SUNIL KUMAR YADAV:-These appeals are preferred by the Revenue against the common order of the ld. CIT(A) relating to assessment years 2007-08, 2008-09 and 2009-10 on a common ground except the difference in quantum. We, however, for the sake of reference, reproduce the ground raised in I.T.A. No. 659/LKW/2013 as under:-
“That the ld. CIT(A) has erred in law and on facts in allowing the relief of Rs. 17,28,644/- without appreciating the facts that no expenditure can be set off against interest income during the construction period as held by the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (1997) 227 ITR 172.”
2. The facts in brief on the impugned issue borne out from the record are that the assessee-company was incorporated on 21.6.2004 for construction of Multiplex and Shopping Malls. The assessee accordingly purchased a plot of land and raised construction thereon. The company has applied for term loan from various banks and got them sanctioned also. The loan was kept in bank in the form of FDRs and assessee earned interest thereon. The Assessing Officer, having relied upon the judgment of the Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (supra), has treated the interest income as income from other source, as the construction was not complete during the impugned assessment years and the expenses incurred by the assessee were capitalized as preoperative expenses. Accordingly addition was made.
3. The assessee preferred an appeal before the ld. CIT(A) with the submission that the judgment of the Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (supra) is applicable only when interest income can be treated as revenue receipt, if arisen out of surplus fund out of borrowed funds are parked to earn interest during the construction period. The company has no idle/surplus fund in hand to park with bank to earn interest but solely dependent upon borrowed funds. The assessee-company has borrowed loans to meet capital obligation and expenditure as and when required. As it takes some routine time between contractual and its execution, funds borrowed were temporarily deposited for that period and earned interest out of it. It has reduced the borrowing cost and project cost, therefore, the payment of interest on borrowed fund, interest received on fund deposited in bank for intermediate period, are part of capital cost and is distinguished from idle funds. It was further contended that net off interest is a part of capital expenditure and by no stretch of imagination, such interest earned on borrowed fund be called as revenue income. He has placed reliance upon the judgment of the Hon’ble Apex Court in the cases of CIT vs. Bokaro Steels Ltd., 102 Taxman 94 and CIT vs. Karnal Cooperating Sugar Mills Ltd., 118 Taxman 489.
4. The ld. CIT(A), being convinced with the explanations of the assessee, has deleted the addition having observed that in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (supra), the facts were entirely different and in that case the assessee-company was an industrial company and had idle and surplus funds which were not being used for construction activities. But in the instant case, there is no surplus or idle funds lying with the assessee-company. He, however, defined that the surplus fund would mean availability of funds over and above required funds and in the present case, had the funds available to the assessee were over and above total cost of project of Rs. 115 crores, then there might have been a case of surplus funds available with the assessee. He further observed that the assessee’s case would rather be covered by the decision of Hon’ble Apex Court in the cases of CIT vs. Bokaro Steels Ltd. and CIT vs. Karnal Cooperating Sugar Mills Ltd. (supra). The ld. CIT(A) has also observed that interest during the precommencement period, while not allowable in the absence of business income, where it is an amount borrowed for business purposes, would go to increase the cost of the assets, while any income received from margin money or any other interest having direct nexus with the acquisition of the assets would go to reduce the actual cost and where there is both payment and receipt of such interest, it follows that it will have to be necessarily netted with net amount of interest representing interest on borrowing. The ld. CIT(A) accordingly deleted the addition in all the three years.
5. Aggrieved, the Revenue is in appeal before the Tribunal. Besides placing reliance upon the judgment of the Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (supra), the ld. D.R. Smt. Nidhi Singh Verma has strongly placed reliance upon the judgment of the Hon’ble jurisdictional High Court in the case of CIT vs. Indo Gulf Fertilizer and Chemicals Corporation Ltd., 280 ITR 621, in which the assessee-company received certain loans which remained lying with bankers and the company managed to get some interest on these deposits with the bank. The Hon’ble High Court having discussed various judicial pronouncements of the Hon’ble Apex Court and different High Courts have held that the amount of interest and receipts were exigible to tax in the hands of the assessee-company as income from other sources. The ld. D.R. has further contended that whereever the assessee earned interest, even on the borrowed funds during the precommencement period, the same is to be treated as income from other sources and is exigible to tax.
6. When the ld. D.R. was confronted with the judgment of the Hon’ble Apex Court in the case of CIT vs. Bokaro Steels Ltd. (supra), she has urged that in the case of CIT vs. Bokaro Steels Ltd., the loan was advanced to the workers/contractors and whenever investment of the idle or borrowed funds are inextricably linked with the commercial/ commencing of the project activities of the assessee, the interest earned thereon may be capital receipt and would reduce the cost of capital investment, but in the instant case borrowed funds were not put in FDRs with the bank on account of any business/commercial exigency. Therefore, the interest earned thereon certainly be income from other sources in the light of the judgment of the Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (supra) and the judgment of the Hon’ble jurisdictional High Court in the case of CIT vs. Indo Gulf Fertilizer and Chemicals Corporation Ltd. (supra).
7. The ld. counsel for the assessee, on the other hand, has filed written submission stating therein that the assessee-company had no idle/surplus fund in hand to park with bank to earn interest but solely dependent on borrowed funds. The assessee-company has already borrowed the funds to meet capital obligation and expenditure as and when required. Therefore, it has also reduced borrowing cost and project cost. The payment of interest on borrowed fund and interest received on fund deposited in bank for intermediate period are part of capital cost and is distinguishable from idle funds. The ld. counsel for the assessee has further contended that deposit of money TDR/investment in Mutual Fund were directly linked with purchase of plant, machineries, equipment etc. Hence, any income earned on such deposit was incidental to the acquisition of assets for setting up of the Plant & Machinery etc., therefore, interest earned has been rightly held to be capital receipt. The ld. counsel for the assessee, besides placing reliance upon the order of the ld. CIT(A), has also placed reliance upon the following judgments/orders:
1. CIT Vs. Karnal Cooperating Sugar Mills Ltd. (2008), 118 Taxman 489.
2. Bongaigaon Refinary And Petrochemicals Ltd. vs. CIT, 251 ITR 329
3. CIT vs. Karnataka Power Corporation, 247 ITR 26.
4. CIT vs. U.P. State Industrial Development Corporation, 225 ITR 703.
5. Indian Oil Panipat Power Commission vs. I.T.O., 315 ITR 255.
6. DCIT vs. M/s NTPC – Sail Power Supply Co. Ltd., 2011 (ID1) GJC-0603 TDEL.
7. Sharpoorji Pallonji Power Company Ltd. vs. I.T.O. in I.T.A. No. 1049/Mum/2008.
8. M/s Phoenix Lamps India Ltd. vs. CIT, Income Tax Appeal No.2 of 2012 (Alld.).
9. CIT vs. Jaypee DSC Ventures Ltd., I.T. Appeal No.357 of 2010 (Delhi).
8. Having carefully examined the orders of the lower authorities and the documents placed on record in the light of the rival submissions, we find that the assessee-company was engaged in construction of Multiplex-cum-Shopping Malls and it has borrowed funds for construction of Multiplex-cum-shopping Mall. In due course, it purchased a land but due to various problems and sanctions required, the project got delayed atleast for 2 to 3 years, according to the assessee, and the borrowed funds were invested in FDRs for the intervening period. Though the assessee has contended that due to delay in project, it was not interested in taking up disbursement against sanctioned limits but the State Bank of India pressurized it for disbursement, hence in order to maintain good and congenial relations with the Banks, it had to accept the proposal of the bank that on one hand they will disburse the loan and on the other hand keep these funds invested in Fixed Deposit for the intervening period. But in order to support these contentions, no documentary evidence in the form of letters of the bankers was filed either before the Assessing Officer or even before the Tribunal. Therefore, the contention of the assessee that the borrowed funds were put in FDRS under pressure of the Banks, cannot be accepted.
9. Now the controversy revolves around an issue whether the receipt of interest on borrowed funds put in FDRs with the bank was capital receipt or revenue receipt. On this issue, the assessee has placed heavy reliance upon the judgments of the Hon’ble Apex Court in the case of CIT vs. Bokaro Steels Ltd. (supra) and CIT Vs. Karnal Cooperating Sugar Mills Ltd. (supra); whereas the ld. D.R. has placed heavy reliance upon the judgment of the Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (supra). Therefore, we are of the view that before adjudicating the nature of receipt, we have to examine all these judgments and the ratio laid down by the Hon’ble Apex Court therein.
10. In the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (supra), the assessee-company during construction/establishment of its factory before commencement of manufacturing activities invested funds borrowed for the purpose of setting up of factory in short term deposit with the bank and earned interest thereon. In its return, assessee disclosed interest earned as income from other sources and after setting off same against business loss, claimed carry forward of the remaining loss. Later on, it filed revised return claiming that interest and finance charges along with other production expenses will have to be capitalized and, therefore, such the interest income should go to reduce the pre-production expenses which would ultimately be capitalized and as such, the interest income was not exigible to tax. The Assessing Officer as well as the Tribunal rejected the assessee’s claim. In view of the conflicting decisions of various High Courts on the issue, the Tribunal made a reference to the Hon’ble Apex Court under section 257 of the Income-tax Act, 1961 (hereinafter called in short “the Act”) and the Hon’ble Apex Court has adjudicated the nature of receipt in the light of different propositions put forth before them and the Hon’ble Apex Court has concluded that the expenditure incurred by the assessee for the purpose of setting up of its business should not be allowed as deduction nor it should be adjusted against any other income under any other head. Similar income from non-business sources could not be set off against liability to pay interest on funds borrowed for the purpose of purchase of plants and machineries even before commencement of business of the assessee. The relevant observations of the Hon’ble Apex Court are extracted hereunder for the sake of reference:-
“The facts of this case are not in dispute. In the usual course, interests received by the company from bank deposits and loans would be taxable as income under the head ‘Income from other sources’ under section 56 of the Income-tax Act, 1961 (‘the Act’). It is argued on behalf of the company that it had not yet commenced its business and in any event the income was derived from funds borrowed for setting up the factory of the company and should be adjusted against the interest payable on the borrowed funds.
Neither of the two factors can affect taxability of the income earned by the company. Under the Act, the total income of the company is chargeable to tax under section 4 of the Act. The total income has to be computed in accordance with the provisions of the Act. Section 14 of the Act lays down that for the purpose of computation, income of an assessee has to be classified under six heads:
The computation of income under each of the above six heads will have to be made independently and separately. There are specific rules of deduction and allowances under each head. No deduction or adjust- ment on account of any expenditure can be made except as provided by the Act.
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 fund in its hand for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head ‘Capital gains’. Similarly, if a company purchases a rented house and gets rent, which rent will be assessable to tax under section 22 of the Act as income from house property. Likewise, a company may have income from other sources. It may buy shares and get dividends. Such dividends will be taxable under section 56. The company may also, as in this case, keep the surplus fund in short-term deposits in order to earn interest. Such interest will be chargeable under section 56.
In the instant case, the company has chosen not to keep its surplus capital idle, but has decided to invest it fruitfully. The fruits of such investment will clearly be of revenue nature.
If the capital of a company is fruitfully utilised instead of keeping it idle, the income, thus, generated will be of the revenue nature and not accretion of capital. Whether the company raised the capital by issue of shares or debentures or by borrowing will not make any difference to this principle. If borrowed capital is used for the purpose of earning income, that income will have to be taxed in accor-dance with law. Income is something which flows from the property. Something received in place of the property will be capital receipt. The amount of interest received by the company flows from its investments and is its income and is clearly taxable even though the interest amount is earned by utilising borrowed capital.
It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilizing the borrowed funds as its income.
The interest earned by the assessee is clearly its income and unless it can be shown that any provision like section 10 has exempted it from tax, it will be taxable. The fact that the source of income was borrowed money does not detract anything from the revenue character of the receipt. The question of adjustment of interest payable by the company against the interest earned by it will depend upon the provisions of the Act. The expenditure would have been deductible as incurred for the purpose of business if the assessee’s business had 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.
There are specific provisions in the Act for setting off of loss from one source against income from another source under the same head of income (section 70), as well as setting off of loss from one head against income from another (section 71). In the facts of this case, the company cannot claim any relief under any 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 business cannot be allowed as deduction, nor can it be adjusted against any other income under any other head. Similarly, any income from a non-business source cannot be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plants and machineries even before commencement of business of the assessee.
Further, no adjustment could be allowed except in accordance with the provisions of the Act. However, desirable it may be, from the point of view of equity, this adjustment cannot be made unless the law specifically permits such adjustment. Further, any argument based on accountancy practice has little merit if such practice cannot be justified by any provisions of the statute or is contrary to it.
11. In the case of CIT vs. Bokaro Steels Ltd. (supra), the assessee is a corporation wholly owned by the Government of India and its object was to construct and own an integral iron and steel works. During the assessment years under consideration, the work of construction of the company’s factory and installation of the plant was in the process of completion and the company had not started any business. It has received certain receipts which are as under:-
“(1) The company had given to the contractors quarters for the residence of the staff and workers employed by the contractors who had been engaged by the assessee-respondent for carrying out the work of construction. The assessee charged the contractors for the use of the quarters so given to the contractors.
(2) The assessee had entered into supplementary agreements with its contractors under which the assessee had made certain advances to the contractors to enable them to execute the largescale construction work smoothly. The assessee had agreed to advance these advances to the contractors on payment of interest. The contractors, thus, did not have to raise funds from outside agencies. For the assessee-company, this arrangement primarily meant payment in advance of the amounts of the contractors’ bills for which the assessee-company had charged interest. This interest was later adjusted against the dues of the contractors.
(3) For the purpose of the construction work, the assessee had given on hire certain plant and machinery to the contractors. Against the letting of plant and machinery, the assessee received from the contractors income in the form of hire charges. It was not the business of the assessee-company to let out plant and machinery to others. The assessee-company permitted its use only to its own contractors for the construction work done by the contractors for the assessee-company. The Tribunal has found that the assessee-company charged hire charges for such use of plant and machinery in order to cover the maintenance and wear and tear of the plant and machinery belonging to the assessee.
(4) The assessee-company allowed the contractors to use the stones lying on the assessee’s land for construction work. The stones lying on the assessee-company’s land were the capital assets of the assessee-company. The assessee charged the contractor a certain amount by way of royalty for excavation and use of these stones for construction work.”
12. The Tribunal had held that all these amounts received by the assessee have gone to reduce the cost of construction, as these were in the nature of capital receipts which can be set off against the capital expenditure incurred by the assessee during the relevant assessment years. This view of the Tribunal was upheld by the Hon’ble High Court and the Revenue has approached the Hon’ble Apex Court raising a dispute about the nature of receipts. Having examined the nature of receipt, the Hon’ble Apex Court has held that in case money is borrowed by a 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 capitalised and added to the cost of the fixed assets created as a result of such expenditure and by the same reasoning, if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. The relevant observations of the Hon’ble Apex Court are extracted hereunder for the sake of reference:-
“The activities of the assessee in connection with all these three receipts are directly connected with or are incidental to the work of construction of its plant undertaken by the assessee. Broadly speaking, these pertain to the arrangements made by the assessee with its contractors pertaining to the work of construction. To facilitate the work of the contractor, the assessee permitted the contractor to use the premises of the assessee for housing its staff and workers engaged in the construction activity of the assessee’s plant. This was clearly to facilitate the work of construction. Had this facility not been provided by the assessee, the contractors would have had to make their own arrangements and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee has provided these facilities. The same is true of the hire charges for plant and machinery which was given by the assessee to the contractors for the assessee’s construction work. The receipts in this connection also go to compensate the assessee for the wear and tear of the machinery. The advances which the assessee made to the contractors to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitches as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts are arrangements which are intrinsically connected with the construction of its steel plant. The receipts have been adjusted against the charges payable to the contractors and have gone to reduce the cost of construction. They have, therefore, been rightly held as capital receipts and not income of the assessee from any independent source.
In case money is borrowed by a 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 capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These were receipts of a capital nature and cannot be taxed as income.
The same reasoning would apply to royalty received by the assessee- company for stones, etc., excavated from the assesseecompany’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 assessee’s steel plant. The cost of the plant to the extent of such royalty received is reduced for the assessee. It is, therefore, rightly taken as a capital receipt.”
13. Again in the case of CIT Vs. Karnal Cooperating Sugar Mills Ltd. (supra), the assessee had deposited money to open Letter of Credit for purchase of machinery required for setting up of its plant in terms of assessee’s agreement with the supplier. It was on the money so deposited some interest has been earned. With regard to the nature of receipt, the Hon’ble Apex Court has held that the deposit of money in the instant case was directly linked with the purchase of plant and machinery. Hence any income earned on such deposit was incidental to the acquisition of assets for setting up of plant and machinery. Thus, the interest was capital interest which would go to reduce the cost of asset.
14. Though reference was made on the other judgments of the Hon’ble Apex Court in the case of CIT vs. Karnataka Power Corporation (supra) and CIT vs. U.P. State Industrial Development Corporation (supra), but on perusal we find that these judgments are not directly on the issue; whereas in the judgment of Hon’ble Allahabad High Court in the case of M/s Phoenix Lamps India Ltd. vs. CIT (supra), it has been held that where the assessee invested share application money received by it in FDRs for a short period for the purpose of providing security for obtaining letter of credit to import machineries, the interest income earned thereon was to be adjusted against pre-operative cost of plant and machinery. In that case, their Lordships of the jurisdictional High Court have held that the deposits with the bank in short term FDRs were made under compulsion for having letter of credit, as without letter of credit/bank guarantee, plant and machinery cannot be imported and without plant and machinery, the factory cannot be established. Hence income earned on such deposit is incidental to acquisition of assets for setting up of the plant and machinery. While dealing with the issue, the jurisdictional High Court has examined the judgment of the Hon’ble Apex Court in the case of CIT vs. Bokaro Steels Ltd. and CIT vs. Karnal Cooperating Sugar Mills Ltd.; CIT vs. Bokaro Steels Ltd.; Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT and Jaypee DSC Ventures Limited, 17 taxmann.com 257 (Delhi).
15. In the case of NTPC – Sail Power Supply Co. Ltd. vs. CIT (supra), 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 the surplus fund by way of margins or giving advances for the purpose of expansion was adjusted to the incidental expenses during construction. The interest was adjusted on account of the matching principle since the interest earned on deposits kept in relation to the expansion were credited to/reduced from the incidental expenses during construction (IEDC). The Assessing Officer treated this interest as “income from other sources”, relying upon the judgment of the Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (supra). The matter was travelled to the Hon’ble High Court and the Hon’ble High Court has examined the issue in the light of various judgments of the Hon’ble Apex Court in the case of CIT vs. Bokaro Steels Ltd.; CIT vs. Karnal Cooperating Sugar Mills Ltd.; Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT and Bongaigaon Refinary And Petrochemicals Ltd. vs. CIT (supra) and various judgments of the different High Courts and has held that provisions of section 36(1)(iii) of the Act enacts that any amount of the interest paid towards (in respect of) capital borrowed for acquisition of an asset or for extension of existing business regardless of its capitalization in the books or otherwise, “for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use” would not qualify as deduction and by the same logic where the funds were invested by the assessee-company and interest earned were “inextricably linked” with the setting up of the plant, the interest earned would be capitalized and would reduce the cost of the project. The relevant observation of the Hon’ble High Court is extracted hereunder for the sake of reference:-
“10. It is no doubt correct that the proviso to section 36(1)(iii) of the Income Tax Act enacts that any amount of the interest paid towards (“in respect of) capital borrowed for acquisition of an asset or for extension of existing business regardless of its capitalization in the books or otherwise, “for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use” would not qualify as deduction. However, in all these cases, when the interest was received by the assessee towards 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.”
16. Similar was the position in the case of Indian Oil Panipat Power Consortium Ltd. vs. Income Tax Officer, 181 taxman 249 (Delhi), in which the assessee company was incorporated in pursuance of a joint venture entered into between Indian Oil Corporation and Marubeni Corporation of Japan to set-up a power project and in order to effectuate the purpose, a joint venture was conceived. The joint venture partners contributed share capital which includes the sum by way of additional share capital. The said funds were required for purchase of land and development of infrastructure, but due to legal entanglements with respect to title of land, they were temporarily put in a fixed deposit in Bank and interest was earned thereon. It claimed that said interest was capital receipt and therefore it should be set off against pre-operative expenses, but the Assessing Officer has treated the same as income from other source. On appeal, the ld. CIT(A) categorically held that the funds were placed in fixed deposit so that liquidity was ensured and money would remain available when required for purchase of land and infrastructure development and hence the interest earned was ‘inextricably linked’ with the setting up of the power plant. He, therefore, following the judgment of the Hon’ble Apex Court in the case of Bokaro Steel Ltd. (supra) directed the Assessing Officer to delete the addition and consider the same for capitalization towards preoperative expenses. On Revenue’s appeal, the Tribunal reversed the findings of the ld. CIT(A) and the matter was before the Hon’ble High Court to examine the issue whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the plant. The Hon’ble High Court has examined the issue in the light of various provisions of the Act and has finally concluded that the funds infused by the joint venture partners in the assessee-company were inextricably linked with the setting up of power plant. Therefore, the interest earned by the assessee could not be treated as income from other sources. The relevant observations of the Hon’ble High Court are extracted hereunder for the sake of reference:-
“The test, therefore, to our mind is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the plant. The clue is perhaps available in section 3 of the Act which states that 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 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.
In the instant case, it was 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 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.”
17. Similar was the position in the case of CIT and Jaypee DSC Ventures Limited (supra), in which the assessee had furnished performance guarantee in favour of NHAI to get the contract awarded in its favour and to procure the said guarantee, it had kept the amount in a fixed deposit in the bank, on which interest income was earned which was set off against project expenses. The Assessing Officer treated the interest received by the company as income from other sources and the matter reached before the Hon’ble High Court and the Hon’ble High Court has held that the performance guarantee by way of bank guarantee was required for faithful performance of its obligations. The non-submission of the guarantee would have entailed termination of the agreement and NHAI would have been at liberty to appropriate the bid security. Therefore, it is clearly evincible that the bank guarantee was furnished as a condition precedent to entering into the contract and further it was to be kept alive to fulfill the obligations. Thus, the instant case is not one where the assessee had made the deposit of surplus money lying idle with it in order to earn interest, on the contrary, the amount of interest was earned from fixed deposits which were kept in the bank for furnishing the bank guarantee. Therefore, it has inextricable nexus with securing the contract. Accordingly the interest earned by the assessee cannot be held to be income from other sources.
18. In the case of CIT vs. Indo Gulf Fertilizer and Chemicals Corporation Ltd. (supra), the assessee-company received certain loans which were remained lying with the bankers and the company managed to get some interest on these deposits with the bank. The issue before the Hon’ble High Court was that whether the amount of interest and miscellaneous receipts were not exigible to tax in the hands of the assessee-company as income from other sources. The Hon’ble High Court having examined the issue in detail in the light of various judicial pronouncements has categorically held that the plea of the assessee that the interest earned by the assessee on such loan is to be set off against the interest payable on loan given for the purpose of construction cannot be accepted, as no adjustment can be allowed in accordance with the provisions of the Act.
19. From a perusal of the aforesaid various judicial pronouncements on the issue, it has been crystal clear that only that interest income earned on short term deposit, etc. would be capitalized or set off against pre-operative expenses, if it is inextricably linked with the setting up of plant or project. In the light of these legal propositions, now we proceed to examine the facts of the case.
20. In the instant case, the assessee has raised loans and borrowed funds from different persons to set up shopping malls, multiplexes and associated activities related thereto. In between construction period, funds were parked with the bank in fixed deposits and/or in mutual funds. The assessee earned on fixed deposits and earned gains in respect of investment in mutual funds. In addition to interest, the assessee has sold scrap which was the alleged result of the construction raised. The Assessing Officer while framing the assessment has taxed interest from FDRs, sale of wastage and mutual funds as income from other sources. It has not been brought on record that the surplus funds were put in FDRs on account of commercial expediency. Since the funds were not required at the relevant point of time in construction activities, the same were parked with bank to earn interest. Therefore, the interest earned on surplus funds parked with bank and in mutual funds are not inextricably linked with the construction of shopping malls, multiplex and other associate activities, etc. Therefore, the aforesaid interest earned on mutual funds by the assessee cannot be capitalized and have been rightly treated by the Revenue as income from other sources. We accordingly set aside the order of the ld. CIT(A) and restore that of the Assessing Officer.
21. So far as the sale of wastages are concerned, it is not clear from the orders of the lower authorities whether sale of wastage was at all generated during the construction activities or connected or inextricably linked with the construction of shopping mall and multiplexes. If it is sale of waste materials generated during the course of construction activities, it would reduce the cost of project; otherwise it would also be revenue receipt. With these directions, we restore the matter to the file of the Assessing Officer to verify the nature of sale of wastage material. We accordingly set aside the order of the ld. CIT(A) in this regard and restore the matter to the Assessing Officer to examine the nature of sale of waste material in terms indicated above and treat it accordingly.
22. In the result, appeal of the Revenue is partly allowed for statistical purposes.
Order was pronounced in the open court on the date mentioned on the captioned page.