AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2023 (2) TMI 1055
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....e business of Design, Build, Finance, Operate and Transfer (DBFOT) for the rehabilitation, Strengthening and Four laning of Jammu Udhampur Section of National Highway-1A, from KM 15.00 (On Jammu Bypass) to KM 67.00 on Annuity basis in the State of Jammu and Kashmir. 4. Assessing Officer observed from the statement of Profit and Loss Account for the year ended 31.03.2014, for the sake of clarity Profit and Loss Account is reproduced below: - Interest Income & Other Income vs. Pre-Operative Expenses: 5.1 The Statement of Profit & Loss for the year ended 31.03.2014 is reproduced as under: Particulars Current Year Previous Year Revenue from Operation --- --- Other Income Interest on Fixed Deposits 9,19,15,998 16,51,48,295 Interest on IT Refund 8,06,463 Particulars Current Year Previous Year Miscellaneous Income 87,089 9,28,09,550 Finance Cost 10,06,03,172 Depreciation & Amortization expenses 8,19,490 Other Expenses 1,05,98,848 11,20,21,510 17,28,53,505 Profit ....
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....ed and transferred to Capital Work in Progress as no income has been generated and offered to tax, from the respective project." 6. In response, Ld. AR of the assessee submitted that the assessee is into construction of road between Jammu and Udhampur and as required by statutes concerning Companies Act, 1956 and Income Tax Act, 1961, assessee has complied with requirements of Accounting Standard 10, being Accounting of Fixed Assets. The assessee has computed the construction cost and allied cost which are directly attributable to the construction of the project and bringing it to its working condition and the balance costs are excluded and charged to Profit and Loss Account. It was stated that the activity is duly audited by the concerned auditors. With respect to allowability of expenses charged to Profit and Loss Account, assessee has received interest from the Fixed Deposits made out of the funds borrowed. Since the interest is charged to profit and loss account, interest received is also credited to Profit and Loss Account. Without prejudice to the stated above, in case Assessing Officer treats interest as part of income from other sources, Assessing Officer was requested t....
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....zers Ltd. v. CIT [227 ITR 172 (SC)]. 9. Further, he observed from the nature of expenditure and the over-all facts that the assessee is still executing the road project between Jammu & Udhampur and the same is not yet started giving returns to the assessee, it can be clearly said that the expenses incurred are preoperative in nature and accordingly, he also disallowed the expenditure. Accordingly, he treated the interest income earned by the assessee which is credited in the Profit and Loss Account, he treated as income from other sources, accordingly, he brought the above said income under the head income from other sources. 10. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and filed detailed submissions, for the sake of clarity it is reproduced below:- "The AO erred in determining the total Income of the Appellant at Rs. 9,28,09,550/- as against returned Loss of Rs. 1,92,11,960/- and further, the AO erred in treating expenses debited to Profit & Loss Account of Rs. 11,20,21,510/- as Pre-Operating Expenditure and thereby adding it into Work in Progress. The Assessing Office has taken recourse of Tuticorin Alkali Chemicals & Fertilizers Ltd. vs....
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....cept as provided by the Act. Section 145 of the Act has been amended by Finance Act 1995 w.e.f 1/4/1997. The amended section is reproduced below: "(1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-Section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144" Related Accounting Standards for accounting of Fixed Assets and accounting of Borrowing Cost areAS10andAS 16 respectively. Para 9.3 of the Accounting standard for fixed Ass....
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....ching concept lies in the view that all costs which are associated to a particular period should be compared with the revenues associated to the same period to obtain the net income of the business. 5. We refer the case of [2012] 25 taxmann.com 401 (Delhi) HIGH COURT OF DELHI NTPC Sail Power Company (P.) Ltd. v. Commissioner of Income-tax. In this case, the assessee-company was in the business of running a power plant and under its expansion plan, it proposed to set up a new unit. It raised a term loan for setting up new plant and separate books of account were maintained for the same. For financing the expansion plan, the assessee-company raised additional capital of Rs.45,000 lakhs during the year The assessee-company earned total interest receipts of Rs. 616.73 lakhs during the year. The interest was earned on temporary deposits from the surplus funds and on the deposits made with banks by way of margin or giving advances, etc. For the purpose of expansion. Such interest earned was of Rs 331.58 lakhs. The balance or difference, of interest of Rs. 285.15 lakhs, which had been admitted as a normal income, did not relate to expansion work. The interest earned on t....
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....ds interest paid for fixed deposits when the borrowed funds could not be immediately put to use for the purpose for which they were taken, this Court, and indeed the Supreme Court held that if the receipt is "inextricably linked" to the setting up of the project, it would be capital receipt not liable to tax but ultimately be used to reduce the cost of the project. By the same logic, in this case too, the funds invested by the assessee company and the interest earned were inextricably linked with the setting up of the power plant. It may be added that the Tribunal has not found that the deposits made as margin monies were not limited to the construction activity connected to the expansion of the business by way of setting up of a new power generation plant. 11. As a result of the above discussion, it is held that the Tribunal and the lower authorities fell into error in holding that the interest earned on fixed deposit of amounts borrowed, which is the subject matter of the present appeal, would have to be treated as revenue receipt. The answer is given in favour of the assessee, the appeal is consequently allowed 6. Similar was the position in the case of Indian ....
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....t 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 to be classified as income under the head "profit and gains of business or profession" it would have to be an activity which is in some manner or form connected with business. The word "business" is of wide import which would also include all such activities which coalesce into setting up of the business. Once it is held that the assessee's income is an income connected with business, which would be so in the present case, in view of the finding of fact by the CIT(A) that the monies which were inducted into the joint venture company by the joint venture partners were primarily infused to pu....
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....d assessee is in appeal before us raising following grounds in its appeal: - "1. That the learned Commissioner of Income Tax, (Appeals), has erred in confirming the total income of the Appellant at Rs. 9,28,09,550/- as against returned loss of Rs.1,92,11,960/ 2. That the learned Commissioner of Income Tax, (Appeals), has erred in confirming the treatment of expenses debited to Profit & Loss Account of Rs 11,20,21,510/- as pre- operative Expenditure and thereby adding it into work in progress without appreciating the fact that major cost has been capitalized by the appellant and only cost which specifically relates to administration and other general overhead expenses are debited to profit and loss account. 3. That the learned Commissioner of Income Tax, (Appeals), has erred in confirming treatment of entire interest income of Rs 9,28,09,550/- derived on fixed-deposit-with bank, credited in Profit & Loss Account as Income from other sources. In doing so, the assessing officer ignored the fact that earning interest by putting additional funds in fixed deposits was inextricably linked with the project of the assessee. 4. Without prejudice to ground ....
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....the main issue in the appeal. 1. The above appeal has been filed by the above appellant against the order dated 27.12.2018 passed by CIT(A)-8, Mumbai for A.Y.2014-15, which was passed against the Assessment Order dated 25.12.2016 by DCIT, 3(3)(2), Mumbai. 2. The appellant company is engaged in the business of design, build, finance, operate and transfer for the carpeting, strengthening and four-laning of Jammu-Udhampur Section of NH-1A on an annuity basis in the state of J & K under the concession agreement dated 19.07.2010 with NHAI and is in the construction/pre-operative stage during the year under consideration. 3. The main issue arising out of the grounds of the appeal of the appellant is the confirmation by CIT(A) of a sum of Rs.9,28,09,550/-, being interest income from Fixed Deposits, taxed under the head 'Income from Other Sources' by the Assessing Officer, whereas the appellant claimed the same to be income from Business. The above interest income has been earned by the appellant from Fixed Deposits made during the construction period before completion of the project by the appellant. 4. During the course of hearing before Hon....
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....out of the funds borrowed. Since the interest is charged to profit and loss account, interest received is also credited to P & L Account without prejudice to what written herein above, in case your Honour treats interest as part of income from other sources, your Honour is requested to treat interest paid and charged to P & L Account as deduction from the interest earned and charged under the head Income from Other Sources". The A.O. in his assessment order dated 05.12.2016 has elaborately discussed the above issue in para 5 of the assessment order. The CIT(A) has also elaborately dealt with the above issue and cited various judicial pronouncements in his decision to confirm the above assessment on the issue. 5.1 Before Hon'ble ITAT, the appellant has filed the written submission dated 24.03.2021 in the paper book and as per para 9, the main argument of the appellant now before Hon'ble ITAT is that the above interest income is not to be taxed as Income from Other Sources but as Income from Business as the interest income earned on Fixed Deposits is from funds which are inextricably linked with project funds and (a) the assessee was constrained to keep the funds in ....
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.... Apex Court in the case of Bongaigaon Refinery and Petrochemicals Ltd. Vs. CIT (2001) (119 taxman 488) (SC) dated 24.07.2001 which have been elaborated discussed by CIT(A) in para 3.1.6 to 3.1.8 of his order. These two decisions are also given after 1988 amendment in the section 56 of the Act but have supported the proposition of the Apex Court in the earlier case of Tuticorin Alkali Chemicals and Fertilizers on the above issue and the treatment of such interest income from FDs. 5.3 The CIT(A) in para 3.1.6 has elaborated that the Hon'ble Supreme Court in the case of CIT VS. Bokaro Steel Ltd. (supra) has differentiated between surplus funds being kept in short term deposits and interest received therefrom and the amounts received under five different heads during the construction phase which were held as inextricably linked with the process of setting up of the company's plant and machinery and held that the latter would go to reduce the cost of assets as these receipts are of a capital nature. In para 4 of the order of the Apex Court in the above case it was clearly held that "during these assessment years, the respondent assessee had invested the amount borrowed ....
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....) may be confirmed. I also rely on the assessment order and the order of the CIT(A) on any other issue involved in this appeal." 15. Further, he brought to our notice Page No. 8 of the agreement in which it was allowed to make the investment only in the permitted investment the details are clearly given in at Page No. 8 of the Paper Book. 16. Considered the rival submissions and material placed on record, we observe that the assessee is carrying on the business of Design, Build, Finance, Operate and Transfer (DBFOT) for the rehabilitation, Strengthening and Four laning of Jammu Udhampur Section of National Highway. We observe from the record that assessee in the process of laying the National Highway in Jammu Udhampur section and the project is still underway and we observe that assessee has paid interest expenditure as well as earned interest income from the funds deposited in the bank. The Assessing Officer disallowed the expenditure claimed by the assessee with the observation that assessee has not earned any business income relating to the project which is yet to commence. Therefore, he treated the expenditure claimed by the assessee as part of the capital work-in-progres....
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....), Bokaro Steel Ltd. 236 ITR pg. 315 (SC), The Road Infrastructure Development Company of Rajasthan Ltd. ITA. No. 628/JP/2014 Jaipur, Andhra Pradesh Expressway Ltd. ITA. No. 663/M/2015 & Karnataka Power Corporation Ltd. 247 ITR 268. However, on the other hand, the Ld. Representative of the revenue has refuted the said contention. The factual situation is not in dispute to the fact that the assessee received the loan and credited in his account lies with Bank of India who credited the interest in the account of the assessee. It is to be seen whether the said interest income is required to be treated as income from business or income from other sources. The assessee company is a special purpose vehicle (SPV) promoted by IL&FS Transportation Network Ltd. The company has entered into a Concession Agreement on 08.10.2009 with the National Highways Authority of India to Design, Engineers, Finance, Procure, Construct, Operate and Maintain 4 laning, Hazaribagh-Ranchi section of NH-33 on BOT basis in the state of Jharkhand. In the year of assessment, the assessee did not commence its business. All the expenses have been shown under capital work-in-progress. The assessee took the loan for th....
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....e as Infrastructure Development Company of Rajasthan Ltd. Vs. DCIT dated 11.08.2016 has held that the interest income upon the deposit by the assessee for the utilization of fund for the project, is liable to be treated as business income. The finding is hereby mentioned below for ready reference.: - "2.10 We have heard the rival contentions and pursued the material available on record. We find that both the parties have relied upon the decisions of the Hon'ble Supreme Court and in addition, the assessee has relied upon the decisions of Hon'ble Delhi High Court. Therefore, it would be appropriate to first refer to these decisions and some of the other recent decisions of Hon'ble High Courts and Coordinate Bench decisions. 2.11 In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), the Hon'ble Supreme Court held as under:- "The facts of this case were not in dispute. In the usual course, interest received by the company from bank deposits and loans would be taxable as income under the head Income from other sources' under section 56. It was argued on behalf of the company that it had not yet commenced its business and in any event if ....
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....l, the amount is of the revenue nature and if so, the amount will have to be taxed. It is true that the Supreme Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act. Whether a particular receipt is of the nature of income and falls within the charge of section 4 is a question of law which has to be decided by the Court on the basis of the provisions of the Act and the interpretation of the term 'income' given in a large number of decisions of the High Courts, the Privy Council and also this Court. It is well-settled that income attracts tax as soon as it accrues. The application or destination of the income has nothing to do with its accrual or taxability. It is also well settled that interest income is always of a revenue nature unless it is received by....
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.... if the assessee received any amounts which were inextricably linked with the process of setting up its plant and machinery, such receipts would go to reduce the cost of its assets. These were receipts of a capital nature and could not be taxed as income. The same reasoning would apply to royalty received by the assessee company for stones, etc., excavated from the assessee-company's land. The land had been allowed to be utilised by the contractors for the purpose of excavating stones to be used in the construction work of the assessee's steel plant. The cost of the plant to the extent of such royalty received, was reduced for the assessee. It was, therefore, rightly taken as a capital receipt." 2.13 That the Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. (supra), after considering the decisions in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and Bokaro Steel Ltd. (supra) at length, held 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 & Fertilizers Ltd.'s case (supra) and that of Bokaro Steel Lt....
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....sed to purchase land and to develop infrastructure - then it cannot be held that the income derived by parking the funds temporarily with Tokyo Mitsubishi Bank, will result in the character of the funds being changed, inasmuch as, the interest earned from the bank would have a hue different than that of business and be brought to tax under the head 'income from other sources'. It is well-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 Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 (SC) and CIT v. 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 prio....
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....ricably 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 aside." 2.14 That the Hon'ble Delhi High Court in the case of Sasan Power Ltd (supra) following the decision in case of Indian Oil Panipat Power Consortium Ltd. (supra), has held as under: "14. It is clear from the facts stated above that Commissioner of Income Tax (Appeals) and tribunal have specifically held that the interest income was on capital account. We have gone through the grounds of appeal and do not find any reason or justification to upset the said finding. The factual findings recorded by the CIT(Appeals) and tribunal are not under challenge. The CIT(Appeals) and the tribunal have held that in view of the factual position quoted above the decision of the Supreme Court in CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 / 102 Taxman 94 was applicable as the Commitment Advance, which had been paid to PFC. This is not a case of surplus funds, which were available and....
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....ra) would squarely apply to the facts of the present case and the Tribunal was right in applying the same. 13. In the present case, there is a finding of fact that the money placed in the fixed deposit was inextricably linked with the setting up of the power plant. Thus, the revenue generated on account of interest on the said fixed deposits would be in the nature of a capital receipt and not a revenue receipt. This case has been decided on the basis of this principle and not on the basis that the source of the funds was through raising of share capital and not through borrowings." 2.16 The Coordinate Bench in case of Adani Power Ltd. v. Assistant Commissioner of Income-tax, Range-1, Ahmedabad [2015] 61 taxmann.com 355 (Ahmedabad - Trib.) has held as under: "From the above, it is evident that the Hon'ble Delhi High Court has considered and interpreted the decisions of Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) as well as Bokaro Steel Ltd. (supra). The conclusion of the Delhi High Court is in fact the law which emerges as per the decision of Hon'ble Apex Court. Therefore, in our opinion, the CIT(A) w....
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.... justified in applying the judgments given in Bokaro Steel, and Karnal Cooperative Sugar Mill's case. If this question were to come originally before us, perhaps we might have taken a task of undertaking the exercise, as to which of the views is required to be followed, and may be, that we might have come to any conclusion, either ways. In such circumstances, when the learned Tribunal, after examining all the three judgments, in Tuticorin's case (supra), Karnal Cooperative Sugar Mill's case (supra), and Bokaro Steel's case (supra), has examined the question, and found Karnal Cooperative's case (supra) to be the nearest, and latest case, on facts, in our view, it cannot be said, that the Tribunal was wholly wrong in adopting this course. It would have been equally the same situation, if the learned Tribunal would have adopted the other line of reasoning, following the judgment in Tuticorin's case (supra). 14. Therefore, when there are two sets of judgments of Hon'ble Supreme Court, proceeding on different lines of reasoning's, and both stand on their own logical footing, and in that event, if the learned Tribunal has accepted one line of reasoning, suppor....
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.... on such borrowed funds infused in the business could not be classified as income from other sources. We also note a distinguishing feature in the instant case that the assessee is not at liberty to use the interest so earned as per its will and discretion unlike the case in Tuticorin Alkali Chemicals & Fertilizers (supra) and the interest has to be used solely for the purposes of implementation of the specified projects only. The impugned interest receipt of Rs. 35,39,479/- on such borrowed funds relates to the mega road projects/stretches which were under construction and the completed road projects/stretches up to the date of commencement of commercial operations. Therefore, the interest received prior to commencement of commercial operations of the specified mega road projects will be in the nature of capital receipt and will be required to be set off against the preoperative expenditure capitalized under the head "Capital work-in-progress" and the same cannot be brought to tax under the head "income from other sources". Hence, ground no. 1 of the assessee is allowed. 3. In ground No.2, the assessee has challenged the action of the Ld.AO in double taxation of interest ....