Pr. CIT Vs. Sangam Power Generation Co. Ltd. (Allahabad High Court)
Where interest on Fixed Deposit Receipt had no immediate nexus with the business of assessee and business was yet to commence, then so long as assessee had no business income, the interest earned could not be treated as business income and it had to be treated as ‘Income from other sources’.
Full Text of the ITAT Order is as follows:-
Heard Sri Manish Misra, learned counsel for appellant and Sri Namit Sharma, learned counsel for respondent.
2. These appeals under section 260(A) of Income Tax Act, 1961 (hereinafter referred to as “ Act 1961”) have arisen from judgment and order dated 15-3-2016 passed by Income Tax Appellate Tribunal (hereinafter referred to as “ Tribunal”) in ITA Nos. 357/LKW/2015 and 358/LKW/2015, relating to assessment year (hereinafter referred to as “ A.Y”) 2011-12 and 2012-13.
3. Both these appeals were admitted on three substantial questions of law which are common and, therefore, same are being reproduced from ITA No. 88 of 2016 :–
“(i) Whether the Income Tax Appellate Tribunal is justified in holding that interest income, earned on FDRs made out of the unutilised fund borrowed for the setting up of the business should be reduced from the cost of the project instead of taxing it as an income from other sources”.
“(ii) Whether the Income Tax Appellate Tribunal is justified in dismissing the department’s appeal beyond the law laid down by the Hon’ble Apex Court in Tuticorin Alkali Chemical and Fertilizers Ltd. v. CIT (1997) 227 ITR (SC) and CIT v. Indo Gulf Fertilizers and Chemical Corporation Ltd. (2006) 280 ITR 261 (All).
“Whether the Income Tax Appellate Tribunal is justified in holding beyond the statutory provision of section 56 (2) of the Income Tax Act that income by way of interest on securities is taxable even if not arises from the profits and gains of the business or profession”.
4. The relevant facts in the giving rise to the present dispute are that M/S Sangam Power Generation Company Ltd, Noida (hereinafter referred to as “ Assesses Company”) is a company registered under “Companies Act, 1956” (hereinafter referred to as “ Act, 1956”) and is 100 percent subsidiary company of “M/S Jaiprakash Power Ventures Ltd”. In the assessment year in question, Assessee company was in the process of setting up a Thermal Power Project in Tehsil-Karchana, District-Allahabad.
5. The funds of assessee company were placed in short term deposit with banks and earned interest of Rs. 10,74,55,666 in the assessment year 2011-12 and Rs. 1,22,04,939 in the assessment year 2012-13. Assessee company treated aforesaid interest income as capital receipt instead of Revenue receipts and credited said amount to pre- operative expenses which go to reduce the cost of project.
6. For the assessment year 2011-12, return of income was filed by Assessee company electronically on 27-9-2011 declaring nil income. Case was selected under scrutiny through CASS and notice under section 143 (2) dated 3-8-2013 was issued through speed post dated 23-8-2013. Again notice under section 143 (2)/142(1) of Act, 1961 along with questionnaire was issued and duly served. Assessee was also asked vide order dated 10-1-2014 to explain as to why the interest income on Fixed Deposit treated as Capital Receipt be not disallowed and said income be treated as “Income from other sources” in the light of this Court’s judgment in CIT v. Indo Gulf Fertilizers and Chemical Corporation Ltd. (2006) 280 ITR 621 (All).
7. Assessee replied vide letter dated 21-1-2014 and objected to the said disallowance. Income Tax officer 6(1), Lucknow (hereinafter referred to as “ A.O”) rejected objection and treated the said income from other sources and completed assessment on a total income of Rs. 10,74,55,670 vide assessment order dated 28-1-2014.
8. Similarly, for the assessment year 2012-13 also, interest income on Fixed Deposit Receipts was treated as “income from other sources” and assessment was completed on a total income of Rs. 1,22,04,940 vide assessment order dated 19-2-2014.
9. Assessee preferred appeal before Commissioner (appeals)-II, Lucknow (hereinafter referred to as “ Commissioner (Appeals)) and both the appeals were dismissed vide separate orders dated 31-3-2015. Thereafter assessee preferred appeals i.e., ITA No. 357 and 358 /LKW/2015 before Tribunal. Both these appeals have been allowed and Tribunal has recorded a finding in favour of assessee that interest income earned by Assessee when business is yet to be set up cannot be considered as “income from other sources” and it cannot be brought to tax. Hence, Tribunal has disallowed and deleted additions made by assessing officer.
10. It is not in dispute that assessee company has not commenced its business during the assessment year in question. The amount kept in fixed deposit is surplus capital fund possessed by Assessee after deciding to invest fruitfully during interregnum period when business is yet to be established and commenced.
11. Assessing officer, however, treated it “Revenue receipt” taxable under Act, 1961. Assessing officer and Commissioner (Appeals) have treated this income being “from other sources” and taxable under section 56 of Act, 1961. However, Tribunal in taking a different view has followed its earlier decision in ITA No. 625 and 626/LKW/2013 in M/s. Prayag Raj Power Corporation. The relevant findings of Tribunal in this regard are as under :–
“In our considered opinion, source of income and head of income are two different things and these should not be mixed up. In a given case, there may be one source of income giving rise to incomes taxable partly under one head and partly under a different head and in another case, there maybe more than one source of income but all giving rise to income which are taxable under one head only. Source of income in the present case is the industrial undertaking for generation of power being set up by the assessee and all the funds, which are available with the assessee at its disposal are arranged by the assesses for that purpose. A chart showing cost of project and means of finance is available on page no. 62 as per which total project cost is Rs. 10,780 crores to be financed by equity of Rs. 2,698 crores i.e., 25% of total project cost and debt Rs. 8,085 crores i.e., 75% of total project cost. Till 31-3-2011, the assessee has arranged total funds of Rs. 1378.97 crores and the same was used till that date on account of purchase of land, computers and furniture, on account of advance for land and supplier for capital equipment, short term FD with bank and the balance amount was left with bank in current account. Hence, it is seen that the entire funds available with the assessee company are in respect of this project being set up by the assessee company being generation of power and FD income is earned by temporary deployment of this fund of this business undertaking and not of any surplus funds not needed for this business undertaking and, therefore, source of income is this project only. The source of income and head of income should not be mixed up because both are different. Any income arising out of a source of income can be taxable under different heads because if the business is set up and commenced then the income from operation is taxable under the head income from business and if after set up of the business, the assessee is left with surplus funds and such surplus fund is used in earning interest income, then such interest income shall be taxable under the head income from other sources and if surplus fund is used for making investment then any income on sale of such investment will be taxable under the head income capital gain but source of income for all these income taxable under these three different heads is same i.e., business undertaking. Hence, in the facts of the present case, where the entire funds available with the assessee company is in respect of the business undertaking being set up by the assessee company, previous year will start only after the setting up of the business undertaking and not before that and the interest income from the GD is not an independent source of income de horse the business undertaking because the earning of interest income is not the object of the assessee company and the funds were not arranged by the assessee company for earning interest income and therefore, the previous year in the facts of the present case will start on setting up of the business and thereafter, if the assessee is having any interest income then the same will be taxable under the head income from other sources and after the commencement of the business, the income from operation will be taxable under the head income from business but it cannot be said that interest income is a separate and new source of income de horse the business undertaking and therefore, the previous year in respect of interest income starts on the date of purchase of FD. In our considered opinion, on the date of purchase of FD, no new source of income has come into existence because in our considered opinion, the source of income is business undertaking and therefore, requirement of starting of previous year in the facts of the present case is setting up of business which has not happened till 31-3-2011 in the present case and therefore, any income from this source cannot be brought to tax before the setting up of business is completed resulting into start of the previous year”.
12. From the facts noticed above, we find that interest on Fixed Deposit Receipt has no immediate nexus with the business of assessee company. Business is yet to commence. So long as Assessee had no business income, the interest earned can not be treated as business income. Thus in our view, it has to be treated as “income from other sources”.
13. In CIT v. Govinda Choudhury & Sons 1993 (203) ITR 881 (SC), Court said :–
“Interest can be assessed under the head “Income from other sources” only if it cannot be brought within one or the other of the specific heads of charge”.
14. In CIT v. Rajasthan Land Development Corporation 1995 (211) ITR 597 (Rajasthan), Court held that interest on fixed deposits and other deposits before commencement of business is an “income from other sources”.
15. The judgment in CIT v. Govinda Choudhury & Sons (supra) was followed in CIT v. B.N. Agarwala and Co. 2003 (259) ITR 754 but Court found that interest income was invested to a continuing business and, therefore, Court held therein that interest income has to be assessed as a “business receipt”. Therefore, facts of CIT v. Govinda Choudhary (supra) and CIT v. B.N. Agarwala (supra) are not straight away applicable to the facts of the case in hand.
16. On the contrary, where a business is yet to commence, there is direct authority of Rajasthan High Court which has also taken similar view in earlier judgment in Murli Investment Company v. CIT (1987) 167 ITR 368 (Raj). In Collis Line Private Limited v. ITO (1982) 135 ITR 390 has taken a similar view where money by Assessee, a shipping company since it was lying idle and, therefore, to make wiser investment, it was kept in short term fixed deposit, Court held that interest earned on such Fixed deposit can not be said to be received in the course of business and, therefore, it has to be treated as income “from other sources”. Patna High Court in Bokaro Steel Limited v. CIT (1988) 170 ITR 545 (Pat) also stated that money not required for business and found surplus kept in short-term deposits in banks, It cannot be said to incidental to the business of the assessee nor incidental to the raising of business establishment and, therefore, must be treated as income asses sable under section 56 of the Act, 1961 as income from “other sources”
17. We find that issue raised in this appeal is squarely covered by three judges judgment of Supreme Court in Tuticorin Alkali Chemical and Fertilizers Ltd. v. ITC, 1997 (6) SCC 117. Therein company was incorporated on 3-12-1971 and commenced business on 31-6-1982. It has taken term loan from various banks and financial institutions but substantial amount of borrowed funds, which was not immediately required by Company was kept invested in short-term deposits with banks. For the assessment year 1982-83 (financial year 1981-82), Assessee received a total amount of interest of Rs. 2,92,440 and disclosed the said amount as “income from other sources”. Company then disclosed a business loss of Rs. 3,21,802 and after setting off interest income against business loss, it claimed benefit of carry forward of net loss of Rs. 29,360. Subsequently revised return was filed by company, claiming a business loss of Rs. 3,21,802 and with respect to interest income, it claimed that it will go to reduce pre- production expenses, therefore, interest income was not exigible to tax. Assessing officer rejected this claim and Commissioner (Appeals) confirmed the view of assessing officer Tribunal also rejected appeal of company. Supreme Court also confirmed the aforesaid view. It confirmed Madras High Court’s decision in CIT v. Seshasayee Paper and Boards Ltd. 1985 (156) ITR 542, that interest earned by Assessee on investment of share capital in call deposits, even before production commenced, would be assessed separately under the heads ‘‘Other sources’. Contrary view taken by Andhra Pradesh High Court in CIT v. Nagarjun Steels Ltd. 1988 Tax LR 973 (AP), by Orrisa High Court in CIT v. Electrochem Orrisa Ltd. 1995 Tax LR 911 (Orrisa) and Bombay High Court in CIT v. Maharashtra Electrosmelt Ltd. 1995 Tax LR 1002 (Bombay) was overruled. Court also referred to a decision of this Court in Kedar Narain Singh v. CIT 1938 6 ITR 157 (All) holding “anything which can properly be described as income is taxable under the Act unless expressly exempted”. Following the above principle, Court held that interest earned by Assessee is clearly its income and unless it can be shown that any provision like section 10 has exempted it from tax, it will be taxable. The fact that source of income was borrowed money does not detract anything from Revenue character of receipt. Further giving the reason as to why interest earned on deposit can be held taxable, in Tuticorin Alkali Chemical (supra) Court said :–
“The question of adjustment of interest payable by the Company against the interest earned by it will depend upon the provisions of the Act. The expenditure would have been deductible as incurred for the purpose of business if the assesses business had commenced. But that is not the case here. The Assessee may be entitled to capitalize the interest payable by it. But what the assessee cannot claim is adjustment of this expenditure against interest asses sable under section 56. Section 57 of the Act sets out in its Clauses (i) to (iii) the expenditures which are allowable as deduction from income asses sable under section 56. It is not the case of the assessee that the interest payable by it on term loans are allowable as deduction under section 57 of the Act.”
18. Similar view has been taken by Delhi High Court in CIT v. Mereena Creations 2011 (330) ITR 199 (Delhi), Supreme Court in Totgar’s Co-operative Society Ltd. v. ITO (2010) 322 ITR 283 (SC) and by this Court in ITA No. 186 of 2000, CIT v. M/s. Brij Bhusan Lal and Sons decided on 20-7-2012 wherein, Court in para-17 of judgment, has said as under :–
“After hearing learned counsel for the parties and considering the judgments cited by them, we are of the opinion that in view of the clarification made by the Supreme Court in Totgar’s Co-operative Society Ltd.’s case (supra), in the present case the interest on the FDRs cannot be treated as income from profits and gains of business. The word ‘income’ has been defined in section 2(24)(i) of the Act to include ‘profits and gains’. Sub-section is an inclusive. The business profits have been specifically included in the word ‘income’. The assessee- company had invested the surplus funds, which were not immediately required by it, in FDRs, which were later on encashed and used for expansion of business. The deposits made by the company were not in the regular course of business, nor it was the business of the company to make deposits and earn interest. The interest income cannot be said to be attributable to the activities of the company. The interest had accrued on the funds, which were not immediately required by the assessee- company for its business purposes and which were invested in FDRs. The assessee company is engaged in the business of manufacture of oxygen and nitrogen gas; re-rolling of steel; and fabrication of railway wagons. The surplus profits retained by the company were kept in FDRs. The interest earned on such income was not earned out of business regularly carried out by the assessee company”.
19. Another Division Bench of this Court in CIT v. Indo Gulf Fertilizer and Chemical Corporation Limited 2006 (280) ITR 621 (All) has also taken the same view and after referring to Supreme Court judgment in Tuticorin Alkali Chemical and Fertilizers Ltd. v. ITC (supra) in para-10 of the judgment, Court said as under :–
The aforesaid decision has been followed subsequently by the Hon’ble Supreme Court in the case of CIT v. Coromandal Cements Ltd. (1998) 234 ITR 412 (SC), CIT v. Bokaro Steel Ltd. and CIT v. Autokast Ltd. (2001) 248 ITR 110 (SC). Thus, the submission that the interest earned by the assessee is not taxable under the head “Income from other sources” is not correct”
20. Learned counsel for assesses company could not trace any binding authority taking otherwise view in the matter so as to pursue as to take a different view in the matter. Therefore, we answer all the three questions in favour of Revenue and against Assessee. We answer question no.1, holding that Tribunal was not justified in holding that interest income earned on Fixed Deposit Receipt should be allowed to be reduced from the cost of project instead of tax as an income from other sources. We also answer question no. 2 against Assessee company and in favour of Revenue, holding that Tribunal was not justified by not following the law laid down in Tuticorin Alkali Chemical and Fertilizers Ltd. v. ITC (supra) and CIT v. Indo Gulf Fertilizer and Chemical Corporation Limited (supra). Similarly, question no. 3 is also answered by holding that Tribunal was not justified in taking a view so as not to allow section 56 to be attracted in the case in hand.
21. In the result, judgment of Tribunal impugned in this appeal cannot be sustained. It is, accordingly, set aside and judgment of assessing officer, as well as Commissioner (Appeals), confirming the same, are restored.
22. Appeals are allowed accordingly. There shall be no order as to cost.