Hll Biotech Ltd. Vs ITO (ITAT Cochin)
Conclusion: Since assessee-company was still at the pre-commencement stage and during this phase, it had raised equity funds which was invested in fixed deposits of the Banks as well as the holding company and had earned interest on the same, the interest earned had to be taxed as ‘income from other sources” and the same could not be set-off against capital expenditure..
Held: Assessee-company, subsidiary of M/s. H Limited, was set up by the Government for the purpose of developing Integrated Vaccine Complex. Assessee had not commenced commercial operations and was in receipt of interest income from deposits in Bank as well as from Holding Company. Assessee had claimed that the interest income was capital receipt to be set off against the expenditure incurred during this period. AO considered the issue of taxability of interest income earned prior to commencement of business and held that interest income was taxable under the head ‘income from other sources’. AO held that expenditure incurred by assessee for the purpose of setting up its business could not be allowed as deduction nor could it be adjusted against any other income under any other head. It was held assessee was still at the pre-commencement stage and during this phase, assessee had raised equity funds which was invested in fixed deposits of the Banks as well as the holding company and assessee had earned interest on the same. The same has to be taxed as ‘income from other sources” and the same could not be set-off against capital expenditure.
FULL TEXT OF THE ITAT JUDGEMENT
These appeals filed by the assessee are directed against the different orders of the CIT(A), Trivandrum dated 30/11/2018 and pertain to the assessment years 2013-14 to 2015-16.
2. The assessee has raised the following grounds:
1. The CIT(A) erred in confirming the action of the Assessing Officer in not setting off the interest income received during construction period against the expense during construction period and assessing it as income from other sources” overlooking the fact that income earned on funds which are otherwise inextricably linked to the setting up of the plant is required to be capitalized and set off against the expense during construction.
2. The CIT(A) failed to note that the ratio of the Apex Court in the case of Turticorin Akali Chemicals & Fertilizers Ltd. (227 ITR 172) is not applicable to the case of the appellant since the appellant is not at liberty to use the interest as it like and it has to be used only for the purpose of the integrated vaccination project, following the general guidelines of Government of India.
3. Without prejudice to the above grounds, the CIT(A) erred in confirming the action of the Assessing Officer in not setting off the business loss of Rs.7,88,636/- assessed in the original assessment order against the additions made by him.
3. The facts of the case are that the assessee company is a subsidiary of M/s. HLL Lifecare Limited. It was set up by the Government of India for thepurpose of developing Integrated Vaccine Complex. The assessee had not commenced commercial operations and the assessee was in receipt of interest income from deposits in Bank as well as from Holding Company amounting to Rs.4,17,75,000/-. The assessee had claimed that the interest income was capital receipt to be set off against the expenditure incurred during this period. The Assessing Officer considered the issue of taxability of interest income earned prior to commencement of business and held that interest income is taxable under the head ‘income from other sources’. The Assessing Officer held that expenditure incurred by the assessee for the purpose of setting up its business cannot be allowed as deduction nor could it be adjusted against any other income under any other head.
4. On appeal, the CIT(A) placed reliance on the judgment of the Supreme Court in the case of Sitaldas Tirathdas, 41 ITR 367 where principles in respect of diversion by overriding title had been laid down. The relevant part of the decision is as under:
“These are the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, not. But we do not propose to examine the correctness of the decisions in the light of the facts in them. In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation, income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one’s own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable. In our opinion, the present case is one in which the wife and children of the assessee who continued to be members of the family received a portion of the income of the assessee, after the assessee had received the income as his own. The case is one of application of a portion of the income to discharge an obligation and not a case in which by an overriding charge the assessee became only a collector of another’s income. The matter in the present case would have been different, if such an overriding charge had existed either upon the property or upon its income, which is not the case. In our opinion, the case falls outside the rule in Bejoy Singh Dudhuria’s case (supra) and rather falls within the rule stated by the Judicial Committee in P.C. Mullick’s case (supra).” [Emphasis Supplied]
4.1 Thus, the CIT(A) observed that obligation to apply income in certain way would not amount to diversion by overriding title. Therefore, according to the CIT(A), in the case of the assessee, the letter of the Ministry is only obligation to apply interest income for the objectives of the assessee and the same cannot be treated as diversion by overriding title. Further, the CIT(A) relied on the decision of the ITAT, Delhi in the case of Mussoorie Dehradun Development Authority, 22 taxmann.com 93 wherein it was held that the memorandum issued by the State Government only regulates how the funds so collected are to be incurred for the fulfilment of its objects and which sector has to be given preference and thus, it only suggests application of income. In the light of the above decisions, the CIT(A) held that there was no merit in the ground raised by the assessee that the interest income was not taxable in view of the guidelines issued by the Government and the same was dismissed.
4.2 The CIT(A) observed that during the financial year 2013-14, in the Audit Report Note; 10, “Notes to financial statements for the period ended 31-03-2013, in Sl. No. 1.7 to 1.9, the Auditors have stated that:
“No Profit and Loss account has been prepared since the company is yet to commence commercial operations and the project is under construction stage , Unutilized surplus funds of the company is kept in short term fixed deposit with Canara Bank, Cantonment Branch, Trivandrum and Indusind Bank. Nungambakkam, Chennai. Interest income is disclosed separately and deducted from the total of the revenue expenditure incurred during the construction period so that the net amount of expenditure is capitalized.”
“The expenditure during construction of the period is included under intangible assets under development and the same will be allocated to the respective fixed assets on the completion of construction.”
“No deferred tax liability and current income tax liability has been recognized as the company is yet to commence commercial operations”
As per Note 4 D(i) the assesse has income from ‘Interest on Deposits’, Rs. 3,23,91,000/- and ‘Interest Income from Holding Company’ Rs. 93,84,000/-.
Thus, CIT(A) observed that the assessee had earned interest on unutilized surplus funds.
4.3 Finally, the CIT(A) by relying on the decision of ITAT, Hyderabad Bench in the case of Thermal Powertech Corporation India Ltd. 81 taxmann.com 168, concluded that the interest income earned on unutilized surplus funds is to be assessed as income under the head ‘income from other sources’. Accordingly, the CIT(A) confirmed the addition of Rs.4,17,75,000/- made by the Assessing Officer.
5. Against this, the assessee is in appeal before us. The Ld. AR submitted that the assessee had commenced construction during the financial year 2012-13 and had planned to complete the project by financial year 2018-19. During the construction period, the assessee had temporarily parked the share capital funds infused by the Govt. of India, which was not immediately required, in deposits with banks on which it earned interest income. HLL Lifecare Ltd. also paid interest on such funds received from Govt. of India, till it was transferred to the assessee. It was submitted that interest received from banks and HLL Lifecare Ltd. was Rs.4,17,75,000/- for AY 2013-14, Rs.14,88,64,388/- for AY 2014-15 and Rs.11,62,02,364/- for AY 2015-16. The assessee had reduced the interest income so received from the construction expenditure, since these funds are inextricably linked to the funds received for setting up of the vaccine plant as per the order of the Govt. of India and as per general policy/guidelines for any funds provided by the Government of India, any income earned out of such funds provided for any specific purpose, it should be utilized only for the purpose for which such funds were given.
5.1 It was submitted that the accounts were also audited by C&AG and there were no adverse comments from them for the method of accounting followed by the assessee.
5.2 The Ld. AR submitted that in the order dated 23.03-2018 for the AY 2014-15, the CIT (Appeals) upheld the action of the Assessing Officer on the following ground:
“Taxability of interest income to my understanding depends upon whether the assessee was authorized to temporarily park the surplus fund and to earn interest thereon or not. In a situation where the assessee had received grant from the Government and received interest on a temporary parking on the instruction of the Government then the interest so received being part of the grant should not be taxed as income. But, if the grant is temporarily parked without specific direction/instruction from the Government then the interest earned cannot be incidental to the set purpose and thereby shall necessarily be brought to tax as income from other sources in the hands of the assessee.
No specific direction from the Ministry of Health and Family Welfare, Government of India and HLL Lifecare Ltd while giving the fund that the surplus fund not immediately required for the implementation of project can temporarily be deposited with banks and interest earned thereon would form part of the fund, has ever been made.
The entire conduct of the assessee right from receiving the fund to the disbursement and parking of the fund shows that it acted as its own fund but not on behalf of the Ministry of Health and Family Welfare, Government of India and HLL Lifecare Ltd. The assessee as far as the temporary parking of the fund is concerned, never has been subjected to the directions of the Ministry of Health and Family Welfare, Government of India and HLL Lifecare Ltd. In the decision relied on by the assessee, the Karnataka Urban Infrastructure Development & Finance Corporation is not only a nodal agency but also committed to apply the interest earned from bank deposits only for the purpose as provided in the guidelines. In the instant case, no specific direction from the Ministry of Health & Family Welfare, Govt. of India and HLL Lifecare has ever made to park temporarily the unutilized fund to earn interest and to return back the same.
5.3 The Ld. AR further submitted that when the case for AY 2014-15 challenging the above order of CIT(A) was heard by ITAT in ITA No.179/Coch/2018, this letter was produced as additional evidence, since the letter was received by the assessee only during June, 2018. The ITAT vide order dated 24.09.2018 had admitted this additional evidence and had remitted the case back to CIT(A) with the following observation :
“The additional evidence filed by the assessee in the form of a letter from Govt. of India, Ministry of Health & Family Welfare dated 14.06 2018 is very vital for deciding the disputed issue. Being so. we are inclined to admit the additional evidence. Accordingly, we remit the issue to the file of the CIT(A) to decide it afresh after considering the relevance of the letter supra. “
As directed by the Tribunal, the case was heard again by CIT(Appeals) to decide the issue, after considering the additional evidence. However, it was submitted that the CIT(A) by relying on judgment of the Supreme Court in the case of Sitaldas Tirathdas (41 ITR 367 SC) dismissed the appeal again, on the ground that the guidelines issued by Govt. of India does not result in diversion of income by overriding title. According to the ld. AR, the issue in this case was maintenance payment to wife and children under consent decree and the Apex court held that since for paying such maintenance no charge on the property was created, this was not diversion at source but only application of income to discharge an obligation which decision is not applicable to the facts of the present case, since in the case of the assessee, there is specific direction from the Govt. of India to utilize the interest earned by way of depositing the equity funds for the purpose of the vaccine project only and not for any other purpose. In the case of the assessee, since the interest can be utilized only for the purpose of setting up the vaccine project and it does not have the liberty to utilize the funds for any other purpose, it was diverted before it reached them. Hence this is a clear case of diversion by overriding title. The CIT(Appeals) had also relied on the decision of the ITAT Hyderabad in the case of Thermal Powertech Corporation India Ltd. vs. DCIT in ITA No.1534/Hyd/2016 dated 26/04/2017 in concluding that the interest income is to be assessed under the head “Income from other sources”. According to the Ld. AR, the facts of this case are also not applicable since in that case the assessee had earned interest on deposits made out of borrowed funds and it had the liberty to utilize the same for any purpose. In the case of the assessee, it was submitted that it had temporarily parked the share capital funds infused by the Govt. of India for setting up the vaccine plant, which is not immediately required, in deposits with banks on which it earned interest income. The Ld. AR relied on the judgment of the Apex Court in the case of CIT vs. Bokaro Steel Ltd. (236 ITR 0315) wherein it was held that when 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.
5.4 The Ld. AR also relied on the following case laws:
1. ITO vs. Bank Note paper Mill India P. Ltd. (56 ITR (Trib.) 266 (Bang.)
2. Indian Oil Panipat Power Consortium Ltd. vs. ITO (315 ITR 255)
3. ITO vs. Alliance Hospitality Services Pvt. Ltd. (ITA No. 3191/Mum/2013 dated 28/08/2017) (ITAT, Mumbai)
4.CIT vs. Karnataka Urban Infrastructure Development and Finance Corporation (315 ITR 301) (Kar.)
5. Adani Power Ltd. vs. ACIT (155 ITD 239) (ITAT, Ahmedabad)
6. CIT vs. VGR Foundations (298 ITR 132) (Mad.)
5.5 Further, the Ld. AR submitted that as general policy/guidelines for any funds provided by the Government of India, any income earned out of such funds provided for any specific purpose, it should be utilized only for the purpose for which such funds were given and the recipient is not at liberty to use the interest income as it like. Following these guidelines, assessee had utilized the interest received on funds exclusively provided for vaccine project, for implementing the project and this in a way had helped it to meet the cost overrun of about Rs. 116 crores. The Ld. AR relied on the letter dated 14/06/2018 issued by Ministry of Health & Family Welfare in support of the argument that there is diversion by overriding title which is reproduced as follows:
F. No.A-45013/07/2018-HPE
Government of India
Ministry of Health & Family Welfare
Nirman Bhawan, New Delhi
Dated the 14th June, 2018
To,
The Chief Executive Officer,
M/s. HLL Biotech Limited,
SR No: 192 & 195, Tirumani Village,
Chengalpattu-603 001.
Subject: Utilization of interest earned on equity funds of Rs.274.88 crore-reg.
Sir,
The undersigned is directed to refer to your letter dated 22nd January, 2018. The GOI has infused Rs.285 Crore towards equity funds through HLL Lifecare Limited for establishing Integrated Vaccine Complex at Chengalpattu out of which Rs.274.88 Crores paid in cash and 100 acre of land in kind with a valuation of Rs.10.12 Cr. As a general policy any income earned out of funds provided by GOI for any specific purpose, must be utilized only for the purpose for which such funds are released.
2. It is clarified that any interest earned by way of depositing the said equity funds in Banks or otherwise form part of funds for establishing the Integrated Vaccine Project at Chengalpattu, Chennai and to be utilized for the purpose of the project only and not for any other purpose.
This issues with the approval of JS(HPE).
Yours faithfully,
Sd/-
(Soma Sanyal)
Under Secretary to the Govt. of India
6. The Ld. DR relied on the order of the authorities below.
