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Before: Shri Amit Shukla & Shri A.N. Mishra
ORDER Per Amit Shukla, J.M.: The aforesaid appeal has been filed by the Revenue against the impugned order dated 23.09.2016 passed by learned CIT(A)-13, New Delhi for the quantum of assessment u/s. 143(3) for the assessment year 2012-13.
In the grounds of appeal, the Revenue has raised following ground: 1. “The Ld.CIT(A) has erred in facts & law of the case in allowing capitalization of interest on FDRs earned during the period of construction without considering various decisions of the Courts including the following: -
(i) Tuticorin Alkali Chemical and Fertilizers Limited Vs. CIT(SC) 227 ITR 172 (ii) CIT Vs Coromandal Cements Ltd. (SC) 234 ITR 412 (iii) CIT Vs Autokast Ltd. (SC) 248 ITR 110 (iv) CIT Vs Kishan Sahakari Chini Mills (All) 280 ITR 617 (v) CIT Vs Manipur Spinning Mills Corpn. Ltd. (Gau) 226 ITR 551.”
The facts, in brief, qua the issue involved, are that the assessee company was in process of construction of a hotel and has filed its return of income declaring income of Rs.1,20,744/- on 29.09.2012. The assessee company acquired an existing hotel at Calwaddo Salcette, Goa under the SARFEASI Act provisions from SBI, Mumbai for a consideration of Rs.61.40 crores. The assessee had not commenced any business operations, as renovation of the said hotel was being carried out during the year under consideration. The expenditure incurred on renovation and refurbishment of the hotel was shown as capital-work-in-progress pending capitalization in the balance sheet. The assessee company has raised foreign currency ECB loan of US dollars 17.45 million which in terms of INR comes to Rs. 82,36,64,497/- from Axis Bank, Hong Kong for the purpose of renovation and refurbishment of the hotel. Entire ECB was disbursed in a single trench by the bank. As per RBI Guidelines and regulations, ECB amount has to be necessarily kept with ‘A’ category bank in India. It is not in dispute that entire ECB loan of approx. 82.37 crores was to be spent for the acquisition of capital asset and renovation of the hotel and was to be paid over a period of time and not at one go. The assessee, instead of keeping the said disbursement of loan in current account has kept the same as fixed deposit with the bank pending utilization. In order to reduce the interest cost on money borrowed, the assessee has kept the balance loan amount in the form of FDRs and ultimately it was treated as project cost. Thus, ECB loan amount disbursed in the bank account of the assessee for solely for the purpose of acquisition of fixed assets/capital expenditure which was temporarily parked in FDRs till the time it was used for fixed assets and capital expenditure strictly in compliance to the RBI Instructions. The assessee had earned interest income of Rs.4.03 crores on the said FDRs, which was netted of against the interest paid of Rs.13.38 crores and only the net amount of interest of Rs.9.35 crores was added to the preoperative expenses pending capitalization, which fact was also disclosed in Note-9 attached to the balance sheet. In this year, out of amount of Rs.82.37 crores received as ECB loan, only an amount of Rs.33.70 crores could be spent on renovation and refurbishment of hotel and was considered as Capital WIP till the year end.
The ld. Assessing Officer observed that the assessee company has not carried out any business activities during the year and after considering the entire facts and submissions of the assessee, he held that there is no difference whether there is direct nexus or proximity of relationship between the bank loan and the FDRs; and whether the assessee company was forced to keep the loan funds in FDR as per RBI stipulations, because these are merely for accounting purpose and has no relevancy in so far as taxability provisions are concerned. After relying on the decision of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., 227 ITR 172, he held that since the assessee has not commenced any business, therefore, the interest income earned on the ECB loans parked in FDRs before commencement of business is assessable as income from other sources. He has also relied upon various other judgments as enlisted by him at page 4.
Before the ld. CIT (A), after explaining the entire facts, the assessee strongly referred and relied on the judgment of Hon’ble Supreme Court in the case of CIT vs. Bokaro Steel Ltd., 236 ITR 315, wherein, the Hon’ble Supreme Court has reiterated the principle that income received from the funds which are inextricably linked with setting up of a plant for acquisition of capital asset is a capital receipt. This judgment has also been followed by the Supreme Court in the case of CIT vs. Karnal Cooperative Sugar Mills Ltd., 243 ITR 2 (SC) and CIT vs. Karnataka Power Corporation, 247 ITR 268. Further reliance was also placed on the judgment of Hon’ble jurisdictional High Court in the case of Indian Oil Panipat Power Consortium Ltd. vs. ITO, 315 ITR 255 (Del), wherein the Hon’ble Delhi High Court have even taken note of the judgment of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra). The ld. CIT (A), after considering the entire facts and submissions and various judicial pronouncements including the ratio and principle laid down in judgment of Delhi High Court dated 07.01.2016 in the case of Pr. CIT vs. Facor Power Ltd., 2016-TIOL-82-HC-DEL-IT, has deleted the disallowance. The relevant observation of Hon’ble High Court relied upon reads as under : "++ this court is of the view that no substantial question of law arises for our consideration. This is so because, in our view, the Tribunal has correctly placed reliance on the decision of this Court in Indian Oil Panipat Power Consortium Limited. The facts in that case were quite similar. In that case also monies had been received as share capital by the assessee which were temporarily put in fixed deposits awaiting acquisition of land which had run into legal entanglements on account of title. The question of law which was raised before the Division Bench was 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 of against pre-operative expenses. The Division Bench considered the decisions of the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd and held 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. It is evident that the test that is required to be employed 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 same. In the present case, findings of fact have been returned by the CIT(A) and have been confirmed by the IT AT to the effect that the funds were inextricably connected with the setting up of the power plant of the assessee. The counsel for the revenue has also not been able to point out any perversity in such finding and, therefore, the factual findings have to be taken as those accepted by the ITAT which is the final fact finding authority in the income tax regime. That being the case, the decision of the Division Bench in Indian Oil Panipat Power Consortium Limited would squarely apply to the facts of the present case and the Tribunal was right in applying the same."
After hearing both the parties and on perusal of the material placed on record and the judgments relied upon by the ld. counsel, we find that it is undisputed fact and even accepted by the Assessing Officer that the assessee has taken Foreign ECB loan of Rs.82.37 crores for the purpose of acquisition of a capital asset, i.e., renovation and refurbishment of hotel acquired by the assessee under SARFEASI Act from SBI, Mumbai. The entire ECB loan was disbursed in a single trench in the year under consideration and till this year, the assessee could utilize only Rs.33.70 crores and was considered in the capital WIP. The assessee has temporarily parked the ECB loan in FDRs till utilization for fixed asset/capital expenditure strictly in compliance with the RBI instruction. The assessee had paid interest amount of Rs.13.38 crores and has earned interest on FDRs of Rs.4.03 crores. The net amount of interest of Rs.9.35 crores has been added to the preoperative expenditure pending capitalization, i.e. in capital WIP. There is no quarrel that the interest paid on ECB loan has been capitalized. Way back in the year 1974, Hon’ble Supreme Court in the case of Challapalli Sugars Ltd. vs. CIT, 98 ITR 167 (SC) had examined the question whether interest paid before commencement of production by a company on the amount borrowed for acquisition, installation of plant and machinery would form part of actual cost of the asset, assessee will be entitled to depreciation allowance and development rebate with reference to such interest also. Their Lordships held that if assessee has received any amount which is inextricably linked with the setting up of plant and machinery, then such receipt will only go to reduce the cost of fixed asset. This principle was followed by Hon’ble Supreme Court in the case of Bokaro Steel Ltd. (supra) and also in the cases of CIT vs. Karnal Cooperative Sugar Mills Ltd.(supra) and CIT vs. Karnataka Power Corporation (supra). The ld. Assessing Officer has relied upon the judgment of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd.(supra) to tax the interest earned on FDRs as income from other sources on the facts of the present case. This precise issue had came up in the case of Indian Oil Panipat Power Consortium Ltd. (supra), wherein explaining the principle laid down in the decision of Tuticorin Alkali Chemicals and Fertilizers Ltd., Bokaro Steel Ltd. and Challapalli Sugars Ltd. (supra), the Hon’ble Jurisdictional Court held that the test which permeates through the judgment in Tuticorin Alkali Chemicals (supra) is that, if funds have been 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 Supreme Court judgment in Bokaro Steel Ltd. (supra) is that if income is earned whether by way of interest or in any other manner or the funds, which are otherwise inextricably linked with setting up of a plant, such income is required to be capitalized to be set off against preoperative expenses. After applying this principle, Hon’ble High Court has observed and held as under: “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 Pvt. 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.”
This decision and principle was again followed by Delhi High court in the case of NTPC Sail Power, (2012) 210 Taxman 358 and PCIT vs. Facor Power Ltd. (supra). In judgment dated 07.01.2016 in the case of Pr. CIT vs. Facor Power Ltd. (ITA No. 1011/2015), their Lordships have observed and held as under : "11. From the above extract, it is evident that the test that is required to be employed 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 same. In the present case, findings of fact have been returned by the Commissioner of Income Tax (Appeals) and have been confirmed by the Income Tax Appellate Tribunal to the effect that the funds were inextricably connected with the setting up of the power plant of the assessee. The learned counsel for the revenue has also not been able to point out any perversity in such finding and, therefore, the factual findings have to be taken as those accepted by the Income Tax Appellate Tribunal which is the final fact finding authority in the income tax regime. That being the case, the decision of the Division Bench in Indian Oil Panipat Power Consortium Limited (supra) would squarely apply to the facts of the present case and the Tribunal was right in applying the same.
Before parting with this decision, we would, however, like to comment upon a contention which has been raised by the learned counsel for the revenue. He submitted that the Tribunal in the impugned order made an observation in paragraph 8 of the impugned order which gives an impression that if funds were obtained through raising share capital as distinct from borrowed funds, then the question of interest derived on placing those funds in a fixed deposit amounting to 'income from other sources' would not arise. Such an impression ought not to be gathered from the Tribunal's decision because the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd (supra) had clearly stated that whether the funds are raised by issue of shares and debentures or through borrowing would not make any difference to the principles set out thereunder. The principle being that if the capital of a company is fruitfully utilised instead of keeping it idle, the income thus generated, will be of a revenue nature and not accretion of capital.
In the present case, there is a finding of fact that the money placed in the fixed deposit was inextricably linked with the setting up of the power plant. Thus, the revenue generated on account of interest on the said fixed deposits would be in the nature of a capital receipt and not a revenue receipt. This case has been decided on the basis of this principle and not on the basis that the source of the funds was through raising of share capital and not through borrowings."
The sequitor of the judgment of Hon’ble Supreme Court and Hon’ble jurisdictional High Court is that if the funds have been raised for the purpose of setting up of a plant or acquisition of capital asset then the funds have to be inextricably linked with the activities of the plant and if such funds have been put in FDRs, then interest received will be a capital receipt and cannot be taxed as income from other sources. Respectfully following the aforesaid principle, which is applicable on the facts of the present case also, we hold that once the ECB loan which is to be utilized for capital expenditure only, then, any interest earned on funds temporarily parked in FDRs is inextricably linked with the setting up of hotel of the assessee, which is to be held as capital receipts only and is permitted to be set off against the capital expenditure. The decision of CIT (A) is in line with the judicial precedence and therefore, the impugned order of the ld. CIT (A) is upheld. Consequently, the appeal of the Revenue is dismissed.