TaxTMI 
TaxTMI 
2018 (9) TMI 344
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....company made by assessing officer. * During the assessment, the cases we submitted to justify our claim (as mentioned in statement of facts) has not been paid any emphasis for deciding the case by the A.0 and CIT (Appeal- 3),Bhubaneswar. On the other hand the A.0 and CIT (Appeal-3) finally imposed his decision based on the facts of Alkali Tuticorin Chem. And fertilizers ltd. in which it has earned interest on the funds, were borrowed funds only Whereas in our case the money which was deposited, is the amount contributed by the shareholders towards Equity Share Capital for the purpose strictly capital in nature, for mining project and it is clarified that "Interest on short term deposits of capital receipts [share capital money (equity)] is capital receipt only and not taxable." The main objective of our Company owned by Govt.of India is Coal production which boosts to Indian economy, Social lifestyle of citizen of India & help in every sector / society which basic core raw material is coal. The company is not even commenced its coal production till date. As per Supreme Court & HC: Above type of capital receipts (similar to our case) is not taxable and thi....
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....G. Mercantile Corporation P. Ltd v. CIT (1972) 83 ITR 700 (SC). * The imposed demand is prejudicial and offers unnecessary hardship on us, since our affairs is still lying on the verge of development only, we do not have commenced yet. * We have the valid reason for taking that interest earned (Rs 91,56,600.00 and TDS of Rs. 12,72,540.00,Tax Demand of Rs. 22,33,130.00) is for capitalization in our books and further utilization into acquisition of Capital assets or any other similar purposes, by the way of interest or in any other manner on funds which are otherwise "inextricably linked" to the setting up of the business, such income is to be treated as capital receipt is required to be capitalized to be set off against pre-operative expenses. As in our case the operations is still lying in the developmental phase and therefore our plea shall be accepted and necessary refund shall be processed in the said case (i.e. A.Y.2011-12). * We are genuine in the eye of law and followed valid procedure for computation of tax for refund as per laws. * In preview of the case reference mentioned by AO & CIT (Appeal-3) regarding Tuticorin Alkali Chemicals and F....
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....and to be set off against pre-operative expenses. As in our case the operations is still lying in the developmental phase and therefore our plea shall be accepted and necessary refund shall be processed in the said case (i.e. A.Y.2011-12). Hope above ground of appeal is valid for taking the matter in appeal." 3. Brief facts of the case are that the assessee is a joint venture and subsidiary of Mahanadi Coal Field Ltd. incorporated in the year 2008-09 to carry on the business of coal mining. The partners in the venture are Mahanadi Coal Field having 60% share holding, M/s JSW Ltd. having 11% share holding, M/s JSW Energy Ltd. having 11% share holding, M/s Shyam Mettalics and Energy Ltd. having 9% share holding and M/s Jindal Stainless Ltd. having 9% share holding. Since the process of land acquisition for extraction of coal and geological survey was under process, the assessee company was yet to commence its commercial production in the said financial year, whereas the assessee company has filed return of income electronically on 24.09.2011 declaring total income at Rs.Nill for the assessment year 2011-2012. Subsequently, the case was selected for scrutiny under CASS and....
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.... considered as inextricably link with the process of setting of its plant and machinery. In appellate proceedings, the CIT(A) confirmed the addition on the ground that the primary objective of holding the share capital as investment is for purpose of deriving interest income in absence of commencement of business, where the contentions of ld. AR is that when the AO in the assessment proceedings has accepted the fact that the assessee company has not started its commencement of business and temporarily kept the funds in bank as fixed deposits out of the share capital amount which was kept for a specific purpose of utilization for establishment/commencement of the business and therefore, interest earned temporarily on fixed deposits is capital receipt and shall be capitalized in the work in progress and the said interest amount cannot be taxable under income from other sources. The contention of ld.AR is that the reliance placed by the lower authorities of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals [1997] 227 ITR 172 (SC) is not applicable to the present facts of the case. In the present case the assessee company has not commenced its business and the interest fr....
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....o the facts of the case, we may reiterate that the Respondent was statutorily required to keep share application money in the separate account till the allotment of shares was completed. Interest earned on such separately kept amount was to be adjusted towards expenditure for raising share capital. We are, therefore, of the opinion that interest earned was inextricably linked with requirement of company to raise share capital and was thus adjustable towards the expenditures involved for the share issue. Though learned counsel for the Appellant contended that part of the share application money would normally have to be returned to unsuccessful applicants, and therefore, the entire share application money would not ultimately be appropriated by the Company, insofar as present case is concerned, we do not see how this factor would make any significant difference. Interest earned from share application money statutorily required to be kept in separate account was being adjusted towards the cost of raising share capital. In that view of the matter, we are of the opinion that the High Court was right in allowing such deduction. 10. In light of the above developments in the case....
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....n such deposit is merely incidental. In the present case, the Respondent was statutorily required to keep the share application money in the bank till the allotment of shares was complete. In that sense, we are of the view that the High Court was right in holding that the interest accrued to such deposit of money in the bank is liable to be set-off against the public issue expenses that the company has incurred as the interest earned was inextricably linked with requirement of the company to raise share capital and was thus adjustable towards the expenditure involved for the share issue. 13. In view of the forgoing discussion, we are of the view that the High Court was right in upholding the decision of the Tribunal dated 21.10.2011 that the interest income earned out of the share application money is liable to be set off against the public issue expenses. The judgment passed by the Division Bench of the High Court in remanding the matter to the Tribunal on other issues requires no interference. 14. The appeals are accordingly dismissed. The parties to bear their own cost." 9. Similarly the Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium L....
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....ng Officer applied the ratio of the judgment of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd.'scase (supra) and the judgment of the Supreme Court in the case of CIT v. Autokast Ltd. [2001] 248 ITR 110 and held that the interest which accrued to the assessee was assessable under the head "income from other sources" and could not be set-off against pre-operative expenses as claimed by the assessee. 3.4 Aggrieved by the order the assessee preferred an appeal to the CIT(A). The CIT(A) examined the facts in detail. It is pertinent to note that the CIT(A) in paragraph 4 of his Order dated 6-2-2003 categorically found that the funds were placed in fixed deposit so that liquidity was ensured and money would remain available when required for purchase of land and infrastructure development and hence the interest earned was 'inextricably linked' with the setting up of the power plant. Based on this line of reasoning, the CIT(A) applied the judgment of the Supreme Court in Bokaro Steel Ltd.'s case (supra) and allowed the claim of the assessee by directing the Assessing Officer to delete the addition and consider the same for capitalization towards....
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.... capital receipt. The income of a newly set-up business, post the date of its setting up can be taxed if it is of a revenue nature under any of the heads provided under section 14 in Chapter IV of the Act. For an income to be classified as income under the head "profit and gains of business or profession" it would have to be an activity which is in some manner or form connected with business. The word "business" is of wide import which would also include all such activities which coalesce into setting up of the business. See Mazagaon Dock Ltd. v. CIT & EPT [1958] 34 ITR 368 (SC), and Narain Swdeshi Weaving Mills v. CEPT [1954] 26 ITR 765 (SC). Once it is held that the assessee's income is an income connected with business, which would be so in the present case, in view of the finding of fact by the CIT(A) that the monies which were inducted into the joint venture company by the joint venture partners were primarily infused to purchase land and to develop infrastructure - then it cannot be held that the income derived by parking the funds temporarily with Tokyo Mitsubishi Bank, will result in the character of the funds being changed, inasmuch as, the interest earned from the ban....
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....ct which makes provision for payment of interest on share capital in certain contingencies. Clause (b) of sub-section (1) of that section provides that in case interest is paid on share capital issued for the purpose of raising money to defray the expenses of constructing any work or building or the provision of any plant in contingencies mentioned in that section, the sum so paid by way of interest may be charged to capital as part of the cost of construction of the work or building or the provision of the plant. The above provision thus gives statutory recognition to the principle of capitalizing the interest in case the interest is paid on money raised to defray expenses of the construction of any work or building or the provision of any plant in contingencies mentioned in that section even though such money constitutes share capital. The same principle, in our opinion, should hold good if interest is paid on money not raised by way of share capital but taken on loan for the purpose of defraying the expenses of the construction of any work or building or the provision any plant. The reason indeed would be stronger in case such interest is paid on money taken on loan for meeting ....
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....and circumstances of case as brought on record by the authorities below, we are inclined to find the contention of the learned Counsel of the assessee appropriate to the extent that it was never a change of stance on the facts remaining the same beginning from Assessment Year 2006-07. It was a misconstruction of the facts for the purpose of finding applicability of the provisions of law ennunciated by the Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd v. CIT (supra). The law ennunciated in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd v. CIT(supra) cannot alone be considered as favoring Revenue insofar as it also talks about capitalization of the interest and the circumstances, which circumstances have been dealt with by the Hon'ble Delhi High Court in the case of India Oil Panipat Power Consortium Ltd v. ITO (supra) and further more in the case of NTPC Sail Power Company Pvt. Ltd., v. CIT decided on 17.07.2012 in ITA No.1238/2011 (copy placed on record) which has also been relied on by the learned Counsel of the assessee. The learned Counsel of the assessee has submitted the financial statements duly audited under the provisions o....
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....e can be taxed under the head "Income from other sources" only if it does not fall under any other head of income as provided in section 14 of the Act. The head "Income from other sources" is a residuary head of income. In the instant case, it was clear upon a perusal of the facts as found by the authorities below that the funds in the form of share capital were infused for 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 he set off against pre-operatiyg expenses. We are inclined to find a meaning to the insertion of the proviso to Section 36(l)(iii) that interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession was being allowed as deduction u/.s.36(l)(iii) of the Act as revenue expenditure was amended w.e.f. 1.4.2004 when the amount of interest paid in respect of capital borrowed for acquisition of a....
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.... 22500.00 2. Land (CW1P) 307.00 664.74 1440.85 3. In Bank Deposit. 19190.00 1289.00 - 4. Interest from Bank 637.44 1,04.17 432.67 5. Pre-operative Expenses. 629.76 3736.28 5280.69 The returns filed by the assessee for the AYs 2006-07 and 2007-08 clearly indicate that the assessee at no point of time was having income from other sources irrespective of the accounting of the income having been capitalized when the claim of expenditure of 10% was purely on estimation when apparently it was not the business of the assessee to earn income but parking of its funds when the interest income sought to be considered exempt for computing expenditure under the provisions of Section 14A for the purpose of I.T.Act. The learned Counsel of the assessee, therefore, has clarified that the assessee cannot be subjected to taxation in the impugned Assessment Year on the interest income capitalized and at the same time allow amortization thereof in the hope that project will see the light of the day in the years to come when the I.T.Department will allow less deduction than otherwise claimed will be multiplication of....
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....interest has been earned on the parking of share capital and not any surplus generated as was considered by the Hon'ble Apex Court insofar as the earning of interest has been capitalized by reducing the project cost to be amortized has to be considered as a nullity after verification. Needless to say, an opportunity of being heard to the assessee be granted to establish the fact as have been narrated before us in the light of Assessment Year 2008-09 when it is not a change of stance as contested by the learned DR but on the same set of facts the interest portion cannot be isolated for the purpose of taxation." 11. Recently, this bench of the Tribunal in the case of POSCO-India Private Limited, in ITA Nos.403&344/CTK/2017, vide order dated 27.07.2018, wherein the CIT(A) has dealt on the disputed issue and observed that interest on FDs cannot be taxed in the hands of the assessee u/s.56 of the Act and the Tribunal confirmed the findings of the CIT(A). 12. We find that the funds of the assessee company kept in the short term fixed deposits out of the share capital amount and not any surplus arising out of the running business, the interest earned on funds primarily brought f....