NARAYANDADA CHAVAN SAHKARI SOOT GIRNI LIMITED(FORMERLY M/S SHIRLA TALUKA SHETKARI SAH SOOT GIRNI LTD),SANGLI vs. ITO, WARD2(5), SANGLI

This appeal by the assessee against the order dated 11-12-2019 passed by the Commissioner of Income Tax (Appeals)-1, Kolhapur [„CIT(A)‟] for assessment year 2011-12.

The ld. AR submits that the assessee does not want to prosecute the ground No. 4 and prayed to treat the same as not pressed.

Ground Nos. 1 to 3 raised by the assessee involving only issue challenging the action of CIT(A) in confirming the addition made on account of invoking section 56 of the Act.

The brief facts of the issue are that the assessee is a Co-operative Society engaged in the business of production, colouring and selling of cotton. During the course of assessment proceedings, the AO noticed that the assessee has borrowed funds and kept them in fixed deposits under which the assessee earned interest of Rs.38,92,957/- for the year under consideration. It was explained that the funds were not part of surplus funds but was a contribution of share capital of State Government which had received in order to set up a spinning mill. According to the AO that the assessee had not utilized the said funds during the pre-operative period and part of the same was kept as short term fixed deposit in bank. Further, he held such interest received from FD had no connection with setting up of business and is a revenue receipt which is chargeable to tax under the head income from other sources. The assessee placed reliance on the decision of Bokaro Steel Ltd. Vs. CIT and contended the interest received was a capital receipt and liable to be set off against pre-operative expenses but however the AO proceeded to treat the same as income from other sources vide this order dated 30-12-2018 passed u/s. 143(3) r.w.s. 147 of the Act. The CIT(A) confirmed the same.

Before us, the ld. AR, Shri M.K. Kulkarni submits that the issue raised is similar and identical to the facts involving the issue raised in A.Y. 2012-13 and referred to order dated 19-02-2020 passed by this Tribunal in assessee‟s own case and argued that this Tribunal held the fixed deposit was not to make some additional income but to comply with the statutory requirement and the interest accrued thereon on such deposit was merely incidental which is liable for set off against capital expenditure and not income from other sources.

The ld. DR, Shri Vitthal Bhosale relied on the order of AO and CIT(A).

We note, that the fact remains undisputed that the amount was received by the assessee form Government of Maharashtra towards share capital and withdrawals from said share capital was monitored by the State Government and it could be utilized only for the purpose to which it has been granted. It is also undisputed fact that the share application money is deposited in the bank in view of the statutory mandatory direction and the interest received from share application money which was deposited in the bank inextricably linked with the requirement to raise share capital is a capital receipt but not revenue receipt as treated by both the authorities below. The relevant portion in Para No. 6 in in assessee‟s own case for A.Y. 2012-13 is reproduced here-in-below : “6. We have heard the rival submissions and perused the material on record. The issue in the present case is with respect to the taxability of the interest of the amount received by the assessee towards share capital in the fixed deposits. It is an undisputed fact that the amount was received by the assessee from the State Government towards share capital of the assessee. It is also a fact that the as per directions of the State Government, the amount received towards share capital from the Government was required to be deposited with the Nationalized Banks and the withdrawals of the amount of the share capital was monitored by Government and it could be utilized only after receiving prior permission of the proper authorities of the Government. In such a situation, we are of the view that AO was not justified in taxing the interest received on such fixed deposits as „Income from other sources‟ and for which we place reliance on the decision of Hon‟ble Apex Court in the case of CIT Vs. Shriram Multi Tech Ltd., reported in (2018) 403 ITR 426 SC wherein the Hon‟ble Apex Court has held that if the share application money that is received is deposited in the bank in the light of statutory mandatory requirement, the interest earned from share application money when inextricably linked with the requirement to raise share capital cannot be considered to be revenue receipt. It further observed that the purpose of such deposit was not to make some additional income but was to comply with the statutory requirement then interest accrued on such deposits was merely incidental. We therefore relying on the aforesaid decision of Hon‟ble Apex Court hold that the AO was not justified in taxing the income as „Income from other sources‟. We therefore direct the AO to allow the set off of interest against the capital expenditure incurred during the preinstallation stage. Thus, the grounds of the assessee are allowed.”

In the light of the above, we hold the interest earned on fixed deposits which are said to have been contributed as share capital by the Government of Maharashtra in order to set up a spinning mill is a capital receipt which are liable to be set up against pre-operative expenses. Thus, the interest earned as treated by the AO and CIT(A) as revenue receipt is not justified. Thus, the ground Nos. 1 to 3 raised by the assessee are allowed.

In the result, the appeal of assessee is allowed.