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2017 (3) TMI 1038
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....and loss account under the head income from other sources. However, at the time of filing the return of income, the said amount was excluded from the head "income from other sources" on the ground that the income was incidental to construction of plant and has to be credited in the capital work in progress in view of decision of the Hon‟ble Supreme Court in the case of Commissioner of Income-tax v. Bokaro Steel Ltd ., [1999] 236 ITR 315 (SC). The AO vide order sheet entry dated 27.02.2013 asked the assessee as to why the income received from PGVCL was not offered for taxation and also to explain the interest expenses claimed and the nexus between the borrowed funds and the interest earned thereon and whether such expenditure was laid out or expended wholly and exclusively for the purpose of making or earning such income. The assessee vide letter dated 25.10.2012 submitted that the said interest was received from PGVCL on security deposit of Rs. 14.78 crores which was deposited with the said company for the purpose of availing the electricity to be used in the construction of plant and was rightly credited under the head work-in-progress following the ratio laid in the decisio....
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.... 88,72,800/-, according to the appellant. the same, being capital receipt, is not taxable. Since heavy reliance is placed on decision of the Hon'ble Apex Court in the case of Bokaro Steel Limited {and a/se Tuticorin Alkali Chemicals and Fertilizers} (refer para 2.7 of Ld. A.R. 's submission) it is necessary to examine the relevant facts of that case. It is settled by judicial pronouncements of the Hon'ble Apex Court that neither it is desirable nor permissible to pick out a word or sentence from the judgment of the, Hon'ble Apex Court, divorced from the context of question under consideration and treat to be the complete law declared by the Hon‟ble Apex Court. Therefore, it is necessary to analyze the facts of that case. In that case, that the assessee had entered into supplementary agreements with contractors under which the assessee had made certain advances to the contractors on interest to enable them to execute large scale construction work smoothly for assessee company. These arrangements primarily meant for payment in advance of amounts of the contractors' bills for which the assessee company had charged interest and this interest income was later o....
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....contractors would have had to make their own arrange- ments 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 from any independent source. 6.....
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....Court examined the question whether interest paid before the commencement of production by a company on amounts borrowed for the acquisition and installation of plant and machinery would form a part of the actual cost of the asset to the assessee within the meaning of that expression in section 10(5) of the Indian Income-tax Act, 1922 and whether the assessee will be entitled to depreciation allowances and development rebate with reference to such interest also. The Court held that the accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a 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 capit....
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....treated as income derived by the industrial undertaking for the purpose of section 80HH ? HELD It is clear that the words 'derived from' in section 80HH must be understood as something which has direct or immediate nexus with an industrial undertaking. Although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking.The derivation of profits on the deposit made with Electricity Board cannot be said to flow directly from the industrial undertaking itself. [Para 6] 4.3.2 The Hon‟ble Madras High Court in above mentioned case of Pandian Chemicals Limited (which is confirmed by Hon‟ble Supreme Court discussed as above ) had held as under (233 ITR 497 MAD) "A study of various case laws clearly indicates that a restricted meaning is given when the Legislature uses the expression, "derived from" in section 80HH. Though the assessee had necessarily to make the deposit with the Electricity Board for running the industry and the power supply would not be made without the deposit in favour of the Electricity Board, ....
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....assessed as income from other sources and it cannot be said that interest income is not taxable on ground that it would go to reduce interest on borrowed amount which would be capitalised - Held, yes" 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 utilising the borrowed funds as its income The interest earned by the assessee was clearly its income and unless it could be shown that any provision like section 10 had exempted it from tax, it will be taxable. The fact that the source of income was borrowed money did not detract any thing 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 was not the case in the instant case. The assessee may be entitled to capitalise the interest payable by it. But what the assessee could not claim was adjustment of this expenditure against interest assessa....
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....nt is of the revenue nature and if so, the amount will have to be taxed. 3. CIT V/s Coromandal Cements Ltd.* [1998] 234 ITR 412 (SC) The Hon‟ble Apex Court reversed the decision of the Hon‟ble High Court of Andhra Pradesh (234 ITR 413) holding the interest received on short term bank deposits during preproduction stage could not be treated as "Income from other sources" and should go towards project cost" 4. CIT V/s Manglam Cement Ltd. [1995] 81 TAXMAN 397 (RAJ.) Section 56 of the Income-tax Act, 1961 - Income from other sources - Chargeable as - Assessment year 1979-80 - Assessee was in process of setting up business of manufacturing cement - It borrowed money to purchase capital equipments and for setting up its business - It deposited share application money received by it and part of borrowed money with a bank as short-term deposit and earned interest - Deducting interest earned on deposit from interest paid on borrowings assessee treated balance interest paid as part of capital, cost of building, plant and machinery - Assessing Officer held that interest received was taxable under section 56 and same could not be deducted from in....
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....posits - Besides there were some miscellaneous receipts - Whether such interest earned by assessee as well as miscellaneous receipts were taxable under head „Income from other sources‟ - Held, yes 7. CIT V/s Manipur Spinning Mills Corpn. Ltd. [1997] 90 Taxman 457 (Gauhati) "Section 56 of the Income-tax Act, 1961 - Income from other sources - Chargeable as - Assessment years 1982-83 to 1985-86 - Assessee, a Government undertaking, claimed that amount of interest income received by it should be set off against interest payments and balance alone capitalised - Whether interest incurred before commencement of production on borrowed money had to be capitalised and added to cost of assets created as a result of such expenditure, and, therefore, interest income had to be taxed as income from other sources - Held, yes" 8. CIT V/s Mimraj Manmal Ruia [1972] 84 ITR 673 (BOM.) "Section 57 of the Income-tax Act, 1961 [Corresponding to section 12(2) of the Indian Income-tax Act, 1922] - Income from other sources - Deductions - Assessment year 1959-60 - Assessee, a speculator in cotton and shares, also derived income from salary, properties and divi....
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.... on fixed deposits kept with bank as this was not expenditure laid out 'wholly and exclusively' for purpose of earning interest on fixed deposits - Held, yes" 11. Saraf Textile Industries v/s CIT (1996) 85 Taxman 146 (Del) "Section 56, read with section 35D of the Income-tax Act, 1961 - Income from other sources - Chargeable as - Assessment year 1983-84 - Assessee-company earned interest on bank deposits during period of construction of its factory building and before commencement of commercial production - It also incurred pre-operative expenses which included expenditure on project report covered under section 35D - Whether Tribunal was right in holding that interest was taxable as 'income from other sources' and could not be reduced from capital expenditure - Held, yes - Whether Tribunal was also right in not adjusting project report expenses against interest received on ground that expenditure claimed was specifically allowable under section 35D - Held, yes" 12. Positive Packaging Industries Ltd. v. ITO [2010] 125 ITD 212 (MUM.) "Section 56 of the Income-tax Act, 1961 - Income from other sources - Chargeable as - Assessment ye....
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....bove clearly stipulate that the interest income is assessable in the hands of the appellant in the year under appeal. 4.3.6 Moreover, as mentioned by the AO, the said interest income formed part of other income in the Profit & Loss Account of the appellant. If it is so, the appellant itself ought to treat it as "Income from other sources", more so when the appellant had claimed credit for TDS. In view of the above cited binding Judicial pronouncements of the Hon'ble Apex Court/Hon‟ble High Courts vis-à-vis the relevant facts of the case discussed hereto fore and also having regard to the plain and clear provisions of section 56 r.w.s 57(iii) of the Act and also provisions of section 198 and Rule 37BA(3A). I have no alternative, save and except confirming he action of the AO and hence no interference is called for and in result, the same stands confirmed. Thus, ground no.2 of appeal stands dismissed." 5. The ld. AR vehemently submitted before us that the ld. CIT(A) has erred in law and on facts by dismissing the appeal of the assessee by not appreciating the facts in correct perspective . The ld. AR argued that the assessee has deposited Rs. 14.78 crores wi....
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....ble to the present case. 7. We have heard the rival contentions and perused the material placed before us including the orders of authorities below as well as the citations relied upon by the assessee. It is an undisputed fact that assessee has given interest bearing security to PGVCL in order to avail electricity for the purpose of construction of plant at Mundra in Kutch, Gujarat. During the year the assessee received interest on the said security deposits and credited the same to the profit and loss account but while filing the return of income the same was withdrawn and reduced from the income and was credited to capital-work- in- progress whereas on the other hand the AO treated the same income from other sources and accordingly brought to tax. In the first appellate proceeding, the ld.CIT(A) upheld the finding of the AO on this issue. The assessee is engaged in the business of special purpose vehicle and during the assessee was engaged in the construction of electricity plant at Mundra, Gujarat and he security deposit was given purely to avail the electricity for the purpose of construction of plant which by no stretch of imagination would be treated as revenue in nature a....
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....01/- from the fixed deposits. 11. At the outset, the ld. AR submitted that the issue raised by the assessee in this ground stands covered in favour of the assessee by the decision of the Co-ordinate Bench of the Tribunal in assessee‟s own case in I.T.A. No.1043/M/2013 (AY:2009-2010) order dated 22.8.2014. The ld. AR prayed before the Bench that by following the decision of the Tribunal in assessee‟s own case for the earlier year, the issue raised in the present appeal also be decided in that line. 12. On the other hand, the ld. DR heavily relied upon the decisions of the lower authorities. 13. We find that the issue raised in the present case and the case law in ITA No.1043/Mum/2013(supra) as relied upon by the assessee is identical. For the sake of brevity, we reproduce the relevant portion of the order as under : "8. We have heard both the parties and perused the orders of the Revenue Authorities as well as the relevant material placed before us. On hearing both the parties, we are of the opinion that the issue of source of funds was deliberated by the AO / CIT (A), which is now made clear by the Ld Counsel before us. All the papers are found in the form o....