INCOME TAX OFFICER, WARD-17(2), HYDERABAD vs. ELGEN (INDIA) PRIVATE LIMITED , HYDERABAD

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “B”: HYDERABAD (THROUGH VIRTUAL CONFERENCE) BEFORE SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER

ITA No. 244/H/2019 Assessment Year: 2015-16 Income-tax Officer, Vs. Elgen (India) Pvt Ltd., Ward - 17(2), Hyderabad. Hyderabad. PAN – AAACE 8520C (Appellant) (Respondent) Revenue by: Shri Rohit Mujumdar Assessee by: Shri M. Poorna Chander Rao Date of hearing: 15/03/2021 Date of pronouncement: 30/04/2021

O R D E R PER L.P. SAHU, A.M.: This appeal filed by the Revenue for AY 2015-16 is directed against CIT(A) – 7, Hyderabad’s order dated 26/12/2018 involving proceedings u/s 143(3) of the Income Tax Act, 1961 ; in short “the Act”, on the following grounds of appeal: 1. The order of Ld .CIT(A) is erroneous both of law and facts.

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3,29,33,633/- towards interest on such advances and interest of Rs. 70,32,913/- from Cosmos Bank on FDRs.

2.1 The AO completed the assessment u/s 143(3) of the Act determining the total income of the assessee at Rs. 3,29,33,633/- by treating the interest income as income from other sources.

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any statutory authority or were kept due to Gods Will. If the funds are kept at instance of any statutory authority, then it may be called as inextricably linked with the project. However, if it is due to any other circumstances even said to be beyond the control of the assessee, it cannot be termed as inextricably linked with the project. The Hon'ble ITAT has relying on Delhi HC decision in the case of Indian Oil Panipat Power Consortium Ltd., that interest received on surplus funds are to be taxed as income from as and if the income is earned on funds which are inextricably linked to the setting up of project is required to be capitalized to be set off against preoperative expenses. 4. The Mumbai ITAT in Maharashtra Airport Development Co Ltd. ITAT Mum in (2014) 150 ITD 709 has analysed the said decision of Indian Oil Panipat Power Consortium Ltd., and has distinguished it on facts. The relevant extract is as under: “28.1 Notwithstanding the above inadequate adjudication by the CIT(A), we find that the funds kept with the Banks as the FD is undisputedly for temporary period of non utilization for business purposes, In that sense of the matter, the said funds are not in use for business purposes. The purpose of parkings such funds in the bank is obviously for safety and security and ready u.se of the funds as and when there arise business needs of the assessee. It is stated that the fund are meant for purchase of the lands at the later days. Thus) the earning of interest income cannot be dominant or business intention of the assessee. In this regard we have examined the judgments relied upon by Ld. counsel. The Judgment in the case of Indian Oil Panipat Power Consortium Ltd. (supra) deals with the interest receipts earned prior to the commencement of business and it is not known if they are earned prior to 'set up' too. Therefore, the same is distinguishable on facts.

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The Apex court judgment in the case oj Karnal Co- operative Sugar Mills Ltd. (supra) relates to the case of 'share capital money') which is meant Jar purchase of Plant and Machinery in connection with set up of the business. Per contra) we have also perused the binding judgment of the Hon'ble High .court of Bombay in the case of Shree Krishna Polyster Ltd. (supra) which is relied upon by the revenue and the conclusion of the same read as follows: "Income earned by the assessee by investing surplus money received in public issue) in bank deposits for a short. period is assessable under the head 'Income from other sources'. " 29. The ratio is binding on us and therefore) we are of the opinion the stand taken by the AD merits our acceptance. For the said reasons, we uphold the views of the revenue. Accordingly) qrounds 5 to 9 are dismissed. " 5. The Hon'ble ITAT also place reliance on the decision of Facer Facor Power Ltd. In the case of FACOR, the assessee was engaged in generating electric power. It kept margin money in form of fixed deposits for procurement of various capital goods for setting up of power project. It was held that the interest earned on said deposits would be in nature of capital receipt not liable to tax. The facts of the case as seen above are clearly distinguishable on facts and law. This is not the case of assessee where funds were kept as margin money, but only surplus funds were invested in FD.” 6. It is prayed that the above facts be kindly be taken into consideration as such arguments were not placed before in the assessee's own case for earlier years.”

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to the interest received on FDR. It is also not clear from the orders of the authorities below as well as submission of the ld. AR that when the fixed deposits were made and advances were given to Pact Securities and Financial Services Ltd. When the Bench asked a specific question to assessee that what was the description of the fixed deposits and advances and utilization of income received on fixed deposits and advances, the ld. AR was unable to give any explanation to the said question. He did not produce any terms and conditions regarding the advances given. We find substance in the written submissions filed by the Ld. DR. The ld. Dr has analyzed the case as discussed hereinabove. Res-judicata does not apply in the Income-tax Act. The coordinate bench of this Tribunal has allowed the appeal of the assessee in the AYs 2012-13 and 2013-14 in ITA Nos. 1286 & 1287/Hyd/2016, dated 29/11/2017 is also not binding on us because in the impugned AY there are some changes in the facts. Earlier the interest was earned from fixed deposits and in this AY the assessee has given some advances to others also and could not respond to our query during the course of hearing. Exercising the powers u/s 254 of the IT Act and relying on the decision of Bombay High Courts full Bench decision in the case of Ahmedabad Electricity CO. Ltd., Vs. CIT [1993] 199 ITR 351 (Bom), we observed that section 254 involving the statutory expression “may pass such orders” ‘as it thinks fit’ confers widest possible jurisdiction on the Tribunal.

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8.1 The ld. AO and the Sr. DR has discussed this issue and facts of the case in detail and has relied on the decision of the Hon’ble Apex court in the case of Tuticorin Alkali, Bokaro Steels Ltd. and other cases. We support and restore the order of the AO and quash the order passed by the CIT(A). The ld. AO has rightly treated the interest received during the construction period from the money parked as fixed deposits and interest on advance as ‘income from other sources and netting off of capital expenditure from the interest has rightly been disallowed. In support of our above decision, we rely on the judgements of ITAT, Delhi Special Bench – Third Member case in the case of National Thermal Power Vs. IAC, [1988] 24 ITD 1 (Delhi) (SB). The Special Bench in the said case has held as under:

ORDER “Per Shri P.K. Mehta, Accountant Member - The assessee M/s National Thermal Power Corporation Ltd., New Delhi (hereinafter to be called as 'NTPC') has come in appeal for the assessment year 1981-82. It was incorporated on 7th November, 1975 and closed its accounts for the first time on 31-3-1977, relevant to the assessment year 1977-78. In the account year ended on 31-3-1981 relevant to the assessment year under appeal it was engaged in the construction of four super thermal power stations at Singrauli (UP), Korba (MP), Ramagundam (AP) and Farakka (West Bengal). The Corporation was to produce electricity and sell the same. All the four projects were under construction. In addition it derived income from the management of Badarpur Thermal Power Station and consultancy fee from M/s Hindustan Limited. The assessee's learned counsel, Shri R. Ganesan, furnished a copy of agreement dated 12-4-1978 entered into between the President of India and the NTPC for the management of Badarpur Thermal Power Station and Badarpur Thermal Power Project. The assessee is a Government of India Undertaking and its entire capital is held by the President of India. The capital has been subscribed as determined from time to time. In the financial year 1975-76, the equity capital of the assessee stood at Rs. 20 lakhs and it came to be increased from year to year and as on 31-3-1991 it stood at Rs. 203.58 crores. In addition to it there was also a loan granted within the accounting year 1980-81 by the Government amounting to Rs. 47.94 crores.

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The total funds available as at the end of 31st March, 1981 stood at Rs. 247.31 crores. 2. One of the major issues raised in the assessee's appeal is about the taxability of a sum of Rs. 1,07,29,848. This amount represents excess of interest income earned over the interest paid. As per the balance sheet of the assessee at page 143 of its paper book, the income derived from interest from banks on short deposits stood at Rs. 96.60 lakhs. Besides there was other income of interest of Rs. 26.03 lakhs derived from the contractors employed and the employees. The gross amount of interest income under both the heads came to Rs. 122.93 lakhs. Out of this gross interest income, an amount of Rs. 15.64 lakhs being interest paid was deducted leaving the net interest income of Rs. 1,07,29,848. According to the Revenue this net interest income was taxable under the head 'Other sources' and it was in fact taxed in that manner for the first two assessment years 1977-78 and 1978-79, whereas the assessee sought to contest that this amount was not taxable at all and that the entire amount was to be capitalised thereby reducing the cost of construction. Only at the stage of the Tribunal for the assessment year 1978-79, this point was raised by way of an additional ground but it was not admitted [vide National Thermal Power Corpn. v. IAC [1985] 12 ITD 99 (Delhi) (SB)]. For the subsequent two assessment years the assessee challenged the view of the Revenue from the beginning and the matter was agitated right up to the stage of the Tribunal. The Tribunal by its order dated 28th February, 1984 upheld the action of the Revenue. Earlier two Special Benches of the Tribunal referred to below had accepted a similar point as that of the assessee. The Division Bench of the Tribunal, relying on certain decisions of the High Court, did not follow the view taken by the two Special Benches of the Tribunal at Hyderabad and Madras, viz., Nagarjuna Steels Ltd. v. ITO [1983] 3 ITD 796 and Arasan Aluminium Industries (P.) Ltd. v. First ITO [1982] 1 ITD 10. When this appeal came up for hearing, an application dated 14-10-1985 was moved on behalf of the assessee requesting for reference of this appeal from a Division Bench to a larger Bench. Briefly it was pointed out that the two Special Bench decisions relied upon by the assessee had been followed by the Jaipur Bench of the Tribunal in camp at New Delhi in the case of ITO v. National Hydro Electric Power Corpn. [IT Appeal No. 1313 (Delhi) of 1983 dated 30-10-1984] and that the decision of the Delhi High Court in the case of Addl. CIT v. Indian Drugs & Pharmaceuticals Ltd. [1983] 141 ITR 134 which was followed by the Division Bench in the assessee's case in preference to Special Bench case needed to be explained in the facts and circumstances of the case. As a result of the acceptance of the assessee's request for constituting a larger Bench, the present Bench consisting of five Members was constituted by the President. There were three interveners who also appeared and made their submissions. The three interveners were National Aluminium Corporation Ltd. Bhubaneshwar, M/s Paradeep Phosphates Ltd., New Delhi and M/s Autokast Limited, S.L. Puram, Shertallai (Kerala). 3. Shri D.K. Sharma, the learned Departmental Representative, raised certain preliminary objections to the constitution of a larger Bench and to the framing of the following question to be considered by the larger Bench: "Whether an interest income of Rs. 1.07 crores earned on shortterm deposits made with Banks by the assessee a thermal power corporation still to set up its power plants is assessable as income from other sources for the assessment year 1981- 82, in the face of the assessee's claim that such interest arose from moneys received by it as equity capital subscriptions and loans that were absorbed immediately by the projects on hand each year from the assessment year 1977-78

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onwards and consequently there had been no surplus fund with the assessee so as to create an independent source of income in regard to the interest in question?" His first objection relating to the constitution of the larger Bench was that it was not open to the Tribunal to revise or review its earlier decision, which had been given in favour of the Revenue in the assessee's own case for the earlier assessment years 1979-80 and 1980-81. In support he referred to a Third Member order in the case of Export House v. ITO [1985] 13 ITD 687 (Asr.). He contended that the principle of res judicata, as he put it, would be attracted and the larger Bench had no power to overrule the view of the Division Bench taken for the assessment years 1979-80 and 1980-81. His second objection was about the question framed for the consideration of the larger Bench viz. it was different from the assessee's ground of appeal No. 2 which merely stated that the sum of Rs. 1,07,29,848 was not income at all. He submitted that in that ground there was neither any reference to there being no surplus fund nor to the taxability of interest income under the head 'Income from other sources'. The assessee's learned counsel, Shri R. Ganesan, however, took the same stand as he had taken while seeking the constitution of a larger Bench. 4. After considering the objections of the learned Departmental Representative, we find no merit in them. His arguments were based on a misconception that the larger Bench was constituted to overrule the earlier decision of the Tribunal in favour of the Revenue. A larger Bench is constituted in accordance with section 255(3) of the Income-tax Act by the President of the Tribunal for disposal of any particular case and there is no question of anticipating the decision for or against a party. A Special Bench is constituted by the President of the Tribunal to consider issues of substantial importance on which conflicting opinions may have been expressed by various Benches of the Tribunal, or for any other weighty considerations. The Special Bench does not and cannot reverse or overrule the decision of any Bench, although, it may on consideration of facts and circumstances come to a different conclusion. It is the convention of the Tribunal to follow the views expressed by Special Benches unless circumstances conjoin as to take a different view like the availability of a High Court decision as in the present case, taking a different view or change in law. The second objection about the framing of question too is based on a misunderstanding about the scope of the controversy which existed at the back of the brief ground of appeal. The question referred for the consideration of the larger Bench highlights the various aspects including its factual background on which the assesses based its claim that the sum of Rs. 1,07,29,848 was not income at all. The stand of the Revenue is also reflected in the question when reference is made to the assessability of the aforementioned amount under the head 'Income from other sources'. The question is framed in order to enable the possible interveners to understand the issue or the range of controversy going to be considered by the Special Bench, so that they could assist the Bench by placing their views on the issue concerned. However the entire appeal is open before the Special Bench, and is not confined to the question framed like a question of law framed and referred to the High Court u/s 256 of the Income-tax Act, 1961. We overrule the preliminary objections of the Revenue. 5. Before proceeding to deal with the controversy about the taxability of the sum of Rs. 1,07,29,848 it will be appropriate to indicate the parameters. In the assessment order the Inspecting Asstt. Commissioner (Asstt.) has brought to tax the income from consultancy fees from Badarpur Thermal Power Station and Hindustan, Limited under the head "Income from business" and there is no dispute between the parties on this point. It is equally undisputed that the assessee's major activity

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of producing electricity by setting up super thermal power stations at four places had not begun and all the four thermal power stations were in various stages of construction in the accounting year under consideration. The Inspecting Asstt. Commissioner (Asstt.) in that background brought to tax the net interest income of Rs. 1,07,29,848 under the head 'Income from other sources.' Similarly he taxed the miscellaneous income of Rs. 49 lakhs, which comprised the following: 1.Liquidated damages recovered from contractors, 2.Rent recovered from contractors and employees, 3.Receipt from sweeping cement, 4.Recovery of overhead charges on account of issue of material to contractors/suppliers, 5.Workshops service charges for repair and maintenance received from contractors, 6.Recovery of overhead charges on issue of diesel, etc., 7.Other receipts of miscellaneous nature. The assessee, on the other hand, in part III of the return had claim ed this income to be exempt from tax. The Inspecting Asstt. Commissioner (Asstt.) also brought to tax receipts from the sale of application forms and tender forms as 'Income from other sources'. The assessee, on the other hand, itself disclosed the item of hire charges of constructional equipments amounting to Rs. 35,64,805 as income under the head 'Other sources' and against the hire charges claimed deduction of salaries and wages of operating staff of Rs. 4,05,114, Repairs and Maintenance of, Construction Equipments Rs. 1,51,860 and Depreciation on Construction Equipments Rs. 1,54,80,137. The Inspecting Asstt. Commissioner (Asstt.) allowed the first two items but reduced the claim for depreciation on construction equipments to Rs. 1,11,96,268 restricting it to the machinery, which was actually put to use in the previous year. From this treatment in the assessment order, it follows that both the Revenue and the assessee have no dispute so far as head of income under which hire charges received by the assessee are to be considered and computed for assessment. 6. Sri Ganesan, the learned counsel of the assessee, opened argu ments by briefly pointing out that no doubt income from interest of Rs. 41,000 and odd was taxed undisputedly under the head 'Income from other sources' in the assessment year 1977-78 and again Income from interest of Rs. 22,84,994 was subjected to tax in the same manner when the additional ground taken before the Tribunal on this point was not admitted in the assessment year 1978-79 and further interest incomes of Rs. 28,34,451 and Rs. 1,12,46,781 were similarly taxed for the subsequent assessment years 1979-80 and 1980-81 by the Tribunal's order against the assessee, yet the matter deserved to be reconsidered as the assumptions made by the Tribunal against the assessee, according to him, were not correct nor the authorities relied upon were applicable. He put forward the factual background of the case. It was stated that all the four thermal power projects at Singrauli, Korba, Ramagundam and Farakka were on the board in the accounting year, being in various stages of construction as per the report of directors and none of these was in a position to produce electricity energy for sale, which was the main object for which this company was set up by the Government of India. He invited our attention to the main object III(A)(1) in the Memorandum of Association of NTPC, which is reproduced below:

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III. Development of Thermal Power (A)(1). To plan, promote and organise an integrated and efficient development of Thermal Power in all its aspects including planning, investigation, research, design and preparation of preliminary, feasibility and definite project reports, construction, generation, Operation and maintenance of Thermal Power Stations and Projects, transmission, distribution and sale of power generated at Thermal Stations in accordance with the national economic policy and objectives laid down by the Central Government from time to time. He next referred to the fact that the Government of India was providing capital from time to time on the basis of the report given about the requirement of funds by the assessee and that In the accounting year under consideration, the Government further provided a loan of Rs. 47.94 crores so as to finance the construction of power plants. He invited our attention to the Annual printed accounts for the year 1980-81 to say that the company had drawn up no profit and loss account and had transferred the expenditure in excess of receilits to construction account styled as "Statement of Incidental Expenditure during the Construction for the Year Ended 31st March, 1981". It was pointed out that whereas the total expenditure amounted to Rs. 10.82 crores after deducting income under various heads amounting to Rs. 2.12 crores, there was a balance of Rs. 8.69 crores and the bulk of that balance, namely, Rs. 7.94 crores was capitalised under the head "Capital Work in Progress" and the balance Rs. 75.09 lakhs was treated as miscellaneous expenditure. The argument made was that the Annual Accounts clearly showed that in the constructional phase, the income from various sources had been accounted for to abate the capital cost of the power plants. This treatment, according to him, of all income including the interest income of Rs. 1,07,29,848 was in accordance with the accountancy principles and practice. in brief he made out three propositions, namely (i) assessee was in the process of Betting Up a source from the exploitation of which it was to earn income, (ii) when the construction was going on, all expenses and Income were to go either to add or to reduce the cost of project as the case may be, and (iii) this was the accountancy practice set by accountancy world and that such a practice deserved to be followed and applied for the purpose of income-tax and for this purpose support was taken from the Supreme Court's decision in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 . 7. To establish the accountancy principle and practice, he referred to a pamphlet 'International Accounting Standard' in respect of 'Capitalisation of Borrowing Costs' issued by International, Accounting Standards Committee. London and another pamphlet of the Institute of Chartered Accountants of India, New Delhi by the name 'Guidance Note on Treatment of Expenditure During construction period.' The latter pamphlet was brought out by the Research Committee of the Institute of Chartered Accountants of India. He referred to paragraphs 9, 14 and 16 of the pamphlet 'International Accounting Standard' and support was sought from the last sentence in paragraph 16, which paragraph is fully quoted below: "16. Sometimes the financing arrangements for specific projects may result in an enterprise incurring a borrowing cost from the commencement date of the agreement on the full amount of the obligation. Under such arrangements, funds are often temporarily invested pending their requirement. Occasionally, interest- bearing compensating balances are required, It is appropriate to offset such investment income against the associated borrowing costs in determining the capitalisation rate."

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Shri Ganesan explained that this paragraph referred to the method of capitalisation of borrowing costs and determining the capitalisation rate. In regard to the other pamphlet 'Guidance Note on Treatment of Expenditure During Construction Period', he referred to paragraph 17.11 at page 32, which is reproduced below: "17.11 During the construction period, a project may earn income from miscellaneous source for example, share transfer fees, interest income, income from hire of equipment or assets and Income from sale of products manufactured during the period of test runs and experimental production. It is recommended that such income should be set off against the related items of expenditure so that only the net amount of the expenditure is capitalised or treated as deferred revenue expenditure, as the case may be. In either case, consideration may have to be given to the question of providing for the income-tax liability on such income (paragraph 8.2)." In addition he referred to paragraphs 11.4 (page 20), 15.2 (page 28), 17.5 (page 32) and 17.6 (page 32) of the same pamphlet, which are also reproduced below: "11.4 During the period of test runs and experimental production it is quite possible that some income will be earned through the sale of the merchandise produced or manufactured during this period. The sale revenue should be set off against the indirect expenditure incurred during the period of test runs and treated as suggested in para 15.2." "15.2 From the total of the aforesaid items of indirect expenditure would be deducted the income (which can be directly related to the particular item of indirect expenditure), if any, earned during the period of construction." "17.5 If the loan or other form of borrowing was taken or incurred for the purpose of providing working capital, the interest and other charges thereon during the period of construction may be treated as deferred revenue expenditure, to be written off to revenue over a period of three to five years after commencement of production. In case a loan has been taken jointly for the purpose of financing the construction and for working capital, the interest and the commitment charge should be apportioned on a reasonable basis. The portion relating to financing of construction should be capita lised and the other should be treated as deferred revenue expenditure to be written off over a period of three to five years after production commences (paragraphs 4.3 and 4.5)." "17.6 The same treatment should be accorded to the various costs And charges, incurred for preparing the loan agreements and other documents as is given to the interest and commitment fees incurred on the loan during the construction period (paragraph, 4.6)." 8. In brief the premise on which the arguments of Shri Ganesan were based was that Government of India sanctioned money by way of share capital or loans for the specific purpose of capital outlay on the construction of four thermal power plants and that as per the directions of the President of India, the money was to be spent for that purpose only and the money so earmarked could not at all be called as surplus funds, on which any income by way of interest could be independently earned, nor could it be subjected to tax under the head 'Income from other sources'. He emphasised that the purpose for which money was given by the Government was important and that in the construction period all the transactions of the assessee would be governed by that purpose and it is that purpose which should be taken into account while considering the taxability of the interest income. It was pointed out that it was obvious that the entire money given by the

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Government could not be disbursed in one single day and it had to be utilised by and by as per the requirements of setting up the power plants and till the money was so utilised wholly, the amount not so utilised had to be kept for safety reasons and in the process, it earned some interest as it was kept in short-term call deposits usually for a period of two weeks at a time. According to Shri Ganesan the income from interest so derived, was to be set off against construction expenditure 'as it went to abate the capital cost of the projects. Another argument put forward in the same vein was that funds having been placed at the disposal of the company by the Government for the construction work in hand, any part of these funds could not be treated to be surplus funds as if the Investment of such funds constitute an independent source of income arising to the assessee. It was emphasised that the investment of funds in short-term call deposits could not be treated as unconnected with the activity of construction work in progress or with the setting up of business and should be regarded as an integral part of it. He went on to say that surplus money could only be that which was not required for putting up the project. It was pointed out that the assessee applied to the Government every quarter only for the money actually required for the construction of the power plants after giving the utilisation report for the money already spent. In short, Shri Ganesan's stand was that interest earned on short-term call deposits was inextricably linked with the construction activity and that the ratio of Delhi High Court's decision in the case of Indian Drugs & Pharmaceuticals Ltd. (supra) in reality supported his stand. It was submitted that the Delhi High Court no doubt dealt with a few items of income but that the principle enunciated in that decision would apply to many other types of income and for illustrative purposes, he referred to a, large list of items at pages 1575 onwards in Volume 2 of the Commentary on the Income-tax Law by Chaturvedi and Pithisaria (third Edition). 9. Shri Ganesan in support of hie stand relied on the two Special Bench decisions of the Tribunal in Nagarjuna Steels Ltd.'s case (supra) and Arasan Aluminium Industries (P.) Ltd.'s case (supra) and on the Delhi High Court's decision in the case of Indian Drugs & Pharmaceuticals Ltd. (supra). He explained the decision of the Delhi High Court and submitted that the observations at page 139 about the surplus moneys invested to earn interest were mere obiter dicta and should not be read against the main proposition laid down on the same page in respect of income from tender forms and excess realised on account of water and electricity charges. It was also submitted that the High Court had approved the reasoning of the Tribunal and the reasoning as noted at page 138 of the judgment is that the receipts were directly related to the capital structure of the business, which was being set up, and did not by themselves create an Independent source of Income unrelated to the business which was being set it, was also contended that the observations of the Delhi High Court were based on the Calcutta High Court's decision in CIT v. Ajmera Industries (A) Ltd. [1976] 103 ITR 245 and they were not binding on the Tribunal, such a question not being for decision before the Delhi High Court. 10. Shri Ganesan next submitted that the various authorities of the High Courts relied upon by the Tribunal in its order for the earlier two assessment years were clearly distinguishable and did not in terms deal with the issue raised by him in this appeal. He submitted that neither of the four authorities, viz., Madhya Pradesh State Industries Corpn. Ltd. v. CIT [1968] 69 ITR 824 (MP), Traco Cable Co. Ltd. v. CIT [1969] 72 ITD 503 (Ker.), Addl. CIT v. Madras Fertilisers Ltd. [1980] 122 ITR 139 (Mad.) and Collis Line (P.) Ltd. v. ITO [1982] 135 ITR 390 (Ker,) dealt with the question posed herein. It was also submitted. that the

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Special Bench of the Tribunal at Madras in the case of Arasan Aluminium Industries (P.) Ltd. (supra) had considered the Madras High Court's decision in Madras Fertilisers Ltd.'s case (supra) and had held that that decision did not apply to the facts of the case before the Tribunal. It was also submitted that the Delhi High Court authority in Indian Drugs & Pharmacevticals Ltd.'s case (supra) was wrongly read by the Tribunal as against the assessee. It was also submitted that the Tribunal in paragraph 13 of the order for the earlier years had misconstrued the following incidental or ancillary object No. B-14 in the Memorandum of Association: "To invest money 14: To accumulate funds and to invest or otherwise employ moneys belonging to or with the company and not immediately required in the purchase or acquisition of any shares, securities or other investments whatsoever whether movable or immovable upon such terms as may be thought proper and from time to time to vary all or any such investments in such manner as the company may think fit." It was pointed out that this ancillary clause was neither activated in accordance with the Companies Act nor acted upon and that it could be activated only when moneys were accumulated out of profits and not when the construction was going on. It was once again submitted that there were no surplus moneys available with the assessee-company as the funds made available to it by the Govt. of India were only for the outlay on construction. An argument was also made that short-term capital deposits for a period of two weeks at a time could not be said to amount to an investment. 11. Shri Ganesan very fairly took upon himself to explain two other High Court decisions; one from Madras and another from Karnataka, which could be read against the assessee. The Madras High Court (decision is CIT v. Seshasayee Paper & Boards Ltd. [1985] 156 ITR 542 and the Karnataka High Court decision is CIT v. Cap Steel Ltd. [1986] 162 ITR 533. In regard to the Madras High Court's decision Shri Ganesan's submission was that apparently it may be against the assessee but since It had proceeded on a concession, no law was laid down. For this proposition the Supreme Court's decision in Lakshmi Shankar Srivastava v. Delhi Administration [1979] SCC 229 was cited in support. It was stated that the assessee's case was different on facts. Further it was Shri Ganesan's contention that the High Court had gone beyond its jurisdiction while deciding the matter at page 550. So far as Karnataka High Court's decision is concerned, it was submitted that it was against the assessee but according to Shri Ganesan the High Court had not considered the accountancy practice, which is prevalent as shown by him in his arguments earlier and having ignored that, the High Court had not correctly followed the ratio of the Supreme Court's decision in Challapalli Sugars Ltd.'s case (supra). 12. Shri Ganesan also raised an alternative plea in respect of the interest amount of Rs. 26,03,245 received from the contractors on advances and interest on loans advanced to employees, which was included in the amount of Rs. 1,07,29,848. It was his contention that these two items of interest receipts were inextricably linked with the construction activity and fell within the ratio of Delhi High Court's decision in the case of Indian Drugs & Pharmaceuticals Ltd. ( supra). He explained that advances were given to contractors to expedite the construction work as per the booklet of the N.T.P.C. containing the general conditions of contract for civil works. A copy of that booklet was filed and our attention was invited to page 48 and Schedule 'A' appearing at page 76. It was submitted that

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according to the contents at page 48 the N.T.P.C. could advance loans subject to the availability of funds if required by the contractors and in the case of contracts valued at over Rs. 20 lakhs, a loan of 75 per cent of the purchase price of new machinery, plant and equipment acquired for work and brought to site could be given to a contractor and the interest on the outstanding sum was to be levied at the rate mentioned in Schedule 'A'. There was also a ceiling provided for loan against plant and equipment, which could in no case exceed 6 per cent of the contract sum. He also stated that in case of contracts again valued at over Rs. 20 lakhs, a lump sum advance not exceeding 4 per cent of the contract sum against a guarantee acceptable to the Corporation at the rate of interest mentioned in Schedule 'A' could be given provided that the advance was to be utilised for the purpose of the contract only and for no other purpose. An overall ceiling was provided in respect of the request for loan made by the contractor under both the provisions and the total sum given under both the heads could not exceed 8 per cent of the contract sum. In Schedule 'A' on both types of loans i.e. for purchase of plant and equipment and lump sum advance the rate of interest prescribed was 12 per cent. Thus, this interest was so different from the interest realised on short- term fixed deposits, and this type of interest went to reduce the cost of construction and it cannot be considered as interest liable to tax as income from any independent source. 13. After Shri Ganesan, Shri R.N. Bajoria, Senior Advocate, the learned counsel of the intervener M/s. National Aluminium Co. Ltd. made his submissions. He made very brief submissions in view of the fact that the question arising in the intervener's case was not involved in the assessee's case as here the assessing officer had already taxed only the net Income from interest. In other words the issue in the case of National Aluminium Co. Ltd. related only to the claim of deduction of interest paid on borrowings from the income from interest, which was undisputedly liable to tax sofar as that case was concerned. He rightly and very fairly appreciated the position that there was no room for raising the same contention of his assessee's case in the case now before the larger Bench of the Tribunal. He nevertheless took the opportunity to touch a few aspects. He emphasised that amounts were borrowed by the assessee to set up the plant and machinery and for setting up of the plant and machinery and the earning of interest from surplus funds not immediately required for that activity constituted one single transaction, which was inextricably mixed up. He further submitted that whether borrowings were used Immediately or later on, the activity of earning of interest sprang from the same borrowings and the factum of earning of interest should not be dissociated from the purpose of borrowing. It was argued that earning of interest would have only reduced the liability for anticipated payment of interest, which in any event had to be capitalised and by the process of deduction, the quantum of interest to be capitalised would only be reduced. The attempt to decrease the amount of interest to be capitalised should not be regarded as a source created for earning income much less income for taxation purposes. Shri Bajoria very fairly conceded that the issue arising in his assessee's case was decided against him by the Calcutta High Court in CIT v. New Central Jute Mills Co. Ltd. [1979] 118 ITR 1005. 14. After Shri Bajoria, Shri O.P. Vaish made his submissions. Shri Vaish was representing the second intervener M/s Paradeep Phosphates Ltd., New Delhi. In the case of Paradeep Phosphates Ltd. the issue involved was taxing of income from interest on short-term deposits under the head 'Income from other sources'. M/s Paradeep Phosphates Ltd. was to manufacture fertilizers and during the previous year relevant to the assessment year 1984-85 of the intervener (sic.), its

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plant was under construction. It had to make deposits in the banks for the opening of letters of credit for the import of equipment and spares of very substantial amounts running into nearly Rs. 12 crores. In addition to making those deposits out of borrowed amounts, it also kept deposited the amount received as subscription of equity shares. On such short-term deposits it earned an interest of Rs. 1.30 crores. In view of these facts of his assessee's case Shri O.P. Vaish firstly relied on the submissions made by Shri Bajoria and Shri Ganesan and further contended that what was material was to look at the source from which interest income had come. When the course, according to Shri Vaish, was the construction activity or the business yet to be set up then there was no question of interest on short-term deposits springing from an independent, source. He referred to the short-term deposits made for the purpose of opening letters of credit for the import of equipments and spares from abroad. As an illustration he submitted that the making of such short-term deposits with the banks was inextricably linked up with the activity of setting up of the project. He contended that the true nature of the transaction of earning interest was to be seen in the first instance and the head of income under which such income will be assessable had to be considered only thereafter. He went on to say that the head of income is to be determined only after the nature of activity producing interest is analysed. In support of his argument he cited the decision of the Delhi High Court in Snam Progetti S.P.A. v. Addl. CIT [1981] 132 ITR 70. He referred to the observations of the Delhi High Court in the head-note to the effect that the assessee had not come from Italy (assessee being an Italian company carrying on business as Engineers and Contractors in the field of Petroleum and Petro-Chemical Plants) to make deposits in India but had come to carry. on business and that the income earned by depositing spare funds in the banks and earning interest thereon would also be business income and for the purpose of set off of brought forward business loss from the earlier assessment years, it could not be treated as separate from business income. He also contended that the Madras and Karnataka High Court decisions in Seshasayee Paper & Boards Ltd.'s case (supra) and Cap Steel Ltd.'s case (Supra) did not consider or deal with the aspect of seeing the true nature of the transaction. In regard to the Madras High Court's decision Shri Vaish submitted that the High Court did not consider the Supreme Court's decision in Challapalli Sugars Ltd.'s case (supra) and another Supreme Court decision in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52 . According to Shri Vaish in the light of the Supreme Court's decision in India Cements Ltd.'s case (supra) the purpose for which money was borrowed was not relevant even when the context in that case related to pre-setting up period and therefore the Madras High Court could not look into the purpose of borrowings to conclude in that case that interest on borrowings will not be allowed to be set off against interest income. Shri Vaish submitted that the reality was that interest was paid on borrowed funds, which funds on being invested i n short-term deposits earned Interest Income and the interest so earned only reduced, in the ultimate analysis, the interest payable on borrowed funds. 15. Lastly Shri L. Rangamani appearing for the third Intervener M/s. Autokast Ltd. made his brief submissions. He at the outset noted that the case of the intervener was different from that of the, assessee and what this intervener claimed was merely set off of interest on borrowings against interest income. His case was like that of the first intervener M/a. National Aluminium Co. Ltd., which was not disputing the taxability of interest income but was only seeking deduction of interest paid on borrowings out of which the short-term deposits bearing interest were made. Shri Rangamani stated that on facts in the case of Autokast Ltd.

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interest paid was more and income was less. His brief submission was that making of short-term depsits was an integral part of the assessee's business activity and further he relied on the arguments made by Shri Ganesan.. 16. Two learned Departmental Representatives, namely Shri D.K. Sharma and Mrs. Archana Ranjan put forward the case of the Revenue. Shri Sharma began his arguments by referring to a letter of the Bureau of Public Enterprises dated 2-4- 1987 advising the public sector undertakings not to resort to the appellate procedure but to resort to the remedy of revision before the C.I.T. The letter laid down a procedure for the settlement of disputes regarding income-tax inter departmentally. We may deal with this submission of Shri Sharma at the outset and point out that such a letter is in the nature of advice to the assessee and it is the assessee, which has to act upon it. The assessee instead of following the guidelines given in that letter has chosen to pursue the appeal before the Tribunal, which the Tribunal was duty bound to decide. Despite this letter the assessee has chosen to pursue the appeal before the Tribunal. 17. Shri Sharma next submitted that the stand. of the assessee is the same as was taken for the preceding two assessment years when the Tribunal had not accepted it. He referred to the Tribunal's order for the earlier two assessment years and the relevant paragraphs and relied upon its findings which were in favour of the Revenue. He next joined issue on the argument of Shri Ganesan that there were no surplus funds. He invited our attention to page 148, Schedule 'E', of the printed balance sheet of the assessee to show that the assessee was maintaning two separate types of accounts with banks, namely (i) balances with the Scheduled Banks in current accounts amounting to Rs. 13.12 crores; (ii) short-term deposits with Scheduled Banks amounting to Rs. 45 lakhs. He referred to a comparative statement at page 5 of the paper book of the Revenue showing surplus funds available with the assessee for the assessment years 1979-80 to 1981-82. It was submitted that all through the assessee had kept a certain portion of the moneys available to it in the current accounts with banks and kept another portion of the moneys in short-term deposits with the banks. From this doployment of funds, it was argued that it was clear that funds surplus to the immediate needs or anticipated immediate needs were put into short-term deposit accounts. Shri Sharma also referred to a letter dated 23-3-81 of Government of India, Ministry of Energy, Department of Power to bring out that towards the end of the accounting year the Government had sanctioned the incurring of an expenditure of Rs. 7.58 crores on account of purchase of 75,800 equity shares of Rs. 1,000 each of the assessee and the argument built around it was that in the nature of things, the assessee will be having from time to time funds surplus to its needs. He further referred to the statement at pages 1 and 2 of the assessee's paper book giving details of capital and loan provided by the Government from time to time on quarterly basis to highlight that even at the end of the accounting year, there were extra funds available to the tune of Rs. 4.21 crores. This figure was arrived at by him by taking into account the equity capital subscribed of Rs. 203.58 crores and loan granted of Rs. 47.94 crores taken together and deducting therefrom the expenditure incurred amounting to Rs. 247.31 crores. Shri Sharma contended that it could not be disputed by the assessee that the Government sanctioned funds in anticipation of the needs of construction and until those funds were fully utilised, there was a time lag in which moneys in the nature of things will become surplus qua the immediate needs and it is out of these moneys that the assessee made short-term deposits to earn interest income. The next contention of Shri Sharma was that it was not correct to say that all the funds given by the Government were meant for construction activity only. He referred to page 10 of

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the assessee's paper book having a statement showing anticipated requirements of funds in respect of Singrauli Super Thermal Power Project and submitted that the expenditure anticipated included expenditure on establishment charges of Rs. 12.90 crores and such expenditure, according to him, could not be said to be only for constructional activity. He went on to say that when expenditure of this nature was anticipated, it could not be said that all the amounts put in short-term deposits were out of funds given for constructional activity. He also stated that only with the surplus funds available, the assessee could advance loans to contractors and employees on which it received a substantial interest of Rs. 26.03 lakhs as per details on page 3 of the paper book of the Revenue. He also took pains to say that the funds of the assessee were not made up exclusively of borrowed funds but included income derived from consultancy services, miscellaneous income of Rs. 49 lakhs, hire charges of Rs. 35.65 lakhs and interest receipts of Rs. 26.03 lakhs from contractors and employees and all these funds got intermixed with the capital provided and loan funds and it could not be said that the funds going into short- term deposits were only the funds supplied by the Government for construction activity. He also claimed that maximum funds of the assessee remained at Delhi where there was no construction activity and again according to him large funds at Delhi were surplus funds and because of such funds, loans could be given to the contractors and employees. He contended that it was not correct to say on the part of the assessee that surplus funds could only result from income and that what is meant by surplus funds are funds not required immediately for construction purposes. He referred to para 8.1 of the pamphlet 'Guidance Note on Treatment of Expenditure During. Construction Period' which referred to earning of interest from the temporary investment of surplus funds prior to the utilisation for capital or other expenditure. Para 8.1 (page 10) is quoted below: "8.1 It is possible that a new project may earn some income from miscellaneous sources during its construction or pre-production period. Such income may be earned by way of share transfer fees or by way of interest from the temporary investment of surplus funds prior to their utilisation for capital. or other expenditure or, from sale Of products manufactured during the period of test runs and experimental production. Such items of, income should be shown separately in the profit and loss account/Development Account/Incidental Expenditure During Construction Period Account/Statement on Incidental Expenditure During Construction. (Refer to para 14.7)" His further argument was that when money not, immediately required was invested in short-term deposits with the banks, the income from Interest arising therefrom will be liable to tax under the head 'Income from other sources'. He invited our attention to para 10 of the order of the Special Bench of the Tribunal at Delhi in the assessee's own case relating to the assessment year 1978-79 which clearly stated that when the money withdrawn from the Central Government could not be utilised for the construction or erection work immediately, the amounts were deposited with banks as short-term deposits. It was his stand that income from interest had been earned out of a conscious act on the part of the assessee to deposit surplus funds in short-term deposits on interest and that it needs no proof that no income from interest could flow from borrowed funds themselves. He went on to say that that conscious act to take short-term deposits on interest gave rise to an independent source of income and that source was immediate and not remote. It was further stated that the income from interest arose from a contract with the bank and not from the transaction of borrowing funds from the Government. He also met the argument that investing in short-term deposits was not merely for the purpose of safe custody of funds by the banks as that purpose of safety could be

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achieved simply by putting those funds in current account along with other funds lying there. Finally, he stated that borrowed funds, if at all, could be said to be a remote source of the funds put in short term deposits and the income from interest did not arise from the act of borrowal of funds. In regard to the concept of surplus funds being put into banks, he referred to the ancillary object B 14 of the Memorandum of Association (reproduced in para 10 above). It, Was also submitted that the assessee's counsel Shri Ganesan could not contend that ancillary object B 14 was not activated. It was pointed out that against the finding of the Tribunal on this point in its order for the preceding two assessment years, the assessee had moved a miscellaneous application in respect of which the order is at page 82 of the assessee's paper book. It was submitted that the Tribunal had overruled those objections and the clause has therefore to be considered to have been put in operation and further there is no material brought before this Bench to prove that the position in that regard has undergone a change for the assessment year under appeal. It was also contended that the argument about the compliance with the requirements of the ompanies Act, 1956 for activating this ancillary object by passing a special resolution before acting on it, is of no assistance as it is not a conclusive circumstance and that the assessee may violate the Companies Law if any such requirement was provided therein and that the non-passing of a resolution could not change the situation if it was in fact found to be existing. 18. Shri Sharma contended that Shri Ganesan could not cite any High Court decision in his favour on the point of interest income and the decisions of the two Special Benches of the Tribunal, Hyderabad and Madras Benches, were before the Madras High Court decision in the case of Seshasayee Paper & Boards Ltd. ( supra) and certain other decisions. The effect of the Madras High Court's decision in Seshasayee Paper & Boards Ltd.'s case (supra). according to Shri Sharma, was that the two Special Bench decisions of the Tribunal were not approved. He further pointed out that due to High Court decisions brought to the notice of other Benches of the Tribunal at Delhi the two Special Bench decisions were not followed by them. He invited our attention to a decision dated 31-3-1986 in the case of National Hydro Electric Power Corpn. (supra) for the assessment year 1980-81 in which the Bench decided the issue in favour of the Revenue by taking rote of the ratio of the Delhi High Court's decision in the case of Indian Drugs, & Pharmaceuticals Ltd. (supra) and decision of the. Calcutta High Court in the case of New Central Jute Mills Co. Ltd. ( supra) and Karnataka High Court in Karnataka Forest Plantations Corpn. Ltd. v. CIT [1985] 156 ITR 275. It was also pointed out that the Tribunal in that case did not follow the view taken for the preceding assessment year on the basis of which Shri Ganesan had raised the plea for the constitution of a larger Bench. In fact Shri Sharma at one stage even pointed out that after the adverse decision of the Tribunal for the assessment year 1980-81 National Hydro Electric Power Corporation had taken recourse to the procedure laid down in the letter of the Bureau of Public Enterprises dated 2-4-1987. Another decision of the Delhi Bench 'C' of the Tribunal in favour of the Revenue in the case of IAC v. Chandpur Sugar Co. [1986] 17 ITD 795 was also cited and relied upon. It was submitted that both the decisions were based on the understanding and interpretation of the Delhi High Court's decision in the case of Indian Drugs & Pharmaceuticals Ltd. (supra). Shri Sharma next submitted that the M.P., Kerala, Madras, Calcutta and Karnataka High Courts had decided that question of head of income in respect of the taxability of interest income to be 'Other sources' and not "Business". He contended that the High Courts therefore had held that income from interest by the investment of surplus funds was from an independent source unconnected with the

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business to be set up and therefore it was to be taxed under the head 'Income from other sources'. He contended that the direct decision in favour of the Revenue was of the Karnataka High Court in Cap Steel Ltd.'s case (supra). He finally submitted that the view taken by the Delhi High Court in the case of Indian Drugs & Pharmaceuticals Ltd. (supra) if correctly read and understood, was in favour of the Revenue and also in consonance with the views of a large number of other High Courts. He submitted that what the assessee's counsel called an obiter dictum in the decision of the Delhi High Court in Indian Drugs & Pharmaceuticals, Ltd.'s case (supra) was a necessary finding of the High Court which could not be brushed aside by saying that that was not the issue before it. Regarding the ratio and dicta of a judgment, he cited the Madras High Court's decision in CIT v. Indian express (Madurai) (P.) Ltd. [1983] 140 ITR 705 . He finally submitted that observations of the Delhi High Court in Indian Drugs & Pharmaceuticals Ltd.'s case (supra) about the taxability of interest income were apt and apposite and the view taken was not contrary to the decisions of other High Courts. At one stage he had also cited another decision of the Tribunal in the assessee's favour from Jaipur Bench in Mangalam Cement Ltd. v. ITO [1986] 19 ITD 727. So analysing the case law Shri Sharma contended that no High Court decision was against the Revenue and therefore the ratio of the Delhi High Court's decision in All India Lakshmi Commercial Bank Officers' Union v. Union of India [1984] 150 ITR 1 will be attracted and the Tribunal should decide the question in favour of the Revenue. 19. Shri Sharma also contended that there was no merit in the alternative plea of Shri Ganesan about excluding the amount of Interest received from the contractors and employees amounting to Rs. 26.03 lakhs from the sum of Rs. 1,07,29,848. According to him Interest in these cases was also charged by the assesses as an act of will which gave rise to a definite Independent source and he cited the decision of the Rajasthan High Court in Murli Investment Co. v. CIT [1987] 31 Taxman 410 . It was also pointed out that the Rajasthan High Court had held that interest earned from depositing surplus funds in short-term deposits did not amount to moneylending. 20. Finally Shri Sharma contended that in accordance with what he termed as the rule of res judicata, when there was no change in the set of facts and law, this Bench of the Tribunal should not depart from the view taken by a Division Bench in the assessee's own case for the preceding two assessment years and more so when the assessee's reference application under section 256(1) was pending before the High Court for those years. He also contended that the assessee wanted the reappraisal of the same position which was considered by the Division Bench and also by the Delhi High Court in Indian Drugs & Pharmaceuticals Ltd.'s case (supra) and he invited our attention to two decisions of the Madras High Court in CIT v. S. Devaraj [1969] 73 ITR 1 and CIT v. L.G. Ramamurthi [1977] 110 ITR 453 and a host of Third Member decisions in Tube Investments of India Ltd. v. ITO [1984] 9 ITD 690, Sree Vadivambigai Textiles (P.) Ltd. v. Third ITO [1985] 11 ITD 125, First ITO v. Grahalakshmi & Co. [1985] 11 ITD 711 and Export House's case (supra) in that regard. 21. In regard to the submissions of the counsel for the interveners, Shri Sharma submitted that their arguments did not go further than those of Shri Ganesan about which he had already made his submissions. 22. Now we take up the submission of the other Departmental Representative Smt. Archana Ranjan in respect of accountancy principles and practice referred to by the assessee's counsel Shri Ganesan. She submitted that it was clear from a

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perusal of the two pamphlets filed by Shri Ganesan that no final accountancy practice in respect of the taxability of interest income by investing surplus funds in the construction phase of a business to be set up had been shown to exist. In this connection she invited our attention to paras 6 and 7 of the pamphlet 'International Accounting Standard—Capitalisation of Borrowing Cost', which mentioned the views held for and against capitalisation of borrowing costs. So far as the other pamphlet Issued by the Research Committee of the Institute of Chartered Accountants of India briefly called 'Guidance Note on Treatment of Expenditure During Construction Period', is concerned she invited our attention to para 8.2 (page 10) quoted below-stating clearly that the question relating to tax liability of income during the construction or pre-production period needed to be considered and the necessary provision for such liability had to be made in the accounts: "8.2 The question relating to tax liability on the income during the construction or pre-production period needs to be considered. Necessary provision for such liability should be made in the accounts." She referred to para 15 (page 27 and its two sub-paras 15.1 and 15.2) (pages 27 and 28)-reproduced below-to say that what was suggested was that from the total of the items mentioned in para 15.1 of Indirect Expenditure, income which can be directly related to the particular item of indirect expenditure, if any, earned during the period of construction, would be deducted. "15. Allocation of Indirect Capital Expenditure to Specific Asset Heads. 15.1 Mention has been made in earlier paragraphs of this note to the various items of Indirect expenditure which may be capitalised. in particular, attention is drawn to the under noted paragraphs which deal with different items of indirect expenditure which may be capitalised as part of the cost of construction- Paragraph 3-relating to Preliminary Project Expenditure. Paragraph 4-relating to Interest Charges and other Financial Expenses. Paragraph 5-relating to Indirect Expenditure Incidental to Construction. Paragraph 9.5-relating to expenditure on Temporary Structures and Service Facilities Built or Acquired Specially for the purpose of Construction. Paragraph 9.4/5-relating to Depreciation on Fixed Assets as well as on Temporary Structures and other Facilities used during the period of Construction. Paragraph 9.6-relating to the Expenditure on Land Grading and Levelling. Paragraph 9.6-relating to Expenditure on Test Runs. 15.2 From the total of the aforesaid items of indirect expenditure would be deducted the income (which can be directly related to the particular item of indirect expenditure), if any, earned during the period of construction." It was submitted that there was no reference at all here to the treatment to be accorded to interest income derived from short-term deposits out of surplus funds. Paragraph 17.11 of the same pamphlet-quoted below-was cited to contend that even the Institute of Chartered Accountants of India had two views on the point in the matter of capitalising or treating the expenditure as deferred revenue expenditure: "17.11 During the construction period, a project may earn income from miscellaneous sources for example, share transfer fees, interest income, income from hire of equipment or assets and income from sale of products manufactured during the period of test runs and experimental production. It is recommended that

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such Income should be set off against the related items of expenditure so that only the net amount of the expenditure is capitalised or, treated as deferred revenue expenditure, as the case may be. In either case, consideration may have to be given to the question of providing for the income-tax liability on such income (paragraph 8.2)." In regard to paragraph 11.4 of the same pamphlet-already quoted above-it was the argument of the learned Departmental Representative that this was merely in the nature of a suggestion and the question of treatment of income was to be governed by paragraph 15,2-reproduced earlier. It was farther contended that accountancy principle or practice should be such which is finally established and such practice any commercial person should be able to understand easily and clearly. It was submitted that there was no such practice established by the assessee and consequently the assessee's repeated reliance on the Supreme Court's decision in Challapalli Sugars Ltd.'s case (supra) was misplaced. It was explained that the Supreme Court in that case was dealing with the, issue of actual cost of an asset in the installation period of a concern and held that all expenditure, which was necessary to bring some asset into existence will be part of the actual cost of the asset and only qua the capitalisation of such an expenditure, the Supreme Court had taken note of the established accountancy practice. Again, it was pointed out that even every expenditure, incurred by an assessee in respect of the Installation of an asset could not be capitalised as could. be seen from the Allahabad High court's decision in CIT v. J.K. Cotton Spg. & Wvg. Mills Ltd. [1975] 98 ITR 153 a decision approved by the Supreme Court in Challapalli Sugars Ltd.'s case (supra). In this connection reference was made to items of expenditure detailed at page 156 of the Report and considered by the High Court. It was further contended that the principle of capitalisation of expenditure incurred to bring some asset into existence could not be stretched to earning of income from interest now under consideration, nor can it be said that whatever can be true about capitalisation of expenditure, would lead to the conclusion that income earned will also be a capital receipt. It was pointed out that even the Supreme Court had sounded a note of caution in Challapalli Sugars Ltd.'s case (supra) at page 175 about adopting a rule of accountancy when the above rule was recommended to be adopted for determining the actual cost of the assets by observing: "in the absence of any statutory definition or other indication to the contrary". It was also pointed out that the Delhi High Court in the case of Indian Drugs & Pharmaceuticals Ltd. ( supra) was purporting to point out the limitation of the rule laid down earlier when it referred to the income from interest derived from the investment of surplus moneys to be assessable under the head 'Income from other sources'. In other words it was. submitted that the Delhi High Court was giving illustrations to show that all receipts in the construction phase of a business to be set up will not always be capital receipts. It was next pointed out that the Karnataka High Court in the case of Cap Steel Ltd. ( supra) had considered the import of the Supreme Court's decision in the case of Challapalli Sugars Ltd. ( supra) and the safeguard provided therein and dealt with the argument of the principle of accountancy raised before it on the basis of another pamphlet issued by the Research Committee of Institute of Chartered Accountants of India by the name "Study on Expenditure During Construction Period". The High Court rejected the principle recommended by the Institute of Chartered Accountants of India by observing that it could not be taken advantage of by the assessee since it appeared to be contrary to the statutory taxability of interest income and that under the Income-tax Act, interest earned or interest income accrued to the assessee, whether out of borrowed money or out of one's own capital was liable to tax. Finally it was

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submitted that no accountancy principle could override the provisions of the. Income-tax Act and that to repel the assessee's argument interest received from short-term deposits cannot be said to be of the same nature as expenditure incurred to bring an asset into existence. Reliance was placed on the Madras and. Karnataka High Courts' decisions in Seshasayee Paper & Boards Ltd.'s case (supra) and Cap Steel Ltd.'s case (supra) which laid down that gross interest income without the deduction of interest paid on, borrowed funds was liable to tax under the head 'Income from other sources'. 23. Shri Ganesan in reply submitted that the Delhi High Court in Indian Drugs & Pharmaceuticals Ltd.'s case (supra) had affirmed the decision of the Tribunal and he referred to pages 137 and 138 of the report and argued that the finding of the Tribunal was that receipts were of a capital nature, when the business was being set up. According to him the finding of the High Court was that in such a situation both the receipts and expenditure will be on capital account. He referred to another decision of the Delhi High Court in CIT v. State Trading Corpn. of India Ltd. [1973] 92 ITR 294 and submitted that even though the grant-in-aid given by the Government of India to the company to meet its administrative expenditure, was a revenue receipt, the High Court held that as the business was not set up, it could not be treated to be assessee's income. Shri Ganesan relied on this authority to say that all receipts in the case of a business, not set up, will be on capital account. He also stated that business of consultancy was not the assessee's business and its main business, as per its memorandum, had not been set up and that that fact is not even disputed by the Revenue. Shri Ganesan finally submitted that it had been erroneously assumed that the assessee derived any income from an independent source which could be taxed as income under the head 'Other sources'. He also pointed out that similar was the view of the Delhi High Court in Snam Progetti S.P.A.'s case (supra). Shri Ganesan submitted that even though the Madras High Court's decision in the case of Madras Fertilisers Ltd. (supra) and the Karnataka High Court's decision in Cap Steel Ltd.'s case (supra) were against the assessee in conclusion. but the binding authority of the Delhi High Court in Indian Drugs & Pharmaceuticals Ltd.'s case (supra ) was in the assessee's favour. Shri Ganesan finally submitted that the Chartered Accountants' literature generally takes the same view as he had advocated and the Delhi High Court had also taken the same view in the Indian Drugs & Pharmaceuticals Ltd.'s case (supra). 24. Shri Sharma on behalf of the Revenue pointed out that the decision of Delhi High Court in the case of State Trading Corpn. of India Ltd. (supra) was not applicable to the facts of the assessee's case and the grant-in-aid was received by the STC which was a one time payment. 25. After bestowing our best consideration and considering the catena of authorities cited by both the sides and the interveners, we are inclined to uphold the stand of the Revenue which is indeed supported by the views of several High Courts. Certain important questions that arise in this case are-(i) Whether the assessee had surplus funds which it invested in short-term deposits to earn interest; (ii) whether an independent source of income had come into being giving rise to interest income; and (iii) whether there is any well established accountancy practice in respect of treating the aforementioned interest income to be a capital receipt of the business to be set up, which was to be adjusted against the capital expenditure incurred, for the setting up of the business; and finally (iv) what is the true ratio of the binding authority of the Delhi High Court in Indian Drugs & Pharmaceuticals Ltd.'s case (supra).

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amounts that were not immediately required for carrying on its business operations wore invested in banks in current account and short-term deposits. Interest from such deposits was assessed under the head 'Income from other sources' and the assessee through a revision petition filed before the Commissioner of Income-tax, claimed that it was entitled to the deduction of interest on the amount borrowed. The Commissioner dismissed the revision petition and the assessee filed a writ petition before the Karnataka High Court.The High Court examined the question of the nature of interest derived on short-term deposits and held that though the borrowings had been made for the purpose of business, these were not made to make investments and earn interest from them and the interest from borrowed amounts kept in short-term deposits. Was totally independent of the borrowings and even the interest payable on such borrowings was, therefore, not deductible u/s 57(iii) of the Income-tax Act. The High Court bad followed the view taken by Kerala High Court in Traco Cable Co. Ltd.'s case (supra). The independent nature of the transaction of earning interest by making short-term deposits out of the borrowed funds is brought out by this decision of the Karnataka High Court. 29. Next is the Madras High Court decision-Seshasayee Paper & Boards Ltd.'s case (supra). In that case the assessee had not estab- lished its factory during the assessment year 1962-63 and, therefore, there was no question of computing its business income. The assessee-company had invested its paid up share capital and loans obtained from the Industrial Credit and Investment Corporation and the Export and Import Bank of Washington in banks as deposits and received interest. It adjusted the interest payable on its loans against the interest received for assessment. The ITO held that so far as the interest earned by the assessee on call deposits of share capital was concerned, it was liable to tax under the head Other sources'. He, however, did not tax the interest on all deposits made out of investment of borrowed money as the interest received was less than the interest paid. In appeal the AAC held that the entire interest income irrespective of its origin had to be assessed only under the head 'Other sources' and directed the ITO to bring that amount to tax accordingly. On further appeal the Tribunal took the view that as the business had not been started and the assessee was in pre-production stage, any earning of income should be viewed from the point of view of reduction in the commitments and that all interest payments incurred during the precommencement period, would go to increase the cost of construction and will have to be capitalised and, therefore, any interest earned during the period irrespective of whether it was out of own funds or borrowed funds, will have to be judged from the point of view of the total outlay in the construction and the setting up of the factory and as such it was justifiable for the assessee to claim set off of the entire interest as attributable to its project cost getting reduced. The Madras High Court, to which the matter was taken by the Commissioner of Income-tax, negatived the finding of the Tribunal that interest receipts could not be assessed and the difference between the interest paid and the interest earned by the assessee should be capitalised and held that the interest earned by the assessee on investment of share capital in call deposits could be assessed separately under the head "Other sources". Shri Ganesan had seriously objected to the decision of the High Court due to a sentence in the last para at page 550 to the following effect: "Thus, on a due consideration of the matter, we are inclined to hold that the Tribunal is not right in this case in holding that the interest receipts cannot be assessed and that the difference between the interest paid and the interest received should be capitalised."

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His argument was that looking to the question referred to the Hon'ble High Court, it had travelled beyond the scope of that question and this was beyond the jurisdiction of the High Court. We are unable to attach much weight to the submission of the learned counsel as the finding of the High Court on the main issue is quite clear and in the sentence referred to above it was merely referring to the controversy which fell for the consideration of the Tribunal. It does not vitiate the ratio of the decision of the High Court which is clearly against the assessee. 30. Then there is a decision again of Karnataka High Court in Cap Steel Ltd.'s case (supra). The assessee had borrowed funds from financial institutions for the purpose of installation of plant and machinery and also for construction of buildings and after spending certain amounts it deposited the excess money available with it in short term deposits and earned interest out of those deposits. The assessee contended before the ITO that interest earned was not assessable to tax and it should be set off against the interest payable on the borrowings. The ITO held that the gross interest payable should be capitalised along with other expenses and that the interest earned was not deductible. The AAC held that the interest was deductible in computing the total income of the assessee, but the net interest should not be capitalised. The Tribunal held that the net interest should be capitalised. Prom the facts noted in the report of the case, it is seen that ITO had brought to tax the interest income and did not allow the set off of interest payable against the Income from interest. The controversy about non-adjustment of interest paid against the interest received went for the consideration of the High Court, before whom the plea of accountancy practice or rule was also raised so as to set off the interest income against the interest paid. The High Court negatived the plea of accountancy practice and held that only the gross amount of interest paid on borrowings had to be capitalised in view of Supreme Court decision in Challapalli Sugars Ltd.'s case (supra). This case rejects the plea of accountancy practice in a direct manner after taking note of the safeguards contained in the Supreme Court judgment about accepting and applying an accountancy practice. It further impliedly upholds the separate assessment of interest income by the ITO. The decision of the Karnataka High Court was admitted by the counsel Shri Ganesan to be against the assessee and so it is. 31. Next we come to the binding authority of Delhi High Court in Indian Drugs & Pharmaceuticals Ltd.'s case (supra). We are unable to share the interpretation of that decision put forward on behalf of the assessee. Shri Ganesan relied on this authority to say that an receipts during the construction period of a business to be set up, would be on capital account and set off against the capital expenditure. He relied upon the observations of the Tribunal at page 137 to the effect that since the business was not fully set up, the receipts and payments would be clearly on capital account. The decision and the finding of the Tribunal cannot be read partly but as a whole. On page 138 the Tribunal had explained that there were receipts which were directly related to the capital structure of the business, being set up and thus did not by themselves set up an independent source of Income unrelated to the business, which was being set up. These receipts, the Tribunal went on to say, wore distinguishable from interest on deposits of surplus money, which was realised by utilization of such surplus money and created a separate independent source. In other words the Tribunal had clearly drawn a distinction in regard to receipts which wore inextricably linked with the process of the setting up of the business and the receipts like interest on deposits of surplus money. arising from a separate independent source. The Tribunal, therefore, had comprehensively examined the issue and did not lay down any proposition of the type which Shri Ganesan says, qua all the receipts including the receipt of interest

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from investing surplus funds. It is these findings of the Tribunal which have been affirmed by the High Court and at page 139 in the earlier part the High Court dealt with the receipts of the type which were inextricably linked with the process of setting up of the business and held them to be deductible while working out the cost. However, the High Court like the Tribunal set out the limitations in the next para at page 139 so that a wide proposition as is put forward by Shri Ganesan could not. be said to be emerging from its decision. This precaution is exercised by the courts to ensure a clear understanding. of Its decision and to circumvent its misapplication by widening the scope of the proposition laid down. It is not a case of any obiter dicta. No doubt an illustration is given by the High Court, but this is there only to explicitly elucidate the ratio it is seeking to lay down. Thus the illustration given cannot be considered to be either obiter dicta or non-relevant for the purpose of the case. It is in this light that the High Court in Ajmera Industries (P.) Ltd.'s case (supra) and the illustration given by it should be read. The High Court had clearly laid down that such interest income would certainly be assessable under the head 'Income from other sources'. 32. Relying upon the above authorities we are fortified in our view that the interest earned by the assessee by taking short term call deposits with the scheduled bank from time to time was income liable to tax under the head 'Income from other sources'. 33. We may next consider the two other Delhi High Court authorities, which the counsel for the assessee and one of the interveners considered to be in favour of the assessee. The first one is State Trading Corpn. of India Ltd.'s case (supra). We do not consider this authority to be of any help to the assessee. That was a case of a grant-in-aid received for administrative expenses of State Trading Corporation of India Ltd., which, if the business had already been set up and carried on, would have been of revenue receipt of such business. The High Court noticed that when the business was not set up, such a receipt could not be treated to be its business income and utilised to reduce the revenue expenditure of the company, considered by the ITO. This is not a case of the kind which is before us. 34. The second authority of Delhi High Court which was cited by Shri O.P. Vaish and also relied upon by Shri Ganesan later on, is in the case of Snam Progetti S.P.A. ( supra). Here also it is clear from the facts of the case that it is not a case of construction period of a business to be set up, like that of the assessee. In that case the Italian company had started carrying on business as engineers and contractors in the field of petroleum and petrochemical plants and for the preceding two assessment years had also returned business income and in the year 1970-71, under consideration was claiming adjustment of interest income on bank deposits, earned by it against the loss suffered in business. We fail to understand how this authority can advance the assessee's case. At this stage we may also, in passing, refer to the line of reasoning put forward by the counsel of intervener Shri O.P. Vaish, who contended that following the Supreme Court's decision in India Cements Ltd.'s case (supra), the purpose for which money was borrowed was not relevant in the context of pre-setting up period of a business. If the argument of Shri Vaish was to prevail, then the argument of Shri Ganesan that the Purpose of funds borrowed or contribution received by way of share capital from the Government was to make capital outlay in the construction of projects would also have to be ignored. But apart from that, it is not a relevant consideration for determining the taxability of any receipt of money invested as to how the funds giving rise to that receipt had to be utilised. Ultimately in the case before us the assessee had utilised the surplus funds in its hands by a conscious act to invest

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them in short-term deposits with a view to earn interest. Immediately a question would arise - whether this utilisation of funds had given rise to any independent source of income. Again it may also be pointed out that under the scheme of the Income-tax Act, 1961 the income arising from a particular source, attracts tax liability, the moment it arises under the mercantile system of accounting, and the charge that gets fastened to such accrued income cannot disappear by any consideration of subsequent utilisation of such income. 35. Shri Ganesan had laid great stress on there being an establ- ished practice of accountancy for capitalising the interest income received from short-term deposits during the period of construction. He relied on two pamphlets for this contention. In the pamphlet entitled 'International Accounting Standard' what has been discussed is the question of capitalisation of borrowing costs. After noting the views for and against such capitalisation the pamphlet discusses the methods of capitalising the borrowing costs and in that connection a reference has been made to the capitalisation rate. It is stated that where funds are temporarily invested pending their requirement it is appropriate to off set such investment income against the associated borrowing costs in deter mining the capitalisation rate. Apart from the fact that this International Accounting Standard becomes operative for financial statements covering the period after 1-1-1986, the observation also does not authorise the set off of interest income towards the cost of construction. However, the borrowing cost as such can be capitalised towards the actual cost of the assets installed as held by the Supreme Court in the case of Challapalli Sugars Ltd. ( supra). 36. The other pamphlet entitled 'Guidance Note on Treatment of Expenditure During Construction Period' issued by the Institute of Chartered Accountants of India essentially deals with the treatment of various items of expenditure incurred during the period of construction. Extracts from this pamphlet have already been reproduced elsewhere in this order. In para 8.1 it is stated that the income during the construction period like interest income from temporary investment of surplus funds should be shown separately in the 'Incidental Expenditure during Construction Period Account' and necessary provision for the tax liability should be made in the accounts. In para 11.4 it is suggested that income from sale of merchandise during test-runs or experimental production should be set off against indirect expenditure incurred during the period off test runs before capitalising such expenditure as suggested in paras 15.1 and 15.2. In the end of the pamphlet there is a summary of conclusions and recommendations. In para 17.4 thereof it is recommended that the interest charges incurred during the construction period on loans and other forms of borrowing should be treated as part of indirect construction cost if the loan or other borrowing was taken or incurred for the purpose of financing the construction of the project. Para 17.11 already reproduced provides that the income from miscellaneous sources like share transfer fees, interest income, income from hire of equipments and income from sale of products manufactured during the period of test runs etc. should be set off against the related items of expenditure so that only the net amount of expenditure is capitalised or treated as deferred revenue expenditure as the case may be. It is further stated there that in either case consideration may have to be given to the question of providing for the income-tax liability on such income. Besides this, there are other recommendations about the treatment of other expenditure and depreciation on assets during the construction period but we are not concerned with them.

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32(2) of the Act. Section 32(1) requires that the machinery or plant in respect of which depreciation is claimed should be owned by the assessee and used for the purposes of the business or profession. The assessee's case undisputedly is not that of carrying on any business of hiring plant or machinery. It has hired out plant & machinery to its contractors and the income derived therefrom is offered for assessment as income from other sources. Shri Ganesan in his submission had explained that capital equipment which was hired was of such a nature that it was to aid the construction of power plant and would be useful for rendering help to the contractors and will not be required for running the power plant later on. In such a situation and on the facts as explained by Shri Ganesan, it is clear that depreciation could only be admissible in respect of plant and machinery/hired to. the contractors and not in respect of plant and machinery not so hired. The theory of passive user applicable in the case of a person who carries on the business of hiring of plant and machinery will not hold good in the case of the assessee. Following the view taken by the Tribunal for the preceding three assessment years, we uphold the orders of the authorities below on this point and reject the contention of the assessee. 44. Ground No. 5 of the assessee seeks to challenge the order of the Commissioner of Income-tax (Appeals) in sustaining the disallowance of an expense of Rs. 69,60,452 under the head 'Training and Recruitment Expenses' against the assessee's income from Management Fees. Shri Ganesan submitted that the assessee was receiving management fees from Badarpur Thermal Power Station which have been disclosed at Rs. 5,00,000 under the head 'business income'. His contention was that personnel had been trained and recruited by the assessee for carrying out duties relating to management activity of Badarpur Thermal Power Station and this fact cannot be denied for obvious reasons and the total disallowance of the amount claimed is not at all supportable. He also referred to the plea taken at the assessment stage that some of the trainees were meant only for Badarpur Thermal Power Station. He submitted that assessee's plea in this regard was appreciated by the Commissioner of Income-tax (Appeals) himself in the subsequent assessment year and he according to a formula allowed deduction of part of expenditure claimed. He invited our attention to the order of the CIT (Appeals) dated 23-2-1985 for the assessment year 1982-83 at pages 112 and. 113 of assessee's paper book. He submitted that at least the same treatment may be accorded to the assessee for the assessment year under appeal. 45. Shri D.K. Sharma contended for the revenue that the assessee having neither furnished any information/evidence before the Inspecting Assistant Commissioner (Assessment) or Commissioner of Income-tax (Appeals), he cannot now come forward. for any relief before the Tribunal. He also referred to the fact that the issue had been decided against the assessee by the Tribunal for the preceding two assessment years and prayed for taking of the same view. 46. After considering the rival submissions and taking particular note of the fact that the lower. authorities rejected the assessee's plea for this deduction in toto, denying to the assesses any appreciation of its stand even on the basis of broad probabilities of the situation and the commercial reality and. further taking note of the fact that the Commissioner of Income-tax (Appeals) for the assessment year 1982-83 has found that the stand of the assessee was partly correct on the basis of information supplied, which was on the same lines as furnished to us now, we consider it fair and just to set aside the order of the Commissioner of Income- tax (Appeals) on this point and to restore it to his file for examination of the issue de novo on the same lines as for the succeeding assessment year. We order

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accordingly. The assessee undertakes to provide whatever the information that may be required to determine the part of expenditure that is accordingly admissible. 47. Ground of appeal No. 6 in respect of disallowance of initial depreciation claim of Rs. 32,27,020 was not pressed by the assessee's learned counsel, Shri Ganesan. It is rejected. 48. Ground No. 7 challenges the order of the Commissioner of Income-tax (Appeals) in upholding the action of Inspecting Assistant Commissioner (Assessment) in bringing to tax miscellaneous income of Rs. 49,00,000 under the head 'Income from other sources'. According to the ground of appeal itself the amount was not taxable and the Commissioner of Income-tax (Appeals) had erred in not treating the same as receipts on capital account going to reduce the capital cost of construction of the company's projects, Shri Ganesan, firstly referred to page 59 of his paper book, which has details of miscellaneous income of the financial year 1980-81. These details are reproduced below:

"NATIONAL THERMAL POWER CORPORATION LTD. Assessment year 1981-82 Details of miscellaneous income during the financial year 1980-81 S.No. Particulars Amount 1. Liquidated damages received from contractors. 2,72,527.81 2. Rent recovered from contractors and employees. 3,44,426.21 3. Receipts from sweeping cement 53,421.00 4. 33,00,128.72 Recovery of overhead charges on account of issue of material to con-tractors/suppliers. 5. 7,499.14 Workshop service charges for repair and maintenance received from contractor. 6. 4,46,698.55 Recovery of overhead charges on issue of diesel etc. 7. Earnest money forfeited 47,000.00 8. 4,28,066.26 Other receipts of Misc. nature (sale of radhi, scraps, old and un- serviceable items). Total: 48,99,767.69 It was his contention that all these items of income were closely connected and inter-linked with the process of setting up the thermal plants and fell within the ratio of Delhi High Court decision in the case of Indian Drugs & Pharmaceuticals Ltd. (supra). According to him these receipts were on capital account and were to abate the capital cost of construction of assessee company's projects. 49. The learned Departmental Representative submitted that rent recovered from contractors and employees, liquidated damages received from contractors were a matter of discretion and due to the exercise of such discretion the income had resulted and the situation as stated by the Commissioner of Income-tax (Appeals) was like hiring charges received and the income was, therefore, rightly taxed. 50. We find force on this issue in the submissions of Shri Ganesan and find that situation here is akin to the income from interest of Rs. 26.03 lakhs which we have held to be not taxable. A mere glance at the 8 items of miscellaneous income noted

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in a preceding paragraph above will bear out that these items of income did not spring from any independent source of income, but were closely connected and inter-linked with the construction activity of setting up of the thermal power projects. These are in our view inextricably linked up with the process of construction of thermal power projects. Consequently we accept the contention of the assessee by following the Delhi High Court Authority in the case of Indian Drugs & Pharmaceuticals Ltd. (supra) and delete the income of Rs. 49,00,000 brought to tax under the head 'Income from other sources. 51. The remaining two grounds of appeal relate to the charging of interest under sections 139 and 217 of the Income-tax Act. Shri Ganesan. at the outset, very fairly admitted that this was not a case of assessee denying liability to the charging of both the types of interest and as per the decision of the Supreme Court in the case of Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961, no appeal in such a situation would lie with the Commissioner of Income-tax (Appeals). He, in view of the Supreme Court's decision, did not press grounds of appeal Nos. 8 and 9 and was clear that consequential relief will no doubt be available to the assessee when the income computed is recalculated by giving the appeal effect. 52. Before parting with this appeal. we will like to record our great appreciation for the valuable assistance rendered to the Bench by the learned counsel of the assessee and the interveners and the learned departmental representatives. 53. In the result, the appeal of the assessee gets partly allowed. Per Shri Ch. G. Krishnamurthy, President - I agree with all the conclusions reached by my learned Brothers in this appeal. I felt that I should add a few lines of my own to explain why I agreed to subscribe to this view on the major questions although I have been a party to the opposite view taken by the two Special Benches referred to in the order of the Tribunal in the earlier portions. At the time of hearing of those Special Bench appeals, we all felt that the matter was fully covered by the decision of the Supreme Court in the case of Challapalli Sugars Ltd. (supra) by which decision the Supreme Court pronounced that accounting practices and guidelines issued by the Institute of Chartered Accountants of India could be relied upon in arriving at the actual cost for the purposes of the Income- tax Act. But now I find that subsequent to the decisions of the Special Benches, two High Courts have expressed a contrary view. The Karnataka High Court in the case of Cap Steel Ltd. ( supra) after considering the Supreme Court decision in the case of Challapalli Sugars Ltd. ( supra) expressed the view that the decisions would have no application to a case of this nature. The Karnataka High Court clearly laid down the rule that interest received on short-term deposits during construction period constitutes income of the assessee and is liable to be taxed as income and could not be deducted from the cost of construction. In view of this direct decision of the Karnataka High Court, I felt that the view expressed by the earlier Special Benches was not proper. I therefore subscribe to the view taken by my other brothers.” CASES REFERRED TO National Thermal Power Corpn. v. IAC [1985] 12 ITD 99 (Delhi) (SB), Nagarjuna Steels Ltd. v. ITO [1983] 3 ITD 796 (Hyd.) (SB), Arasan Aluminium Industries (P.) Ltd. v. First ITO [1982] 1 ITD 10 (Mad.) (SB), ITO v. National Hydro Electric Power Corpn. [IT Appeal No. 1313 (Delhi) of 1983, dated 30-10-1984], Addl. CIT v. Indian Drugs & Pharmaceuticals Ltd. [1983] 141 ITR 134 (Delhi), Export House v. ITO

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[1985] 13 ITD 687 (Asr.) (TM), Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC), CIT v. Ajmera Industries (P.) Ltd. [1976] 103 ITR 241, (Cal.), Madhya, Pradesh State Industries Corpn. Ltd. v. CIT [1968] 69 ITR 824 (MP), Traco Cable, 503 (Ker.), Addl. Co. Ltd. v. CIT [1969] 72 CIT v. Madras Fertilisers ITR Ltd. [1980] 122 ITR 139 (Mad.), Collis Line (P.) Ltd. v. ITO [1982] 135 ITR 390 (Ker.), CIT v. Seshasayee Paper & Boards Ltd. [1985) 156 ITR 542 (Mad.), CIT v. Cap Steel Ltd. [1986] 162 ITR 533 (Kar.), Lakshmi Shankar Srivastava v. Delhi Administration [1979] 1 SCC 229 (SC), CIT v. New Central Jute Mills Co. Ltd. [1979] 118 ITR 1005 (Cal ), Snam Progetti S.P.A. v. Addl. 70 (Delhi), India CIT [1981] 132 Cements Ltd. v. CIT [1966] 60 ITR ITR 52 (SC), Karnataka Forest Plantations Corpn. Ltd. v. CIT [1985] 156 ITR 275 (Kar.), IAC v. Chandpur Sugar Co. [1986] 17 ITD 795 (Delhi), CIT v. Indian Express (Madurai) (P.) Ltd. [1983] 140 ITR 705 (Mad.), Mangalam Cement Ltd. v. ITO [1986] 19 ITD 727 (JP.), All India Lakshmi Commercial Bank officers' Union v. Union of India [1984] 150 ITR 1 (Delhi), Murli Investment Co. v. CIT [1987] 31 410 (Raj.), CIT v. S. Devaraj [1969] 73 Taxman ITR 1 (Mad.), CIT v. L.G. 453 (Mad.), Tube Ramamurthi [1977] 110 ITR Investments of India Ltd. v. ITO [1984] 9 ITD 690 (Mad.) (TM), Sree Vadivambigai Textiles (P.) Ltd. v. Third ITO [1985] 11 ITD 125 (Mad.) (TM), First ITO v. Grahalakshmi & Co. [1985] 11 ITD 711 (Mad.) (TM), CIT v. J.K. Cotton Spg. & Wvg. Mills Ltd. [1975] 98 ITR 153 (All.), CIT v. State Trading Corpn. of 294 (Delhi), Capital India Ltd. [1973] 92 Bus Service (P.) ITR Ltd. v. CIT [1980] 123 ITR 404 (Delhi) and Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961 (SC).”

8.2 In the case of Anrak Aluminum Ltd. Vs. DCIT, ITA No. 994/hyd/2017, dated 08/02/2021, the coordinate bench of ITAT, Hyderabad, has held on similar issue, as under:

“6. We are now left with the second issue of interest income addition of Rs.26,45,20,127/- treated as 'income from other sources' in both the lower proceedings. Ld.CIT(A) detailed discussion to this effect reads as under: "5.1 During the course of assessment proceedings, it is noticed by the Assessing Officer, that the assessee has not yet commenced its business activities. Further the assessee has received bank interest on fixed deposits amounting to Rs.26,45,20,127/- which was reduced from interest paid to banks. 5.2 The assessee was asked to explain why the interest income should not be taxed under the head income from "other sources" in view of the Apex court decision in the case of Turicorin Alkali Chemicals and Fertilizers Limited Vs. CIT 227 ITR 0172, In response, the assessee stated that the company has availed term loans, which were pending for

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utilization, these funds were invested in mutual funds and fixed deposits. Income earned on such short term investments was reduced from the capitalization cost. This treatment was in accordance with the accounting standard 16. The Appellant took reliance of the case M/s. Neelachal Ispat Nigam Ltd vs Asst. CIT (ITAT Cuttack bench dated 31 Aug 2004). The Assessing Officer did not accept the submission of the assessee and interest received on fixed deposits amounting to Rs.26,45,20,127/- was treated as income from other sources. 5.3 Before me, Appellant submitted that Assessing Officer assessed the interest income under the head" other sources" by relying on the decision of the Supreme Court in the case of Tuticorin Alkalis reported in 227 ITR 172. The appellant submitted that the Assessing Officer who is aware of the decision should be aware of the facts and application of such ratio to such facts. What the apex court in fact held is that where the business of the assessee has not commenced and no profit and loss account Is drawn, it is required to assess the interest income separately under the head "other sources" and not in a case where a profit and loss account is drawn. In the appellant's case a profit and loss account is drawn and loss of Rs.47, 43,37,983/- is claimed. Even if the interest income is assessable under the head "Other sources" once there is loss under the head business the same is permitted to be set off under the provisions of Sec.71. 5.4 I have considered the submissions of the appellant and the findings of the Assessing Officer. There are certain aberrations in the submission of the Appellant. 5.5 To begin, one has to understand the decision of the Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Limited vs. CIT 227 ITR 172 (SC), wherein it was held that: "interest earned short term investment of funds borrowed for setting up of factory during construction of factory before commencement of business, has to be assessed as income from other sources and it cannot be claimed as non- taxable on the ground that it would go to reduce interest on borrowed funds. ...... .. In the case before us, the company had surplus funds in its hands. In order to earn income out of the surplus funds, it invested the amount for the purpose of earning interest. The interest thus earned is clearly of revenue nature and will have to be taxed accordingly. The accountants may have taken some other view but accountancy practice is not necessarily good law. In B.S.C. Footwear Ltd. vs. Ridgway (Inspector of Taxes) (1972) 83 ITR 269 (HL), the House of Lords had no hesitation in holding that the accounting practice for calculating Its profit followed by the assessee and accepted by the Revenue for 30 years could not be

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treated as sanctioned by law and was not acceptable for the purpose of computation of taxable income. " 5.6. In the case of M/s.Bokaro Steel Ltd. (supra), different assessment years were involved, however on the issue of treatment of interest received on the short-term deposit, the Hon'ble Supreme Court has held as under: "During these assessment years, the respondent assessee had invested the amounts borrowed by it for the construction work which were not immediately required, in short-term deposits and earned interest. It has been held in these proceedings that the receipt of interest amounts to income of the assessee from other sources. .............. In any case, this question is now concluded by a decision of this Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. VS. CIT (1997) 141 CTR (SC) 387 : (1997) 227 ITR 172 (SC). Hence, we are not called upon to examine that issue." 5.7. As far as the facts of the present case are concerned, it is not a case of the assessee where "the deposits" had any nexus with the setting up of the plant. In fact, the surplus fund which was kept with the bank on which the assessee earned interest. In my opinion, the principles laid down by the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd (supra) are squarely applicable and interest earned by the assessee even during the construction period on the short- term deposit kept with the bank is assessable as an income which the Assessing Officer has done. 5.8. I also rely on the Hon'ble Court decisions in the following cases: a) CIT Vs. Autokast, (2000) [248 ITR 110] (SC) : The question that was before the High court, whether, on the facts and in the circumstances of the case, the interest income is not assessable to tax in the hands of the appellant? The Hon'ble High Court answered the question against the revenue and the department was in appeal by special leave. In reference to the Tuticorin Alkali Chemicals and Fertilizers Limited vs. CIT 227 ITR 172 (SC), the civil appeal allowed in favour of the Revenue. In other words, the interest income is assessable to tax in the hands of the assessee and held that the interest which occurred to the assessee was assessable under the head 'Income from other sources' and cannot be set off against preoperative expenses as claimed by the assessee. b) Chandapur Sugar Company Limited vs. CIT (2004) [197 CTR 381] (Allahabad High Court): In this case, the assessee claimed that interest received should be set off against the interest payment. Hence no interest income is assessable in hands. The ITO has rejected the claim and was assessed under Income from other sources. The court held that interest

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earned by the appellant has rightly been held to be the income and taxable under the head 'Income from other sources'. c) CIT Vs. Coromandal Cements Ltd (1997) [234 ITR 412] (SC) d) CIT Vs. New Central Jute Mills Co. Ltd [1979] [118 ITR 1005](Koll.); In this case the appellant earned interest which was deposited in a bank to receive interest. The difference between interest paid and earned was claimed as revenue expenses. The Kolkata High Court, referred to the observation that in case money borrowed by d newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalized and added to the cost of the fixed assets which have been created as a result of such expenditure. The Court concluded in favor of the Revenue. "The expenditure assessee has failed to establish that it was its purpose that utilized amount received on loan for earning interest. It cannot be said that the assessee has established nexus between the deposit and the loan taken. e) Addl.CIT Vs. Madras Fertilizers Ltd [1980] [122 ITR 139J(Mad.) : In' this case, the issue raised was whether the interest received was wholly and exclusively in connection of business. The borrowing itself was not for the purpose of depositing the money and earning, interest, only for the purpose of putting up the plant and purchasing the capital goods. Hence, the interest paid to the loan amount cannot have any direct connection with the deposit of the amount and with the interest earned. The case also referred to Smt. Padmavati Jaykrishna Vs. CIT (1975) 101 ITR 153 (Guj.) f) M/S Traco Cable Company Limited Vs. CIT [19691 [72 ITR 503](Ker.) : In this case, the court held that receipt of income by interest was only incidental or consequential on the deposit. It can hardly be contended, if an individual, who carries on any business other than a business of banking or dealing in money, deposits in' his surplus funds in a bank and receives interest thereon, the interest thus received, would be income from business. That is to say interest received in the bank deposits cannot be said to have connection with the business unless he is in the business of banking. g) M/S Madhya Pradesh State Industries Corporation Limited Vs. CIT [1968] [69 ITR 824] (MP): The court held that newly established the claim of treating the interest income received as income from business, was obviously made for the purpose of deduction of a major portion of the expenses incurred. The court held it is not sufficient merely to look at the Memorandum of Association and to find out of the business at

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profits. It is also necessary to determine further whether the particular act done by the company was done in pursuance with the objects enumerated in the Memorandum or Articles of Association. In my opinion on the facts of the case, it is impossible to hold the deposit of the share, money in certain money was an investment made by the appellant to the objects specified by other clause. The appellant was not a banking company, hence money deposited by the company with the business was not in the ordinary course of business. Hence, income received on the deposits cannot be regarded as income under the head Income' from Profit and gains of the business and, this clearly is a Income from other Sources u/s. 56 of the IT Act, 1961. h) In the case of CIT Vs. Seshasayee Paper & Boards Limited, Hon'ble Madras High Court held that "the interest earned by the assessee on investment of share capital in call deposits have been before production commenced should be assessed separately under the head Other sources". I) CIT vs. Nagarjuna Steel, Hon'ble A.P. High court held that "interest received on short term deposits by a company prior to commencement of production could not be treated as revenue receipt", j) Chalapalli sugar limited Vs. CIT [1975J [98 ITR 167J (SC) held that the Interest was not allowed as revenue expenditure in the period prior to commencement of the business of the assessee. k) In the case of Central Travancore Specialists Hospital Ltd Vs. ACIT, Hon'ble ITAT, Cochin Bench held that "interest earned by the assessee even during the construction period on the short-term deposit kept with the bank is assessable as an income". I) CIT Vs. Universal Electro Graphite Limited [1989] [197 ITR 465], wherein it related to interest on Fixed deposits and let a payment of call money prior to setting up of business showing no nexus or relation with a capital expenditure, reduction was refused. m) International Marketing limited Vs. ITO & Ors. [2007] [292 ITR 504] (Del.) held that if no business had been transacted there was no question of allowing any expenses in relation thereto. 5.9. Based on the above decisions, I consider interest income of Rs.26, 45,20,127/- earned by the appellant is to be assessed under the head 'Income from other sources'. Having decided that, the issue of set off of business losses (interest payable on long term borrowings) against the income from "other sources" (interest received on short term deposit during pre-operative period), as contended by the Appellant, cannot be allowed u/s 72. Hence, the Assessing Officer is right in holding the

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interest income on short term deposits which is to be assessed under "Income from Other Sources" and not to be set off against interest payable or capitalized in works-in- progress". 7. We have given our thoughtful consideration to the rival pleadings against and in support of the impugned disallowance. We find no merit in assessee's stand in principle since its interest income is not related to any revenue deriving business activity. The same therefore deserves to be treated as 'income from other sources' only going by the Ld.CIT(A)'s detailed discussion extracted hereinabove in the light of various judicial precedents. The fact also remains that neither of the lower authorities has proceeded on netting formula going by Hon'ble apex court's decision in ACG Associated Capsules Pvt. Ltd. Vs. CIT (2012) [343 ITR 89] (SC). We therefore direct the Assessing Officer to allow netting benefit qua the impugned addition vis-à-vis the corresponding expenditure incurred at the taxpayer's behest in above terms. 8. Learned counsel next invited our attention to the CIT(A)'s order in para 5 that the assessee had although pleaded set-off of its impugned interest income against business losses of Rs.3,12,49,041/-, the same has not been dealt with specifically. 9. Ld.CIT-DR, on the other hand, quoted para 5.9 of the CIT(A)'s order that the same had been duly considered. It emanates from the case records that although the CIT(A) appears to have denied the assessee the impugned intra head set-off of the two heads of income, it is not clear as to under which clause of Section 72 was invoked to decline this relief. We thus are of the opinion that this issue of set-off of interest income against business loss deserves to be considered afresh as per law. We restore this issue back to the Assessing Officer therefore. 10. Mr.Raghuram lastly invited our attention to the assessee's ground No.5 that the CIT(A) has erred in not considering the assessee's alternate plea seeking directions to the Assessing Officer to increase the work in progress upon addition of interest income of Rs.26,45,20,127/-. We do not find any merit in the instant ground per se. The fact also remains that since the assessee's main issue has already been restored back to the Assessing Officer, he shall also examine and ensure that there is no double deduction/addition qua the same in consequential proceedings. Necessary computation to follow as per law. 8.3 The ld. AR of the assessee has relied on number of judgements, which are not applicable to the facts of the case of the assessee. Respectfully, following the above

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judgments, we allow the grounds raised by the revenue in this regard.

Pronounced in the open court on 30th April, 2021. Sd/- Sd/- (S.S. GODARA) (L. P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated: 30th April, 2021. kv copy to : 1 ITO, Ward – 17(2), 9th Floor, Signature Towers, Kondapur, Hyderabad – 84 2 M/s Elgen (India) Pvt. Ltd., Plot No. 213, Prathima Nagar, Road No. 1, Hyderabad. 3 CIT(A) – 7, Hyderabad. Pr. CIT - 5, Hyderabad 4 5 ITAT, DR, Hyderabad. 6 Guard File.