C I T UDAIPUR vs. M/S BHAVAL SYNTHETICS INDIA LTD

ITA/46/2006HC RajasthanRJHC01020536200505 May 20178 pages
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What did the High Court hold?

The High Court allowed the appeal filed by the Revenue. On the first issue, it held that interest earned on FDRs is income from other sources and is taxable. The Court relied on the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Limited Vs. Commissioner of Income Tax (227 ITR 172) which stated that interest earned on short-term investment of borrowed funds for setting up a factory, even before commencement of business, must be assessed as income from other sources and cannot be exempted on the ground that it would reduce interest on borrowed amounts to be capitalized. The Court found that neither the Assessing Officer nor the ITAT examined under which provision the assessee claimed deduction or set off of interest income against interest payable on borrowed funds. On the second issue, the Court found that the Assessing Officer's order did not reflect any inquiry beyond noting the assessee's explanation, indicating a lack of proper and adequate inquiry. Consequently, the order of the ITAT dated March 28, 2003, was set aside, and the order passed by the CIT under Section 263 was restored. For the connected appeal (ITA No. 46/2006), the Court noted that the original assessment order for AY 1996-97 was made at nil income. Since the CIT's revisional order under Section 263, which led to a fresh assessment, was set aside by the ITAT, the consequential assessment order was also set aside. However, as the revisional order was now restored by this judgment, the consequential assessment order also deserved restoration and was remanded to the ITAT for adjudication on merits.

What were the facts?

The Revenue (Commissioner of Income Tax) appealed against an order of the Income Tax Appellate Tribunal (ITAT) dated March 28, 2003, which had set aside a revisional order passed by the CIT under Section 263 of the Income Tax Act, 1961. The ITAT's order concerned the assessment year(s) not explicitly stated for the primary appeal but implied to be related to the assessment of interest earned on Fixed Deposit Receipts (FDRs) amounting to Rs. 9,31,572/-. The CIT had found the Assessing Officer's original assessment order erroneous and prejudicial to the revenue because the interest earned on FDRs was not brought to tax or was wrongly set off, and the Assessing Officer had failed to conduct a proper inquiry. The assessee, M/s Bhawal Synthetics (India) Udaipur, had initially filed a return with no income, leading to scrutiny.

What were the issues?

1. Whether the interest earned on Fixed Deposit receipts, used by the assessee as margin money for funds to set up an industry, can be considered inextricably linked with the process of setting up the industry, thus being a capital receipt and not revenue income? 2. Whether the ITAT was justified in holding that the inquiry conducted by the Assessing Officer before passing the assessment order was proper and adequate, so as not to render the assessment order erroneous and prejudicial to the interest of the revenue, as held by the CIT in his order under Section 263? Assessee's Contentions (as inferred from the Revenue's arguments and the ITAT's decision): The assessee contended that the interest earned on FDRs was rightly treated as business expenditure and set off because the FDR was related to funds to be adjusted in the project cost and was used for obtaining letters of credit for machinery purchase. Revenue's Contentions: The Revenue argued that the interest earned on FDRs is business income and liable to be taxed. It contended that the Assessing Officer passed the assessment order without proper and adequate inquiry, making it erroneous and prejudicial to the interest of the revenue. Therefore, the ITAT erred in setting aside the CIT's order under Section 263.

Which sections of the Income-tax Act were involved?

Section 260(A),Section 143(2),Section 263,Section 10,Section 56,Section 57

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Cause title — parties, addresses and appearances
HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR D.B. Income Tax Appeal No. 54 / 2003 The Commissioner Of Income Tax ----Appellant Versus M/S Bhawal Synthetics (India) Udaipur ----Respondent Connected With D.B. Income Tax Appeal No. 46 / 2006 _____________________________________________________ For Appellant(s) : Mr. KK Bissa For Respondent(s) : _____________________________________________________ HON'BLE MR. JUSTICE GOVIND MATHUR HON'BLE MR. JUSTICE VINIT KUMAR MATHUR

Judgment Per Hon’ble Mr. Govind Mathur, J. 05/05/2017

By this judgment we are deciding two appeals being absolutely inter-related. It would be appropriate to first deal with D.B. Income Tax Appeal No.54/2003. This appeal under Section 260(A) of the Income Tax Act, 1961 is before us to question correctness of order dated 28.3.2003 passed by the Income Tax Appellate Tribunal, Jodhpur on the basis of the following substantial questions of law :- “1. Whether in the facts and circumstances of the case, the interest earned on Fixed Deposit receipts used by (2 of 8) [ITA-54/2003]

The order continues below.

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