HONOURABLE THE CHIEF JUSTICE) The writ petition is filed against an assessment order passed under Section 143(3) of the Income Tax Act (hereinafter referred to I.T. Act) dated 26.03.2021. The statutory remedy by way of an appeal was not availed of. The question raised is also one which can be considered in appeal; as to whether the income ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise of the order having been uploaded in the website. 4. Learned counsel for the petitioner relied on the decisions of the Hon ble Supreme Court in Commissioner of Income Tax, Bihar - II, Patna v. Bokaro Steel Ltd, Bokaro, reported in (1999) 1 SCC 645 followed by the Delhi High Court in NTPC Sail Power Company Private Limited v. Commissioner of Income Tax reported in 2012 SCC Online Del 3717 decided on 17.10.2010. The department, on the other hand, points out that the assessee, is engaged in the construction of buildings for the Police Department. The decisions cited are not applicable since they were with respect to borrowed funds, as distinguished from the grants received from the Government. The decisions clearly were on the interest on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble against the interest paid on borrowings even if it could be capitalized after commencement of business. It was held that the amount of interest received by the company flows from its investments and is it s income and is clearly taxable even though the interest amount is earned by utilizing borrowed capital (sic para 14). It was held by the Hon ble Supreme Court that it was perfectly permissible for the Company to keep the surplus funds in short-term deposits, where interest is earned; which would normally be chargeable under Section 56 of the Income Tax Act, in which event the company was not bound to utilize the interest earned to adjust it against the interest paid as borrowed capital. However, when borrowed capital is kept in short- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 8. In NTPC Sail Power Company Private Limited (supra), the question referred was as to whether the interest earned on the deposits and advances can be added in the computation of total income instead of being set off against the interest on borrowed funds, utilized for the new unit. The High Court of Delhi also followed the principle laid down by the Hon ble Supreme Court of there being an inextricable link to the setting up of a project which ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eposits, out of the grants received, are surplus funds; since the amounts earned by the assessee from the deposit of such funds are set-off from the grants for the subsequent year. The principle in Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra) applies squarely and not that of Bokaro Steel Ltd., (supra). 10. The circular of the State Government providing for deduction of grants in the successive years to the extent of the interest earned from the grants of the earlier year, cannot regulate the taxability under the Income Tax Act. If at all, income tax is deducted from the interest earned, the Corporation would be entitled to request the Government to not deduct the amounts paid as income tax from the grants of the subsequent years. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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