Treatment of Interest on Fixed Deposit – ITAT remanded case Back to AO

Angul Sukinda Railway Ltd. Vs ITO (ITAT Cuttack)

We find that during the course of assessment proceedings the assessee explained before the AO with regard to interest on mobilization advance is a capital receipt, therefore, it has been reduced from the capital work-in-progress and in case of interest earned on fixed deposit/flexi deposits is a business income, therefore, it has been treated as a revenue income. The AO did not accept the claim of the assessee and treated the same as income from other sources. In appeal, the CIT(A) accepted the claim of the assessee in regard to interest on mobilization advance but he did not agree with the interest received on fixed deposits/flexi deposits and upheld the action of AO holding that the AO has rightly treated the interest earned on FDR & Flexi Deposit as income from other sources.

We observe from the balance sheet for both the assessment years under consideration that the share application money pending for allotment is also appearing and we have decided the similar issue in the case of M/s Haridaspur Paradip Railway Company Limited Vs. DCIT in ITA No.383/CTK/2019, order dated 12.10.2020, in which the issue of share application money were pending for allotment has been remitted back to the file of AO

In the impugned case, on perusal of the orders of the authorities below as well as the submissions made by both the sides before us, we observe that the assessee has deducted the expenses from the interest and surplus has been transferred into the reserve and surplus account. Before the AO the assessee has also offered it as a business income in the form of written submissions, which has been incorporated by the AO in the assessment order. We found substance on the submission of the ld. CIT-DR. As the issue being similar to the case of Haridaspur Paradip Railway Company Ltd.(supra), therefore, we also remit the issue to the file of AO on the same directions given therein along with some additional direction to the AO for examination as to whether the income which has been transferred into the reserve and surplus account and its utilization, either for revenue purpose or for capital expenditure. The AO is also directed to decide the issue as per law after providing reasonable opportunity of being heard to the assessee. The assessee is also directed to avoid taking any unnecessary adjournment and cooperate with the AO for early disposal of the case. We order accordingly.

FULL TEXT OF THE ITAT JUDGEMENT

These two appeals filed by the assessee against the order dated 16.09.2019, passed by the CIT(A)-1, Bhubaneswar for the assessment year 2013-2014 & 2014-2015.

2. Grounds taken by the assessee for A.Y.2013-2014 are as under :-

1. That the order of the Ld. AO is illegal, arbitrary contrary to evidence on record and without application of mind and for that matter the said order is liable to be quashed and/or annulled.

2. That on the facts of circumstances of the case, the Ld. AO has erred in treating interest on FDR and Flexi deposit amounting to Rs. 1,08,02,969/- as revenue receipt and made addition although the said interest is inextricably linked to the project and is purely a capital receipt and hence the aforesaid addition is liable to be deleted.

3. That the Ld. AO has erred both in law and facts by treating capital receipt as revenue

5. That the appellant craves leave to add or to amend the above grounds of appeal before or at the time of hearing of the appeal.

6. For these and among other grounds to be urged at the time of hearing, adequate relief as may be deemed fit be granted in the matter.

3. Grounds taken by the assessee for A.Y.2014-2015 are as under :-

1. That the order of the Ld. AO is illegal, arbitrary contrary to evidence on record and without application of mind and for that matter the said order is liable to be quashed and/or annulled.

2. That on the facts and circumstances of the case, the Ld. AO was not justified in denying that the interest on mobilization advance amounting to Rs.45,84,391/- received from the contractors during the construction/project period is a capital receipt and is adjustable against pre-operative expenses.

3. That on the facts of circumstances of the case, the Ld. AO has erred in treating interest on FDR and Flexi deposit amounting to Rs.3,85,82,206/- as revenue receipt and made addition although the said interest is inextricably linked to the project and is purely a capital receipt and hence the aforesaid addition is liable to be deleted.

4. That the Ld. AO has erred both in law and facts by treating capital receipt as revenue

5. That the appellant craves leave to add or to amend the above grounds of appeal before or at the time of hearing of the appeal.

6. For these and among other grounds to be urged at the time of hearing, adequate relief as may be deemed fit be granted in the matter.

4. The grounds raised in both the appeals are same to the grounds taken before the CIT(A) for both the assessment years under consideration. However, the interest on mobilization advance amounting to Rs.45,84,391/- for the assessment year 2014-2015 has been deleted by the CIT(A) in spite of the assessee has challenged this issue before us. As per our considered opinion, this issue is not required to adjudicate, hence, this ground of appeal for the assessment year 2014-2015 is dismissed. Now, we have to decide the issue involved regarding addition of interest on FDR and Flexi deposit amounting to Rs.1,08,02,969/- and Rs.3,85,82,206/-, respectively for both the above assessment years.

5. First we shall take up appeal of the assessee in ITA No.384/CTK/2019 for the assessment year 2013-2014, wherein the assessee has raised sole issue of disallowance of interest on FDR & Flexi deposit treating the same as revenue receipt.

6. Brief facts of the case are that the assessee is a public limited company filed its return of income electronically on 26.09.2013 disclosing a loss of Rs.11,85,939/-, however a tax was paid u/s.115JB of the Act on an income of Rs.92,02,009/-. The case of the assessee was selected for scrutiny under CASS and statutory notices were issued to the assessee. After examination of the details including books of account and written submission filed by the assessee, the AO observed that the assessee has received interest on Fixed Deposits and Flexi Deposits of Rs.1,08,02,969/- against which the assessee has made provision for income tax of Rs.29,82,746/- against which the assessee has claimed as some expenditure and the balance amount has been transferred into the General Reserve Account and interest earned on mobilization advance of Rs.68,55,574/- has been treated as capital receipts which has been adjusted against Fixed Assets as per Note No. 7 of the audit report. The Assessing Officer after considering the written submissions filed by the assessee determined the total income of the assessee at Rs.1,76,58,540/- for the assessment year 2013-2014 and Rs.4,31,66,600/- for assessment year 2014-2015.

7. Aggrieved from the assessment order, the assessee appealed before the CIT(A) and the CIT(A) after considering the submission of the assessee and findings of AO, he accepted the contention of the assessee in respect addition of Rs. 68,55,574/- and uphold the addition of Rs. 1,08,02,969/-, accordingly partly allowed the appeal of the assessee for both the assessment years.

8. Against the above order of CIT(A) for both the assessment years under consideration, the assessee is in appeals before the Income Tax Appellate Tribunal.

9. AR has reiterated the submissions made before the lower authorities and he has also relied on number cases and filed his written submissions for A.Y.2013-2014 as under :-

1. This issue is squarely covered by the decision of the Hon’ble Cuttack Tribunal in the case of DCIT v. M/s Radhikapur (West) Coal and Mining Pvt. Ltd., I.T.A. Nos.396/397CTK/2018, dated 21.10.2019. Wherein the Hon’ble Tribunal, after relying on the order of Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. 315 ITR 255, held that Interest earned on funds primarily brought for infusion in the business activity cannot be termed as income from other sources.

2. Further, the Hon’ble Karnataka High Court on a similar issue in the case of PCIT v. M/s Banknote Paper Mill India Pvt. Ltd. in ITA  690/2017 held that this issue is ex facie covered by the decision of the jurisdictional High Courts or even the Hon’ble Supreme Court of India. Thus, no substantial question of law arises in the present case and the Appeal filed by the Revenue is without merit and liable to be dismissed.

3. The Hon’ble Karnataka HC in the above case has relied on the order of the Tribunal. Wherein, the Tribunal held that the interest income earned by the Assessee Company on bank deposits made out of share capital received by it from the Reserve Bank of India could not be taxed as “Income from Other Sources” as the said interest income was earned prior to commencement of operations of the company during the construction period.

Brief facts of the case

4. The assessee is a Joint Venture Company of Rail Vikas Nigam Limited, Jindal Steel and Power and Bushan Limited, incorporated in the year 2009. The assessee was incorporated as a Special Purpose Vehicle (SPV) to construct a New Rail Line between (Budhapank) Angul and (Baghupal) Sukida. Copy of MOU entered between Rai Vikas Nigam Limited, Jindal Steel and Power and Bushan Limited is enclosed at PB Pg. 25-35 (Relevant Pg. 27)

5. That, it has been provided in the MOU that the Joint Venture Partners via Equity Participation will fund the cost of the project. PB Pg. 28. Further, RVNL will undertake the construction of the project. Copy of construction agreement is at PB Pg. 36-59

6. Accordingly, the assessee company infused equity which is being utilised for expenditure incurred on the construction of Railway Line. Further, the small number of funds are parked in various banks in the form of term deposit to meet day to day cost of the project.

7. Moreover, on a regular basis, the assessee has made certain advances to RVNL to enable it to execute the construction work. Furthermore, on such advances, the assessee company received Interest which was later adjusted against the dues of RVNL from their bills.

8. That, the assessee treated interest income as a capital receipt. The interest income is utilised to meet the expenses of the project, and it is inextricably linked with the process of construction of Railway Line. Copy of Audited Balance sheet and P/l account for the FY 2013-14 is at PB Pg.6-24

9. That, the assessee filed its return of income for AY 2014-15 on 25.09.2014, declaring NIL income. Copy of acknowledgement of ROI along with the computation of income is at PB Pg. 1.

10. That, the case was selected for scrutiny assessment and notice u/s 143(2) & 142(1) of the Act, were issued to the assessee. The Ld. AO asked the assessee to explain the treatment of Interest received on Mobilisation Advances and Fixed Deposit.

11. That, in compliance with the same, the assessee produced the books of accounts and other relevant documents. Moreover, it explained that Mobilisation advance and Interest of FD are inextricably linked with the setting up of the Railway Line. Therefore, the same should not be treated as Income from Other Sources. Copy of reply submitted by the assessee is at PB Pg. 60-55

12. Subsequently, AO completed the assessment assessing the total income at Rs. 4,31,66,600/- and its passed order u/s 143(3) of the Act, dated 01.09.2016 making the following addition–

Sr. No.	Particulars	Amount (Rs.)
1.	Interest on FDR and Flexi Deposit	3,85,82,206/-
2.	Interest on Mobilisation advance	45,84,391/-

13. That, the additions mentioned above were made on the ground that assessee has not commenced its business operation and therefore, the Interest earned by it is taxable under the head’ Income from  Other Sources’. AO also relied on the decision of Tuticorin Alkali Chemical and Fertilizers Ltd. v. CIT (Relevant findings of AO are at Page 7, Para 6)

14. Aggrieved by the above additions, the assessee preferred an appeal before the CIT (A). The ld. CIT (A) deleted the addition of Interest received on Mobilisation advance relying on the order passed by the Tribunal (ITA No. 197/CTK/2016) in the assessee’s own case for the AY 2012-13.Copy of ITAT order is placed at PB Pg. 66-75

15. However, the CIT (A) confirmed the addition of Interest on FDR and Flexi Deposit relying on the decision of Tuticorin Alkali Chemical and Fertilizers Ltd. (Relevant findings of CIT (A) are at Para 4, Pg. 7)

16. Challenging the order of CIT (A), the assessee in appeal before your Honors.

Submissions

17. In the present case, assessee incorporated as Joint Venture Company of Rail Vikas Nigam Limited, Jindal Steel and Power and Bushan Limited to construct of a New Rail Line work between (Budhapank) Angul and (Baghupal) Sukida. Copy of MOU entered between Rai Vikas Nigam Limited, Jindal Steel and Power and Bushan Limited is enclosed at PB Pg. 27

18. Further, it is provided in the MOU that the cost of the project has to be funded through Equity Participation by the Joint Venture Partners. PB Pg.28

19. Accordingly, the assessee company infused equity and incurred expenditure on construction of Railway Line. Further, the small amount of fund so raised is also parked in various banks in the form of term deposit to meet day to day cost of the project.

20. It is pertinent to note that there is no allegation of AO or CIT (A) that funds infused by the assessee were being used for any other purpose other than the construction of Railway Line. This fact can also be evident from the Balance sheet wherein all expenditure incurred on the project is shown as WIP PB Pg. 21

21. Since the assessee company is incorporated only for construction of Railway Line therefore it is not free to utilise the funds for any purpose except for Railway Project. Moreover, there is no allegation of AO regarding the utilization of funds for any other purpose and lastly, the interest income from FD was earned in a period before the commencement of business; therefore, the said receipt is a capital receipt.

22. It is pertinent to note that the ld. CIT (A) has misconstrued the ratio of the Judgment of the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals and held that the income earned by the assessee is not a capital receipt.

23. It may kindly be noted that the Hon’ble Delhi HC has interpreted the aforesaid judgement of Apex Court in the case of Indian Oil Panipat Power Consortium Ltd v. ITO. [2009] 315 ITR 255.

24. Further, the Hon’ble High Court in the said case considered the another Judgement of Supreme Court in Bokaro Steel Ltd. Wherein the Supreme Court held that “if income is earned, whether by way of Interest or in any other manner on funds which are otherwise “inextricably linked” to the setting up of the plant, such income is required to be capitalised to be set off against pre-operative  ”

25. Finally, the Delhi High Court after analyzing the ratio in the case of Tuticorin Alkali Chemicals and Bokaro Steel Ltd simultaneously, held that the Interest earned on funds primarily brought for infusion in the business could not have been classified as income  from other sources.

Relevant para of Judgment are reproduced hereunder:

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 prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre­operative expenses. In the case of Tuticorin Alkali Chemicals (supra) it was found by the authorities that the funds available with the assessee in that case were “surplus” and, therefore, the Supreme Court held that the Interest earned on surplus funds would have to be treated as “income from other sources”. On the other hand in Bokaro Steel Ltd (supra) where the assessee had earned Interest on advance paid to contractors during pre-commencement period was found to be “inextricably linked” to the setting up of the plant of the assessee and hence was held to be a capital receipt which was permitted to be set off against pre-operative expenses.

26. Thus, applying the aforesaid Judgment of Delhi High Court in the facts of the present case, it can be appreciated that here also interest income is earned on funds which are “inextricably linked” to the setting up of the Rail Line. Therefore, such income is required to be capitalised to be  set off against pre-operative expenses.

27. It may also be noted that the above Judgement of Delhi High Court has been followed by the Coordinate Bench of ITAT Cuttack in the following cases.

28. The Hon’ble ITAT Cuttack, on similar facts after considering the decision of Apex Court in the case of Tuticorin Alkali Chemical and Fertilizers Ltd. v. CIT, decided the issue in favour of the assessee.

a) DCIT v. M/s Radhikapur (West) Coal and Mining Pvt. Ltd., I.T.A. Nos.396/397CTK/2018, dated 21.10.2019

From the above observations of the CIT(A), we find that CIT(A) while dealing with the issue has observed that in the case of Indian Oil Panipat Power Consortium Ltd. v. ITO 315 ITR 255, the Hon’ble High Court held that the interest earned on FDs was capital receipt liable to be set off against pre-operative expenses, and could not be taxed as income from other sources. In their judgment, the Hon’ble Delhi High Court has considered a host of decisions of various courts on the issue including the decisions of the Hon’ble Supreme Court in the cases of Tuticorin Alkali Chemicals & Fertilizers Ltd. and Bokaro Steel Ltd. The case of the assessee appears to be squarely covered by the decision of the Hon’ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd.

b) MJSJ Coal Limited v. ITO, I.T.A. Nos.429/CTK/2016, 68/CTK/2017 And 107/CTK/2018, dated 31.08.2018.

Para 12 the Interest earned on funds primarily brought for infusion in the business activity cannot be termed as income  from other sources, whereas the interest income on bank deposits earned by the assessee company to commencement of its business is in the nature of capital receipt and accordingly be set off against pre-operative expenses.  We considering the judicial precedence and the facts and circumstances of the present case, are of the substantive opinion that if the assessee company receives any amount which is inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. Hence such receipts are capital in nature and cannot be taxed as income under income from other sources. The assessee company was formed to set up a mining project and the process of setting up was got delayed and deposits of share capital amount received from the share applicants with the bank in the form of fixed deposits for short term, is to be considered as inextricably linked with the process of setting of its plant and machinery. Accordingly, we hold that the Interest earned by the assessee should not be treated as income from other sources and we allow the grounds of appeal of the assessee. Therefore, the appeal of the assessee for assessment year 2011-2012 is allowed.

c) POSCO INDIA PVT. LTD VERSUS , DCIT ITA Nos. 186 and 460/CTK/2011, 461/CTK/2011 and held as under:

Para 5 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 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 he set off against pre-operative expenses.

d) ACIT, v. M/S. POSCO INDIA PVT LTD. AND VICE-VERSA ITA No.155 & 122/CTK/2017, C.O.No.07 And 08/CTK/2017

the Interest on fixed deposits are not taxable under income from other sources and, accordingly, we uphold the findings of the CIT (A) and dismiss the ground of appeal taken by the revenue for both the assessment years.

e) M/S. KALINGA COAL MINING PVT. LTD., VERSUS ACIT ITA No. 123 and 279/CTK/2010

The learned Counsel has been able to establish that there was no surplus insofar as it was the share capital received as application money pending allotment which was poured in for the purchase/acquisition of land which would entitle the assessee to commence business of excavating coal in accordance with the Rules and Regulations governed by the State undertakings namely, IDCO and OMC. We have perused the correspondences lying with the assessee to clarify the stand taken for the purpose of starting business which required the assessee to park funds in the bank simultaneously incurring pre-operative expenses to the magnitude of ₹51 Crores and ₹66 Crores. This clearly indicates that there was no surplus available with the assessee for earning Interest as income from other sources

29. Further reliance has been placed on the following decisions:

♦ Bongaigaon Refinery and Petrochemicals ltd. v. CIT 251 ITR 329 (SC);

♦ NTPC Sail Power co. Pvt. Ltd. v. CIT in ITA No. 1238/2011 (DELHI HC);

♦ PCIT v. M/S. NTPC Tamil Nadu Energy Co. Ltd., ITA 233/2018 & CM APPL.7162/2018, ITA 234/2018 & CM APPL.7163/2018;

♦ Solarfield Energy Pvt. Ltd. v. ITO, ITA No. 5189/Mum/2016;

♦ BTW-Atlanta Transformers India Pvt. Ltd. v. ACIT, ITA Nos. 1642 & 1643/Ahd/2018;

♦ ITO, v. CMDC ICPL Coal Ltd, ITA No. 271/RPR/2014;

♦ M/s Saville Hospital & Research Centre PVT. Ltd. v. ITO ITA No. 491/JP/2018

30. It may also be noted that recently the Hon’ble Supreme Court in the case of NATIONAL CO-OPERATIVE DEVELOPMENT CORPORATION v. CIT in CIVIL APPEAL NOS. 5105-5107 OF 2009, dated 11.09.2020 held that interest income generated on the idle funds which is applied in the business of the assessee company is to be treated as a business income thus, fall under the head of ‘Profits and Gains of Business or Profession and not under Income from Other Sources.

Relevant findings of the order are as under:

23. We are in agreement with this view taken by the High Court, as the only business of the appellant-Corporation is to receive funds and then to advance them as loans or grants. The interest income arose on account of the fund so received and it may not have been utilised for a certain period of time, being put in fixed deposits so that the amount does not lie idle. That the income generated was again applied to the disbursement of grants and loans. The income generated from interest is necessarily inter- linked to the business of the appellant-Corporation and would, thus, fall under the head of ‘profits and gains of business or profession’. There would, therefore, be no requirement of taking recourse to Section 56 of the IT Act for taxing the interest income under this residuary clause as income from other sources. In our view, to decide the question as to whether a particular source of income is business income, one would have to look to the notions of what is the business activity. The activity from which the income is derived must have a set purpose. The business activity of the appellant-Corporation is really that of an intermediary to lend money or give grants. Thus, the generation of interest income in support of this only business (not even primary) for a period of time when the funds are lying idle, and utilised for the same purpose would ultimately be taxable as business income.

31. Considering the above submission and judicial pronouncements it is submitted that the Interest earned on FDR & Flexi deposits should go to reduce the cost of its assets since these are receipts of a capital nature and could not be taxed as income.

Allegation regarding treatment of Interest income till AY 2012-13.

32. It is submitted that the ld. AO has also raised an allegation that the assessee in the preceding assessment year AY 2012-13 has itself shown the interest income as income for other sources.

33. In this regard, it is submitted that “Principle of Consistency” should be followed only, when the facts & circumstances continue to remain the same. However, in this case, circumstances are not same.

34. It is pertinent to note that the assessee for the first time has infused significant funds through issue of equity shares in the FY 2012-13, i.e. AY 2013-14 only. Further, during the year, the assessee has issued equity shares for construction of Railway Line, and out of this capital, the assessee has deposited small amount in FD to meet day to day expense of the project. Details regarding share capital issued during the year is at PB Pg. 18

35. Thus, the action of the AO to match the treatment of interest income earned in the AY 2012-13 from the treatment done in AY 2013-14 and AY 2014-15 may not merit the consideration as no capital was issued specifically for the purpose of completion Project in AY 2012-13.

36. Therefore, the circumstances of the present situation are highly dissimilar from that of the preceding assessment year, i.e. AY 12-13 because the major infusion has been in the AY 2013-14 and AY 2014-15 only and not in AY 2012-13.

If anything was going wrong in the past that wrong thing need not to  be followed in subsequent years

37. Without prejudice to the above, it is also submitted that it also a settled law if anything was going wrong in the past that wrong thing need not to be followed in subsequent years. This is so because an error cannot be allowed to be perpetuate forever.

38. In this regard reliance has been placed on the following decisions:-

i. CIT v British Paints India Ltd in 188 ITR 44 (SC)

ii. ANUP SHARMA v. CIT, ITA No. 161/CHD/2012

iii. Rohitasava Chand [2008] 306 ITR 242 (Delhi)

iv. Meeraj Estate & Developers vs DCIT [2014] 44 com 431 (ITAT, Agra)

39. Thus, even if, the assessee has wrongly considered interest income as income from other sources in the AY 2012-13, such wrong treatment may not be accepted in the subsequent years.

Thus, in the light of the above, it is submitted that the addition made by the Ld. AO and sustained by the CIT (A) holding that Interest earned on FDR & Flexi deposits is of revenue nature, is bad in law and therefore may kindly be deleted.

The ld. AR further submitted that the arguments advanced in case of M/s Haridaspur Paradip Railway Company Limited Vs. DCIT in ITA No.383/CTK/2019, order dated 12.10.2020 may be treated the same in both these cases also.

10. On the other hand, ld. DR relied on the others of authorities below and also filed his written submissions as under :-

i.) This is assessee’s appeal against the appellate order dated 16.09.2019 u/s. 250 of the Income Tax Act passed by CIT(A)-1, Bhubaneswar. The solitary issue in this appeal relates to taxation of interest income of Rs.3.85 crores earned on FDs kept in banks which has been reduced by the assessee from the capital WIP. This interest income is different from interest income of Rs.45.84 lakhs received on mobilization advances given to contractors i.e. RVNL

ii.) In fact, these amounts were invested in FDRs out of surplus funds lying idle with the appellant company. This amount could not have been used for making advances to the contractor or meeting day to day  expenses as alleged by the assessee. In the absence of bank statement, this contention of the assessee can’t be verified. On perusal of balance sheet of the assessee as on 31.03.2014, it is seen that the assessee is having surplus funds to the extent of Rs.129.52 crores which is lying in the form of cash and cash equivalents. Out of total share capital/reserves of Rs.248.29 crores, the capital work-in-progress as on 31.03.2014 stands at Rs.112.49 crores. The amount invested as FDRs in banks has neither been given as advances to RVNL nor utilized in meeting day to day expenses as alleged. In this case, the AR of the assessee had relied upon the decisions rendered in the case of Indian Oil Panipat Power Consortium Ltd. vs. ITO (315 ITR 255)(Delhi High Court). However there is no link between the construction business of laying down railway line and the surplus monies parked in FDs.

iii.) There is no material on record to suggest that the interest earned from the fixed deposits was inseparably connected with the business activity of the assessee or it was commercially utilized for laying down railway line.

iv.) Investing monies in the FDS is neither the business of the assessee company not incidental to its main business. It was held by the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (227 ITR 172) that it is totally immaterial whether the funds were raised by the issue of share or debentures. If the money lying idle is put into FDs, then interest income so earned would be revenue in nature chargeable to tax.

v.) The assessee had raised share application monies for the purpose of laying down railway line. But, due to non-utilization of funds, fixed deposits were made out of the said funds. Thus the interest income in respect of surplus funds, not required for business immediately and deposited in bank for short period was to be assessed as “income from other sources”. In that sense of the matter, the said funds were not in use for business purposes. The purpose of parking such funds in the bank was obviously for safety and security and ready use of the funds as and when there arose business needs of the assessee. Thus, the earning of interest income could not be dominant or business intention of the assessee. In this regard, the judgment relied upon by assessee in the case of Indian Oil Panipat Power Consortium Ltd. Vs. ITO (315 ITR 255) (Delhi) which dealt with the interest receipts earned prior to the commencement of business, was held to be distinguishable on facts since it was not known if the interest receipts were earned prior to ‘set up’ too.

vi.) The judgment of the Hon’ble Mumbai High Court in the case of Shree Krishna Polyster Ltd. Vs. Dy. CIT (274 ITR 21) is relied upon wherein it was held the income earned by the assessee by investing surplus money in bank deposits for a short period was assessable under the head ‘Income from other sources’.

vii.) In the case of Whistling Woods International Ltd. Vs. ITO (16 com 242), the assessee-company was incorporated to establish research and training institute-cum-integrated studio for training people in film line. During relevant assessment year, the project was under construction and there were no allied activities. The assessee, however had received interest on loans given to various other companies as well as short-term deposits with banks out of surplus fund received from share capital. The assessee reduced such interest income from the cost of project. The Assessing Officer, however, held that since assessee was in the process of setting up of training institute during the year, interest earned by deploying surplus funds was income to be assessed under the head ‘Income from other sources’. On appeal, the Commissioner (Appeals) confirmed the Assessing Officer’s views relying upon the decision of Tuticorin Alkali Chemicals & Fertilisers Ltd. Vs. CIT [1997] 93 Taxman 502 (SC). However, he agreed with the submission of the assessee that in case any expenditure had been incurred for the purpose of earning interest income, then the Assessing Officer should examine the same and allow the same. On appeal, the Honourable Mumbai ITAT held that except under the head ‘profits and gains of business’, then such income had to charged to tax under that particular head. In the instant case, the assessee was still constructing the building for the institute which was to be established for training of people. During this phase, the assessee had raised share capital and funds raised from such share capital had been invested in FDRs of the banks as well as deposits with various companies and assessee had earned interest on the same. The same had to be taxed as ‘income from other sources’ in the light of the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. Vs. CIT (supra). It was clear that unless and until the machinery of project was fully installed and the project became operational and the order was executed, it could not be said that the business had been set up. In view of the fact that the assessee was in the process of setting up an institute for training of people in film line but the building for such training institute was under construction during the year and not even a single student was taken up for the training purposes, it was clear that business was not set up and there was no question of claiming any expenditure. It was also contended that in any case, expenditure incurred, which was on revenue account, should had been adjusted against the interest income. Such expenditure could not be allowed as business expenditure because the business had not commenced. However, if any expenditure was incurred for earning interest income, it could have been allowed under section 57. In the result, assessee’s appeals were dismissed.

vii.) In the case of CIT Vs. Bokaro Steel Ltd. (236 ITR 315), the assessee-company was in the business of manufacturing of steel. For the purpose of construction of the plant, the assessee company gave advances to its contractors and earned interest from such advances, which were adjusted against the charges payable to the contractors, thus utilizing the interest amount to reduce the cost of construction. The assessee company was in process of constructing and erecting its plant; the company was charging rent from its contractor for workers and staff employed by contractor for the construction work of company. Further, there were hire charges for plant and machinery given to contractors for use in construction work of the company. Similarly, there were interest income from advances made to contractors and royalty from excavation. The earlier three receipts were adjusted against charges payable to contractor and had gone to reduce the cost of construction. Based on these facts, the Hon’ble Supreme Court held that these receipts were directly connected with or were incidental to the work of construction of its plant undertaken by the company. This was to facilitate the work of construction. Had this facility not been provided by the assessee company, then the contractors would have made their own arrangements and it would have been reflected in the charges on the contractor for the construction work. Thus, the Hon’ble Supreme Court gave the finding that the three receipts being intrinsically connected with construction of assesses’s plant were capital receipts and not income of company from any independent source. Similar was the finding by the Hon’ble High Court of Delhi in the case of Indian Oil Panipat Consortium Ltd. (supra). The facts in the present case are totally different from that in the case of Bokaro Steel Ltd. (supra) or Indian Oil Panipat Consortium Ltd. (supra). Here no advances have been given to the contractors. In other words, the interest receipts have not been utilized towards creation of capital assets. In these facts & circumstances, it is prayed that the interest income ought to be charged as “income from other sources”.

viii.) If the funds were not required for certain period, then these would constitute surplus funds for that period which were utilized for making short term deposits/fixed deposits as held by the Chandigarh ITAT in the case of Himalayan Expressway Ltd., Kalka Vs. ITO in ITA No.690/Chd/ 2014 dated 23.07.2015. The facts & circumstances of the present case are similar to that of Matoshri Ramabai Ambedkar Magaswargiya Sahakari Soot Girani Maryadit, Warananagar, Tal. Panhala, Dist. Kolhapur Vs. ITO in ITA No.1804/PN/2012 dated 31.12.2013 for AY 2008-09 wherein the Jurisdictional ITAT i.e. Honourable Pune Tribunal decided against the assessee. In the cited case, the assessee was a Co-operative Society, registered under Societies Act proposed to set-up a spinning mill. In addition to share capital contributed by its members, the assessee also received an amount of Rs.10,04,00,000/- from the State Government through account payee cheque on the IDBI Bank. This amount was invested in various banks as the assessee was yet to commence production activities owing  to the fact that construction of the project was under way and  machineries were yet to be acquired. As a result, the assessee earned interest of Rs.41,83,517/- on the above sum. The assessee filed its return of income on 31.03.2009 declaring total income at Nil. The case was selected for scrutiny and consequently an order u/s. 143(3) of Income Tax Act was passed whereby interest received from nationalized banks amounting to Rs.41,83,517/- was brought to tax which was confirmed by the CIT(A). The observations of the Honourable Pune ITAT are reproduced under:

“After going through the rival submissions and material on record, we find that the issue is with regard to the treatment of the interest earned of Rs.41,83,517/- on bank deposit for tax purpose. According to the Assessing Officer, only interest received from cooperative bank is exempt u/s.80(P) and interest income received from nationalized banks will be taxable in the assessee’s hand. The Assessing Officer did not agree with the contention of the assessee that the amount received from  government was kept in nationalized bank as per instructions from  state government,  accordingly, charged to tax interest of Rs.41,83,517/-. The cooperative society was set up on 09.12.1993. After collection of funds from the members towards their share of capital (Rs.1,41,15,884/-) the process of collection of funds other stake holders, namely the  Government of Maharashtra, who had to contribute Rs.10,04,00,000/-as its share of share capital, started. This share capital was contributed  on 31.03.2007 and kept in an account in IDBI Bank. The Government of Maharashtra vide letter dated 29.03.2007 indicated that the fund should be utilized for setting up of spinning mill. At the end of the relevant accounting period 60 % of civil work was completed and order for procurement of machinery, along with security deposit, was placed with Voltas Ltd. No interest was earned from the supplier of machinery. In the interregnum, the assessee kept this amount in various institutions and earned interest thereon. The institutions from which interest to the tune of Rs.49,35,409/-was earned are Shivaji Sahakari Bank Ltd., Union Bank of India, Bank of India and IDBI Bank against which expenses to the tune of Rs.15,40,341/- were claimed. The assessee had received interest to the tune of Rs.27,83,940/- from Shivaji Sahakari Bank Ltd., another cooperative institution and Rs.41,83,517/- from other banks. Manufacturing has not started during the relevant previous year. The assessee claimed a deduction of the amount of Rs.33,95,068/-  u/s. 80P of the Income-tax Act against which an amount of Rs.27,83,940/-received from Shivaji Sahakari Bank Ltd. was allowed. The Assessing Officer did not allow the claim of Rs.15,40,341/- attributed to various expenses on the ground that during pre-business commencement period, the expenses ought to be capitalized which was evident that funds given by the Government of Maharashtra as their contribution towards share capital was deposited with various banks primarily as the same was idle fund lying with the assessee pending development of land and construction of factory building and erection of spinning mill. Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT (1997) 227 ITR 172 (SC) has held that in case 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 deposits, the income earned in the form of interest will be taxable under the head ‘income from other sources’. The assessee has not made out the case that the deposits were kept with bank for setting up of a factory. In fact it was surplus fund which was kept with the bank on which the assessee earned interest. The ratio of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. is squarely applicable and interest earned by the assessee during construction period on deposits kept with the nationalized bank is assessable as income from other sources as done by the Assessing Officer. This view is fortified by the decision of Hon’ble Supreme Court in the case of CIT Vs. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC). Accordingly, we are not inclined to interfere in the findings of CIT(A) who has rejected the appeal of assessee holding that interest earned on deposit kept with bank was taxable u/s.56 of I.T. Act. The same is upheld. In the result, appeal filed by the assessee is dismissed”. In view of above facts & circumstances, the appeal of the assessee needs to be rejected.

Apart from the above written submissions, ld. DR also submitted that the arguments advanced in the case of M/s Haridaspur Paradip Railway Company Limited Vs. DCIT in ITA No.383/CTK/2019, order dated 12.10.2020, shall be treated as same in this case also. He further submitted that in the impugned case the share application money were also lying with the assessee as per the annual financial reports. It was also submitted by the ld. CIT-DR the interest received on fixed deposits/flexi deposits is in the nature of income from other sources.

11. After hearing both the sides and perusing the entire material available on record and the order of the authorities below, we find that during the course of assessment proceedings the assessee explained before the AO with regard to interest on mobilization advance is a capital receipt, therefore, it has been reduced from the capital work-in-progress and in case of interest earned on fixed deposit/flexi deposits is a business income, therefore, it has been treated as a revenue income. The AO did not accept the claim of the assessee and treated the same as income from other sources. In appeal, the CIT(A) accepted the claim of the assessee in regard to interest on mobilization advance but he did not agree with the interest received on fixed deposits/flexi deposits and upheld the action of AO holding that the AO has rightly treated the interest earned on FDR & Flexi Deposit as income from other sources.

12. We observe from the balance sheet for both the assessment years under consideration that the share application money pending for allotment is also appearing and we have decided the similar issue in the case of M/s Haridaspur Paradip Railway Company Limited Vs. DCIT in ITA No.383/CTK/2019, order dated 12.10.2020, in which the issue of share application money were pending for allotment has been remitted back to the file of AO with the following observations :-

4. Ld. AR has reiterated the submissions made before the lower authorities and he has also relied on number cases and filed his written submissions :-

• • This issue is squarely covered by the decision of the Hon’ble Cuttack Tribunal in the case of DCIT v. M/s Radhikapur (West) Coal and Mining Pvt. Ltd., I.T.A. Nos.396/397CTK/2018, dated 21.10.2019. Wherein the Hon’ble Tribunal, after relying on the order of Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. 315 ITR 255, held that interest earned on funds primarily brought for infusion in the business activity could not be termed as income from other sources.
  • Further, the Hon’ble Karnataka High Court on a similar issue in the case of PCIT v. M/s Banknote Paper Mill India Pvt. Ltd. in ITA 690/2017 held that this issue is ex facie covered by the decision of the jurisdictional High Courts or even the Hon’ble Supreme Court of India. Thus, no substantial question of law arises in the present case and the Appeal filed by the Revenue is without merit and liable to be dismissed.
  • The Hon’ble Karnataka HC in the above case has relied on the order of the Tribunal. Wherein, the Tribunal held that the interest income earned by the Assessee Company on bank deposits made out of share capital received by it from the Reserve Bank of India could not be taxed as “Income from Other Sources” as the said interest income was earned prior to commencement of operations of the company during the construction period.

Brief facts of the case

• • The assessee is a Joint Venture Company of­- Rail Vikas Nigam Limited;

–   Government of Orissa

– Paradip Port Trust,

– Rungta Mines Ltd;

– Essel Mining & Industrial Ltd.

– Jindal Steel & Power Ltd;

• • The assessee was incorporated as a Special Purpose Vehicle (SPV) by the Joint Venture Partners to complete the project, i.e. construction of a New Railway Line between Haridaspur to Paradeep in Orissa. Copy of MOU entered between the joint venture partners is enclosed at PB Pg. 3­12 (Relevant Pg. 5)
  • That, it has been provided in the MOU that the Joint Venture Partners will provide funds via Equity Participation to the assessee company to complete the cost of the project. PB Pg. 6.
  • Accordingly, the assessee company issued share capital to construct the Railway Line.
  • Further, for construction, the assessee company has entered into a construction agreement with RVNL. Wherein, RVNL shall undertake the construction of the project (Railway Line) on behalf of the assessee company and for which the assessee company provided funds. Copy of construction agreement is at PB Pg. 13-40 (Relevant Pg. 27, Para 11 of the construction Agreement)
  • Moreover, as per construction agreement, if any expenditure incurs out of the funds of RVNL, then RVNL shall charge interest at the Average Prime Lending Rate on the amount so expended. (Relevant Pg. 28, Para 11.5 of the construction Agreement)
  • That, on a regular basis, the assessee made advances to RVNL to enable it to execute the construction work. Furthermore, on such advances, the assessee company received interest which was later adjusted by the assessee against the dues of RVNL from their bills.
  • Further, the small amount of money so raised by the assessee is parked by in various banks in the form of term deposit to earn interest in order to meet day to day cost of the project.
  • That, the interest income mentioned above is utilized to meet the expenses of the project, and it is inextricably linked with the process of construction of Railway Line. Accordingly, the assessee treated the said income as a capital receipt.
  • That, the assessee filed its return of income for AY 2014-15 on 27.09.2014, declaring nil income. Copy of Acknowledgement of ROI along with the Computation of Income is at PB Pg. 1-2.
  • That, the case was selected for scrutiny assessment and notice u/s 143(2) & 142(1) of the Act, were issued to the assessee. The Ld. AO asked the assessee to explain why the interest on mobilization advances and Fixed Deposit should not be treated as income from other sources instead of a capital receipt.
  • That, in compliance with the same, the assessee produced the books of accounts and other relevant documents. Moreover, assessee explained that Mobilization advance and Interest of FD are inextricably linked with the setting up of the Railway Line. Therefore, the same should not be treated as Income from Other Sources, and accordingly, it must be viewed as capital receipt going to reduce the cost of construction. Copy of reply submitted by the assessee is at PB Pg. 41-44

• • Subsequently, AO completed the assessment assessing the total income at Rs. 3,89,83,258/- and its passed order u/s 143(3) of the Act, dated 28.12.2016 making the following addition-

Sr. No.	Particulars	Amount (Rs.)
1.	Interest on FDR and Flexi Deposit	3,27,79,005
2.	Interest on Mobilization advance	62,04,253/-

• • That, the additions mentioned above were made on the ground that assessee has not commenced its business operation and therefore, the interest earned by it is taxable under the head’ Income from Other Sources’. AO also relied on the decision of Tuticorin Alkali Chemical and Fertilizers Ltd. v. CIT. (Relevant findings of AO are at Page 11, Para 5 of AO’s order)
  • Aggrieved by the above additions, the assessee preferred an appeal before the CIT (A). The Id. CIT (A) deleted the addition of interest received on Mobilization advance relying on the order passed by the Tribunal (ITA No. 83/CTK/2016), dated 09.10.2017 in the assessee’s own case for the AY 2010-11. Copy of ITAT order is placed at PB Pg. 45-49
  • However, the CIT (A) confirmed the addition of Interest on FDR and Flexi Deposit relying on the decision of Tuticorin Alkali Chemical and Fertilizers Ltd. (Relevant findings of CIT (A) are at Para 4.2, Pg. 11)
  • Challenging the order of CIT (A), the assessee in appeal before your

Honors.

Our Submissions:

• • It is submitted that in the present case, the assessee being a Joint Venture Company of-

– Rail Vikas Nigam Limited;

–   Government of Orissa

– Paradip Port Trust,

– Rungta Mines Ltd;

– Essel Mining & Industrial Ltd.

– Jindal Steel & Power Ltd;

is incorporated as a Special Purpose Vehicle (SPV) particularly to construct a New Railway Line between Haridaspur to Paradeep in Orissa.

• • Further, for the purpose of construction, the assessee company entered into a construction agreement with RVNL. Wherein, RVNL shall undertake the construction of the project (Railway Line) on behalf of the assessee company. Moreover, the funds required for construction shall be arranged by the assessee company. Copy of construction agreement is at PB Pg. 13-40 (Relevant PB Pg. 27, Para 11 of the construction Agreement)
  • It may also be noted that, as per the construction agreement, RVNL shall charge interest at the Average Prime Lending Rate, if any expenditure is incurred out of its own funds. (Relevant PB Pg. 28, Para 11.5 of the construction Agreement). Thus, the whole cost of the project is to be financed by the assessee company
  • Accordingly, the assessee company issued share capital which is unquestionably utilized for construction of Railway Line. Further, small amount of funds are also parked in various banks in the form of term deposit on which assessee received interest which is also expended to meet day to day cost of the project.

• • It is pertinent to note that there is no allegation of AO or CIT (A) that the share capital of the assessee company was being used for any other purpose other than the construction of Railway Line.
  • It is submitted that since the assessee company is incorporated only for construction of Railway Line, therefore it is not free to utilize the funds for any purpose except for Railway Project. Moreover, there is no  allegation of AO regarding the utilization of funds for any other purpose,  and lastly, the interest income from FD was earned in a period before the  commencement of business; therefore, the said receipt is a capital receipt.
  • The Id. CIT (A) has misconstrued the ratio of the Judgment of the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals and held that the income earned by the assessee is not a capital receipt.
  • It may kindly be noted that the Hon’ble Delhi HC has interpreted the aforesaid judgement of Apex Court in the case of Indian Oil Panipat Power Consortium Ltd v. ITO. [2009] 315 ITR 255.
  • Further, the Hon’ble High Court in the said case considered another Judgement of Supreme Court in Bokaro Steel Ltd. Wherein the Supreme Court held that “if income is earned, whether by way of Interest or in any other manner on funds which are otherwise “inextricably linked” to the setting up of the plant, such income is required to be capitalized to be set off against pre-operative expenses.”
  • Finally, the Delhi High Court after analyzing the ratio in the case of Tuticorin Alkali Chemicals and Bokaro Steel Ltd simultaneously, held that the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources-Relevant para of Judgment are reproduced hereunder:

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 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 (supra) it was found by the authorities that the funds available with the assessee in that case were “surplus” and, therefore, the Supreme Court held that the interest earned on surplus funds would have to be treated as “income from other sources”. On the other hand in Bokaro Steel Ltd (supra) where the assessee had earned interest on advance paid to contractors during pre-commencement period was found to be “inextricably linked” to the setting up of the plant of the assessee and hence was held to be a capital receipt which was permitted to be set off against pre-operative expenses.

• • Thus, applying the aforesaid Judgment of Delhi High Court in the facts of the present case, it can be appreciated that here also interest income is earned on funds which are “inextricably linked” to the setting up of the Rail Line. Therefore, such income is required to be capitalized to be set off against pre-operative expenses.

It may also be noted that the above Judgement of Delhi High Court has been followed by the Coordinate Bench of ITAT Cuttack in the following cases.

The Hon’ble ITAT Cuttack, on similar facts after considering the decision of Apex Court in the case of Tuticorin Alkali Chemical and Fertilizers Ltd. v. CIT, DCIT v. M/s Radhikapur (West) Coal and Mining Pvt. Ltd., I.T.A. Nos.396/397CTK/2018, dated 21.10.2019

From the above observations of the CIT(A), we find that CIT(A) while dealing with the issue has observed that in the case of Indian Oil Panipat Power Consortium Ltd. v. ITO 315 ITR 255, the Hon’ble High Court held that the interest earned on FDs was capital receipt liable to be set off against pre-operative expenses, and could not be taxed as income from other sources. In their Judgment, the Hon’ble Delhi High Court has considered a host of decisions of various courts on the issue including the decisions of the Hon’ble Supreme Court in the cases of Tuticorin Alkali Chemicals & Fertilizers Ltd. and Bokaro Steel Ltd. The case of the assessee appears to be squarely covered by the decision of the Hon’ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd.

b) MJSJ Coal Limited v. ITO, I.T.A. NOS.429/CTK/2016, 68/CTK/2017 And 107/CTK/2018, dated 31.08.2018.

Para 12 the interest earned on funds primarily brought for infusion in  the business activity cannot be termed as income from other sources,  whereas the interest income on bank deposits earned by the assessee company to commencement of its business is in the nature of capital receipt and accordingly be set off against pre-operative expenses. We considering the judicial precedence and the facts and circumstances of the present case, are of the substantive opinion that if the assessee company receives any amount which is inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. Hence such receipts are capital in nature and cannot be taxed as income under income from other sources. The assessee company was formed to set up a mining project and the process of setting up was got delayed and deposits of share capital amount received from the share applicants with the bank in the form of fixed deposits for short term, is to be considered as inextricably linked with the process of setting of its plant and machinery. Accordingly, we hold that the interest earned by the assessee should not be treated as income from other sources and we allow the grounds of appeal of the assessee. Therefore, the appeal of the assessee for assessment year 2011-2012 is allowed.

c) POSCO INDIA PVT. LTD VERSUS, DCIT ITA Nos. 186 and 460/CTK/2011, 461/CTK/2011 and held as under:

Para 5 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 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 he set off against pre­operative expenses.

d) ACIT, v. M/S. POSCO INDIA PVT LTD. AND VICE-VERSA ITA No.155 & 122/CTK/2017, C.O.No.07 And 08/CTK/2017

the interest on fixed deposits are not taxable under income from other sources and, accordingly, we uphold the findings of the CIT (A) and dismiss the ground of appeal taken by the revenue for both the assessment years.

e) M/S. KALINGA COAL MINING PVT. LTD., VERSUS ACIT ITA No. 123 and 279/CTK/2010

The learned Counsel has been able to establish that there was no surplus insofar as it was the share capital received as application money pending allotment which was poured in for the purchase/acguisition of land which would entitle the assessee to commence business of excavating coal in accordance with the Rules and Regulations governed by the State undertakings namely, IDCO and OMC. We have perused the correspondences lying with the assessee to clarify the stand taken for the purpose of starting business which reguired the assessee to park funds in the bank simultaneously incurring pre-operative expenses to the magnitude of Rs.51 Crores and ?66 Crores. This clearly indicates that there was no surplus available with the assessee for earning interest as income from other sources.

• • Further reliance has been placed on the following decisions wherein the decision of Indian Oil Panipat Power Consortium Ltd v. ITO has been followed :

♦ Bongaigaon Refinery and Petrochemicals ltd. v. CIT 251ITR 329 (SC);

♦ NTPC Sail Power co. Pvt. Ltd. v. CIT in ITA No. 1238/2011 (DELHI HC);

♦ PCIT v. M/S. NTPC Tamil Nadu Energy Co. Ltd., ITA 233/2018 & CM APPL.7162/2018, ITA 234/2018 & CM APPL.7163/2018;

♦ Solarfield Energy Pvt. Ltd. v. ITO, ITA No. 5189/Mum/2016;

♦ BTW-Atlanta Transformers India Pvt. Ltd. v. ACIT, ITA Nos. 1642 & 1643/Ahd/2018;

♦ ITO, v. CMDC ICPL Coal Ltd, ITA No. 271/RPR/2014;

♦ M/s Saville Hospital & Research Centre PVT. Ltd. v. ITO ITA No. 491/JP/2018

• • It may also be noted that recently the Hon’ble Supreme Court in the case of NATIONAL CO-OPERATIVE DEVELOPMENT CORPORATION v. CIT in CIVIL APPEAL NOS. 5105-5107 OF 2009, dated 11.09.2020 held that interest income generated on the idle funds which is applied in the business of the assessee company is to be treated as a business income thus, fall under the head of ‘Profits and Gains of Business or Profession and not under Income from Other Sources. Relevant findings of the order are as under:

23. We are in agreement with this view taken by the High Court, as the only business of the appellant-Corporation is to receive funds and then to advance them as loans or grants. The interest income arose on account of the fund so received and it may not have been utilised for a certain period of time, being put in fixed deposits so that the amount does not lie idle. That the income generated was again applied to the disbursement of grants and loans. The income generated from interest is necessarily interlinked to the business of the appellant-Corporation and would, thus, fall under the head of ‘profits and gains of business or profession’. There would, therefore, be no requirement of taking recourse to Section 56 of the IT Act for taxing the interest income under this residuary clause as income from other sources. In our view, to decide the question as to whether a particular source of income is business income, one would have to look to the notions of what is the business activity. The activity from which the income is derived must have a set purpose. The business activity of the appellant-Corporation is really that of an intermediary to lend money or give grants. Thus, the generation of interest income in support of this only business (not even primary) for a period of time when the funds  are lying idle, and utilised for the same purpose would ultimately be taxable as business income.

• • Thus, in the view of above submission and judicial pronouncements, it is submitted that the interest earned on FDR & Flexi deposits should reduce the cost of its assets since these are the receipts of capital nature and could not be taxed as income from other sources^
  • Thus, in the light of the above, it is submitted that the addition made by the Ld. AO and sustained by the CIT (A) holding that interest earned on FDR & Flexi deposits is of revenue nature, is bad in law and therefore may kindly be deleted.”

Apart from the above, he has also filed copy of fixed deposit receipts containing pages No.1 to 8 and copy of balance sheet containing page No.9 to 11, which all are placed on record. He has also filed paper book containing pages 54 and submitted that the case is covered in assessee’s own case for the assessment year 2010-2011, order dated 2009-2010, therefore, the assessee has rightly claimed it as a capital receipt.

5. On the other hand, ld. DR submitted that the authorities below are justified to hold that interest on fixed deposit is an income from other sources and case laws relied on by the authorities below are squarely applicable in the present case. He further submitted that the MOU was signed for construction of railway lines on 16.08.2009 and still the works are under construction and he further submitted that the assessee has received interest and how it has been utilized and it can be verified from the bank accounts of the assessee. Therefore, it need to be verified the utilization of the interest as to whether it has been utilized for the revenue purpose or for the construction of the project. He also submitted that the share application money is kept pending for allotment at the year ending 31.03.2014. He also made analysis of the balance sheet and submitted that the huge amounts have been kept by the assessee in liquid form in the bank by way of investments as FD. Therefore, it is clear that the intention of the assessee is to earn interest on investment in fixed deposit and no advances were made to the contractor. Therefore, ld. CIT-DR requested that the matter should go back to the AO for verification.

6. After hearing both the sides and perusing the entire material available on record and the order of the authorities below, we find that the assessee has shown interest on fixed deposit of Rs.3,27,79,005/- and further on perusal of the documents filed by the assessee in the paper book containing page Nos.1 to 11 filed on 8^th October, 2020 on email that the assessee has filed copy of the fixed deposit and the balance sheet of the assessee company. On perusal of the balance sheet it was noticed that the assessee has shown share application money pending for allotment in Note No.4 of Rs.454.95 crores as on 31.03.2014 and Rs.274.95 crores on 31.03.2013, respectively. It shows that there is net increase in the above account head of Rs.180 crores and as per Note No.4.2 of the balance sheet, the company has issued 42,74,50,000 equity shares of Rs.10/- each at par on 29.05.2014 against the share application money pending allotment as on 31.03.2014 to all the applicants except POSCO Ltd. The details are as under :-

4. Share application money pending allotment (Amount in Rs.)

Particulars	As at 31st March, 2014	As at 31st March, 2013
(a) Rungta Mines Ltd.	300,000,000	300,000,000
(b) Essel Mining and Industries Ltd. .	299,750,000	299,750,000
(c) Paradip Port Trust	510,000,000	275,000,000
(d) MSPL Ltd..	150,000,000	150,000,000
(e) Jlndal Steels & Power Ltd.	50,000,000	50,000,000
(f) steel Authority of India Ltd.	50,000,000	50,000,000
(g) POSCO Ltd,	275,000,000	275,000,000
(h) IDCO	18,000,000	18,000,000
(i) Rail Vikas Nlgam Ltd,	1,639,750,000	1,331,750,000
(j) Govt Or Odlsha	450,000,000	–
(k)Orissa Mining Corporation	747,000,000
	4.549,500,000	2,749,500,000

–

Number of Share proposed to be issued	454,950,000	2,749,950.000
Amount of Premium/Discount on issue	Nil	Nil
Period before which shares are to be issued	Refer Note 4.1	Refer Note 4.1
Whether the company has sufficient authorized capital	Yes	Yes
Interest accrued on amount due for refund	Nil	Nil
Period for which pending beyond the period for allotment	Refer Note 4.1	Refer Note 4.1

4.1 During the year, company made a cash call of Rs.36.80 Crore from Rail Vikas Nigam Ltd. Rs.23.50 Crore from Paradip Port Trust, Rs.100 Crore from Govt. of Odisha and Rs.74.70 Crore from Orissa Mining Corporation. Out of total called amount of Rs.235 Crore, company received Rs.180 Crore during the year. Rs.55 Crore from Govt. of Odisha was not received during the year.

4.2 Subsequent to Balance Sheet date on 29.05.2014, the company has issued 42,74,50,000 equity shares of Rs.10/- each at par against the share application money pending allotment as on 31.03.2014 to all the applicants, except POSCO Ltd. (at 4(g) above) due to non-fulfillment of certain conditions by them.

7. From the above it is clear that the assessee company is a public limited company and the share application money was kept pending for allotment for a long time. In this regard, we specifically asked questions to the ld. AR of the assessee on the following certain points which are as under :-

i) Date of receipt of share application money & allotment to shareholders.

ii) whether the company has followed the relevant rules/provisions of the Companies Act in this regard.

iii) if the shares have not been allotted within 60 days from the date of receipts then the discloser policy in the balance sheet, whether it should be treated as current liability or otherwise and treatment in the books of account of the company.

iv) use of share application money during pendency for allotment.

v) applicability of company deposit rules and its classification in the balance sheet & utilization of interest or interest on such deposit and taxability as per the Income Tax Act, 1961.

vi) the fixed deposit is a short term fixed deposit or long term fixed deposit and/or auto renewal system in the bank and after maturity the utilization of the interest.

Ld. AR of the assessee could reply only the date of allotment of shares as per balance sheet note No.4.2, which is 29.05.2014 and the rest were remained unanswered. Therefore, the ld. AR submitted that let the AO may examine the above questions which are unanswered.

8. Considering the submissions of both the sides and with the consent of both the parties for sending back to the file of AO for the examination of above questions for deciding the issue raised as above afresh, we remit the matter back to the file of AO for fresh adjudication in the light of the above questions and taxability of interest income as per Income Tax Act, 1961. The AO is directed to decide the case after detail examinations and documents produced by the assessee after considering the relevant rules and regulations as per the law. The assessee is also directed to avoid any unnecessary adjournment and cooperate with the AO for early disposal of the case.

13. In the impugned case, on perusal of the orders of the authorities below as well as the submissions made by both the sides before us, we observe that the assessee has deducted the expenses from the interest and surplus has been transferred into the reserve and surplus account. Before the AO the assessee has also offered it as a business income in the form of written submissions, which has been incorporated by the AO in the assessment order. We found substance on the submission of the ld. CIT-DR. As the issue being similar to the case of Haridaspur Paradip Railway Company Ltd.(supra), therefore, we also remit the issue to the file of AO on the same directions given therein along with some additional direction to the AO for examination as to whether the income which has been transferred into the reserve and surplus account and its utilization, either for revenue purpose or for capital expenditure. The AO is also directed to decide the issue as per law after providing reasonable opportunity of being heard to the assessee. The assessee is also directed to avoid taking any unnecessary adjournment and cooperate with the AO for early disposal of the case. We order accordingly.

14. Similar issue has been raised in appeal of the assessee for A.Y.2014-2015 in ITA No.385/CTK/2019, therefore, our observations made in ITA No.384/CTK/2019 (AY:2013-2014) shall apply mutatis mutandis to this appeal also. We order accordingly.

15. In the result, both appeals of the assessee are allowed for statistical purposes.

Order pronounced in the open court on 03/ 11/ 2020.