ASSISTANT COMMISSIONER OF INCOME TAX, MUMBAI vs. CHENANI NASHRI TUNNELWAY LIMITED, MUMBAI

3. In response, the assessee vide its submissions dt. 16-02-2015 submitted that it has undertaken the project of infrastructure facility being construction of 9 kms two lane long tunnel with parallel escape tunnel in the state of Jammu & Kashmir between Chenani and Narshri. The promoters of the company have introduced money by way of share capital and the assessee has also obtained credit facilities from the banks and institutions. It was submitted that the total funds are exclusively meant for use for setting up of the infrastructure facility. The lenders disburse the funds at specified intervals and the said funds are required to be used for the purpose of setting up of the project. However, due to timing difference between the sources and application of the funds, the assessee has invested these funds into short term deposits with banks and earned interest income and on maturity of the fixed deposits, the funds are ultimately used for the purposes of project. It was submitted that the intention of the assessee in parking the funds by way of fixed deposit for short term period was to utilize the funds to maximize the return as the assessee has a liability for payment of interest. It was also submitted that the assessee has also received funds from the promoter by way of share capital during the FY. 2011-12 and the assessee is in a position to identify each and every deposit with the bank with the corresponding borrowings, which are interest bearing as well as share capital from the promoters. It was further submitted that the assessee has only two sources of funds viz. the contribution by the promoters for setting up of the project as well as borrowing from banks and institutions. The activity of parking the funds by way of fixed deposit can be considered as an activity which is inextricable linked with the activity of setting up of the project and submitted that it is an accepted proposition of law that when the income is earned during the course of setting up of the project which is inextricably linked to the said project, then the character of the said income will be treated as „capital receipt‟. Accordingly, it was submitted that the assessee has capitalized all the capital expenditure as well as revenue expenditure and has treated the same as capital expenditure. As the character of interest income from short-term deposits was also on capital account, the assessee has taken the view that the said amount can be reduced from the total capital expenditure, which is treated as capital work-in-progress. Further reliance was placed on the decision of the Hon‟ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd., 181 Taxman 249 and the decision of the Hon‟ble Supreme Court in the case of Bokaro Steel Ltd. 236 ITR 315 and it was submitted that the interest earned be treated as business receipt having the character of capital in nature and the same can be reduced from the capital work-in-progress and the same need not be offered to tax separately in the hands of the assessee.

4. The submissions of the assessee were considered but not found acceptable to the AO. As per the AO, though the assessee has earned the interest on unutilized borrowed funds parked in fixed deposit, it is not business of the assessee. It was held that the interest was earned on the unutilized borrowed funds and the same were not parked with the banks for the purpose of any business obligation. The funds were parked with clear intention to earn the extra income by way of interest. Further, the assessee was not engaged in the business of money lending and borrowing and merely invested or parked its unutilized funds for short or specific period to earn interest. Since the interest earned is not linked to the business of the assessee, it cannot be assessed under the business income. Further, the interest paid/payable on borrowed funds has no connection with the receipt of interest. The earning of interest on fixed deposit has no nexus with business activity of the assessee. The assessee has borrowed fund for carrying out business activities and not for parking the fund in fixed deposits. Therefore, the interest earned on fixed deposit should be charged as income from other sources and should not be capitalized nor set off against the interest paid on borrowed funds and reliance was placed on the decision of the Hon‟ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT 227 ITR 172 and various other decisions on the subject and it was accordingly held that the interest income of Rs. 3,44,38,898/- be treated as income from other sources as against the business income treated by the assessee and accordingly determined the income at Rs. 3,44,38,898/- as against NIL income reported by the assessee while filing its return of income and assessment order was passed u/s. 143(3) of the Act, dt. 20-03-2014.

5. The assessee thereafter carried the matter in appeal before the Ld.CIT(A), who has allowed the relief to the assessee and the relevant findings of the Ld.CIT(A) reads as under:

“I have carefully gone through the grounds of appeal

, submission of the appellant, assessment order in relevant to the facts and in circumstances of this case. Ground 1, 2,3 is regarding the treatment of the interest income of Rs 3,44,38,9000/- under the head income from other sources. The appellant had treated the interest income as business income and the same is reduced from the cost of capital work in progress. The AO on the other hand treated the said interest income as chargeable under "income from other sources". In this regard, I find that the issue involved in the present appeal regarding taxability of interest amount earned from Fixed deposits, whether it is taxable under the head income from other sources or it can be reduced from capital work-in-progress, when the funds are inextricably linked with project funds is no longer a res-integra. The co-ordinate bench of ITAT, Mumbai 'G' bench in the case of Hazaribagh Expressway Ltd for AY 2011-12 had considered an identical issue and after considering relevant facts and also by following another co-ordinate bench decision, in the case of Infrastructure Development Company of Rajasthan Ltd. vs DCIT held that interest earned from time deposits kept out of surplus funds available to the assessee out of project funds is deductible from the capital working progress. The relevant findings are discussed in detail by the honorable jurisdictional ITAT in the case of Hazaribagh Expressway Ltd for AY 2012-13 [Ι.Τ.Α No.6696/Mum/2017 pages 10-12] dated 22/01/2020. Respectfully following the jurisdictional ITAT decision, I am of the firm opinion that the interest income from time deposits kept in banks out of surplus funds of the project is rightly reduced from capital work in progress. The grounds of the appellant regarding interest income is hereby allowed.”

6. Against the said findings of the Ld.CIT(A), the Revenue is in appeal before us.

7. During the course of hearing, the Ld.DR relied on the order of the AO as well as the decision of the Hon‟ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (supra) and submitted that the Ld.CIT(A) has allowing the relief to the assessee whereby the assessee has been allowed to capitalize the interest earned on the fixed deposits as against treating such interest as income from other sources. It was submitted that the ld CIT(A) has not discussed how the decision of the Hon‟ble Supreme Court is not applicable in the facts of the present case and without any discussion, he has allowed the relief to the assessee.

8. In his submissions, the Ld. AR submitted that the assessee has undertaken the project of setting up infrastructure facility being construction of 9 kms two lane long tunnel with parallel escape tunnel in the state of Jammu & Kashmir between Chenani and Narshri. It was submitted that the funds raised by the assessee includes share capital introduced by the promoters and obtained credit facilities from the banks and institutions and all the funds are exclusively meant for setting up of the infrastructure facility. It was submitted that lenders disburse the funds at specified intervals and the said funds are required to be used for the purpose of setting up of the project and cannot be used for any other purposes. It was submitted that during the year under consideration, the business was in the construction phase and, therefore, all the expenses including interest on the borrowed funds were capitalized as part of the work-in-progress. Similarly interest earned on the deposits were also capitalized as part of work-in-progress as the funds from which such interest was earned are exclusively for the development of the project. It was submitted that lenders disburse the funds at specified intervals and the said funds are required to be used for the purpose of setting up of the project. However, the funds are invested into short term deposits with banks and earns interest income. It was submitted that the intention of parking the funds by way of fixed deposits for short term period is to utilize the funds to maximize the return and in turn to optimize the over all cost of the project. It was submitted that the assessee has capitalized the capital expenditure as well as the revenue expenditure till the time the project is set up and has treated the same as capital expenditure. It was further submitted that the assessee had paid up share capital of Rs. 3,72,00,00,000/- and has borrowed funds of Rs. 9,06,54,00,000/- as on 31-03-2012 and the whole of the share capital and the borrowed money have been utilized in acquiring certain assets as well as in incurring various expenditure relating to the project. The project cost as on 31-03-2012 was Rs. 11,37,15,22,907/- after reducing interest on fixed deposits of Rs. 3,44,38,900/-. Since the capital cost of Rs. 1137.15 crores is higher than the borrowed funds of Rs. 906.54 crores, therefore, the assessee does not have surplus funds available with them for making any investment. It was accordingly submitted that the activity of making investments for a short period of time is undertaken to reduce the overall cost of the project. The funds which are sanctioned and disbursed, but are not immediately required for disbursement are parked for a short period of time to earn the income which will reduce the burden on the company and this activity is inextricably linked to the activity of construction of road. Further, the company is engaged in only one business activity viz., road construction, operation and maintenance and the activity of investment is directly linked and related to such business activity. Thus, the interest earned on fixed deposits being inextricably linked to the construction project goes on to reduce the construction cost and hence, reduce from the capital work-in-progress for the year under consideration. It was submitted that it is now a settled position that any interest received by the assessee which is inextricably linked with the process of setting up of Plant and Machinery will go to reduce the cost of the said assets and accordingly, these receipts must be considered as capital in nature and cannot be taxed as income from other sources. It was further submitted that the matter is squarely covered in favour of the assessee by the decision of the Co-ordinate Bench of the Tribunal in assessee‟s own case for the AY. 2011-12. Drawing reference to the financial statements and in particular, note no 12 and cash flow statement, it was submitted that no fresh deposits have been placed during the year, the deposits amounting to Rs. 15,00,00,000/- which were placed in earlier financial year for period less than 3 months were carried forward in the year under consideration and were liquidated and it was interest on the same fixed deposits which were capitalized in the earlier financial year to the tune of Rs 395,548/- and Rs 3,44,38,898/- for the year under consideration which was again capitalized during the year under consideration and netted off against capital work in progress. It was accordingly submitted that the facts and circumstances of the case are identical and, therefore, the ratio of the decision of the Co-ordinate Bench of the Tribunal for the AY. 2011-12 are equally applies to the instant case, wherein it was held that the interest income which is arising out of the activity which is inextricably linked to setting up the road project should be reduced from the cost of the project.

9. Further reliance was placed on the decision of the Hon‟ble Supreme Court in the case of Bokaro Steel Ltd. 236 ITR 315 (supra), decisions of the Hon‟ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd., (supra) and Pr.CIT vs. International Coal Ventures Pvt. Ltd. in and the decision of the Co-ordinate Bench of the Tribunal in the case of Hazaribagh Ranchi Expressway Limited in and ITA No. 6696/Mum/2017 for AY. 2012-13. It was submitted that the ratio of all these decisions is that interest income earned on deposits which is inextricably linked to the project should not be taxed as income from other sources and, therefore, following the same, the sum of Rs. 3,44,38,900/- should not be taxed under the head „income from other sources‟ as the same has to be reduced from capital work-in- progress. He accordingly supported the order of the Ld. CIT(A) and submitted that the appeal of the Revenue may thus be dismissed.

“3.1 I have considered the rival submissions and perused the material available on record. The facts in brief are that the assessee earned income of Rs. 3,95,548/- and declared NIL returned income on 26/09/2011. The assessee entered into Concession Agreement with National Highway Authority of India on 29/06/2010 for construction of infrastructure facility in the State of Jammu & Kashmir The assessee incurred expenditure of Rs. 2,76,19,267/- under head "Administrative & General Expenses" out of which the assessee claimed deduction of expenditure of Rs. 3,95,548/-. The ld. Assessing Officer denied the deduction and treated the claimed interest income of Rs. 3,95,548/- as income from other sources. The assessee carried the matter in appeal before the Ld. Commissioner of Income Tax (Appeals), wherein also the stand taken in the assessment order was affirmed by observing that the assessee had not yet commenced the business and merely earned interest income on fixed deposits by claiming the same as business income. The assessee is in further appeal before this Tribunal. 3.2 If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the Id. respective counsel, if kept in juxtaposition and analyzed, it is noted that the Ld. Commissioner of Income Tax (Appeals) followed the decision Apex Court in the case Tuticorin Alkali & Fertilizers Ltd. v. CIT 227 ITR 172 (SC) and decided against the assessee. The relevant portion from the aforesaid order from Hon'ble Apex Court is reproduced herein from Hon'ble Chemical under for ready reference and analysis:- The basic proposition that has to be borne in mind in this case is that it is possible for a company to have six different sources of Income, each one of which will be chargeable to income-tax. Profits and gains of business or profession is only one of the heads under which the company's Income is liable to be assessed to tax. If a company has not commenced business, there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed. If the company, even before it commences business, invests the 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 a rented house and gets rent, such rent will be assessable to tax under section 22 as income from house property. Likewise, a company may have Income from other sources. It may buy shares and get dividends. Such dividends will be taxable under section 56 of the Act. The company may also, as in this 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. 3.3 The aforesaid decision from Hon'ble Apex Court was also considered /reiterated in CIT v. Autokast Ltd. (248 ITR 110) (SC) and Bongaigaon Refinery Petrochemicals Ltd. V. CIT 251 ITR 329 (SC). In view of these decisions, the Ld. Commissioner of Income Tax (Appeals) treated the interest income on fixed deposits as "income from other sources". Hon’ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. (supra) held as under:-

“2.The only Issue which arose for consideration of the authorities below was as to the treatment which was to be accorded to the अnterest earned on monies received as share capital by the assessee which were temporarily put in a fixed deposit awaiting acquisition of land which had run into legal entanglements on account of title. The Assessing Officer had treated the interest received by the assessee in respect of the aforementioned two years as "Income from other sources", whereas the Commissioner of Income-tax (Appeals) (hereinafter referred to as " the CIT(A)") had accepted the stand of the assessee that the interest was in the nature of capital receipt which was liable to be set off against pre-operative expenses. In a further appeal to the Tribunal by the Revenue the Tribunal reversed the decision of the Commissioner of Income-tax (Appeals). The Tribunal was of the view that the facts obtaining in the present case were similar to those which arose in the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172. The assessee being aggrieved is in appeal before us.

"Whether the Tribunal misdirected itself in law in holding that interest which accrued on funds deployed with the bank could be taxed as Income from other sources and not as capital receipt liable to be set off against pre-operative expenses"?

10. It is important to note that the Tribunal without holding that the finding of fact of the Commissioner of Income-tax (Appeals), that the interest earned was "inextricably linked" with the setting up of the power plant reversed the decision of the Commissioner of Income-tax (Appeals) by making a bald observation that the deposit of share capital has no or very remote connection with setting up of plant

and machinery". The Tribunal further observed hat it was an independent income earned in a similar fashion as * was the case in Tuticorin Alkali Chemicals [1997] 227 ITR 172 (SC).

11.In our opinion, the Tribunal has misconstrued the ratio of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals [1997] 227 ITR 172 and that of Bokaro Steel Ltd. [1999] 236 ITR 315. The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals [1997] 227 ITR 172 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. [1999] 236 ITR 315 to our mind 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.

12. The test, therefore, to our mind is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the plant. The clue is perhaps available in section 3 of the Act which states that for newly set up business the previous year shall be the period beginning with the date of setting up of the business. Therefore, as per the provision of section 4 of the Act which is the charging section income which arises to an assessee from the date of setting of the business but prior to commencement is chargeable to tax depending on whether it is of a revenue nature or capital receipt. The income of a newly set up business, post the date of its setting up can be taxed if it is of a revenue nature under any of the heads provided under section 14 in Chapter IV of the Act. For an income to be classified as income under the head" Profits and gains of business or profession" it would have to be an activity which is in some manner or form connected with business. The word business" is of wide import which would also include all such activities which coalesce into setting up of the business. See Mazagaon Dock Ltd. v. CIT/Excess Profits Tax [1958] 34 ITR 368 (SC) and Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax [1954] 26 ITR 765 (SC). Once it is held that the assessee's income is an income connected with business, which would be so in the present case, in view of the finding of fact by the Commissioner of Income-tax (Appeals) that the monies which were inducted into the joint venture company by the joint venture partners were primarily infused to purchase land and to develop infrastructure then it cannot be held that the income derived by parking the funds temporarily with Tokyo Mitsubishi Bank, will result in the character of the funds being changed, inasmuch as, the interest earned from the bank would have a hue different than that of business and be brought to tax under the head Income from other sources". It is wellsettled that an income received by the assessee can be taxed under the head Income from other sources" only if it does not fall under any other head of income as provided in section 14 of the Act. The head Income from other sources" is a residuary head of income. See S. G. Mercantile Corporation P. Ltd. v. CIT [1972] 83 ITR 700 (SC) and CIT v. Govinda Choudhury and Sons [1993] 203 ITR 881 (SC).

13. It is clear upon a perusal of the facts as found by the authorities below that the funds in the form of chare 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 tobe 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.

15. In our view, the situation in the instant case is quite similar except here instead of paying interest on funds brought in for specific purpose interest is earned on funds brought in by way of share capital for a specific purpose. Could it be said that in the former situation interest could have been capitalized and in the latter situation it cannot be capitalized. To test the principle we could extend the example, that is, would our answer be any different had assessee passed on the interest to the respective shareholders. If not, then, in our view, the only conclusion possible is that interest earned in the present circumstances ought to be capitalized.

“40. In view of the above, the key issue is whether interest on funds deposited in the short-term fixed deposit can be construed as incidental to setting up the business acquisition of a coal mine. Plainly, if the interest is earned on the amounts which were temporarily kept in fixed deposits in the course of acquisition of the coal mine to set up its business, the interest earned would require to be accounted for as the part of the capital value of the business/asset.

14. We accordingly do not find any justifiable and legal basis in interfering with the decision of the Ld.CIT(A) as the same is based on sound legal reasoning and proposition as so propounded by the Hon‟ble Courts and consistently followed across various Benches of the Tribunal including in the case of the assessee in the immediately preceding assessment year. In view of the same, the grounds of appeal so taken by the Revenue are hereby dismissed and the order of the Ld.CIT(A) is hereby sustained.