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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) 11, Chennai dated 21.03.2017 relevant to the assessment year 2010-11. The only effective ground raised in the appeal of the assessee is that the ld. CIT(A) erred in confirming the disallowance of interest income as capital abatement amounting to ₹.1,80,23,464/- considering the same as ‘income from other sources’.
Brief facts of the case are that the assessee is engaged in manufacturing and installation of turbine and generators for thermal power plants. The assessee filed return of income on 14.11.2011 declaring NIL income. The return filed by the assessee was selected for scrutiny and the assessee filed all details against statutory notices. After scrutiny of the details filed by the assessee and by following the decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT 227 ITR 172, the Assessing Officer disallowed the entire interest income earned on deposits and taxed under the head “income from other sources”.
The assessee carried the matter in appeal before the ld. CIT(A). After considering the submissions of the assessee, the ld. CIT(A) confirmed the addition in view of the decision of the Hon’ble Apex Court cited supra.
On being aggrieved, the assessee is in appeal before the Tribunal. By filing detailed written submissions of the assessee as well as paper book, the ld. Counsel for the assessee has submitted that the interest income, earned before the date of commencement of business, from deposits made out of own funds is in the nature of capital abatement and the investment made by the assessee is inextricably linked with business commitment. the assessee has infused share capital for meeting the following requirements: * Capital requirements stipulated in the Memorandum of Understanding entered with Government of Tamil Nadu.
* Capital requirements stipulated under the Joint Venture Agreement for investments to be made in India; and * Capital/business requirements in order to be eligible to take part in the bid of NTPC Limited. If the above requirements were not met out, the assessee would not have been eligible to set up an Industry in Chennai and moreover, the assessee would not be eligible to take part in the bid proposed by NTPC. By relying on the Bidding Documents; it was the submissions of the ld. Counsel that the assessee was required to produce various Bank Guarantee Form for Advance Payment [For FOB/Ex-Works], Bank Guarantee Form for Advance Payment [for installation/Civil Works], etc. besides Bid Security Form – Bank Guarantee & Bid Security Form – Letter of Credit. It was also submitted that the assessee company would not be eligible to take part in the bid proposed by NTPC, if their terms and conditions are not fulfilled. Accordingly, to satisfy the capital/bidding requirements and ensure liquidity and availability of funds for procurement of capital assets, the aforesaid funds were temporarily deposited in the banks. Hence, the interest earned by the assessee cannot be taxed as income from other sources. By relying on various case law, the ld. Counsel prayed that the addition made should be deleted. On the other hand, the ld. DR strongly supported the orders of authorities below.
We have heard both sides, perused the materials available on record and gone through the orders of authorities below. We have also perused the 4 detailed paper book filed before us, which was also filed before the authorities below. We have to adjudicate as to whether the deposits made by the assessee and the receipt of income is inextricably linked with its business activities or not based on the Financials as well as other documents. The assessee has claimed expenses such as personnel expenses, administrative expenses, depreciation and financial expenses to the tune of ₹.3,43,63,086/- and the same was adjusted against the interest income of ₹.1,80,23,464/- and shown loss of ₹.1,63,39,622/-. When questioned as to why the entire interest income earned should not be taxed under the head “income from other sources” and why the expenditure should not be capitalized as the assessee has not commenced its business. The assessee has submitted that the funds received towards share capital of the company, which was intended to be utilized for purchase of capital assets of the company, were temporarily invested as deposits with the Bank. The assessee treated the interest earned from such deposits as capital receipt and reduced the same from the capital work in progress. After considering the submissions of the assessee, the Assessing Officer was of the opinion that the income received by way of interest on deposit, no expenditure could have been incurred by the assessee, since interest accrues at fixed intervals without any extra effort by the assessee. On the other side, the amount claimed by the assessee was only to develop its business and the assessee has not commenced its commercial operations during the year. Therefore, by following the decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (supra), the Assessing Officer held that the interest earned out of funds invested in deposits was clearly of revenue in nature and liable to be taxed. Moreover, the interest earned by a company on deposits during pre-production period is assessable as its income from other sources and cannot be set off against pre-operative expenditure which is allowable under section 35D of the Act and accordingly, brought the same to tax under “income from other sources”. On appeal, the ld. CIT(A) confirmed the above assessment.
5.1 It is the case of the assessee that the shareholders of the assessee company had infused funds in the nature of share capital to facilitate the procurement of capital assets, which were to be utilized for carrying out the business of manufacturing of power plant. Pending procurement of capital assets, the same was deployed in fixed deposits. In its written submission, the assessee has stated that the interest income is inextricably linked and has direct proximity with the setting up of business/procurement of capital assets, the same cannot be brought under the head “income from other sources” and can be taxed. It was also submitted by the assessee that the assessee company would not be eligible to take part in the bid proposed by NTPC if the terms and conditions are not fulfilled. Accordingly, to satisfy the capital/bidding requirements and ensure liquidity and availability of funds for 6 procurement of capital assets, the aforesaid funds were temporarily deposited in the banks. Moreover, as per Schedule 5 to Balance Sheet filed in the form of paper book, the capital work in progress as at 31.03.2010 was at ₹.122,12,84,692/-, which indicates that the assessee has parked substantial amount under capital work in progress. We have also perused the Bidding Documents; the assessee was required to produce various Bank Guarantee Form for Advance Payment [For FOB/Ex-Works], Bank Guarantee Form for Advance Payment [for installation/Civil Works], etc. besides Bid Security Form – Bank Guarantee & Bid Security Form – Letter of Credit. We find force in the submissions of the assessee. However, on perusal of the appellate order, the ld. CIT(A) has not discussed anything about the financials of the assessee or the circumstances under which the assessee made deposits and earned the receipts, but, simply following the decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT (supra), the ld. CIT(A) confirmed the addition made by the Assessing Officer.
5.2 In the case of CIT Karnal Co-operative Sugar Mills Ltd. 243 ITR 2 (SC), the assessee 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.
5.3 Under the above facts and circumstances, we remit the matter back to the file of the ld. CIT(A) to examine the case as per the details of financial statements and other documents, etc. and decide the issue afresh in accordance with law after allowing sufficient opportunities of being heard to the assessee. The assessee is also directed to file all the details before the ld. CIT(A) as was filed before the Tribunal for verification. Accordingly, the ground raised by the assessee is allowed for statistical purposes.
Since we have remitted the main issue to the file of the ld. CIT(A), the alternate claim of depreciation become academic and requires no adjudication at this stage.