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Income Tax Appellate Tribunal, ‘A’ BENCH : BANGALORE
Before: SHRI CHANDRA POOJARIA & SMT. BEENA PILLAI
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER Present appeals are filed by assessee against separate orders both dated 08/03/2022 passed by Ld.CIT(A)-11, Bangalore for A.Ys. 2011-12 and 2012-13. 2. The issues involved in both these appeals are identical and arises out of identical facts and circumstances. We therefore deem it convenient to pass common order and the decision in ITA Page 2 & 344/Bang/2022 No.343/Bang/2022 shall apply mutatis mutandis in ITA No.344/Bang/2022. 3. The grounds raised
in both these appeals are common except for the figures. Grounds raised by the assessee in is reproduced as under:- “1. The learned Assessing officer had erred in passing the order in the manner passed by him and the learned Commissioner of Income-Tax (Appeals) has erred in confirming the same. The orders passed being bad in law and are required to be quashed in toto. 2.1 In any case, the learned CIT(A)-11, Bangalore has erred in not admitting the additional grounds raised by the appellant during the course of appellate proceedings holding that a) The appellant had not made any claim either in the return of income filed or during assessment proceedings before the Assessing officer. b) The issue involved requires detailed investigation of the facts. The action of the CIT(A) being contrary to facts and law applicable is to be negated and additional grounds as raised is to be allowed. 2.2 In any case and without prejudice, the learned CIT(A) has erred in not appreciating the fact that the power of CIT(A) are co-terminus with that of Assessing officer and as per the dictum of honourable Apex Court, additional claim can be made before the appellate authority and same is to be considered. 3.1 In any case the authorities below have erred in taxing the interest income earned from investing idle borrowed funds in fixed deposit under the head Income from other sources. The interest income being inextricably linked to the Projects of the appellant, the income so earned is in the nature of capital receipt and the income so earned is required to be deducted from the cost of the asset/construction. 3.2 In any case and without further prejudice, the tax treatment of interest as adopted by the appellant in the computation of total income is to be disregarded and the treatment made in the books of accounts by capitalizing the same to WIP account is to be accepted.
4. In any case, the learned Assessing officer had erred in disallowing the Interest claim of Rs. 2,46,96,522/- u/s 57(iii) of the Act and assessing the entire interest received from the fixed deposits amounting to Rs. 1,00,38,532/- as Page 3 & 344/Bang/2022 income from other sources and the learned CIT(A) has erred in confirming the same. On proper appreciation of facts and law applicable, both interest paid and interest received are capitalized to WIP Account in the books of accounts and same is to be upheld.
5. The appellant denies the liability to pay interest u/s 234A, 234B and 234D of the Act. The interest having been levied erroneously is to be deleted.
In view of the above and on the grounds to be adduced at the time of hearing, it is requested that orders passed be quashed or at least the additional grounds/claim raised before CIT(A) be admitted, disallowance of interest paid be deleted, assessing interest received under the head income from other sources be deleted, the treatment of interest paid/received by the appellant in the books of accounts be upheld by disregarding the computation of total income as done by the appellant and interest received be also deleted.”
Brief facts of the case are as under: 4.1 Assessee is a company incorporated as a special purpose vehicle to carry out development of residential project at Lumbini Park, Bangalore. It filed its return of income for year under consideration on 29/11/2011 declaring total income at Nil. The case was selected for scrutiny and notices were issued u/s. 143(2) and 143(1) calling for various details from the assessee. The Ld.AO observed that, the assessee had international transaction with M/s. Equinox Parks Ltd., Cyprus, and paid sum of Rs.1,79,27,730/- as on 31/03/2011. A reference was made to the transfer pricing officer. The Ld.TPO vide order dated 15/01/2015 accepted the value of international transaction with the AE in regard to ALP. The Ld.AO during the assessment proceedings thereafter observed that, the assessee has claimed interest paid at 16.5% of Rs.22,46,96,522/- against the interest on FD with the bank. It was also noted by the Ld.AO that in the computation of income filed by the assessee, a note was put to Page 4 & 344/Bang/2022 inform that the loan amount pending unutilised was invested in the FD with bank and hence the interest received on FD was disclosed under the head income from other sources and the corresponding interest paid on loan was claimed as deduction against the same. 4.2 The Ld.AO called upon assessee to explain as to why the interest claimed u/s. 57(ii) should not be disallowed and added back to the total income. In response, the assessee submitted that it had claimed interest against the interest income earned and hence there is no excess claim of interest paid. The assessee submitted as under: “Assessee's above explanation have been carefully considered and not acceptable for the following reasons:-
1. 1. During the course of assessment proceedings, it has been submitted by the assessee that the assessee company is engaged in the business of construction and development of residential projects. Further, it has been submitted that the loans which has been borrowed preliminary for the purpose of the project of the assessee company.
2. On perusal of the audited annual accounts. it has been observed that the assessee has debited the interest paid or. the borrowed funds fully to the work in progress accounts. However. in the computation of total income the assessee has claimed the interest paid as an expenditure u/s.57(iii) of the IT Act without reducing the corresponding of interest from the closing A1P of the project as per B/sheet. This amounts to claim of double deduction which is not permissible under the I.T. Act.
3. Assessee derives interest on its F 0 at a lower rate and paid interest on its borrowing at the higher rate No prudent businessman will invest the borrowed fund in FD for deriving lower rate of interest. Further assessee s main business is not of investment.
4. As the provisions of section 57(iii) only the expenses incurred wholly and exclusively for the purpose of earning the income are only allowable while computing the income chargeable under the head of income from other sources.. During the course of assessment proceedings, the Page 5 & 344/Bang/2022 assessee has not proved the nexus between the borrowed fund and its utilization for investing in FD.
5. It appears that the asessee's claim of interest is an after thought as in the books of accounts assessee has debited the interest to the WIP and not to the interest on FD from the bank accounts.” 4.3 Based on the above, the Ld.AO after considering the submissions of assessee observed and held as under: “In view of the above forgoing and in view of the fact that the assessee has claimed double deduction and also the assessee has not proved the nexus between the borrowed fund and its utilization for investment in FD Reliance is placed on the decision of the Hon'ble Supreme Court in the case of Dr V P Gopinath Vs CIT. 248-ITR-449 (SC) In view of this the assessee's claim for deduction of interest of Rs. 2.46,96,522/-is hereby disallowed u/s. 57(iii) and added to the total income of the assessee.” 4.4 Aggrieved by the order of Ld.AO, assessee preferred appeal before the Ld.CIT(A). Before the Ld.CIT(A), assessee raised the following additional grounds: “1. In any case and without prejudice. the learned assessing officer has erred in taxing the interest income earned from investing idle borrowed funds in fixed deposit under the head Income from Other Sources. The interest income being inextricably linked to the construction or acquisition of asset, the income so earned is in the nature of a capital receipt and the income so earned is required to be deducted from the Cost of the asset/construction.
The tax treatment as adopted by the appellant is to be disregarded as there cannot be any estoppels against the law and taxing of interest income received is to be held as erroneous.” 4.5 The Ld.CIT(A) admitted the additional ground and decided the issues. The Ld.CIT(A) observed and held as under:
Page 6 & 344/Bang/2022 Page 7 ITA Nos. 343 & 344/Bang/2022 Page 8 ITA Nos. 343 & 344/Bang/2022 Page 9 ITA Nos. 343 & 344/Bang/2022 4.6 Aggrieved by the order passed by Ld.CIT(A), assessee has filed the present appeal before this Tribunal.
Ground no. 1 is general in nature and therefore do not require any adjudication.
6. Ground no. 2.1 raised by assessee is in respect of the claim that, the interest income is inextricably linked with the project of the assessee and is therefore a capital receipt which requires to Page 10 ITA Nos. 343 & 344/Bang/2022 be deducted from the cost of the asset / construction. The Ld.AR submitted that this was raised as an additional ground before the Ld.CIT(A) which was not admitted in the impugned order. It was submitted before the Ld.CIT(A) that assessee wrongly declared the said interest income under the head income from other sources. The Ld.CIT(A) however while considering this issue was of the opinion that assessee had not made such claim before the Ld.AO during the assessment proceedings and therefore assessee could not have raised this issue before the first appellate authority. Hence this additional ground raised
was dismissed in limine.
7. Ground nos. 3.2 – 4 in respect of disallowance of Rs.1,00,38,532/- made u/s. 57(iii), the Ld.AR submitted as under: 7.1 The year under appeal was the first year of incorporation of the Company. The assessee is in the business of real estate and the assessee was engaged in construction and development of a project in Bangalore. For the purpose of carrying out the development and construction activity, the assessee borrowed money from banks, financial institutions and other companies, in the form of inter corporate deposits. The entire borrowed money could not at once be fully deployed for the construction and therefore the idle available funds were invested in fixed deposits by the assessee. 7.2 It is submitted that on borrowed funds, the interest is to be recognised in the books of accounts in accordance with the accounting standards issued by ICAI. The method of accounting Page 11 & 344/Bang/2022 and recognition is given in AS-16-“Borrowing Costs”. The relevant extract of the standard reads as under: "Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of that asset the amount of borrowing costs eligible for capitalization on that asset should he determined as the actual borrowing costs incurred on that borrowing during the period less any income on the temporary investment of those borrowings.” 7.3 It was submitted that as per the above Accounting Standard, the assessee capitalized the interest paid on the borrowed funds to the work in progress as the funds were borrowed for the purpose of construction of the project. It was submitted that, the assessee had not completely deployed the funds for the purpose of construction and had idle funds which the appellant company invested in the fixed deposits for a temporary period and earned interest income of Rs. 1,00.38,532/- with a view that the income so earned on fixed deposits can be utilized in the business and whenever the appellant would require funds, the fixed deposit can be encashed and be utilized for the purpose of business. It is therefore submitted that, the interest income so earned was to be reduced from the work in progress being income received on temporary investment of borrowed funds as required by AS-I6 ‘Borrowing costs’. 7.4 It is submitted by the Ld.AR that such treatment of the borrowing cost is evident from Schedule 5 to the Audited financial statements, which is in accordance with the Accounting Standards issued. The interest income earned on fixed deposits was not shown as income in the Profit & Loss A/c, but was reduced from the work in progress. The Ld.AR submitted that the interest income earned on investing the idle funds in Fixed Page 12 & 344/Bang/2022 deposits is inextricably linked with the construction and development of the project undertaken by the Company and therefore the interest amount could only be considered as cutting down the cost of the construction of the project.
The Ld.AR relied on the following decisions in support of the above contention. Decision of Hon’ble Supreme Court in case of CIT vs. Bokaro Steel Ltd. reported in (1999) 102 Taxman 94 Decision of Hon’ble Supreme Court in case of Challapalli Sugars Ltd. vs. CIT reported in (1975) 98 ITR 167 Decision of Coordinate Bench of this Tribunal in case of ITO vs. Bank Note Paper Mill India (P) Ltd. reported in (2017) 88 taxmann.com 780 Decision of Hon’ble Karnataka High Court in case of CIT vs. Karnataka State Agricultural Produce Processing & Export Corporation Ltd. reported in (2015) 57 taxmann.com 349 9. The interest earned against the FD was capitalised by the assessee under work in progress and had not claimed in the P&L account. It was submitted that as per the provisions of section 57(iii) of the Act, the expenses incurred wholly and exclusively for the purpose of earning income are only allowable while computing income chargeable under the head ‘Income from other sources’, and that since the assessee did not prove any nexus between the borrowed fund and its utilisation for investing in FD due to which the said amount was disallowed by the Ld.CIT(A).
The Ld.AR submitted that, based on the decisions relied hereinabove, the treatment of interest income earned on investing the idle borrowed fund in fixed deposits were not completely payable for the construction of the project should be treated as income as a capital receipt and the same is to be reduced from the cost of construction of the project. It was also submitted that Page 13 & 344/Bang/2022 the interest income so received would not be taxable under any heads of income as it is capital in nature.
On the contrary, the Ld.DR relied on the decision of Hon’ble Supreme Court in case of Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT reported in (1997) 93 Taxman 502. It was submitted that interest earned on short term investment of funds borrowed for the purposes of setting up of business has to be assessed as income from other sources. It was submitted that interest income received on such borrowed funds invested also cannot be capitalised as held by Hon’ble Supreme Court in the above referred case. He placed heavy reliance on the orders passed by authorities below.
It was submitted that even set off of interest income earned on short term deposit cannot be carried out the way the assessee has accounted for the year under consideration. We have perused the submissions advanced by both sides.
We note that assessee has reduced the income earned on fixed deposits from capital work in progress however, and while filing the return of income for the year under consideration, offered the interest earned from un-utilised borrowed funds that was put in FDs as income under the head Income from other sources. We also note that against the interest income earned, the assessee claimed interest paid on the borrowed funds to the extent of interest received which has not been accepted by the revenue authorities. It has been submitted by the Ld.AR that offering the interest income earned on fixed deposits by the assessee to be taxable under the head, “Income from other sources”, was an inadvertent mistake, as it was the same Page 14 & 344/Bang/2022 borrowed funds which were parked in FD during the non- utilisation period, and therefore was inextricably linked with the business activity of project development undertaken by assessee. It is also noted that, during the assessment proceedings, the assessee had brought these details to the notice of the Ld.AO and had also placed reliance on the Board Circular No. 14(XL-35) dated 11/04/1955 wherein following directions were issued to the revenue officers. “Officers of the Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the Officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the Department for it would inspire confidence in him that he may be sure of getting a square deal from the Department. Although, therefore, the responsibility for claiming refunds and reliefs rests with assessees on whom it is imposed by law, officers should :— (a) draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other; (b) freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs.”
We note that the Ld.AO disputed the submission of the assessee for the reason that assessee had not proved the nexus between the borrowed fund and its utilisation for investment in FD. Admittedly, the borrowed funds were for the purpose of project of the assessee, and that, the interest paid on the borrowed funds were part of work in progress accounts. It is also noted by the Ld.AO that assessee’s main business is not into investment. Therefore assessee do not have any reason to create a FD which would derive lower rate of interest income.
Page 15 & 344/Bang/2022 15. It is also noted that, the assessee had claimed the interest paid on borrowed fund as a part of closing work in progress in the balance sheet, and in the computation of total income, the assessee claimed the same as an expenditure u/s. 57(iii) and set it off against the interest income received from FD. This in our view is an accounting mistake on the part of the assessee. It is not the case of the Ld.AO that assessee has any other funds which could have been assumed to be parked in the fixed deposit and for the reason that assessee was setting up its business, the borrowed fund that remained unutilised was to put into a fixed deposit which would have otherwise remained idle.
We refer to the principle laid down by Hon’ble Supreme Court in case of CIT vs. Bokaro Steel Ltd. reported in (1999) 102 Taxman 94. Assessee has rightly shown the interest paid on the borrowed funds in the work in progress of the project account, in the balance sheet and as some of the borrowed funds were not utilised immediately, assessee made fixed deposit with the bank on which it earned interest. It is also admitted fact that the interest earned on the FD was not claimed by assessee in the profit and loss account. There is no profit motive according to us, as the entire borrowed fund and the interest accrued there from the deposit was to be utilised only for the purposes of construction. It was on similar facts, that Hon’ble Supreme Court held that, interest earned on the fixed deposits are also to be capitalised and cannot be treated as a revenue receipt. We refer to this specific observation of Hon’ble Supreme Court in case of CIT vs. Bokaro Steel Ltd. (supra) that reads as under:
Page 16 & 344/Bang/2022 “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 of 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 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.”
The Hon’ble Supreme Court in the case of CIT v. Karnal Co- Operative Sugar Mills Ltd. reported in [2000] 243 ITR 2, held that, where the assessee deposited money to open a letter of credit for the purchase of the machinery required for setting up its plant., the interest earned from such deposit would be treated as capital receipt since it is inextricably linked with the purchase of machinery. The relevant extract reads as under; “In the present case, the assessee had deposited money to open a letter of credit for the purchase of the machinery required for setting up its plant in terms of the assessee's agreement with the supplier. It was on the money so deposited that some interest has been earned. This is therefore, not a case where any surplus share capital money which is lying idle has been deposited in the bank for the purpose of earning interest. The deposit of money in the present case is directly linked with the purchase of plant and machinery. Hence, any income earned on such deposit is incidental' to the acquisition of assets for the setting up of the plant and machinery. In this view of the matter the ratio laid down by this Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. v CIT [1997] 227 ITR 1721 will not be attracted. The more appropriate decision in the factual situation in the present case is in CIT v Bokgr9 Steel Ltd. [1999] 236 ITR 3152 (SC). The appeal is dismissed. There will be no order as to costs.”
In the case of CIT v. Karnataka Power Corporation reported in (2001) 247 ITR 268, the Hon’ble Supreme Court, following its own decision in the case of Bokaro (Supra) held that, interest receipts Page 17 & 344/Bang/2022 and hire charges from contractors are capital receipts which would go to reduce capital cost.
In the case of CIT v. VGR Foundation reported in [2008] 292 ITR 132, Hon'ble Madras High Court reviewed the available decisions on this issue and held that; "In the Light of the Supreme Court decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), it is only in the event of interest earned from out of deposits made from borrowed funds that it would be in the nature of income. Share application monies do not fall into the category of borrowed funds and do not involve payment of interest. In effect share application monies etc., are gathered for being used in setting up of an industry, unit, purchase of assets, and so on. Till such time the money is required for deferment of various items, obviously the money has to be kept in deposit with a bank. Keeping the money in current account would not yield any interest income. It can therefore, be seen that it is during the course of construction that the monies are kept in deposits with the bank. In these circumstances, in the Light of the Supreme Court decisions in the cases of Bokaro Steel Ltd. (Supra), Karnal Co-operative Sugar Mills Ltd. (supra) and Karnataka Power Corpn. (supra), the claim of the assessee is reasonable and deserves to be accepted"
Thus in the present facts of the case, the assessee has made short term fixed deposit from which it had earned interest and such interest earned is inextricably linked with the capital expenditure as the source of the fixed deposit are the borrowed funds. We are therefore of the opinion that the ratio laid down by the Hon’ble Supreme Court in case of Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (supra) is not applicable and that the ratio laid down by the Hon’ble Supreme Court in case of CIT vs. Bokaro Steel Ltd. (supra) would be applicable. Thus the interest earned on fixed deposits has to be considered as a part of capital work in progress. Accordingly, we allow the grounds raised by the assessee.
Page 18 & 344/Bang/2022 The Ld.AO is directed to recomputed the taxable income in the hands of the assessee based on the above decision.
Ground no. 5 is consequential in nature and therefore do not require adjudication.
Ground no. 6 is general in nature and therefore do not require adjudication. Accordingly, the appeal filed by the assessee stands allowed.
As this issue is remanded hereinabove while considering assessment year 2011-12, applying the same view mutatis mutandis, the present appeal for A.Y. 2012-13 also stands remanded to the Ld.AO, with the direction to verify the claim in accordance with the principles laid down in various decisions. In the result, both the appeals filed by the assessee stands allowed. Order pronounced in the open court on 01st November, 2022.