TaxTMI 
TaxTMI 
2018 (9) TMI 344
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....ment, 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 this is "inextricably linked" to the setting up of the business. Such income i....
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....ill 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 Fertilizers Ltd v. CIT (1997) 227 ITR 172 (SC). The said company has borrowed funds and utilized to in short term deposits to earn interests with the bank which is difficult to follow the re....
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....he 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 notices u/s.143(2) & 142(1) of the Act were issued to the assessee. In compliance, ld. AR of the assessee appeared before the AO from time to time and produced the books of accounts and other relevant documents. Su....
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....estment 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 from bank deposits is duly capitalized under the head work-in-progress as per guidelines and are directly linked/nexus with the activities of setting up the plant and machinery. Therefore, the receipts are inextricably linked w....
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....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, the question of law has been decided by this Court in case in Bokaro Steel Ltd. (supra), wherein the company was set up to produce steel. When the construction of plant was yet not completed, company earned interest on advances to contractor,....
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....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 Limited, New Delhi Vs. ITO, 315 ITR 255 (Delhi), has held as under :- 3. We have heard the learned counsel for the parties at length. Following substantial question of law arises for our consideration : "Whether the Tribunal misdirected itself in law in holding....
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.... 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 pre-operative expenses. 3.5 The Tribunal in an appeal preferred by the Revenue, by virtue of the impugned judgment, has reversed the decision of the CIT(A). 4. It is important to note that the Tribunal without holding that the finding of fact of the CIT(A), that the interest earned was 'inextricab....
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....ivity 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 bank would have a hue different than that of business and be brought to tax under the head 'income from other sources'. It is well-settled that an income received by the assessee 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.....
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....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 the above expenses." (p. 175) 6.1 In our view the situation in the instant case is quite similar except here instead of paying interest on funds brought in for specific purpose interest is earned on funds brought in by way of share capital for a specific purpose. Could it be said that in the former situation interest could have been capitalized a....
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.... 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 of the I.T.Act as well as under the Companies Act which have been verified by the Assessing Officer requiring no reference to be made to the Transfer Pricing Officer under the provisions of Section 92CA. In other words, no business income hasbeen generated by the assessee. The expenditure claimed therefore was only for the purpose of setting up the project envisaged and....
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....d 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 an asset for extension of existing business or profession whether capitalized in the books of account or not for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction, holds true for the income insofar as once having identified that the i....
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....ources 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 assessments for no fault of the assessee appellant. We are therefore inclined to hold that the learned Counsel of the assessee has submitted a bulk Paper Book which inter alia correlates to earning of interest on the amounts deposited in the Banks to be utilised for the purpose of business of the assessee as per the project envisaged and as per the project approved by the Government of Orissa but taken time due to ....
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....n 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 for infusion in the business activity cannot be termed as income from other sources, whereas the interest income on bank deposits earned by the assessee company to commencement of its business is in the nature of capital receipt and accordingly be set off against pre-operative expenses. We considering the judicial precedence and the facts and circumstances of the present case, are of the substantive opinion that if the a....