Case Law Details
Assessee, even though has borrowed funds has not utilized them for the purpose of project and has kept them in short term FDs with another bank, not in the bank from which it has obtained loan. This indicates that the funds are not utilized for the purpose of business in the project construction. Therefore, on facts alone, the set-off cannot be given. The issue of interest earned on FDs of surplus funds are considered by the Honorable Supreme Court in a series of judgements. The first of which is the decision of Honorable Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., [227 ITR 172] (SC) in which the Honorable Supreme Court has confirmed and analyzed the tax ability of interest earned during the construction period and also held that the same cannot be set-off to the interest paid on borrowed funds. Honorable Supreme Court in the said case has clearly held that the amounts are to be brought to tax under the head ‘Other Sources’. The same was reiterated in later judgements of CIT Vs. Autokast Ltd., [248 ITR 110] (SC) and also in other decisions of Honorable Supreme Court. The decision of Bokaro Steel Ltd., Vs. CIT [236 ITR 315] (SC) pertaining to the receipts arising in the project/ construction activity was reiterated in Bongaigaon Refinery & Petrochemicals Ltd., [251 ITR 329] (SC) (supra). Thus, there is clear line of demarcation. If the receipts are inextricably connected to the project or construction, then, the amounts are to be set-off to the capital expenditure incurred during the pre-operative stage. The interest on FDs have no connection with the project/ construction activity, then the same is to be brought to tax under the head ‘Other Sources’. The order of the CIT(A) has clearly demarcated the distinguishing features of various judgements of Honorable Supreme Court and has correctly came to the conclusion that interest on FDs is taxable during the pre-operative period under the head ‘Other Sources’.
Full Text of the ITAT Order is as follows:
This is an appeal by assessee against the order of the Commissioner of Income Tax (Appeals)-5, Hyderabad, dated 30-06-2016 on the issue of tax ability of interest earned on Fixed Deposits during pre-operative period when business has not commenced. Assessee has raised the following grounds:
“1. The CIT(A) erred in law and facts of the case in considering the interest earned during the construction period out of borrowed funds, as income from other sources.
2. The CIT(A) ought to have consider the fact that your Appellant has commenced business on staring the construction, therefore interest on FDR ought to have been reduced from the pre- operative expenses and capitalized.
3. Your Appellant submits that the CIT(A) as well as ITO having appreciated the fact that borrowed funds from banks not immediately required, have been deposited in Fixed deposits ought to have allowed the set off of interest earned on deposit from interest on borrowed funds.
4. Your Appellant submits that there being a nexus between the interest earned and interest paid the same ought to have been set off, consequently the addition may be deleted.
5. Your Appellant submits that the CIT(A) ought to have considered the Honorable Supreme Court decision in Karnal Co-operative Sugar Mills Ltd 243 ITR 2 (SC) and deleted the addition”.
2. Briefly stated, assessee- company is involved in developing, maintaining warehouses and go downs etc., and during the year, the developing of operational facilities for storage of commodities, goods and articles was in progress and assessee company has capitalized all expenditures under the head ‘preoperative expenses’. Assessing Officer (AO) has noticed that assessee has earned interest income of Rs. 31,52,918/- and had set-off towards the capital expenditure. Assessee was asked to explain why the interest income earned from FDs should not be brought to tax under the head ‘other sources’ following the principles laid down by the Honorable Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., [227 ITR 172] (SC). Assessee has explained that it has taken a loan from State Bank of Hyderabad of Rs. 15 Crores which was released on 08-04-2010 and the said amount which could not be utilised immediately was kept in FD in Yes Bank on 19-04-2010 to an extent of Rs. 8 Crores. The deposit was withdrawn on 23-12-2010 and interest of Rs. 31,52,918/- was earned, after deduction of tax of Rs. 3,51,292/-. It was contended that the said interest was set-off to the borrowed interest and accordingly, the same is not taxable as assessee has not commenced the business. Assessee has relied on various decisions including the decision of Honorable Supreme Court in the case of Bokaro Steel Ltd., Vs. CIT [236 ITR 315] (SC). However, AO has not accepted the same and distinguishing the cases relied on by assessee, brought the amount to tax under the head ‘other sources’.
2.1. Before the Ld.CIT(A), assessee has contested the same and made elaborate submissions. Ld.CIT(A) has analysed the decision of Honorable Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilisers Ltd., [227 ITR 172] (SC), the facts involved in the case of Bokaro Steel Ltd., Vs. CIT [236 ITR 315] (SC) and also the series of judgements following the Bokaro Steel Ltd., Vs. CIT, like CIT Vs. Karnataka Power Corporation [247 ITR 268] (SC) and Bongaigaon Refinery & Petrochemicals Ltd., [251 ITR 329] (SC). Ld.CIT(A) analyses the other series of judgements of Honorable Supreme Court in the case of CIT Vs. Govinda Choudhury & Sons [203 ITR 881] (SC), CIT Vs. Karnal Co-operative Sugar Mills Ltd., [243 ITR 2] (SC) and CIT Vs. Autokast Ltd., [248 ITR 110] (SC). After analyzing the consistent line of reasoning emerged from the case law, Ld .CIT(A) has come to a conclusion that interest is taxable, following the principles laid down by the Honorable Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., (supra) as confirmed in the later decisions of Bongaigaon Refinery & Petrochemicals Ltd., [251 ITR 329] (SC) and CIT Vs. Autokast Ltd., [248 ITR 110] (SC). His final conclusion in paras 7.10 and 7.11 is as under:
“7.10. The consistent line of reasoning which emerges from the case law adverted to earlier is that the mere fact that an assessee carried on business would not result in an inference that the income which is earned by way of interest would fall for classification as business income. Where an assessee invests its surplus funds in order to earn interest and to obviate its funds lying idle, such income would not fall for classification as business income. This is particularly so in a situation where the business of the assessee does not consist in the investment of funds. Where the assessee engages in an independent line activity, interest earned on deposits cannot be regarded as falling under the head of profits and gains of business or profession. Such income would fall for classification as income from other sources.
7.11 It is pertinent to note hear that the issue with regard to assessing the interest income earned during the period prior to commencement of a business has been a very litigious issue which has seen many turns and tribulations over the period of time. In fact, the Honorable Supreme Court of India in view of the dichotomous views taken by the apex court in the cases of Tuticorin Alkali (supra) and Bokaro Steel (supra) referred the matter to a larger Bench i.e., Bongaigaon Refinery and Petrochemicals (supra). The larger Bench of the Honorable Supreme Court came to the conclusion that income derived from house property, guest house, charges for equipment and recoveries from the contractors on account of water and electricity supply during the formation period of the business is not chargeable to tax but had to be adjusted against the project cost but interest income was however considered as taxable. Thus, a larger bench of the apex Court after considering the entire case law with regard to receipts of a business prior to its commencement concluded that interest income cannot be adjusted against project cost.
In this case the appellant obtained loan Rs. 15,00,00,000/- from State Bank of Hyderabad for construction of warehouses and it was released on 08.04.2010. The assessee kept a sum of Rs. 8,00,00,000/- as fixed deposit in Yes Bank on 19.04.2010. The Fixed Deposit was withdrawn on 23.12.2010. For this Yes Bank has paid an interest of Rs. 31,52,918/-. The expenditure incurred by the appellant suggests that the assessee is in the process of setting up a business. Thus does the interest income generated out of fixed deposits cannot be adjusted against the project cost. Thus, all the grounds of appeal are dismissed”.
3. Ld. Counsel reiterated the submissions made before the CIT(A) and tried to distinguish the judgements of Honorable Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilisers Ltd., [227 ITR 172] (SC) and relied on the decision of the Honorable Delhi High Court in the case of CIT Vs. Shri Ram Honda Power Equipment and Others [289 ITR 475] (Del). It was the submission that assessee has borrowed funds and these funds are not surplus funds, so the same should have been set-off to the interest paid on the borrowed funds during the construction period.
4. Ld.DR, however, relied on the orders of the AO and CIT(A) and supported the orders in view of the principles laid down by the Honorable Supreme Court.
5. I have considered the rival contentions and perused the facts of the case and case law relied upon. It is clear that assessee, even though has borrowed funds has not utilized them for the purpose of project and has kept them in short term FDs with another bank, not in the bank from which it has obtained loan. This indicates that the funds are not utilised for the purpose of business in the project construction. Therefore, on facts alone, the set-off cannot be given. The issue of interest earned on FDs of surplus funds are considered by the Honorable Supreme Court in a series of judgements. The first of which is the decision of Honorable Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., [227 ITR 172] (SC) in which the Honorable Supreme Court has confirmed and analysed the tax ability of interest earned during the construction period and also held that the same cannot be set-off to the interest paid on borrowed funds. Honorable Supreme Court in the said case has clearly held that the amounts are to be brought to tax under the head ‘Other Sources’. The same was reiterated in later judgements of CIT Vs. Autokast Ltd., [248 ITR 110] (SC) and also in other decisions of Honorable Supreme Court. The decision of Bokaro Steel Ltd., Vs. CIT [236 ITR 315] (SC) pertaining to the receipts arising in the project/construction activity was reiterated in Bongaigaon Refinery & Petrochemicals Ltd., [251 ITR 329] (SC) (supra). Thus, there is clear line of demarcation. If the receipts are inextricably connected to the project or construction, then, the amounts are to be set-off to the capital expenditure incurred during the pre-operative stage. The interest on FDs have no connection with the project/ construction activity, then the same is to be brought to tax under the head ‘Other Sources’. The order of the CIT(A) has clearly demarcated the distinguishing features of various judgements of Honorable Supreme Court and has correctly came to the conclusion that interest on FDs is taxable during the pre-operative period under the head ‘Other Sources’.
5.1. The Honorable jurisdictional High Court in the case of CIT Vs. Raasi Cement Ltd., [232 ITR 554] has answered similar questions involved in favor of the Revenue. The question before the Honorable High Court was whether the interest earned on surplus funds deposited in the banks during the installation of the company, the status of the company before commencement of the business. The Honorable High Court has held that such interest has to be separately treated as income from other sources and cannot be taken as part of the capital structure following the decision of the Honorable Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., Vs. CIT [227 ITR 172] (SC). It was categorically held that interest earned on surplus funds deposited in banks during installation of company, prior to commencement of business, has to be brought to tax as ‘Income from Other Sources’ u/s. 57. Respectfully following the jurisdictional High Court decision also, the contentions of assessee that this amount has to be adjusted towards capital account cannot be accepted.
5.2. In view of that, respectfully following the jurisdictional High Court judgement as supported by the principles laid down by the Honorable Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., [227 ITR 172] (SC), Bongaigaon Refinery & Petrochemicals Ltd., [251 ITR 329] (SC) and CIT Vs. Autokast Ltd., [248 ITR 110] (SC) (supra), I confirm the order of the CIT(A) and reject the grounds of appeal.
6. In the result, appeal of assessee is dismissed.
Order pronounced in the open court on 9th May, 2017.
