CENTURY ENKA LIMITED,PUNE vs. ACIT, CIRCLE - 1, MUMBAI, PUNE

The Assessee is engaged in the manufacture and sale of Polyester chips, Nylon/Polyester yarn, Nylon Tyre Cord/Fabrics, Polyester industrial Yarn etc. The Assessee was incorporated on 24.10.1988. During the previous year the PFY project of the Assessee was under implementation and commercial production had not commenced. Since commercial operations of the Assessee had not commenced during the previous year, the Assessee capitalized all the expenses incurred during the previous year. While doing so, the Assessee reduced the following income from “Preoperative expenses” during construction period:- i) Interest on Deposit Rs.14,01,95,927 ii)Interest on Tax free bonds Rs. 1,14,16,027 iii)Bill discounting commission Rs. 1,30,37,043 iv) Gain on sale of Investment Rs. 94,55,610 Rs.17,41,04,607 3. The AO was of the view that interest on deposit, commission on bill discounting and gain on sale of investment before commencement of business was taxable as Enka Limited- A.Y.1995-96 “Income from other sources” and “Capital Gain”. The Assessee claimed before the AO that the funds raised by the Assessee for the purpose of setting up the PFY project, pending utilisation of funds for the project, were deployed by the Assessee by investing in units of UTI and placing them in deposits etc., resulting in the income referred to above. The Assessee claimed that as per the guidance note on “Treatment of expenditure during construction period” issued by the Institute of Chartered Accountants of India (ICAI) such earnings which are directly identified with the Asssessee’s PFY project have been deducted from the project expenditure carried forward for the eventual capitalisation. The Assessee placed reliance on the decision of the Hon’ble Supreme Court in the case of Challapalli Sugars Ltd. Vs. CIT 98 ITR 167 (SC) for the proposition that accounting treatment as per accounting standards would be relevant even for tax purposes. The Assessee further contended that the funds, the deployment of which has resulted in income set out above, were raised solely with the object of defraying the project cost and the temporary utilization of such funds, with a view to minimise the financial burden on the project, form an integral part of the management of the capital funds used for setting up the project. Thus the temporary deposit/investments cannot be viewed as an investment activity, in an ordinary sense, for earning income but in the larger perspective, represented an effective mode of reducing the project costs. The return were inextricably linked with the process of setting up the business, they were distinguishable from income received on mere investment or deposit of surplus money. The returns are directly related to the capital structure of the business which was being set-up and go to reduce the cost of construction, they cannot be treated as revenue receipts. The Assessee also contended that in the event the receipts are considered as taxable under the head “Income from other sources” and “capital gain”respectively, expenditure incurred in earning income from other sources should be allowed u/s.57(iii) of the Income Tax Act, 1961 (Act).

The AO however did not accept the claim of the Assessee. He held that interest and other income has to be assessed under the head “Income from other sources” and “capital gain” respectively. With regard to the claim of the Assessee that Enka Limited- A.Y.1995-96 in the event of interest and other income is brought to tax under the head “Income from other sources”, the computation of such income should be done after allowing deduction u/s.57(iii) of the Act, the AO held that the Assessee did not give any details or claimed any expenses from income being taxed. He also held that only expenditure incurred to earn income charged to tax under the head “Income from other sources” could be allowed as a deduction and the Assessee claim does not satisfy this requirement of the law.

On appeal by the Assessee, the CIT(A) confirmed the order of the AO. Before CIT(A) the Assessee conceded that interest income has to be assessed under the head “Income from other sources” but contended that expenses incurred in earning the interest & other income should be allowed as deduction u/s.57(iii) of the Act and only the result income should be brought to tax under the head “Income from other sources”. The Assessee in the submissions filed before the CIT(A) dated 21.12.2011 had given details of expenditure claimed as deduction u/s.57(iii) of the Act as annexure 3 to the said submissions. The same are placed at pages 72 to 78 of the paper book. The CIT(A) on the above submissions held in para 8 of his order that the Assessee did not submit any details of expenses. He also added that expenses have not been incurred directly to earn the income and that the Asssessee has not given any basis of allocation of expenses. The conclusions of the CIT(A) in this regard are contradictory in the sense that if no details are given by the Assessee, there would be no remark that the expenses have not been incurred directly to earn income and that the remark that the Assessee has not given any basis of allocation of expenses.

The final conclusions of the CIT(A) on the issue were as follows: “11. The assessee did not borrow any funds/money specifically for the purposes of giving it on interest. There is no direct relationship of earning of interest of Rs.14,01,95,927/- and the funds borrowed or contributed to give it on interest. The income of interest has been assessed as income from other sources by the assessing Officer. I agree with the reasoning given by assessing officer to disallow any expenditure on earning of interest and short term capital gain. It shows that the surplus funds have been utilised for the said purpose of giving it on interest. Similarly the capital gain of Rs.94,55.610/- might have been calculated after deducting the direct expenses incurred thereon.

We have heard the submissions of the learned counsel for the Assessee who reiterated the stand of the Assessee as put forth before CIT(A) and further submitted that all the details including the utilization of funds on which interest was paid and which were deployed to earn interest income were duly furnished before the AO/CIT(A) and the observations and conclusions in this regard are incorrect. It was also brought to our notice that in AY 96-97 on an identical issue the Hon’ble Tribunal in was pleased to allow the claim of the Assessee with a rider that nexus between the income and expenditure has to be examined and income computed. The learned DR relied on the order of the AO/CIT(A). 9. We have given a very careful consideration to the rival contentions. There can be no dispute to the proposition that deduction u/s.57(iii) of the Act had to be given when income is brought to tax under the head “Income from other sources”, provided the conditions laid down in Sec.57(iii) of the Act are satisfied. The CIT(A) has accepted this position but has sought to reject the claim of the Assessee on extraneous and irrelevant considerations and ignoring the claim made by the Assessee. The AO/CIT(A) have not given any finding with regard to claim of the Assessee for allocation of expenditure incurred on salary of employees and other expenditure which are given at page-74 of the paper book filed before us. The finding with regard Enka Limited- A.Y.1995-96 to borrowed funds not having been used for the purpose of making investments which yielded interest income in question has been giving without considering the fund flow statement and apportionment of interest expenses relatable to pre commencement expenses and interest income chargeable to tax under the head “Income from other sources”. These details are given at page-76 to 77 of the paper book. We are therefore of the view that the order of CIT(A) on this issue has to be set aside and the issue remanded to the AO for fresh consideration as was done by the Tribunal in AY 96-97. The AO will consider the claim of the Assessee in the light of the documents already available on record after affording Assessee opportunity of being heard. The Assessee will be at liberty to substantiate its case by filing any other relevant and contemporaneous evidence to substantiate its case. 10. In the result for statistical purpose the appeal is treated as allowed. Order pronounced in the Court on 02.03.2016. Sd/- Sd/-