TaxTMI 
TaxTMI 
2015 (10) TMI 2016
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....r construction of Multiplex and Shopping Malls. The assessee accordingly purchased a plot of land and raised construction thereon. The company has applied for term loan from various banks and got them sanctioned also. The loan was kept in bank in the form of FDRs and assessee earned interest thereon. The Assessing Officer, having relied upon the judgment of the Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (supra), has treated the interest income as income from other source, as the construction was not complete during the impugned assessment years and the expenses incurred by the assessee were capitalized as preoperative expenses. Accordingly addition was made. 3. The assessee preferred an appeal before the ld. CIT(A) with the submission that the judgment of the Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (supra) is applicable only when interest income can be treated as revenue receipt, if arisen out of surplus fund out of borrowed funds are parked to earn interest during the construction period. The company has no idle/surplus fund in hand to park with bank to earn interest but solely depend....
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....with net amount of interest representing interest on borrowing. The ld. CIT(A) accordingly deleted the addition in all the three years. 5. Aggrieved, the Revenue is in appeal before the Tribunal. Besides placing reliance upon the judgment of the Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (supra), the ld. D.R. Smt. Nidhi Singh Verma has strongly placed reliance upon the judgment of the Hon'ble jurisdictional High Court in the case of CIT vs. Indo Gulf Fertilizer and Chemicals Corporation Ltd., 280 ITR 621, in which the assessee-company received certain loans which remained lying with bankers and the company managed to get some interest on these deposits with the bank. The Hon'ble High Court having discussed various judicial pronouncements of the Hon'ble Apex Court and different High Courts have held that the amount of interest and receipts were exigible to tax in the hands of the assessee-company as income from other sources. The ld. D.R. has further contended that whereever the assessee earned interest, even on the borrowed funds during the precommencement period, the same is to be treated as income from other sources and is exigible ....
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....t Power Commission vs. I.T.O., 315 ITR 255. 6. DCIT vs. M/s NTPC - Sail Power Supply Co. Ltd., 2011 (ID1) GJC-0603 TDEL. 7. Sharpoorji Pallonji Power Company Ltd. vs. I.T.O. in I.T.A. No. 1049/Mum/2008. 8. M/s Phoenix Lamps India Ltd. vs. CIT, Income Tax Appeal No.2 of 2012 (Alld.). 9. CIT vs. Jaypee DSC Ventures Ltd., I.T. Appeal No.357 of 2010 (Delhi). 8. Having carefully examined the orders of the lower authorities and the documents placed on record in the light of the rival submissions, we find that the assessee-company was engaged in construction of Multiplex-cum-Shopping Malls and it has borrowed funds for construction of Multiplex-cum-shopping Mall. In due course, it purchased a land but due to various problems and sanctions required, the project got delayed atleast for 2 to 3 years, according to the assessee, and the borrowed funds were invested in FDRs for the intervening period. Though the assessee has contended that due to delay in project, it was not interested in taking up disbursement against sanctioned limits but the State Bank of India pressurized it for disbursement, hence in order to maintain good and congenial relations with the Banks, it had to accept the p....
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....erent propositions put forth before them and the Hon'ble Apex Court has concluded that the expenditure incurred by the assessee for the purpose of setting up of its business should not be allowed as deduction nor it should be adjusted against any other income under any other head. Similar income from non-business sources could not be set off against liability to pay interest on funds borrowed for the purpose of purchase of plants and machineries even before commencement of business of the assessee. The relevant observations of the Hon'ble Apex Court are extracted hereunder for the sake of reference:- "The facts of this case are not in dispute. In the usual course, interests received by the company from bank deposits and loans would be taxable as income under the head 'Income from other sources' under section 56 of the Income-tax Act, 1961 ('the Act'). It is argued on behalf of the company that it had not yet commenced its business and in any event the income was derived from funds borrowed for setting up the factory of the company and should be adjusted against the interest payable on the borrowed funds. Neither of the two factors can affect taxability of the income earned by the....
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....s used for the purpose of earning income, that income will have to be taxed in accor-dance with law. Income is something 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 utilizing the borrowed funds as its income. The interest earned by the assessee is clearly its income and unless it can be shown that any provision like section 10 has exempted it from tax, it will be taxable. The fact that the source of income was borrowed money does 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 is not the case here....
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.... had been engaged by the assessee-respondent for carrying out the work of construction. The assessee charged the contractors for the use of the quarters so given to the contractors. (2) The assessee had entered into supplementary agreements with its contractors under which the assessee had made certain advances to the contractors to enable them to execute the largescale construction work smoothly. The assessee had agreed to advance these advances to the contractors on payment of interest. The contractors, thus, did not have to raise funds from outside agencies. For the assessee-company, this arrangement primarily meant payment in advance of the amounts of the contractors' bills for which the assessee-company had charged interest. This interest was later adjusted against the dues of the contractors. (3) For the purpose of the construction work, the assessee had given on hire certain plant and machinery to the contractors. Against the letting of plant and machinery, the assessee received from the contractors income in the form of hire charges. It was not the business of the assessee-company to let out plant and machinery to others. The assessee-company permitted its use only to its....
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....ility not been provided by the assessee, the contractors would have had to make their own arrangements and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee has provided these facilities. The same is true of the hire charges for plant and machinery which was given by the assessee to the contractors for the assessee's construction work. The receipts in this connection also go to compensate the assessee for the wear and tear of the machinery. The advances which the assessee made to the contractors to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitches as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts are arrangements which are intrinsically connected with the construction of its steel plant. The receipts have been adjusted against the charges payable to the contractors and have gone to reduce the cost of construction. They have, therefore, been rightly held as capital receipts and not income of the assessee f....
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....djusted against pre-operative cost of plant and machinery. In that case, their Lordships of the jurisdictional High Court have held that the deposits with the bank in short term FDRs were made under compulsion for having letter of credit, as without letter of credit/bank guarantee, plant and machinery cannot be imported and without plant and machinery, the factory cannot be established. Hence income earned on such deposit is incidental to acquisition of assets for setting up of the plant and machinery. While dealing with the issue, the jurisdictional High Court has examined the judgment of the Hon'ble Apex Court in the case of CIT vs. Bokaro Steels Ltd. and CIT vs. Karnal Cooperating Sugar Mills Ltd.; CIT vs. Bokaro Steels Ltd.; Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT and Jaypee DSC Ventures Limited, 17 taxmann.com 257 (Delhi). 15. In the case of NTPC - Sail Power Supply Co. Ltd. vs. CIT (supra), the assessee-company was in the business of running a power plant and under its expansion plan, it proposed to set up a new unit. It raised a term loan for setting up new plant and separate books of account were maintained for the same. For financing the expansion plan, th....
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....ction 36(1)(iii) of the Income Tax Act enacts that any amount of the interest paid towards ("in respect of) capital borrowed for acquisition of an asset or for extension of existing business regardless of its capitalization in the books or otherwise, "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" would not qualify as deduction. However, in all these cases, when the interest was received by the assessee towards interest paid for fixed deposits when the borrowed funds could not be immediately put to use for the purpose for which they were taken, this Court, and indeed the Supreme Court held that if the receipt is "inextricably linked" to the setting up of the project, it would be capital receipt not liable to tax but ultimately be used to reduce the cost of the project. By the same logic, in this case too, the funds invested by the assessee company and the interest earned were inextricably linked with the setting up of the power plant. It .may be added that the Tribunal has not found that the deposits made as margin monies were not limited to the construction activity conne....
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....artners in the assessee-company were inextricably linked with the setting up of power plant. Therefore, the interest earned by the assessee could not be treated as income from other sources. The relevant observations of the Hon'ble High Court are extracted hereunder for the sake of reference:- "The test, therefore, to our mind is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the plant. The clue is perhaps available in section 3 of the Act which states that for newly set-up business the previous year shall be the period beginning with the date of setting up of the business. Therefore, as per the provision of section 4 of the Act which is the charging section income which arises to an assessee from the date of setting of the business but prior to commencement is chargeable to tax depending on whether it is of a revenue nature or capital receipt. The income of a newly set-up business, post the date of its setting up can be taxed if it is of a revenue nature under any of the heads provided under section 14 in Chapter IV of the Act. For an income to be classified as income under the....
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....required for faithful performance of its obligations. The non-submission of the guarantee would have entailed termination of the agreement and NHAI would have been at liberty to appropriate the bid security. Therefore, it is clearly evincible that the bank guarantee was furnished as a condition precedent to entering into the contract and further it was to be kept alive to fulfill the obligations. Thus, the instant case is not one where the assessee had made the deposit of surplus money lying idle with it in order to earn interest, on the contrary, the amount of interest was earned from fixed deposits which were kept in the bank for furnishing the bank guarantee. Therefore, it has inextricable nexus with securing the contract. Accordingly the interest earned by the assessee cannot be held to be income from other sources. 18. In the case of CIT vs. Indo Gulf Fertilizer and Chemicals Corporation Ltd. (supra), the assessee-company received certain loans which were remained lying with the bankers and the company managed to get some interest on these deposits with the bank. The issue before the Hon'ble High Court was that whether the amount of interest and miscellaneous receipts were no....