TaxTMI 
TaxTMI 
2020 (2) TMI 73
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.... the addition made, by the Learned Assessing Officer and confirmed by the Learned Commissioner of Income tax (Appeals) amounting to Rs. 75,96,711/- under the head Income from other sources in may be deleted. 3. On the [acts & circumstances of the case the appellant prays that the sum of Rs. 75,96,711/-may be treated as income earned from business and profession and may be reduced from the total value of the capital work-in-progress and the said amount is not chargeable to tax under the head Income from other sources. 4. On the facts &. circumstances of the case the Learned Commissioner of Income Tax (Appeals) has erred in concluding that the appellant is not entitled to claim the deduction of the sum of Rs. 2,48,92,602/- , being the interest paid against the interest income. 5. On the facts and circumstances the appellant prays that the sum of Rs. 2,48,92,602/- being the interest payment may be allowed as deduction against the interest of Rs. 75,96,711/- treated as the income chargeable to tax under the head income from other sources. 6. Without prejudice to ground 1 to 5 the appellant prays that if the sum of Rs. 75,96,711/- is taxed under the h....
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.... period and necessary interest earned from said deposits has been credited to RTA account to be used for project of the assesse. 4. The Ld. AO did not convinced with the arguments of the assesee for the reasons that weather there is any link between funds used for time deposits or not, but interest earned from time deposits shall be assessable under the head income from other sources. He, further observed that this legal position has been settled by the Hon'ble Supreme Court, in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs CIT 227 ITR 172, where it was held that even, if the surplus funds at the disposal of the assessee, where deployed for earning income like interest etc., but the interest income earned was to be offered to tax under the head income from other sources. The relevant findings of the AO are as under:- 5.6 The submissions made by the assessee has been carefully perused and considered but the same are found untenable. At the outset, it needs not be mentioned that the assesse has placed emphasis on the facts that the interest has been earned on the borrowed funds on which it has paid interest. Since, the interest is paid by the assesse, as ....
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....st in arriving at the judicious conclusion. Taking into consideration the significance of this aspect of the Balance sheet it is observed that the assessee has earned interest income on temporary investment from borrowed funds of Rs. 75,96,711/- which was deducted from the borrowing cost to arrive at the figure of Capital Work-in-progress of Rs. 185,60,44,412/-. Even a cursory look at the above imprinted Schedule of the Balance sheet makes it abundantly clear that the closing balance of the work-inprogress has been arrived at after reducing an amount of Rs. 75,96,711/- which the assesee has claimed as expenses related to earning of interest (to the extent of interest earned i.e Rs. 75,96,711/-). 5.10 Taking into consideration this aspect the natural question that crops up is that as to why the impugned amount of Rs. 75,96,711/- has not been shown in the P&L Account as receipts following the dictum of various court pronouncements. Instead, the assessee while taking this income under the head "Income from other sources" has conveniently reduced the same amount from the interest income being expenses incurred for earning interest income. This act of the assesee is totally not....
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....construction of road activities were advanced by the assessee to its associate concerns and interest was charged on the same. This activity fetch interest income of Rs. 75,96,711/- which assessee has not credited to P&L Account, but has credited to WIP account meaning thereby the WIP has been reduced to that extent. 5.14 Facts of the case before the Supreme Court: In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT 227 ITR 172 (SC) the work of project in the hands of the assessee was in progress and as a result the funds at the disposal of the assessee were not used for the purpose they were meant. The surplus funds at the disposal of have assessee were deployed for earning income like interest etc. The interest so earned was not offered for tax and was reduced from the work-inprogress. The Hon'ble Supreme Court rejected assessee's claim and ruled that the income earned by the assessee requires to be brought to tax under the head 'Income from Other sources.. 5.15 In the back drop of above comparative facts there is no iota of doubt that in the instant case the ruling of Supreme Court in the case of Tuticorin Alkali chemicals & Fertilizers....
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.... sum of Rs. 75,96,711/- is brought to tax as assessee's income under the head Income under the head Income from Other Sources without giving any deduction u/s 57(iii) of the Income Tax Act. 5. Aggrieved, by the assessment order, the assesee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assesee has reiterated its arguments made before the Ld. AO, in light of the decision of Hon'ble Supreme Court, in the case of CIT vs Bokaro Steel Ltd. 236 ITR 315. The Ld.CIT(A) after considering relevant submissions of the assesse and also by relied upon various judicial precedents, including the decision of Hon'ble Supreme Court, in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs CIT(Supra) held that whether, funds used for deployment in fixed deposits to earn interest is inextricably linked with the project or not, but interest so earned is assessable under the head income from other sources. Therefore, he opined that there is no error in the findings of the Ld. AO in assessing interest income from time deposits under the head income from other sources. Insofar as, alternative ground taken by the assessee for deduction of certain expenses, including inte....
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.... and Fertilizers Ltd(supra), where it was categorically held that it is irrelevant to see the source of funds, but what is relevant is the nature of income to decide the head of income. The Ld. AO, as well as the Ld.CIT(A) has rightly considered the facts, in light of provision of the Act, and assessed interest income under the head income from other sources and their order should be upheld. 8. We have heard both the parties, perused the materials available on record and gone though orders of the authorities below. We find that the issue involved in the present appeal regarding taxability of interest earned from time deposits, whether it is taxable under the head income from other sources or it can be reduced from capital work-in-progress, when the funds are inextricably linked with project funds is no longer a res-integra. The co-ordinate bench of ITAT, Mumbai 'G' bench in assessee's own case for AY 2011-12 had considered an identical issue and after considering relevant facts and also by following another co-ordinate bench decision, in the case of Infrastructure Development Company of Rajasthan Ltd. vs DCIT (supra) held that interest earned from time deposits kept out of su....
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....The Hon'ble ITAT has treated the said income as income from business. The relevant para no. 5 is reproduced as under.: - "5. Having heard rival submissions, we are of the view that there is merit in the later submissions made by Ld A.R. From the financial statements, we notice that the assessee has borrowed loans for executing the project and the amount of loan outstanding as on 31.3.2010 stand at Rs. 824.73 crores. The loan taken from banks alone stands at Rs. 503.29 crores. It is an admitted fact that the term loans have to be repaid in fixed installments and hence there is merit in the contentions of the assessee that it was constrained to keep the funds in fixed deposits to earn interest, which will meet a portion of interest burden of bank loans. Further, we find merit in the contentions of the assessee that it had to keep some surplus funds in hand in order to meet the maintenance requirements of the roads. In these set of facts, we are of the view that there were business exigencies in keeping the funds in fixed deposits and hence there is merit in the contentions of the assessee that interest income earned on those fixed deposits is assessable as income from busine....
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....fied under six heads. In the instant case, the company had chosen not to keep its surplus capital idle, but had decided to invest it fruitfully. The fruits of such investment will clearly be of the revenue nature. If the capital of a company is fruitfully utilised instead of keeping it idle, the income thus generated will be of the revenue nature and not accretion of capital Whether the company raised the capital by issue of shares or debentures or by borrowing will not make any difference to this principle. If borrowed capital is used for the purpose of earning income, that income will have to be taxed in accordance with law. Income is something which flows from the property. Something received in place of the property will be capital receipt. The amount of interest received by the company flows from its investments and is its income and is clearly taxable even though the interest amount is earned by utilising borrowed capital. It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilising the borrowed funds as its income. The company was at liberty to use the interest inco....
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....essee with its contractors pertaining to the work of construction. To facilitate the work of the contractor, the assessee permitted the contractor to use the premises of the assessee for housing its staff and workers engaged in the construction activity of the assessee's plant. This was clearly to facilitate the work of construction. Had this facility not been provided by the assessee, the contractors would have had to make their own arrangements and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee had provided these facilities. The same was true of the hire charges for plant and machinery which was given by the assessee to the contractor for the assessee's construction work. The receipts in this connection also went to compensate the assessee for the wear and tear on the machinery. The advances which the assessee made to the contractor to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitches as to help the contractors. The arrangements which were made between the assessee-company and....
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....judgment in Bokaro Steel Ltd.'s case (supra) to our mind 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, 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 clue is perhaps available in section 3 of the Act which states that for newly set-up business the previous year shall be the period beginning with the date of setting up of the business. Therefore, as per the provision of section 4 of the Act which is the charging section income which arises to an assessee from the date of setting of the business but prior to commencement is chargeable to tax depending on whether it is of a revenue nature or 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 t....
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....n Bokaro Steel Ltd.'s case (supra) 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. 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 subsections (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. 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 and in the later situation it cannot be....
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....zed commitment advances cannot be taxed as revenue income and interest paid on commitment advance treated as a capital expense. This will be contradictory. The entire expenditure for inviting bids etc. and even documentation was paid to PFC. The amounts received from the prospective bidders on account of sale of tender documents was also transferred to PFC. As noticed above, Revenue has not challenged and has accepted the order of the tribunal deleting addition of Rs. 1,35,81,234/- paid by the respondent-assessee to PFC for preparation of tender documents. In view of the factual matrix, the tribunal has rightly followed the ratio in Indian Oil Panipat power Consortium Ltd.'s case (supra)." 2.15 In a recent decision, the Delhi High Court in case of Pr. Commissioner of Income-tax v. Facor Power Ltd. [2016] 66 taxmann.com 178 (Delhi) following the decision in case of Indian Oil Panipat Power Consortium Ltd. (supra), has held as under: 11. From the above extract, it is evident that the test that is required to be employed 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 sett....
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.... form of share capital were infused for the 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 the pre-operative expenses." That, the ratio of the above finding of the Hon'ble Delhi High Court would be squarely applicable to the facts of the assessee's case, because admittedly in the case under appeal before us the share capital as well as loans were raised for the specific purpose of setting up of the power generation plants. The business of the assessee has not been commenced and therefore, as per above decision, the interest received in the period prior to commencement of business was in the nature of capital receipt and hence was required to be set off against the pre-operative expenses. The assessee has already set off the interest income against the preoperative expenses which is titled as "project development expenditure". In view of above, w....
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....Panipat Consortium Ltd (supra) has considered and interpreted the decisions of Hon'ble Supreme Court in case of Tuticorin Alkali Chemicals & Fertilizers (supra) as well as Bokaro Steel ltd (supra). After analyzing both the decisions of Hon'ble Supreme Court, it held that "the test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case (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'. On the other hand the ratio of the Supreme Court judgment in Bokaro Steel Ltd.'s case (supra) to our mind 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." 2.19 The facts in the instant case are pari materia with the facts of the Indian Oil Panipat (supra) and the ratio decidendi o....
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.... was deducted from the borrowing cost to arrive at the figure of capital work-in-progress of Rs. 1,86,25,83,284/-. The promoters of the company had introduced money by way of share capital and also obtained credit facilities from the banks and institutions. The total funds were exclusively meant for use for setting up of the infrastructure facility. The lenders disbursed the funds at specified intervals and the said funds were required to be used for the purpose of setting up of the project. Needless to say that the on account of the time difference, the funds may lies with the bank resultantly earning the interest income in dispute. These funds were deposit in the bank for a short period for the purpose of utilizing the same in the project. Eventually, raising the interest is clearly on account of business exigency. Taking into account, all the facts and circumstances, we are of the view that the finding of the CIT(A) is not justifiable hence the same is hereby ordered to be set aside and we treat the interest income as business income of the assessee. 9. In this view of the matter and consistent with view taken by the co-ordinate bench, we are of the consider....
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....the claim of the deduction is not accepted, then the said sum of Rs. 35,87,773/- be added to capital work-in-progress. 12. The Ld. DR, on the other hand, strongly supported order of the Ld.CIT(A). 13 . We have heard both the parties, perused the material available on record and gone through orders of the authorities below. It is an admitted fact that any expenditure incurred for day to day maintenance of corporate status of the assesee needs to be allowed as revenue expenditure, whether or not any business activity, including income from business is generated during the year under consideration. But, in order to consider those expenditure as revenue expenditure deductible u/s 37(1), the assessee shall beyond the doubt prove that the said expenditure are in the nature of general administrative and other expenses, which are required to be incurred to maintain corporate status of the assessee. In this case, the Ld.CIT(A) after considering the nature of expenditure and its relevance for maintaining the corporate status of the assessee has allowed director's fees of Rs. 70,000 and audit fees of Rs. 2,20,600/-, on the ground that the above mentioned expenses are required to be incu....