TaxTMI 
TaxTMI 
2017 (5) TMI 903
X X X X Extracts X X X X
X X X X Extracts X X X X
....enses. (e) Whether business loss carried f orward can be set Off to the interest income.. 2. Briefly stated, Assessee is closely held Public Limited Company, incorporated under the companies Act, as a joint venture between Hyderabad based Gayathri Energy Venture Pvt., Ltd., and Singapore based Semb Corp Utilities, to build, own and operate a 1320 Megawatt Coal Fired Power Plant. During the impugned year the construction of the Power Plant was in advance stage and Assessee did not have any operational income. Due to delay in scheduled work Assessee parked unutilized / not immediately required funds (stated as committed funds) during the interim period in short term fixed deposits which yielded interest, in accordance with the terms laid down under the common loan agreement (CLA) read with the trust retention account (TRA) agreement. Assessee adjusted the said interest income to an extent of Rs. 22,35,48,281/- against the capital work in progress, on the reason that interest income earned from barrowed funds were linked to funds borrowed for setting up of the power plant. For the year under consideration, Assessee e-filed its return of income declaring Nil income under the norm....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... between the term 'surplus funds' and 'committed funds'. It was submitted that even though the A.O and CIT(A) relied on the judgments of Apex count in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd., Vs CIT (supra), CIT Vs Auto Cast Ltd., (supra) they have failed to notice the judgment of the Hon'ble Supreme Court in the case of CIT Vs Bokaro Steel Ltd., (1993) 236 ITR 315, wherein Hon'be Supreme Court held the receipts which are inextricably linked with the setting up of the business would be capital in nature and be reduced from the cost of construction/project. It was submitted that the facts of Assessee case were squarely covered by the above decision. It was further submitted that the Hon'ble Supreme Court in the case of CIT Vs Karnataka Power Corporation 247 ITR 268 (SC) has held that interest earned out of money kept in deposits with banks during the course of construction / preconstruction stage shall be set off against the expenses. The same principles were followed in the case of CIT Vs Karnal Co-operative Sugar Mills Ltd. While admitting that the coordinate Bench in the case of Kakinada SEZ Pvt Ltd (ITA No. 1215/Hyd/2010) has followed the judgment of the Hon'bl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er arguments, it was submitted that A.O had erred in taxing the gross interest income instead of net interest income. It was submitted that Assessee paid interest and finance charges totaling to Rs. 127,84,98,794/- on the term loans taken from the PF lenders and this amount has to be set off to the interest income earned and he relied on the decision of the Hon'ble Gujarat High Court in the case of Sardar Sarovar Narmada Nigam Ltd., Vs ACIT 96 CCH 30 Gujarat. Ld. Counsel also placed reliance in the case of coordinate Bench decision of Chennai in the case of DCIT Vs Chennai Network Infrastructure Pvt. Ltd., following the judgment of the jurisdictional High Court in the case of M/s VJR Foundations. It was the contention that if interest income is to be considered taxable under head income from other sources, corresponding expenditure in Sec. 57 of the IT Act should be allowed. 8. Coming to the ground Nos. 11 & 12 regarding the contention that interest income to be taxed under head profit and gains of business, it was the submission that the funds are obtained for a distinct activity for a setting up of power project and interest earned thereon is only with the sole objective of re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n in various cases it was submitted that Assessee has commenced the business and accordingly the expenditure claim should be allowed as revenue expenditure and be allowed to be carried forward to the extent not set off to any income there under. 12. Ld. CIT DR in reply reiterated the stand of the Revenue. It was submitted that the principles were laid down by the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd., Vs CIT (supra), which is a three Judge Bench, wherein the Hon'ble Supreme Court has clearly pronounced that interest on borrowed funds is taxable as interest from other sources and cannot be set off against the interest payable for the project cost. It was submitted that even though Ld. Counsel relied on the decision of the Hon'ble Supreme Court in the case of CIT Vs Bokaro Steel Ltd., (supra) it was stated that issue of interest on borrowed funds is not considered in the said decision of the Hon'ble Supreme Court in the case of CIT Vs Bokaro Steel Ltd., (supra) as Assessee has not contested the same as can be seen from para 4 of the judgment. 12.1 Then Ld. DR referred to para 4 of the said judgment to submit that the Hon'ble Supreme ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....terest income. IV. Carried f orward of business loss to subsequent years. 14. With reference to the argument that Assessee has commenced the business, Ld. CIT DR submitted that Assessee has not commenced its business during the financial year under reference and this fact was admitted by Assessee as 'Assessee was in the advance stage of construction of power plant' and business has been set up but did not commence its operations. It is also evident from the audited financial statements that Assessee has not commenced the business. With reference to the issue of 'set up of the business' and 'commencement of business', it was submitted that as per provisions of Sec. 3 of the IT Act all Assessees who are engaged in business or profession are required to file their first return of income, in the year in which the business was set up, ie. year of setting up of the business. The provisions of Sec. 3 of the IT Act applies only in regard to requirements of Assessee to file its first return of income, who is engaged in business or profession. However, it was submitted that the question of allowing any expenditure or computing income under head 'profits and gains of business or profess....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Pradesh High Court held that in case of business of production of sponge iron, exploration of iron ore cannot be constituted as commencement of business of the assessee. v. CWT Vs. Ramaraju Surgical Cotton Mills Ltd. (1967) 63 ITR 478 (SC): In this case, it is held by the Hon'ble Supreme Court that in the case of a manuf acturing concern, the business cannot be set up unless the equipments are installed and the plant is ready f or production beyond the experimental stage, whether there is any actual production or not. 14.1 It was submitted that the said principle of law with regard to the difference between setup of the business and commencement of the business have once again reiterated in the following decisions: (a) Travencor - Cochin Chemicals Pvt Ltd. Vs CWT 65 ITR 651 (SC) (b) CIT Vs Electron India 241 ITR 166 (MAS) 14.2 It was submitted that the expenditure claimed by Assessee amounting to Rs. 98,53,986/- incurred during the year, but prior to commencing the business, cannot be allowed as revenue loss and therefore the same cannot be adjusted against the income computed under the head other sources. Since there is no issue of quantification of loss, it ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ancial institutions which would be capitalised af ter commencement of commercial production?" 17. In the case before the Apex Court, the assessee for the purpose of setting up of a factory has taken term loans from various banks and financial institutions. A part of the borrowed fund which was not immediately required by the assessee was kept invested in short term deposits with banks. The assessee claimed before the Assessing Officer that the interest of Rs. 2,92,440 received on the term deposit with banks would go to reduce the pre-production expenses such as interest and financial charges which would ultimately be capitalised. Accordingly the assessee claimed that the interest of Rs. 2,92,440 was not exigible to tax. However, the ITO rejected the claim of the assessee. The CIT(A) as well as the Tribunal confirmed the order of the Assessing Officer. However, the Tribunal found that there were conflicting judgments of the Madras High Court in CIT vs. Seshasayee Paper and Boards Ltd. (1985) 156 ITR 542 and A.P. High Court in CIT vs. Nagarjuna Steels Ltd. (1988) 171 ITR 63. Accordingly a reference was made to the Apex Court. The Apex Court after examining the facts of the case an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee in the relevant accounting year. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business cannot be allowed as deduction, nor can it be adjusted against any other income under any other head. Similarly, any income from a non-business source cannot be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee." 18. No doubt, the Apex Court found that it is not the case of the assessee that the interest payable by it on term loan is allowable as deduction u/s. 57 of the Act. The Apex Court after referring to the judgment of the Orissa High Court in CIT vs. Electrochem Orissa Ltd. (1995) 211 ITR 552 and the judgment of the Madras High Court in Seshasayee Paper and Boards Ltd. (supra) disapproved the reading of the judgment of the Madras High Court in Seshasayee Paper and Boards Ltd. (supra) by the Orissa High Court. In fact, the Apex Court has observed as follows: i. Let out of its dwelling units to the contractor which were used for the purpose of housing the workers/labourers and staff for construction wo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the Madras High Court found that the claim of the assessee cannot be allowed even u/s. 57(iii) of the Act. In our opinion, the judgment of the Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) on identical set of facts has answered a similar question against the assessee. Therefore, the interest received by the assessee on temporary deposit of funds which are not required immediately has to be assessed as 'Income from other sources' and it cannot be set off against the interest payable by the assessee on borrowed funds. 20. Admittedly deposit of funds in the bank is not the business of the assessee. The assessee borrowed the funds for the purpose of establishing the Power project. So long as the assessee uses the funds in the process of setting up of the project, we can say that the assessee has utilised the funds for the purpose of business. In this case the assessee has deposited the funds in FD for a temporary period, since the same was not required immediately. As observed by the Madras High Court in the case of Seshasayee Paper and Boards Ltd. (supra) which was approved and confirmed by the Apex Court in Tuticorin Alkali Chemicals & ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aid certain consideration to the company. The nature of the services and consideration/income received by the company from the contractor are noted as below :- i. Let out of its dwelling units to the contractor which were used for the purpose of housing the workers/labourers and staff for construction work; ii. Hire charges received by the company from the contractor in connection with hiring of the plant and machinery owned by the company to the contractor which were used by the contractor in the construction work iii. Interest received by the company from the contractor on account of advances made to the contractor which were used for the purpose of construction work of the factory by the contractor; and iv. Royalty received by the company from the contractor in connection with permitting the contractor to excavate / mine the stones from the land owned by :; the company which were used in the construction activity of the company. In this connection, the Hon'ble Supreme Court held that the income received by the company ie. from the contractor under various sources mentioned above is inextricably linked with the setting up of the factory building / capital struc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ld amount to the assessee earning any income. This court held that if a person borrows money for business purposes, but utilises that money to earn interest, however, temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. Merely because he utilised it to repay the interest on the loan taken will not make the interest income as a capital receipt. The department relied upon the observations made in that judgment (at page 179) to the effect that if the company, even bef ore it commences business, invests surplus funds in its hands for purchase of land or house property and later sells it at prof it, the gain made by the company will be assessable under the head 'Capital gains'. Similarly, if a company purchases rented house and gets rent, such rent will be assessable to tax under section 22 as income f rom house property. Likewise, the 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 Act. This court also emphasized the fact that the company was ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... interest income is not received from the contractor to whom the assessee has assigned the construction work of its power project. In view of this, the ratio laid down by Hon'ble Supreme Court in the case of Bokaro Steels(supra) is not applicable to the facts of the assesse's case. As such, in view of the similar set of facts and circumstances involved in the case of the assessee as well as in the case of Tuticorin Alkali Chemicals & Fertilizers (supra), the proposition of law laid down by the Hon'ble Supreme court in that case is squarely applicable without any deviation. 24. Further, a clear-cut differentiation between treatment of interest income from short term deposits made out of borrowed funds and other categories of income received during the period prior to the commencement of business, more so, income received from the contractor undertaking the work of set up of the business of the assessee, has once again been made out by the Hon'ble Supreme Court in its later decision in the case of Bongaigaon Refinery and Petrochemicals Ltd. Vs. CIT (2001) 251 ITR 329 (SC). In this judgment, the Hon'ble Supreme Court has reiterated the law that excluding interes....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the interest on surplus funds would have to be treated as 'Income from other sources'. We find that the Madras High Court on another occasion, in South India Shipping Corporation (supra), considered an identical situation and after referring to the Apex Court judgment in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) observed s follows at page 31 of the Report: "Coming now to the questions that have been referred to us at the instance of the Revenue, these questions are required to be answered in favour of the Revenue and against the assessee, in view of the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals an Fertilizers Ltd. (1997) 227 ITR 172, wherein the apex court, inter alia, held that in view of section 57(iii) of the Incometax Act, interest paid on overdraf t obtained for the purpose of business could not be deducted from the interest earned on monies kept in f ixed deposits as such income derived by way of interest on fixed deposits was to be taxed under the head 'Income from other sources. We, however, make it clear that though the assessee may not be entitled to have interest paid by it on overdraft to the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Hon'ble Supreme Court gave a finding of fact that the assessee had not commenced / started its business and accordingly ruled that there could not be any computation of business income or loss of the assessee in the relevant accounting year. The relevant portion at Para No. 17 of the order is as under: "There are specif ic provisions in the Income-tax Act for setting off loss from one source against income f rom another source under the same head of income (section 70), as well as setting off loss from one head against income f rom another (section 71). In the f acts of this case the company cannot claim any relief under either of these two sections, since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting year. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business cannot be allowed as deduction, nor can it be adjusted against any other income under anyother head. Similarly, any income f rom a non-business source cannot be set off against the liability to pay interest on funds borrowed f or the purpose of purchase of plant and machine....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e decision at Para No. 18 & 19 is as under:: "It has been argued that the source f rom which the company has earned interest is borrowed capital. The company has to pay interest to its creditors on the same borrowed capital. Having regard to the identity of the f und on which interest is earned and interest is payable, the company should be allowed to set off its income against interest payable by it on the same f und. We are of the view that no adjustment can be allowed except in accordance with the provisions of the Income-tax Act. However desirable it may be from the point of view of equity. this adjustment cannot be made unless the law specifically permits such adjustment. Next, it has been argued that according to wellestablished accountancy practice the interest earned by the company even bef ore the commencement of business from investing borrowed capital will have to be set off against interest payable by the company on that borrowed capital. The argument based on accountancy practice has little merit, if such practice cannot be justif ied by any provision of the statute or is contrary to it." (Emphasis supplied) 30. Further, the distinction between set up and comm....