TaxTMI 
TaxTMI 
TaxTMI 
2025 (10) TMI 943
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....interest income earned on the unutilised fund should be taxed under income from other sources?" 2. Briefly the facts of the case are that the assessee-company has entered into a concession agreement on 29th June, 2010, with the National Highways Authority of India for rehabilitation, strengthening and four laning of Chenani to Nashri section of NH-1A on BOT basis in the state of Jammu & Kashmir. During the year under consideration, the project was under construction and the assessee company accounted for all direct and attributable expenses for construction of highway to capital work in progress account. During the course of assessment proceedings, the AO observed that the assessee has earned interest of Rs. 3,44,38,898/- on fixed deposits which has been capitalized treating as 'business income' and reduced from the cost of the capital work-in-progress and the assessee was asked to explain as to why the interest amount should not be treated as revenue in nature and be brought to tax under the head 'income from other sources'. 3. In response, the assessee vide its submissions dt. 16-02-2015 submitted that it has undertaken the project of infrastructure facility being construct....
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....urther reliance was placed on the decision of the Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd., 181 Taxman 249 and the decision of the Hon'ble Supreme Court in the case of Bokaro Steel Ltd. 236 ITR 315 and it was submitted that the interest earned be treated as business receipt having the character of capital in nature and the same can be reduced from the capital work-in-progress and the same need not be offered to tax separately in the hands of the assessee. 4. The submissions of the assessee were considered but not found acceptable to the AO. As per the AO, though the assessee has earned the interest on unutilized borrowed funds parked in fixed deposit, it is not business of the assessee. It was held that the interest was earned on the unutilized borrowed funds and the same were not parked with the banks for the purpose of any business obligation. The funds were parked with clear intention to earn the extra income by way of interest. Further, the assessee was not engaged in the business of money lending and borrowing and merely invested or parked its unutilized funds for short or specific period to earn interest. Since the interest earned is....
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....nd also by following another co-ordinate bench decision, in the case of Infrastructure Development Company of Rajasthan Ltd. vs DCIT held that interest earned from time deposits kept out of surplus funds available to the assessee out of project funds is deductible from the capital working progress. The relevant findings are discussed in detail by the honorable jurisdictional ITAT in the case of Hazaribagh Expressway Ltd for AY 2012-13 [Ι.Τ.Α No.6696/Mum/2017 pages 10-12] dated 22/01/2020. Respectfully following the jurisdictional ITAT decision, I am of the firm opinion that the interest income from time deposits kept in banks out of surplus funds of the project is rightly reduced from capital work in progress. The grounds of the appellant regarding interest income is hereby allowed." 6. Against the said findings of the Ld.CIT(A), the Revenue is in appeal before us. 7. During the course of hearing, the Ld.DR relied on the order of the AO as well as the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (supra) and submitted that the Ld.CIT(A) has allowing the relief to the assessee whereby the assessee has ....
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....quiring certain assets as well as in incurring various expenditure relating to the project. The project cost as on 31-03-2012 was Rs. 11,37,15,22,907/- after reducing interest on fixed deposits of Rs. 3,44,38,900/-. Since the capital cost of Rs. 1137.15 crores is higher than the borrowed funds of Rs. 906.54 crores, therefore, the assessee does not have surplus funds available with them for making any investment. It was accordingly submitted that the activity of making investments for a short period of time is undertaken to reduce the overall cost of the project. The funds which are sanctioned and disbursed, but are not immediately required for disbursement are parked for a short period of time to earn the income which will reduce the burden on the company and this activity is inextricably linked to the activity of construction of road. Further, the company is engaged in only one business activity viz., road construction, operation and maintenance and the activity of investment is directly linked and related to such business activity. Thus, the interest earned on fixed deposits being inextricably linked to the construction project goes on to reduce the construction cost and hence, r....
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....the same, the sum of Rs. 3,44,38,900/- should not be taxed under the head 'income from other sources' as the same has to be reduced from capital work-in-progress. He accordingly supported the order of the Ld. CIT(A) and submitted that the appeal of the Revenue may thus be dismissed. 10. We have heard the rival contentions and perused the material available on record. The relevant facts necessary for adjudication of the matter under consideration are that the assessee-company had entered into a concession agreement on 29th June, 2010, with the National Highways Authority of India for rehabilitation, strengthening and four laning of Chenani to Nashri section of NH-1A on BOT basis in the state of Jammu & Kashmir and during the year under consideration, being the second year, the project was under construction and the assessee company accounted for all direct and attributable expenses for construction of highway in capital work in progress account. As per audited financial statements, the assessee company had paid up share capital of Rs. 3,72,00,00,000/-, borrowed long term funds of Rs. 9,06,54,00,000/- and the project cost under capital work in progress of Rs. 11,37,15,22,907/- as ....
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....awn in the impugned order, material available on record, assertions made by the Id. respective counsel, if kept in juxtaposition and analyzed, it is noted that the Ld. Commissioner of Income Tax (Appeals) followed the decision Apex Court in the case Tuticorin Alkali & Fertilizers Ltd. v. CIT 227 ITR 172 (SC) and decided against the assessee. The relevant portion from the aforesaid order from Hon'ble Apex Court is reproduced herein from Hon'ble Chemical under for ready reference and analysis:- The basic proposition that has to be borne in mind in this case is that it is possible for a company to have six different sources of Income, each one of which will be chargeable to income-tax. Profits and gains of business or profession is only one of the heads under which the company's Income is liable to be assessed to tax. If a company has not commenced business, there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed. If the company, even before it commences business, invests the surplus funds in its hands for purchas....
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....Tribunal misdirected itself in law in holding that interest which accrued on funds deployed with the bank could be taxed as Income from other sources and not as capital receipt liable to be set off against pre-operative expenses"? 4. We are called upon to really decide as to whether given the facts obtaining in the assessee's case it would be covered by the line of cases which follow the ratio of the decision of the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. [1997] 227 ITR 172 or those which follow the ratio of the Supreme Court in the case of CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315. At the outset, we must note that the Supreme Court in the case of Bokaro Steel Ltd. [1999] 236 ITR 315 has noticed the judgment of the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. [1997] 227 ITR 172. Therefore, in these circumstances it would be incumbent to note the following brief facts as recorded by the authorities below. 5. The assessee-company was incorporated on October 6, 1999, in pursuance of a joint venture entered into between Indian Oil Corporation and Marubeni Corporation of Japan. The joint venture was conceived to set up....
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....y virtue of the impugned judgment, has reversed the decision of the Commissioner of Income-tax (Appeals). 10. It is important to note that the Tribunal without holding that the finding of fact of the Commissioner of Income-tax (Appeals), that the interest earned was "inextricably linked" with the setting up of the power plant reversed the decision of the Commissioner of Income-tax (Appeals) by making a bald observation that the deposit of share capital has no or very remote connection with setting up of plant and machinery". The Tribunal further observed hat it was an independent income earned in a similar fashion as * was the case in Tuticorin Alkali Chemicals [1997] 227 ITR 172 (SC). 11. In our opinion, the Tribunal has misconstrued the ratio of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals [1997] 227 ITR 172 and that of Bokaro Steel Ltd. [1999] 236 ITR 315. The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals [1997] 227 ITR 172 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 dep....
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....k would have a hue different than that of business and be brought to tax under the head Income from other sources". It is wellsettled that an income received by the assessee can be taxed under the head Income from other sources" only if it does not fall under any other head of income as provided in section 14 of the Act. The head Income from other sources" is a residuary head of income. See S. G. Mercantile Corporation P. Ltd. v. CIT [1972] 83 ITR 700 (SC) and CIT v. Govinda Choudhury and Sons [1993] 203 ITR 881 (SC). 13. It is clear upon a perusal of the facts as found by the authorities below that the funds in the form of chare capital were infused for a specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre-operative expenses. In the case of Tuticorin Alkali Chemicals [1997] 227 ITR 172 it was found by the authorities that the funds available wit....
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....bove expenses." 15. 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 latter situation it cannot be capitalized. To test the principle we could extend the example, that is, would our answer be any different had assessee passed on the interest to the respective shareholders. If not, then, in our view, the only conclusion possible is that interest earned in the present circumstances ought to be capitalized. 16. In view of the discussion above, in our opinion, the Tribunal misdirected itself in applying the decision of the Supreme Court in Tuticorin Alkali Chemicals [1997] 227 ITR 172 in the facts of the present case. In our opinion, on account of the finding of fact returned by the Commissioner of Income-tax (Appeals) that the funds infused in the assessee by the joint venture partner were inextricably linked with the setting up of the plant, the interest earned by the assessee could not be treat....
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....since been followed by the Coordinate Benches of the Tribunal in case of Infrastructure development Company of Rajasthan Ltd and Hazaribagh Ranchi Expressway Ltd. Further, the ld AR has drawn our reference to recent decision of the Hon'ble Delhi High Court in case of International Coal Ventures Pvt Ltd where following its earlier decision in case of Indian Oil Panipat ltd, the Hon'ble Delhi High Court has reiterated the legal position that interest earned on funds which were called for and earmarked for acquisition of coal mine and which were temporarily kept in fixed deposits in the course of acquisition of the coal mine to set up the business would require to be accounted for as part of the capital value of the asset and required to be credited to capital work in progress and cannot be brought to tax and the relevant findings therein read as under: "40. In view of the above, the key issue is whether interest on funds deposited in the short-term fixed deposit can be construed as incidental to setting up the business acquisition of a coal mine. Plainly, if the interest is earned on the amounts which were temporarily kept in fixed deposits in the course of acquisition of th....