TaxTMI 
TaxTMI 
2017 (11) TMI 1815
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....f convenience. 2. We find that the assessee had raised several grounds revolving around one issue i.e the chargeability of interest income on deposits to tax. The central issue involved in these appeals is as to whether the ld CITA was justified in confirming the addition made on account of interest income on deposits earned by the assessee, in the facts and circumstances of the case. 3. The brief facts of this issue is that the assessee is a company incorporated on 20.12.2006 under the Companies Act, 1956. The assessee is engaged in the business of setting up a 2.2 MTPA Iron & Steel Plant including a Ductile Iron Pipes and Fitting Plant (in short ' the plant') in the State of Jharkhand,, interalia, to manufacture Straight Bars, Iron Rods and Ductile Iron Pipes. The assessee was incorporated for setting of the steel plant and the same was in progress and production at the steel plant had not started. The assessee filed its original return of income for the Asst Year 2008-09 on 29.9.2008 showing total income of Rs. 3,69,38,763/- under the normal provisions of the Act and tax liability of Rs. 1,26,61,361/- was discharged by tax deducted at source of Rs. 83,69,850/- , advance ta....
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....d herewith as below: "9. To invest any moneys of the Company out of own surplus fund of the company not immediately required in such investment as may be thought proper". 5. Therefore, the company as per the objects of the Memorandum and Articles of Association has invested the amount and earned interest income. The interest income earned by the company does not de hors the business which is carried on by it but is attributable and incidental to the business carried on by company. The monies which were inducted by the shareholders into the company and borrowed by the company were primarily infused for the purpose of business i.e. for setting up the .plant. The funds were placed in fixed deposit so that the liquidity was ensured and money would remain available when required for setting up the plant and hence is attributable and incidental to the business carried on by company. Thus the interest income earned out of such money is chargeable under the head "Business and Profession". In this regard it is pertinent to note 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 in....
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....igh Court in CIT Vs Tamil Nadu Dairy Development Corpn. Ltd reported in (1995) 216 ITR 535 (Mad) has held as follows: "In CIT v. Calcutta National Bank Ltd. [1959J 37 ITR 171, the Supreme Court has observed as follows: 'The term, 'business' is a word of very wide, though by no means determinate, scope. It has rightly been observed in judicial decisions of high authority that it is neither practicable nor desirable to make any attempt at de-limiting the ambit of its connotation. Each case has to be determined with reference to the particular kind of activity and occupation of the person concerned. Though ordinarily, 'business' implies a continuous activity in carrying on a particular trade or avocation, it may also include an activity which may be called, 'quiescent'.' Upon the facts of the case, the Supreme Court held that the realisation of rental income by the assessee-bank, was in the course of its business in prosecution of one of the objects in its memorandum; it was, therefore, liable to be included in its business profits. " 8. The Hon'ble Calcutta High Court in Eveready Industries India Limited Vs. CIT reported in (2010)....
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....rest income earned during the AY 2008-09 is chargeable under the head "Business and Profession" . However in the instant case, it is an admitted position that during the AY 2008-09, the business of the assessee has not commenced. If a company has not commenced business, there cannot be any question of assessment of its 'profits and gains of business. Since the business had not *started, there could not be any computation of business income or loss incurred by the assessee in the relevant AY. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence has to be set off against pre-operative expenses. 12. Further, the amount invested by the shareholders and borrowed from banks was inextricably linked with the setting up of the plant, and hence the interest earned by the assessee is of capital nature and cannot be taxed as income. In the instant case, the monies which were inducted by the shareholders into the company and borrowed by the company were preliminary infused for the purpose of business i.e. for setting up the plant. The funds were placed in fixed deposit so that the liquidity was ensured and money....
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....ss. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of CIT vs U.P.State Industrial Development Corporation reported in (1997) 225 ITR 703(SC) wherein it was held as follows:- " It is a well accepted proposition that for the purposes of ascertaining profits and gains the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statutes". 3.5.1. Further reliance was placed on the decision of the Hon'ble Supreme Court in the case of P.M.Mohammed Meerakhan vs CIT reported in (1969) 73 ITR 735 (SC) wherein it was held as follows:- "For that purpose it was the duty of the Income Tax Officer to find out what profit the business has made according to the true accountancy practice." 3.5.2. The assessee also placed reliance on the decision of the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd vs CIT reported in (1975) 98 ITR 167 (SC) wherein it was held that interest paid before commencement of production on amount borrowed by the assessee for the acquisition and installation of plant and machinery forms part of the 'actual cost'. 3.6. Based o....
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....no disputes are in picture. B) The decision in CIT vs Bokaro Steels Ltd. (236 ITR 315) has no bearing upon this assessment as the following extract from the decision would prove:- "During these assessment years, the respondent-assessee had invested the amounts borrowed by it for the construction work which were not immediately required, in shortterm deposits and earned interest. It has been held in these proceedings that the receipt of interest amounts to income of the assessee from other sources. The assessee has not filed any appeal from this finding which is given against it. In any case, this question is now concluded by a decision of this Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1991) 227 ITR 172. Hence, we are not called upon to examine that issue." Hence the question of taxability of interest earned from short term deposits never came up before the Hon'ble SC in this - case. On the contrary, this decision goes on to say, as would be evident from the above extract, that the interest earned from the short term deposits will have to be taxed as revenue receipts, and only strengthens the view point taken by me, citing the Tuticorin ....
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....d deposits were not taken by the appellant for the purpose of its business i.e. to keep margin money etc. or as a pre-condition to make import etc. The fixed deposits were taken purely out of the surplus fund. Under the circumstances, I am of the opinion that the AO was justified in holding that the interest income of Rs. 3,69,36,403/- is assessable to tax in pre-commencement period as "Income from Other Sources." 5.1. The ld CITA distinguished the various case laws relied upon by the assessee as under:- "5.2 In the course of assessment proceedings as well as the appellate proceedings, the appellant has placed its reliance on the decision of Hon'ble Supreme Court in the case of Bokaro Steel Ltd. (supra). However, I am of the opinion that the decision in the case of Bokaro Steel is not applicable in the case of appellant. In that case, in addition to the issue of interest received on short term deposits in pre-commencement period, there were three more issues i.e. the rent charged by the assessee to its contractors for housing workers and staff employed by the contractor for construction work of the assessee, secondly, hire charges for plant* and machinery which was ....
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.... were covered by the decision in Bokaro Steel Ltd.'s case. Thus, this decision is also of no help to the appellant company because the interest income derived during the formative period has been held to be taxable income. 5.4 The appellant has relied on the decision of Hon'ble Delhi High Court in the case of NTPC SAIL Power Company Pvt. Ltd., 2012-TIOL-652-HC-DEL-IT. In this case the assessee company earned total interest receipts of Rs. 616.73 lakhs during the year. The interest was earned on temporary deposits made from surplus funds and on the deposits made with banks by way of margin or giving advances etc. for the purpose of expansion. The interest earned from such deposits and advances was Rs. 331.58 lakhs. The assessee adjusted interest of Rs. 331.58 lakhs from the cost of project and admitted the balance interest of RS.28S.15 lakhs i.e. (Rs.616.73 lakh - Rs. 331.58 lakh) as normal income. The AO brought to tax the Interest income of Rs. 331.58 lakhs also as income from other sources. However, in appeal, the said amount of interest of 331.58 lakhs was held to be inextricably linked with the project of the assessee being the interest on margin money and advances....
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....olding the order of the Learned AO in initiating penalty proceedings under section 271(1)(c) of the Act ignoring the fact that the Appellant has not filed inaccurate particulars of income or concealed its income. 6. That the appellant craves leave to add, alter and amend the grounds of appeal on or before the date of hearing. 6. We have heard the rival submissions and perused the materials available on record. It is not in dispute that the business of setting up of a steel plant had not commenced during the year under appeal. It is not in dispute that the assessee had received share capital from its shareholders and also term loans from banks for the purpose of its business of setting up of a steel plant. The unutilized portion of the said funds were invested in short term deposits with banks and interest income derived thereon by the assessee as under:- Particulars Interest Interest Total Received Accrued Interest Income Interest on FD with SBI CAG Branch from temporarily parked Money out of equity funds 1,92,73,564 1,57,74,280 3,50,47,844 Interest on FD with SBI CAG Branch from temporarily parked Money out of Term Lo....
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....bai Tribunal in the case of Solarfield Energy Two Pvt Ltd vs ITO in ITA No. 5076/Mum/2016 for Asst Year 2012-13 dated 11.9.2017 wherein it was held as under:- We have heard rival contentions and perused the material available on record in the light of decisions relied upon. We have also applied our mind to the decisions relied upon. Undisputed facts are, the assessee was awarded the work of setting-up of Solar Power Plant project in Rajasthan by NVVNL. It is also evident, NVVNL has entered into a power projects agreement with the assessee on 25th January 2012. As per the terms and conditions stipulated in the bid one of the financial criteria in Request For Selection (RFS) document requires a newly incorporated company to have the required net worth connected to the capacity of the power project. Thus, as per the precondition, the assessee was required to have the net worth of Rs. 60 crore. Since, the assessee was not having the required net worth it had to infuse fund for enabling itself to meet the qualification criteria and for this purpose, assessee's parent company KESPPL stepped in and invested fund in acquiring 98,500 equity shares and 1,00,000 compulsorily conv....
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....in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalized and added to the cost of fixed asset created as a result of such expenditure. Following the aforesaid reasoning, the Hon'ble Supreme Court in Bokaro Steels Ltd. (supra) held that by applying the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting-up of plant and machinery such receipts will come to reduce the cost of its assets, hence, are of capital nature. The ratio laid down by the Hon'ble Supreme Court in Bokaro Steels Ltd. (supra) was followed by the Hon'ble Delhi High Court in Indian Oil Panipat Power Consortium Ltd. (supra). The facts of this case are, the assessee a joint venture company was to set-up a power project to effectuate the purpose for which joint venture was created. The joint venture partners contributed share capital which included a sum by way of additional share capital. The said fund, though, was required for purchase of land and development of infrastructure, however, due to legal entanglement with regard to title of land, the funds ....
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....ers Ltd. (supra) and that of Bokaro Steel Ltd.'scase (supra). The test, which permeated through the judgment of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case (supra ), was that if funds have been borrowed for setting up of a plant and if the funds are 'surplus' and then by virtue of that circumstance 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 the Supreme Court judgment in Bokaro Steel Ltd.'s case(supra) is that if income is earned, whether by way of interest or in any other manner on funds which are otherwise 'inextricably linked' to the setting up of the plant, such income is required to be capitalized to be set off against pre-operative expenses. 5.1. The test, therefore, 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 clue is perhaps available in section 3 which states that for newly set-up business, the previous year shall be the period beginning with the date o....
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....receipt and, hence, was required to be set off against pre-operative expenses. 6. There is another perspective from which the present issue can be examined. Under section 208 of the Companies Act, 1956 a company can pay interest on share capital which is issued for a specific purpose to defray expenses for construction of any work and which cannot be made profitable for a long period subject to certain restrictions contained in sub-sections (2) to (7) of section 208. This section was specifically noted by the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. The Supreme Court went on to observe as follows: "We have already referred to section 208 of the Companies Act which makes provision for payment of interest on share capital in certain contingencies. Clause (b) of subsection (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 t....
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....f Rs. 3,50,47,844/-, being the amounts invested in deposits out of share capital, would be capital receipt and would go to reduce the project cost of steel plant as it is inextricably linked with the setting up of the power plant. Following the same judgement, we hold that the interest income derived in the sum of Rs. 18,88,559/- from deposits invested out of borrowed funds, would be liable to tax under the head income from other sources, which would be in line with the decision of the Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals supra. Accordingly, the grounds raised by the assessee for the Asst Year 2008-09 are partly allowed. 7. Now let us come to the grounds raised in the Asst Year 2009-10. The issue involved in this appeal is similar to Asst Year 2008-09. The assessee during the Asst Year 2009- 10 had earned interest income on deposits as under:- Particulars Interest Interest Total Received Accrued Interest Income Interest on FD with SBI CAG Branch from temporarily parked Money out of equity funds 1,79,65,828 1,79,65,828 (A) Interest on FD with SBI CAG Branch from temporarily parked Money out of Term....