AI Drafter 
TaxTMI 
TaxTMI 
2017 (10) TMI 1087
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....the T.P. order, the AO proposed the draft assessment order in which the AO has examined the allowability of the assessee's claim of expenditure of Rs. 5,30,86,825 debited to the P&L A/c. Observing that the assessee has not commenced its business activity during the relevant financial year, the AO held that the expenditure under consideration neither relates to the start up of the project nor after production and disallowed the claim of Rs. 5,30,86,825 resulting in "Nil" business loss for the relevant A.Y. Aggrieved, the assessee raised its objections before the DRP and the DRP confirmed the draft assessment order and accordingly, the final assessment order was passed, against which the assessee filed its appeal before us raising the following grounds of appeal: "Based on the facts and circumstances of the case, Kalburgi Cement Private Limited. respectfully craves leave to prefer an appeal against the assessment order passed by the Learned Deputy Commissioner of Income-tax, Circle 2(1), Hyderabad ("Ld. Assessing Officer" or "Ld. AO") under Section 143(3) read with Section 92CA(3) and Section 144C of Income tax- Act, 1961 ("Act"), based on the directions provided by the Lear....
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.... Revenue expenses or as expenses to be capitalized but should not have been disallowed on the grounds that they are neither startup expenses nor related to expenses after production". 3. The learned Counsel for the assessee submitted that as far as Grounds 1 to 4 are concerned, they are against the disallowance of the expenditure which was debited to the P&L A/c. He fairly conceded that this issue is covered against the assessee by the decision of the Coordinate Bench of this Tribunal in the case of Thermal Powertech Corporation India Ltd. vs. DCIT in ITA No.1534/Hyd/2016 dated 26.04.2017. However, he submitted that Ground No.5 being an alternate ground may be allowed by directing the capitalization of the expenditure and thereafter allowing the depreciation thereon. 4. The learned DR was also heard. 5. Having considered the rival contentions and the material on record, we find that the Coordinate Bench of this Tribunal in the case of Thermal Powertech Corporation India Ltd. vs. DCIT (cited Supra) has considered the issue of allowability of expenditure prior to commencement of the business and at Paras 16 to 34 ha held as under: "16. We have considered the rival s....
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....ts of the Madras High Court in CIT v. Seshasayee Paper & Boards Ltd. [1985] 156 ITR 542 and A.P. High Court in CIT v. Nagarjuna Steels Ltd. [1988] 171 ITR 663/38 Taxman 229. Accordingly a reference was made to the Apex Court. The Apex Court after examining the facts of the case and the judgment of the Madras High Court in Seshasayee Paper & Boards Ltd. (supra) and Andhra Pradesh High Court in Nagarjuna Steels Ltd. (supra) confirmed the judgment of the Madras High Court. The Apex Court has specifically observed as follows at pages 180 and 181 of the Report: "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. It was rightly pointed out in the case of Kedar Narain Singh v. CIT [1938] 6 ITR 157 (All) that "anything which can properly be described as income is taxable under the Act unless expressly exempted ". 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 borro....
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....ading of the judgment of the Madras High Court in Seshasayee Paper & Boards Ltd. (supra) by the Orissa High Court. In fact, the Apex Court has observed as follows: 'Our attention was drawn to two other decisions where the view of the Andhra Pradesh High Court was followed. In the case of CIT v. Electrochem Orissa Ltd. [1995] 211 ITR 552, the Orissa High Court preferred the view expressed by the High Court of Andhra Pradesh to the view expressed by the Madras High Court in Seshasayee Paper and Boards Ltd.'s case [1985] 156 ITR 542on the ground that the Madras case was based on a finding of fact that there was no direct connection between the interest paid and the interest received. In our view, it will not be right to read the judgment in Seshasayee Paper and Boards Ltd.'s case [1985] 156 ITR 542 (Mad) in that way. The court's finding in Seshasayee Paper and Boards Ltd.s case [1985] 156 ITR 542 (Mad) was that the interest earned by the assessee from the bank deposits had to be assessed under the head " Other sources ". Consequently, the interest paid on the borrowings for the purpose of purchase of plant and machinery could not be allowed or adjusted against....
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....est paid on borrowings for the purpose of purchase of plant and machinery could not be allowed or adjusted against the income u/s. 57(iii) of the Act. The Apex Court finally concluded that the view expressed by the Madras High Court in Seshasayee Paper and Boards Ltd. is correct and the views expressed in other cases are erroneous. From the above it is obvious that even though the Apex Court found that the assessee in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) has not specifically made any claim u/s. 57 of the Act for setting off of the interest received on the FD with interest payment on borrowed fund, the Apex Court after referring to the judgment in the case of Seshasayee Paper and Boards Ltd. (supra) 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 othe....
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....reme Court in its own decision in the case of Bokara Steel Ltd. (supra). On the other hand, in the case of Bokara Steel Ltd. (supra) the Hon'ble Supreme Court has once again reiterated and supported its decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) with regard to the issue of treatment of interest earned on short term deposits made out of borrowed funds during the period prior to the commencement of the business of the assessee. in the case of Bokara Steel Ltd. (supra), that company received certain income from the contractor who was assigned the job of constructing the factory. During the course of construction activities carried on by the contractor, the contractor had availed certain facilities and services from the company and paid 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 p....
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....this question is now concluded by a decision of this court inTuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172(sq. Hence, we are not called upon to examine that issue." (Emphasis supplied) This issue of difference between the treatment of income received from contractor and the interest income received from the banks on account of short term deposits is once again highlighted by Hon'ble Supreme court in the case of Bokara Steel Ltd. (supra) at Para No.7. The relevant portion of the same is reproduced below: "The appellant, however, relied upon the decision of this court in Tuticorin Alkali Chemicals & Fertilizers Ltd. case (supra). That case dealt with the question whether the investment of borrowed funds prior to commencement of business, resulting in earning of interest by the assessee, would 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 ....
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....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 capital nature and cannot be taxed as income." (Emphasis supplied) 23. Under the facts and circumstances, it cannot be construed that the interest earned on account of parking the un utilized borrowed funds is inextricably linked with the setting up of the capital structure of the assessee company, inasmuch as such 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 Bokara Steel Ltd. (supra)is not applicable to the facts of the assessee's case. As such, in view of the similar set of facts and ci....
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....d not immediately required in short term deposits and securities would not fall under business income but income from other sources. 26. We have also carefully gone through the judgment of the Delhi High Court in Indian Oil Panipat Power Consortium Ltd. (supra). The Hon'ble Delhi High Court distinguished the judgment of Apex Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) on the ground that the funds in the form of share capital were infused for a specific purpose of acquiring land and development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as 'Income from other sources'. After referring to the judgment of Apex Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), the Hon'ble Delhi High Court found that 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 Corpn. v. CIT [1999] 105 Taxman 660, considered an identical situation and after referring to the Apex Court judgment in the case of Tuticorin Alkali Chemicals & Fertili....
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....hat 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 liability to pay interest on funds borrowed for the purpose of establishing the business including purchase of plant and machinery even before commencement of the business of the assessee. 29. While deciding the core issue of taxability of interest earned on short term deposits made out of borrowed funds during the period prior to the commencement of the business, the Hon'ble Supreme Court has also laid down proposition of law that no income under the head "profits and gains of the business or profession" could be computed during the accounting year prior to commencement of the business of the assessee. Further, the 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....
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....n made by the company will be assessable under the head "Capital gains". Similarly, if a company purchases a rented house and gets rent, such rent will be assessable to tax under section 22 as income from house property. Likewise, a company may have income from other sources. It may buy shares and get dividends. Such dividends will be taxable under section 56 of the Act. The company may also, as in this 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." (Emphasis supplied) After having held that no business income could be computed prior to the commencement of the business, the Hon'ble Supreme Court has adjudicated the matter with regard to assessment of interest income under the head "other sources" and non-adjustment of interest paid on borrowed capital against such income. The relevant portion of the decision at Para No. 18 & 19 is as under: "It has been argued that the source from 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 fund on which ....
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....Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). 33. As seen from the above, the Hon'ble Supreme Court has clearly laid down the law that- i. Before the commencement of the business of the assessee, income earned in the form of interest on deposits made with banks out of the funds borrowed from banks and financial institutions which was not immediately required for the purpose of setting up of the business should be assessed to tax under the head "other sources". ii. Similarly, no expenditure can be claimed under the head "Profits and Gains of business or profession" during the period prior to the commencement of the business; and iii. Any expenditure incurred including the interest on funds borrowed for the purpose of setting up of the business/purchase of plant and machinery etc., cannot be set-off against the interest income under the head "other sources". 34. The Hon'ble jurisdictional High Court in the case of CIT v. Rasi Cement Ltd. [1998] 232 ITR 554/100 Taxman 568 (AP) has answered similar questions involved in favour of the Revenue. The question before the Hon'ble High Court was whether the interest earned on s....
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....sources" by virtue of the judgment of the Hon'ble Supreme Court of India in Tuticorin Alkali Chemicals and Fertilisers Ltd. v Commissioner of Income Tax (1997) Supp (1) SCR 528. 4. The assessee had further been advised that the subsequent judgment of the Hon'ble Supreme Court in Commissioner of Income Tax v Bokaro Steel Ltd (Civil Appeal 2544-45 of 1988) applied only to the interest earned from temporary parking of borrowed capital in fixed deposits. 5. It has now been brought to the knowledge of the assessee that the matter of taxability of interest arising from temporary parking of equity funds (inextricably linked to the project) in Fixed Deposits has since been considered by the Hon'ble High Court, Delhi, in Pri. Commissioner of Income- Tax v Facor Power Ltd. [ITA 1011/2015) and, after considering the ratio of the aforesaid judgments of the Hon'ble Supreme Court, has passed judgment on 07.01.2016. 6. In view of the aforesaid judgment of the Hon'ble High Court, Delhi, a question of law arises in regard to the taxability of INR 3,78,22,091 that was offered by assessee as "Business Income". 7. In view of the peculiar circumst....