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Before: Shri A. Mohan Alankamony & Shri Duvvuru RL Reddy
O R D E R
PER DUVVURU RL REDDY, JUDICIAL MEMBER:
This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 9, Chennai dated 30.12.2016 relevant to the assessment year 2009-10. The only effective ground raised in the appeal of the assessee is that the ld. CIT(A) has erred in holding that the interest receipt of ₹.62,77,671/- is income and is to be assessed as income from other sources.
Brief facts of the case are that the assessee is engaged in he business of developing and maintenance of commercial complex and filed its return on 30.09.2009 declaring an income of ₹.2,98,060/-. The assessee filed a revised return on 28.09.2010. The Assessing Officer completed the assessment under section 143(3) of the Income Tax Act, 1961 [“Act” in short] assessing the total income of the assessee at ₹.65,75,730/- after bringing to tax the interest income of ₹.62,77,671/- under the head ‘income from other sources’.
2.1 From the details of TDS certificates, the Assessing Officer noticed that the assessee earned interest income of ₹.62,77,671/- during the year on which TDS of ₹.12,89,733 /- was deducted, but the assessee had not disclosed the interest income. From the Notes on account- Sl. No. 6, the Assessing Officer noticed that the assessee derived the interest income from short term deposits with banks and had netted off the interest income against the project development expenditure pending for allocation. The assessee contended that the interest income was not taxable under the Act. By relying on the decisions in the cases of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT 227 ITR 172 (1997) (SC) and the Madras High Court decision in the case of CIT v. Nizar Ahmed & Co.259 ITR 244, the Assessing Officer assessed the interest income earned by the assessee of ₹.62,77,671/- under 'income from other sources' and did not allow the same to be netted off against capital work in progress.
The assessee carried the matter in appeal before the ld. CIT(A). After considering the detailed submissions of the assessee, various case law relied upon by the assessee as well as considering the facts of the case, the ld. CIT(A) confirmed the addition of ₹.62,77,671/-.
On being aggrieved, the assessee is in appeal before the Tribunal. By reiterating the submissions as made before the ld. CIT(A) and relying upon the decision in the case of CIT v. Bokaro Steel Ltd. 236 ITR 315(SC), Vodafone South Ltd. v. CIT 378 ITR 410 (Delhi) and NTPC Sail Power Company Pvt. Ltd. v. CIT 210 Taxman 358, the ld. Counsel for the assessee prayed for deleting the addition made and confirmed by the ld. CIT(A).
On the other hand, the ld. DR strongly supported the orders of authorities below besides placing heavy reliance on the decisions of the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals Ltd. v. CIT (supra) and in the case of CIT v. Autokast Ltd. 248 ITR 110 (SC).
We have heard both sides, perused the materials available on record and gone through the orders of authorities below. The assessee was incorporated with the objective of promoting commercial buildings. Initially, an extent of 10.64 acres was taken on lease from Express Newspapers Pvt. Ltd. and subsequently surrendered on 26.03.2007. On the same day, an extent of 9.59 acres was once again transferred to the assessee company for the purpose of construction of a shopping mall and a commercial office complex in the premises. For this purpose of construction and project development expenditure, the assessee took financial assistance from several banks and made certain deposits with other banks and financial institutions from those funds. The assessee received an interest of ₹.62,77,671/- from the aforesaid deposits. The Assessing Officer assessed the same under the head ‘income from other sources’.
6.1 During the course of appellate proceedings, the assessee submitted that the interest income earned was inextricably linked to the setting up of the project and therefore, it is a capital receipt and not liable to be taxed. The assessee relied on the decisions in the case CIT v. Bokaro Steel Ltd. (supra), Vodafone South Ltd. v. CIT (supra) and NTPC Sail Power Company Pvt. Ltd. v. CIT (supra). By reproducing the relevant portion of the order in the case of CIT v. Bokaro Steel Ltd.(supra) in the appellate order, the ld. CIT(A) observed as under: “7.3.3 From the analysis of the facts mentioned in case of Bokaro Steel Ltd, it is clear that the interest earned on the money advanced to the contractors was purely for the purpose of business and these contractors have be employed by the assessee for the construction of the company factory and installation of plant and it is only for this purpose the contractors were given quarters, advance and also plant and machinery on hire. From the facts of this case, it is very clear that the income earned is inextricably linked to the business of the assessee and therefore the Supreme Court held that the income received is capital in nature. It is also relevant to mention that the Supreme Court in the case of Bokaro Steel Ltd. in page no.6 also upheld the decision by the Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. 227 ITR 172. 7.3.4 Similarly, in the case of Vodafone South Ltd., referred supra, there is a clear finding that the sanction letter of lender bank HSBC permitted the assessee in that case to utilize the borrowed sum to advance loans to others and on the same date the sums were transferred to SCL. The Hon’ble Delhi High Court observed that without the facility of credit by the HSBC, the assessee could not have advanced the loan to SCL. Therefore, there was a direct nexus between the earning of interest on the loan advanced by the assessee to SCL and payment of interest to HSBC on the loan drawn, Therefore, the Hon’ble Court held that the earning of interest income and the payment of interest to HSBC are inextricably linked and direct nexus is established and allowed setting off of interest paid against interest income earned under the head ‘income from other sources’. 7.3.5 In the case of NTPC Sail Power Company Pvt. Ltd., referred supra, the Delhi High Court held that the funds invested by the assessee company and the interest earned were inextricably linked with the setting of the power plant. The facts mentioned in the above case as pointed out by the AR of the appellant is not similar to the facts in the case of the appellant. 7.3.6 As mentioned by the AR in his written submissions that the company has taken on lease 9.59 acres from its holding company M/s. Express Newspapers Pvt. Ltd. On this land, the appellant company start constructing shopping mall and commercial office complex. It is for this purpose of construction and project development, the company took loans from several banks and out of such loans, deposits are made in the other banks and financial institutions, out of which income was earned. From these facts, it is clear that obtaining loans from banks is clearly, for the purpose of construction. The same purpose cannot be attributed to advancing of such loans as deposits with such other banks and financial institutions because it is only that sum which is borrowed for the purpose of construction is said to be for the purpose of business and that incidental income earned out of such money kept in the banks only will be in the nature of income earned under the head ‘income from other sources’ and cannot be referred to as income earned during the course of business activity. This aspect is made clear vide the Supreme Court decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., 227 ITR 172,…. 6.2 As per the law laid down by the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra), the ld. CIT(A) further observed as under:
7.3.7 From the above, it is very clear that if a person borrows money for business purposes but utilizes that money to earn interest, however temporarily, the interest so generated will be his income. Since the company has not commenced the business there cannot be any question of assessment of profits and gains. Since no income can be admitted under the head ‘business’ until otherwise the business commenced it is not possible either to set off of losses under the business or under ‘income from other sources’ or any income earned from non-business sources can be set off against the liability to pay interest on funds borrowed for business purpose even before commencement of the business. The facts in the case of the appellant also clearly show that the loan taken for the purpose of business kept in the bank account yielded interest income which is incidental in nature. Such incidental income ought to be assessed only under the head ‘income from other sources’. This is also made clear by the Supreme Court in the case of Pandian Chemicals, 262 ITR 278, Madras High Court decision in the case of South India Shipping Corporation Ltd., 240 ITR 24 and the Supreme Court decisions in the cases of Sterling Foods 237 ITR 579, Liberty India, 317 ITR 218. 7.3.8 Though these judgements have been rendered in a different context, however the principle laid down is same. While defining the term ‘derived from’, the Hon’ble Courts have held that only that income which is: directly earned from the business source will be treated as business income. Any income which is incidental in nature including the interest income ought to be assessed only under the head ‘income from other sources’. After considering various judgements, submissions of the assessee as well as facts of the case, the ld. CIT(A) held that the interest income earned of ₹.62,77,671/- is assessable under the head ‘income from other sources’ and the assessee is not entitled to set off of business expenses against the income shown under the head ‘income from other sources’ as the business of the assessee has not commenced.
6.3 We have also perused the judgement of the Hon’ble Supreme Court in the case of CIT v. Bokaro Steel Ltd. (supra). At page 321, the Hon’ble Supreme Court made a note with regard to the interest earned out of short term deposits and the same is reproduced verbatim as under: “During these assessment years, the respondent-assessee had invested the amounts borrowed by it for the construction work which were not immediately required, in short-term deposits and earned interest. It has been held in these proceedings that the receipt of interest amounts to income of the assessee from other sources. The assessee has not filed any appeal from this finding which is given against it. In any case, this question is now concluded by a decision of this Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. Commissioner of Income- tax ([1997] 227 ITR 172). Hence, we are not called upon to examine that issue.” [Emphasis applied] Since the assessee has not disputed in appeal and accepted that the earning of interest from short-term deposits is an income of the assessee from other sources in view of the decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT(supra), this issue was not subject matter in appeal before the Hon’ble Supreme Court in the case of CIT v. Bokaro Steel Ltd. (supra). So, from the above, it is very clear that earning of interest income from short term deposits is not intrinsically linked with the process of setting up of its plant.
6.4 Further, we find that in the case of CIT v. Karnal Co-operative Sugar Mills Ltd. 243 ITR 2(SC), the assessee had deposited money to open a Letter of Credit for the purchase of the machinery required for setting up its plant. Therefore, the Hon’ble Supreme Court observed that income earned on such deposit was incidental to the acquisition of assets for the setting up of the plant and machinery and therefore, not a case where any surplus share capital money which was lying idle had been deposited in the bank for the purpose of earning interest. Thus, the Hon’ble Supreme Court held that the interest was a capital receipt, which would go to reduce the cost of asset. Whereas, in the present case in hand, the assessee has parked the loan amount in short term deposits with Banks and other financial institution and earned interest income, which has no direct nexus and the interest income is directly attributable to the deposits made out of funds generated by way of term loans. In view of the above, we are of the considered opinion that the interest earned by the assessee has to be treated as income on commercial principles.
6.5 Moreover, having regard to the judgment in the case of Tuticorin Alkali Chemicals and Fertilisers Ltd v CIT [1997] 227 ITR 172 (SC), in the case of CIT v. Autokast Ltd. 248 ITR 110 (SC), the Hon’ble Supreme Court has held that the interest income is assessable to tax in the hands of the assessee.
6.6 In view of the identical findings of the Hon’ble Supreme Court in the above decisions that the income tax is attracted at the point when the income is earned from the fixed deposits/short term deposits and taxability of income is not dependent upon its destination or the manner of its utilization and respectfully following the above decisions, we confirm the order of the ld. CIT(A) in holding that the Assessing Officer rightly brought the interest income under the head ‘income from other sources’ and dismiss the ground raised by the assessee.
In the result, the appeal filed by the assessee is dismissed. Order pronounced on the 13th June, 2018 at Chennai.