TaxTMI 
TaxTMI 
2017 (8) TMI 168
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....e previous year relevant to assessment year under consideration, it is in the process of setting up of plant for manufacture of paper. The assessee filed return of income for the assessment year 2011-12 on September 29, 2011 through e-filing. After processing the return of income, the case was selected for scrutiny by issuing notice under section 143(2) of the Income-tax Act, 1961 ("the Act" for short) and the assessment was completed under section143(3) vide order dated June 28, 2013 by the Income-tax Officer, Ward 11(1), Bengaluru, at a total income of Rs. 5,50,78,525. The disparity between the returned income and the assessed income is on account of making addition of interest earned by the respondent-assessee out of fixed deposits made with various banks out of share capital of Rs. 200 crores. The assessee had reduced the interest income so received from the pre-operative expenditure incurred by the company, whereas the Assessing Officer (AO) was of the opinion that in view of the judgment of the hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC), the interest income is chargeable to tax under the head "Income....
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....rrowed 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 capital nature and cannot be taxed as "income".' 7.4 The Supreme Court in the case of CIT v. Karnal Co-operative Sugar Mills Ltd. [2000] 243 ITR 2 (SC), has held that where the assessee had deposited money to open a letter of credit for the purchase of the machinery required for setting up its plant, the interest earned from such deposit would be capital receipt since it is inextricably linked with the purchase of machinery. The relevant extract reads as under (page 3) : 'In the present case, the assessee had deposited money to open a letter of credit for the purchase of the machinery required for setting up its plant in terms of the assessee's agreement with the supplier. It was on the money so deposited that some interest has been earned. This is therefore, not a case where any surplus share capital money which is ly....
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....nd the commitments of the applicant company from time to time and not with an intention to earn the interest and such interest earned having been inextricably linked with its capital expenditure, I am of the considered opinion that the decision of the hon'ble Supreme Court in the case of Bokaro Steel Ltd. (supra) is applicable to the assessee case and not that of the hon'ble Supreme Court decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. v CIT [1997] 227 ITR 172 (SC). Thus, the interest earned which is earmarked and kept as deposit with banks for capital expenditure has to go to reduce the cost of pre-operative expenses and does not constitute income in the hands of the appellant. Relief is allowed to appellant on this ground." 4. Being aggrieved, the Revenue is in appeal in I. T. A. No. 692/Bang/2015. The Revenue raised the following grounds of appeal : "1. The order of the Commissioner of Income-tax (Appeals) is opposed to law and the facts and circumstances of the case. 2. The Commissioner of Income-tax (Appeals) erred in allowing the claim of the assessee-company by holding that the interest earned which was earmarked and kept as deposit w....
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....e assessee-company. Undisputedly, the facts are that the said interest income was earned by the assessee-company on bank deposits made out of share capital received by it from the Reserve Bank of India. The share capital was received by the respondent-assessee-company to meet capital expenditure for setting up of the assessee's factory. As the funds were not immediately required, the respondent-assessee made deposits with the bank on which the assessee earned interest. This interest income was treated as abatement of capital cost of the project/factory by the assessee-company in the books of account, whereas the Assessing Officer was of the opinion that the same should be treated as revenue receipt and brought to tax placing reliance on the decision of the hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra). The decision of the hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra) was distinguished by the hon'ble Supreme Court in the case of CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC) wherein it was held that the ratio of the decision of the hon'ble Supreme Court in the case of ....
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....cted that interest earned on fixed deposits of grants pending utilisation should be treated as additional grant of the scheme and not to be treated as 'income of the company'. No liberty was provided to the company to make use of that the interest earned on the said amount kept in fixed deposits. Though the assessee- company is engaged in trading in agricultural produce, it has no power to make use of the said grant made by the Government of Karnataka other than for a particular scheme i.e., the said amount cannot be diverted for any other purpose other than for which it was sanctioned as per the Government order dated January 23, 2007. Thus, the emphasis made by the Revenue that the assessee-company being engaged in trading activities cannot be considered as a nodal agency of the State Government and the interest earned on the grants by the assessee-company has to be treated as income is not accept able in view of the specific directions issued by the State Government regarding the utilisation of the amount granted and on the interest accrued thereon. The Tribunal relied on the judgment of this court in the case of CIT v. Karnataka Urban Infrastructure and Develop....
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.... permitted under the scheme. Therefore, in computing the total income of the assessee for any previous year the interest accrued on bank deposits cannot be treated as an income of the assessee as the interest is earned out of the money given by the Government of India for the purpose of implementation of mega-city scheme. Therefore, we do not find any error in the conclusion reached by the Tribunal that there was no income earned by way of interest by the assessee and setting aside the order of the Assessing Officer which is affirmed by the first appellate authority. The finding given by the Tribunal is purely a question of fact. We do not find any substantial question of law involved in this appeal and therefore, this appeal is liable to be dismissed at the stage of admission itself.' In Tuticorin Alkali Chemicals and Fertilizers Ltd.'s case (supra), the apex court has held that (page 182 of 227 ITR) : 'There is another aspect of this matter. The company, in this case, is at liberty to use the interest income as it likes. It is under no obligation to utilise this interest income to reduce its liability to pay interest to its creditors. It can re-inves....
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.... made subsequent to the setting up of the project but this is the unutilised income parked in fixed deposits for a temporary period and inextricable link for the interest earned on the grants and the original grant made by the State Government to set up a project is established as in Bokaro Steel Ltd. case." Respectfully following the ratios of the decisions laid down in the above cases, we hold that even in the present case also, interest earned should only go to reduce the capital cost of the project to be set up by the respondent company and it should not be brought to tax, as the interest is earned on capital account. The appeal of the Revenue is dismissed. 8. The assessee has filed cross-objections. The assessee raised the following grounds of cross-objections : "1. The order (to the extent it is against the respondent) of the learned Commissioner (Appeals) is not justified in law and on facts and circumstances of the case. 2. As regards the jurisdiction of the learned Assessing Officer in selecting respondent's case for scrutiny assessment under section 143 of the Act : '(1) The learned Commissioner (Appeals) is not justified in uphold....