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Income Tax Appellate Tribunal, MUMBAI BENCHES “B”, MUMBAI
Before: Shri Mahavir Singh & Shri Manoj Kumar Aggarwal
Date of Hearing :04.10.2017 Date of Pronouncement :11.10.2017 O R D E R
Per Mahavir Singh, Judicial Member
The appeal by the Revenue and the cross-objection by the assessee arises out of the order of the Commissioner of Income Tax (Appeals) – 5, Mumbai [In
CO 163/Mum/16 Bajaj Energy Ltd. short CIT(A)] in appeal No.IT-896/13-14/227/14-15, dated 14.11.2014. The assessment was framed by the Deputy Commissioner of Income Tax / Assessing Officer, Circle 3(1), Mumbai, (in short DCIT /AO) for Assessment Year 2011-12, vide order dated 21.01.2014, u/s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).
The only issue involved in the appeal by the revenue and the cross-objection of the assessee is with regard to the order of the CIT(A) holding that interest income of ` 4,24,30,920/- is assessable as income from other sources but interest expenses are to be allowed which are meant for earning of such interest income. For this the Revenue has raised following ground no.1: -
“1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the relatable interest expenditure incurred on interest income of Rs.4,24,30,920/- u/s. 57(iii) of the I.T.Act without appreciating the fact that the borrowed funds are not meant for earning interest from such lending as held by Hon’ble Apex Court in the case of Dr.V.P.Gopinathan 248 ITR 449 (SC).” The ground raised by the assessee in this regard is as under:-
“1. On the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in confirming the action of the Assessing Officer of taxing the interest income amounting to ` 4,24,30,920/- as “Income from Other Sources” instead of treating the same as a capital receipt.
2. On the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in not appreciating that the interest income earned on such deposits was inextricably linked with the setting up of the project and should be reduced from the cost of the same.”
Briefly stated facts of the case are that the assessee company is engaged in the business of generation of coal based power and electricity and is setting up
CO 163/Mum/16 Bajaj Energy Ltd. power plants at various places. The Assessing Officer during the course of assessment proceedings noticed from the accounts of the assessee that it has raised funds for the purpose of acquisition of various business assets and plant and machinery. The Assessing Officer also noticed that it has parked certain amounts out of the above borrowed funds in various fixed deposits to earn interest. According to the Assessing Officer the assessee, instead of offering the amount earned as interest as “Income from other sources”, has reduced the same from capital work-in-progress and avoided paying tax. According to the Assessing Officer, the assessee has reduced an amount of ` 4,24,40,920/- on account of interest received on Fixed Deposits from the capital work-in-progress and ` 90,45,333/- being interest received against margin money. The Assessing Officer was of the view that this income is taxable as “Income from other sources” and, accordingly, he treated both the amounts i.e. ` 4,24,40,920/- & ` 90,45,333/- as “Income from other sources”. Accordingly, he made an addiction of ` 5,14,76,310/. Aggrieved the assessee preferred appeal before the CIT(A).
The CIT(A) after considering the decision of Hon’ble Supreme Court in the case of Bongaigaon Refinery & Petrochemicals Ltd. [2001] 252 ITR 329 (SC) and Karnal Co-operative Sugar Mills Ltd. [2000] 243 ITR 2 (SC) treated the interest income as income earned on temporary deposits out of the surplus funds kept as deposits during the construction stage and held the same as taxable as “Income from other sources.” Alternatively, the CIT(A) allowed the claim of the assessee of related interest expenses on the borrowed funds, which were utilised for temporary deposits in bank u/s. 57 of the Act. As regards second amount of addition of CO 163/Mum/16 Bajaj Energy Ltd. ` 90,45,333/-, the CIT(A) was of the view that interest earned on deposits kept as margin money is not taxable and is to be treated as capital receipt and would go to reduce the cost of fixed assets/capital work-in progress. As regards deleting the addition of interest income of ` 90,45,333/- by CIT(A), Revenue is not in appeal before the Tribunal. Hence, this issue has become final.
As regards the order of the CIT(A) holding the borrowed funds as temporary deposits kept as fixed deposits during the construction stage as taxable under the head ‘Income from other sources’ amounting to ` 4,24,30,920/-, the assessee is in cross-objection before us. The Revenue is against the allowance of interest expenses from this interest income on the expenses relatable to borrowed funds.
We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the assessee had been sanctioned a term loan of ` 1740 crores by consortium of Banks to part finance for setting up power generating plant. Surplus funds had arisen due to gap between fund borrowed as per the disbursement schedule prefixed by lender banks and actual utilization for the project. In between the surplus funds were kept as fixed deposits and earned interest by the assessee amounting to ` 4,24,30,920/-. The assessee while filing return of income claimed the interest from aforesaid fixed deposit and reduced it from cost of project as fixed deposit claiming that interest thereon was inextricably linked with the setting up of project. The assessee claimed interest from fixed deposits as capital receipt in its revised return of income. The assessee before us also claimed that the interest received can only go to reduce the cost of capital asset and these amounts are inextricably linked with the process of setting up of CO 163/Mum/16 Bajaj Energy Ltd. plant and machinery. The assessee claimed that the funds deployed towards short term deposits were only ` 209 crores, which is tabulated as under:
Bank Name FDR Amount SBI- Lucknow ` 110,00,00,000 PNB ` 25,00,00,000 ` 74,00,00,000 PNB Total ` 209,00,00,000 The assessee before us filed complete details of interest received and interest paid including the banks from which loans have been taken by the assessee and the FDRs made by it. The assessee submitted complete details by a separate note. We find that this issue has been considered by Hon’ble Supreme Court in the case of CIT vs. Karnal Co-operative Sugar Mills Ltd (supra), wherein the Hon’ble Supreme Court has clearly laid down the principal that the deposit of money which are directly linked with the purchase of plant and machinery, any income earned on such deposit which was incidental to the acquisition of asset for the setting up of plant and machinery, the consequential interest was capital receipt which would go to reduce the cost of asset. Similar view was taken by the Supreme Court in the case of Bongaigaon Refinery & Petrochemicals Ltd (supra). Respectfully following the judgment of Hon’ble Supreme Court, we also direct the Assessing Officer to find out from the details whether this interest earned was out of the borrowed funds, which was directly linked to the purchase of plant and machinery, in that eventuality, the Assessing Officer will treat the interest as capital receipt. In case the interest is relatable to surplus funds, out of share capital and reserve & surplus, interest will be treated as ‘Income from other sources’. As regards to deductibility of CO 163/Mum/16 Bajaj Energy Ltd. interest expenditure, in case the AO treat this interest receipt as income from other sources, the same shall be considered by Ld. AO as per law. We direct the Assessing Officer accordingly.
6. In the result, the appeal of the Revenue and the cross–objection of the assessee are partly allowed for statistical purpose.
Order pronounced in the open court on this day of 11th October 2017.