KAMAT HOTELS (INDIA ) LTD, MUMBAI V. ADDL CIT 8(2), MUMBAI

ITA 1078/MUM/2013

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 9121 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 7 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-10-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 23-11-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 07-02-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V JUSTIN
• Assessee Lawyers: J D MISTRY
• Keywords: Earning of tax free income; Capital receipt
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A, MUMBAI BEFORE SHRI G.S.PANNU, ACCOUNTANT MEMBER AND SHRI RAVISH SOOD, JUDICIAL MEMBER ITA NO. 1078/MUM/2013,(A.Y 2008-09) KAMAT HOTELS (INDIA) LIMITED, 70-C, NEHRU ROAD, VILE PARLE (E) MUMBAI 400 099 PAN:AAACK2912L ...... APPELLANT VS. THE ADDL.COMMISSIONER OF INCOME TAX 8(2), 2 ND FLOOR, AAYKAR BHAVAN,M.K.ROAD, MUMBAI 400020 .... RESPONDENT APPELLANT BY : SHRI J.D.MISTRY RESPONDENT BY : SHRI V.JUSTIN DATE OF HEARING : 03/07/2017 DATE OF PRONOUNCEMENT : 03/10/2017 ORDER PER G.S.PANNU,A.M: THE CAPTIONED APPEAL FILED BY THE ASSESSEE IS DI RECTED AGAINST AN ORDER OF THE CIT(A)-16 MUMBAI DATED 01/11/2012, PER TAINING TO THE ASSESSMENT YEAR 2008-09, WHICH IN TURN HAS ARISEN F ROM ORDER PASSED BY THE ASSESSING OFFICER UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) DATED 20/12/2010 2 ITA NO. 1078/MUM/2013,(A.Y 2008-09) 2. IN THIS APPEAL, THE SUBSTANTIVE DISPUTE RAISED B Y THE ASSESSEE IS WITH REGARD TO THE NATURE AND TAXABILITY OF INTERES T EARNED BY THE ASSESSEE OF RS.3,09,25,159/- ON FIXED DEPOSITS WITH BANKS. 3. IN BRIEF, THE RELEVANT FACTS ARE THAT THE APPELL ANT IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956 AND IS, INTER-ALIA, ENGAGED IN HOTEL BUSINESS. ITS ACTIVIT Y INCLUDES TO OWN, RUN, MANAGE AND OPERATE VARIOUS HOTELS UNDER THE BRAND N AMES SUCH AS THE ORCHIDS, VITS, VITHAL KAMAT ORIGINAL FAMILY RESTAUR ANTS, ETC. IN ORDER TO PART-FINANCE ITS EXPANSION PLANS, ASSESSEE HAD BOR ROWED FUNDS BY WAY OF FOREIGN CURRENCY CONVERTIBLE BONDS (FCCBS) IN T HE EARLIER FINANCIAL YEAR ENDING 31/03/2007, WHICH AGGREGATED TO RS.79,5 6,00,000/-. THE ASSESSEE UNDERTOOK ITS EXPANSION PLAN, IN TERMS OF WHICH IT WAS SEEKING TO CONSTRUCT 100 MORE GUEST ROOMS TO THE EXISTING R OOMS AT THE ORCHID HOTEL, MUMBAI AND WAS ALSO PUTTING UP A NEW HOTEL A T PUNE, FORT JHADAV GADH AND ANOTHER HOTEL AT HIMACHAL PRADHES H (BADDI). SUCH EXPANSION WAS PARTLY FINANCED BY THE FCCBS RAISED BY THE ASSESSEE. IT HAS BEEN CANVASSED BEFORE THE LOWER AUTHORITIES AS WELL AS BEFORE US THAT THE AFORESAID BORROWINGS WERE PUT TO USE IN SE TTING-UP OF NEW HOTEL PROJECTS, INCLUDING HOTEL FORT JHADAV GADH A T PUNE AND THE ADDITIONAL ROOMS IN THE EXISTING ORCHID HOTEL AT MU MBAI. IT TRANSPIRES THAT PENDING FULL DEPLOYMENT OF THE FUNDS IN THE ON GOING PROJECTS, ASSESSEE HAD PLACED THE FUNDS IN BANK DEPOSITS, WHI CH EARNED INTEREST INCOME OF RS.3,09,25,159/-. SIMULTANEOUSLY, ASSESS EE HAD INCURRED EXPENSES ON THE ISSUE OF FCCBS AS WELL AS INTERE ST ON BORROWINGS. THE SAID EXPENDITURE WAS RELATABLE TO THE ONGOING PROJE CTS AND, THEREFORE, ASSESSEE CAPITALIZED THE EXPENDITURE AND DEBITED IT TO HOTEL PROJECT CAPITAL WORK-IN-PROGRESS ACCOUNT. THE INTEREST EAR NED OF 3 ITA NO. 1078/MUM/2013,(A.Y 2008-09) RS.3,09,25,159/- WAS REDUCED BY THE ASSESSEE FROM T HE COST OF BORROWINGS CAPITALIZED IN RESPECT OF ONGOING EXPANS ION PROJECTS. ON BEING ASKED TO EXPLAIN BY THE ASSESSING OFFICER, AS SESSEE POINTED OUT THAT THE TREATMENT ACCORDED BY IT OF REDUCING THE C OST OF BORROWINGS CAPITALIZED BY THE IMPUGNED INTEREST INCOME IN RESP ECT OF THE ONGOING PROJECTS WAS IN ACCORDANCE WITH THE GENERALLY ACCEP TED ACCOUNTING PRINCIPLES AS WELL AS ACCOUNTING STANDARD -16 NOTIF IED AS PER THE COMPANIES (ACCOUNTING STANDARDS) RULES, 2006. TH E ASSESSING OFFICER ALSO REQUIRED THE ASSESSEE TO EXPLAIN AS TO WHY IN TEREST INCOME WAS ADJUSTED AGAINST THE FCCB ISSUE EXPENSES AND INTERE ST PAID AND THAT IN TERMS OF THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. VS. C IT, 227 ITR 172 (SC), SUCH INTEREST INCOME IS LIABLE TO BE TAXED IN I SOLATION AS INCOME FROM OTHER SOURCES. THE RELEVANT DISCUSSION IN THE ASS ESSMENT ORDER REVEALS THAT ASSESSEE SOUGHT TO DISTINGUISH THE DECISION IN THE CASE OF TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. (SUPRA) AND INS TEAD PLACED RELIANCE ON THE SUBSEQUENT JUDGMENT OF THE HON'BLE SUPREME COUR T IN THE CASE OF CIT VS. BOKARO STEEL LTD., 236 ITR 315(SC). IT WAS SOUGHT TO BE CONTENDED THAT IN TERMS OF THE PARITY OF REASONING LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CASE OF BOKARO STEEL L TD. (SUPRA) ANY INTEREST OR OTHER MISCELLANEOUS INCOME EARNED AT TH E STAGE OF CONSTRUCTION WORK, WHILE SETTING UP A BUSINESS, C AN BE TREATED AS AN ABATEMENT OF THE CAPITAL COST, SO AS TO REDUCE THE COST OF THE CAPITAL WORK-IN-PROGRESS UPTO THE DATE OF THE COMPLETION OF THE PROJECTS. AS AN ALTERNATIVE, ASSESSEE ALSO RAISED A PLEA THAT IF TH E INTEREST INCOME WAS TO BE TAXED UNDER THE HEAD INCOME FROM OTHER SOURC ES, A CORRESPONDING DEDUCTION IN RESPECT OF EXPENSES ON I SSUE OF FCCBS AND 4 ITA NO. 1078/MUM/2013,(A.Y 2008-09) INTEREST ON FCCBS RAISED NEEDS TO BE ALLOWED IN ACC ORDANCE WITH THE PROVISIONS OF SECTION 57(III) OF THE ACT. 3.1 THE ASSESSING OFFICER, HOWEVER, BROUGHT TO TAX THE ENTIRE INTEREST INCOME OF RS.3,09,25,159/- AS INCOME FROM OTHER S OURCES FOLLOWING THE DECISION OF THE HON'BLE SUPREME COURT IN THE CA SE OF TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. (SUPRA). IN DOING SO, THE ASSESSING OFFICER ALSO DENIED THE ALTERNATE PLEA OF THE ASSESSEE FOR ALLOWING OF DEDUCTION OF INTEREST AND OTHER EXPENSES PAID ON FCCBS UNDER SECTION 57(III) OF THE ACT. 4. IN APPEAL BEFORE THE CIT(A), ASSESSEE MADE VARIE D SUBMISSIONS ON FACTS AND IN LAW, PRIMARILY REITERATING WHAT WAS SU BMITTED BEFORE THE ASSESSING OFFICER. THE CIT(A) HAS AFFIRMED THE DECI SION OF THE ASSESSING OFFICER AND NOTED THAT THE RELIANCE PLACED BY THE ASSESSEE ON THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE O F BOKARO STEEL LTD. (SUPRA) WAS MISPLACED AND THAT THE CASE OF THE ASSE SSEE WAS TO BE DECIDED IN THE LIGHT OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS & FERTILIZERS LT D. (SUPRA). ACCORDING TO THE CIT(A), THE JUDGMENT OF THE HON'BLE SUPREME COU RT IN THE CASE OF BOKARO STEEL PLANT IS APPLICABLE IN A SITUATION WHE RE ASSESSEE WAS TO EARN AMOUNTS, WHICH ARE INEXTRICABLY LINKED WITH TH E PROCESS OF SETTING- UP OF ITS PROJECT. ACCORDING TO THE CIT(A), IN TH E PRESENT CASE, THE INTEREST EARNED IS ON DEPOSITS MADE IN THE BANK IS OUT OF IDLE FUNDS AND THAT IN SUCH A SITUATION THE JUDGMENT OF THE HO N'BLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS & FERTILI ZERS LTD. (SUPRA) IS APPLICABLE AND NOT THE JUDGMENT IN THE CASE OF BOKA RO STEEL LTD. (SUPRA). THUS, HE UPHELD THE ASSESSMENT OF THE IMPUGNED INTE REST INCOME UNDER 5 ITA NO. 1078/MUM/2013,(A.Y 2008-09) THE HEAD INCOME FROM OTHER SOURCES. AS REGARDS A SSESSEES ALTERNATE CLAIM OF INTEREST PAID ON FCCB FUNDS AGAINST THE IN TEREST INCOME, THE CIT(A) DENIED THE SAME BY OBSERVING THAT THE INTERE ST ON FCCB BORROWING COULD NOT BE SAID TO HAVE BEEN INCURRED W HOLLY AND EXCLUSIVELY FOR THE PURPOSE OF EARNING THE IMPUGNED INTEREST INCOME EARNED ON THE DEPOSITS PLACED WITH THE BANKS. THUS , THE ORDER OF THE ASSESSING OFFICER WAS AFFIRMED, AGAINST WHICH THE A SSESSEE IS IN FURTHER APPEAL BEFORE US. 5. BEFORE US, THE RIVAL COUNSELS HAVE REITERATED TH EIR RESPECTIVE POSITIONS, WHICH WE HAVE ALREADY NOTED IN THE EARLI ER PARAS. THE LD. REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT TH E LOWER AUTHORITIES HAVE NOT APPROPRIATELY APPRECIATED THE POSITION IN THE RIGHT PERSPECTIVE, INASMUCH AS, THE FUNDS RAISED THROUGH FCCBS WERE MEANT FOR DEPLOYMENT IN THE ONGOING HOTEL PROJECTS ALONE AND THE TEMPORARY PLACEMENT OF FUNDS IN THE BANKS, WHICH HAS YIELDED THE IMPUGNED INTEREST INCOME, WAS MADE IN VIEW OF THE MANDATE OF RESERVE BANK OF INDIA. IT HAS BEEN EMPHASIZED THAT IN ORDER TO EXA MINE AS TO WHETHER AN AMOUNT IS INEXTRICABLY LINKED WITH THE PROCESS O F SETTING-UP A PROJECT, ONE MAY LOOK AT THE PURPOSE FOR WHICH THE RELEV ANT FUNDS HAVE BEEN RAISED AND IN THE PRESENT CONTEXT THE FCCBS HAVE BE EN RAISED WITH THE PURPOSE OF INVESTMENT IN THE ONGOING HOTEL PROJECTS ONLY. IN SUPPORT OF HIS SUBMISSION, THE LD. REPRESENTATIVE FOR THE ASSE SSEE POINTED OUT THAT FACTUALLY SPEAKING, THE FCCBS COULD BE USED ONLY FO R THE PURPOSES OF THE ONGOING HOTEL PROJECT AND, THEREFORE, SAME ARE INEX TRICABLY LINKED WITH SETTING-UP OF THE NEW HOTELS AND, ACCORDINGLY, ANY INTEREST EARNED IN THE SHORT PERIOD PENDING DEPLOYMENT OF SUCH FUNDS IN TH E CONSTRUCTION ACTIVITY IS TO BE VIEWED AS A CAPITAL RECEIPT, WHI CH WOULD GO TO REDUCE 6 ITA NO. 1078/MUM/2013,(A.Y 2008-09) THE COST OF THE CAPITAL WORK-IN-PROGRESS. IN SUPPO RT OF HIS SUBMISSIONS, RELIANCE HAS BEEN PLACED ON THE FOLLOWING JUDGMENTS :- (I) NTPC SAIL POWER COMPANY (P) LTD.,(2012) 25 TAXM ANN.COM 401(DEL) (II) INDIAN OIL PANIPAT POWER CONSORTIUM LIMITED V S. ITO 315 ITR 255 (DEL) (III) CIT V. KARNAL CO-OPERATIVE SUGAR MILLS LTD., 243 ITR2 (SC) 6. ON THE OTHER HAND, THE LD. DEPARTMENTAL REPRESEN TATIVE HAS REITERATED THE REASONING ADOPTED BY THE LOWER AUTHO RITIES, WHICH WE HAVE ALREADY NOTED IN THE EARLIER PARAS AND IS NOT BEING REPRODUCED FOR THE SAKE OF BREVITY. APART THEREFROM, THE LD. DEPA RTMENTAL REPRESENTATIVE POINTED OUT THAT THE INTEREST INCOME IN QUESTION WAS EARNED FROM THE DEPOSITS PLACED WITH THE BANK AND N OT FROM THE ONGOING CONSTRUCTION OF THE HOTEL PROJECTS AND, THE REFORE, THE RATIO OF THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CA SE OF BOKARO STEEL LTD. (SUPRA) HAS BEEN RIGHTLY NOT APPLIED BY THE LO WER AUTHORITIES. IT IS FURTHER POINTED OUT THAT THE ONUS TO ESTABLISH THAT THERE IS AN INEXTRICABLE LINK BETWEEN THE INCOME IN QUESTION AN D THE ONGOING CONSTRUCTION OF HOTEL PROJECT IS ON THE ASSESSEE WH ICH HAS NOT BEEN DISCHARGED BY THE ASSESSEE. 7. IN REPLY, THE LD.REPRESENTATIVE FOR THE ASSESSEE REITERATED THE RELIANCE ON THE RATIO LAID DOWN BY THE DELHI HIGH C OURT IN THE CASES OF NTPC SAIL POWER COMPANY (P) LTD.,(SUPRA) AND INDIAN OIL PANIPAT POWER CONSORTIUM LIMITED (SUPRA). WITH REGARD TO THE LIN KAGE BETWEEN THE IMPUGNED INTEREST INCOME AND THE ONGOING HOTEL PRO JECT THE LD. REPRESENTATIVE FOR THE ASSESSEE EXPLAINED THAT ASSE SSEE HAS DEMONSTRATED THE SAME IN ADEQUATE TERMS AND FOR THA T MATTER REFERRED 7 ITA NO. 1078/MUM/2013,(A.Y 2008-09) TO THE RELEVANT DISCUSSION IN PARA-6. 2 OF THE ASSE SSMENT ORDER, WHERE THE FACTUAL STAND OF THE ASSESSEE HAS BEEN NOTE D AND IT HAS NOT BEEN NEGATED AT ALL. OUR ATTENTION WAS ALSO INVITED TO PAGES 178 TO 189 OF THE PAPER BOOK, WHEREIN IS PLACED A COPY THE RBI MASTER CIRCULAR ON EXTERNAL COMMERCIAL BORROWINGS AND TRADE CREDITS TO POINT OUT THAT THE ASSESSEE HAS USED THE FCCB PROCEEDS IN THE MANN ER AS MANDATED BY THE RBI DURING THE PERIOD AWAITING FULL DEPLOYME NT OF FUNDS IN THE ONGOING HOTEL PROJECTS. 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. THE CRUX OF THE CONTROVERSY BEFORE US RELATES TO THE TAX TREATMENT OF RS.3,09,25,159/-, REPRESENTING INTEREST EARNED BY THE ASSESSEE ON DE POSITS PLACED WITH THE BANKS. NOTABLY, ASSESSEE IS IN HOTEL BUSINESS AND IT WAS UNDERTAKING EXPANSION PLANS, WHEREBY IT WAS SETTING -UP A NEW HOTEL AS WELL AS ADDING ROOM CAPACITY IN AN EXISTING HOTEL. SUCH NEW PROJECTS ARE BEING PART-FINANCED BY WAY OF FCCBS RAISED BY THE A SSESSEE IN MARCH, 2007 OF A SUM OF RS.79.56 CRORES. THE CIT(A) NOTES THAT OUT OF THE TOTAL FCCB PROCEEDS OF RS.79.56 CRORES, AN AMOUNT OF RS.6 9.04 CRORES HAD BEEN DEPLOYED BY THE ASSESSEE IN THE ONGOING NEW HO TEL PROJECTS AND SHOWN AS CAPITAL WORK-IN-PROGRESS. PENDING DEPLOYM ENT OF THE COMPLETE FCCB PROCEEDS, ASSESSEE EARNED INTEREST IN COME BY PLACING THE FUNDS IN A SEPARATE FIXED DEPOSIT ACCOUNT WITH BANKS, AS SUCH FUNDS WERE TO BE EXCLUSIVELY USED IN THE NEW HOTEL PROJEC TS. BEFORE THE LOWER AUTHORITIES, ASSESSEE ASSERTED THAT THE INTEREST EXPENDITURE AND OTHER EXPENSES INCURRED ON ISSUANCE OF FCCBS HAS BEEN CAP ITALIZED IN THE COST OF CAPITAL WORK-IN-PROGRESS OF THE NEW PROJECTS, BE ING EXPENDITURES WHICH ARE INEXTRICABLY LINKED WITH SETTING-UP OF TH E NEW HOTEL PROJECTS. THE MOOT QUESTION IS WHETHER THE INTEREST INCOME EA RNED BY THE 8 ITA NO. 1078/MUM/2013,(A.Y 2008-09) ASSESSEE ON DEPOSITS MADE WITH BANKS OUT OF THE FCC B PROCEEDS, AWAITING DEPLOYMENT IN THE CONSTRUCTION OF THE NEW HOTELS, IS LIABLE TO BE TAXED AS THE INCOME IN ISOLATION OR THE SAME IS LIABLE TO BE TREATED AS INEXTRICABLY LINKED WITH SETTING-UP OF THE NEW H OTEL PROJECTS, SO AS TO REDUCE THE COST OF CAPITAL WORK-IN-PROGRESS. 8.1 IN THIS CONTEXT, THE STAND OF THE REVENUE IS TH AT SUCH INCOME IS FROM THE DEPOSITS PLACED WITH BANK AND NOT FROM THE CONSTRUCTION OF THE NEW PROJECT AND, THUS, THE SAME IS NOT INEXTRIC ABLY LINKED WITH THE SETTING-UP OF THE NEW HOTEL PROJECTS. THE STAND OF THE ASSESSEE IS TO THE CONTRARY AND IT IS EMPHASISED THAT THE FCCBS HAVE B EEN RAISED FOR THE PURPOSE OF INVESTMENT IN THE NEW HOTEL PROJECTS AND , THEREFORE, THE INTEREST EARNED IS INEXTRICABLY CONNECTED TO THE SE TTING-UP OF THE NEW HOTEL PROJECTS. 8.2 IN THIS CONTEXT, WE MAY REFER TO THE JUDGMENT O F HON'BLE DELHI HIGH COURT IN THE CASE OF INDIAN OIL PANIPAT POWER CONSORTIUM LIMITED (SUPRA), WHICH HAS EXPLAINED THE JUDGMENTS OF THE H ON'BLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS & F ERTILIZERS LTD. (SUPRA) AND BOKARO STEEL LTD. (SUPRA). IN THE CASE BEFORE THE HIGH COURT, ASSESSEE WAS A JOINT VENTURE BETWEEN TWO CORPORATIO NS TO SET-UP A POWER PROJECT AND WITH THAT OBJECTIVE BOTH JOINT VE NTURE PARTNERS CONTRIBUTED THE SHARE CAPITAL. THE ASSESSEE HAD T EMPORARILY PUT SUCH FUNDS IN FIXED DEPOSITS WITH BANK AND EARNED INTERE ST THEREON AND CLAIMED THAT THE INTEREST INCOME WAS IN THE NATURE OF CAPITAL RECEIPT LIABLE TO BE SET-OFF AGAINST THE PRE-OPERATIVE EXPE NSES, WHEREAS THE REVENUE SOUGHT TO TAX IT AS INCOME FROM OTHER SOUR CES. THE ASSESSEE HAD CLAIMED THAT THE FUNDS WERE REQUIRED FOR PURCHA SE OF LAND AND 9 ITA NO. 1078/MUM/2013,(A.Y 2008-09) INFRASTRUCTURE BUT DUE TO LEGAL ENTANGLEMENT WITH R ESPECT TO THE TITLE OF LAND, THE SAME WERE TEMPORARILY PUT IN FIXED DEPOSI TS, WHICH EARNED INTEREST. THE CONTROVERSY, WHICH AROSE BEFORE THE HON'BLE HIGH COURT WAS AS TO WHETHER SUCH INTEREST INCOME WAS INEXTRIC ABLY LINKED WITH SETTING-UP OF POWER PLANT OR IT COULD BE TREATED A S AN INDEPENDENT INCOME ASSESSABLE AS INCOME FROM OTHER SOURCES. THE HON'BLE HIGH COURT, AFTER CONSIDERING THE JUDGMENTS OF THE HON'B LE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS & FERTILIZER S LTD. (SUPRA) AS WELL AS IN THE CASE OF BOKARO STEEL LTD. (SUPRA), HELD THAT THE INTEREST INCOME WAS IN THE NATURE OF CAPITAL RECEIPT AND WAS REQUIR ED TO BE SET-OFF AGAINST PRE-OPERATIVE EXPENSES. IN COMING TO ITS D ECISION, THE HON'BLE HIGH COURT OBSERVED THAT THE TEST IS WHETHER THE AC TIVITY WHICH IS TAKEN UP FOR SETTING UP OF THE BUSINESS AND THE FUNDS WHI CH ARE GENERATED ARE INEXTRICABLY CONNECTED TO THE SETTING-UP OF THE PLA NT OR NOT. PERTINENTLY, THE HON'BLE HIGH COURT WAS DEALING WIT H A SIMILAR ARGUMENT THAT IS BEING SET-UP BEFORE US, WHICH IS TO THE EFF ECT THAT THE DEPOSIT OF SHARE CAPITAL IN SHORT TERM DEPOSITS WITH BANK HAD NO CONNECTION WITH SETTING-UP OF THE POWER PLANT. THE HON'BLE HIGH C OURT IN THE CONTEXT OF THE ABOVE ARGUMENTS OBSERVED AS UNDER:- '5. IN OUR OPINION, THE TRIBUNAL HAS MISCONSTRUED T HE RATIO OF THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF TUTICORIN ALKAL I CHEMICALS FERTILIZERS LTD. (SUPRA) AND THAT OF BOKARO STEEL LTD. (SUPRA). THE TEST WHICH PERMEATES THROUGH THE JUDGMENT OF THE SUPREME COURT IN TUTICO RIN ALKALI CHEMICALS & FERTILIZERS LTD.S CASE (SUPRA) IS THAT IF FUNDS HA VE BEEN BORROWED FOR SETTING UP OF A PLANT AND IF THE FUNDS ARE ' SURPLUS' AND T HEN BY VIRTUE OF THAT CIRCUMSTANCE THEY ARE INVESTED IN FIXED DEPOSITS TH E INCOME EARNED IN THE FORM OF INTEREST WILL BE TAXABLE UNDER THE HEAD ' I NCOME FROM OTHER SOURCES' . ON THE OTHER HAND, THE RATIO OF THE SUPREME COURT JUDGMENT IN BOKARO STEEL LTD.S CASE (SUPRA) TO OUR MIND IS THAT IF INCOME I S EARNED, WHETHER BY WAY OF INTEREST OR IN ANY OTHER MANNER ON FUNDS WHICH ARE OTHERWISE ' INEXTRICABLY LINKED' TO THE SETTING UP OF THE PLANT, SUCH INCOME IS REQUIRED TO BE CAPITALIZED TO BE SET OFF AGAINST PRE-OPERATIVE EXP ENSES . 10 ITA NO. 1078/MUM/2013,(A.Y 2008-09) ................................................... ................................................... ..................... 5.2 IT IS CLEAR UPON A PERUSAL OF THE FACTS AS FOUN D BY THE AUTHORITIES BELOW THAT THE FUNDS IN THE FORM OF SHARE CAPITAL WERE IN FUSED FOR A SPECIFIC PURPOSE OF ACQUIRING LAND AND THE DEVELOPMENT OF INFRASTRUC TURE. THEREFORE, THE INTEREST EARNED ON FUNDS PRIMARILY BROUGHT FOR INFU SION IN THE BUSINESS COULD NOT HAVE BEEN CLASSIFIED AS INCOME FROM OTHER SOURC ES. SINCE THE INCOME WAS EARNED IN A PERIOD PRIOR TO COMMENCEMENT OF BUSINES S IT WAS IN THE NATURE OF CAPITAL RECEIPT AND HENCE WAS REQUIRED TO BE SET OF F AGAINST PRE-OPERATIVE EXPENSES. IN THE CASE OF TUTICORIN ALKALI CHEMICALS & FERTILISERS LTD., 227 ITR 172 (SC) IT WAS FOUND BY THE AUTHORITIES THAT THE F UNDS AVAILABLE WITH THE ASSESSEE IN THAT CASE WERE 'SURPLUS' AND, THEREFORE , THE SUPREME COURT HELD THAT THE INTEREST EARNED ON SURPLUS FUNDS WOULD HAV E TO BE TREATED AS 'INCOME FROM OTHER SOURCES ' . ON THE OTHER HAND IN BOKARO STEEL LTD., 236 ITR 315 (SC) WHERE THE ASSESSEE HAD EARNED INTEREST ON ADVANCE PAID TO CONTRACTORS DURING PRE-COMMENCEMENT PERIOD WAS FOUN D TO BE 'INEXTRICABLY LINKED' TO THE SETTING UP OF THE PLANT OF THE ASSES SEE AND HENCE WAS HELD TO BE A CAPITAL RECEIPT WHICH WAS PERMITTED TO BE SET OFF AGAINST PRE-OPERATIVE EXPENSES. [UNDERLINED FOR EMPHASIS BY US] 8.3 THE AFORESAID DISCUSSION BY THE HONBLE HIGH CO URT BRINGS OUT THE MANNER IN WHICH THE RATIONALE IN THE TWO JUDGMENTS OF THE HONBLE SUPREME COURT IN THE CASES OF TUTICORIN ALKALI CHEM ICALS & FERTILIZERS LTD. (SUPRA) AND BOKARO STEEL LTD. (SUPRA) IS TO BE UNDERSTOOD. AT THIS POINT OF TIME, WE MAY ALSO REFER TO THE PLEA OF THE REVENUE THAT IN THE PRESENT CASE, IT IS THE IDLE FUNDS WHICH HAVE YIE LDED THE INTEREST INCOME AND, THEREFORE, THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS & FERTILIZER S LTD. (SUPRA) WOULD PREVAIL TO TREAT THE INTEREST INCOME AS AN INDEPEND ENT INCOME ASSESSABLE AS INCOME FROM OTHER SOURCES. NO DOUB T, AND AS NOTED BY THE HONBLE DELHI HIGH COURT IN INDIAN OIL PANIPAT POWER CONSORTIUM LTD. (SUPRA), IN THE CASE OF TUTICORIN ALKALI CHEMI CALS & FERTILISERS LTD. (SUPRA), THE FUNDS AVAILABLE WITH THE ASSESSEE WER E SURPLUS AND THEREFORE THE HONBLE SUPREME COURT HELD THAT THE I NTEREST INCOME WOULD BE TREATED AS INCOME FROM OTHER SOURCES. F ACTUALLY SPEAKING, IN 11 ITA NO. 1078/MUM/2013,(A.Y 2008-09) THE INSTANT CASE, THERE IS NO DISPUTE THAT THE FCCB PROCEEDS HAVE BEEN RAISED WITH THE SPECIFIC PURPOSE OF FUNDING THE ONG OING NEW HOTEL PROJECTS AND IT IS ONLY DURING THE PERIOD AWAITING DEPLOYMENT OF FULL FUNDS IN THE CONSTRUCTION OF NEW PROJECTS THAT A PART HAS BEEN PLACED IN THE BANKS, WHICH HAS YIELDED IMPUGNED INTEREST I NCOME. IT MAY BE A CASE OF IDLE FUNDS, AS THE CIT(A) HAS PUT IT, BUT IT CERTAINLY IS NOT A CASE OF SURPLUS FUNDS, SO AS TO ATTRACT THE RATIONALE OF TUTICORIN ALKALI CHEMICALS & FERTILISERS LTD. (SUPRA). BECAUSE IT I S ONLY IN THE INTERREGNUM PERIOD, PENDING UTILISATION IN THE CONS TRUCTION OF NEW PROJECTS, THAT THE FUNDS HAVE BEEN PUT IN FIXED DEP OSITS WITH BANKS; BUT, THERE IS NO DISPUTE THAT SUCH FUNDS HAVE BEEN RAISE D FOR FINANCING THE CONSTRUCTION OF NEW PROJECTS. IT IS NOT THE CASE OF THE REVENUE THAT THE DEPOSITS WITH THE BANK ARE NOT FOR A TEMPORARY PERI OD. IN SUCH A SITUATION, IT IS THE RATIONALE LAID DOWN IN THE CAS E OF BOKARO STEEL LTD. (SUPRA), WHICH IS APPLICABLE. 8.4 IN THIS CONTEXT, WE MAY ALSO REFER TO THE FACT- SITUATION IN THE CASE OF NTPC SAIL POWER COMPANY (P) LTD., (SUPRA) BEFOR E THE HON'BLE DELHI HIGH COURT. IN THE CASE OF NTPC SAIL POWER COMPAN Y (P) LTD.,(SUPRA), ASSESSEE WAS IN THE BUSINESS OF RUNNING POWER PLANT AND IN TERMS OF ITS EXPANSION PLAN, IT PROPOSED TO SET-UP A NEW UNIT. FOR THE SAID PURPOSE, IT RAISED TERM LOANS AND THE INTEREST RELATABLE TO THE BORROWINGS UTILIZED FOR EXPANSION PURPOSE WAS CAPITALIZED AS THE COST O F CONSTRUCTION. THE ASSESSEE ALSO EARNED INTEREST ON TEMPORARY DEPOSITS OF SURPLUS FUNDS AND INTEREST ON MARGINS/ ADVANCES MADE FOR THE PURP OSES OF EXPANSION; AND, SUCH INTEREST INCOME WAS ADJUSTED AGAINST THE COST OF CONSTRUCTION OF THE NEW PROJECT. IN THIS BACKGROUND ALSO, THE H ON'BLE HIGH COURT HELD THAT THE FUNDS INVESTED BY THE ASSESSEE AND IN TEREST EARNED WERE 12 ITA NO. 1078/MUM/2013,(A.Y 2008-09) INEXTRICABLY LINKED WITH THE SETTING-UP OF THE POWE R PLANT AND, THEREFORE, IT NEGATED THE STAND OF THE REVENUE OF T REATING SUCH INTEREST INCOME AS A REVENUE RECEIPT. THE FACT-SITUATION BEF ORE US IS SIMILAR AND THEREFORE THE ISSUE HAS TO BE DECIDED IN THE MANNER IN WHICH THE HONBLE DELHI HIGH COURT HAS RESOLVED THE CONTROVER SY. THUS, IN THE INSTANT CASE ALSO, IT HAS TO BE DEDUCED THAT INTERE ST ON FCCB FUNDS TEMPORARILY PLACED IN FIXED DEPOSITS AWAITING DEPLO YMENT IN THE CONSTRUCTION OF NEW PROJECTS IS A CAPITAL RECEIPT, SINCE THE FCCB PROCEEDS ARE INEXTRICABLY LINKED WITH THE CONSTRU CTION OF NEW PROJECTS, AS THE SAME HAVE BEEN RAISED FOR THAT PUR POSE ALONE. 8.5 IN VIEW OF OUR AFORESAID DISCUSSION, AND, HAVIN G REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE, IT HAS TO BE H ELD THAT THE INTEREST EARNED BY THE ASSESSEE BY TEMPORARILY PARKING THE F CCB FUNDS IN BANKS, PENDING ITS FULL DEPLOYMENT IN THE ONGOING CONSTRUC TION OF HOTEL PROJECTS, WAS IN THE NATURE OF CAPITAL RECEIPT AND WAS THUS, REQUIRED TO BE SET-OFF AGAINST THE COST OF CAPITAL WORK-IN-PROG RESS. THUS, ASSESSEE SUCCEEDS ON THIS ASPECT. 8.6 SINCE THE ASSESSEE HAS SUCCEEDED ON THE AFORESA ID ASPECT, THE ALTERNATE PLEA OF ADJUSTING THE INTEREST PAID ON F CCBS AGAINST INTEREST INCOME IS RENDERED ACADEMIC AND IS NOT BEING ADJUDI CATED. 9. THE SECOND ISSUE RAISED IN THE APPEAL IS TAXABIL ITY OF RS.20,16,418/- AS INCOME FROM TIME SHARE BUSINESS. 9.1 AT THE TIME OF HEARING, THE LD. REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT ASSESSEE DOES NOT WISH TO PRESS TH E SAME AND ACCORDINGLY THE SAME IS DISMISSED AS NOT PRESSED. 13 ITA NO. 1078/MUM/2013,(A.Y 2008-09) 10. THE LAST ISSUE IS WITH REGARD TO A DISALLOWAN CE OF RS.10,81,701/- MADE BY THE ASSESSING OFFICER UNDER SECTION 14A OF THE ACT. IT IS NOTICED THAT THE DISALLOWANCE OF RS.10,81,701/- HAS BEEN MADE BY THE LOWER AUTHORITIES UNDER SECTION 14A OF THE ACT IN RESPECT OF EXEMPT INCOME OF RS.18,311/-EARNED BY THE ASSESSEE. ON THI S ASPECT, WITHOUT GOING INTO MUCH DETAIL, IT IS DIRECTED THAT THE DIS ALLOWANCE BE LIMITED TO THE EXTENT OF EXEMPT INCOME IN TERMS OF THE RATIO O F THE RATIO OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD. VS. CIT, [2015] 61 TAXMANN.COM 118 (DEL). 11. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED, AS ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 03/10/2017. SD/- SD/- (RAVISH SOOD) (G.S. PANNU) JUDICIAL MEMBER ACCOCUNTANT MEMBER MUMBAI, DATED 03/10/2017 VM , SR. PS COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT , 2. THE RESPONDENT. 3. THE CIT(A)- 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI