DCIT-4(1), INDORE, INDORE vs. MARAL OVERSEAS LTD, KHARGONE

आदेश/ O R D E R

Per Paresh M Joshi, J.M.:

This is an Appeal filed by the Revenue under section 253

of the income tax Act 1961,[ herein after referred to as the Act

for the sake of brevity] before this Tribunal. The Assessee is

aggrieved by the order bearing Number:-1045/21-22 dated

22.07.2022 [DR NO.-31/10 D.No.-104] passed by the Ld. CIT(A)

u/s 250 of the Act, which is herein after referred to as the

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“Impugned order”. The relevant assessment year is 1992-93

and the corresponding previous year period is from 01.04.1991

to 31.03.1992.

2.1 That as and by way of an “ Assessment order” made u/s

143(3) r.w.s. 254 of the Act wherin it was held that the

interest amount of Rs. 1,51,54,534/- is income from other

sources, [The total loss as per last order passed u/s

143(3)/250 dated 03.11.1999 was at Rs. 1,69,39,343/-]. That

the aforesaid assessment order is dated 31.12.2009 which is

herein after referred to as the “Impugned Assessment Order”.

2.2 That it is required to be noted that the assessment u/s

143(3)(in this case) was originally made on 08.03.1995. Later

on the matter reached to ITAT, Indore Bench in ITA No.

289/IND/02 and the ITAT, Indore Bench vide order dated

16.05.2008 [For this Assessment Year] set aside the

Assessment order to re-decide on a particular

issue.[Discussed later]

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2.3 The core issue in the Assessment was regarding the

treatment of the interest received of Rs. 1,51,54,534/- on

the proceeds of Public Issue deposited with the Banks. The

received before the commencement of said interest was

Commercial Production which was offered by the assessee

as income from “Other Sources”. However, by way of a Note

it was claimed that the interest is “not taxable” & that the

same be reduced from the preoperative expenses &

accordingly also reduced from the cost of the Assets. This

claim was not accepted by the then AO & that he assessed

the said interest as “ income from other sources” in an order

u/s 143(3). The then Ld. CIT(A) confirmed the action of the Ld.

AO. The matter then reached to ITAT, & the ITAT by an order

(supra) restored the matter to back to the Ld. AO with certain

directions. The submission of the Assessee & gist of the ITAT

order dt. 16.05.2008 are recorded in the “Impugned

Assessment Order” which is reproduced by us as below:-

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“ 3. In these proceedings the company filed a detailed

reply which for the sake of clarity is being reproduced

here under: -

"The Hon'ble ITAT Indore Bench Indore in ITA No.

289/IND/2002 for AY 1992-93 vide order dated

16.05.2008, has restored to re-decide, in the light of

the decision of Hon'ble Supreme Court in the case of

Bokaro Steel Ltd. (236 ITR 315) and Kamal Co-

operative Sugar Mills Limited (243 ITR 2) as well as

in the light of the decision of Hon'ble Madras High

Court in the case of VGR Foundation P. Ltd. (2008)

298 ITR 132, the issue of treatment of interest of Rs.

1,51,54,534/- received by the company from various

banks on share application money. In this respect

the relevant undisputed facts, also taken note of by

Hon'ble ITAT are as under: -

a. The assessee has received income of Rs. 1,51,54,534/- as interest from various banks on share application money and deducted the

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said receipt from pre-operative expenses in its books of accounts. In the original return filed on 31.12.1992 the company offered the said amount as income from other sources and adjusted the capitalisation of pre-operative expenses for the purposes of claiming depreciation for the income tax return.

b. In the revised return filed on 16.07.1993, the company though offered the said interest as income from other sources, however, it was claimed by way of a note appended to the return of income that the said income is not taxable and have been rightly deducted from pre-operative expenses

c. The assessment order was passed u/s 143(3) on 08.03.1995 where in the Assessing Officer has not discussed the assessee's claim and has only recorded that the assessee has disclosed income of interest on share application money of Rs. 1,51,54,534/- as the income of the year in the revised return. Since

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the claim made by the assessee company through a note appended to the return was not entertain by the AO, the company took the matter before the CIT (A). The assessee claimed that the said amount be either reduced from pre operative expenses or be deducted from the interest paid to banks which was capitalised.

d. It was submitted before the learned Commissioner of Income tax (Appeals) that as per requirements of section 73 of the Companies Act, it was obligatory on the part of the assessee to deposit the share application money received by it in separate bank account maintained with any scheduled bank. The assessee could not use the said amount for a specific period as prescribed under section 73 of the Companies Act. The attention of the learned Commissioner of Income tax (Appeals) was drawn to the order passed by his predecessor in the case of Neo

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Sack Limited for the assessment year 1994-95 wherein these requirements of the Companies Act have been referred to and discussed. The assessee also took support from the decision of the Hon'ble Supreme Court in the case of Vellore Electric Corporation; 227 ITR 557. Reliance was also placed on other decisions as per the written submissions.

e. The learned Commissioner of Income tax (Appeals) considering the submissions of the assessee found that it was not in dispute that the said income has been received prior to the date of commercial production and that it was under legal compulsion to deposit the share application money in separate bank account but these facts do not change the basic nature and character of receipt. The learned Commissioner of Income tax (Appeals) held that the said receipt is nothing but income of the assessee for earning the same and that the assessee did not incur any cost. The

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learned Commissioner of income tax. (Appeals) referring to the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals; 227 ITR 172 held that the said receipt has been rightly assessed and dismissed this ground of appeal of the assessee.

f. The assessee carried the matter before the Hon'ble ITAT, which has decided on this issue in ITA no. 289/IND/02 on 16.05.2008 and restored the matter for reconsideration. The Hon'ble ITAT has accepted the proposition of the assessee that the facts of Tuticorin Alkali Chemicals 227 ITR 172, relying on which the Learned CIT (A) has decided this issue against the assessee, are clearly distinguishable. The Hon'ble ITAT has categorically stated that the decision in the case of Tuticorin Alkali Chemicals has no applicability to this case. The relevant observation of the Hon'ble Bench have been abstracted here under: -

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Bokaro Steel Limited (supra) interest income is intrinsicably linked to set up project before commencement, then it is capital receipt and would reduce the capital investment. It is an admitted fact that the interest income has been received prior to the date of commercial production. It is also admitted that the assessee was under legal obligation/compulsion to deposit the share application money in the separate bank account and on that account the assessee earned the interest. The authorities below have thus failed to note these important facts while rejecting the claim of the assessee. The authorities below have also failed to give the finding of fact whether interest income so earned on share application money had any link with the setting up of the project before the commencement. The learned counsel for the assessee while referring to decision of Hon'ble High Court of Madras in the case of VGR Foundation (supra) has referred to the observations of the Hon'ble High Court of Madras in para 5 of the above judgment which distinguished the decision in the case of Tuticorin Alkali Chemicals (supra) and also referred to observations of the Hon'ble High Court of Madras

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to the effect that the share application money, etc. are gathered for being used for setting up of an industry, unit, purchase of assets and so on. It therefore, appears from the aforesaid decisions that the assessee has prima facie ease for allowing the deduction on this issue. However considering the facts and circumstances of the case and that the authorities below have not given any finding to the effect whether the interest income is intrinsicably linked to set up project before the commencement of production, we are of the view that the matter requires reconsideration at the level of the Assessing Officer in the light of the decision of the Hon'ble Supreme Court in the case of Bokaro Steel Limited (supra) and Karnal Co-op. Sugar Mills Limited (supra). The contention of the learned Departmental Representative is rejected with regard to bona fide of the claim of the assessee in appending note with the return of income because the leamed CIT(A) considered this issue on which the revenue is not in appeal. It is also very well settled that note given or filed in the return of income is a part of return of income. If the assessee would not have any justification to claim the expenditure, then it would not have

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appended the note with the return of income. The contention of the learned Departmental Representative is therefore rejected. We therefore, set aside the orders of the authorities below and restore this issue to the file of the Assessing Officer with the direction to re-decide this issue in the light of the decision of the Hon'ble Supreme Court in the case of Bokaro Steel Limited (supra) and Kamal Co-op. Sugar Mills Limited (supra) as well as in the light of the decision of the Hon'ble High Court of Madras in the case of VGR Foundation (supra). The Assessing Officer shall decide the issue by giving reasonable opportunity of being heard to the assessee.

(vii) In light of the above observation of the Hon'ble

Bench the matter has been remitted back for Your

Honour's consideration. The documents filed before the

H'ble ITAT, though are, all on record, are being filed

again, for ready reference. Some of the facts which will

have a bearing in deciding the issue are as under.

subscription on 3rd September 1991. The cost of

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the project was pegged at Rs. 3400 Lacs which

was mainly on account of land, building, plant &

machinery and other fixed assets. The means of

finances were to the tune of Rs. 1336 lacs by

way of capital from promoters and public, Rs.

509 lacs by way of term loan, Rs. 1545 lacs by

way of foreign currency loan and Rs. 10 lacs by

way of subsidy from the state government. The

issue was slated for closing on earliest by 6th

September 1991 and latest by 14th September

1991. The issue was an unprecedented success

and was over subscribed by 75 times. The issue

was made at par. Copy of the prospectus is

enclosed.

the Hon'ble ITAT the proceeds of the issue by

virtue of section 73 of the Companies Act, were

required to be kept separately till the allotment

is finalize. The proceeds of the public issue are

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required to be kept in separate bank accounts

and the company cannot appropriate the funds

unless the approval of the stock exchange is

obtained for allotment. The company was

obliged to complete the allotment process within

10 weeks from the date of the closing of the

issue.

proceeds with various banks on which it has

earned this interest of Rs. 1,51,54,534/-. All the

deposits were realized in Oct & Nov 1991 és

evident from the TDS certificates issued by these

banks which are already already on record. The

company commenced part commercial production

from 1st February 1992 as evident from the

annual accounts note no. 7. Therefore the interest

was received before the commencement of

commercial production.”

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2.4 In the “Impugned Assessment Order” at para 4 it is

also recorded as under :-

“4. At the time of public issue the company was at an

advanced stage of construction of its manufacturing

facilities and was in dire need of funds. Had there

been no statutory compulsion of the Companies Act,

the company would -not have kept the funds with

banks on a lower rate of interest rather would have

immediately deployed the proceeds in the

construction activities. Had this been the case, the

company would have incurred lower interest cost on

its term loans as the term loans would have been

utilised from a later date. The details of interest paid

on term loans is already available on record as the

same was submitted during the initial assessment

proceedings. If need be the same can be filed again.

Therefore it is clear that the company has received

the interest of Rs. 1,51,54,534/- prior to

commencement of commercial production. It is not the

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case of investment of surplus money. It is not the

case of earning interest on short term deposits of

surplus funds, out of borrowed funds, not

immediately required for setting up of the projects.

This fact has also been accepted by the Hon'ble

Tribunal while distinguishing the facts of Tuticorin

Alkali Chernical P. Ltd. (227 ITR 172). At this

juncture we wish to point out that in the order

passed u/s 143(3), a separate addition of Rs.

17,79,605/- was made by the AO in respect of

interest earned on deposit of surplus fund not

immediately required for the project. This addition

was also confirmed by the Learned CIT (A).

Coming to the observation of Hon'ble ITAT in Para 16

of the order where in after considering the

observations of Hon'ble Madras High Court in the

case of . VGR Foundations (298 ITR 132) in Para 5 it

has been stated that "It therefore, appears from the

aforesaid decisions that the assessee has prima facie

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case for allowing the deduction on this issue". It will

be worthwhile to quote from Para 5 abstracted in CIT

(A) vs. VGR Foundations (298 ITR 132) Madras

"In our opinion, in view of the above clear cut

ruling by the Supreme Court it is necessary to

give a finding of facts in regard to monies that

were kept in deposit from out of the share

application monies. In the light of the Supreme

Court decision in Tuticorin Alkali Chemicals &

Fertilizers Ltd. (supra), it is only in the event of

interest earned from out of deposits made from

borrowed funds that it would be in the nature

of income. Share application monies do not fall

into the category of borrowed funds and do not

involve payment of interest. In effect share

application money etc. are gathered for being

used in setting up of an industry, unit,

purchase of assets, and so on. Till such time

the money is required for deferment of various

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items, obviously the money has to be kept in

deposit with a bank, Keeping the money in

current account would not yield any interest

income. It can therefore be seen that it is

during the course of construction that the

monies are kept in deposits with the banks. In

these circumstances in the light of the Supreme

Court decisions in the cases of Bokaro Steels

Ltd. (supra), Karnal Co-operative Sugar Mills

Ltd. (supra) and Kamataka Power Corporation

(supra), the claim of the assessee is reasonable

and deserves to be accepted. We accordingly

uphold the claim of the assessee and delete the

addition of interest made to the income. The

legal plea was insisted upon."

Therefore, in the above case, it seems that surplus

share application money not immediately required for

the project, was deposited, on which interest was

earned. In the present case since the amount was

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deposited out of statutory compulsion, otherwise would

have gone to reduce the interest on term loan, which

has been capitalised, and also for the reason that the

same was received prior to commencement of

commercial production and also for the reason that the

public issue was basically for setting up of the

manufacturing facilities, hence the interest received is

directly linked and is required to be adjusted against

pre-operative expenses and cannot be assessed as

income from other sources."

The Ld. AO in the “Impugned Assessment Order” has 2.5

observed & held as under :-

“The issue has been considered. The direction of the

Hon'ble ITAT has also been taken into consideration.

The relevant directions have been reproduced by the

assessee in its reply already abstracted above and

hence are not being reproduced here again. The

assessee has earned interest on proceeds of public

issue deposits which is not in dispute. However the

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fact that the said interest has been received prior to

commencement of commercial production does not

change the nature of income. There is no cost

associated with this income. The said income cannot be

said to be directly related to setting up of the project.

Every public issue is made to setup some projects.

Therefore simply for the reasons that the public issue

was made to set up the project, will also not help the

assessee. The fact that the proceeds were required to

be kept in separate bank account by the provision of

Companies Act, will also not, in any manner alter the

nature of income. The fact remains that the interest

received is income for all practical purposes. It has no

connection, what so ever, with the setting up of the

project and hence cannot be allowed to be adjusted

against the cost of fixed assets.

“Therefore I hold that the interest of Rs.

1,51,54,534/- is income from other sources and the

same is being taxed accordingly”

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2.6 That the assessee being Aggrieved by the aforesaid

“Impugned Assessment Order” prefers the first appeal u/s

246A of the Act before the Ld. CIT(A) who by the “Impugned Order” has allowed the 1st appeal of the Assessee on the

grounds & reasons stated therein. The core grounds & reasons

are as under:-

“ 7. I have carefully considered the assessment order and

submissions of the appellant. Ground no. 1 of the appeal

is directed against the action of the AO in treating the

interest received on proceeds of public issue, deposited

with Banks before commencement of commercial

production, amounting to Rs. 1,51,54,534/- as Income

from other sources liable to tax. The appellant has

contended that this interest of Rs. 1,51,54,534/- is not

taxable and as such deductible from pre-operative

expenses and accordingly deductible from the cost of

assets. The appellant stated that the Hon'ble ITAT

principally decided the issue in favour of the appellant by

holding that interest earned from parking share capital

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money in bank before commencement of business is of

capital nature and is liable to be adjusted against cost of

fixed asset. However, the issue was restored back to the

file of assessing officer for limited purpose of verification

with the directions that if the share-capital so raised is

intrinsically connected with setting up of the project, the

interest earned on same is not taxable and is rightly

adjustable against pre-operative expense and cost of fixed

asset. However, in the consequent order passed by the AO

he has held that it is not in dispute that the assessee has

earned interest on proceeds of public issue deposits prior

to commencement of commercial production but the fact

that the said interest has been received prior to

commencement of commercial production does not change

the nature of income and the said income cannot said to

be directly related to setting up of the project. The AO has

also remarked that simply for the reason that the public

issue was made to set up the project, will also not help

the assessee and the fact that the proceeds were required

to be kept in a separate bank account will also not alter

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the nature of income. The appellant has stated that the

share capital was raised in order to generate funds for

setting up manufacturing facility and as such same is

directly connected with setting up of the project. The

prospectus alongwith supporting details in order to

demonstrate the purpose an nexus between raising of

funds and setting up of manufacturing facility were dul

filed before Hon'ble ITAT as well as before assessing

officer. In fact, the assessin officer has not even disputed

the fact that share capital was utilized in setting up

manufacturing facility which is self evident from following

finding of the AO:

"Every public issue is made to set up some projects.

Therefore simply for t reasons that public issue was

made to set up the project, will also not he the

assessee."

7.1. I have carefully considered the order of Hon'ble ITAT,

Indore, consequent or u/s 143(3) r.w.s. 254 of the I.T. Act

as well as the submissions of the appellant. T ITAT had

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remanded the case for the limited purpose of verification

as to whether fresh share capital was linked to the setting

up of the project, and if so, the AO was directed to give

the benefit of capitalizing the interest amount, thereby

reducing the cost of assets. The said directions are quite

clear as evident from the relevant portions thereof

reproduced below:

"The Hon'ble Supreme Court in the case of Bokaro Steel

Limited (supra) and Kamal Co-op. Sugar Mills Limited

(suprn) held that if interest income is intrinsically linked to

set up project before commencement, then it is capital

receipt and would reduce the cupital investment.......

The authorities below have also failed to give the finding

of fact whether interest income so earned on shure

application money had any link with the setting up of the

project before the commencement......

It therefore appears from the aforesaid decisions that the

assessee has prima facie case for allowing the deduction

on this issue. However considering the facts and

circumstances of the case and that the authorities below

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have not given any finding to the effect whether the

interest income is intrinsically linked to set up project

before the commencement of production, we are of the

view that the matter requires reconsideration at the level

of the Assessing Officer in the light of the decision of the

Hon'ble Supreme Court in the case of Bokaro Steel Limited

(supra) and Kamal Co-op. Sugar Mills Limited (supra)."

7.2. It is therefore clear that the ITAT had remanded the

case for the limited purpose of verification as to whether

the fresh share capital was linked to the setting up of the

project, and if so, the AO was directed to give the benefit

of capitalizing the interest amount, thereby reducing the

cost of assets. Instead of giving a reasoned finding

regarding linkage or otherwise of interest income with

setting up of the project, the AO has simply denied the

said linkage without giving any reasons and also

remarking in the process that simply for the reason that

public issue was made to set up the project, will not help

the assessee since every public issue is made to set up

some projects. This observation is in direct conflict with

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the directions of Hon'ble ITAT, which has held that if the

proceeds of the public issue are linked to setting up of the

project, the AO should allow capitalization of the interest

earned on such proceeds. It is further observed that the

AO has failed to examine the issue of linkage as per the

directions of ITAT, which required examination of the

issue in the light of judgements of Hon'ble Supreme Court

in the case of Bokaro Steel Limited (supra) and Kamal Co-

op. Sugar Mills Limited (supra). Be that as it may, the said

issue was examined during the appellate stage, and the

findings in this regard are as follows.

7.3. From a comparative analysis of the audited financial

statements of FY 1990-91 and 1991-92, the following

position emerges w.r.t. the increases in share capital, term

loans and gross value of fixed assets.

“Fund utilised for setting up the Project as on 31/03/1992 Amount in ‘ooo Particulars 31.03.1992 31.03.1991 Increase A B C(A-B) Gross value of fixed assets* 3,90,736 2,993 3,87,743

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Capital Work in progress* 11, 754 24,604 -12,850 Add: Interest income earned 15154.534 0 15,155 on IPO Proceeds which was reduced from the value of fixed assets Total outflow on 4,17,645 27,597 3,90,048 acquisition of fixed assets

Term loans for acquisition of 2,63,684 22,950 2,40,734 fixed assets # Share capital (net of calls in 1,53,151 18,468 1,34,683 arrars) $ Total inflow for meeting 4,16,835 41,418 3,75,417 cost of fixed assets Excess amount utilized for 810 -13,821 14,631 acquisition of fixed assets from internal accruals

7.4. During the year under consideration, there was an

increase in share capital to the extent of Rs.

13,46,83,000/- due to the proceeds of the IPO, which

were temporarily placed in a separate bank account as

mandated under the Companies Act. Further, there was

an increase of term loans of Rs. 24,07,34,000/-

specifically taken for acquisition of fixed assets, as

emerging from the relevant schedules to the statement of

accounts, which is extracted below:

Schedules to statement of accounts

As at As at 31.3.1992 31.3.1991 Rs. In 000’s Rs. In 000’s

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7.5. Thus, the total inflow from increase in share capital

and dedicated term loans was Rs. 37,54,17,000/-. As

against this, the gross value of fixed assets has increased

from Rs. 29,93,000/- in FY 1990-91 to Rs. 39,07,36,000/-

in FY 1991-92, resulting in an increase of Rs.

38,77,43,000/-, which when adjusted for the capital work

in progress and interest earned from IPO proceeds, gives a

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resultant figure of Rs. 39,00,48,000/- on account of total

outflow on acquisition of fixed assets. In this manner, the

total inflow of Rs. 37,54,17,000/- approximately matches

the total outflow of Rs. 39,00,48,000/- on account of

acquisition of fixed assets, giving a small excess amount

of Rs. 1,46,31,000/- utilized for acquisition of fixed assets

from internal accruals. It is therefore clear that the entire

increase in share capital of Rs.13,46,83,000/- during the

year has been completely utilized towards the acquisition

of fixed assets and hence it is clear that the IPO proceeds

are inextricably linked to the setting up of the plant. Such

being the case, the interest income earned from temporary

parking of IPO funds is hereby allowed to be set-off from

the capital cost of the project, in accordance with the

directions of Hon'ble ITAT. Ground no. 1 is accordingly

allowed.

separate adjudication.

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2.7 The Revenue being aggrieved by the “Impugned Order”

has preferred the instant second appeal before this Tribunal &

has raised the following grounds of appeal in the Form No. 36

against the “Impugned Order” which are as under:-

“1. Whether on the facts and circumstances of the case,

the Ld. CIT(A)-31, New Delhi was justified in holding that

the interest income earned from temporary parking of IPO

funds was not taxable as it was of capital nature and not

revenue?

Ld. CIT(A)-31, New Delhi was justified in holding that the

interest income earned from temporary parking of IPO

funds was of capital nature as it was earned on share

application money to be used for setting up of the plant,

without appreciating the fact that the Hon'ble ITAT held

that the Assessing Officer should decide whether the

interest earned on share application money had any link

with the setting up of the project before the

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commencement, and not whether the share application

money had any link with the setting up of the project?

Ld. CIT(A)-31, New Delhi was justified in inferring the

finding of the assessing officer that it was immaterial

whether the public issue was used for setting up the

project, as the intent of deposit was to be examined in

view of the judgments quoted by the Hon'ble ITAT?

4 Whether on the facts and circumstances of the case, the

Ld. CIT(A)-31, New Delhi was justified in ignoring the fact

that the assessee was under the obligation to keep the

share application money in a separate bank account and

the allowable bank account for the company, being current

account does not yield any interest income and the

question of treatment of interest income would not arise as

per provisions of Section 73 of Companies Act, 1956?

Ld. CIT(A)-31, New Delhi was justified in concluding that

the total inflow of funds in share capital has been

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completely utilized towards the acquisition of fixed assets

by referring to few particulars of Balance Sheet and not

all ?.

6.The order of the Ld. CIT(A)-31, New Delhi is perverse,

erroneous and is not tenable on facts and in law.

other ?

forgo any ground(s) of appeal either on or before the final

hearing of the appeal.”

Record of Hearing 3.

3.1 The hearing in the matter took place before this Tribunal

on 03.022026 when the Ld. DR for & on behalf of the Revenue

appeared before this Tribunal & inter alia contended that the

“Impugned Order” is bad in law, illegal & not Proper. It

therefore deserves to be set aside. It was next contended that

the registry of this Tribunal has pointed out the delay of 975

days in preferring the present appeal. The “Impugned Order”

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is dated 22.07.2022. The date of service of the “Impugned

Order” is dated 05.08.2022. The appeal was e-filed on

02.07.2025 which period is well beyond the statutory time

limit of 60 days. In this regard the Revenue has placed on the

record of this Tribunal a letter dated 16.12.2025 by virtue of

which the Revenue has prayed that the delay be condoned. In

the said letter a detailed explanation is given by the Revenue

on delay in filing the instant appeal. The contents of the said

letter is reproduced by as below :-

“

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3.2 In this regard the Ld. AR of the assessee has submitted

that the assessee has no objection on delay aspect.

Accordingly we condone the delay. Sufficient cause is shown.

There are no malafides. The cause of the delay is bonafidely

explained basis bonafide reasons. Appeal admitted & taken up

for hearing.

3.3 During the course of hearing thereafter the Ld. AR for

the assessee addressed this Tribunal first for which the Ld. DR

had no objection.

3.4 The Ld. AR stated that the assessee presently is into

the manufacturing of yarn, knitting etc. & has a factory

premises in the Khargone District of M.P. It was also stated

that the present appeal before this Tribunal is second round

of litigation. It was submitted that few decades ago the

management of the assessee company took a decision to set up

yarn, knitting facilities factory at Khargone District of M.P. In

order to set up the manufacturing facilities at the aforesaid

location, the management of the assessee company also took

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decision to bring “Initial Public Offer” popularly known as

“IPO” to finance the proposed project.

The assessee company received an amount of Rs.

1,51,54,534/- as the interest income on the proceeds of Public

Issue deposited with the banks, prior to the commencement of

commercial production. It was submitted by the Ld. AR that

the interest income was parked in [Fixed Deposit Receipt]

FDR’s. The aforesaid amount was reduced from the cost of the

project. It was stated that in the first round of litigation before

ITAT, Indore, this Tribunal has remanded back to the file of

the Ld. AO. Our attention was brought to the internal page 2 &

3 of the “Impugned Order” especially para 16 [extract of ITAT

order] which was read out by the Ld. AR which we reproduce

as under :-

“ 16. We have considered the rival submissions and the

material available on record. It is not in dispute that the

assessee received the above interest income from various

banks on share application money. The learned

Commissioner of Income tax (Appeals) accepted the claim

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of the assessee that the said income has been received

prior to commercial production of the assessee and that

the assessee was under legal compulsion to deposit the

share application money in separate bank account. These

facts would clearly prove that the assessee as per the

Companies Act deposited the share application money

with the scheduled bank on which he had no control over

the same. The assessee therefore earned the interest

incidentally on the same. The decision in the case of

Tuticorin Alkali Chemicals (supra) has no applicability to

the case because in that case the interest earned on

short term deposit out of borrowed funds which were not

immediately utilized for setting up of the factory. This

decision would not support the findings of the learned

Commissioner of Income tax (Appeals). The Hon'ble

Supreme Court in the case of Bokaro Steel Limited (supra)

and Kamal Co-op. Sugar Mills Limited (supra) held that if

interest income is intrinsically linked to set up project

before commencement, then it is capital receipt and

would reduce the capital investment. It is an admitted

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fact that the interest income has been received prior to

the date of commercial production. It is also admitted

that the assessee was under legal obligation/compulsion

to deposit the share application money in the separate

bank account and on that account the assessee earned

the interest. The authorities below have thus failed to

note these important facts while rejecting the claim the

assessee. The authorities below have also failed to give

the finding of fact whether interest income so earned on

share application money had any link with the setting up

the project before the commencement. The learned

counsel for the assessee while referring to decision of

Hon'ble High Court of Madras in the case of VGR

Foundation (supra) has referred to the observations of

the Hon'ble High Court of Madras in para 5 of the above

judgment which distinguished the decision in the case of

Tuticorin Alkali Chemica (supra) and also referred too

observations of the Hon'ble High Court of Madras to the

effect that the share application money, etc. are gathered

for being used for setting up of industry, unit, purchase

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of assets and so on. It therefore appears from the

aforesaid decisions that the assessee has prima facie

case for allowing the deduction on this issue. However

considering the facts and circumstances of the case and

that the authorities below have not given any finding to

the effect whether the interest income is intrinsically link

to set up project before the commencement of production,

we are of the view that the mat requires reconsideration

at the level of the Assessing Officer in the light of the

decision the Hon'ble Supreme Court in the case of Bokaro

Steel Limited (supra) and Kanal Co-Sugar Mills Limited

(supra). The contention of the learned Departmental

Representative is rejected with regard to bona fide of the

claim of the assessee in appending note with return of

income because the learned CIT(A) considered this issue

on which the revenu not in appeal. It is also very well

settled that note given or filed in the return of income

part of return of income. If the assessee would not have

any justification to claim expenditure, then it would not

have appended the note with the return of income.

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contention of the learned Departmental Representative is

therefore rejected. We therefore set aside the orders of

the authorities below and restore this issue to the file of

the Assess Officer with the direction to re-decide this

issue in the light of the decision of the Horn Supreme

Court in the case of Bokaro Steel Limited (supra) and

Kamal Co-op. Sugar M Limited (supra) as well as in the

light of the decision of the Hon'ble High Court of Man in

the case of VGR Foundation (supra). The Assessing

Officer shall decide the issue giving reasonable

opportunity of being heard to the assessee."

3.3 It was then submitted by the Ld. AR for the assessee by

inviting our attention to the “Impugned Assessment Order”

by virtue of which it was contended that same is not proper &

are highted in nature. The “Impugned Assessment Order” is

contrary to the ITAT order (supra). At this stage a query was

raised by this Tribunal to the Ld. AR as to for what various

purposes IPO are made by the corporates. The Ld. AR in reply

submitted that IPO could be for 1)working capital

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requirements 2) For repayment of existing loans 3) For the

purpose of expansion of plant and machinery including

modernization 4) for running of business 5) other purposes too.

In so far as the assessee company was concerned, the IPO was

made for “Setting up of projects”. The Ld. AR during the

course of the hearing also read out relevant extracts like para

3 & 4 of the “Impugned Assessment Order”. It was also

submitted that in the “Impugned Assessment Order” the Ld.

AO has not examined the books of the assesses whereas the Ld.

CIT(A) in the first appeal has done so.

3.4 The Ld. AR then read out the following from the

“Impugned Assessment Order”

“1. The company's public issue opened for subscription

on 3rd September 1991. The cost of the project was

pegged at 3400 Lacs which was mainly on account of

land, building, plant & machinery and other fixed

assets. The means of finances were to the tune of Rs.

1336 lacs by way of capital from promoters and

public, Rs. 509 lacs by way of term loan, Rs. 1545

lacs by way of foreign currency loan and Rs. 10 lacs

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by way of subsidy from the state government. The

issue was slated for closing on earliest by 6th

September 1991 and latest by 14th September 1991.

The issue was an unprecedented success and was

over subscribed by 75 times. The issue was made at

par. Copy of the prospectus is enclosed.”

proceeds with various banks on which it has earned

this interest of Rs. 1,51,54,534/-. All the deposits

were realized in Oct & Nov 1991 as evident from the

TDS certificates issued by these banks which are

already on record. The company commenced part

commercial production from 1st February 1992 as

evident from the annual accounts note no. 7.

Therefore the interest was received before the

commencement of commercial production”

“4. At the time of public issue the company was at an

advanced stage of construction of its manufacturing

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facilities and was in dire need of funds. Had there

been no statutory compulsion of the Companies Act,

the company would not have kept the funds with

banks on a lower rate of interest rather would have

immediately deployed the proceeds in the

construction activities. Had this been the case, the

company would have incurred lower interest cost on

its term loans as the term loans would have been

utilised from a later date. The details of interest paid

on term loans is already available on record as the

same was submitted during the initial assessment

proceedings. If need be the same can be filed again.”

3.5 The Ld. AR finally contended that the nexus is drawn

as required. The Ld. CIT(A) impugned order is well merited &

reasoned order, in consonance with the order of the ITAT

(supra).

3.6 The Ld. DR appearing for & on behalf of the revenue

submitted that the revenue has raised in all 8 grounds & read

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out each of them as per form No. 36. It was emphasized with

regard to ground No. 3 that intent of the deposit is of

importance whether before or after the commencement of

project. With regards to ground 4, it was submitted that there

is an obligation of mandatory nature to deposit the money in

the separate bank account. With regard to the ground No. 5, it

was contended that the CIT(A) has taken the figures which are

partial in the nature & not whole at all.

3.7 The Ld. DR finally stated that “Impugned Order” is bad

in law & illegal. Revenue has demonstrated this fact & reliance

was placed on “Impugned Assessment Order”.

3.8 In the rejoinder, the Ld.AR submitted that the ITAT in

earlier order(supra) has held in the favor of the assessee &

that the “Impugned Assessment Order” is contrary to the

ITAT order (supra). In further rejoinder stage the DR Stated

that it is lawful obligation & statutory duty to keep funds

separately in a separate A/C. The issue of prior to

commissioning of plant was considered by the ITAT. The

Hearing was then concluded.

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4.1 We have to decide the legality, validity and proprietary of the

“impugned order” basis records of the case & the rival submission

canvassed before us.

4.2 We have carefully perused the records of the case and have

heard the submissions.

4.3 We basis records of the case & after hearing & upon

examining the rival contentions of the Ld. AR & the Ld. DR

canvassed before us, are of the considered view that in the

“Impugned Assessment Order” dated 31.12.2009 , the Ld. AO

has held as under in the ultimate analysis:-

Issue deposit which is not in dispute.

prior to the commencement of commercial production

does not change the nature of income.

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directly related to setting up of the Project.

Therefore simply for the reasons that the Public issue was

made to set up the Project will not help the assessee.

separate bank account by the provisions of Companies

Act, will also not, in any manner alter the nature of

income.

all practical purposes.

the setting up of the project & cannot be allowed to be

adjusted against the cost of fixed assets.

other sources & same is taxed accordingly.

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4.4 The Ld. CIT(A) in the “Impugned order” dated22.07.2022

has allowed the first appeal of the assessee & has observed &

held as under in the ultimate analysis:-

purpose of verification as to whether the fresh share

capital was linked to the setting up of the Project and if

so, was directed to give benefit of capitalizing the

interest amount, thereby reducing the cost of assets.

or otherwise of interest income with setting up of the

Project, the AO has simply denied the said linkage

without giving any reasons & also remarking in the

process that simply for the reason that the Public issue

was made to set up the Project, will not help the

assessee since every public issue is made to set up

some projects. The Ld. CIT(A) has further held that this

above observation is in direct conflict with the

directions of Hon’ble ITAT which had clearly stated that

if the Proceeds of the Public Issue are linked to setting

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up of the Project, the AO should allow capitalization of

the interest earned on such Proceeds.

has failed observed and held that the Ld. AO to

examine the issue of linkage as per the directions of

ITAT which required examination of the issue in the

light of the judgements of Hon’ble Supreme Court of

India in case of Bokaro steel Ltd.[ 1998(12) TMI-4-SC]

& Karnal Co-op. sugar Mills Ltd. [(2000) 243 ITR 2(SC)].

notwithstanding aforesaid examined the aforesaid issue of

linkage between aforesaid interest income [earned out of

Proceeds of IPO] with the setting up of the Project.

comparative analysis of the audited Financial Statements of

F.Y. 1990-91 & 1991-92 and observed that following

position emerges with regard to the increases in the

share capital, term loans and gross value of fixed assets

which is reproduced by us as below:-

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“Fund utilised for setting up the Project as on 31/03/1992 Amount in ‘ooo Particulars 31.03.1992 31.03.1991 Increase A B C(A-B) Gross value of fixed assets* 3,90,736 2,993 3,87,743 Capital Work in progress* 11, 754 24,604 -12,850 Add: Interest income earned 15154.534 0 15,155 on IPO Proceeds which was reduced from the value of fixed assets Total outflow on 4,17,645 27,597 3,90,048 acquisition of fixed assets

Term loans for acquisition of 2,63,684 22,950 2,40,734 fixed assets # Share capital (net of calls in 1,53,151 18,468 1,34,683 arrars) $ Total inflow for meeting 4,16,835 41,418 3,75,417 cost of fixed assets Excess amount utilized for 810 -13,821 14,631 acquisition of fixed assets from internal accruals

observed & held that during the year under

consideration there was an increase in the share capital

to the extent of Rs. 13,46,83,000/- due to the Proceeds

of the IPO, which were temporarily placed in a separate

Bank account as mandated under the Companies Act.

Further, there was an increase of term loans of Rs.

24,07,34,000/- [for acquisition of fixed assets] specially

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taken for acquisition of fixed assets as emerging from

the relevant schedules to the statement of Accounts

[supra table]

the Statement of Accounts has also done comparison

between years ended as 31/3/91 & 31/3/92 which is

reproduced by us as below :

Schedules to statement of accounts

As at As at 31.3.1992 31.3.1991 Rs. In 000’s Rs. In 000’s 1. Share Capital Authosised 2,00,000 1,50,000 200,00,000 Equity shares at Rs. 10 each 1,53,640 1 Issued, Subscribed & Paid up 153,64,000 Equity shares at Rs. 10 each 489 - 1,53,151 1 Less: Calls in arrear - 18,467 Share application money pending allotment 1,53,151 18,468

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4.5 The core argument of the Ld. DR in the final analysis during the course of hearing was nothing but placing reliance on the “Impugned Assessment Order” of the Ld. AO which according to us assailed by the Ld. CIT (A) has been done

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reasonably. The Ld.AO was directed to do the linkage between Interest income (IPO) with setting up of Project as per ITAT order of Indore Bench(supra) which analysis he did not do so despite the order of higher Authority body like ITAT. The Ld. CIT(A) did elaborate exercise basis financial statements of both the years studied the financial statements did necessary calculations & has come to a well reasoned & merited finding as analyzed by us aforesaid. The Ld. DR has failed to demolish & tarnish the analysis done by Ld. CIT(A) on any cogent & tangible grounds. No material is placed on record of this Tribunal to dint the analysis of the Ld. CIT(A). The arguments of Ld. DR as recorded by us Para 3.6 (supra) are not enough weapons to dint the findings of the Ld. CIT(A) which is done basis a proper financial analysis that too basis material available on record. Entire gamut of the case is examined & contentions of the Ld. DR are all rejected as they do not have sufficient strength to dislodge the findings made by the Ld. CIT(A). The Ld. AR has rightly asserted that core finding on the issue was already examined by the ITAT, Indore Bench earlier & matter was remitted back to the Ld. AO to establish linkage between interest income (IPO) vis-a-viz setting up of

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projects as & by way of verification only which too was not done so by the Ld. AO & ultimately was done by the CIT(A) in the “Impugned Order” . The Ld. AR has rightly stated in the hearing as recorded by us in para 3.8 that earlier order of ITAT, Indore was in favour of the assessee & that the “Impugned Assessment Order” is contrary to earlier order of ITAT, Indore Bench & hence revenue appeal should be rejected. We concur

with the submission made by the Ld. AR on this case.

4.6 In view of above premises drawn by us, we upheld the “Impugned Order” & dismiss the revenue’s appeal.

5 Order

5.1 In the result, the “Impugned Order” is set aside & the revenue’s appeal is dismissed.

Pronounced in open court on 27.02.2026.

Sd/- Sd/-

(BHAGIRATH MAL BIYANI) (PARESH M JOSHI) ACCOUNTANT MEMBER JUDICIAL MEMBER

Indore Dated : 27/02/2026

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SN Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) Departmental Representative (6) Guard File By order UE COPY Senior Private Secretary Income Tax Appellate Tribunal Indore Bench, Indore

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