Loading judgment…
No AI summary yet for this case.
Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.
Income Tax Appellate Tribunal, DELHI BENCH : G : NEW DELHI
Before: SHRI R.K. PANDA & MS SUCHITRA KAMBLE
ORDER
PER R.K. PANDA, AM:
This appeal filed by the assessee is directed against the order dated 25.09.2017 passed u/s 143(3) read with section 144C(13) of the Income-tax Act, 1961, relating to assessment year 2013-14.
Facts of the case, in brief, are that the assessee is a company engaged in the business of construction of mixed commercial development projects at Whitefield, Bangalore. It filed its return of income on 26.11.2013 declaring the total income at Rs.13,24,24,139/-. Since the assessee had entered into certain international transactions, the Assessing Officer referred the matter to the TPO for determination of the ALP of the international transaction. The TPO suggested enhancement of Rs.3,50,95,614/- on account of adjustment to arm’s length price. Accordingly, the Assessing Officer made an addition of Rs.3,50,95,614/- as suggested by the TPO.
The Assessing Officer, during the course of assessment proceedings, noted that the assessee has disclosed an amount of Rs.61,95,19,044/- as income under the head ‘Income from other sources.’ This amount has been received by the assessee on account of interest on fixed deposits in bank. The income has been set off against business loss of the current year of Rs.49,43,63,478/-. He noted that while computing the business loss for the year under consideration, the assessee has claimed interest expenses of Rs.61,93,34,362/- as interest on Fully Compulsorily Convertible Debentures. He noted that the assessee has also other interest receipts apart from interest on fixed deposits. The total interest disclosed by the assessee in the P & L Account was Rs.76,46,90,621/-. He noted that while an amount of Rs.61,95,19,944/- has been treated as ‘Income from other sources’, the balance amount of interest amounting to Rs.13,79,02,237/- has been treated as business income by the assessee.
Further, the assessee has also disclosed capital gain of Rs.72, 68,440/- in its accounts.
According to the Assessing Officer, the assessee failed to substantiate as to how the interest income is business income. According to him, the assessee is a real estate developer and its project is under construction. The assessee has not earned any revenue from the project till date. The interest is on the short-term deposit of surplus funds lying with the banks. The actual nature of receipts according to the Assessing Officer appeared to be from pre commencement income taxable as ‘Income from other sources.’ He noted that the assessee is involved in the business of development of real estate. All the costs incurred for real estate development has been capitalized except for a few items. He observed that as per Note 22 to the Notes to the Accounts, the assessee has stated the following capital work in progress:-
"Capital work in progress
The Company is in the process of construction of Hotel & Commercial Building at Bangalore. Expenditure incurred, which is directly related to the construction of the above mentioned project, has been disclosed as part of 'Capital work-in- progress'. Costs incurred in this regard comprise:-
Particulars As at 31 March Additions As at 31 March 2012 2013 Administration 1,26,84,931 87,98,469 2,14,83,400 expenses Construction cost 36,79,79,588 28,02,18,872 64,81,98,460 Development cost 1,02,58,095 3,66,38,825 4,68,96,920 Project consultancy 14,35,06,871 5,08,46,471 19,43,53,342 Sanction fee 1,84,46,010 97,46,120 2,81,92,130 Preoperative expenses 47,66,533 - 47,66,533 pending capitalization Payroll 1,14,59,745 2,06,87,034 3,21,46,779 Zone -CWIP - 47,56,636 47,56,636 Total 56,91,01,773 41,16,92,427 98,07,94,200
The facts of the matter is that the company was incorporated on 08.09.1987 but there was no activity till the financial year 2003-04. In the year 2004-05 the Company acquired land admeasuring 17140 Sq Mtrs in Bangalore for Rs. 378.24 Lacs, which was funded against loan taken from Eicher Goodearth Ltd. (secured against mortgage of the said land). In the year 2007-08 the company raised Rs.19,96,80,000/- by allotting 3840 shares of Rs. 10/- per each at a premium of Rs. 51,990/- to Virtuous Retail Ltd., Mauritius for repayment of loan of Eicher Goodearth Ltd., and start project of constructing the commercial building on the land acquired by it with the object of operation of the commercial building on lease after completion of the same. After making repayment of loan to Eicher Goodearth Ltd., the company invested the balance fund in Mutual Funds on temporary basis. In the year 2010-11 the company raised Rs. 1,40,00,00,000/- by allotting 5600 Shares of Rs. 10/- each at a premium of Rs. 2,49,990/- to Virtuous Retail Ltd., and in the year 2011- 12 the company further raised Rs.1,90,22,75,000/- by allotting 19,02,27,500 FCDs of Rs.10/- each to Vassam Ltd., of Cyprus and Rs. 4,70,67,75,160 by allotting 47,06,77,516 FCDs to Virtuous Retail Pte Ltd., of Singapore and repaid Debenture Application Money of Rs. 4,70,67,75,160/- to Vassam Ltd of Cyprus. The Company also executed Sale Deeds for purchase of land rights for execution of mixed commercial development project at Chennai and is currently executing construction of mixed commercial development project at Bangalore, work for which is under progress.
The details of funds raised by the assessee from all the sources during the year under consideration is as below:
S. No. Source of funds Amount (Rs.) l. Equity with share premium 159,97,85,500 2. FCCDs 660,90,50,160 3. Bank Overdraft 79,50,90,896 Total 900,39,26,556 and out of the above the assessee made investment amounting to Rs. 812,36,57,276 during the year under consideration. The details of investment made by the assessee and interest income thereon is as below:
S. No. Investment Interest income Investment as on 31 (Rs.) March 2013 (Rs.) 1. Investment in fixed deposit 692,36,57,276 61,60,67,889 2. Investment in certificate of deposit - 13,78,70,654 3. Profit on redemption of mutual funds - 72,68,440 4. Investment in inter-corporate deposit 120,00,00,000 34,52,055 Total 812,36,57,276 76,46,59,038 5.1 The interest paid during the year by the assessee was as below:
S. No. Source of funds Amount (Rs.) Interest Paid (Rs.) 1. Equity with share premium 159,97,85,500 - 2. FCCDs 660,90,50,160 61,93,34,362/- 3. Bank Overdraft 79,50,90,896 45,13,743/- Total 900,39,26,556 62,38,48,105/-
6. Relying on various decisions, the Assessing Officer held that the interest income on the investments made by the assessee out of the borrowed funds, while the business of the assessee of construction of the said commercial complex had not commenced or the said funds had not been utilized for the construction of the said commercial complex and during the period when the funds were lying idle could not be considered as business income and was taxable under the head ‘Income from other sources.’ Similarly, the interest paid on the borrowed funds was not allowed to be set off against the said interest income in terms of the provisions of section 57 of the Act since the funds invested by the assessee were out of borrowed funds which though were taken for the purpose of the business of the assessee were lying idle and could not be considered to have a direct nexus with the business income of the assessee. The Assessing Officer similarly disallowed various other expenses debited to the P&L Account. In the draft order, the Assessing Officer also disallowed depreciation on various assets.
7. The assessee approached the DRP. However, the DRP concurred with the findings given by the Assessing Officer so far as the treatment of the interest income as ‘Income from other sources’ and non-setting off of interest paid on borrowed funds from such interest income is concerned. So far as the disallowance of various expenses debited to P&L Account is concerned, the DRP allowed the same as business expenditure except Market Research expenditure, which is directly related to the projects, on the ground that the business process of the assessee is ongoing and certain legitimate expenses are allowable as business expenditure. The DRP, however, directed the Assessing Officer to disallow depreciation of Rs.5,21,411/- out of the total depreciation claimed at Rs.14,51,646/- and allowed balance depreciation on furniture and fixtures, computers, office equipments and leasehold improvements. The Assessing Officer, thereafter passed final order determining the total income of the assessee at Rs.75,86,71,015/-.
Aggrieved with such order of the A.O./TPO/DRP, the assessee is in appeal before the Tribunal by raising the following grounds:-
“ l. On facts in the circumstances of the case and in law, the Ld. AO, following the directions of Hon’ble Dispute Resolution Panel-2, New Delhi (‘Hon’ble DRP’), erred in assessing the income of the Appellant at Rs. 75,86,71,020 as against the returned income of Rs. 13,24,24,139.
Ground No. 2: Validity of the assessment orders
2.1 On facts in the circumstances of the case and in law, the draft assessment order dated 28 December 2016 passed by the Learned Additional Commissioner of Income-tax, Range 24, New Delhi (‘Ld. Addl. CIT’) is illegal, bad in law and without jurisdiction and so may kindly be ordered to be quashed.
2.2 Without prejudice to Ground No. 2.1 above, on facts in the circumstances of the case and in law, order dated 25 September 2017 passed by the Ld. AO (alleged final assessment order) is illegal, bad in law, and without jurisdiction as it is consequential to the draft assessment order passed by the ld. Addl. CIT which was itself illegal, bad in law and without jurisdiction and so may ordered to be quashed.
Ground No. 3: Disallowance and capitalization of interest paid on Fully and Compulsorily Convertible Debentures (‘FCCDs’) incurred wholly and exclusively for the purposes of business of the Appellant (on a without prejudice basis)
3. Without prejudice to the above grounds challenging the validity of the assessment orders, on facts in the circumstances of the case and in law, the Ld. AO/ Hon’ble DRP has erred in disallowing and capitalizing the interest of Rs. 61,93,34,362 payable on FCCDs, even after accepting that the funds were raised and utilized for the purposes of the ongoing project (which constituted the business of the Appellant), without appreciating that the interest expense is incurred wholly and exclusively for the purposes of business of the Appellant and is an allowable expenditure under the provisions of Section 37/ 36(i)(iii) of the Act.
"Ground No. 4: Disallowance of interest paid on FCCDs under Section 57 of the Act (on a without prejudice basis)
4.1 Without prejudice to the above grounds, on facts in the circumstances of the case and in law, the Ld. AO/ Hon’ble DRP has erred in not allowing deduction for the interest payable on FCCDs under Section 57 of the Act against the interest income offered to tax under Section 56 of the Act.
4.2 On facts in the circumstances of the case, the Ld. AO/ Hon’ble DRP has failed to appreciate that there is a direct nexus between interest expense and interest income of the Appellant as the interest income was earned from temporary investment of the same funds on which the interest expense was incurred by the Appellant and thus the interest expense was incurred wholly and exclusively for earning the interest income.
Ground No. 5: Netting off the interest income with the interest expenses (on a without prejudice basis)
5. Without prejudice to the above grounds, on facts in the circumstances of the case and in law, the Ld. AO/ Hon’ble DRP has erred in not appreciating that if the interest expense was to be capitalized in the cost of the ongoing project, the interest income, being inextricably linked with the ongoing project, was to be allowed to be set off against cost of project and not separately taxed under the head “Income from other sources”.
Ground No. 6: Disallowance and capitalization of other expenses
6.1 On facts in the circumstances of the case and in law, the Ld. AO/ Hon’ble DRP has erred in disallowing and capitalizing the expenses related to market research and depreciation on leasehold improvements debited to the Profit and Loss Account, without assigning any cogent reasons and without appreciating that such expenses are allowable under the provisions of the Act, more so when the Ld. AO/ Hon’ble DRP have themselves accepted that the Appellant has setup and commenced its business.
6.2 On the facts and circumstances of the case and in law, the Ld. AO/ Hon’ble DRP has erred in not allowing the claim of expenses amounting to Rs. 45,13,743 on account of ‘interest on overdraft facility’, which was used for expenses already allowed as being tax deductible, without appreciating that the same is a revenue expenditure allowable under Section 36(i)(iii) read with Section 37 of the Act.
6.3 On facts in the circumstances of the case and in law, the Ld. AO has erred in not granting the deduction of an amount of Rs. 10,29,847 on account of depreciation, as per the provisions of the Act, without appreciating that the Hon’ble DRP had specifically directed the Ld. AO to grant the benefit of depreciation to the Appellant.
Ground No.7: Miscellaneous
7.1 On facts in the circumstances of the case, the Ld. AO has erred in not granting the entire credit of taxes deducted at source while computing the tax demand under Section 156 of the Act without appreciating that the Appellant has claimed the credit of taxes deducted at source based on Form 26AS.
7.2. On facts in the circumstances of the case and in law, the Ld. AO/ Hon’ble DRP erred in holding that the Appellant has furnished inaccurate particulars of income in respect of each item of disallowance/ additions and in initiating penalty proceedings under section 271(1)(c) of the Act. The above grounds are without prejudice to each other. The Appellant craves leave to alter, amend or withdraw all or any of the grounds herein or add any further grounds as may be considered necessary either before or during the hearing.”
8.1 The assessee has also raised the following additional grounds:- “ Without prejudice to the above grounds, on the facts, in the circumstances of the case and in law, the interest income amounting to Rs. 75,74,22,181 accruing to the Appellant, in the absence of set up of business, was liable to be treated as capital receipt with the consequential effect of such receipt reducing the capital work-in-pr ogress. On the facts, in the circumstances of the case & in law, the interest income amounting to Rs.75,74,22,181/- accruing to the Appellant in the captioned assessment year be assessed as business income instead of income from other sources.
The ld. counsel for the assessee, referring to various decisions including the decision of the Hon'ble Supreme Court in the case of NTPC Ltd., submitted that since all facts are already available on record and no new facts are required to be investigated, therefore, the additional ground raised by the assessee should be admitted for adjudication.
The ld. DR, on the other hand, strongly objected to the admission of such additional ground. He submitted that the additional grounds filed by the assessee could not be considered for adjudication particularly when no claim was made before the original authority and there is nothing on record to indicate as to what prevented the assessee from raising such a claim before the lower authorities. For the above proposition, he relied on the following decisions:- i) Ultratech Cement Ltd. vs. Addl. CIT [2017-TIOL-785-HC-MUM-IT]; and ii) Addl. CIT vs. Gurjarqravures (P) Ltd. [1978] 111 ITR 1 (SC).
The ld. counsel for the assessee, in his rejoinder, submitted that the decision of the Hon'ble Bombay High Court in the case of Ultratech Cement (supra) is not applicable since the audit report was not available on record. However, in the instant case, the facts are already on record and, therefore, the additional ground should be admitted.
After hearing both the sides and considering the fact that all material facts necessary for adjudication of both the additional grounds are already available on record and no new facts are required to be investigated, the additional grounds raised by the assessee are admitted for adjudication.
The ld. counsel for the assessee, referring to page 8 of the paper book, drew the attention of the Bench to the Profit & Loss Account and submitted that the assessee has shown an amount of Rs.76,46,90,621/- as ‘Other income.’ Referring to the balance sheet of the assessee company, copy of which is placed at page 7 of the paper book, he drew the attention of the Bench to the ‘Liabilities’ as appearing in the balance sheet and submitted that the surplus amount was kept as short-term deposits on which the assessee has earned interest income. He submitted that the ld. DRP while directing the Assessing Officer to capitalize the various expenses as work-in- 10 progress, treated the interest income as ‘Income from other sources.’ Referring to Note No.17 attached to the Notes Forming Part of Financial Statements, copy of which is placed at page 18 of the paper book, the ld. counsel for the assessee drew the attention of the Bench to the finance costs of Rs.62,38,48,105/- which consists of interest on Fully and Compulsorily Convertible Debentures at Rs.61,93,34,362/- and interest on overdraft facility at Rs.45,13,743/-. He submitted that the Assessing Officer treated the interest income as ‘Income from other sources’ on the ground that the assessee has not received any income. He submitted that the Assessing Officer is taking divergent views. If the expenditure has to be capitalized, then, the income should go to reduce the capital work-in-progress. Referring to the decision of the Hon'ble Delhi High court in the case of Indian Oil Panipat Power Consortium Ltd. vs. ITO reported in 181 Taxman 249, he submitted that the Hon'ble High Court held that when the income was earned in a period prior to commencement of business it was in the nature of capital receipt and, hence, was required to be set off against the pre- operative expenses.
The ld. counsel for the assessee, in his another plank of argument, submitted that the assessee is engaged in the real estate business and had purchased a plot of land in Bangalore in F.Y. 2004-05 out of the loan funds. However, pursuant to the infusion of equity funds by Virtuous Retail Ltd., the loan fund was repaid in F.Y. 2008-09.
During the impugned assessment year, the assessee was in the process of construction of a mall in Bangalore on the aforesaid land. Apart from this business, the assessee also carried on ancillary business of lending of money/advances and investment of funds which were not immediately required and earned interest of Rs.76.47 crores. He submitted that the interest cost incurred in respect of loan funds amounting to Rs.62.38 crores was related to the business of the assessee i.e., the real estate business as well as investment of funds which were not immediately required. The interest expenditure was claimed as deduction under the provisions of the Act while computing its taxable income. The assessee also claimed other administrative expenses amounting to Rs.77.69 lakhs and depreciation of Rs.12.29 lakhs while computing the business income. Although the Assessing Officer accepted the fact that the business of the assessee had commenced during the captioned assessment year, however, disallowed the various expenses for the reason that the same was incurred in relation to the ongoing projects in Bangalore and, therefore, the same needs to be capitalized. The DRP while agreeing to the fact that the assessee had commenced its business, allowed depreciation on furniture and fixtures, computers and office equipments. Therefore, once the business has been set up as held by the Assessing Officer as well as the DRP, therefore, such interest income should have been treated as business income and all expenses should be allowed as business expenditure. Referring to the decision of the coordinate Bench of the Tribunal in DCIT vs. HMS Real Estate Pvt. Ltd., 54 CCH 427, he submitted that the Tribunal in the said decision has held that when an assessee, whose business is to develop real estate is in a position to perform certain acts towards the acquisition of land, that would clearly show that it is ready to commence business and as a corollary that it has already been set up. The actual acquisition of land is the 12 result of such efforts put in by the assessee. Once the land is acquired, the assessee may be said to have actually commenced its business which is that of development of real estate. The actual acquisition of land may be a first step in the commencement of the business, but, section 3 of the Act does not speak of commencement of the business. It speaks only of setting up of the business. Accordingly, the order of the CIT(A) allowing the various expenses as business expenditure as against capitalization of the same as work-in-progress by the Assessing Officer was upheld.
Referring to various other decisions as filed in the paper book, the ld. counsel for the assessee submitted that disallowance of the various expenses including the interest paid on Fully & Compulsorily Convertible Debentures is not justified.
In his another plank of argument, the ld. counsel for the assessee submitted that if the interest expenses was to be capitalized in the cost of the ongoing project, the interest income being inextricably linked with the ongoing project was to be allowed to be set off against the cost of project and not to be separately taxed under the head ‘Income from other sources.’ He accordingly submitted that the order of the Assessing Officer/TPO/DRP should be set aside and the various grounds raised by the assessee should be allowed.
The ld. DR, on the other hand, heavily relied on the orders of the A.O./TPO/DRP. He submitted that during the assessment proceedings, the assessee failed to substantiate as to how the interest income is business income. He submitted that the assessee, vide letter dated 13th December, 2016, had stated that the other 13 interest income may be treated as ‘Income from other sources.’ He submitted that since the assessee is engaged in the business of construction, therefore, it can follow the Project Completion Method or Percentage Completion Method. In both these methods of accounting, the expenses are required to be capitalized. The normal business running expenses have already been allowed by the DRP. He submitted that in view the provisions of section 57, only expenses incurred for earning interest income are to be allowed. He submitted that the assessee wants to claim various other expenses which are not related to earning of interest income. The onus is upon the assessee to show that these expenses have been incurred for earning the interest income. So far as the argument of the ld. counsel for the assessee that receiving and giving interest is its business is concerned, he submitted that the same is not evident from the audit report. He submitted that since the assessee has not disclosed a single rupee of income as revenue by way of sale of building, therefore, the Assessing Officer was fully justified in taxing the interest income as ‘Income from other sources’ and treating the various expenses including the finance cost as work-in-progress. He also relied on the following decisions:-
(i) Conventional Fastners vs. CIT 2018-TIOL-202-SC-IT; (ii) CIT vs. Jyoti Apparels (2008) 166 Taxman 343; (iii) CIT Vs. Mereena Creations (2010) 189 Taxman 71 (Del); (iv) CIT Vs. Bhawal Synthetics (India), Udaipur (2017) 81 taxmann.com 478
(Raj); (v) Thermal Powertech Corporation India Ltd. vs. DCIT (2017) 81 taxmann.com 168; (vi) CIT vs. Rassi Cement Ltd. (1998) 100 taxman 568 (AP).
We have considered the rival arguments made by both the sides and perused the orders of the A.O./TPO/DRP. We have also considered the various decisions cited before us. We find the Assessing Officer, in the instant case, held that the assessee is developing a property for its use in the business of letting them on hire and is not developing the property for future sale. Therefore, the Revenue in future will not come from sale of property but will come from rental receipt and the business assets on which the assessee will earn income will come into existence much later. He, therefore, held that the interest income on the investments made by the assessee out of the borrowed funds while the business of the assessee of construction of the said commercial complex had not commenced or the said funds had not been utilized for the construction of the said commercial complex and during the period when the funds were lying idle could not be considered as business income and was taxable under the head ‘Income from other sources.’ Similarly, he held that the interest paid on the borrowed funds was not allowable to be set off against the said interest income in terms of the provisions of section 57 of the Act since the funds invested by the assessee were out of borrowed funds which though were taken for the purpose of the business of the assessee were lying idle and could not be considered to have a direct nexus with the business income of the assessee. We find the DRP upheld the action of the Assessing Officer on this issue. So far as the disallowance of various other expenses debited to the Profit & Loss Account is concerned, the DRP held that except marketing research expenditure of Rs.11,68,544/- which is directly related to the project, the other expenses are allowable as business expenditure. The DRP also did not allow the claim of interest on overdraft as business expenditure. It is the submission of the ld. counsel for the assessee that when the A.O./DRP have already held that the assessee has set up its business, therefore, there was no need for having this divergent treatment of the income and expenses.
After considering the various alternate arguments advanced by the ld. counsel for the assessee, we find merit in the first additional ground raised by the assessee. We find somewhat identical issue had come up before the Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. (supra). In that case the assessee- company was incorporated in pursuance of a joint venture entered into between an Indian company and a Japanese company to set up a power project. In order to effectuate the purpose for which the joint venture was conceived, both the joint venture partners contributed share capital which included a sum by way of additional share capital. The assessee stated that said funds were required for purchase of land and development of infrastructure, but due to legal entanglements with respect to tide of land, they were temporarily put in fixed deposit with bank and interest was earned thereon. It claimed that said interest was capital receipt and, therefore, should be set off against pre-operative expenses. The Assessing Officer, however, treated the interest as 'income from other sources'. On appeal, the Commissioner (Appeals) categorically found that the funds were placed in fixed deposit so that liquidity was ensured and money would remain available when required for purchase of land and infrastructure development and, hence, the interest earned was 'inextricably linked' with the setting up of the power plant. He, therefore, applied the judgment of the Supreme Court in CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 / 102 Taxman 94 and allowed the claim of the assessee by directing the Assessing Officer to delete the addition and to consider the same for capitalization towards pre-operative expenses.
On the revenue's appeal, the Tribunal, following decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172 / 93 Taxman 502 (SC) reversed the order of the Commissioner (Appeals).
Before the Hon'ble High Court, the following substantial question of law arose for its consideration:-
"Whether the Tribunal misdirected itself in law in holding that interest which accrued on funds deployed with the bank could be taxed as income from other sources and not as capital receipt liable to be set off against pre-operative expenses ?"
20.1 We find the Hon'ble High Court decided the issue in favour of the assessee.
The relevant observations of the Hon'ble High Court from para 5 onwards read as under:-
“5. In our opinion the Tribunal has misconstrued the ratio of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals (supra) and that of Bokaro Steel Ltd. (supra). The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals (supra) is that if funds have been 17 borrowed for setting up of a plant and if the funds are „surplus‟ and then by virtue of that circumstance they are invested in fixed deposits the income earned in the form of interest will be taxable under the head "income from other sources‟. On the other hand the ratio of the Supreme Court judgment in Bokaro Steel Ltd. (supra) to our mind is that if income is earned, whether by way of interest or in any other manner on funds which are otherwise „inextricably linked‟ to the setting up of the plant, such income is required to be capitalized to be set off against pre-operative expenses. 5.1 The test, therefore, to our mind is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the plant. The clue is perhaps available in Section 3 of the Act which states that for newly set up business the previous year shall be the period beginning with the date of setting up of the business. Therefore, as per the provision of Section 4 of the Act which is the charging Section income which arises to an assessee from the date of setting of the business but prior to commencement is chargeable to tax depending on whether it is of a revenue nature or capital receipt. The income of a newly set up business, post the date of its setting up can be taxed if it is of a revenue nature under any of the heads provided under Section 14 in Chapter IV of the Act. For an income to be classified as income under the head "profit and gains of business or profession" it would have to be an activity which is in some manner or form connected with business. The word "business" is of wide import which would also include all such activities which coalesce into setting up of the business. See Mazagaon Dock Ltd vs CIT & Excess Profits Tax; (1958) 34 ITR 368 (SC), and Narain Swadeshi Weaving Mills vs Commissioner of Excess Profits Tax; (1954) 26 ITR 765 (SC). Once it is held that the assessee’s income is an income connected with business, which would be so in the present case, in view of the finding of fact by the CIT(A) that the monies which were inducted into the joint venture company by the joint venture partners were primarily infused to purchase land and to develop infrastructure - then it cannot be held that the income derived by parking the funds temporarily with Tokyo Mitsubishi Bank, will result in the character of the funds being changed, in as much as, the interest earned from the bank would have a hue different than that of business and be brought to tax under the head „income from other sources". It is well-settled that an income received by the assessee can be taxed under the head "income from other sources" only if it does not fall under any other head of income as provided in Section 14 of the Act. The head "income from other sources" is a residuary head of income. See S.G. Mercantile Corporation P. Ltd vs CIT, Calcutta; (1972) 83 ITR 700 (SC) and CIT vs Govinda Choudhury & Sons.; (1993) 203 ITR 881 (SC). 5.2 It is clear upon a perusal of the facts as found by the authorities below that the funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre-operative expenses. In the case of Tuticorin Alkali Chemicals (supra) it was found by the authorities that the funds available with the assessee in that case were „surplus‟ and, therefore, the Supreme Court held that the interest earned on surplus funds would have to be treated as „income from other sources‟. On the other hand in Bokaro Steel Ltd (supra) where the assessee had earned interest on advance paid to contractors during pre-commencement period was found to be „inextricably linked‟ to the setting up of the plant of the assessee and hence was held to be a capital receipt which was permitted to be set off against pre-operative expenses.
There is another perspective from which the present issue can be examined. Under Section 208 of the Companies Act, 1956 a company can pay interest on share capital which is issued for a specific purpose to defray expenses for construction of any work and which cannot be made profitable for a long period subject to certain restrictions contained in Section (2) to (7) of Section 208. This section was specifically noted by the Supreme Court in Challapalli Sugars Ltd vs CIT (1975) 98 ITR 167. The Supreme Court went on to observe at page 175 as follows: "We have already referred to section 208 of the Companies Act which makes provision for payment of interest on share capital in certain contingencies. Clause (b) of sub-Section (1) of that section provides that in case interest is paid on share capital issued for the purpose of raising money to defray the expenses of constructing any work or building or the provision of any plant in contingencies mentioned in that section, the sum so paid by way of interest may be charged to capital as part of the cost of construction of the work or building or the provision of the plant. The above provision thus gives statutory recognition to the principle of capitalizing the interest in case the interest is paid on money raised to defray expenses of the construction of any work or building or the provision of any plant in contingencies mentioned in that section even though such money constitutes share capital. The same principle, in our opinion, should hold good if interest is paid on money not raised by way of share capital but taken on loan for the purpose of defraying the expenses of the construction of any work or building or the provision any plant. The reason indeed would be stronger in case such interest is paid on money taken on loan for meeting the above expenses." 6.1 In our view the situation in the instant case is quite similar except here instead of paying interest on funds brought in for specific purpose interest is earned on funds brought in by way of share capital for a specific purpose. Could it be said that in the former situation interest could have been capitalized and in the later situation it cannot be capitalized. To test the principle we could extend the example, that is, would our answer be any different had assessee passed on the interest to the respective shareholders. If not, then in our view the only conclusion possible is that interest earned in the present circumstances ought to be capitalized.
In view of the discussion above, in our opinion the Tribunal misdirected itself in applying the decision of the Supreme Court in Tuticorin Alkali Chemicals (supra) in the facts of the present case. In our opinion on account of the finding of fact returned by the CIT(A) that the funds infused in the assessee by the joint venture partner were inextricably linked with the setting up of the plant, the interest earned by the assessee could not be treated as income from other sources. In the result we answer the question as framed in favour of the assessee and against the Revenue. These appeals are allowed and the impugned judgment is set aside.”
Respectfully following the above decision, we hold that the funds raised by the assessee are inextricably linked with setting up of its mall at Bangalore and, therefore, the interest earned by the assessee by parking the said funds temporarily with bank cannot be treated as ‘Income from other sources.’ Since the income was earned in a period prior to commencement of business, it was in the nature of capital receipt and, therefore, it would go to reduce the capital work-in-progress. We, therefore, accept the above contention of the ld. counsel for the assessee that if the expenditure is capitalized, the income earned on temporary parking of the funds being capital in nature will go to reduce the capital work-in-progress. The ground of appeal Nos.3 to 5 and the additional grounds are accordingly decided in the terms indicated above.
So far as ground of appeal No.6.1 is concerned, it is the grievance of the assessee that the market research expenses and depreciation on leasehold improvements should have been allowed as business expenditure since the assessee has already set up and commenced its business activities. Since, in the preceding paragraphs, we have already held that the interest income should go to reduce the capital work-in-progress where all the expenses are capitalized, therefore, following similar reasoning we hold that the assessee should not have any grievance in treating this expenditure as work-in-progress since it is getting the benefit of reduction to the extent of the interest income. Ground of appeal No.6.1 is, therefore, dismissed.
So far as ground of appeal No.6.2 regarding the claim of expenses amounting to Rs.45,13,743/- on account of interest on overdraft facility is concerned, the same also, in our opinion, has to be capitalized and the assessee will get only the benefit of set off to the extent of interest income. Ground No.6.2 raised by the assessee is also accordingly dismissed.