TaxTMI 
TaxTMI 
2021 (5) TMI 390
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....er, in view of facts and law involved, the CIT(A) is correct in allowing the assessee to capitalize interest income earned which is not an incident to the assessee's business activity. 4. Whether, in view of facts and law involved, the CIT(A) is correct in allowing the assessee to capitalize interest income earned by keeping idle funds in FDs which is a deliberate and intentional act of unrelated to its actual business activity. 5. Any other ground that may be raised at the time of hearing." 2. Briefly, the facts of the case are that the assessee company dealing in establishing of natural gas based power projects, filed its return of income for the AY 2015-16 on 29/09/2015 admitting nil income, as the business is yet to be commenced, since the power project is still under consideration. The assessee capitalized the preoperative expenses. However, since the operations are yet to be started due to delay of the Govt. of India in allotting the required gas from Krishna Basin, the company advances some part of its idle funds as interest bearing loans to Pact Securities Pvt. Ltd. The assessee received an amount of Rs. 3,29,33,633/- towards interest on such advanc....
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....ty and ready u.se of the funds as and when there arise business needs of the assessee. It is stated that the fund are meant for purchase of the lands at the later days. Thus) the earning of interest income cannot be dominant or business intention of the assessee. In this regard we have examined the judgments relied upon by Ld. counsel. The Judgment in the case of Indian Oil Panipat Power Consortium Ltd. (supra) deals with the interest receipts earned prior to the commencement of business and it is not known if they are earned prior to 'set up' too. Therefore, the same is distinguishable on facts. The Apex court judgment in the case oj Karnal Co-operative Sugar Mills Ltd. (supra) relates to the case of 'share capital money') which is meant Jar purchase of Plant and Machinery in connection with set up of the business. Per contra) we have also perused the binding judgment of the Hon'ble High .court of Bombay in the case of Shree Krishna Polyster Ltd. (supra) which is relied upon by the revenue and the conclusion of the same read as follows: "Income earned by the assessee by investing surplus money received in public issue) in bank deposit....
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.... as 'income from other sources and in the following year it has reduced from the cost of the project up to the interest received on FDR. It is also not clear from the orders of the authorities below as well as submission of the ld. AR that when the fixed deposits were made and advances were given to Pact Securities and Financial Services Ltd. When the Bench asked a specific question to assessee that what was the description of the fixed deposits and advances and utilization of income received on fixed deposits and advances, the ld. AR was unable to give any explanation to the said question. He did not produce any terms and conditions regarding the advances given. We find substance in the written submissions filed by the Ld. DR. The ld. Dr has analyzed the case as discussed hereinabove. Res-judicata does not apply in the Income-tax Act. The coordinate bench of this Tribunal has allowed the appeal of the assessee in the AYs 2012-13 and 2013-14 in ITA Nos. 1286 & 1287/Hyd/2016, dated 29/11/2017 is also not binding on us because in the impugned AY there are some changes in the facts. Earlier the interest was earned from fixed deposits and in this AY the assessee has given some advan....
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....apital is held by the President of India. The capital has been subscribed as determined from time to time. In the financial year 1975-76, the equity capital of the assessee stood at Rs. 20 lakhs and it came to be increased from year to year and as on 31-3-1991 it stood at Rs. 203.58 crores. In addition to it there was also a loan granted within the accounting year 1980-81 by the Government amounting to Rs. 47.94 crores. The total funds available as at the end of 31st March, 1981 stood at Rs. 247.31 crores. 2. One of the major issues raised in the assessee's appeal is about the taxability of a sum of Rs. 1,07,29,848. This amount represents excess of interest income earned over the interest paid. As per the balance sheet of the assessee at page 143 of its paper book, the income derived from interest from banks on short deposits stood at Rs. 96.60 lakhs. Besides there was other income of interest of Rs. 26.03 lakhs derived from the contractors employed and the employees. The gross amount of interest income under both the heads came to Rs. 122.93 lakhs. Out of this gross interest income, an amount of Rs. 15.64 lakhs being interest paid was deducted leaving the net....
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.... Paradeep Phosphates Ltd., New Delhi and M/s Autokast Limited, S.L. Puram, Shertallai (Kerala). 3. Shri D.K. Sharma, the learned Departmental Representative, raised certain preliminary objections to the constitution of a larger Bench and to the framing of the following question to be considered by the larger Bench: "Whether an interest income of Rs. 1.07 crores earned on shortterm deposits made with Banks by the assessee a thermal power corporation still to set up its power plants is assessable as income from other sources for the assessment year 1981-82, in the face of the assessee's claim that such interest arose from moneys received by it as equity capital subscriptions and loans that were absorbed immediately by the projects on hand each year from the assessment year 1977-78 onwards and consequently there had been no surplus fund with the assessee so as to create an independent source of income in regard to the interest in question?" His first objection relating to the constitution of the larger Bench was that it was not open to the Tribunal to revise or review its earlier decision, which had been given in favour of the Revenue in the assessee'....
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....us aspects including its factual background on which the assesses based its claim that the sum of Rs. 1,07,29,848 was not income at all. The stand of the Revenue is also reflected in the question when reference is made to the assessability of the aforementioned amount under the head 'Income from other sources'. The question is framed in order to enable the possible interveners to understand the issue or the range of controversy going to be considered by the Special Bench, so that they could assist the Bench by placing their views on the issue concerned. However the entire appeal is open before the Special Bench, and is not confined to the question framed like a question of law framed and referred to the High Court u/s 256 of the Income-tax Act, 1961. We overrule the preliminary objections of the Revenue. 5. Before proceeding to deal with the controversy about the taxability of the sum of Rs. 1,07,29,848 it will be appropriate to indicate the parameters. In the assessment order the Inspecting Asstt. Commissioner (Asstt.) has brought to tax the income from consultancy fees from Badarpur Thermal Power Station and Hindustan, Limited under the head "Income from business....
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....odd was taxed undisputedly under the head 'Income from other sources' in the assessment year 1977-78 and again Income from interest of Rs. 22,84,994 was subjected to tax in the same manner when the additional ground taken before the Tribunal on this point was not admitted in the assessment year 1978-79 and further interest incomes of Rs. 28,34,451 and Rs. 1,12,46,781 were similarly taxed for the subsequent assessment years 1979-80 and 1980-81 by the Tribunal's order against the assessee, yet the matter deserved to be reconsidered as the assumptions made by the Tribunal against the assessee, according to him, were not correct nor the authorities relied upon were applicable. He put forward the factual background of the case. It was stated that all the four thermal power projects at Singrauli, Korba, Ramagundam and Farakka were on the board in the accounting year, being in various stages of construction as per the report of directors and none of these was in a position to produce electricity energy for sale, which was the main object for which this company was set up by the Government of India. He invited our attention to the main object III(A)(1) in the Memorandum of Asso....
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....rld and that such a practice deserved to be followed and applied for the purpose of income-tax and for this purpose support was taken from the Supreme Court's decision in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 . 7. To establish the accountancy principle and practice, he referred to a pamphlet 'International Accounting Standard' in respect of 'Capitalisation of Borrowing Costs' issued by International, Accounting Standards Committee. London and another pamphlet of the Institute of Chartered Accountants of India, New Delhi by the name 'Guidance Note on Treatment of Expenditure During construction period.' The latter pamphlet was brought out by the Research Committee of the Institute of Chartered Accountants of India. He referred to paragraphs 9, 14 and 16 of the pamphlet 'International Accounting Standard' and support was sought from the last sentence in paragraph 16, which paragraph is fully quoted below: "16. Sometimes the financing arrangements for specific projects may result in an enterprise incurring a borrowing cost from the commencement date of the agreement on the full amount of the obligation. Under such arrang....
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....intly for the purpose of financing the construction and for working capital, the interest and the commitment charge should be apportioned on a reasonable basis. The portion relating to financing of construction should be capita lised and the other should be treated as deferred revenue expenditure to be written off over a period of three to five years after production commences (paragraphs 4.3 and 4.5)." "17.6 The same treatment should be accorded to the various costs And charges, incurred for preparing the loan agreements and other documents as is given to the interest and commitment fees incurred on the loan during the construction period (paragraph, 4.6)." 8. In brief the premise on which the arguments of Shri Ganesan were based was that Government of India sanctioned money by way of share capital or loans for the specific purpose of capital outlay on the construction of four thermal power plants and that as per the directions of the President of India, the money was to be spent for that purpose only and the money so earmarked could not at all be called as surplus funds, on which any income by way of interest could be independently earned, nor could it be subjec....
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....s, he referred to a, large list of items at pages 1575 onwards in Volume 2 of the Commentary on the Income-tax Law by Chaturvedi and Pithisaria (third Edition). 9. Shri Ganesan in support of hie stand relied on the two Special Bench decisions of the Tribunal in Nagarjuna Steels Ltd.'s case (supra) and Arasan Aluminium Industries (P.) Ltd.'s case (supra) and on the Delhi High Court's decision in the case of Indian Drugs & Pharmaceuticals Ltd. (supra). He explained the decision of the Delhi High Court and submitted that the observations at page 139 about the surplus moneys invested to earn interest were mere obiter dicta and should not be read against the main proposition laid down on the same page in respect of income from tender forms and excess realised on account of water and electricity charges. It was also submitted that the High Court had approved the reasoning of the Tribunal and the reasoning as noted at page 138 of the judgment is that the receipts were directly related to the capital structure of the business, which was being set up, and did not by themselves create an Independent source of Income unrelated to the business which was being set it, was a....
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....of India were only for the outlay on construction. An argument was also made that short-term capital deposits for a period of two weeks at a time could not be said to amount to an investment. 11. Shri Ganesan very fairly took upon himself to explain two other High Court decisions; one from Madras and another from Karnataka, which could be read against the assessee. The Madras High Court (decision is CIT v. Seshasayee Paper & Boards Ltd. [1985] 156 ITR 542 and the Karnataka High Court decision is CIT v. Cap Steel Ltd. [1986] 162 ITR 533. In regard to the Madras High Court's decision Shri Ganesan's submission was that apparently it may be against the assessee but since It had proceeded on a concession, no law was laid down. For this proposition the Supreme Court's decision in Lakshmi Shankar Srivastava v. Delhi Administration [1979] SCC 229 was cited in support. It was stated that the assessee's case was different on facts. Further it was Shri Ganesan's contention that the High Court had gone beyond its jurisdiction while deciding the matter at page 550. So far as Karnataka High Court's decision is concerned, it was submitted that it was against the a....
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....sum advance the rate of interest prescribed was 12 per cent. Thus, this interest was so different from the interest realised on short-term fixed deposits, and this type of interest went to reduce the cost of construction and it cannot be considered as interest liable to tax as income from any independent source. 13. After Shri Ganesan, Shri R.N. Bajoria, Senior Advocate, the learned counsel of the intervener M/s. National Aluminium Co. Ltd. made his submissions. He made very brief submissions in view of the fact that the question arising in the intervener's case was not involved in the assessee's case as here the assessing officer had already taxed only the net Income from interest. In other words the issue in the case of National Aluminium Co. Ltd. related only to the claim of deduction of interest paid on borrowings from the income from interest, which was undisputedly liable to tax sofar as that case was concerned. He rightly and very fairly appreciated the position that there was no room for raising the same contention of his assessee's case in the case now before the larger Bench of the Tribunal. He nevertheless took the opportunity to touch a few aspects.....
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....r the business yet to be set up then there was no question of interest on short-term deposits springing from an independent, source. He referred to the short-term deposits made for the purpose of opening letters of credit for the import of equipments and spares from abroad. As an illustration he submitted that the making of such short-term deposits with the banks was inextricably linked up with the activity of setting up of the project. He contended that the true nature of the transaction of earning interest was to be seen in the first instance and the head of income under which such income will be assessable had to be considered only thereafter. He went on to say that the head of income is to be determined only after the nature of activity producing interest is analysed. In support of his argument he cited the decision of the Delhi High Court in Snam Progetti S.P.A. v. Addl. CIT [1981] 132 ITR 70. He referred to the observations of the Delhi High Court in the head-note to the effect that the assessee had not come from Italy (assessee being an Italian company carrying on business as Engineers and Contractors in the field of Petroleum and Petro-Chemical Plants) to make deposits in I....
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....ments made by Shri Ganesan.. 16. Two learned Departmental Representatives, namely Shri D.K. Sharma and Mrs. Archana Ranjan put forward the case of the Revenue. Shri Sharma began his arguments by referring to a letter of the Bureau of Public Enterprises dated 2-4-1987 advising the public sector undertakings not to resort to the appellate procedure but to resort to the remedy of revision before the C.I.T. The letter laid down a procedure for the settlement of disputes regarding income-tax inter departmentally. We may deal with this submission of Shri Sharma at the outset and point out that such a letter is in the nature of advice to the assessee and it is the assessee, which has to act upon it. The assessee instead of following the guidelines given in that letter has chosen to pursue the appeal before the Tribunal, which the Tribunal was duty bound to decide. Despite this letter the assessee has chosen to pursue the appeal before the Tribunal. 17. Shri Sharma next submitted that the stand. of the assessee is the same as was taken for the preceding two assessment years when the Tribunal had not accepted it. He referred to the Tribunal's order for the earlier two ....
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.... nature of things will become surplus qua the immediate needs and it is out of these moneys that the assessee made short-term deposits to earn interest income. The next contention of Shri Sharma was that it was not correct to say that all the funds given by the Government were meant for construction activity only. He referred to page 10 of the assessee's paper book having a statement showing anticipated requirements of funds in respect of Singrauli Super Thermal Power Project and submitted that the expenditure anticipated included expenditure on establishment charges of Rs. 12.90 crores and such expenditure, according to him, could not be said to be only for constructional activity. He went on to say that when expenditure of this nature was anticipated, it could not be said that all the amounts put in short-term deposits were out of funds given for constructional activity. He also stated that only with the surplus funds available, the assessee could advance loans to contractors and employees on which it received a substantial interest of Rs. 26.03 lakhs as per details on page 3 of the paper book of the Revenue. He also took pains to say that the funds of the assessee were not m....
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.... not be utilised for the construction or erection work immediately, the amounts were deposited with banks as short-term deposits. It was his stand that income from interest had been earned out of a conscious act on the part of the assessee to deposit surplus funds in short-term deposits on interest and that it needs no proof that no income from interest could flow from borrowed funds themselves. He went on to say that that conscious act to take short-term deposits on interest gave rise to an independent source of income and that source was immediate and not remote. It was further stated that the income from interest arose from a contract with the bank and not from the transaction of borrowing funds from the Government. He also met the argument that investing in short-term deposits was not merely for the purpose of safe custody of funds by the banks as that purpose of safety could be achieved simply by putting those funds in current account along with other funds lying there. Finally, he stated that borrowed funds, if at all, could be said to be a remote source of the funds put in short term deposits and the income from interest did not arise from the act of borrowal of fun....
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....d. (supra) and decision of the. Calcutta High Court in the case of New Central Jute Mills Co. Ltd. ( supra) and Karnataka High Court in Karnataka Forest Plantations Corpn. Ltd. v. CIT [1985] 156 ITR 275. It was also pointed out that the Tribunal in that case did not follow the view taken for the preceding assessment year on the basis of which Shri Ganesan had raised the plea for the constitution of a larger Bench. In fact Shri Sharma at one stage even pointed out that after the adverse decision of the Tribunal for the assessment year 1980-81 National Hydro Electric Power Corporation had taken recourse to the procedure laid down in the letter of the Bureau of Public Enterprises dated 2-4-1987. Another decision of the Delhi Bench 'C' of the Tribunal in favour of the Revenue in the case of IAC v. Chandpur Sugar Co. [1986] 17 ITD 795 was also cited and relied upon. It was submitted that both the decisions were based on the understanding and interpretation of the Delhi High Court's decision in the case of Indian Drugs & Pharmaceuticals Ltd. (supra). Shri Sharma next submitted that the M.P., Kerala, Madras, Calcutta and Karnataka High Courts had decided that question....
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....dent source and he cited the decision of the Rajasthan High Court in Murli Investment Co. v. CIT [1987] 31 Taxman 410 . It was also pointed out that the Rajasthan High Court had held that interest earned from depositing surplus funds in short-term deposits did not amount to moneylending. 20. Finally Shri Sharma contended that in accordance with what he termed as the rule of res judicata, when there was no change in the set of facts and law, this Bench of the Tribunal should not depart from the view taken by a Division Bench in the assessee's own case for the preceding two assessment years and more so when the assessee's reference application under section 256(1) was pending before the High Court for those years. He also contended that the assessee wanted the reappraisal of the same position which was considered by the Division Bench and also by the Delhi High Court in Indian Drugs & Pharmaceuticals Ltd.'s case (supra) and he invited our attention to two decisions of the Madras High Court in CIT v. S. Devaraj [1969] 73 ITR 1 and CIT v. L.G. Ramamurthi [1977] 110 ITR 453 and a host of Third Member decisions in Tube Investments of India Ltd. v. ITO [1984] 9 ITD 69....
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....t expenditure which may be capitalised. in particular, attention is drawn to the under noted paragraphs which deal with different items of indirect expenditure which may be capitalised as part of the cost of construction- Paragraph 3-relating to Preliminary Project Expenditure. Paragraph 4-relating to Interest Charges and other Financial Expenses. Paragraph 5-relating to Indirect Expenditure Incidental to Construction. Paragraph 9.5-relating to expenditure on Temporary Structures and Service Facilities Built or Acquired Specially for the purpose of Construction. Paragraph 9.4/5-relating to Depreciation on Fixed Assets as well as on Temporary Structures and other Facilities used during the period of Construction. Paragraph 9.6-relating to the Expenditure on Land Grading and Levelling. Paragraph 9.6-relating to Expenditure on Test Runs. 15.2 From the total of the aforesaid items of indirect expenditure would be deducted the income (which can be directly related to the particular item of indirect expenditure), if any, earned during the period of construction." It was submitted that there was no reference ....
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....g. Mills Ltd. [1975] 98 ITR 153 a decision approved by the Supreme Court in Challapalli Sugars Ltd.'s case (supra). In this connection reference was made to items of expenditure detailed at page 156 of the Report and considered by the High Court. It was further contended that the principle of capitalisation of expenditure incurred to bring some asset into existence could not be stretched to earning of income from interest now under consideration, nor can it be said that whatever can be true about capitalisation of expenditure, would lead to the conclusion that income earned will also be a capital receipt. It was pointed out that even the Supreme Court had sounded a note of caution in Challapalli Sugars Ltd.'s case (supra) at page 175 about adopting a rule of accountancy when the above rule was recommended to be adopted for determining the actual cost of the assets by observing: "in the absence of any statutory definition or other indication to the contrary". It was also pointed out that the Delhi High Court in the case of Indian Drugs & Pharmaceuticals Ltd. ( supra) was purporting to point out the limitation of the rule laid down earlier when it referred to the inc....
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....f the Delhi High Court in CIT v. State Trading Corpn. of India Ltd. [1973] 92 ITR 294 and submitted that even though the grant-in-aid given by the Government of India to the company to meet its administrative expenditure, was a revenue receipt, the High Court held that as the business was not set up, it could not be treated to be assessee's income. Shri Ganesan relied on this authority to say that all receipts in the case of a business, not set up, will be on capital account. He also stated that business of consultancy was not the assessee's business and its main business, as per its memorandum, had not been set up and that that fact is not even disputed by the Revenue. Shri Ganesan finally submitted that it had been erroneously assumed that the assessee derived any income from an independent source which could be taxed as income under the head 'Other sources'. He also pointed out that similar was the view of the Delhi High Court in Snam Progetti S.P.A.'s case (supra). Shri Ganesan submitted that even though the Madras High Court's decision in the case of Madras Fertilisers Ltd. (supra) and the Karnataka High Court's decision in Cap Steel Ltd.'s case....
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....tax assessment of a particular assessment year is also based on a unit of time and that is equivalent to one year. The facts which are relevant to be noted, therefore, relate to availability of the surplus funds in that unit of time. There indeed were surplus funds available to the assessee from time to time and it can be seen from the balance-sheet that due to the existence of such surplus funds, it started investing them in short-term deposits with the scheduled banks which yielded interest income. The concept of surplus funds and their investments is well known to the assessee itself when we take note of its ancillary object No. B-14 in the memorandum of association. Reading the language of that object in a proper manner, which reads as "otherwise employ moneys belonging to or with the company and not immediately required in the purchase or acquisition of any shares, securities or other investments, whatsoever, whether movable or immovable". It refers clearly to the concept of investment of surplus funds. Acquisition of funds not immediately required in "investments whatsoever" can be related to short-term fixed deposits, as they also partake the same character of inves....
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....ad 'Income from other sources' and the assessee through a revision petition filed before the Commissioner of Income-tax, claimed that it was entitled to the deduction of interest on the amount borrowed. The Commissioner dismissed the revision petition and the assessee filed a writ petition before the Karnataka High Court.The High Court examined the question of the nature of interest derived on short-term deposits and held that though the borrowings had been made for the purpose of business, these were not made to make investments and earn interest from them and the interest from borrowed amounts kept in short-term deposits. Was totally independent of the borrowings and even the interest payable on such borrowings was, therefore, not deductible u/s 57(iii) of the Income-tax Act. The High Court bad followed the view taken by Kerala High Court in Traco Cable Co. Ltd.'s case (supra). The independent nature of the transaction of earning interest by making short-term deposits out of the borrowed funds is brought out by this decision of the Karnataka High Court. 29. Next is the Madras High Court decision-Seshasayee Paper & Boards Ltd.'s case (supra). In that case ....
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....nclined to hold that the Tribunal is not right in this case in holding that the interest receipts cannot be assessed and that the difference between the interest paid and the interest received should be capitalised." His argument was that looking to the question referred to the Hon'ble High Court, it had travelled beyond the scope of that question and this was beyond the jurisdiction of the High Court. We are unable to attach much weight to the submission of the learned counsel as the finding of the High Court on the main issue is quite clear and in the sentence referred to above it was merely referring to the controversy which fell for the consideration of the Tribunal. It does not vitiate the ratio of the decision of the High Court which is clearly against the assessee. 30. Then there is a decision again of Karnataka High Court in Cap Steel Ltd.'s case (supra). The assessee had borrowed funds from financial institutions for the purpose of installation of plant and machinery and also for construction of buildings and after spending certain amounts it deposited the excess money available with it in short term deposits and earned interest out of those depos....
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....l structure of the business, being set up and thus did not by themselves set up an independent source of Income unrelated to the business, which was being set up. These receipts, the Tribunal went on to say, wore distinguishable from interest on deposits of surplus money, which was realised by utilization of such surplus money and created a separate independent source. In other words the Tribunal had clearly drawn a distinction in regard to receipts which wore inextricably linked with the process of the setting up of the business and the receipts like interest on deposits of surplus money. arising from a separate independent source. The Tribunal, therefore, had comprehensively examined the issue and did not lay down any proposition of the type which Shri Ganesan says, qua all the receipts including the receipt of interest from investing surplus funds. It is these findings of the Tribunal which have been affirmed by the High Court and at page 139 in the earlier part the High Court dealt with the receipts of the type which were inextricably linked with the process of setting up of the business and held them to be deductible while working out the cost. However, the High Court like the....
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....rted carrying on business as engineers and contractors in the field of petroleum and petrochemical plants and for the preceding two assessment years had also returned business income and in the year 1970-71, under consideration was claiming adjustment of interest income on bank deposits, earned by it against the loss suffered in business. We fail to understand how this authority can advance the assessee's case. At this stage we may also, in passing, refer to the line of reasoning put forward by the counsel of intervener Shri O.P. Vaish, who contended that following the Supreme Court's decision in India Cements Ltd.'s case (supra), the purpose for which money was borrowed was not relevant in the context of pre-setting up period of a business. If the argument of Shri Vaish was to prevail, then the argument of Shri Ganesan that the Purpose of funds borrowed or contribution received by way of share capital from the Government was to make capital outlay in the construction of projects would also have to be ignored. But apart from that, it is not a relevant consideration for determining the taxability of any receipt of money invested as to how the funds giving rise to that re....
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.... interest income from temporary investment of surplus funds should be shown separately in the 'Incidental Expenditure during Construction Period Account' and necessary provision for the tax liability should be made in the accounts. In para 11.4 it is suggested that income from sale of merchandise during test-runs or experimental production should be set off against indirect expenditure incurred during the period off test runs before capitalising such expenditure as suggested in paras 15.1 and 15.2. In the end of the pamphlet there is a summary of conclusions and recommendations. In para 17.4 thereof it is recommended that the interest charges incurred during the construction period on loans and other forms of borrowing should be treated as part of indirect construction cost if the loan or other borrowing was taken or incurred for the purpose of financing the construction of the project. Para 17.11 already reproduced provides that the income from miscellaneous sources like share transfer fees, interest income, income from hire of equipments and income from sale of products manufactured during the period of test runs etc. should be set off against the related items of expendi....
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....he above reasons we are of the considered opinion that the views expressed by the two earlier Special Benches would ran contrary to the legal position emerging from the decisions of the High Courts referred to above. We, therefore, uphold the action of the lower authorities in taxing the interest income from short term bank deposits. 39. However, we have yet to deal with the alternative, plea of Shri Ganesan about the taxability of interest received from contractors and employees amounting to Rs. 26.03 lacs. Shri Ganesan had filed before us a booklet giving the general conditions of contract in civil works of the assessee company. It is apparent from page 48 of schedule 'A' that the charging of interest from contractors is closely connected and inter-linked with the construction activity. These advances were in fact given to expedite the construction activity and the provision of interest on advances paid is incidental to the achievement of object in accordance with the normal commercial practice relating to advancing of funds to a contractor executing the. Construction work. Similar is the case about making advances to employees who were working for the execution ....
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....ssessment years by an order dated 28th February, 1984 and further order of the Tribunal on assessee's miscellaneous application dated 31st December, 1984 are included in assessee's paper book. However, Shri Ganesan again urged that ground and contended that depreciation on machinery not actually put to use is allowable on the theory of passive user accepted by the courts. He once again cited Delhi High Court's decision in the case of Capital Bus Service (P.) Ltd. v. CIT [1980] 123 ITR 404. 42. Shri D.K. Sharma, the learned Departmental Representative relied on the decisions of the Tribunal for the preceding three assessment years and pointed out that Delhi High Court's decision in the case of Capital Bus Service (P.) Ltd. (supra) had been duly considered in the Tribunal's order for the assessment years 1979-80 and 1980-81. He submitted that the decision in the case of Capital Bus Service (P.) Ltd. ( supra) was in the context of income to be computed under the head 'business'. He finally submitted that as 'there was no change in the circumstances prevailing in this assessment year from that in the earlier three years already decided by the Tr....
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.... good in the case of the assessee. Following the view taken by the Tribunal for the preceding three assessment years, we uphold the orders of the authorities below on this point and reject the contention of the assessee. 44. Ground No. 5 of the assessee seeks to challenge the order of the Commissioner of Income-tax (Appeals) in sustaining the disallowance of an expense of Rs. 69,60,452 under the head 'Training and Recruitment Expenses' against the assessee's income from Management Fees. Shri Ganesan submitted that the assessee was receiving management fees from Badarpur Thermal Power Station which have been disclosed at Rs. 5,00,000 under the head 'business income'. His contention was that personnel had been trained and recruited by the assessee for carrying out duties relating to management activity of Badarpur Thermal Power Station and this fact cannot be denied for obvious reasons and the total disallowance of the amount claimed is not at all supportable. He also referred to the plea taken at the assessment stage that some of the trainees were meant only for Badarpur Thermal Power Station. He submitted that assessee's plea in this regard....
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....round of appeal itself the amount was not taxable and the Commissioner of Income-tax (Appeals) had erred in not treating the same as receipts on capital account going to reduce the capital cost of construction of the company's projects, Shri Ganesan, firstly referred to page 59 of his paper book, which has details of miscellaneous income of the financial year 1980-81. These details are reproduced below: "NATIONAL THERMAL POWER CORPORATION LTD. Assessment year 1981-82 Details of miscellaneous income during the financial year 1980-81 S.No. Particulars Amount 1. Liquidated damages received from contractors. 2,72,527.81 2. Rent recovered from contractors and employees. 3,44,426.21 3. Receipts from sweeping cement 53,421.00 4. Recovery of overhead charges on account of issue of material to con-tractors/suppliers. 33,00,128.72 5. Workshop service charges for repair and maintenance received from contractor. 7,499.14 6. Recovery of overhead charges on issue of diesel etc. 4,46,698.55 7. Earnest money forfeited 47,000.00 8. Other receipts of Misc. nature....
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....at consequential relief will no doubt be available to the assessee when the income computed is recalculated by giving the appeal effect. 52. Before parting with this appeal. we will like to record our great appreciation for the valuable assistance rendered to the Bench by the learned counsel of the assessee and the interveners and the learned departmental representatives. 53. In the result, the appeal of the assessee gets partly allowed. Per Shri Ch. G. Krishnamurthy, President - I agree with all the conclusions reached by my learned Brothers in this appeal. I felt that I should add a few lines of my own to explain why I agreed to subscribe to this view on the major questions although I have been a party to the opposite view taken by the two Special Benches referred to in the order of the Tribunal in the earlier portions. At the time of hearing of those Special Bench appeals, we all felt that the matter was fully covered by the decision of the Supreme Court in the case of Challapalli Sugars Ltd. (supra) by which decision the Supreme Court pronounced that accounting practices and guidelines issued by the Institute of Chartered Accountants of India could be....
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....ank officers' Union v. Union of India [1984] 150 ITR 1 (Delhi), Murli Investment Co. v. CIT [1987] 31 Taxman 410 (Raj.), CIT v. S. Devaraj [1969] 73 ITR 1 (Mad.), CIT v. L.G. Ramamurthi [1977] 110 ITR 453 (Mad.), Tube Investments of India Ltd. v. ITO [1984] 9 ITD 690 (Mad.) (TM), Sree Vadivambigai Textiles (P.) Ltd. v. Third ITO [1985] 11 ITD 125 (Mad.) (TM), First ITO v. Grahalakshmi & Co. [1985] 11 ITD 711 (Mad.) (TM), CIT v. J.K. Cotton Spg. & Wvg. Mills Ltd. [1975] 98 ITR 153 (All.), CIT v. State Trading Corpn. of India Ltd. [1973] 92 ITR 294 (Delhi), Capital Bus Service (P.) Ltd. v. CIT [1980] 123 ITR 404 (Delhi) and Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961 (SC)." 8.2 In the case of Anrak Aluminum Ltd. Vs. DCIT, ITA No. 994/hyd/2017, dated 08/02/2021, the coordinate bench of ITAT, Hyderabad, has held on similar issue, as under: "6. We are now left with the second issue of interest income addition of Rs. 26,45,20,127/- treated as 'income from other sources' in both the lower proceedings. Ld.CIT(A) detailed discussion to this effect reads as under: "5.1 During the course of assessment proceedings, it is noticed by the As....
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....rs Limited vs. CIT 227 ITR 172 (SC), wherein it was held that: "interest earned short term investment of funds borrowed for setting up of factory during construction of factory before commencement of business, has to be assessed as income from other sources and it cannot be claimed as non-taxable on the ground that it would go to reduce interest on borrowed funds. ...... .. In the case before us, the company had surplus funds in its hands. In order to earn income out of the surplus funds, it invested the amount for the purpose of earning interest. The interest thus earned is clearly of revenue nature and will have to be taxed accordingly. The accountants may have taken some other view but accountancy practice is not necessarily good law. In B.S.C. Footwear Ltd. vs. Ridgway (Inspector of Taxes) (1972) 83 ITR 269 (HL), the House of Lords had no hesitation in holding that the accounting practice for calculating Its profit followed by the assessee and accepted by the Revenue for 30 years could not be treated as sanctioned by law and was not acceptable for the purpose of computation of taxable income. " 5.6. In the case of M/s.Bokaro Steel Ltd. (supra), differ....
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....ould be set off against the interest payment. Hence no interest income is assessable in hands. The ITO has rejected the claim and was assessed under Income from other sources. The court held that interest earned by the appellant has rightly been held to be the income and taxable under the head 'Income from other sources'. c) CIT Vs. Coromandal Cements Ltd (1997) [234 ITR 412] (SC) d) CIT Vs. New Central Jute Mills Co. Ltd [1979] [118 ITR 1005](Koll.); In this case the appellant earned interest which was deposited in a bank to receive interest. The difference between interest paid and earned was claimed as revenue expenses. The Kolkata High Court, referred to the observation that in case money borrowed by d newly started company which is 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 the fixed assets which have been created as a result of such expenditure. The Court concluded in favor of the Revenue. "The expenditure assessee has failed to establish that it was its purpose that utilized amount received on loan for earning in....
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.... and, this clearly is a Income from other Sources u/s. 56 of the IT Act, 1961. h) In the case of CIT Vs. Seshasayee Paper & Boards Limited, Hon'ble Madras High Court held that "the interest earned by the assessee on investment of share capital in call deposits have been before production commenced should be assessed separately under the head Other sources". I) CIT vs. Nagarjuna Steel, Hon'ble A.P. High court held that "interest received on short term deposits by a company prior to commencement of production could not be treated as revenue receipt", j) Chalapalli sugar limited Vs. CIT [1975J [98 ITR 167J (SC) held that the Interest was not allowed as revenue expenditure in the period prior to commencement of the business of the assessee. k) In the case of Central Travancore Specialists Hospital Ltd Vs. ACIT, Hon'ble ITAT, Cochin Bench held that "interest earned by the assessee even during the construction period on the short-term deposit kept with the bank is assessable as an income". I) CIT Vs. Universal Electro Graphite Limited [1989] [197 ITR 465], wherein it related to interest on Fixed deposits and let a payment of call money prio....