TaxTMI 
TaxTMI 
2016 (1) TMI 461
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....us funds make it inextricably linked with setting up of the power project? C. Whether the judgment in Tuticorin Alkali Chemicals and Fertilizers Ltd v. CIT (1997) 227 ITR 172 (SC) is applicable to the present case and whether the judgment of this Hon'ble Court in Indian Oil Panipat Consortium Ltd is distinguishable from the facts of the present case? D. Whether the Hon'ble ITAT has failed to consider the judgment of this Hon'ble Court in CIT v. Madhya Bharat Energy Corporation Ltd (ITA No. 950/2008 dated 11.07.2011) wherein it was held that interest earned on FDs cannot be set off as pre-operative expenses? 3. The facts are that the assessee company was incorporated on 24.08.2005 to carry on in India or elsewhere the business to generate, receive, produce, improve, buy, sell etc. electric power by establishing thermal power plants, atomic power plants etc.. In the year under consideration, no business activity was carried out by the assessee as the project was under implementation. 4. On scrutiny, the assessment proceedings under Section 143(3) of the said Act were initiated. The Assessing Officer had noted that the assessee had received an amoun....
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.... boiler for Rs. 7500 lacs. The appellant gave advance of Rs. 50,00,000/- to said company. In the month of January the appellant gave order for STG Set for Rs. 3510 Lacs and paid advance of Rs. 130 lacs to M/s BHEL. In the month of May 2009, appellant further gave contract to M/s Paharpur Cooling Towers for Rs. 1017 lacs and paid advance of Rs. 10 lacs. These facts established that amount raised as additional share capital from share holders and put in the FDRs was inextricably linked with acquisition of plant and machinery by the appellant company. The additional share capital raised was for purpose of acquiring capital assets which was temporarily put in the Fixed Deposits. The appellant had spent substantial money in acquisition of land in F.Y. 2007-08 and for that purpose it has spent Rs. 68.62 lacs. This shows that the funds raised by the appellant from share holders were not idle but the same were meant for acquisition Of capital assets. In view of the above it is held that funds raised by the appellant company were inextricably linked with acquisition of the capital assets. The interest received from such funds which were put in FDRs for temporary period was in the nature of ....
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....of Rs. 70,75,843/-treating the interest income as "income from other sources" is deleted. 8. Ground No. 5 & 6:- These grounds of appeal are general in nature, therefore, do not require adjudication. 9. In the result, the appeal is partly allowed." 8. Being aggrieved by the decision of the Commissioner of Income Tax (Appeals), the revenue preferred the said appeal (ITA 4300/Del/2012) before the Income Tax Appellate Tribunal on the following grounds:- "1. The Learned CIT (A) has erred on the facts and circumstances of the case and in lmv in treating the interest income of Rs. 70,75,843/- received on account of bank deposit as capital receipt instead of treating it as. income under head other sources and there by overlooking the ratio laid down in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. 2. The Learned C1T(A) has erred on facts and circumstances of the case and in law in allowing to adjust interest income against preoperative expenses, however assessee had no compulsion for making fixed deposit with the bank rather it was surplus money kept with the bank to earn interest." 9. The Income Tax Appellate Tribunal concurred with ....
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....a). 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. 5.1 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 Sect....
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....e 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 (supra) it was found by the authorities that the funds available with the assessee in that case were 'surplus' and, therefore, the Supreme Court held that the interest earned on surplus funds would have to be treated as 'income from other sources'. On the other hand in Bokaro Steel Ltd (supra) where the assessee had earned interest on advance paid to contractors during pre-commencement period was found to be 'inextricably linked' to the setting up of the plant of the assessee and hence was held to be a capital receipt which was permitted to be set off against pre-operative expenses." 11. From the above extract, it is evident that the test that is required to be employed 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 same. In the present case, findings of fact have been returned by the Commissioner of Income Tax (Appeals) and have been confirmed by the Income Tax A....