1. These two assessees' appeals for AYs.2012-13 & 2013-14 arise from the CIT(A)-3, Hyderabad's common order dated 14-10-2016 passed in appeal Nos.1432/14-15 & 0304/15- 16/CIT(A) involving proceedings u/s.143(3) of the Income Tax Act, 1961 [in short, 'the Act'].
Heard both the parties. Case files perused.
2. The assessee has raised the following substantive grounds in appeal No.141/Hyd/2017 for AY.2012-13:
"1. The order of the learned Commissioner of Income-Tax (Appeals) is erroneous both on facts and in law.
2. The learned Commissioner of Income-Tax (Appeals) erred in holding that the appellant did not commence business activity and that the interest on fixed deposits of Rs.9,26,440/- is taxable under the head "Other sources".
3. The learned Commissioner of Income-Tax (Appeals) ought to have seen that the interest of derived in the process of the business activity of the appellant and that the expenditure incurred during the course of business is an allowable deduction.
4. In the alternate, the learned Commissioner of Income-Tax (Appeals) ought to have directed that interest relatable to the deposits should be allowed.
5. The learned Commissioner of Income-Tax (Appeals) erred in confirming the observation of the Assessing Officer that the business did not commence during the year under consideration and further erred in treating the amount of Rs.18,83,457/- as preliminary expenses.
6. Any other ground that may be urged at the time of hearing".
3. We notice that the assessee's grievances pleaded in latter AY.2013-14 appeal No.142/Hyd/2017 are identical except the fact that it had derived interest income of Rs.1,92,76,530/- and preliminary expenses amounting to Rs.10,32,360/-; respectively.
4. Learned authorised representative has argued only the issue of assessment of assessee's interest income under the head 'income from other sources'. He took us to para 3 onwards in assessment order dt.30-12-2014 AY.2012-13 that the impugned interest income had arisen on account of Debt Service Reserve Account (DSRA) created as per the terms of financial assistance imposed by the IDBI Bank Ltd. Mr.Rao then invited our attention to pages 48 onwards containing the details of the corresponding 'DSRA'. His case therefore is that the impugned interest income relates to the business and therefore it ought to have been assessed as 'income from business' head only.
5. Learned departmental representative has supported the CIT(A)'s identical action in both these assessment years upholding the Assessing Officer's action assessing the impugned interest income as 'income from other sources' vide following detailed discussion:
"7. Regarding the second Issue of treating the Interest Income from Fixed Deposits as Income from other sources by the Assessing Officer, the details are as under:
The appellant had to deposit the following amounts as a pre-requisite to obtain loan from IDBI Particulars Loan Amount FD made as a Received (Rs.) Pre-requisite (Rs.) 1st disbursement in 17,27,00,000 4,50,00000 AY.2012-13 2nd disbursement in 49,94,23,308 16,10,00,000 AY.2013-14 On these FDs the appellant received interest as under:
A.Y.2012-13 - Rs. 9,26,440/-
A.Y.2013-14 - Rs. 1,92,76,530/-
The appellant reduced the above interest from capital work in progress.
Whereas the Assessing Officer treated the same as income from other sources.
The Assessing Officer relied on Tuticorn Alkali Chemicals and Fertilisers Ltd 227 ITR 172 (SC) In this case interest earned by assessee before commencement of business on short term deposits with banks out of term loans secured from financial institutions was considered as income chargeable under the head "income from other sources" and would not go to reduce the interest payable by the assessee.
Coromandel Cements Ltd 234 ITR 412 (SC) In this case it was held that interest received on short term deposits during the pre-production stage is assessable as income from other sources.
Autokast Ltd 248 ITR 110 ( SC) In this case it was held that interest earned on short-term deposit of amount borrowed for setting up business is assessable to tax in the hands of assessee as income from other sources. The Assessing Officer observed that the interest income incurred during pre-construction period out of equity contributions has no nexus with the project, therefore the interest earned is to be taxed under the head other sources relying on the Supreme Court decisions mentioned above.
8. The submissions of the appellant are as under:
a) As per the sanction letter of IDBI dated 28.6.2010, the appellant was compelled to make FDs with the bank to obtain loans, thus the interest was eligible to be set off against the project expenditure incurred.
b) In case of Tuticorn Alkali Chemicals and Fertilisers Ltd cited supra the facts were different. In that case the interest was earned on surplus funds deposited with the bank. Whereas in the present case the appellant is compelled to deposit certain amounts with IDBI Bank as pre-requisite to obtain loans, therefore the case of Tuticorn Alkali Chemicals and Fertilisers Ltd cannot be applied.
c) In the case of Autokast Ltd, the facts were, the assessee borrowed amounts from IDBI and deposited the same with State Bank of Travancore as he did not require the funds immediately. The interest earned was considered as taxable under the head other sources by the Hon'ble Supreme Court. However in the present case the appellant made FDs as a pre-requisite to obtain loans.
d) The appellant relied on Indian Oil Panipat Power Consortium Ltd Vs ITO (2009) 315 ITR 255 wherein the Hon'ble Delhi High Court held that the interest accrued on funds deployed during pre-operative period should be set off against pre-operative expenses and should not be taxed under the head other sources.
e) Reliance is placed on Adani Power Ltd Vs ACIT (2015) 155 ITO 239 wherein the Hon'ble Ahmedabad Tribunal held that the interest earned during pre-operative period on deposits in Govt. securities should be treated as capital asset. Hence required to be set off against pre-operative expenses.
f) Reliance is also placed on the decision of DCIT Vs Facor Power Ltd (2016) 380 ITR 474 wherein the Hon'ble Delhi High Court held interest earned during pre-operative period on deposits made out of share capital is a capital receipt.
9. The information on record is carefully considered. The Hon'ble ITAT Hyderabad in the case of Kakinda SEZ Pvt Ltd Vs ACIT 141 ITO 635 held that interest earned on FDs during pre-operative period are to be brought to tax under the head 'income from other sources'. The facts in this case were the assessee obtained large amount of secured loans, part of which was kept in FDs with the banks. The interest earned on these FDs were set off against preoperative expenses by assessee. The Hon'ble Tribunal considered the decision of Tuticorn Alkali Chemicals and Fertilisers Ltd ( cited supra ) and Indian Oil Panipat Power Consortium Ltd (cited supra ) and various other precedents on this issue held that Interest paid on borrowed funds has no connection with receipt of interest and held that interest payable cannot be allowed as deduction U/s 57(iii). Further in appellants case as verified from IDBI loan sanction letter dated 28.6.2010, the appellant made deposits with the bank as his equity being promoter. Therefore it practically amounts to that the appellant kept his share of capital with the bank on which he received interest. Therefore it is dearly taxable under the head other sources. Therefore the action of Assessing Officer in treating interest earned on FDs as income from other sources is upheld.
10. It is to be mentioned here that the facts are identical for A.Y 2013- 14 also. The P&L account for A.Y.2013-14 read as under.
The details of 'Other expenses' are as under For the year ended March, 31, 2013 Rent 42,300 Rates and taxes 3,795 Printing and stationery 4,040 Communication 5,602 expenses Payments to the auditor - Statutory Audit 2,24,720 Office maintenance 64,246 Donations 3,06,782 Miscellaneous expenses 4,12,504 10,63,989 The computation of A.Y.2013-14 read as under:
Amount Income from Business Net profit as per Profit and (18,77,886) Loss Account Add: Depreciation considered 7,82,663 separately Donation US 37 3,06,782 Interest - Others 3,37,633 Audit fee disallowed u/s. 2,24,720 16,51,798 40(a)(ia) (2,26,088) Less: Depreciation as per IT Act 5,81,552 Disallowance made in early 2,24,720 8,06,272 year paid now 40(a)(ia) Total taxable income (10,32,360)
6. We have given our thoughtful consideration to the foregoing rival contentions. We find no substance in the assessee's foregoing grievance. Case records indicate in Pg.47 of the paper book that the assessee had to commence its commercial operations for the project(s) in issue from December 31st, 2013 relevant to AY.2014-15 whereas we are in AYs.2012-13 & 2013-14 only. The clinching fact as emerges therefore is that the assessee has sought the assessment of its interest income as 'business income' without having commenced its corresponding actual business activity at all in these two assessment years. We therefore find no reason to interfere with detailed reasoning extracted from the CIT(A)'s ord
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er in the preceding paragraphs. We thus decline assessee's solitary grievance. 7. Next comes Mr.Rama Rao yet another plea that both the lower authorities ought to have adopted netting method by following the decision of Hon'ble apex court ACG Associated Capsules Pvt. Ltd. Vs. CIT (2012) [343 ITR 089] (SC) than assessing the entire interest income u/s.57 of the Act. 8. Mr.Pandey, on the other hand, vehemently contended that the assessee is not entitled for netting since the corresponding interest expenditure has to be treated as part of capital account only. The fact remains that this issue has neither been examined in the course of assessment nor in the CIT(A)'s order. We therefore draw support from their lordships' above decision and direct the Assessing Officer to finalise necessary computation on netting basis. No other ground has been pressed before us. 9. These assessee's appeals are partly allowed for statistical purposes in above terms. A copy of this common order be placed in the respective case files.