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Income Tax Appellate Tribunal, “C”, BENCH MUMBAI
Before: SHRI G. MANJUNATHA & SHRI RAM LAL NEGI
Date of Hearing 18/07/2019 Date of Pronouncement 09/08/2019 आदेश आदेश / O R D E R आदेश आदेश PER G.MANJUNATHA (A.M):
This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)–22, Mumbai, dated 08/08/2017 and it pertains to the Assessment Year 2011-12. The assessee has raised the following grounds of appeal:-
1. On the facts & circumstances of the case the Learned Commissioner of Income Tax (Appeals) has erred in confirming that the sum of Rs. 1,46.89,403/- be taxed under the head Income from other sources. The appellant prays that the conclusion reached by the Learned Commissioner of Income Tax (Appeals) that the sum of Rs. 1,46,89,403/- is chargeable to tax under the head Income from other sources. 2.On the facts & circumstances of the case the appellant prays that the addition made by the Learned Assessing Officer and confirmed by the Learned Commissioner of Income Tax (Appeals) amounting to Rs. 1,46,89,403/- under the head Income from other sources may be deleted. 3.On the facts & circumstances of the case the appellant prays that the sum of Rs. 1 ,46,89,403/- may be treated as income earned from business and profession and may he reduced from the total value of the capital work in progress and the said amount is not chargeable to tax under the head Income from other sources. 4. on the facts & circumstances of the ease the Learned Commissioner Of Income Tax (Appeals) has erred in concluding that the appellant is not entitled to claim the deduction of the sum of Rs, 4,38,83,558/- , being the interest paid against the interest income.
5. On the facts and circumstances the appellant prays that the sum of Rs. 4,38,83,558/- being the interest payment may be allowed as deduction against the interest of Rs. 1,46,89,403/- treated as the income chargeable lo tax under the head income from other sources.
6. Without prejudice Lo ground I to 5 the appellant prays that if the sum of Rs. 1,46,89,403/- is taxed under the head income from other sources and if deduction of interest payment is not allowed to be set olfayain5t the said income then the sum of Rs. 1 ,46, 89, 403/- may be added to the capital work in progress as the appellant has reduced the said amount while computing the capital work in progress,- 7. On the facts and circumstances of the case the appellant denies the liability for payment of interest u/s. 234B and prays that the interest levied by the Learned Assessing Officer may be deleted.
The appellant craves the permission to add alter or amend the grounds of appeal at the time of hearing.
The brief facts of the case are that the assessee company is engaged in the business of road construction, operation and maintenance under BOT basis, undertaken project to develop Pune-Sholapur section of NH9 on design, build, finance, operate and transfer basis. During the Financial Year 2010-11, relevant Assessment Year 2011-12, the project work is under progress.
Therefore, the assessee has capitalized all expenses incurred for development of project including finance cost, however while arriving at finance cost, the assessee has reduced interest earned on short term fixed deposits kept at bank, on the ground that the funds from which interest has been earned are exclusively meant for development of project, and hence, interest earned on short term fixed deposits is necessarily should be reduced from work in progress. The assessee has filed its return of income on 23/09/2011 declaring “nil” total income. The case was selected for scrutiny and the assessment has been completed u/s 143(3) of the I.T.Act, 1961 on 28/03/2014, where the AO has determined total income of the assessee at Rs. 1,46,89,403/-., after considering, interest on fixed deposits under the head income from other sources. The relevant findings of the AO are as under:-
The submission made by the assessee company are considered carefully. The contention of the assessee is not acceptable because though the assessee has earned the interest on unutilized borrowed fund parked in fixed deposit, it is not business of assessee. The interest was earned on the unutilized borrowed fund and the same were not parked with the banks for the purpose of any business obligation. The fund was parked with clear intention to earn the extra income by way of interest. Further, the assessee is not engaged in the business of money lending and borrowing. The assesee merely invested or parked its unutilized fund for short or specific period to earn interest. Since the interest earned is not linked to the business of the assessee, it cannot be assessed under the business income. Further the interest paid/payable on borrowed fund has not connection with the receipt of interest. The earning of interest on fixed deposit has no nexus with business activity of the assesee. The assessee has borrowed fund for carrying out business activities ad not for parking the fund in fixed deposit. Therefore, the interest earned on fixed deposit should be charged as income from other sources and should not be capitalised nor set off against the interest paid on borrowed fund.
5.1 In the case of South India Shipping Corporation Ltd. Vs CIT (1999) 240 ITR 24 (Madras), the Hon’ble Madras High Court has held that when the assessee was carrying on business, the interest earned by it from loans and bank deposits was assessable under the head ‘Income From Other Sources.” The High Court had followed the Hon’ble Apex Court’s judgement in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. Vs CIT 227 ITR 172 wherein it was held that in usual course, interest received by the company on loans and banks deposits would be taxable as income under the head income from other sources under section 56 of the I.T.Act. In the case of Murli Investment Co. Vs CIT 167 ITR 368 (Raj), the Rajasthan High Court has held that the activity indulged in by the assessee did not constitute money lending business since the assessee merely invested its funds when the fund were not required for the time being and, therefore, the interest earned by the assessee was assessable as Income From Other Sources. Reliance in this regard is also placed on the following judgments: i. Godavari Sugar Mills Pvt.Ltd. V CIT 191 ITR 359 (Bom) ii. Shree Krishna Pollyster Ltd. Vs DCIT 274 ITR 21 (Bom) iii. CIT Vs Ravi Ratna Exports Pvt.Ltd. 246 ITR 443 (Bom 5.2 Further I have gone through the decision relied by the assesee. In respect of decision in the case the Bokaro Steel Ltd. 236 ITR 315, the assessee had received interest from the contractor to whom advance was given to facilitate the construction work. Therefore, the fact of the case of Bokaro Steel Ltd, is not relevant to this case as advances given in the case of Bokaro Steel Ltd. was a business obligation.
6. In view of the above decision and the facts of the case ,after examination of case records and submissions made, the interest income of Rs. 1,46,89,403/- is hereby treated as “income from other source” as against business income treated by assessee. Accordingly, the total income of the assesee for assessment year 2011-12 is computed as under. Further in view of the above discussion, it is clear that the assessee has furnished inaccurate particulars of income and has concealed the particulars of income which may attract penalty proceeding. Therefore, penalty proceeding u/s 27(1)(c) of the I.T.Act is being initiated.
Not profit as per P (-)13,05,991 & L account Add: Wealth Tax 1,44,070 (-)11,61,921 Less: Disallowed u/s 11,61,921 37 Total Business NIL Income Income from other source Interest on Fixed 1,46,89,403 deposit (As discussed in para 5 & 6) Total assessed 1,46,89,403 Income
Aggrieved by the assessment order, the assessee preferred an order before the Ld. CIT(A). Before the Ld. CIT(A), the assessee reiterated its submissions made before the AO to argue that interest earned from short term fixed deposits kept in bank out of funds earmarked for project construction needs to be considered as business receipts, consequently during the period of construction of project, the same needs to be reduced from capital working progress. The Ld. CIT(A) after considering relevant submission of the assessee and also by relied upon the decision of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & fertilizer Ltd. vs CIT (227 ITR 172) held that interest earned from fixed deposits is at no stretch of imagination can be considered as receipts from business assessable under the head income from business. Therefore, he opined that there is no error in the findings recorded by the AO in assessing interest income under the head income from other sources. The relevant findings of the CIT(A) are as under:
5,1 I have considered the matter. I find that the issue of deduction of interest payment against the Income from Other Sources has also been addressed at length by the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) wherein it had observed and held as under:
“15 It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilising the borrowed funds as its income. It was rightly pointed out in the case of Kedar Narain Singh vs. CIT that "anything which can properly be described as income is taxable under the Act unless expressly exempted". The interest earned by the assessee is clearly its income and unless it can be shown that any provision like s. 10 has exempted it from tax, it will be taxable. The fact that the source of income was borrowed money does not detract anything from the Revenue character of the receipt. The question of adjustment of interest payable by the company against the interest earned by it will depend upon the provisions of the Act. The expenditure would have been deductible as incurred for the purpose of business if the assessees business had commenced. But that is not the case here. The assessee may be entitled to capitalise the interest payable by it. But what the assessee cannot claim is adjustment of this expenditure against interest assessable under s.
56. Sec. 57 of the Act sets out in its cls. (i) to (iii) the expenditures which are allowable as deduction from income assessable under s.
It is not the case of the assessee that the interest payable by it on term loans are allowable as deduction under s. 57 of the Act.
If that be so, under which other provision of law can the assessee claim deduction or set-off of his income from other source against interest payable on the borrowed fund ?
17 . There are specific provisions in the IT Act of setting off of loss from one source against income from another source under the same head of income (s. 70), as well as setting off of loss from one head against income from another (s. 71). In the facts of this case the company cannot claim any relief under any of these two sections, since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting year. In such a situation the expenditure incurred by the assessee for the purpose of setting up its business cannot be allowed as deduction, nor can it be adjusted against any other income under any other head. Similarly any income from a non-business source cannot be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plants and machineries even before commencement of the business of the assessee.
It has been argued that the source from which the company has earned interest is borrowed capital. The company has to pay interest to its creditors on the same borrowed capital. Having regard to the identity of the fund on which interest is earned and interest is payable, the company should be allowed to set off its income against interest payable by it on the same fund. We are of the view that no adjustment can be allowed except in accordance with the provisions of the IT Act. However desirable it may be from the point of view of equity, this adjustment cannot be made unless the law specifically permits such adjustment.
5.2 As mentioned earlier, there is no dispute that during the year under consideration the appellant was yet to commence its business. The appellant company has been set up with the main object of design engineering .construction development finance operation and maintenance of 4 laning of Pune-Sholapur Section of NH-9 from KM 144.400 to KM 249.000 in the State of Maharashtra under NHDP phase III on Design Build Finance Operate and Transfer (DBFOT) basis., ft had borrowed funds for the purpose of setting up its business There is also no dispute that on disbursement of loans, the idle surplus funds which could not be immediately utilized for the purpose of business were kept in fixed deposits on which interest income of Rs. 1,46,89,403/- was earned. In view of the above decision of the Hon'ble Supreme Court which is squarely applicable in the appellant's case, the interest payable on the amount borrowed for the business purpose of design engineering,construction development finance operation and maintenance of 4 laning of Pune-Sholapur Section of NH-9 cannot be adjusted against the interest income of Rs. 1,46,89,403/- which has been considered as income from Other Sources The appellant's grounds of appeal are dismissed
4. The Ld. AR for the assessee, at the time of hearing submitted that this issue is squarely covered in favour of the assessee by the decision of ITAT, Mumbai ‘G’ Bench in assessee sister concern case of Hazaribag Ranchi Expressway Ltd. vs. ITO in ITA.No.
3669/Mum/2016, where under identical set of facts the Tribunal held that interest earned from short term fixed deposits is assessable under the head income from business, as part of business receipts, consequently during the construction period of project, the same needs to be reduced from working progress.
5. The Ld. DR, on the other hand, strongly supporting the order of the Ld. CIT(A) submitted that the law is very clear, in respect of, head of income of kind of receipts, as per which interest income is assessable under the head income from other sources. Therefore, to ascertain nature of receipts and head of income under, which it is assessable, the sources of funds is irrelevant. The Ld. CIT(A) after considering relevant submissions has rightly affirmed findings of the AO and his order should be upheld.
We have heard both the parties, perused the material available on record and gone through orders of the authorities below. We find that the assessee has earned interest income from short term fixed deposits kept in bank out of unutilized funds available in respect of money borrowed for the purpose of execution of project and the same has been reduced from working progress. We, further noted that an identical issue has been considered by the Co-ordinate Bench in the case of Hazaribag Ranchi Expressway Ltd Vs. ITO (supra), where under identical set of facts and also after considering various judicial precedents, including the decision of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & fertilizer Ltd. vs CIT (supra) held that interest income from short term fixed deposits kept in bank out of funds borrowed for the purpose of project is assessable under the head income from business, consequently during construction period of project, it needs to be reduced from working progress. We, further noted that the Hon’ble Bombay High Court in the case of Pr.CIT vs M/s West Gujarat Expressway Ltd. in of 2016 dated 19/03/2019 had considered an identical question of law raised by the revenue and after considering relevant facts not entertained, question of law raised by the revenue, because for earlier assessment years although, the revenue had filed appeal before the High Court, but the question of law raised for the year under consideration, in respect of interest income from short term fixed deposits was not taken before the High Court. From the above, it is very clear that although, the High Court has not expressed any opinion on question of law raised by the revenue, but because of dismissal of question of law in limine without any answer is clear indication of the opinion of the High Court that the issue is already covered in favour of the assessee.
Therefore, considering the facts and circumstances of this case and also by following the decision of ITAT, Mumbai in the case of Hazaribag Ranchi Expressway Ltd Vs. ITO, we direct the AO to consider interest earned from short term fixed deposits kept in bank, as part of business receipts assessable under the head income from business, consequently during project implementation period same needs to be reduced from working progress.
In the result, appeal filed by the assessee is allowed.
Order pronounced in the open court on this 09 /08/2019