M/S. GANPATI GLOBAL PRIVATE LTD.,JAIPUR vs. ITO, WARD1(4), JAIPUR
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Income Tax Appellate Tribunal, JAIPUR BENCHES,”A” JAIPUR
Before: SHRI SANDEEP GOSAIN, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA. No. 302/JP/2020
आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES,”A” JAIPUR Jh lanhi xkslkbZ] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k BEFORE: SHRI SANDEEP GOSAIN, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA. No. 302/JP/2020 fu/kZkj.k o"kZ@Assessment Years : 2013-14 cuke M/s Ganpati Global (P) Ltd., The ITO, Vs. Flat No. B-9, Second Floor, Ward-1(4), Ganpati Enclave, Jaipur. Near Civil Lines Metro Station, Ajmer Road, Jaipur. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AACCM 6367 K vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@ Assessee by : Shri Anoop Bhatia (CA) jktLo dh vksj ls@ Revenue by : Smt. Monisha Choudhary (JCIT) a lquokbZ dh rkjh[k@ Date of Hearing : 05/04/2021 mn?kks"k.kk dh rkjh[k@Date of Pronouncement : 30/06/2021 vkns'k@ ORDER
PER: VIKRAM SINGH YADAV, A.M.
This is an appeal filed by the assessee against the order of ld. CIT(A)-I, Jaipur dated 30.01.2019 relevant for the assessment year 2013-14 wherein the assessee has raised the following ground of appeal:- “1. On facts and in circumstance of the case, the Ld. CIT(A) has grossly erred in confirming the addition made by treating the interest of Rs. 3,05,430/- earned during the pre-operative span as being ‘Interest from other sources". Appellant prays that such treatment being unjustified and against the judicial pronouncements, deserves to be deleted;
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That the Ld.CIT(A) has further erred in not considering the explanations/documentary evidences filed by assessee, in support of its claim that the receipts were in fact capital receipts, earned during the pre-operative period and thus the Appellant prays that addition so made deserves to be deleted. Without prejudice and in the alternate- 3. On facts and in the circumstances of the case Ld. CIT(A) has grossly erred in not allowing the corresponding interest borne by the appellant on the borrowed funds, which were utilized in making the short term deposits. Appellant prays that such expenditure being incurred ‘in relation to earning of said interest income’, deserves to be allowed as deduction from income treated as ‘income from other sources’.”
In ground Nos. 1 and 2, the assessee has challenged the addition by treating the interest of Rs. 3,05,430/- received on STDR made in the pre-commencement period as being income from other sources.
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.
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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
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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
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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);
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(v) Indian Oil Panipat Power Consortium Ltd vs. ITO 315 ITR 255 (Delhi High Court); (vi) CIT vs Jaypee Dsc Ventures Ltd in ITA No. 357/2010 (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
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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. 5.2. It is clear upon a perusal of the facts as found by the authorities below that the funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre-operative expenses. In the case of Tuticorin Alkali Chemicals [1997] 227 ITR 172 it was found by the authorities that the funds available with the assessee in that case were “surplus” and, therefore, the Supreme Court held that the interest earned on surplus funds would have to be treated as “Income from other sources”. On the other hand in Bokaro Steel Ltd. [1999] 236 ITR 315 (SC) where the assessee had earned interest on advance paid to contractors during pre- commencement period was found to be “inextricably linked” to the setting up of the plant of the assessee and hence was held to be a capital receipt which was permitted to be set off against pre- operative expenses.”
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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
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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
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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
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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
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offered for taxation. The AO did not allow the set off of such income and taxed the same by observing as under:-
“I have carefully considered the reply of the AR of the assessee and not found tenable because in usual course, interests received by the company from bank deposits and loans would be taxable as income under the head "income from other sources" u/s 56 of the Act,. In the other words, if the capital of a company is fruitfully utilised far income generated will be of revenue nature and not accretion of capital and such interest income will have to be taxed in accordance with law. The interest derived by the assessee company from the borrowed funds which were invested in short-term deposits would be chargeable to tax under the head "income from other sources" or would go to reduce the interest payable by the assessee on term loan secured by the assessee from financial institutions, which would be capitalized after the commencement of commercial production. in the case of ACT Vs. Z. Square Shopping Mall Pvt. Ltd. the Hon'ble ITAT, Lucknow observed as under:-
“The assessee invested the borrowed fund in FOR & Mutual fund, as there is no need of fund in construction process during that specific period. Therefore, fund invested is not inextricably linked to the setting up of the construction activities and it is rightly treated by the AO”.
Further, the Hon'ble IT AT, Lucknow placed reliance upon the judgement of Hon'ble Apex Court in the case of Tuticorin Alkali chemicals and Fertilizaers Ltd. Vs.C1T (1997) 141 CTR SC 387 in which the Supreme Court of India treated interest income as income from other sources and made the addition.
(ii) During the appellate proceedings, the appellant filed the final accounts for the FY 2013-14. It was specifically
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mentioned in notes in accounts that the company commenced its commercial production on 30th Nov, 2013. Regarding capitalization of preoperative expenses, the notes on accounts reads as under:-
Capitalization & pre-operative expenses: All the fixed assets have been capitalized on the date of commercial production, i.e., 30th of November, 2013 (except vehicle & computer), since this date has been construed to be the date of put to use for all the assets. Pre-operative expenses incurred till 30th of November, 2013 have been apportioned to the fixed assets of the company on value wise pro-rata basis on the same date. Expenses incurred during the implementation period of the project and during trial runs have been capitalized, whereas income earned out of trial runs have been netted from pre-operative expenses."
(iii) The appellant mainly relied on the judgment of Hon'ble Apex Court in the case of CIT vs. M/s Bokaro Steel Ltd. [1999] 236 ITR 315 (SC). However, the facts of the appellant case are different from the case of M/s Bokaro Steel Ltd. [In CIT v Bokaro Steel Ltd (Supra), a government company, which during the period of construction of the plant had advanced money to contractors on which it was earning interest, received rent from quarters let out to employees. It also received hire charges on plant let out to contractors and received royalty on stones removed from its land.] However, in the case of the appellant, the funds were invested in to bank TDRs and interest was earned. The judgement of Hon'ble Apex Court relied on by the AO in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT [1997] 141 CTR 387 (SC) is directly applicable to the facts of the case.
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(iv) Further, from the submissions of the appellant, it is seen that the significant accounting policies being part of final accounts for FY 2012-13 clearly mentions regarding treatment of pre-operating span as under:-
“II OTHER NOTES TO ACCOUNT:
1.Pre-operative Span: The company is presently operating in pre- operative span. Therefore, all the expenditure incurred towards executing the project are treated as pre-operative expenditures, the year-end balance of which aggregates to Rs. 35,32,902/- which would be allocated over the completed fixed assets on suitable and rational basis at the time of capitalization."
(V) Thus, the accounting policies adopted by the appellant itself mentioning allocation of the pre-operative expenses towards fixed assets and there is no mention of netting of pre-operative income against pre-operative expenses. The appellant is not expected to go beyond the accounting policies adopted by it.
(vi) Considering the above facts and judicial pronouncements discussed in the order, no interference is called for and the addition made by the AO is upheld.”
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.
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The claim of the ld AR on behalf of the assessee is that in order to minimize its interest burden, the assessee company has parked the interim/excess funds in short term deposit receipts with the bank and the interest so received will go to reduce pre-operative expenses and cannot be taxed as “income from other sources” as has been done by the Assessing Officer and confirmed by the ld. CIT(A). In the alternate, it has been contended that interest on borrowed funds to the extent invested in STDR may be allowed to be deducted from interest income u/s 57(1)(iii) of the Act. In support of its contention, the assessee has relied on the decision of Hon’ble Supreme Court in case of Bokaro Steel Limited and the decision of Hon’ble Delhi High Court in case of Indian Oil Panipat Power Construction Ltd.
Per contra, the ld. DR submitted that the surplus funds were invested in short terms deposits in order to earn interest income and such interest income has rightly been brought to tax as chargeable under the head ‘income from other sources” and there is no basis for claim of interest expenditure under section 57(1)(iii) of the Act. The ld DR has relied on the decision of Hon’ble Supreme Court in case of Tuticorin Alkali Chemicals and Fertilizers Ltd. as well as decision in case of Bokaro Steel Limited and submitted that there is no inconsistency in these two decisions and in the latter decision, the Hon’ble Supreme Court has reaffirmed the view taken earlier in case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra). The ld. DR has also relied upon decision of Hon’ble Calcutta High Court in case of Consolidated Fibres
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and Chemicals Ltd vs CIT and the Coordinate Bench decision in case of Thermal Powertech Corporation India Ltd.
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
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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?" 17. 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
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case and the judgment of the Madras High Court in Seshasayee Paper & Boards Ltd. (supra) and Andhra Pradesh High Court in Nagarjuna Steels Ltd. (supra) confirmed the judgment of the Madras High Court. The Apex Court has specifically observed as follows at pages 180 and 181 of the Report: "It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilizing the borrowed funds as its income. It was rightly pointed out in the case of Kedar Narain Singh v. CIT [1938] 6 ITR 157 (All) that "anything which can properly be described as income is taxable under the Act unless expressly exempted ". The interest earned by the assessee is clearly its income and unless it can be shown that any provision like section 10 has exempted it from tax, it will be taxable. The fact that the source of income was borrowed money does not detract from the revenue character of the receipt. The question of adjustment of interest payable by the company against the interest earned by it will depend upon the provisions of the Act. The expenditure would have been deductible as incurred for the purpose of business if the assessee's business had commenced. But that is not the case here. The assessee may be entitled to capitalise the interest payable by it. But what the assessee cannot claim is adjustment of this expenditure against interest assessable under section 56. Section 57 of the Act sets out in its clauses (i) to (iii) the expenditures which are allowable as deduction from income assessable under section 56. It is not the case of the assessee that the interest payable by it on term loans is allowable as deduction under section 57 of the Act. If that be so, under which other provision of law can the assessee claim deduction or set-off of his income from other sources against interest payable on the borrowed funds? There are specific provisions in the Income-tax Act for setting off loss from one source against income from another source under the
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same head of income (section 70), as well as setting off loss from one head against income from another (section 71). In the facts of this case the company cannot claim any relief under either of these two sections, since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting year. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business cannot be allowed as deduction, nor can it be adjusted against any other income under any other head. Similarly, any income from a non-business source cannot be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee." 18. 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
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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. 19. We have carefully gone through the judgment of the Madras High Court in Seshasayee Paper Boards Ltd. (supra). The assessee company invested its paid-up share capital and loans obtained from banks and received interest income. The interest income received by the assessee was adjusted towards the interest payable on its loan. Accordingly the interest received by the assessee was not offered as income for taxation. The claim of the assessee that the interest income received by the assessee would go to reduce the interest payment on borrowed funds was rejected by the Income-
ITA No. 302/JP/2020 21 M/s Ganpati Global (P) Ltd. vs. ITO
tax authorities. However, the Tribunal allowed the claim of the assessee. On a reference to the Madras High Court, after referring to the judgment of the Apex Court in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 and various other judgments of the High Courts, found that the borrowing has not been exclusively and solely for the purpose of earning interest in which case alone it should be taken as income which should be deducted from the interest receipt. This judgment of the Madras High Court in Seshasayee Paper and Boards Ltd. (supra) was specifically taken note of by the Apex Court and it was observed that interest paid on borrowings for the purpose of purchase of plant and machinery could not be allowed or adjusted against the income u/s. 57(iii) of the Act. The Apex Court finally concluded that the view expressed by the Madras High Court in Seshasayee Paper and Boards Ltd. is correct and the views expressed in other cases are erroneous. From the above it is obvious that even though the Apex Court found that the assessee in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) has not specifically made any claim u/s. 57 of the Act for setting off of the interest received on the FD with interest payment on borrowed fund, the Apex Court after referring to the judgment in the case of Seshasayee Paper and Boards Ltd. (supra) of the Madras High Court found that the claim of the assessee cannot be allowed even u/s. 57(iii) of the Act. In our opinion, the judgment of the Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) on identical set of facts has answered a similar question against the assessee. Therefore, the interest received by the assessee on temporary deposit of funds which are not required immediately has to be assessed as 'Income from other sources' and it cannot be set off against the interest payable by the assessee on borrowed funds. 20. Admittedly deposit of funds in the bank is not the business of the assessee. The assessee borrowed the funds for the purpose of establishing the Power project. So long as the assessee uses the funds in the process of setting up of the project, we can say that the assessee has utilised the funds for the purpose of business. In
ITA No. 302/JP/2020 22 M/s Ganpati Global (P) Ltd. vs. ITO
this case the assessee has deposited the funds in FD for a temporary period, since the same was not required immediately. As observed by the Madras High Court in the case of Seshasayee Paper and Boards Ltd. (supra) which was approved and confirmed by the Apex Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) the interest earned by the assessee by investing the borrowed fund which was not required immediately in fixed deposit has nothing to do with the actual borrowing. The payment of interest has no connection with the receipt of interest. Admittedly the borrowing has not been made for the purpose of earning interest income in which case alone the interest received by the assessee can be deducted from the interest payable. In view of the judgment of the Madras High Court in the case of Seshasayee Paper and Boards Ltd. (supra) and the judgment of the Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), we are unable to uphold the contention of the assessee. The distinction sought to be made by categorising the funds as committed funds and surplus funds, in our view, cannot be accepted as in both the events the nature of fund is the they are not required immediately for the project. 21. In this regard, it is interesting to note that in all the mentioned decisions by assessee, reliance has been placed on the decision of the Hon'ble Supreme Court in the case of Bokara Steel Ltd. (supra). Further, in all such cases, various judicial authorities have tried to differentiate the decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) with the decision of Hon'ble Supreme Court in the case of Bokara Steel Ltd. (supra) However, in reality, the proposition of law laid down by Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) has not been overruled or distinguished by Hon'ble Supreme Court in its own decision in the case of Bokara Steel Ltd. (supra). On the other hand, in the case of Bokara Steel Ltd. (supra) the Hon'ble Supreme Court has once again reiterated and supported its decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) with regard to the issue of treatment of interest earned on short term deposits made out of borrowed funds during the period
ITA No. 302/JP/2020 23 M/s Ganpati Global (P) Ltd. vs. ITO
prior to the commencement of the business of the assessee. in the case of Bokara Steel Ltd. (supra), that company received certain income from the contractor who was assigned the job of constructing the factory. During the course of construction activities carried on by the contractor, the contractor had availed certain facilities and services from the company and paid certain consideration to the company. The nature of the services and consideration/income received by the company from the contractor are noted as below :—
i. Let out of its dwelling units to the contractor which were used for the purpose of housing the workers/labourers and staff for construction work;
ii. Hire charges received by the company from the contractor in connection with hiring of the plant and machinery owned by the company to the contractor which were used by the contractor in the construction work
iii. Interest received by the company from the contractor on account of advances made to the contractor which were used for the purpose of construction work of the factory by the contractor; and
iv. Royalty received by the company from the contractor in connection with permitting the contractor to excavate/mine the stones from the land owned by; the company which were used in the construction activity of the company. In this connection, the Hon'ble Supreme Court held that the income received by the company ie. from the contractor under various sources mentioned above is inextricably linked with the setting up of the factory building/capital structure of the company and, therefore, such income has to be treated as capital receipt going to reduce the cost of construction of the assessee company.
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However, in the same case of Bokara Steel Ltd. (supra), there was an issue with regard to treatment of interest income received by the company on short term deposits made with banks out of the amounts borrowed by it for the construction work which were not immediately required. On this issue, the AO treated the interest received as income of the assessee from "other sources" and brought to tax accordingly. However, as observed by the Hon'ble Supreme Court, the assessee had accepted the same and not filed any appeal against such finding and decision of lower authorities before Supreme Court. In view of this, Hon'ble Supreme Court made a mention in its judgement at Para No.4 stating that "we were not called upon to examine this issue" and further made a reference that in any" case, this question now concluded by the decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). The relevant portion of the decision at Para No.4 is as under:: "During these assessment years, the respondent-assessee had invested the amounts borrowed by it or 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. The assessee has not filed any appeal (rom this finding which is given against it. In any case, this question is now concluded by a decision of this court inTuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172(sq. Hence, we are not called upon to examine that issue." (Emphasis supplied) This issue of difference between the treatment of income received from contractor and the interest income received from the banks on account of short term deposits is once again highlighted by Hon'ble Supreme court in the case of Bokara Steel Ltd. (supra) at Para No.7. The relevant portion of the same is reproduced below: "The appellant, however, relied upon the decision of this court in Tuticorin Alkali Chemicals & Fertilizers Ltd. case (supra). That case dealt with the question whether the investment of borrowed funds
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prior to commencement of business, resulting in earning of interest by the assessee, would amount to the assessee earning any income. This court held that if a person borrows money for business purposes, but utilises that money to earn interest, however, temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. Merely because he utilised it to repay the interest on the loan taken will not make the interest income as a capital receipt. The department relied upon the observations made in that judgment (at page 179) to the effect that if the company, even before it commences business, invests surplus funds in its hands for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head 'Capital gains'. Similarly, if a company purchases rented house and gets rent, such rent will be assessable to tax under section 22 as income from house property. Likewise, the company may have income from other sources. The company may also, as in that case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under section 56 of the Act. This court also emphasized the fact that the company was not bound to utilise the interest so earned to adjust it against the interest paid on borrowed capital. The company was free to use this income in any manner it liked. However, while interest earned by investing borrowed capital in short-term deposits is an independent Source of income not connected with the construction activities or business activities of the assessee the same cannot be said in the resent case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee-company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction. In the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC), this court examined the question whether interest paid before the commencement of production by a company on amounts borrowed
ITA No. 302/JP/2020 26 M/s Ganpati Global (P) Ltd. vs. ITO
for the acquisition and installation of plant and machinery would form a part of the actual cost of the asset to the assessee within the meaning of that expression in section 10(5) of the Indian Income Tax Act, 1922 and whether the assessee will be entitled to depreciation allowances and development rebate with reference to such interest also. The court held that the accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a 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 capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income." (Emphasis supplied) 23. Under the facts and circumstances, it cannot be construed that the interest earned on account of parking the un utilized borrowed funds is inextricably linked with the setting up of the capital structure of the assessee company, inasmuch as such interest income is not received from the contractor to whom the assessee has assigned the construction work of its power project. In view of this, the ratio laid down by Hon'ble Supreme Court in the case of Bokara Steel Ltd. (supra)is not applicable to the facts of the assessee's case. As such, in view of the similar set of facts and circumstances involved in the case of the assessee as well as in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), the proposition of law laid down by the Hon'ble Supreme court in that case is squarely applicable without any deviation. 24. 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
ITA No. 302/JP/2020 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". 25. 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.
ITA No. 302/JP/2020 28 M/s Ganpati Global (P) Ltd. vs. ITO
We have also carefully gone through the judgment of the Delhi High Court in Indian Oil Panipat Power Consortium Ltd. (supra). The Hon'ble Delhi High Court distinguished the judgment of Apex Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) on the ground that the funds in the form of share capital were infused for a specific purpose of acquiring land and development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as 'Income from other sources'. After referring to the judgment of Apex Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), the Hon'ble Delhi High Court found that the interest on surplus funds would have to be treated as 'Income from other sources'. We find that the Madras High Court on another occasion, in South India Shipping Corpn. v. CIT [1999] 105 Taxman 660, considered an identical situation and after referring to the Apex Court judgment in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) observed s follows at page 31 of the Report: "Coming now to the questions that have been referred to us at the instance of the Revenue, these questions are required to be answered in favour of the Revenue and against the assessee, in view of the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals an Fertilizers Ltd. [1997] 227 ITR 172, wherein the apex court, inter alia, held that in view of section 57(iii) of the Income-tax Act, interest paid on overdraft obtained for the purpose of business could not be deducted from the interest earned on monies kept in fixed deposits as such income derived by way of interest on fixed deposits was to be taxed under the head 'Income from other sources. We, however, make it clear that though the assessee may not be entitled to have interest paid by it on overdraft to the bank, deducted from the interest received by it on the short-term fixed deposits, the assessee is entitled to deduction of the same from its business income."
ITA No. 302/JP/2020 29 M/s Ganpati Global (P) Ltd. vs. ITO
In view of this judgment of the Madras High Court and the judgment of the Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), and other judgments of Hon'ble Supreme court, in our opinion, the judgment of the Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. (supra) and other case relied on by Ld. Counsel in his arguments may not be applicable to the facts of this case. In view of the above discussion, we do not find any infirmity in the order of the lower authority. Accordingly, the same is confirmed.”
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
ITA No. 302/JP/2020 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:
“24. We need not dilate on this question because of the distinction we have already made, namely, until the business commences the interest paid on the borrowed capital for acquiring asset is includible in the actual cost within the meaning of Explanation 8 to section 43(1) and it would not be a business expenditure till the asset is first put to use and until the business commences the interest received on investment of unutilised funds will not be a business income, when such interest, until the business commences, is in the nature of capital expenditure and is eligible for being capitalised. The purpose of the borrowing was for the purpose of construction of the project and the interest would have been paid even if it would not have been invested. Therefore, this interest could not be said to have been laid out or expended for the purpose of earning the income particularly when the interest paid is eligible for being capitalised, the expenditure that has been incurred being in the nature of capital expenditure, and as such it would not come within the purview of section 57(iii).”
ITA No. 302/JP/2020 31 M/s Ganpati Global (P) Ltd. vs. ITO Therefore, respectfully following the same, the interest income has to be brought to tax without allowing any deduction u/s 57(iii) towards interest on borrowed capital.
In light of aforesaid discussion and in the entirety of facts and circumstances, we uphold the order of the lower authorities and the matter is decided against the assessee and in favour of the Revenue.
In the result, the appeal of the assessee is dismissed.
Order pronounced in the open Court on 30/06/2021. Sd/- Sd/- ¼ lanhi xkslkbZ ½ ¼foØe flag ;kno½ (Sandeep Gosain) (Vikram Singh Yadav) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member
Tk;iqj@Jaipur fnukad@Dated:- 30/06/2021. *Santosh आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. vihykFkhZ@The Appellant- M/s Ganpati Global (P) Ltd., Jaipur. 2. izR;FkhZ@ The Respondent- ITO, Ward-1(4), Jaipur. 3. vk;dj vk;qDr@ CIT 4. vk;dj vk;qDr@ CIT(A) 5. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत. 6. xkMZ QkbZy@ Guard File { ITA No. 302/JP/2020} vkns'kkuqlkj@ By order, सहायक पंजीकार@Aेेज. त्महपेजतंत
