TaxTMI 
TaxTMI 
TaxTMI 
2018 (2) TMI 1763
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.... 3. That the above grounds are independent and without prejudice to each other. 4. That the appellant seeks leave to add, amend, alter, abandon or substitute any of the above grounds during the hearing of appeal." 2. Brief facts of the case are as under. Assessee filed its return of income on 28/11/13 declaring 'nil' income. The return was processed and case was selected for scrutiny. Accordingly notices under section 143(2) and 142(1) was issued to assessee. In response to statutory notices, representatives of assessee appeared before Ld.AO from time to time and filed necessary details as called for. 2.1. Ld. AO observed that during the year assessee earned interest income from banks on FD and capitalised an amount of Rs. 20,05,96,284/-in pre-operative expenses as per Note 12 annexed to the balance sheet. From the details filed by assessee Ld.AO observed that assessee has earned interest of Rs. 26.35 Lacs from the deposit of Rs. 4.99 crores. He observed that the deposits are under lien for various BG given to 3rd parties and government agencies for capital job or accomplishment of various purposes for the project. It was observed that the interest earned was deducted from ca....
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....ccount. Ld.AR submitted that similar and identical treatment of deposits were accepted during the preceding assessment year being 2012-13 in the regular scrutiny assessment, a copy of which has been enclosed in the paper book at page 5. 2.6. Ld.AR submitted that during the year under consideration assessee earned a total interest of Rs. 1643.90 Lacs on the money is kept as deposits which was credited to expenses during the construction/CWIP. He submitted that after the credit of interest earned during the year assessee capitalised the net expenses of Rs. 230.33 Lacs as expenses during construction which was ultimately treated as a part of capital work in progress to be capitalised and amortised on the start of commercial production. He submitted that interest earned Rs. 1643.90 Lacs were to be treated as capital in nature, to be set off against expenses during construction/CWIP in accordance with the accounting standards. The Ld.AR placed reliance upon decision of Hon'ble Delhi High Court in the case of Indian oil Power Consortium Ltd versus ITO reported in 315 ITR 255. 2.7. On the contrary Ld. DR submitted that certain funds were brought in by promoters to the tune of Rs. 17,88,....
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....and government agencies for capital job or accomplishment of various purposes for the project. However what has been disallowed by Ld. AO is Rs. 20,05,96,284 out of the total Rs. 16,43,90,640/-. It is observed that interest to the extent of Rs. 20,05,96,284 have been earned out of temporary surplus funds being share capital and the borrowings raised for setting up of the factory as bank deposits. 3.3. Ld.AR distinguished the decisions by Hon'ble Delhi High Court relied upon by Ld. CIT (A) in the case of CIT vs. Madhya Bharat energy Corporation Ltd reported in 20 Taxman.com 557. He submitted that this decision is distinguishable on facts, as in these cases deposits were returned which were kept as fixed deposit. 3.4. In our considered opinion, decision of CIT vs. Madhya Bharat Energy Corporation Ltd (supra) are factually different from the facts of this case. However, Hon'ble Delhi High Court in the case of Indian Oil Power Consortium Ltd versus ITO (supra) has held as under: "12. 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....
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....or a specific purpose of acquiring land and the 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. Since the income 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 [1997] 227 ITR 172 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 have to be treated as "income from other sources". On the other hand in Bokaro Steel Ltd. [1999] 236 ITR 315 (SC) 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. 3.5. Ld.CIT (A) has placed reliance upon the decision of Hon'ble Delhi High Court in the case of CIT versus Madhya Bharat energy ....
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.... that such interest is a capital receipt entitled to be set off against preoperative expenses is admissible as the funds received by assessee company by the joint venture partners are inextricably linked with setting up of the plant and such interest earned cannot be treated as income from other sources. 3.8. That test that permeates through the judgment of Hon'ble Supreme Court in the case of 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 circumstances 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 Hon'ble Supreme Court in the case of Bokaro steel Ltd (supra) to our mind is that if income is earned whether by way of interest or in any other manner on the funds which are otherwise inextricably linked to setting up of the plant, such income is required to be capitalised to be set off against preoperative expenses. The test thus to be applied to the facts of the present case is whether the activity which is taken up for setting up the business and the funds whi....