TaxTMI 
TaxTMI 
2012 (10) TMI 524
X X X X Extracts X X X X
X X X X Extracts X X X X
....es of Rs.10/- each. Of these, 98 shares were subscribed by M/s. Steel Authority of India Limited (hereinafter referred to as SAIL) and 1 share each by two individuals, both employees of SAIL. The SAIL owned and operated captive power plants at Durgapur and Rourkela which were necessary for the continuous operation of critical areas of plant. In tune with the policy of the Central Government, as SAIL's core activity is steel production, power plants were to be shifted to NTPC, another public sector undertaking power production. The captive power plants were transferred to the assessee, which became a joint venture company owned equally by SAIL and NTPC. Consequent to the approval by the Board of Directors of the assessee company, a shareholders' agreement was executed on 16.3.2001. The transfer of shares from SAIL to NTPC was completed on 22.3.2001 by Stock Holding Corporation of India Limited which is also a public sector undertaking. 3. The assessee company was in the process of expansion of its business by setting up new units at Bhilai for generation of power. Separate books of account and records were maintained for the new units being set up under expansion programme. For f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....effect from 1-4-2004, by which interest paid on borrowed capital did not qualify for exemption, and in turn, Bokaro Steel did not consequently apply, was patently erroneous. In this context, it was submitted that by reason of the amended provision (section 36(1)(iii) inserted by the Finance Act, 2004) interest paid for capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not) for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, cannot be allowed as deduction. However, the reasoning in Bokaro that the interest accrued or earned on borrowed capital which is linked with the construction activity is a capital receipt, has remained unaffected. 5. Counsel for the revenue argued that the reasoning of the Tribunal is unexceptionable and does not call for interference. It was submitted that the Tribunal's reasoning distinguishing the decision in Bokaro was based on the change in law brought about by amendment to section 36 (1) with effect from 1.4.2004. It was also submitted that interest earned o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e in respect of the interest earned on the FDRs of surplus fund and margins and advances made for the purpose of expansion. Admittedly, these incidental expenses were incurred during construction period of setting up new unit at Bhilai and whatever not related to this expansion work was claimed as revenue expenditure in the books which had been allowed. The CIT (A) granted the relief by following the judgement of Hon'ble Supreme Court in the case of Bongaigaon Refinery & Petrochemicals Ltd. vs. CIT 251 ITR 329 where the decision of Tuticorin Alkalies Chemicals & Fertilisers Ltd. vs. CIT 227 ITR 172 was also referred. We would like to state that in the decision of Bongaigaon Refinery & Petrochemicals Limited, Hon'ble Supreme Court has held as under :- "The High Court has already held that the interest income derived by the assessee during its formative period was taxable. What remains for consideration is the income which the assessee derived from house property, its guest house, charges for equipment and recoveries from the contractors on account of water and electricity supply. These items are covered by the decision in Bokaro Steel Ltd.‟s case [1999] 236 ITR 315 (SC).....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and interest is earned thereon can only be categorized as income from other sources and such receipts merits separate treatment under section 56 of the Income-tax Act. Therefore, the principle of netting cannot be adopted in the assessee‟s case. ................. ................. ............. The nexus between obtaining the loan and paying interest thereon (laying out the expenditure by way of interest) for the purpose of earning the interest on the fixed deposit, to draw an analogy from section 37, will require to be shown by the assessee for application of the netting principle. The interest earned on surplus fund parked into FDRs and on margin/advances made for expense on work can be categorized only as „income from other sources‟. Further, as per the proviso to section 36(iii), the whole of interest as the borrowed capital have to be capitalised for the period till the asset first put to use. Admittedly, the assets were not put to the use in the financial year relevant to assessment year under consideration. Hence, it has to be capitalised. Further, the deduction of interest or other expenditure under section 57 can be allowed only when it has been bor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ofit, the gain made by the company will be assessable under the head „Capital gains‟. Similarly, if a company purchases a rented house and gets rent, such rent will be assessable to tax under section 22 as income from house property. Likewise, a 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 Income-tax Act". The Supreme Court, subsequently, in Bokaro Steel Ltd. (supra) held that: "However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee- company. They must, therefore, be viewed as capital receipts going to reduce the cost....