M/S. GANPATI GLOBAL PRIVATE LTD.,JAIPUR vs. ITO, WARD1(4), JAIPUR

In this regard, the ld AR submitted that the assessee company was registered with the objective to carry out the business of cultivators, growers, processors, producers, manufacturers, importers, exporters, buyers, sellers, traders, agents, and dealers in products or by-products of chemical, lac, sheliac, resin, gum, tannin, cutch, guar seeds, guar splits, guar meal, guar gum, guar powder, industrial and household gums and all sort of forest produce and produce of soil and trees and to buy and sell, dispose off and deal in any such commodities, things prepared, manufactured or in raw state. 3 M/s Ganpati Global (P) Ltd. vs. ITO

It was submitted that the assessee was sanctioned a term loan from State Bank of India as project finance of around Rs. 5.0 crores for erection of plant and construction of factory building etc. for carrying on industrial undertaking. Out of the said loan upto 31.03.2013, the loan amount disbursed was approximately Rs. 3.59 crores. The purpose of such loan was to establish a guar gum production unit. The said finance was disbursed to the appellant in instalments, based on progress of the project. As a result, there was time gap between availability of funds and actual utilization in the project. Therefore, to minimize its interest burden, the appellant had parked the interim excess in Short Term Deposit Receipt (STDR) with the said bank only. On such investments the appellant earned interest of Rs. 3,05,432/- during the relevant year. This interest was shown in the profit and loss statement of the relevant year as ‘Pre-operative income’. Further since there were substantial pre- commencement (or pre-operative) expenses of Rs. 39.92 lakh hence the aforesaid ‘Pre-operative Income’ of Rs.3,05,432/- was adjusted against the ‘Pre-operative Expenses and balance amount of Rs.35.32 lakh was shown forming part of Capital Work in Progress.

It was further submitted that the Ld. CIT(A) as also AO relying on the decision of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd Vs. CIT (1997) 141 CTR SC 387 and the decision of ITAT Lucknow in the case of ACIT vs. Z Square Shopping Mall P Ltd held the interest earned as being ‘Income from other sources’ The assessee had placed reliance on decisions of various High Courts as also the decision of Hon’ble Supreme court in the case CIT Vs. Bokaro Steel Limited 236 ITR 315 to support its contention that the said funds 4 M/s Ganpati Global (P) Ltd. vs. ITO were temporarily available idle funds which were invested in short term deposits, before they could be used in the setting-up of business/ construction of assets for business purposes.

It was submitted that the Ld. CIT(A) while trying to distinguish the case of Bokaro Steel Ltd with Tuticorin Alkali Chemicals and Fertilizers Ltd observed that in the case of Bokaro Steel Ltd, it was a government company, which during the period of construction of its plant had advanced money to contractors on which it was earning interest, received rent from quarters let out to employees and had received hire charges on plant let out to contractors also royalty on stones removed from its land. As against this, the appellant had invested funds in TDRs, thus the case of Tuticorin Alkali Chemicals and Fertilizers Ltd was directly applicable to the appellant. Appellant humbly submits that this observation is vague and not relevant, as what is to be differentiated is the nature / character of funds that were utilized to earn such income, whether these funds invested were inextricably linked to the business of assesseee or were surplus and idle funds, which by the way were invested to earn certain income. Thus, the observation that since the assessee utilized the term loan to invest in term deposit, the ratio of decision in the case of Bokaro Steel shall not apply is absolutely vague, and deserves to be ignored.

The ld AR further submitted that it is not uncommon for the newly incorporated business enterprises and ‘start-ups’ to temporarily park their share capital contributions and/or borrowed funds in Bank 5 M/s Ganpati Global (P) Ltd. vs. ITO Fixed Deposits or other similar investment avenues to earn interest or other similar income prior to the commencement of business/ commercial production, in order to augment and optimize their project resources or to minimize their project costs. As a matter of fact, the Revenue Authorities tend to consider the ‘expenditure’ incurred by business enterprises or ‘start-ups’ during the pre-commencement business period as capital in nature, but the same view is not applied for incomes earned during this period- as being capital in nature by following the concept of consistency. In doing so, the Authorities most often quote the decision of the Hon’ble Supreme Court in the case of “Tuticorin Alkali Chemicals and Fertilisers Ltd vs. CIT’ reported in 227 ITR 172.

It was submitted that in the said case of ‘Tuticorin Alkali Chemicals’ [1997] 227 ITR 172, it was found by the authorities that the borrowed funds, being surplus and idle, were utilized by the assessee in investing in fixed deposits to earn interest income and, therefore, the Hon’ble Supreme Court have held that the interest earned on surplus borrowed funds, would have to be treated as “Income from other sources”. However, in numerous subsequent judgements of the Hon’ble Supreme Court and the Hon’ble High Courts, in the cases of : (i) Bokaro Steel Ltd. [1999] 236 ITR 315 (SC); (ii) CIT vs Karnal Co-operative Sugar Mills Ltd 243 ITR 2 (SC); (iii) CIT vs Karnataka Power Corporation 247 ITR 268 (SC); (iv) BongaigaonRefinary And Petrochemicals Ltd. v. Commissioner of Income-Tax, [2001] 251 ITR 329 (SC); 6 M/s Ganpati Global (P) Ltd. vs. ITO (v) Indian Oil Panipat Power Consortium Ltd vs. ITO 315 ITR 255 (Delhi High Court); (vi) CIT vs Jaypee Dsc Ventures Ltd in (Delhi High Court);and (vii) PCIT vs Facor Power Ltd (2016) 66 Taxmann.com (Delhi High Court), it has been categorically held that if the income is earned whether by way of interest or in any other manner on the funds which are otherwise inextricably linked to setting up of the plant for business purpose, such income is required to be capitalized to be set off against preoperative expenses.

It was further submitted that in the case of “Indian Oil Panipat Power Consortium Ltd vs. ITO 315 ITR 255, the Hon’ble Delhi High Court has held as under:- “5. In our opinion the Tribunal has misconstrued the ratio of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals (supra) and that of Bokaro Steel Ltd. (supra). The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals (supra) is that if funds have been borrowed for setting up of a plant and if the funds are surplus and then by virtue of that circumstance they are invested in fixed deposits the income earned in the form of interest will be taxable under the head “income from other sources. On the other hand the ratio of the Supreme Court judgment in Bokaro Steel Ltd. (supra) to our mind is that if income is earned, whether by way 7 M/s Ganpati Global (P) Ltd. vs. ITO

It was submitted that the ratio of the judgment of the Hon’ble Supreme Court in the case of ‘Tuticorin Alkali Chemicals’ (supra) and that of ‘Bokaro Steel Ltd.’ (supra), needs to be distinguished in their actual sense as done in the above judgement of the Hon’ble Delhi High Court. The real test which permeates through the judgment of the Hon’ble Supreme Court in ‘Tuticorin Alkali Chemicals’ (supra) is that if funds have been borrowed for setting up of a plant and if the funds are surplus and then by virtue of that circumstance they are invested in fixed deposits the income earned in the form of interest will be taxable under the head “income from other sources. On the other hand, the ratio of the Hon’ble Supreme Court judgment in Bokaro Steel Ltd. (supra) is that if income is earned, whether by way of interest or in any other manner on funds which are otherwise inextricably linked to the setting up of the plant, such income is required to be capitalized to be set off against pre-operative expenses. Therefore, in the case of assessee, the project finance so disbursed in installments depending upon the stage of completion of project, if invested in STDR during the gap between receipt of funds and actual incurrence thereof in the on- going project cannot be termed as being ‘surplus and idle’ funds and thus the ratio applied in the case of Tuticorin Alkali Chemicals’ (supra) is not applicable in the case of the appellant. And the interest earned on such STDR being inextricably related to the setting-up of business are eligible to be netted-off against expenditure incurred during the pre- commencement stage and hence deserve to be capitalized.

It was further submitted that the ld. CIT(A) while confirming the addition made by ld.AO has observed at para 3.1.2 clause (v) that “the 9 M/s Ganpati Global (P) Ltd. vs. ITO accounting policies adopted by the appellant itself- mentions allocation of the pre-operating expenses towards fixed assets and there is no mention of netting off of pre-operative income against pre-operative expenses. Thus, the appellant is not expected to go beyond the accounting policies adopted by it.” In this regard, it was submitted that the said accounting policy duly quotes the amount of pre-operating expenses to be capitalized at Rs. 35,32,902/- which is arrived at after netting off the income earned during the pre-operative span and thus duly supports the version of appellant that the interest on STDR was indeed a pre-operative income, earned on funds parked during the idle time-span of pre-construction period and thus deserves to be capitalized and prays accordingly.

In respect of ground no. 3, the ld AR submits that in the event such interest is held to be income from other sources then the interest accrued on such borrowed funds, invested in STDR may kindly be allowed to be deducted from interest income by virtue of provisions of sec 57(1) of the Act, as the same is expenditure incurred by the appellant in relation to earning of such income. Even otherwise accounting policies assist the preparation and reading of financial statements and cannot play a role in changing the nature of a particular income or expenditure, as also are not a law to determine taxability. Since the interest rate on borrowed funds was higher than the interest on STDR this would ultimately result in no addition in the hands of assessee at all. Based on above it is submitted that the amount invested in STDR were not surplus and idle funds but were invested by 10 M/s Ganpati Global (P) Ltd. vs. ITO appellant during the time gap available between project funds disbursed and actual utilization for setting up of business. Therefore, decision in the case of Bokaro Steel limited squarely applies to the facts of the Appellant, and the interest received on STDR may kindly be directed to be netted off against pre-operative expenses capitalized during the pre- construction period and consequently the addition made may kindly be directed to be deleted.

Per contra, the ld. DR relied on the decision of Hon’ble Supreme Court in case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (supra) as well as decision of the Coordinate Bench in case of Thermal Powertech Corporation India Ltd. vs. DCIT [2017] 81 taxmann.com 168. It was submitted that the Coordinate Bench in the said decision has exhaustively considered and analysed the decision of Hon’ble Supreme Court in case of Tuticorim Alkali Chemicals and Fertilizers Ltd. vs. CIT as well as its subsequent decisions in case of CIT vs. Bokaro Steel Limited (supra) and Bongaigaon Refinery and Petrochemicals Ltd vs. ITO 251 ITR 329 (SC) as well as the decision of Hon’ble Delhi High Court in case of Indian Oil Panipat Power consortium Ltd vs. ITO as relied upon by the ld AR. It was submitted that in case of CIT vs. Bokaro Steel Limited, there was also an issue with regard to treatment of interest income received by the company on short term deposit with bank out of the amounts borrowed for construction work which were not immediately required and in that context, the Hon’ble Supreme Court has made a reference that the same is now concluded by its earlier decision in case of Tuticorim Alkali Chemicals and Fertilizers Ltd. vs. CIT. It was further submitted that the issue of treatment of interest received from 11 M/s Ganpati Global (P) Ltd. vs. ITO contractor and interest income received from the banks on account of short term deposits was again discussed by the Hon’ble Supreme Court in case of Bokaro Steel Ltd at para 7 of its decision and it was held that “the company, may also in that case keep the surplus funds in short terms deposits in order to earn interest and such interest will be chargeable under section 56 of the Act. This Court also emphasized the fact that the company was not bound to utilize the interest so earned to adjust against the interest paid on borrowed capital. The company was free to use this income in any manner it liked” and therefore interest earned by investing borrowed capital in short term deposit is an independent source of income not connected with construction activities. It was accordingly submitted that the decision of CIT vs. Bokaro Steel Limited as relied upon by the ld. AR in fact supports the stand taken by the Revenue and is consistent with the earlier decision in case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT.

Regarding the issue of claim of interest paid against such interest income u/s 57(iii) of the Act, the ld DR has relied on the decision of Hon’ble Calcutta High Court in case of Consolidated Fibres and Chemicals Ltd vs CIT [2005] 146 Taxman 14 (Cal).

Further, the ld. DR relied on the finding of the lower authorities and our reference was drawn to the findings of the ld CIT(A) which are contained at para 3.1.2 of the appellate order which reads as under:- “(i) From the facts of the case, it is seen that the appellant received interest on STDR amounting to Rs. 3,05,432/- in pre-operating period. The appellant set off this income against the preoperative expenses and no income was 12 M/s Ganpati Global (P) Ltd. vs. ITO

We have heard the rival contentions and perused the material available on record. Undisputed facts borne out of the records are that the assessee company has availed term loan from State Bank of India for the purposes of erection of plant and construction of a factory building. Based on the progress of the project, the funds were disbursed by the bank to the assessee in installments from time to time. Given the time gap between the availability of funds and actual utilization in the project, the assessee company has parked these funds in short term deposits with the bank and has earned interest income thereon. 15 M/s Ganpati Global (P) Ltd. vs. ITO

We find that in case of Thermal Powertech Corporation India Ltd., the facts of the case were that for the purpose of setting up of the project, the assessee has borrowed certain funds from the banks and has invested a part of the borrowed funds which were not immediately required in short term deposits with an intention to earn interest ostensibly to reduce the interest liability. The question which arose for consideration before the Coordinate Bench was whether the interest income of Rs. 22,35,48,281/- received by the assessee on temporary deposit of funds with banks was assessable as income of the assessee or it would go to reduce the cost of borrowings. We therefore find that under similar facts and circumstances of the case, the Coordinate Bench has examined the matter of taxability of interest income and has taken into consideration various decisions of the Hon’ble Supreme Court as well as decisions of various Hon’ble High Courts including the Hon’ble Delhi High Court which have also been referred to by both the parties before us. It would therefore be relevant to refer to the findings of the Coordinate Bench which are contained at para 16 to 27 of its order which read as under:- “16. We have considered the rival submissions and also perused the material available on record. Admittedly the assessee is in the process of setting up of power project. For the purpose of setting up of the project the assessee has availed funds from banks. Admittedly, the assessee invested a part of the borrowed funds from banks, which was not immediately required in short term deposits with an intention to earn interest ostensibly to reduce the interest liability. The question arises for consideration is whether the 17 M/s Ganpati Global (P) Ltd. vs. ITO interest income of Rs. 22,35,48,281/- received by the assessee on temporary deposit of funds in with banks is assessable as income of the assessee or it would go to reduce the cost of borrowings? In other words, whether the interest amount of Rs. 22,35,48,281/- received by the assessee would be set off against the interest payment of Rs. 127,84,98,794/- on the borrowed funds. As rightly submitted by the learned CIT DR, the Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) had examined an identical situation. The question which was referred to the Supreme Court is as follows: "Whether, on the facts and in the circumstances of the case, interest derived by the assessee from borrowed funds which were invested in short term deposits with banks would be chargeable to tax under the head 'Income from other sources' or would go to reduce the interest payable by the assessee on the term loan secured by the assessee from financial institutions which would be capitalised after commencement of commercial production?"

In the case before the Apex Court, the assessee for the purpose of setting up of a factory has taken term loans from various banks and financial institutions. A part of the borrowed fund which was not immediately required by the assessee was kept invested in short term deposits with banks. The assessee claimed before the Assessing Officer that the interest of Rs.2,92,440 received on the term deposit with banks would go to reduce the pre-production expenses such as interest and financial charges which would ultimately be capitalised. Accordingly the assessee claimed that the interest of Rs.2,92,440 was not exigible to tax. However, the ITO rejected the claim of the assessee. The CIT(A) as well as the Tribunal confirmed the order of the Assessing Officer. However, the Tribunal found that there were conflicting judgments of the Madras High Court in CIT v. Seshasayee Paper & Boards Ltd. [1985] 156 ITR 542 and A.P. High Court in CIT v. Nagarjuna Steels Ltd. [1988] 171 ITR 663/38 Taxman 229. Accordingly a reference was made to the Apex Court. The Apex Court after examining the facts of the 18 M/s Ganpati Global (P) Ltd. vs. ITO

No doubt, the Apex Court found that it is not the case of the assessee that the interest payable by it on term loan is allowable as deduction u/s. 57 of the Act. The Apex Court after referring to the judgment of the Orissa High Court in CIT v. Electrochem Orissa Ltd. [1995] 211 ITR 552/78 Taxman 209 and the judgment of the Madras High Court in Seshasayee Paper & Boards Ltd. (supra) disapproved the reading of the judgment of the Madras High Court in Seshasayee Paper & Boards Ltd. (supra) by the Orissa High Court. In fact, the Apex Court has observed as follows: 'Our attention was drawn to two other decisions where the view of the Andhra Pradesh High Court was followed. In the case of CIT v. Electrochem Orissa Ltd. [1995] 211 ITR 552, the Orissa High Court preferred the view expressed by the High Court of Andhra Pradesh to the view expressed by the Madras High Court in Seshasayee Paper and Boards Ltd.'s case [1985] 156 ITR 542 on the ground that the Madras case was based on a finding of fact that there was no direct connection between the interest paid and the interest received. In our view, it will not be right to read the judgment in Seshasayee Paper and Boards Ltd.'s case [1985] 156 ITR 542 (Mad) in that way. The court's finding in Seshasayee Paper and Boards Ltd.s case [1985] 156 ITR 542 (Mad) was that the interest earned 20 M/s Ganpati Global (P) Ltd. vs. ITO by the assessee from the bank deposits had to be assessed under the head " Other sources ". Consequently, the interest paid on the borrowings for the purpose of purchase of plant and machinery could not be allowed or adjusted against this income under section 57(iii) nor were such adjustments permissible under section 70 or 71 of the Act because the business of the assessee had not commenced. The Madras High Court (see [1985] 156 ITR 542) categorically held: "In this case, admittedly, the borrowing has not been made exclusively and solely for the purpose of earning interest in which case alone it should be taken as an income which should be deducted from the interest receipts." An assessee-company may have raised its capital by issue of shares or debentures or by borrowing. But when that capital or a portion of it was utilised for whatever reason, even for a short period, to earn interest, that interest must be treated as revenue receipt and will have to be taxed accordingly. Any set off or deduction of any expenditure can only be made in accordance with the provisions of the Act.' In view of the observation of the Apex Court, it is obvious that the Apex Court is conscious of the provision of section 57(iii) and it was held that when the assessee borrowed the funds for business, the interest earned on short term deposit of such funds cannot be allowed as deduction.

Further, a clear-cut differentiation between treatment of interest income from short term deposits made out of borrowed funds and other categories of income received during the period prior to the 27 M/s Ganpati Global (P) Ltd. vs. ITO commencement of business, more so, income received from the contractor undertaking the work of set up of the business of the assessee, has once again been made out by the Hon'ble Supreme Court in its later decision in the case of Bongaigaon Refinery and Petrochemicals Ltd. (supra). In this judgment, the Hon'ble Supreme Court has reiterated the law that excluding interest derived by the assessee during the period prior to the commencement of business, other items of income such as hire charges for it equipment and recoveries from contractors on account of water and electricity charges shall be adjusted against the project cost or the business of oil refinery and petro chemicals. As such, in regard to interest income earned prior to commencement of the business, it is once again reiterated by the Hon'ble Supreme Court as income under "other sources" by reiterating the law laid down in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). The relevant portion of - the said decision of Hon'ble Supreme Court is reproduced below: "The High Court has already held that the interest income derived by the assessee during its formative period was taxable income. What remains for consideration is the income which the assessee derived from house property, its guest house, charges for equipment and recoveries from the contractors on account of water and electricity supply. These items are covered by the decision in Bokaro Steel Ltd.s case (supra). To the extent that it relates to these items, i.e., items excluding interest, the question must be answered in the affirmative and in favour of the assessee. The order under challenge will stand modified to that extent".

Also, it is pertinent to note that in the case of Totgars Cooperative Sale Society Ltd. (supra), the Hon'ble Supreme Court has once again held that interest earned on investment of surplus funds on hand not immediately required in short term deposits and securities would not fall under business income but income from other sources.

Drawing support from the analysis so done by the Coordinate Bench of various authorities on the subject, with which we find no reason but to follow and endorse, we agree with the contention advanced by the ld. DR that in the instant case, the matter is squarely covered against the assessee by the series of decisions of Hon’ble Supreme Court in case of Tuticorin Alkali Chemicals & Fertilizers Ltd., Bokara Steel Ltd. as well as Bongaigaon Refinery and Petrochemicals Ltd. In the instant case, the assessee company has invested borrowed funds, available during the period starting disbursement and availability of funds, and actual utilization for the purposes the funds were borrowed, and therefore surplus in the intervening period, in short term interest bearing deposits with the bank. There is nothing on record to suggest that the assessee company was bound to utilize the interest so earned on such short term deposits to adjust against the interest paid on borrowed capital and there were any end-use restrictions and it was therefore free to use the interest income in any manner it liked and therefore interest earned by investing borrowed capital in short term deposit is an independent source of income not in any manner 30 M/s Ganpati Global (P) Ltd. vs. ITO connected with construction activities which rightly been brought to tax as income under the head “income from other sources”.

Even the ground relating to setting off of interest expenses on borrowed funds U/s 57(iii) against the interest income has been discussed by the Coordinate Bench in decision referred supra and relying on the Hon’ble Supreme Court decision in case of Seshasayee Paper & Boards Ltd. has decided the same against the assessee. We find that the Hon’ble Calcutta High Court in case of Consolidated Fibres and Chemicals Ltd has also taken a similar view and has held as under: