TaxTMI 
TaxTMI 
2026 (3) TMI 679
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....sing out of assessment order dated 07.12.2023 passed u/s. 143(3) r.w.s. 144B of the Act pertaining to Assessment Year 2021-22. 2. Brief acts of the case are that the assessee is a company, engaged in the business of real estates development and started construction of commercial complex project "Max Square" at sector 129, Noida. The assessee borrowed funds from Indusind Bank amounting to INR 29.45 crores for the construction and further raised funds through issue of Equity/CCD's. The funds which remained un-utilized, were invested temporary in FDRs from which interest was received of INR 63,77,502/- and was credited to the cost of construction. However, the AO has held the same as taxable under the head "Income from Other Sources". 3.....
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....ot liable to tax. 1.2 The Learned CIT(A) has erred both on facts and in law in failing to appreciate that the assessee had borrowed capital specifically for the construction and development of a commercial real estate project and had also raised funds via CCDs and equity for the same purpose. The temporary parking of such funds in fixed deposits was necessitated by the time gap deployment, and the interest earned thereon was adjusted against the project cost, thereby not yielding any real income. 1.3 The Learned CIT(A) has erred both on facts and in law in rejecting the explanation and evidences submitted by the assessee without establishing that the interest income earned was not inextricably linked to the project. The CI....
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....mained ideal for short period, they were temporarily invested only for that period in FDRs and thus had direct communication with the acquisition of the assets and should be treated as capital receipts. The revenue placed reliance on the decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) where the Hon'ble Apex Court 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 reduc....
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.... commenced. But that is not the case here. The assessee may be entitled to capitalise the interest payable by it. 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 sett....
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....uld be said that the assessee has utilised the funds for the purpose of business. However, admittedly assessee has deposited the funds in FDR's for temporary period, since the same was not required immediately. As observed by the Hon'ble 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. 10. The assessee r....
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....r to excavate / mine the stones from the land owned by the company which were used in the construction activity of the company. 11. Looking to such peculiar nature of above stated income, the Hon'ble Supreme Court held that the income received by the company from its contractor 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. It is also relevant to state at this stage that in the case of Bokaro steels, AO has held the interest income received by the company on short term deposits made with banks out of the amounts borrowed by it for the construction wor....