TaxTMI 
TaxTMI 
2019 (8) TMI 835
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.... The TPO suggested enhancement of Rs. 3,50,95,614/- on account of adjustment to arm's length price. Accordingly, the Assessing Officer made an addition of Rs. 3,50,95,614/- as suggested by the TPO. 3. The Assessing Officer, during the course of assessment proceedings, noted that the assessee has disclosed an amount of Rs. 61,95,19,044/- as income under the head 'Income from other sources.' This amount has been received by the assessee on account of interest on fixed deposits in bank. The income has been set off against business loss of the current year of Rs. 49,43,63,478/-. He noted that while computing the business loss for the year under consideration, the assessee has claimed interest expenses of Rs. 61,93,34,362/- as interest on Fully Compulsorily Convertible Debentures. He noted that the assessee has also other interest receipts apart from interest on fixed deposits. The total interest disclosed by the assessee in the P & L Account was Rs. 76,46,90,621/-. He noted that while an amount of Rs. 61,95,19,944/- has been treated as 'Income from other sources', the balance amount of interest amounting to Rs. 13,79,02,237/- ha....
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.... the company raised Rs. 19,96,80,000/- by allotting 3840 shares of Rs. 10/- per each at a premium of Rs. 51,990/- to Virtuous Retail Ltd., Mauritius for repayment of loan of Eicher Goodearth Ltd., and start project of constructing the commercial building on the land acquired by it with the object of operation of the commercial building on lease after completion of the same. After making repayment of loan to Eicher Goodearth Ltd., the company invested the balance fund in Mutual Funds on temporary basis. In the year 2010-11 the company raised Rs. 1,40,00,00,000/- by allotting 5600 Shares of Rs. 10/- each at a premium of Rs. 2,49,990/- to Virtuous Retail Ltd., and in the year 201112 the company further raised Rs. 1,90,22,75,000/- by allotting 19,02,27,500 FCDs of Rs. 10/- each to Vassam Ltd., of Cyprus and Rs. 4,70,67,75,160 by allotting 47,06,77,516 FCDs to Virtuous Retail Pte Ltd., of Singapore and repaid Debenture Application Money of Rs. 4,70,67,75,160/- to Vassam Ltd of Cyprus. The Company also executed Sale Deeds for purchase of land rights for execution of mixed commercial development project at Chennai and is currently executing construction of mixed commercial development pro....
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....enses debited to the P&L Account. In the draft order, the Assessing Officer also disallowed depreciation on various assets. 7. The assessee approached the DRP. However, the DRP concurred with the findings given by the Assessing Officer so far as the treatment of the interest income as 'Income from other sources' and non-setting off of interest paid on borrowed funds from such interest income is concerned. So far as the disallowance of various expenses debited to P&L Account is concerned, the DRP allowed the same as business expenditure except Market Research expenditure, which is directly related to the projects, on the ground that the business process of the assessee is ongoing and certain legitimate expenses are allowable as business expenditure. The DRP, however, directed the Assessing Officer to disallow depreciation of Rs. 5,21,411/- out of the total depreciation claimed at Rs. 14,51,646/- and allowed balance depreciation on furniture and fixtures, computers, office equipments and leasehold improvements. The Assessing Officer, thereafter passed final order determining the total income of the assessee at Rs. 75,86,71,015/-. ....
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....has erred in not allowing deduction for the interest payable on FCCDs under Section 57 of the Act against the interest income offered to tax under Section 56 of the Act. 4.2 On facts in the circumstances of the case, the Ld. AO/ Hon'ble DRP has failed to appreciate that there is a direct nexus between interest expense and interest income of the Appellant as the interest income was earned from temporary investment of the same funds on which the interest expense was incurred by the Appellant and thus the interest expense was incurred wholly and exclusively for earning the interest income. Ground No. 5: Netting off the interest income with the interest expenses (on a without prejudice basis) 5. Without prejudice to the above grounds, on facts in the circumstances of the case and in law, the Ld. AO/ Hon'ble DRP has erred in not appreciating that if the interest expense was to be capitalized in the cost of the ongoing project, the interest income, being inextricably linked with the ongoing project, was to be allowed to be set off against cost of project and not separately taxed under the head "Income from other sources". Gr....
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....g additional grounds:- " Without prejudice to the above grounds, on the facts, in the circumstances of the case and in law, the interest income amounting to Rs. 75,74,22,181 accruing to the Appellant, in the absence of set up of business, was liable to be treated as capital receipt with the consequential effect of such receipt reducing the capital work-in-pr ogress. On the facts, in the circumstances of the case & in law, the interest income amounting to Rs. 75,74,22,181/- accruing to the Appellant in the captioned assessment year be assessed as business income instead of income from other sources. 9. The ld. counsel for the assessee, referring to various decisions including the decision of the Hon'ble Supreme Court in the case of NTPC Ltd., submitted that since all facts are already available on record and no new facts are required to be investigated, therefore, the additional ground raised by the assessee should be admitted for adjudication. 10. The ld. DR, on the other hand, strongly objected to the admission of such additional ground. He submitted that the additional grounds filed by the assessee could not be conside....
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....he assessee has not received any income. He submitted that the Assessing Officer is taking divergent views. If the expenditure has to be capitalized, then, the income should go to reduce the capital work-in-progress. Referring to the decision of the Hon'ble Delhi High court in the case of Indian Oil Panipat Power Consortium Ltd. vs. ITO reported in 181 Taxman 249, he submitted that the Hon'ble High Court held that when 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 the preoperative expenses. 14. The ld. counsel for the assessee, in his another plank of argument, submitted that the assessee is engaged in the real estate business and had purchased a plot of land in Bangalore in F.Y. 2004-05 out of the loan funds. However, pursuant to the infusion of equity funds by Virtuous Retail Ltd., the loan fund was repaid in F.Y. 2008-09. During the impugned assessment year, the assessee was in the process of construction of a mall in Bangalore on the aforesaid land. Apart from this business, the assessee also carried on ancillary business o....
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....alization of the same as work-in-progress by the Assessing Officer was upheld. 15. Referring to various other decisions as filed in the paper book, the ld. counsel for the assessee submitted that disallowance of the various expenses including the interest paid on Fully & Compulsorily Convertible Debentures is not justified. 16. In his another plank of argument, the ld. counsel for the assessee submitted that if the interest expenses was to be capitalized in the cost of the ongoing project, the interest income being inextricably linked with the ongoing project was to be allowed to be set off against the cost of project and not to be separately taxed under the head 'Income from other sources.' He accordingly submitted that the order of the Assessing Officer/TPO/DRP should be set aside and the various grounds raised by the assessee should be allowed. 17. The ld. DR, on the other hand, heavily relied on the orders of the A.O./TPO/DRP. He submitted that during the assessment proceedings, the assessee failed to substantiate as to how the interest income is business income. He submitted that the assessee, vide letter ....
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....n income will come into existence much later. He, therefore, held that the interest income on the investments made by the assessee out of the borrowed funds while the business of the assessee of construction of the said commercial complex had not commenced or the said funds had not been utilized for the construction of the said commercial complex and during the period when the funds were lying idle could not be considered as business income and was taxable under the head 'Income from other sources.' Similarly, he held that the interest paid on the borrowed funds was not allowable to be set off against the said interest income in terms of the provisions of section 57 of the Act since the funds invested by the assessee were out of borrowed funds which though were taken for the purpose of the business of the assessee were lying idle and could not be considered to have a direct nexus with the business income of the assessee. We find the DRP upheld the action of the Assessing Officer on this issue. So far as the disallowance of various other expenses debited to the Profit & Loss Account is concerned, the DRP held that except marketing research expenditure of Rs. ....
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....eversed the order of the Commissioner (Appeals). 20. Before the Hon'ble High Court, the following substantial question of law arose for its consideration:- "Whether the Tribunal misdirected itself in law in holding that interest which accrued on funds deployed with the bank could be taxed as income from other sources and not as capital receipt liable to be set off against pre-operative expenses ?" 20.1 We find the Hon'ble High Court decided the issue in favour of the assessee. The relevant observations of the Hon'ble High Court from para 5 onwards read as under:- "5. In our opinion the Tribunal has misconstrued the ratio of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals (supra) and that of Bokaro Steel Ltd. (supra). The test which permeates through the judgment of the Supreme Court in 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 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‟....
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....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. The head "income from other sources" is a residuary head of income. See S.G. Mercantile Corporation P. Ltd vs CIT, Calcutta; (1972) 83 ITR 700 (SC) and CIT vs Govinda Choudhury & Sons.; (1993) 203 ITR 881 (SC). 5.2 It is 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 be set off against pre-operative expenses. In the case of Tuticorin Alkali Chemicals (supra) 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 fu....
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....t 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 and in the later situation it cannot be capitalized. To test the principle we could extend the example, that is, would our answer be any different had assessee passed on the interest to the respective shareholders. If not, then in our view the only conclusion possible is that interest earned in the present circumstances ought to be capitalized. 7. In view of the discussion above, in our opinion the Tribunal misdirected itself in applying the decision of the Supreme Court in Tuticorin Alkali Chemicals (supra) in the facts of the present case. In our opinion on account of the finding of fact returned by the CIT(A) that the funds infused in the assessee by the joint venture partner were inextricably linked with the setting up of the plant, the interest earned by the assessee could not be treated as income from other sources. In the result we answer the question as framed in favour of the assessee and against the Revenue. These appeals are allowed and the impugned judgment is set asid....