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Facts
The assessee, a pharmaceutical manufacturer, earned interest income on funds raised through an IPO and kept in an escrow account as per SEBI directions. The assessee treated this interest as a capital receipt and set it off against pre-operative expenses, but the AO brought it to tax as income from other sources.
Held
The Tribunal held that the interest income earned by the assessee from funds in an escrow account, even if related to setting up a new unit, is revenue in nature and taxable as 'income from other sources', as the assessee's main business was already operational.
Key Issues
Whether interest income earned on funds kept in an escrow account, when the assessee's primary business is already operational, is a capital receipt or taxable as income from other sources.
Sections Cited
143(3), 80-IC, 56, 4, 22
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Income Tax Appellate Tribunal, “A” BENCH, CHANDIGARH
Before: HON’BLE SHRI RAJPAL YADAV & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM
O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeals by assessee for Assessment Years (AY) 2014- 15 & 2016-17 have common issues. First, we take up appeal for AY 2014-15 which arises out of an order of learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [CIT(A)] dated 06-07-2023 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 28-10-2016. The sole grievance of the assessee is assessment of interest income of Rs.273.42 Lacs. Having heard rival submissions and upon perusal of case records including case laws as cited before us, our adjudication would be as under.
The assessee being resident corporate assessee is stated to be engaged in manufacturing of pharmaceuticals. Upon perusal of Form 26AS, Ld. AO observed that the assessee earned interest income of Rs.273.42 Lacs which was not offered to tax in the Profit & Loss Account. The assessee stated that it came out with initial Public Offering (IPO) in the year 2011 with a view of set up another manufacturing unit at Gujarat and to meet long-term working capital requirements. However, restriction was imposed by SEBI on usage of funds as received from public issue. As per the directions, the funds were kept in interest bearing escrow account with the bank till further clearance from SEBI. Since the FDRs were made out of funds raised through public issue for setting up of upcoming unit, the interest so earned by the assessee was to be treated as capital receipts and accordingly, the same was reduced from pre-operative expenses. However, Ld. AO rejected the submissions of the ground that any income received by the assessee would be taxable under the Act. The submissions of the assessee had no legal basis. Accordingly, the interest income was brought to tax as ‘income from other sources’.
During first appeal, the assessee reiterated that funds were deposited not to earn some additional income but merely to comply with SEBI requirements. The interest income was merely incidental. Subsequently, utilization of funds for new units was allowed in AY 2015-16. Since the assessee had not commenced its operation from the new unit, the interest was set-off against pre-operative expenses of the new unit. Reference was made to various judicial decisions to support the same.
The Ld. CIT(A) observed that the assessee earned interest income from funds received in public issue which was kept in the escrow account on the basis of the directions of the SEBI. It was undisputed fact that the assessee had not set up new unit during the year under consideration and therefore, interest would be taxable as ‘income from others sources’. The assessee was directed to put public issue money received in escrow account as the assessee had diverted the funds for giving inter-corporate deposits (ICDs) to several entities and therefore, such interest could not be considered as business income for the assessee. In the case of Indian Oil Panipat Power Consortium Ltd. (315 ITR 255), it was observe by Hon’ble Delhi High Court that funds were infused for business purposes and therefore, interest could not be classified as ‘income from other sources’. Since the income was earned during period prior to commencement of business, it was in the nature of capital receipt and it was required to be set-off against pre-operative expenses. In the present case, the funds were diverted to other entities which were brought into Escrow Account as per the directions of the SEBI and therefore, the funds lying in escrow account were not connected with the setting up of a new plant. In the case of Tuticorin Alkali Chemical and Fertilizers Ltd. (227 ITR 172), it was held that interest received on surplus funds would have to be treated as income from other sources, In the case of Bokaro Steel Ltd. (236 ITR 315), the assessee earned interest on advances paid to the contractors during pre-commencement period and the same was found to be inextricably linked to the setting up of the plant of the assessee and accordingly, held as capital receipt. However, the same was not the case here. Finally, the action of Ld. AO was upheld against which the assessee is in further appeal before us. Our findings and Adjudication 5. From the facts, it clearly emerges that the assessee is already engaged in manufacturing of pharmaceuticals at its unit which is situated at Village Kishangarh, Nalagarh, Baddi, Solan. In fact, the assessee is claiming deduction u/s 80-IC against the same from AYs 2007-08 to 2011-12. Quite clearly, the assessee has already commenced its business operations and it is having an existing plant which is carrying on the manufacturing activity and claiming deduction u/s 80-IC. With a view to set-up another manufacturing unit in existing line of business, the assessee came out with IPO during the year 2011. The primary object was to set up another manufacturing unit at Panoli, Gujarat for manufacturing of various pharmaceuticals formulations, to meet long-term working capital requirements and for general corporate purposes. Thus, the IPO was primarily aimed to setting up of another manufacturing unit in the same line of business activity which the assessee was hitherto being carrying out. This was not a case that a new business was being set-up and it is not the case that the assessee was in the process of commencing its business operations.
Upon perusal of para-41 of SEBI order dated 10-09-2015 as placed on record, it is quite clear that the assessee raised funds through ICDs prior to IPO and the assessee diverted proceeds of IPO to the extent of Rs.8 Crores. The assessee made various other defaults as noted therein including non-disclosure of bridge loans obtained through ICDS and non-disclosure of award of contracts and wrong disclosures in the offer document regarding the procurement of plant and machinery from Neo Power. The concealments of various aspects by the assessee were held to be fraudulent in nature. In the concluding paras, the assessee was directed to utilize the funds lying in the escrow account for the objects as disclosed in the prospectus subject to adherence to various formalities. Thus, the funds were lying in the escrow account as per the directions of SEBI and the assessee has earned interest income on these deposits. The interest so earned by the assessee is clearly in the nature of ‘income from other sources’ and the same could not partake the character of capital receipt, viewed from any angle. The earning of interest income is not linked with business activities of the assessee and therefore, it could not be considered as business income of the assessee. The mere facts that the funds were kept in escrow account according to the directions of SEBI would not alter the character or colour of the interest income so earned by the assessee. The assessee’s business had already commenced its business long ago and this income could not be said to be earned at pre-operative stage which would justify reduction thereof from capital work-in-progress account or deduction from pre-operative expenses. It is another aspect that setting up of new unit was only one of the object of IPO whereas the other objects of IPO was to meet long term working capital requirements and for general corporate purposes which are clearly for trading operations of the assessee. In such a case, interest income could neither be held to be capital receipt nor could it be classified as business income.
In the case law of Hon’ble Supreme Court in Tuticorin Alkali Chemical and Fertilizers Ltd. (227 ITR 172), it was held that in the usual course, interest received by the company from bank deposits and loans would be taxable as ‘Income from other sources' u/s 56. It was argued on behalf of the assessee that it had not yet commenced its business and in any event, if the income was derived from funds borrowed for setting up the factory of the company and therefore, it should be adjusted against the interest payable on the borrowed funds. The Hon’ble Court rejected the arguments and held that neither of the two factors could affect taxability of the income earned by the assessee. The total income of the company is chargeable to tax u/s 4 and the same has to be computed in distinct heads. The computation of income under each of the heads will have to be made independently and separately. There are specific rules of deduction and allowances under each head. No deduction or adjustment on account of any expenditure can be made except as provided by the Act. The basic proposition that has to be borne in mind is that it could be possible for a company to have 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 fund in its hand 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 u/s 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 u/s 56. The company may also, as in this case, keep the surplus fund in short-term deposits in order to earn interest. Such interests will be chargeable u/s 56. In the instant case, the company had chosen not to keep its surplus capital idle, but had decided to invest it fruitfully. The fruits of such investment will clearly be of the revenue nature.If the capital of a company is fruitfully utilised instead of keeping it idle, the income thus generated will be of the revenue nature and not accretion of capital. Whether the company raised the capital by issue of shares or debentures or by borrowing will not make any difference to this principle. If borrowed capital is used for the purpose of earning income, that income will have to be taxed in accordance with law. Income is something which flows from the property. Something received in place of the property will be capital receipt. The amount of interest received by the company flows from its investments and is its income and is clearly taxable even though the interest amount is earned by utilizing borrowed capital. It was further held by Hon’ble Court that the company was at liberty to use the interest income as it liked and it was under no obligation to utilise this interest income to reduce its liability to pay interest to its creditors. It could re-invest the interest income in land or shares, it could purchase securities, it could buy house property, it could also setup another line of business, it might even pay dividends out of this income to its shareholders. There was no overriding title of anybody diverting the income at source to pay the amount to the creditors of the company. It is well-settled that tax is attracted at the point when the income is earned. Taxability of income is not dependent upon its destination or the manner of its utilisation. It has to be seen whether at the point of accrual, the amount is of the revenue nature and if so, the amount will have to be taxed. The aforesaid principles quite clearly support the conclusion drawn by us.
In the case law of Bokaro Steel Ltd. (236 ITR 315), the assessee’s receipts were in the nature of rent from contractors for housing workers and staff employed by contractor for construction work of assessee, hire charges for plant and machinery given to contractors for use in construction work of assessee, interest from advances made to contractors for purpose of facilitating work of construction and royalty for excavation and use of stones lying on assessee's land for construction work. The first three receipts were adjusted against charges payable to contractors and, thus, had gone to reduce cost of construction. It was accordingly held that first three receipts being intrinsically connected with construction of assessee's plant would be capital receipt and not income of assessee from any independent source. Similarly, royalty received for stone excavated from assessee's land would go to reduce cost of plant and could not be taxed as income. The same is not the case here. The facts of the present case are quite different as noted in preceding paragraphs.
The case law of Chandigarh Tribunal in M/s Winsome Textile Industries Ltd. (ITA No.1496/Chd/2017 dated 27-10-2021) as referred to by Ld. AR addresses the issue of exchange rate fluctuation gain. The case law in Apna Punjab Resorts Ltd. (ITA No.111/Chd/2021 dated 24-02-2023) deals with challenge to revisionary jurisdiction u/s 263. These case laws do not render any assistance to the case of the assessee.
Finally, considering the facts and circumstances of the case, the adjudication of Ld. CIT(A) that interest income so earned by the assessee would be assessable as income from other sources could not be faulted with. We order so. The appeal stands dismissed. Assessment Year 2016-17 11. In this year, the assessee initially offered interest income to tax in the return of income but later on, during the course of assessment proceedings, sought adjustment of interest income of Rs.64.53 Lacs against pre-operative expenses. The same was rejected by Ld. CIT(A) for want of any satisfactory explanation. Aggrieved, the assessee is in further appeal before us. Facts being pari-materia the same as in AY 2014-15, this ground is decided against the assessee. The corresponding grounds of assessee’s appeal stand dismissed.
The second ground is qua deduction u/s 80-IC for interest income of Rs.64.13 Lacs pertaining to Baddi unit. The interest was earned on FDRs which were kept as margin money. The assessee has not made any such claim in the return of income. The Ld. CIT(A), considering first appellate order for AY 2012-13, decided this issue against the assessee. Aggrieved, the assessee is in further appeal before us. The Ld. AR fairly stated that this issue stood covered against the assessee in earlier years. This being so, the corresponding grounds as raised by the assessee stands dismissed.
There is no other issue in assessee’s appeal for AY 2016-17. The appeal stand dismissed. Conclusion 14. Both the appeals stand dismissed in terms of our above order. Order pronounced on 20-05-2025. (RAJPAL YADAV) (MANOJ KUMAR AGGARWAL) VICE PRESIDENT लेखासद" /ACCOUNTANT MEMBER Dated: 20-05-2025. आदेश की "ितिलिप अ"ेिषत /Copy of the Order forwarded to : 1. अपीलाथ"/Appellant 2. ""थ"/Respondent 3. आयकरआयु"/CIT 4. िवभागीय"ितिनिध/DR 5. गाड"फाईल/GF