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Income Tax Appellate Tribunal, BENCH “D” MUMBAI
Before: SHRI D.T.GARASIA, JM & SHRI RAJESH KUMAR, AM
सुनवाई की तारीख /Date of Hearing : 6.3.2017 घोषणा की तारीख /Date of Pronouncement : 4.2017 आदेश / O R D E R PER RAJESH KUMAR, A. M: This is an appeal filed by the assessee against the order of ld.CIT(A)- 13, Mumbai dated for the assessment year 2008-09.
The grounds of appeal taken by the assessee are as under : “The appellant objects to the assessment order dated 19.11.2010 passed u/s. 143(3) of the I.T. Act, 1961 by the learned Asst. Commissioner of Income Tax Range 7(2) Mumbai (hereinafter referred to as the "Assessing Officer" for the Assessment Year 2008-09 and as confirmed by honorable CIT (A) -13 vide order dated 25/10/2011 on the following among other grounds:
1. On the facts and in the circumstances of the case and in law, the learner CIT(A) erred in confirming the disallowance of Rs. 8,05,43,972/- claimer under section 57(iii) of the Income Tax Act, 1961.
2. The Order passed by the learned CIT (A) is illegal, bad in law, ultra virus and contrary to the provisions of the law and facts and is passed without application of mind and in violation of the principles of natural justice. 3. The Appellant craves leave to add, to alter or to amend any of the ground of appeal mentioned hereinabove.
Brief facts of the case in respect of grounds of appeal no.1 are that the assessee is a company and engaged in the business of development of minor ports. During the year the assessee filed its return of income on 27.9.2008 by declaring a total income of Rs.10,21,31,760/-, thereafter the assessee filed revised return of income on 25.3.2010 declaring a total income of Rs.2,15,87,791/-. During the year the assessee was engaged in the development of port at Rewas-Aware minor port at Rewas in the State of Maharashtra. During the course of assessment proceedings, the AO found that the assessee has earned interest amounting to Rs.8,05,43,972/- which was not offered to tax and has been reduced from the project development expenditures under the head Work-In-Progress and accordingly a show cause notice dated 14.12.2010 was issued to the assessee calling upon the assessee as to why the same shall not be treated as income from other sources, which was replied by the assessee vide letter dated 20.12.2010. It
AO that during the year the assessee has borrowed funds from UTI Bank Limited which was utilized by the company for making inter-corporate deposits on which the assessee had earned interest income of Rs.8,05,43,972/-. Likewise the investments were made by the assessee in the various other companies which fetched dividend income of Rs.1,26,790/-. On the sale of investments, the assessee has also earned profit of Rs.2,15,87,791/-. The said income was reduced from WIP in the balance sheet as the company has not commenced its revenue operations during the year. However, while filing the return of income for the assessment year 2008-09 the profit on sale on investment was offered for taxation under the head “CAPITAL GAINS” as “Short Term Capital Gains”. The dividend income of Rs.1,26,790/- was claimed as exempt u/s 10(35) of the Act and the interest of Rs.8,05,43,972/- was offered under the head “income from other sources” and the interest paid to bank was claimed deduction u/s 57(iii) of the Act. The assessee contended that since the assessee has earned the interest income from inter-corporate deposits which were not from the business or profession of the assessee as the company has deposited surplus funds into these inter-corporate deposits and therefore, the income so offered to tax u/s 56(1) of the Act. The company has invested the said money out of money borrowed from UTI Bank in respect of which the company has also paid interest. Thus, the interest bearing funds were utilized for making inter- corporate deposits on which the company has earned income and there was direct nexus between the borrowed funds and utilized for inter-corporate deposits and interest expenditure incurred by the assessee has resulted into income from inter-corporate deposits. Accordingly the said interest was claimed u/s 57(iii) of the Act as expenditure incurred wholly and exclusively for the purpose of earning interest income . The assessee has filed details of interest bearing funds available and investment hereof in the project before the AO and prayed before the AO that the weighted average comparison of total equity funds (cash) to interest bearing funds calculated to Rs.36.69% and 63.31% and the total interest should be logically be bifurcated on the same basis and allowed u/s 57(iii) of the Act. The AO, not convinced with the contentions raised by the assessee , assessed interest income at Rs.8,05,43,972/- under the head “income from other sources” without allowing any expenses under section 57(iii) of the Act thereby framing the assessment under section 143(3) vide order dated 30.12.2010 by assessing the total income at Rs.10,21,31,760/-.
During the course of appellate proceedings, the ld. CIT(A) dismissed the appeal of the assessee by holding that the interest earned on borrowed surplus funds temporarily parked pending utilization was chargeable as income from other sources/revenue in nature/interest paid on borrowings for 57(iii) of the Act. Aggrieved by the order of the FAA, the assessee is in appeal before us.
The ld. AR vehemently submitted before us that the issue raised in this year stands covered in favour of the assessee by the decision of the co- ordinate Bench of the Tribunal in assessee’s own case for the assessment years 2009-10 and 20010-11. The ld. AR submitted that the assessee is engaged in the business of development of minor ports and raised money from the banks beside investing own funds. However, the assessee after finding surplus funds available with it temporarily invested excess funds in the inter-corporate deposits on interest which was shown as interest income from the other sources by claiming the interest paid on the said income to the banks u/s 57(iii) of the Act. The ld. AR pointed out that the assessee has withdrawn appeal bearing and 4942/Mum/2014(AY- 2009-10 and 2010-11) vide tribunal order dated 10.2.2016. Thus, the order passed by the ld.CIT(A) dated 20.5.2014 for the assessment year 2009-10 and 2010-11 attained finality.
The ld. AR submitted that since the facts of the present case are identical to that of assessment year 2009-10 and 2010-11, therefore the case in hand be restore to the file of the AO to be decided on the same lines as 2009-10 and 2010-11 wherein by allowing the 1/3 of the total interest debited in the profit and loss account.
The ld.DR fairly agreed with the arguments of the ld.AR.
We have carefully considered the rival submissions, material placed before us and the orders of authorities below including the earlier decisions of the Tribunal in assessee’s own case. We find merit in the contentions of the ld.AR that the facts of the instant case before us are materially same as in the assessment years 2009-10 and 2010-11 which attained finality due to withdrawal of appeals which were allowed by the co-ordinate bench of the Tribunal vide odder dated 10.2.2016. The relevant extract of the ld.CIT(A)’s order for the AYs-2009-10 and 2010-11 is reproduced below: “3.6 I have duly considered the facts and submissions made in the case. I have also gone e through the decision relied upon by the appellant as mentioned above. These facts are not disputed that appellant borrowed the money for setting up the plant however it could not commence the business as port was not yet complete and hence these interest-bearing funds being surplus with them were utilised for making intercorporate deposits and fixed deposits on which appellant have earned interest also. As far as A.Y 2009-10 is concerned this interest was initially offered by the appellant as interest income however the return was revised declaring total income of Rs.26,38,974/-. It is noted that assessing officer after treating the income as income from other sources has assessed total income at the figure of Rs.1,39,01,050/ - only. This has happened for the reason that the interest expenses incurred on the borrowed capital were not allowable under section 36 of the I T Act due to amended provisions ofsection 36 (1) (iii) with effect from 1.04.2004.
3.7 As it is accepted principle that in considering whether the interest paid by an assessee on loans raised for acquisition of new asset, before the same was first put to use, is to be added towards the cost of the asset or the same is to be granted as a revenue expenditure for the reason that the assessee was already in. business, the provisions of section 36 (l)(iii) cannot be read in isolation but have to be read with s.43 (1). DCIT vs. Core Healthcare 251 ITR 61 (Guj) dissented from. Further S. 36(1)(iii) does not confer a deduction borrowed for the purposes of setting up a new unit even in the case of an assessee already in business. Deduction for interest on capital borrowed can be allowed only after the asset is first put to use and started generating income. Then it is implicit from Expl 8 to sec 43(1), which provides that interest payable after the asset is put to use shall not be added to the actual cost, that interest payable before the asset is put to use has to be added to the actual cost. Thus in conformity with law and accounting principles, interest paid on capital borrowed for acquisition of an asset has to capitalized and cannot be allowed as a revenue deduction till the asset is put to use. There is no distinction between capital borrowed for the setting up of a new business and the expansion of an existing business. Thus the Proviso to s. 36(1)(ill) inserted by the Finance Act 2003 is to 'curb tax avoidance' and is merely clarificatory.
3.8 Now coming to the plea of appellant that while doing so assessing officer has not allowed expenditure incurred as interest paid on these very borrowed capital's which have been utilised for making these intercorporate as well as fixed deposits, I find that this has not been disputed by assessing officer also that these funds on which interest is being paid by the appellant are having direct link with the investment made by way of fixed deposit and intercorporate deposits. What all assessing officer has said in the assessment order as reproduced above in Para 5, as is coming out from a reading of the same that 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 assessing officer has also clearly stated that this expenditure would have been deductible as incurred for the purpose of business if the assessee's business had commenced but that is not the case. In that case the assessing officer has stated that the assessee may be entitled to capitalise the interest payable by it at what the assessee cannot claim its adjustment of this expenditure against the interest assessable under section 56. It is here that I find that the conclusion drawn by assessing officer is unsupported by these decisions as none of these decisions say that when expenses are inextricably linked, is still they cannot be claimed as per provisions of the Act against the income earned by deploying the same funds. It is altogether a different matter that before the amendment came into effect III section 36 of the act the interest earned would have been treated as a capital receipt and thus would have gone to reduce the cost of asset being capital in nature, as per the decision given by Honourable Supreme Court in the case of CIT versus Bokaro steel Ltd. However as the amendment has come into effect from first of April 2004 such interest expenditure cannot be claimed in the profit and loss account till the date on which such asset was first put to use. In view of this it is clear that the appellant could not have claimed the interest expenses for the reason that the business had not commenced at all during the period relevant to A.Y 2009-10 as well as A.Y 2010-11.
3.9 This leaves the question whether expenditure incurred as interest paid on those very fund which have been directly deployed for making these investment on which interest has been or, are deductible or not uJs. 57 of the act when the interest earned is being assessed as income from other sources in that section. The provisions of section 57 (ill) of the act clearly say that any expenditure which is not in the nature of capital expenditure, laid out or expended wholly and exclusively for the purpose of making or earning such income will be allowed as deduction while computing income under the head income from other sources in section 57 of the act. In the instant case the AO is also not disputing the fact that income has to be assessed under section 57 of the Act, which has already been agreed in principle. Having said that once income has to be assessed u/s 57 of the Act provisions of section 57(iii) allowing deduction which are wholly and exclusively incurred for earning the said income to be allowed in accordance with the provisions of the Act. In view of this I am in agreement with the appellant that interest paid being expenses incurred on the same fund which has been deployed to all the interest, having direct nexus has to be allowed. This view is also taken by Honourable Court of Delhi in the case of NTPC SAIL Power Co.Ltd. For the sake of clarity relevant portion of the said decision dealing with the issue are reproduced as under : "Deduction under section 57 (iii) of the income tax act is allowable when any expenditure not being in the nature of capital expenditure laid out or expended wholly and excessively for the purpose of making or earning such income. Thus the expenditure to be deductible under section 57 (iii) must be laid out or expended wholly or exclusively for the purpose of making or earning such income. Unless the expenditure sought to be deducted resulted in making or earning income it could not be said to be laid out or expended for the purpose of making such income. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Admittedly predominant purpose for the loan taken was for the extension of existing business by way of setting up an new power generation plant at Bhilai. Since assessee had been denied the benefit by inserting a specific proviso to section 136 (I) (iii), therefore, matching principles shall help assessee. Whatever cannot be achieved directly, it can also not be achieved indirectly."
3.10 The A.O has rightly concluded that interest earned by utilising surplus funds, before commencement of business in the instant case of the appellant has to be assessed as 'income from other sources'. For the same assessing officer has relied upon decisions given by honourable courts in the case of Tuticorin alkali chemicals and fertilisers Ltd versus C.LT (SC) to 27 ITR 172, C.I.T versus Petroff is co- operative (Guj) 241 ITR 139, CIT versus Cochin Shipyard Ltd (Ker) 158 CTR 208, C.I.T V/s Rassii cement Ltd (AP) 232 ITR 554, South India shipping Corporation versus ACIT (Mad) 240 ITR 24, C.LT V/s Kisan Sahakari Genie bills (All) 280 ITR 617, Chanderpaul sugar: company Ltd versus C.LT (All) 280 ITR 612, Bokaro steel Ltd versus CIT (patna) 170 ITR 545, CIT versus Coromandel Siemens Ltd (SC) 234 ITR 412, C.LT versus auto cast Ltd (SC) 248 ITR 110, Consolidated fibers and chemicals Ltd versus CIT (Cal) 273 ITR 353, Skayef Ltd versus DCIT (ITAT, Bangalore) 71 ITD 419, Godavari fertilisers and chemicals Ltd versus CIT (AP) 198 ITR 388 and CIT versus Hindustan Electro graphite's Ltd (MP) 177 ITR 465, CIT versus Tamil Nadu industrial development Corporation Ltd (Mad) 189 ITR 670, CIT versus newscentre jute mills co-operative Ltd (Cal) 118 ITR 1005, CIT versus VP Gopinathan (SC) 248 ITR 449 and CIT versus Manipur Shipping bills Corporation Ltd (Gau) 26 ITR 551. I have gone through these decisions and I am fully in agreement with the assessing officer that income so earned before commencement of the business though out of business funds has to be assessed as income from other sources. To this extent A.O action of treating the interest earned as Income from Other Sources is upheld.
3.11 In the instant case as the project was at the start-up stage of development, obviously the interest-bearing funds could not have been utilised to the extent of 100% in the very first go and hence the surplus funds were invested in intercorporate deposits by the appellant. Having accepted this, it is also is a fact that the same position would not have been throughout those years when project was taking shape and getting completed for the purpose of business of the appellant. Obviously in such a case funds deployed in the very first year have to be withdrawn to be deployed towards project development. This position vary year to year and go on till all the funds borrowed for the purpose of project have been put to the project development, thus reducing the balance of funds invested in such intercorporate deposits year after year. It is noted the appellant has simply stated that the entire interest expenditure relates to the interest income earned on such intercorporate deposits without giving any details of actual amounts of fund involved in the fmancial year relevant to A.Y 2009-10 and then A.Y 2010-11, these two A.Ys which was involved in the appeals.
3.12 In view of this appellant was asked to provide a fund flow position showing the amount deployed for the project and the one invested in intercorporate deposits, during the financial year relevant to A.Y 2009 - 10 and then A.Y 2010-11. The appellant was specifically told that only that part of interest. expenditure which is related to the amount of funds deployed in intercorporate deposit in the financial year relevant to A.Y 2009-10, is allowable u/s 57(iii) in the assessment year 2009 - 10. Then on the same lines funds deployed yielding interest income in the financial year relevant to A.Y 2010 - 11 can only be allowed u/s 57 (iii) in A.Y 2010 - 11.
3.13 In reply the appellant have submitted a reply for A.Y 2010 - 11 wherein it has been stated as under - From the perusal of the balance sheet, "total interest-bearing funds (IBF) at the beginning of the year was rupees 334.75 Cr and out of these funds available surplus other than those has been utilised for the purpose of project has been deployed in the net current assets of rupees 140.29 Cr." Further, total interest- bearing at the end of the year was rupees 296.34 Cr and out of these funds available surplus other than those has been utilised for the purpose of project had been deployed in the net current assets of rupees 90.30 Cr, which clearly indicates that the company has utilised borrowed funds (available surplus) for giving ICDs et cetera and hence such expenditure is allowable u/s 57 (iii) of the I Tact 1961. The interest income earned on these ICOs has nexus to the interest paid on the borrowed funds of the company. Hence the interest expenses claimed under section 57 (iii) is justified and should be allowed as expenditure against the interest earned on ICDs. Funds deployed for the purpose of intercorporate deposits at the beginning of the year was rupees 41.22 Cr (given to the group companies) and at the end of the year it remains rupees 13.73 Cr . Gist is that the fund which was deployed out of interest-bearing fund was continued during the whole year. Therefore. the deduction claimed under section 57 (iii) is justified and should be allowed and accordingly."
3.14. A reading of the same makes it clear that appellant has only reiterated its submissions made during the assessment proceeding before the AO and thus has only tried to justify the linkage of interest- bearing funds to the interest income earned in general and thus to claim allowability u/s. 57 (iii) of the LT act 1961, without quantifying the amount admissible under section 57 (iii) of the act. Thus it is seen that despite being asked for to quantify the amount by giving the actual amount of fun deployed, the appellant have only submitted that interest expenses should be allowed under section 57 (ill) of the act. In the given facts in the case that with each year of progress of project development such surplus funds deployed in intercorporate deposits have to be withdrawn in order to be deployed for the purpose of project development, for which they were borrowed from financial institutions. As the appellant have not come up with the specific details and have relied upon balance sheet figures, that too at the beginning and at the end of the financial year on! rather than giving actual amount of fun deployed throughout the year and calculation of interest paid on the same, as asked for, I am of the considered view that based on balance sheet figures only, the interest expenses paid on the borrowed funds, which were deployed throughout the period, can only be allowed xx]«. 57 (ill of the act and the balance amount of interest expenditure has to be capitalised in the cost of project for the reason that the asset has not yet taken shape in these two F.Ys i.e. F.Y 2008- 09 and 2009-10 relevant to A.Ys 2009-10 and A.Y. 2010-11, those involved in these two instant appeals.
3.15 As far as A.Y 2010-11 is concerned, the appellant have themselves submitted that the funds deployed at the beginning of the year for the purpose of intercorporate deposits was Rs.41.22 Cr whereas at the end of the year the figure was Rs.13.73 Cr, thus it is clear that the balance funds i.e. Rs. 27.49 Cr were taken out during the year for the purpose of project. Even going on proportionate basis it is seen that the funds deployed in intercorporate deposits and fixed deposits which are forming part of net current assets, in the beginning of the year funds which were at Rs. 334.75 Cr have been reduced to Rs.140.29 Cr at the end of the year. This means funds deployed in net current assets at the beginning of the year at Rs.334.75 Cr have reduced to at their 23.86% i.e. less than 1/3 of the same. Then coming to funds deployed only for intercorporate deposits, it is seen that at the beginning of the year reduced to less than their 1/3rd at the end of the year (Rs. 41.2 to CrI Rs. 13.73 Cr = 30.02%) . In view of this interest paid for the balance amount of funds cannot be taken as invested in intercorporate deposits to earn interest income and hence has to be capitalised in the cost of project in view of the discussions made in the light of decisions available on the issue, as cited above already. Accordingly I am of the considered view that out of the interest expenditure debited in the profit and loss account by the appellant at Rs.2,30,730,63/- at the maximum the proportionate expenditure, even if taken on the higher side i.e. 30.02% can only be attributed to earning of interest income on intercorporate deposits made by the appellant, whereas appellant has claimed entire interest expenditure as revenue expenditure by debiting the same in the profit and loss account. Applying the weighted average theory for these two segments, as higher amount of funds deployed in net current assets have been reduced to 23.86% whereas a smaller part of the fund related to intercorporate deposits have been reduced to 30.02%, I am of the view that it can be taken that approximately 25% of the funds have gone as investment in these intercorporate deposits and fixed deposits, which have yielded interest income and hence taking the same, 25% of the amount of interest expenses debited in the profit and loss account, can be attributed to earning of interest income and thus allowable under section 57 (ill) of the act, whereas the balance 75% expenses should be capitalised to be taken as. Project of the cost. Accordingly the assessing officer is directed to allow 25% of the interest expenses debited in the profit and loss account for the A.Y 2010 - 11.
3.16. As far as the A.Y 2009-10 is concerned, it is seen that the appellant have not submitted these details for assessment year 2009-10 during the appellate proceedings. A reading of the assessment order shows submissions during the assessment proceedings before the AO that total interest-bearing fund (I BF) and the beginning of the year were Rs 264.79 Cr and out of these funds available surplus other than those has been utilized for the project has been deployed in net current assets of Rs. 92.67 Cr. Then appellant had submitted before A.O. during the assessment proceedings then also that the funds deployed at the beginning of the year for the purpose of intercorporate deposits was Rs.41.22 Cr whereas at the end of the year the figure was Rs.13.73 Cr. Thus ratio of interest bearing fund deployed in net current assets is (92.7/264.79) again is coming to 34.99% and that of funds deployed to intercorporate deposits and fixed deposits for A.Y. 2009-10, figures being the same position remains the same, as for A.Y. 2009-10 the funds deployed the beginning of the year reduced to less than their 1/3rd at the end of the year (Rs. 41.2 to Cri Rs.13.73 Cr = 30.02%). Here the range is between 30.25 to 34.99%. So taking an average in absence of actual period of funds deployed, an approximate ratio of 33% can be taken for A.Y. 2009-10. Accordingly, for A.Y 2009-10, 1/3 rd ratio is applied for working out admissible interest expenses out of total amount of interest expenses debited in the profit and loss account for the A.Y 2009-10 . Accordingly the assessing officer is directed to allow 1/3rd of interest expenses debited in the profit and loss account for the A.Y 2009-10, and to capitalise 2/3rd of the amount of interest expenses debited by appellant in the profit and loss account for capitalizing that in project cost. The ground numbers 2 as taken by appellant in both these appeals, being identical thus are partly allowed”.
We, therefore, in view of the said decision of the coordinate bench of the Tribunal, set aside the order of the ld.CIT(A) and restore the issue to the file
AO to decide the same afresh as per law and facts in the light of the decision of CIT(A) in the assessment years 209-10 and 2010-11 after affording reasonable opportunity of being heard to the assessee. 9. In the result, the appeal of the assessee stands allowed for statistical purposes. Order pronounced in the open court on 12th April , 2017.