TaxTMI 
TaxTMI 
2021 (7) TMI 321
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed during the pre-operative period and thus the Appellant prays that addition so made deserves to be deleted. Without prejudice and in the alternate- 3. On facts and in the circumstances of the case Ld. CIT(A) has grossly erred in not allowing the corresponding interest borne by the appellant on the borrowed funds, which were utilized in making the short term deposits. Appellant prays that such expenditure being incurred 'in relation to earning of said interest income', deserves to be allowed as deduction from income treated as 'income from other sources'." 2. In ground Nos. 1 and 2, the assessee has challenged the addition by treating the interest of Rs. 3,05,430/- received on STDR made in the pre-commencement period as being income from other sources. 3. In this regard, the ld AR submitted that the assessee company was registered with the objective to carry out the business of cultivators, growers, processors, producers, manufacturers, importers, exporters, buyers, sellers, traders, agents, and dealers in products or by-products of chemical, lac, sheliac, resin, gum, tannin, cutch, guar seeds, guar splits, guar meal, guar gum, guar powder, industrial and h....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... was a government company, which during the period of construction of its plant had advanced money to contractors on which it was earning interest, received rent from quarters let out to employees and had received hire charges on plant let out to contractors also royalty on stones removed from its land. As against this, the appellant had invested funds in TDRs, thus the case of Tuticorin Alkali Chemicals and Fertilizers Ltd was directly applicable to the appellant. Appellant humbly submits that this observation is vague and not relevant, as what is to be differentiated is the nature / character of funds that were utilized to earn such income, whether these funds invested were inextricably linked to the business of assesseee or were surplus and idle funds, which by the way were invested to earn certain income. Thus, the observation that since the assessee utilized the term loan to invest in term deposit, the ratio of decision in the case of Bokaro Steel shall not apply is absolutely vague, and deserves to be ignored. 7. The ld AR further submitted that it is not uncommon for the newly incorporated business enterprises and 'start-ups' to temporarily park their share capital contri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ur 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. On the other hand the ratio of the Supreme Court judgment in Bokaro Steel Ltd. (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. 5.2. 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... STDR being inextricably related to the setting-up of business are eligible to be netted-off against expenditure incurred during the pre-commencement stage and hence deserve to be capitalized. 11. It was further submitted that the ld. CIT(A) while confirming the addition made by ld.AO has observed at para 3.1.2 clause (v) that "the accounting policies adopted by the appellant itself- mentions allocation of the pre-operating expenses towards fixed assets and there is no mention of netting off of pre-operative income against pre-operative expenses. Thus, the appellant is not expected to go beyond the accounting policies adopted by it." In this regard, it was submitted that the said accounting policy duly quotes the amount of pre-operating expenses to be capitalized at Rs. 35,32,902/- which is arrived at after netting off the income earned during the pre-operative span and thus duly supports the version of appellant that the interest on STDR was indeed a pre-operative income, earned on funds parked during the idle time-span of pre-construction period and thus deserves to be capitalized and prays accordingly. 12. In respect of ground no. 3, the ld AR submits that in the event suc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rence that the same is now concluded by its earlier decision in case of Tuticorim Alkali Chemicals and Fertilizers Ltd. vs. CIT. It was further submitted that the issue of treatment of interest received from contractor and interest income received from the banks on account of short term deposits was again discussed by the Hon'ble Supreme Court in case of Bokaro Steel Ltd at para 7 of its decision and it was held that "the company, may also in that case keep the surplus funds in short terms deposits in order to earn interest and such interest will be chargeable under section 56 of the Act. This Court also emphasized the fact that the company was not bound to utilize the interest so earned to adjust against the interest paid on borrowed capital. The company was free to use this income in any manner it liked" and therefore interest earned by investing borrowed capital in short term deposit is an independent source of income not connected with construction activities. It was accordingly submitted that the decision of CIT vs. Bokaro Steel Limited as relied upon by the ld. AR in fact supports the stand taken by the Revenue and is consistent with the earlier decision in case of Tuticorin ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....income as income from other sources and made the addition. (ii) During the appellate proceedings, the appellant filed the final accounts for the FY 2013-14. It was specifically mentioned in notes in accounts that the company commenced its commercial production on 30th Nov, 2013. Regarding capitalization of preoperative expenses, the notes on accounts reads as under:- 2. Capitalization & pre-operative expenses: All the fixed assets have been capitalized on the date of commercial production, i.e., 30th of November, 2013 (except vehicle & computer), since this date has been construed to be the date of put to use for all the assets. Pre-operative expenses incurred till 30th of November, 2013 have been apportioned to the fixed assets of the company on value wise pro-rata basis on the same date. Expenses incurred during the implementation period of the project and during trial runs have been capitalized, whereas income earned out of trial runs have been netted from pre-operative expenses." (iii) The appellant mainly relied on the judgment of Hon'ble Apex Court in the case of CIT vs. M/s Bokaro Steel Ltd. [1999] 236 ITR 315 (SC). However, t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee company has parked these funds in short term deposits with the bank and has earned interest income thereon. 17. The claim of the ld AR on behalf of the assessee is that in order to minimize its interest burden, the assessee company has parked the interim/excess funds in short term deposit receipts with the bank and the interest so received will go to reduce pre-operative expenses and cannot be taxed as "income from other sources" as has been done by the Assessing Officer and confirmed by the ld. CIT(A). In the alternate, it has been contended that interest on borrowed funds to the extent invested in STDR may be allowed to be deducted from interest income u/s 57(1)(iii) of the Act. In support of its contention, the assessee has relied on the decision of Hon'ble Supreme Court in case of Bokaro Steel Limited and the decision of Hon'ble Delhi High Court in case of Indian Oil Panipat Power Construction Ltd. 18. Per contra, the ld. DR submitted that the surplus funds were invested in short terms deposits in order to earn interest income and such interest income has rightly been brought to tax as chargeable under the head 'income from other sources" and there is no basis for clai....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or consideration is whether the interest income of Rs. 22,35,48,281/- received by the assessee on temporary deposit of funds in with banks is assessable as income of the assessee or it would go to reduce the cost of borrowings? In other words, whether the interest amount of Rs. 22,35,48,281/- received by the assessee would be set off against the interest payment of Rs. 127,84,98,794/- on the borrowed funds. As rightly submitted by the learned CIT DR, the Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) had examined an identical situation. The question which was referred to the Supreme Court is as follows: "Whether, on the facts and in the circumstances of the case, interest derived by the assessee from borrowed funds which were invested in short term deposits with banks would be chargeable to tax under the head 'Income from other sources' or would go to reduce the interest payable by the assessee on the term loan secured by the assessee from financial institutions which would be capitalised after commencement of commercial production?" 17. In the case before the Apex Court, the assessee for the purpose of setting up of a fact....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... But what the assessee cannot claim is adjustment of this expenditure against interest assessable under section 56. Section 57 of the Act sets out in its clauses (i) to (iii) the expenditures which are allowable as deduction from income assessable under section 56. It is not the case of the assessee that the interest payable by it on term loans is allowable as deduction under section 57 of the Act. If that be so, under which other provision of law can the assessee claim deduction or set-off of his income from other sources against interest payable on the borrowed funds? There are specific provisions in the Income-tax Act for setting off loss from one source against income from another source under the same head of income (section 70), as well as setting off loss from one head against income from another (section 71). In the facts of this case the company cannot claim any relief under either of these two sections, since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting year. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the interest receipts." An assessee-company may have raised its capital by issue of shares or debentures or by borrowing. But when that capital or a portion of it was utilised for whatever reason, even for a short period, to earn interest, that interest must be treated as revenue receipt and will have to be taxed accordingly. Any set off or deduction of any expenditure can only be made in accordance with the provisions of the Act.' In view of the observation of the Apex Court, it is obvious that the Apex Court is conscious of the provision of section 57(iii) and it was held that when the assessee borrowed the funds for business, the interest earned on short term deposit of such funds cannot be allowed as deduction. 19. We have carefully gone through the judgment of the Madras High Court in Seshasayee Paper Boards Ltd. (supra). The assessee company invested its paid-up share capital and loans obtained from banks and received interest income. The interest income received by the assessee was adjusted towards the interest payable on its loan. Accordingly the interest received by the assessee was not offered as income for taxation. The claim of the assesse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ness. In this case the assessee has deposited the funds in FD for a temporary period, since the same was not required immediately. As observed by the Madras High Court in the case of Seshasayee Paper and Boards Ltd. (supra) which was approved and confirmed by the Apex Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) the interest earned by the assessee by investing the borrowed fund which was not required immediately in fixed deposit has nothing to do with the actual borrowing. The payment of interest has no connection with the receipt of interest. Admittedly the borrowing has not been made for the purpose of earning interest income in which case alone the interest received by the assessee can be deducted from the interest payable. In view of the judgment of the Madras High Court in the case of Seshasayee Paper and Boards Ltd. (supra) and the judgment of the Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), we are unable to uphold the contention of the assessee. The distinction sought to be made by categorising the funds as committed funds and surplus funds, in our view, cannot be accepted as in both the events the nature of fund is the t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tor to excavate/mine the stones from the land owned by; the company which were used in the construction activity of the company. In this connection, the Hon'ble Supreme Court held that the income received by the company ie. from the contractor under various sources mentioned above is inextricably linked with the setting up of the factory building/capital structure of the company and, therefore, such income has to be treated as capital receipt going to reduce the cost of construction of the assessee company. 22. However, in the same case of Bokara Steel Ltd. (supra), there was an issue with regard to treatment of interest income received by the company on short term deposits made with banks out of the amounts borrowed by it for the construction work which were not immediately required. On this issue, the AO treated the interest received as income of the assessee from "other sources" and brought to tax accordingly. However, as observed by the Hon'ble Supreme Court, the assessee had accepted the same and not filed any appeal against such finding and decision of lower authorities before Supreme Court. In view of this, Hon'ble Supreme Court made a mention i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mpany purchases rented house and gets rent, such rent will be assessable to tax under section 22 as income from house property. Likewise, the company may have income from other sources. The company may also, as in that case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under section 56 of the Act. This court also emphasized the fact that the company was not bound to utilise the interest so earned to adjust it against the interest paid on borrowed capital. The company was free to use this income in any manner it liked. However, while interest earned by investing borrowed capital in short-term deposits is an independent Source of income not connected with the construction activities or business activities of the assessee the same cannot be said in the resent case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee-company. They must, therefore, be viewed as capital receipts going to reduce the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... income received during the period prior to the commencement of business, more so, income received from the contractor undertaking the work of set up of the business of the assessee, has once again been made out by the Hon'ble Supreme Court in its later decision in the case of Bongaigaon Refinery and Petrochemicals Ltd. (supra). In this judgment, the Hon'ble Supreme Court has reiterated the law that excluding interest derived by the assessee during the period prior to the commencement of business, other items of income such as hire charges for it equipment and recoveries from contractors on account of water and electricity charges shall be adjusted against the project cost or the business of oil refinery and petro chemicals. As such, in regard to interest income earned prior to commencement of the business, it is once again reiterated by the Hon'ble Supreme Court as income under "other sources" by reiterating the law laid down in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). The relevant portion of - the said decision of Hon'ble Supreme Court is reproduced below: "The High Court has already held that the interest income derived by the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... inter alia, held that in view of section 57(iii) of the Income-tax Act, interest paid on overdraft obtained for the purpose of business could not be deducted from the interest earned on monies kept in fixed deposits as such income derived by way of interest on fixed deposits was to be taxed under the head 'Income from other sources. We, however, make it clear that though the assessee may not be entitled to have interest paid by it on overdraft to the bank, deducted from the interest received by it on the short-term fixed deposits, the assessee is entitled to deduction of the same from its business income." 27. In view of this judgment of the Madras High Court and the judgment of the Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), and other judgments of Hon'ble Supreme court, in our opinion, the judgment of the Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. (supra) and other case relied on by Ld. Counsel in his arguments may not be applicable to the facts of this case. In view of the above discussion, we do not find any infirmity in the order of the lower authority. Accordingly, the same i....