HABLIS HOTELS,CHENNAI vs. ITO NON CORPORATE WARD 1(3), CHENNAI

आदेश आदेश /O R D E R आदेश आदेश

PER MAHAVIR SINGH, VP:

:: 2 :: I.T.A No.:1690/CHNY/2019

Aggrieved, the Assessee is in appeal before the Tribunal.

Rajesh and earned bank interest of a sum of Rs.82,13,028/- on this deposit. Consequently, the Assessee has also paid an interest to the partner, Mr. D. Rajesh to the extent of Rs.58,33,333/- and claimed the same for deduction u/s.57 of the Act. We noted that this issue is covered by the decision of the Hon’ble Supreme Court in the case of Commissioner of Income Tax Vs. Bokaro Steel Limited reported in [1999] 236 ITR 315 (SC); wherein the Hon’ble Supreme Court has considered the character of interest paid and received by the Assessee and held to be capitalized, both., i.e. interest paid as well as interest received by observing in paragraph No.7, as under:

:: 4 :: I.T.A No.:1690/CHNY/2019

“7. The appellant, however, relied upon the decision of this Court in Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case (supra). That case dealt with the question whether the investment of borrowed funds prior to commencement of business, resulting in earning of interest by he 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 emphasised 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 present 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 Limited v. Commissioner of Income Tax (1975] 98 ITR 167 = 2002-TIOL-593-SC- IT, this Court examined the question whether interest paid before the commencement of production by a company on amounts borrowed for the acquisition and installation of plant and machinery would form a part of :: 5 :: I.T.A No.:1690/CHNY/2019 the actual cost of the asset to the assessee in the within the meaning of that expression in Section 10(5) of the Indian Income-tax Act, 1922 and case whether the assessee will be entitled to depreciation allowances and development rebate with share 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 amount 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 Assessee has disclosed the income u/s.56 of the Act as income from other sources. Even, if we follow the principle laid down by the Hon’ble Supreme Court, no income would be accrued to the Assessee on receipt of the interest. Since, the Assessee has disclosed this interest receipt as income from other sources amounting to Rs.82,12,028/-, the Assessee is also entitled to claim the interest expenditure of Rs.58,33,333/- as expenses. Thus, we

:: 6 :: I.T.A No.:1690/CHNY/2019 reverse the orders of the lower authorities and allow the ground raised by the Assessee.