ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE -6,, PUNE vs. M/S. SION PANVEL TOLLWAYS PVT.LTD,, PUNE

आदेश / ORDER PER R.S. SYAL, VP : These two appeals by the Revenue and equal number of Cross Objections by the assessee pertain to the assessment years

2 M/s. Sion Panvel Tollways Pvt. Ltd., A.Yrs. 2013-14 & 2014-15

2013-14 & 2014-15. Since common issues and overlapping

grounds are raised in these appeals and Cross Objections, we are,

therefore, proceeding to dispose them off by this consolidated

order for the sake of convenience.

the assessee. An affidavit has been filed attributing the reasons to

Covid-19 pandemic prevailing across the globe. We are satisfied

with the reason so stated. Ergo, the delay is condoned by virtue

of judgment of the Hon’ble Supreme Court in Cognizance for

Extension of Limitation, In re 438 ITR 296 (SC) read with

judgment in Cognizance for Extension of Limitation, In re 432

ITR 206 (SC) dated 08-03-2021 and 421 ITR 314 and the instant

cross objections are admitted for disposal on merits.

A.Y. 2013-14 :

grounds is against the granting of deduction of interest

expenditure of Rs.6,82,57,053/- u/s 57 of the Income-tax Act,

1961 (hereinafter also called `the Act’) against the interest income

earned from fixed deposits prior to commencement of business.

The assessee in its Cross Objection pleads in alternate for treating

3 M/s. Sion Panvel Tollways Pvt. Ltd., A.Yrs. 2013-14 & 2014-15

the interest income as capital receipt which would reduce the cost

of the qualifying assets.

assessee is engaged in the business of infrastructure activities,

principally, consisting of development of multiproduct and

construction. The assessee received a contract from the

Government of Maharashtra represented by Public Works

Department for improvement of Sion Panvel Special State

Highway under Build-Operate-Transfer (BOT) scheme. It is

undisputed that the project was completed somewhere in

September, 2014 relevant to assessment year 2015-16, that is,

beyond the two years under consideration. In the immediately

preceding year, the assessee obtained loan from banks amounting

to Rs.351.43 crore in December, 2011 and purchased FDRs

amounting to Rs.325.00 crore in January, 2012. For the year

under consideration, the assessee earned interest on such bank

deposits to the tune of Rs.4,91,20,726/-, which was declared as

income under the head ‘Income from other sources’. The

assessee calculated proportionate interest of Rs.6,82,57,053/-

relatable to the borrowings used for making FDRs. Deduction for

4 M/s. Sion Panvel Tollways Pvt. Ltd., A.Yrs. 2013-14 & 2014-15

such sum was claimed u/s. 57(iii) and the resultant loss of Rs.1.91

crore was claimed in the computation of total income. The

Assessing Officer (AO) did not accept the grant of deduction of

interest expenditure against the interest income earned from FDRs

and held the interest of Rs.4,91,20,726/- as income chargeable

under the head ‘Income from other sources’. The ld. CIT(A)

overturned the assessment order by holding that such interest was

deductible u/s.57(iii) because the assessee had utilized borrowed

funds for investment in fixed deposits. Aggrieved thereby, the

Revenue has come up in appeal before the Tribunal.

relevant material on record, it is pertinent to note that the assessee

did not commence the business during the year under

consideration and also the next year as well. The assessee made

certain borrowings from bank for the purpose of developing and

improving Sion Panvel State Highway under BOT scheme. Since

the amount borrowed was not immediately required for the

improvement work, the assessee’s parked a larger chunk of such

borrowing in the fixed deposits and earned interest thereon. The

moot point for determination from the Revenue’s perspective is

5 M/s. Sion Panvel Tollways Pvt. Ltd., A.Yrs. 2013-14 & 2014-15

whether the interest paid on borrowings can be allowed as

deduction against the interest income earned. This pre-supposes,

firstly, the taxability of interest on FDRs as income under the

head “Income from other sources” u/s 56 as was also suo motu

offered by the assessee and then the granting of deduction for

interest expenditure u/s 57(iii). The assessee, apart from

supporting the impugned order on this score, has also taken a

stand that such interest income is not at all an item of income u/s

56, which should be reduced from the cost of assets for which the

borrowing was made. We will examine both the issues

independently hereinafter.

the interest expenditure u/s 57(iii) against the interest income

offered u/s 56. Section 57(iii) of the Act stipulates for allowing

deduction of “any other expenditure (not being in the nature of

capital) laid down or expended wholly and exclusively for the

purpose of making or earning such income”. It is vivid from the

mandate of the provision that only such expenditure can be

allowed as deduction which is incurred wholly and exclusively for

the purpose of earning such income. In the present context, only

6 M/s. Sion Panvel Tollways Pvt. Ltd., A.Yrs. 2013-14 & 2014-15

such expenditure will qualify for deduction which has been

incurred for earning interest income on FDRs. When we examine

the factual matrix under consideration, it becomes explicitly clear

that the funds were borrowed by the assessee for the purpose of

development of Sion Panvel State Highway, on which interest

was paid. After making the borrowings, the assessee made FDRs

out of such funds. The interest paid on borrowings for highway

development activity cannot be considered as expenditure

incurred for the purpose of earning interest income

notwithstanding the fact that the idle funds were utilized for

making FDRs. The prescription of the provision for granting

deduction is that the expenditure should be incurred wholly and

exclusively for the purpose of earning income. Inter-twining of

funds between the borrowing for highway development before

commencement of business and purchasing of the FDRs is though

a relevant factor but not conclusive. The decisive criterion for

allowing the deduction is that the two transactions - of earning

income and incurring expenditure - should have an interwoven

activity or at least common connection in some manner apart

from mere utilization of funds from one into the other. To put it

7 M/s. Sion Panvel Tollways Pvt. Ltd., A.Yrs. 2013-14 & 2014-15

simply, the activity of earning income should be directly

connected with or be incidental to the primary activity for which

borrowing was made. If the transactions involving activities of

earning income and incurring expenditure are not even distantly

related to each other, then deduction u/s 57(iii) fails. We are

confronted with a situation in which the borrowing was made for

developing highway. The FDRs were purchased for utilization of

idle funds. Such FDRs were not required to be made as a

condition precedent for having letter of credit or furnishing of

guarantee for doing any activity connected with the highway

development. In such circumstances, it becomes glaring that the

proportionate interest expenditure on borrowing for highway

development has no relation with the making of FDRs on which

the interest income chargeable to tax under the head `Income

from other sources’ was earned.

Ropes Ltd. (1980) 121 ITR 762 (Bom.) considered almost similar

facts in a case in which the assessee received interest on the

amounts kept in short term deposits with various banks which was

assessed as ‘Income from other sources’. The assessee paid

8 M/s. Sion Panvel Tollways Pvt. Ltd., A.Yrs. 2013-14 & 2014-15

interest in respect of loan which it had obtained. Deduction of

interest paid on loan exceeded the interest received and hence,

nothing was offered for taxation. The AO did not accept the

assessee’s contention. When the matter finally came before the

Hon’ble High Court, it was held that the interest paid on loan

could not be set off under s. 57(iii) against interest earned on

deposits, in the absence of any evidence that the two transactions

were so integrated as to be regarded a single composite

transaction. In the hue of the above discussion and the binding

precedent, we hold that the ld. CIT(A) was not justified in

allowing deduction of proportionate interest on borrowing u/s

57(iii) against the interest income earned on FDRs, which was

offered by the assessee as chargeable to tax u/s 56 of the Act. The

impugned order is overturned on this score.

cross objection that the interest income earned on FDRs is a

‘capital receipt’ not chargeable to tax which would reduce the

highway development costs including the interest expenditure etc.

It is thus seen that the assessee has recorded a shift from its

original stand of deduction of interest paid under section 57(iii)

9 M/s. Sion Panvel Tollways Pvt. Ltd., A.Yrs. 2013-14 & 2014-15

against interest earned on FDRs offered as taxable u/s 56 to now

treating interest earned as not an income itself under section 56

and consequently claiming set off of such interest income against

the interest expenditure and other capital expenditure incurred for

which the loan was taken.

assessee. It cannot be said that no income chargeable to tax can be

earned simply because the business has not commenced. There

are five heads of income mutually exclusive of each other. If a

particular income has been earned by a businessman before the

commencement of business, which is otherwise chargeable to tax

under one of heads, the same will be taxed under such head

notwithstanding the fact that there is no income under the head

`Profits and gains of business or profession’ for non-

commencement of business. The Hon’ble Supreme Court in

Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT (1997) 227

ITR 172 (SC) considered similar circumstances as are extantly

obtaining. In that case also, the assessee invested the funds

borrowed for the purpose of setting up factories in short term

deposits with the bank and earned interest thereon during

10 M/s. Sion Panvel Tollways Pvt. Ltd., A.Yrs. 2013-14 & 2014-15

construction and establishment of its factory. Interest income was

initially offered for taxation as `Income from other sources’ and

set off was claimed against the business loss. Later on, a revised

return was filed claiming that interest expenditure was required to

be capitalized and hence the interest income was not exigible to

tax as it would reduce prior period expenses. The AO as well as

the Tribunal rejected the assessee’s contention. When the matter

finally came before the Hon’ble Supreme Court, their Lordships

held that: “The company may also, as in this case, keep the

surplus fund in short-term deposits in order to earn interest. Such

interest will be chargeable u/s.56”. To similar effect is the

judgment of the Hon’ble Apex Court in CIT Vs. Autokast Ltd.

(2001) 248 ITR 110 (SC) laying down that Interest earned on

short-term deposit of amount borrowed for setting up business is

assessable to tax in the hands of assessee as income from other

sources.

236 ITR 315 (SC) is misplaced. In that case, the assessee, prior to

commencement of business and during the construction and

erection phase, charged rent from its contractors for housing of

11 M/s. Sion Panvel Tollways Pvt. Ltd., A.Yrs. 2013-14 & 2014-15

their workers engaged in construction of assessee’s factory and

also earned interest on advances made to contractors. This

amount was claimed as capital receipt, which got countenanced

by the Hon’ble Apex Court. The distinguishing point to be noted

is that in that case that the contractors who were constructing the

assessee’s factory were given certain advances for the purpose of

constructing the factory, on which interest was earned. Such

interest income was held to be directly connected with or

incidental to the construction work. There cannot be any dispute

about the deductibility of interest in such circumstances from the

cost of construction. However, in the instant case, the receipt of

interest on FDRs has no relation whatsoever with the business of

the assessee much less with the improvement of State Highway

and both the transactions are independent of each other.

Supreme Court in CIT Vs. Shree Rama Multi Tech Ltd. (2018)

403 ITR 426 (SC) for canvassing a view that interest income

should be adjusted against the capital costs for developing

highway. In that case, the assessee came out with a public issue

and certain share application money was received which was

12 M/s. Sion Panvel Tollways Pvt. Ltd., A.Yrs. 2013-14 & 2014-15

deposited with the bank on which interest was earned. The

assessee contended for set off of interest income against the

public issue expenses. The Hon’ble Supreme Court accorded its

imprimatur to allowing set off of interest income against the

public issue expenses. Again, the reason for allowing such set off

was that the share application money received by the assessee was

required to be statutorily deposited in bank account. Since the

shares related to capital structure of the company for which

certain expenses were incurred, the interest income on such

amount, required to be statutorily deposited with the bank, was

held to be adjustable against share issue expenses. Au contraire,

we are concerned with a situation in which the assessee was not

supposed to statutorily keep the amount in FDRs. Rather the loan

was obtained for improvement of the highway. It was only during

the interregnum that the borrowed amount was deposited in the

FDRs on which interest was earned. There is no correlation

whatsoever between the transaction of borrowing the sums from

the banks and the making of FDRs. The assessee, at its sweet

will, parked the borrowed amount in the FDRs and earned interest

thereon.

13 M/s. Sion Panvel Tollways Pvt. Ltd., A.Yrs. 2013-14 & 2014-15

which the transaction resulting into income is connected with the

other activity for which capital was borrowed on which interest is

paid. If the connection is established between the two, then such

income qualifies for set off. Like the case of Bokaro (supra), in

which rent and interest received from contractors was connected

with the construction activity and in the case of Shree Rama Multi

Tech (supra), in which FDRs were statutorily required to be

made for issuing share capital. It is in such circumstances that the

income cannot be taxed as such but reduces the cost incurred. If

no connection is established between the income and expenditure,

then such income is required to be taxed separately. Like the case

of Tuticorin (supra) and Autokast (supra), in which interest was

earned from the deposit of idle funds and the making of FDRs had

no relation with the purpose for which the loan was taken. Such a

distinction can be more appropriately appreciated with the

judgment of the Hon’ble Supreme Court in Bongaigaon Refinery

& Petrochemicals Ltd. Vs. CIT (2001) 251 ITR 329 (SC), in

which the assessee derived income towards charges for equipment

and recoveries from the contractors on account of water and

14 M/s. Sion Panvel Tollways Pvt. Ltd., A.Yrs. 2013-14 & 2014-15

electricity supply during the formation period and also earned

interest income from deposits prior to commencement of the

business. It was held that the first set of items were not chargeable

to tax and would be adjusted against the project cost. However,

Interest income was held to be separately taxable. The case under

consideration falls in the category of Tuticorin (supra) and

Autokast (supra) in which no relation of the interest income has

been proved with the activity of improving highways for which

the loan was taken. We thus hold, that the interest earned by the

assessee is chargeable to tax under the head ‘Income from other

sources’ and cannot be allowed set off against the capital work-in-

progress.

interest paid amounting to Rs.6.82 crore against the interest

income, and further that interest income of Rs.4.91 crore is

chargeable to tax separately, the logical consequence of this is

that the interest cost of Rs.6.82 crore would go to increase the

amount of capital work-in-progress in the same way as has been

the interest paid on bank borrowings not used for purchasing

FDRs. To clarify, if, for example, an assessee borrows a sum of

15 M/s. Sion Panvel Tollways Pvt. Ltd., A.Yrs. 2013-14 & 2014-15

Rs.100/- for construction on which interest of Rs.10/- is incurred.

Further suppose a sum of Rs.80/- out of such borrowing is utilised

for making FDRs which is unconnected with the construction.

Total interest of Rs.10/- payable by the assessee on the

borrowings is liable to be capitalised. Proceeding with the

hypothetical example, the assessee capitalized Rs.2 and claimed

deduction of Rs.8 against the interest income. Once it is held that

Rs.8 cannot be allowed deduction against interest income, then

such interest of Rs.8 will also get the same treatment of

capitalization as has been given to Rs.2. In other words, the entire

interest of Rs.10 on borrowing will be capitalized. We order

accordingly.

cross objection of the assessee is dismissed.

A.Y. 2014-15

deletion of addition of interest expenditure against interest income

which was taxed as ‘Income from other sources’. The assessee in

its cross objection has pitched for set off of interest income

against the other pre-operative costs including interest

16 M/s. Sion Panvel Tollways Pvt. Ltd., A.Yrs. 2013-14 & 2014-15

expenditure on borrowings. Both the sides are consensus ad idem

that the facts and circumstances of this issue are similar to those

of the immediately preceding year. The ld. DR, referring to the

relevant portions of the assessment order, submitted that the

assessee categorically admitted before the AO that the borrowings

made for the purpose of improvement of the highway were

utilized for the purpose of making the FDRs. This fact is

otherwise also apparent from the facts noted for the preceding

year. Following the view taken hereinabove, we overturn the

impugned order on this score and hold that the interest income

earned on FDRs is chargeable to tax as `Income from other

sources’ without any deduction of interest expenditure. Further,

such interest income will not be set off against the interest

expenditure on borrowings or other pre-operative expenses.

However, such interest expenditure would increase the amount of

capital work-in-progress. The respective grounds raised by the

Revenue in its appeal are allowed and by the assessee in its cross

objection are dismissed.

Revenue is against the deletion of addition of Rs.3,74,11,321/-

17 M/s. Sion Panvel Tollways Pvt. Ltd., A.Yrs. 2013-14 & 2014-15

made by the AO u/s.56(2)(viib) of the Act by accepting the value

of shares at Rs.2412 as fair market value (FMV).

7,23,486 optionally Convertible Preference Shares (OCPS) with a

face value of Rs.10/- each at premium of Rs.1,990/-. It received

share premium of Rs.143.97 crore during the year which was

claimed as not chargeable to tax. The OCPS were redeemable at

a premium of Rs.1,990/- at any time on the option of the

investors. The AO called upon the assessee to submit the details

regarding valuation of the shares at the FMV. The assessee

submitted that the FMV of unquoted equity shares of the

company was determined as per Discounted Cash Flow (DCF)

method. A Project Appraisal and Information Memorandum

prepared by IDFC Capital Ltd., acting in its capacity as placement

and distribution agent for the debt facilities of the assessee, was

submitted calculating the FMV of the shares at Rs.2,412/- per

share. The assessee contended that it received share premium

only at Rs.1,990/- per share. The AO computed FMV as per Rule

11UA at Rs.1938.29. The differential amount of Rs.51.71

(Rs.1990 - Rs.1938.29) was multiplied with 7,32,486 number of

18 M/s. Sion Panvel Tollways Pvt. Ltd., A.Yrs. 2013-14 & 2014-15

preferential shares issued to make the addition of Rs.3,74,11,321/-

u/s.56(2)(viib) of the Act. The ld. CIT(A) deleted the addition.

any consideration for issue of shares which exceeds its face value,

aggregate consideration received which exceeds the FMV of the

shares, shall be taken as income from other sources. The term

“Fair Market Value” has been defined in Explanation (a) to the

section, which talks of the fair market value of the shares to be

determined in accordance with the method as may be prescribed.

The relevant prescription is rule 11UA. Clause (c) of Rule

11UA(1) deals with the valuation of shares and securities to be

taken as FMV that it would fetch if sold in the open market on the

valuation date. Clause (b) of Rule 11UA(1)(c) deals with

valuation of unquoted equity shares on the basis of Net Asset

Value (NAV) method. Since the assessee company was recently

incorporated and had not acquired any tangible assets, the NAV

method cannot be applied. Turning to Rule 11UA(1)(c)(c), it

provides for determining the FMV that it would fetch if sold in

the open market. The assessee, in the instant case, has determined

the FMV on the basis of Discounted Cash Flow method, which is

19 M/s. Sion Panvel Tollways Pvt. Ltd., A.Yrs. 2013-14 & 2014-15

one of the accepted methods of valuation of shares. Considering

the fact that the project of improving highways itself was at

incomplete phase, it is this method which can be more

appropriately applied vis-à-vis the NAV method. The assessee

submitted a report prepared by IDFC Capital Ltd. valuing the

shares under the Discounted Cash Flow method at Rs.2,412/- per

share. The AO in the instant case did not find out anything amiss

in the report, but simply went ahead by considering the FMV at

Rs.1,990/- under Rule 11UA.

of the Hon’ble jurisdictional High Court in Vodafone M-Pesa

Limited Vs. PCIT (2018) 256 Taxman 240 (Bom.). In that case,

the AO raised the demand by changing method of valuation of

shares issued at premium from the Discounted Cash Flow to Net

Asset Value (NAV) method. The Hon’ble High Court, ruling in

favour of the assessee, held that “the AO is undoubtedly entitled

to scrutinize the valuation report and determine a fresh valuation

either by himself or by calling for a final determination from an

independent valuer to confront the petitioner. However, the basis

has to be the Discounted Cash Flow method and it is not open to

20 M/s. Sion Panvel Tollways Pvt. Ltd., A.Yrs. 2013-14 & 2014-15

him to change the method of valuation which has been opted for

by the assessee”. Adverting to the facts of the instant case, it is

seen that the assessee adopted the DCF method and determined

the valuation of share at Rs.2,412/-. As against that the shares

were issued only at premium of Rs.1,990/-. Since the AO has not

found out any flaw in the calculation done by the IDFC Capital

Limited under DCF method, the same has to be accepted. We,

therefore, affirm the view taken by the ld. CIT(A) on this score.

the cross objection by the assessee is dismissed.

Order pronounced in the Open Court on 16th November, 2022.

Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; �दनांक Dated : 16th November, 2022 Satish

21 M/s. Sion Panvel Tollways Pvt. Ltd., A.Yrs. 2013-14 & 2014-15

आदेश क� ��त�ल�प अ�े�षत/Copy of the Order is forwarded to:

आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

Date 1. Draft dictated on 14-11-2022 Sr.PS 2. Draft placed before author 16-11-2022 Sr.PS 3. Draft proposed & placed before the JM second member 4. Draft discussed/approved by Second JM Member. 5. Approved Draft comes to the Sr.PS/PS Sr.PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *