The ITO, Ward-1(1), Ahmedabad V. M/s. Adani Power Rajasthan Ltd., Ahmedabad

ITA 1430/AHD/2015

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 6378 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 7 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-01-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 20-05-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S N SOPARKAR
• Keywords: Sale consideration of property below Jantri Value; Capital asset; Business income; Depreciation; Diversion of income; Capital receipt; Capital expenditure
• Section: 143(3); 56

Judgement Text

, B IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD BEFORE SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER & SHRI MAHAVIR PRASAD, JUDICIAL MEMEBR ./ I.T.A. NO. 1430/AHD/2015 WITH CROSS OBJECTION NO. 114/AHD/2015 ( ASSESSMENT YEAR : 2011-12) ITO, WD.1(1)(1), AHMEDABAD / VS. M/S. ADANI POWER RAJASTHAN LIMITED ADANI HOUSE, NR. MITHAKHALI SIX ROAD, NAVRANGPURA, AHMEDABAD 380006 ./ ./ PAN/GIR NO. : AAGCA9379P ( APPELLANT / RESPONDENT ) .. ( RESPONDENT / CROSS OBJECTOR ) / REVENUE BY : SHRI MUDIT NAGPAL, SR. D.R. / ASSESSEE BY : SHRI S. N. SOPARKAR & SHRI PARIN SHAH, A.R. DATE OF HEARING 20/12/2018 ! / DATE OF PRONOUNCEMENT 18/01/2019 / O R D E R PER PRADIP KUMAR KEDIA - AM: THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTANCE OF THE REVENUE AGAINST THE ORDER OF THE COMMISSIONER OF IN COME TAX (APPEALS)-6, AHMEDABAD (CIT(A) IN SHORT), DATED 0 9.03.2015 ARISING IN THE ASSESSMENT ORDER DATED 26.02.2014 PASSED BY THE ASSESSING OFFICER (AO) UNDER S. 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT) CONCERNING ASSESSMENT YEAR 2011-12. ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 2 - 2. THE ASSESSEE HAS ALSO FILED CROSS OBJECTION IN T HE REVENUES APPEAL AS CAPTIONED ABOVE. ITA NO. 1430/AHD/2015 (REVENUES APPEAL) 3. THE GROUNDS OF APPEAL RAISED BY THE REVENUE REA DS AS UNDER:- 1. THE LD. CIT(A) HAS ERRED IN DELETING THE ADDIT ION OF RS.1,45,50,007/- MADE U/S 56 OF THE ACT BEING INTEREST RECEIVED FROM SBI WITHOUT APPRECIATING THE FACT THAT THE SAME HAS EARNED BEFORE COMMENCEMENT O F THE BUSINESS. 4. BRIEFLY STATED, THE ASSESSEE COMPANY IS SUBSIDIA RY COMPANY OF ADANI POWER LTD. (APL) WHICH OWNS MAJORITY OF THE I SSUED SHARE CAPITAL IN IT. THE ASSESSEE COMPANY IS ENGAGED IN POWER SECTOR AND HAS UNDERTAKEN A PROJECT OF CONSTRUCTION OF POWER P LANT TO GENERATE ELECTRICITY. THE POWER PLANT WAS STATED TO BE IN T HE PROCESS OF BEING SET UP DURING THE YEAR. THE ASSESSEE COMPANY THUS H AS NOT BEGUN ANY COMMERCIAL ACTIVITIES WHATSOEVER DURING THE YEAR. THE EXPENSES INCURRED FOR THE PURPOSE OF SETTING UP OF PROJECT W ERE SHOWN IN THE BALANCE SHEET AS PROJECT DEVELOPMENT EXPENDITURE AND CAPITAL WORK IN PROGRESS. THE EXPENDITURE INCURRED WERE CAPITA LIZED AND INCOME GENERATED WERE REDUCED FROM THE COST OF PROJECT. THE RETURN WAS THUS FILED BY THE ASSESSEE DECLARING THE TOTAL INCOME OF RS. NIL. THE RETURN SO FILED FOR AY 2011-12 WAS SUBJECTED TO SCRUTINY A SSESSMENT. ON SCRUTINY OF THE PROJECT DEVELOPMENT EXPENDITURE AND CAPITAL WORK IN PROGRESS, THE AO INTER ALIA NOTICED THAT THE AS SESSEE HAS MADE ADJUSTMENT OF INTEREST INCOME OF RS.3,68,56,918/- A GAINST FINANCIAL CHARGES (INCLUDED IN PROJECT DEVELOPMENT EXPENDITUR E) OF RS.1,36,80,38,638/-. IT WAS NOTICED IN THE COURSE OF THE ASSESSMENT THAT CERTAIN DEPOSITS WERE PARKED BY THE ASSESSEE C OMPANY WITH STATE BANK OF INDIA AND IDBI BANK LTD. TO AVAIL VARIOUS C REDIT FACILITIES FOR CONSTRUCTION OF POWER PLANT AND INTEREST WAS EARNED THEREON. THE ASSESSEE COMPANY CHARACTERIZED THE AFORESTATED INTE REST INCOME AS ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 3 - CAPITAL RECEIPT AND HENCE REDUCED THE PROJECT DEVEL OPMENT EXPENDITURE TO THIS EXTENT. IT WAS THE CASE OF THE ASSESSEE TH AT SUCH DEPOSITS ARE INEXTRICABLY LINKED WITH HIGHLY CAPITAL INTENSIVE P OWER PROJECT AS SUCH MEGA PROJECTS REQUIRE USE OF STATE OF ART TECHNOLOG Y, SUBSTANTIAL IMPORTS, PLANNING AND EXECUTION OF INSTALLATION AND COMMISSION OVER A SUBSTANTIAL LONG PERIOD OF TIME. IT WAS CLAIMED TH AT THE ASSESSEE HAS ALSO INTER ALIA INCURRED VERY HEAVY INTEREST COSTS ON BORROWED FUN DS TO THE TUNE OF RS.84,26,19,593/-. THE ASSESSEE THUS C LAIMED THAT BOTH INTEREST INCURRED ON BORROWED FUNDS AND INTEREST IN COME DERIVED FROM TEMPORARY DEPOSITS FORM PART OF PROJECT DEVELOPMENT EXPENDITURE AND BOTH OUTGO AND RECEIPT BEARS THE CHARACTER OF CAPIT AL ITEM. THE AO HOWEVER HELD THAT INTEREST EARNED ON TEMPORARY DEPO SITS AMOUNTING TO RS.3,68,56,918/- DERIVED FROM DEPOSITS PLACED WITH BANK ARE IN THE NATURE OF REVENUE INCOME AND THUS CANNOT BE REDUCED FROM PROJECT COSTS OF CAPITAL NATURE. WHILE HOLDING SO, THE AO DENIED NEXUS BETWEEN THE DEPOSITS MADE AND SETTING UP OF PLANT / ACQUISITION OF ASSETS. THE AO ACCORDINGLY ASSESSED AGGREGATE INTE REST INCOME OF RS.3,68,56,918/- AS INDEPENDENT REVENUE INCOME OF T AXABLE NATURE AND DENIED ITS SET OFF AGAINST THE PROJECT DEVELOPMENT EXPENDITURE (CAPITAL WORK IN PROGRESS). 5. AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A). 6. THE CIT(A) REVISITED THE FACTS AND CIRCUMSTANCES OF THE CASE AND FOUND MERIT IN THE PLEA OF THE ASSESSEE FOR ADJUSTM ENT OF INTEREST INCOME DERIVED FROM STATE BANK OF INDIA RS.1,45,50, 007/- AS ADJUSTIABLE AGAINST THE PROJECT AND DEVELOPMENT EXP ENDITURE (CAPITAL WORK IN PROGRESS). IT WAS CONSEQUENTLY HELD THAT T HE INTEREST INCOME SO DERIVED TO THE AFORESAID EXTENT WOULD GO TO REDU CE THE CUMULATIVE PROJECT DEVELOPMENT EXPENDITURE OF CAPITAL NATURE W HICH ALSO INTER ALIA INCLUDES INTEREST EXPENDITURE TO THE TUNE OF RS.84. 26 CRORES. THE CIT(A) HOWEVER DID NOT AGREE WITH THE PLEA OF THE ASSESSEE TOWARDS ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 4 - REDUCTION OF INTEREST INCOME DERIVED FROM DEPOSITS WITH IDBI BANK AMOUNTING TO RS.2,23,06,911/- FROM THE PROJECT DEVE LOPMENT EXPENDITURE AGGREGATING TO RS.145.55 CRORES (INCLUD ING INTEREST COSTS RS.84.26 CRORES) ON THE GROUND THAT ASSESSEE FAILED TO DEMONSTRATE THAT INTEREST EARNED IS INEXTRICABLY LINKED WITH TH E SETTING UP OF POWER PLANT. 7. IT WILL BE APT TO REPRODUCE THE RELEVANT PARAS D EALING WITH THE CONTROVERSY: 9.1 AS DISCUSSED ABOVE, THE APPELLANT-COMPANY HAS EARNED INTEREST INCOME FROM THE FOLLOWING TWO SOURCES:- SR. NO. PARTICULARS AMOUNT (IN RS.) 1. IDBI BANK LTD. 2,23,06,911 2. STATE BANK OF INDIA 1,45,50,007 TOTAL 3,68,56,918 9.2 INTEREST INCOME FROM IDBI BANK LTD. - RS. 2,23,06,911/-: THE APPELLANT-COMPANY HAD PLACED A FIXED DEPOSIT OF RS 36 CRORES WITH THE BANK FOR THE PURPOSE OF AVAILING CR EDIT FACILITIES OF RS.360 CRORES. COPY OF THE TERM SHEET BETWEEN IDBI BANK LTD. AND THE APPELLANT-COMPANY IS ATTACHED HEREWITH AS PER A NMEXURE-1. ON PERUSAL OF THE ABOVE TERM SHEET, IT MAY BE SEEN THA T THE APPELLANT- COMPANY HAD OBTAINED BANK GUARANTEE WHICH WAS UTILI ZED FOR THE PURPOSE OF ISSUANCE OF CONTRACT PERFORMANCE GUARANT EE IN RESPECT OF THE REQUEST FOR PROPOSAL FLOATED BY RAJASTHAN RAJYA VIDYUT PRASARAN NIGAM LTD. FOR SUPPLY OF UPTO 1200 MW POWER. THE AB OVE BANK GUARANTEE HAD BEEN MADE AVAILABLE TO THE APPELLANT- COMPANY ON A CONDITION THAT THE APPELLANT-COMPANY PLACES A MARGI N OF 10% OF THE TOTAL CREDIT FACILITY IT HAD AVAILED. THE APPELLANT -COMPANY HAD AVAILED THE CREDIT FACILITY OF RS.360 CRORES FROM I DBI BANK LTD., FOR WHICH IT HAD DEPOSITED RS.36 CRORES AS MARGIN MONEY . TO SUMMARIZE, THE APPELLANT-COMPANY WOULD LIKE TO REPRODUCE THE R ELEVANT PART OF THE TERM SHEET ENTERED INTO BETWEEN IDBI BANK LTD. AND THE APPELLANT-COMPANY AS UNDER:- '1. BANK GUARANTEE LIMIT: SR. NO. PARTICULARS TERMS & CONDITIONS I TYPE OF FACILITY BANK GUARANTEE LIMIT (CONTRACT PERFORMANCE ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 5 - GUARANTEE) II LIMIT/AMOUNT RS.360 CRORE (RUPEES THREE HUNDRED SIXT Y CRORES ONLY) III PURPOSE THE BANK GUARANTEE WOULD BE UTIL IZED FOR THE PURPOSE OF ISSUANCE OF THE CONTRACT PERFORMANCE GUARANTEE IN RESPECT OF THE REQUEST FOR PROPOSAL (RFP) FLOATED BY RAJASTHAN RAJYA VIDYUT PRASARAN NIGAM LTD. FOR SUPPLY OF UPT O 1200 MW POWER BY APRL, WITH SPECIFIC VALIDITY PERIOD. IV COMMISSION 1% P. A. ON PRO RATA BASIS V COMMITMENT CHARGES NIL' ON PERUSAL OF THE ABOVE TERM SHEET, YOUR GOODSELVES WILL APPRECIATE THAT THERE IS IN FACT A DIRECT NEXUS BETWEEN THE FI XED DEPOSIT PLACED AS MARGIN MONEY WITH THE PERFORMANCE BANK GUARANTEE GIVEN TO STATE ELECTRICITY UTILITY COMPANY, THIS FACT HAS NOT BEEN QUESTIONED BY THE ASSESSING OFFICER AS WELL. THE ASSESSING OFFICER HA S, WITHOUT TAKING INTO CONSIDERATION THE ABOVE FACTUAL POSITION, RELI ED UPON THE DECISION OF TUTICORIN ALKALI CHEMICALS & FERTILIZER S LTD. (SUPRA) AND MADE THE ADDITION IN RESPECT OF THE INTEREST INCOME EARNED. IN DOING SO, HE HAS COMPLETELY OVERLOOKED THE FACTS ON RECOR D MAINLY WITH A PRECONCEIVED NOTION OF MAKING THE ADDITION. 9.3 INTEREST INCOME FROM STATE BANK OF INDIA RS. 1,45,50,007 THE APPELLANT-COMPANY HAD EARNED RS.1,45,50,007/- F ROM THE MARGIN MONEY PLACED WITH STATE BANK OF INDIA IN ORD ER TO AVAIL BANK GUARANTEE LIMIT OF RS.150 CRORES. THE TERM SHEET BE TWEEN STATE BANK OF INDIA AND THE APPELLANT-COMPANY IS ATTACHED HERE WITH AS PER ANNEXURE-2. ON PERUSAL OF THE ABOVE TERM SHEET, IT MAY BE SEEN THAT THE APPELLANT-COMPANY WAS REQUIRED TO PLACE 10% OF THE BANK GUARANTEE AVAILED BY IT. RELEVANT PORTION OF THE TE RM SHEET DATED 20TH AUGUST, 2010 IS REPRODUCED BELOW FOR READY REF ERENCE: A FACILITY BANK GUARANTEE B AMOUNT RS.150CR. C SECURITY SAME AS TERM LOAN FACILITY D MARGIN 10% E TENOR AS PER THE BANK'S NORM. ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 6 - F TYPE FOR THE PROJECT RELATED WORKS G CHARGES AS PRESCRIBED BY THE BANK FROM TIME TO TIME COPY OF THE ABOVE AGREEMENT BETWEEN STATE BANK OF I NDIA AND THE APPELLANT-COMPANY WAS ALREADY SUBMITTED TO THE ASSESSING OFFICER VIDE LETTER DATED 17.2.2014. THE ASSESSING OFFICER NOWHERE IN THE BODY OF THE ASSESSMENT ORDER DENIED THE FACT TH AT THE ABOVE BANKING FACILITY AVAILED IN LIEU OF MARGIN MONEY WE RE NOT INEXTRICABLY LINKED TO THE SETTING UP OF THE POWER PLANT. IN FACT, THE ONLY CONTENTION OF THE ASSESSING OFFICER IS THAT TH E INTEREST INCOME EARNED DURING THE PRE-COMMENCEMENT STAGE NOT BEING EXEMPT U/S.10 WOULD BE TAXABLE. IN DOING SO, THE ASSESSING OFFICE R HAS GROSSLY ERRED, ON THE FACTS AS WELL AS IN LAW. IN SUPPORT OF THE CONTENTION OF THE APPELLANT-COMPA NY THAT THE INCOME WHICH IS INEXTRICABLY LINKED TO THE SETTING UP OF THE PLANT IS A CAPITAL RECEIPT, RELIANCE IS PLACED ON THE FOLLOWIN G DECISIONS:- (I) CIT VS. BOKARO STEEL LTD., 236 ITR 315 (SC). ON ANALYSIS OF THE ABOVE DECISION, IT MAY BE SEEN T HAT BOKARO STEEL LTD. HAD EARNED INCOME THROUGH RENT FROM CONT RACTORS FOR HOUSING WORKERS AND STAFF-EMPLOYEES, HIRE CHARGES O N PLANT AND MACHINERY GIVEN TO CONTRACTORS AND INTEREST ON ADVA NCES MADE TO CONTRACTORS FOR FACILITATING THE WORK OF CONSTRUCTI ON. THE PRINCIPLE LAID DOWN BY THE HON'BLE APEX COURT IS REPRODUCED B ELOW: '5, WE WILL TAKE THE FIRST THREE HEADS UNDER WHICH THE ASS ESSEE HAS RECEIVED CERTAIN AMOUNTS. THESE ARE THE RENT CHARGED BY THE ASSESSEE TO ITS CONTRACTORS FOR HOUSING WORKERS AND STAFF EMPLOYED BY THE CONTRACTOR FOR THE CONSTRUCTION WORK OF THE ASSESSEE INCLUDING CERTAIN AMENITIES GRANTED TO THE STAFF BY THE ASSESSEE. SECONDLY, HIR E CHARGES FOR PLANT AND MACHINERY WHICH WAS GIVEN TO THE CONTRACTORS BY THE ASSESSEE FOR USE IN THE CONSTRUCTION WORK OF THE ASSESSEE, AND T HIRDLY, INTEREST FROM ADVANCES MADE TO THE CONTRACTORS BY THE ASSESS EE FOR THE PURPOSE OF FACILITATING THE WORK OF CONSTRUCTION. T HE ACTIVITIES OF THE ASSESSEE IN CONNECTION WITH ALL THESE THREE RECEIPT S ARE DIRECTLY CONNECTED WITH OR ARE INCIDENTAL TO THE WORK OF CON STRUCTION OF ITS PLANT UNDERTAKEN BY THE ASSESSEE. BROADLY SPEAKING, THESE PERTAIN TO THE ARRANGEMENTS MADE BY THE ASSESSEE WITH ITS CONT RACTORS PERTAINING TO THE WORK OF CONSTRUCTION. TO FACILITA TE THE WORK OF THE CONTRACTOR, THE ASSESSEE PERMITTED THE CONTRACTOR T O USE THE PREMISES OF THE ASSESSEE FOR HOUSING ITS STAFF AND WORKERS E NGAGED IN THE CONSTRUCTION ACTIVITY OF THE ASSESSEE'S PLANT. THIS WAS CLEARLY TO FACILITATE THE WORK OF CONSTRUCTION. HAD THIS FACIL ITY NOT BEEN PROVIDED BY THE ASSESSEE, THE CONTRACTORS WOULD HAV E HAD TO MAKE THEIR OWN ARRANGEMENTS AND THIS WOULD HAVE BEEN REF LECTED IN THE CHARGES OF THE CONTRACTORS FOR THE CONSTRUCTION -WO RK. INSTEAD, THE ASSESSEE HAS PROVIDED THESE FACILITIES. THE SAME IS TRUE OF THE HIRE CHARGES FOR PLANT AND MACHINERY WHICH WAS GIVEN BY THE ASSESSEE TO ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 7 - THE CONTRACTORS FOR THE ASSESSEE'S CONSTRUCTION WO RK THE RECEIPTS IN THIS CONNECTION ALSO GO TO COMPENSATE THE ASSESSEE FOR THE WEAR AND TEAR OF THE MACHINERY. THE ADVANCES WHICH THE ASSESSEE MADE TO THE CONTRACTORS TO FACILITATE THE CONSTRUCT ION ACTIVITY OF PUTTING TOGETHER A VERY LARGE PROJECT WAS AS MUCH T O ENSURE THAT THE WORK OF THE CONTRACTORS PROCEEDED WITHOUT ANY FINAN CIAL HITCHES AS TO HELP THE CONTRACTORS. THE ARRANGEMENTS WHICH WERE M ADE BETWEEN THE ASSESSEE-COMPANY AND THE CONTRACTORS PERTAINING TO THESE THREE RECEIPTS ARE ARRANGEMENTS WHICH ARE INTRINSICALL Y CONNECTED WITH THE CONSTRUCTION OF ITS STEEL PLANT. THE RECEIPTS H AVE BEEN ADJUSTED AGAINST THE CHARGES PAYABLE TO THE CONTRACTORS AND HAVE GONE TO REDUCE THE COST OF CONSTRUCTION. THEY HAVE, THEREFO RE, BEEN RIGHTLY HELD AS CAPITAL RECEIPTS AND NOT INCOME OF THE ASSE SSEE FROM ANY INDEPENDENT SOURCE. 6. IN THE CASE OF ADDL. CIT V. INDIAN DRUGS & PHARM ACEUTICAL LTD. [1983] 141 ITR 134, THE DELHI HIGH COURT CONSIDERED A CASE WHERE THE WORK OF CONSTRUCTION OF THE FACTORY OF THE ASSE SSEE WAS IN PROGRESS AND PRODUCTION HAD NOT COMMENCED. RECEIPTS FROM THE SALE OF TENDER FORMS AND SUPPLY OF WATER AND ELECTRICITY TO THE CONTRACTORS ENGAGED IN CONSTRUCTION AS ALSO RECEIPTS ON ACCOUNT OF SALE OF STONES, BOULDERS, GRASS AND TREES WERE HELD TO BE RECEIPTS NOT FROM INDEPENDENT SOURCES BUT WERE CONSIDERED AS INEXTRIC ABLY LINKED WITH THE PROCESS OF SETTING UP OF BUSINESS. THESE WERE D IRECTLY RELATED TO THE CAPITAL STRUCTURE OF BUSINESS AND WERE HELD TO BE CAPITAL IN NATURE. WE AGREE WITH THIS VIEW TAKEN BY THE DELHI HIGH COURT. 7. THE APPELLANT, HOWEVER, RELIED UPON THE DECISION OF THIS COURT IN TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD.'S CAS E (SUPRA). THAT CASE DEALT WITH THE QUESTION WHETHER THE INVESTMENT OF BORROWED FUNDS PRIOR TO COMMENCEMENT OF BUSINESS, RESULTING IN EARNING OF INTEREST BY THE ASSESSES, WOULD AMOUNT TO THE ASSES SEE EARNING ANY INCOME. THIS COURT HELD THAT IF A PERSON BORROWS MO NEY FOR BUSINESS PURPOSES, BUT UTILISES THAT MONEY TO EARN INTEREST, HOWEVER, TEMPORARILY, THE INTEREST SO GENERATED WILL BE HIS INCOME. THIS INCOME CAN BE UTILISED BY THE ASSESSEE WHICHEVER WA Y HE LIKES. MERELY BECAUSE HE UTILISED IT TO REPAY THE INTEREST ON THE LOAN TAKEN WILL NOT MAKE THE INTEREST INCOME AS A CAPITAL RECE IPT. THE DEPARTMENT RELIED UPON THE OBSERVATIONS MADE IN THA T JUDGMENT (AT PAGE 179) TO THE EFFECT THAT IF THE COMPANY, EVEN B EFORE IT COMMENCES BUSINESS, INVESTS SURPLUS FUNDS IN ITS HANDS FOR PU RCHASE OF LAND OR HOUSE PROPERTY AND LATER SELLS IT AT PROFIT, THE GA IN MADE BY THE COMPANY WILL BE ASSESSABLE UNDER THE HEAD 'CAPITAL GAINS'. SIMILARLY, IF A COMPANY PURCHASES RENTED HOUSE AND GETS RENT, SUCH RENT WILL BE ASSESSABLE TO TAX UNDER SECTION 22 AS INCOME FROM H OUSE PROPERTY. LIKEWISE, THE COMPANY MAY HAVE INCOME FROM OTHER SO URCES. THE COMPANY MAY ALSO, AS IN THAT CASE, KEEP THE SURPLUS FUNDS IN SHORT- TERM DEPOSITS IN ORDER TO EARN INTEREST. SUCH INTER EST WILL BE CHARGEABLE UNDER SECTION 56 OF THE ACT. THIS COURT ALSO EMPHASISED THE FACT THAT THE COMPANY WAS NOT BOUND TO UTILISE THE INTEREST SO EARNED TO ADJUST IT AGAINST THE INTEREST PAID ON BO RROWED CAPITAL. THE ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 8 - COMPANY WAS FREE TO USE THIS INCOME IN ANY MANNER I T LIKED. HOWEVER, WHILE INTEREST EARNED BY INVESTING BORROWE D CAPITAL IN SHORT-TERM DEPOSITS IS AN INDEPENDENT SOURCE OF INC OME NOT CONNECTED WITH THE CONSTRUCTION ACTIVITIES OR BUSIN ESS ACTIVITIES OF THE ASSESSEE, THE SAME CANNOT BE SAID IN THE PRESEN T CASE WHERE THE UTILISATION OF VARIOUS ASSETS OF THE COMPANY AND TH E PAYMENTS RECEIVED FOR SUCH UTILISATION ARE DIRECTLY LINKED W ITH THE ACTIVITY OF SETTING UP THE STEEL PLANT OF THE ASSESSEE. THESE R ECEIPTS ARE INEXTRICABLY LINKED WITH THE SETTING UP OF THE CAPI TAL STRUCTURE OF THE ASSESSEE-COMPANY. THEY MUST, THEREFORE, BE VIEWED A S CAPITAL RECEIPTS GOING TO REDUCE THE COST OF CONSTRUCTION. IN THE CASE OF CHALLAPALLI SUGARS LTD. V. CIT [1975] 98 ITR 167, THIS COURT EXAMINED THE QUESTION WHETHER INTEREST PAID BEFORE THE COMMENCEMENT OF PRODUCTION BY A COMPANY ON AMOUNTS BORROWED FOR THE ACQUISITION AND INSTALLATION OF PLANT AND MACHI NERY WOULD FORM APART OF THE ACTUAL COST OF THE ASSET TO THE ASSESS EE WITHIN THE MEANING OF THAT EXPRESSION IN SECTION 10(5) OF THE INDIAN INCOME-TAX ACT, 1922 AND WHETHER THE ASSESSEE WILL BE ENTITLED TO DEPRECIATION ALLOWANCES AND DEVELOPMENT REBATE WITH REFERENCE TO SUCH INTEREST ALSO. THE COURT HELD THAT THE ACCEPTED ACCO UNTANCY RULE FOR DETERMINING COST AFFIXED ASSETS IS TO INCLUDE ALL E XPENDITURE NECESSARY TO BRING SUCH ASSETS INTO EXISTENCE AND T O PUT THEM IN WORKING CONDITION. IN CASE MONEY IS BORROWED BY A N EWLY STARTED COMPANY WHICH IS IN THE PROCESS OF CONSTRUCTING AND ERECTING ITS PLANT, THE INTEREST INCURRED BEFORE THE COMMENCEMEN T OF PRODUCTION ON SUCH BORROWED MONEY CAN BE CAPITALISED AND ADDED TO THE COST OF THE FIXED ASSETS CREATED AS A RESULT OF SUCH EXPEND ITURE. BY THE SAME REASONING IF THE ASSESSEE RECEIVES ANY AMOUNTS WHIC H ARE INEXTRICABLY LINKED WITH THE PROCESS OF SETTING UP ITS PLANT AND MACHINERY, SUCH RECEIPTS WILL GO TO REDUCE THE COST OF ITS ASSETS. THESE ARE RECEIPTS OF A CAPITAL NATURE AND CANNOT B E TAXED AS INCOME. 8. THE SAME REASONING WOULD APPLY TO ROYALTY RECEIV ED BY THE ASSESSEE- COMPANY FOR STONES, ETC., EXCAVATED FROM THE ASSESSEE- COMPANY'S LAND. THE LAND HAD BEEN ALLOWED TO BE UTI LISED BY THE CONTRACTORS FOR THE PURPOSE OF EXCAVATING STONES TO BE USED IN THE CONSTRUCTION WORK OF ASSESSEE'S STEEL PLANT. THE CO ST OF THE PLANT TO THE EXTENT OF SUCH ROYALTY RECEIVED IS REDUCED FOR THE ASSESSEE. IT IS, THEREFORE, RIGHTLY TAKEN AS A CAPITAL RECEIPT. ' THE UNDERLINING PRINCIPLE OF LAW LAID DOWN BY HON'B LE APEX COURT IS THAT THE RECEIPTS WHICH ARE INEXTRICABLY L INKED TO SETTING UP OF POWER PLANT GO ON TO REDUCE THE COST OF THE PROJ ECT. APPLYING THE SAME PRINCIPLE IN THE FACTS OF THE APPELLANT'S CASE IT MAY BE NOTED THAT THE MARGIN MONEY WAS PLACED IN ORDER TO AVAIL CREDIT FACILITIES MAINLY USED FOR CONSTRUCTION OF THE POWER PLANT AND ADVANCING PERFORMANCE BANK GUARANTEE TO THE STATE ELECTRICITY UTILITY COMPANY. FURTHER THE OPERATIONS OF THE COMPANY HAVE NOT YET BEGUN. THE ONLY ACTIVITY WHICH IS CARRIED ON IS SETTING UP OF POWER PLANT AT KAWAI, RAJASTHAN. THIS IS ALSO ACCEPTED BY THE ASSESSING O FFICER. THE APPELLANT HAS GIVEN A PERFORMANCE BANK GUARANTEE TO IDBI BANK LTD. ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 9 - TO THIS ESTABLISHES THE NEXUS RATIO OF THE HON'BLE APEX COURT DECISION IN BOKARO STEEL LTD. (SUPRA) THE INTEREST RECEIPT SHOULD GO ON TO REDUCE THE COST OF CONSTRUCTION/DEVELOPMENT O F THE POWER PLANT. (II) CIT VS. KARNAL CO-OPERATIVE SUGAR MILLS LTD., 243 ITR 2 (SC ) THE RELEVANT PART OF THIS DECISION IS REPRODUCED BE LOW: '1. LEAVE GRANTED. 2. IN THE PRESENT CASE, THE ASSESSEE HAD DEPOSITED MONEY TO OPEN A LETTER OF CREDIT FOR THE PURCHASE OF THE MACHINER Y REQUIRED FOR SETTING UP ITS PLANT IN TERMS OF THE ASSESSEE'S AGR EEMENT WITH THE SUPPLIER. IT WAS ON THE MONEY SO DEPOSITED THAT SOM E INTEREST HAS BEEN EARNED. THIS IS, THEREFORE, NOT A CASE WHERE A NY SURPLUS SHARE CAPITAL MONEY WHICH IS LYING IDLE HAS BEEN DEPOSITE D IN THE BANK FOR THE PURPOSE OF EARNING INTEREST. THE DEPOSIT OF MON EY IN THE PRESENT CASE IS DIRECTLY LINKED WITH THE PURCHASE OF PLANT AND MACHINERY. HENCE, ANY INCOME EARNED ON SUCH DEPOSIT IS INCIDEN TAL TO THE ACQUISITION OF ASSETS FOR THE SETTING UP OF THE PLA NT AND MACHINERY. IN THIS VIEW OF THE MATTER THE RATIO LAID DOWN BY THIS COURT IN TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. V. CIT [1997] 2 27ITR 172, WILL NOT BE ATTRACTED. THE MORE APPROPRIATE DECISION IN THE FACTUAL SITUATION IN THE PRESENT CASE IS IN CIT(A) V. BOKAR O STEEL LTD. [1999] 236 ITR 315 (SC). THE APPEAL IS DISMISSED. THERE WI LL BE NO ORDER AS TO COSTS. ' IN THIS CASE THE ASSESSEE HAD EARNED INTEREST ON DE POSITS PLACED TO AVAIL A CREDIT FACILITY FOR PURCHASE OF M ACHINERY FOR SETTING UP A PLANT. THE HON 'BLE APEX COURT HELD THAT THE D EPOSIT OF MONEY WAS DIRECTLY LINKED WITH THE PURCHASE OF PLANT AND MACHINERY AND THEREFORE THE INCOME EARNED ON SUCH DEPOSIT WAS INC IDENTAL TO THE ACQUISITION OF THE ASSET. AS NARRATED ABOVE, THE AP PELLANT-COMPANY HAS PLACED THE ABOVE MARGIN MONEY WITH THE BANK IN ORDER TO AVAIL CREDIT FACILITIES FOR GIVING PERFORMANCE BANK GUARA NTEE TO THE STATE ELECTRICITY UTILITY COMPANY AND TO AVAIL OTHER CRED IT FACILITIES FOR DEVELOPING AND CONSTRUCTION OF POWER PLANT. THEREFO RE, THE APPELLANT HAS PROVED BEYOND ANY DOUBT THE INEXTRICABLE NEXUS BETWEEN DEPOSIT/MARGIN MONEY WITH THE CONSTRUCTION OF POWER PLANT. THEREFORE THE INTEREST INCOME IS CAPITAL RECEIPT WH ICH SHOULD GO ON TO REDUCE THE CAPITAL COST OF THE PROJECT. (III) CIT VS. JAYPEE DSC VENTURES LTD., 35 ITR 132 (DEL.) . THE RELEVANT PART OF THIS DECISION IS REPRODUCED BE LOW: 'FACTS: THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE REL EVANT ASSESSMENT YEAR DECLARING NIL INCOME. IT HAD FURNISHED PERFORM ANCE GUARANTEE IN FAVOUR OF NHAI TO GET THE CONTRACT AWARDED IN ITS F AVOUR AND TO ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 1 0 - PROCURE THE SAID GUARANTEE, IT HAD KEPT THE AMOUNT IN A FIXED DEPOSIT IN THE BANK. THE AMOUNT OF INTEREST INCOME FROM FIX ED DEPOSITS WAS SET OFF AGAINST THE PROJECT EXPENSES. THE ASSESSEE' S CASE WAS THAT THE FURNISHING OF BANK GUARANTEE HAD A DIRECT NEXUS WIT H THE CARRYING ON OF THE PROJECT AND, THEREFORE, THE SAID SET OFF DES ERVED TO BE ALLOWED. THE ASSESSING OFFICER HELD THAT INTEREST RECEIVED B Y THE COMPANY ON THE BANK DEPOSIT WAS TAXABLE AS INCOME UNDER THE HE AD 'INCOME FROM OTHER SOURCES'. ACCORDING TO THE ASSESSING OFFICER, PROJECT EXPENSES DID NOT HAVE EVEN REMOTE PROXIMITY WITH THE EARNING OF INTEREST AND, THUS, THE SAME COULD NOT BE ALLOWED TO BE SET OFF A GAINST THE INTEREST INCOME. ON SECOND APPEAL, THE TRIBUNAL, HOWEVER, AL LOWED THE ASSESSEE 'S CLAIM. FINDING: 21. KEEPING IN VIEW THE AFORESAID PRONOUNCEMENTS IN THE FIELD, THE PRESENT CONTROVERSY IS TO BE ADJUDGED. AS IS NOTICE ABLE FROM THE STIPULATIONS IN THE AGREEMENT, THE PERFORMANCE GUAR ANTEE BY WAY OF BANK GUARANTEE WAS REQUIRED FOR FAITHFUL PERFORMANC E OF ITS OBLIGATIONS. THE NON-SUBMISSION OF THE GUARANTEE WO ULD HAVE ENTAILED TERMINATION OF THE AGREEMENT AND NHAI WOUL D HAVE BEEN AT LIBERTY TO APPROPRIATE THE BID SECURITY. THAT APAR T, THE RELEASE OF SUCH PERFORMANCE SECURITY DEPENDED UPON CERTAIN CON DITIONS. THUS, IT IS CLEARLY EVINCIBLE THAT THE BANK GUARANTEE WAS FU RNISHED AS A CONDITION PRECEDENT TO ENTERING INTO THE CONTRACT A ND FURTHER IT WAS TO BE KEPT ALIVE TO FULFIL THE OBLIGATIONS. QUITE A PART FROM THE ABOVE, THE RELEASE OF THE SAME WAS DEPENDENT ON THE SATISF ACTION OF CERTAIN CONDITIONS. THUS, THE PRESENT CASE IS NOT ONE WHERE THE ASSESSEE HAD MADE THE DEPOSIT OF SURPLUS MONEY LYING IDLE WITH I T IN ORDER TO EARN INTEREST; ON THE CONTRARY, THE AMOUNT OF INTEREST W AS EARNED FROM FIXED DEPOSITS WHICH WERE KEPT IN THE BANK FOR FURN ISHING THE BANK GUARANTEE. IT HAD AN INEXTRICABLE NEXUS WITH SECURI NG THE CONTRACT. THEREFORE, WE ARE DISPOSED TO THINK THAT THE FACTUA L MATRIX IS COVERED BY THE DECISIONS RENDERED IN BOKARO STEEL LTD. (SUP RA), KARNAL CO- OPERATIVE SUGAR MILLS LTD. (SUPRA) AND KOSH IKATELECOM LTD. (SUPRA) AND, ACCORDINGLY, WE HOLD THAT THE VIEW EXP RESSED BY THE TRIBUNAL CANNOT BE FOUND FAULT WITH. 22 . RESULTANTLY, WE DO NOT FIND ANY SUBSTANTIAL QUEST ION OF LAW BEING INVOLVED IN THE PRESENT APPEAL AND, ACCORDING LY, THE SAME STANDS DISMISSED WITHOUT ANY ORDER AS TO COSTS. ' FROM THE ABOVE, IT IS SEEN THAT PERFORMANCE BANK GU ARANTEE HAS BEEN GIVEN BY JAY PEE DSC VENTURES LTD., FOR FAITHFUL PE RFORMANCE OBLIGATION TO NHAI. IN ORDER TO GIVE SUCH PERFORMAN CE BANK GUARANTEE THE ASSESSEE HAD PLACED A FIXED DEPOSIT A S MARGIN MONEY. THE BANK GUARANTEE WAS FURNISHED ON A CONDITION PRE CEDENT TO ENTER A CONTRACT AND THEREFORE THE HON'BLE DELHI HIGH COU RT HELD THAT THE INTEREST EARNED ON THE FIXED DEPOSIT USED FOR FURNI SHING BANK GUARANTEE AS HAVING INEXTRICABLE NEXUS IN SECURING THE CONTRACT AND HENCE INTEREST WAS HELD AS CAPITAL RECEIPT NOT LIAB LE TO TAX AS INCOME ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 1 1 - FROM OTHER SOURCE. THE FACTS OF THE CASE IN REGARD TO THE INTEREST EARNED BY THE APPELLANT-COMPANY FROM IDBI BANK LTD. IS EXACTLY THE SAME WHEREIN IT HAS EARNED INTEREST INCOME ON FIXED ASSETS PLACED WITH THE BANK FOR FURNISHING PERFORMANCE BANK GUARA NTEE TO THE STATE ELECTRICITY UTILITY COMPANY . AT THIS JUNCTURE IT W OULD ALSO BE RELEVANT TO REFER TO CLAUSE PERTAINING TO 'CONTRACT PERFORMANCE GUARANTEE ' ENTERED INTO BETWEEN STATE ELECTRICITY COMPANIES AND THE APPELLANT COMPANY. COPY OF RELEVANT PORTION OF THE AGREEMENT IS ATTACHED HEREWITH VIDE ANNEXURE 3. ON PERUSAL YOUR GOOD SELF WOULD APPRECIATE THAT THE PERFORMANCE GUARANTEE HAS BEEN ADVANCED FOR GUARANTEEING THE COMMENCEMENT AND CONTINUITY OF THE SUPPLY OF POWER UP TO THE CONTRACTED CAPACITY. (IV) NTPC SAIL POWER CO. (P) LTD. VS. CIT 25 TAXMANN.COM 401 (DEL.). THE RELEVANT PART OF THIS DECISION IS REPRODUCED BE LOW: FACTS THE ASSESSEE-COMPANY WAS IN THE BUSINESS OF RUNNI NG POWER PLANT. UNDER ITS EXPANSION PLAN IT PROPOSED TO SET UP A NE W UNIT. IT RAISED TERM LOAN FOR SETTING UP NEW PLANT. SEPARATE BOOKS OF ACCOUNT WERE MAINTAINED FOR THE SAME. THE ASSESSES HAD WORKED OUT THE AMOUNT OF INTERES T PAYABLE OR PAID RELATING TO THE BORROWINGS UTILIZED FOR EXPANSION P URPOSES. IT ALSO WORKED OUT THE EARNING OF INTEREST ON TEMPORARY DEP OSITS OF SURPLUS FUND AND INTEREST ON MARGINS/ADVANCES MADE FOR THE PURPOSES OF EXPANSION. THE ASSESSEE ADJUSTED THE SAID INTEREST TOWARDS THE INCIDENTAL EXPENSES DURING CONSTRUCTION BY ADOPTING MATCHING PRINCIPLE. HOWEVER, THE ASSESSING OFFICER TREATED THE SAID I NTEREST AS 'INCOME FROM OTHER SOURCES' WHICH WAS AFFIRMED BY THE TRIBU NAL. HELD INTEREST ON TEMPORARY IS NOT INCOME FROM OTHER SOUR CES THIS COURT, IN INDIAN OIL PANIPAT POWER CONSTRUCT ION LTD. V. ITO [2009] 315ITR 255/181 TAXMAN 249 (DELHI) HELD THAT WHERE INTEREST ON MONEY RECEIVED AS SHARE CAPITAL IS TEMPORARILY P LACED IN FIXED DEPOSIT AWAITING ACQUISITION OF LAND, A CLAIM THAT SUCH INTEREST IS A CAPITAL RECEIPT WHICH IS TO BE SET OFF AGAINST PRE- OPERATIVE EXPENSES, IS ADMISSIBLE, AS THE FUNDS RECEIVED BY THE ASSESSE E-COMPANY FROM THE JOINT VENTURE PARTNERS ARE 'INEXTRICABLY LINKED ' WITH THE SETTING UP OF THE PLANT AND SUCH INTEREST EARNED CANNOT BE TRE ATED AS INCOME FROM OTHER SOURCES. [PARA 9] \ ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 1 2 - INTEREST EARNED WAS RELATED TO SETTING UP OF PLANT IN THE INSTANT CASE, THE FUNDS INVESTED BY THE AS SESSEE COMPANY AND THE INTEREST EARNED WERE INEXTRICABLY LINKED WITH T HE SETTING UP OF THE POWER PLANT. IT MAY FURTHER BE ADDED THAT THE TRIBU NAL HAS NOT FOUND THAT THE DEPOSITS MADE AS MARGIN MONIES WERE NOT LI MITED TO THE ACTIVITY OF CONSTRUCTION CONNECTED WITH THE EXPANSI ON OF THE BUSINESS BY WAY OF SETTING UP OF A TOTALLY NEW POWER GENERAT ION PLANT [PARA 10] THE TRIBUNAL AND THE LOWER AUTHORITIES COMMITTED ERROR IN HOLDING THAT THE INTEREST EARNED ON FIXED DEPOSIT OF AMOUNT S BORROWED, WHICH IS THE SUBJECT-MATTER OF THE PRESENT APPEAL, WOULD HAVE TO BE TREATED AS REVENUE RECEIPT. [PARA 11] ON PERUSAL OF THE ABOVE CASE LAW, YOUR GOOD SELF MA Y APPRECIATE THAT THE ONLY REQUIREMENT TO JUSTIFY WHE THER THE RECEIPT IS A CAPITAL RECEIPT OR OTHERWISE IS TO TEST WHETHER T HE RECEIPT IS INEXTRICABLY LINKED WITH SETTING UP OF POWER PLANT OR NOT. THE APPELLANT COMPANY HAS BROUGHT ON RECORD ALL RELEVAN T FACTS TO PROVE THE DIRECT NEXUS BETWEEN THE FIXED DEPOSIT (ON WHIC H INTEREST INCOME IS EARNED) WITH SETTING UP OF POWER PLANT. THEREFOR E ON APPLICATION OF THE ABOVE CASE LAW INTEREST INCOME MAY BE CHARACTER IZED AS A CAPITAL RECEIPT.' 4.2 IN THE ASSESSMENT ORDER A.O. OBSERVED THAT THE APPELLANT WAS ENGAGED IN THE BUSINESS OF MANUFACTURING POWER IN T HE STATE OF RAJASTHAN; THE PROJECT WAS UNDER IMPLEMENTATION STA GE; THE GENERATION OF POWER HAD NOT COMMENCED IN THE YEAR U NDER CONSIDERATION; THEREFORE THE INTEREST EARNED BY THE APPELLANT ON THE FIXED DEPOSITS KEPT WITH THE BANKS WAS ASSESSABLE A S INCOME FROM OTHER SOURCES (AND THE INTEREST INCOME CANNOT BE RE DUCED FROM THE COST OF THE PROJECT). ACCORDINGLY HE ASSESSED THE I NTEREST INCOME OF RS. 3,68,56,918/- AS INCOME FROM OTHER SOURCES U/S 56. THIS AMOUNT COMPRISES OF THE INTEREST INCOME FROM IDBI BANK OF RS. 2,23,06,911/- AND INTEREST INCOME FROM SBI OF RS. 1,45,50,007/-. MY FINDINGS ISSUE WISE ARE AS UNDER: 4.3 INTEREST INCOME FROM IDBI BANK RS 2,23,06,9 11 IDENTICAL ISSUE CAMP UP IN THE CASE OF ADANI POWER LTD. IN A.Y. 2009-10. VIDE THE ORDER DATED 25/03/2014 IN APPEAL NO. CIT(A)- VI/DCIT/CIR-1/311/11-12, IT WAS HELD BY ME AS UNDER : '4.3 AT PARA - 3 OF THE ASSESSMENT ORDER ASSESSING OFFICER OBSERVED THAT APPELLANT EARNED INTEREST INCOME OF R S. 8,60,12,309 IN THE RETURN OF INCOME OUT OF THE SAID SUM APPELLANT ADMITTED INTEREST INCOME OF RS. 2,41,55,6 30; APPELLANT WAS SHOW-CAUSED AS TO WHY THE DIFFERENCE AMOUNT OF RS. 6,18,56,679 SHALL NOT BE ASSESSED AS INCOME FRO M OTHER ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 1 3 - SOURCES AND IN THE LIGHT OF THE SUPREME COURT DECIS ION IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. [2278 1TR 172] THE DIFFERENCE AMOUNT WAS BEING ASSESSED A S INCOME FROM OTHER SOURCES. HOWEVER, AS SEEN FROM THE COMPU TATION OF INCOME THE ADDITION MADE WAS OF RS. 5,52,01,133. 4.4 THE CONTENTIONS OF THE LEARNED AR ARE THAT AS MAY BE SEEN FROM SCHEDULE 7 OF THE AUDITED BALANCE SHEET APPELLANT HAD EARNED INCOME OF RS. 8,17,50,319; OUT OF IT, IT HAD ADMITTED INTEREST INCOME OF RS. 2,59,19,961; THE BA LANCE AMOUNT WAS RS. 5,58,40,358; OUT OF THE BALANCE AMO UNT, ASSESSING OFFICER ASSESSED RS. 5,52,01,133 AS INCOME FROM OTHER SOURCES; THE INTEREST EARNED ON (I) BID BONDS FOR THE PURPOSE OF PPA (POWER PURCHASE AGREEMENT], (II) FIX ED DEPOSITS KEPT AS MARGIN MONEY WITH THE BANKS FOR GE TTING BANK GUARANTEE FOR PURCHASE OF CAPITAL ASSETS, AND (III) OTHER FIXED DEPOSITS AND IN VIEW OF THE CASE-LAWS RELIED ON THE INTEREST INCOME CANNOT BE ASSESSED AS INCOME FROM OTHER SOUR CES. 4.5 INTEREST INCOME ASSESSED AS INCOME FROM OTHE R SOURCES CONSISTS OF THREE COMPONENTS. MY FINDING ISSUE-WISE ARE AS UNDER: (I) BID-BONDS FOR THE PURPOSE OF PPA [POWER PURCHASE AGREEMENT] (RS.1,46,60,271): IT IS SEEN THAT IDENTICAL ISSUE CAME UP FOR CONSIDE RATION IN APPELLANT'S I CASE IN THE IMMEDIATELY PRECEDING ASS ESSMENT YEAR 2008-09. VIDE THE APPELLATE ORDER DATED 07-09- 2011 IN APPEAL NO. CIT(A)-VI/ADDL.CIT./R-1/199/10-11 MY PRE DECESSOR HAS HELD AS UNDER: '3.3 I HAVE CONSIDERED THE FACTS OF THE CASE; ASSE SSMENT ORDER AND APPELLANT'S SUBMISSION. IT IS NOT IN DISPUTE T HAT APPELLANT'S BUSINESS IS BEING SET UP AND ACCORDINGL Y APPELLANT DID NOT OFFER ANY BUSINESS INCOME. APPELLANT RAISED FUNDS FOR SETTING UP PROJECT, HOWEVER, 'DURING THE CONSTRUCTI ON PERIOD OF THE PROJECT, SURPLUS FUNDS WERE INVESTED ON WHICH I NTEREST AND OTHER INCOME WERE RECEIVED. IN THE RETURN OF INCOME FIELD APPELLANT OFFERED INTEREST INCOME OF RS. 7,9151,306 AND CLAIMED THAT INTEREST INCOME OF RS. 1,3981,841 WAS EARNED FROM DEPOSITS WHICH WERE GIVEN AS LIEN AGAINST OPEN ING OF LC, BID BONDS AND BANK GUARANTEES. THIS INCOME WAS NOT OFFERED FOR TAX \ON THE GROUND THAT THE SAME IS INEXTRICABL Y LINKED WITH CAPITAL PROJECTS AND HENCE TO BE REDUCED FROM CAPIT AL COST. ASSESSING OFFICER AFTER EXAMINING THE VARIOUS ISSUE S FOUND THAT APPELLANT'S CLAIM IS NOT JUSTIFIED IN VIEW OF THE S UPREME COURT DECISION IN THE CASE OF TUTICORIN ALKALIES, CHEMICA LS AND FERTILIZERS LTD., 227 ITR 172. APPELLANT RELIED UPO N THE OTHER DECISIONS. HOWEVER, THE FOLLOWING EXTRACT FROM THE DECISION OF ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 1 4 - APEX COURT IN THE CASE OF TUTICORIN ALKALIES, CHEMI CALS AND FERTILIZERS LTD., IS QUITE RELEVANT TO DECIDE THE I SSUE. 'FOR THE PURPOSE OF SETTING UP OF THE FACTORIES, TH E COMPANY HAS TAKEN TERM LOAN FROM VARIOUS BANKS AND FINANCIA L INSTITUTIONS. THAT PART OF BORROWED FUNDS WHICH WER E NOT IMMEDIATELY REQUIRED BY THE COMPANY BUT ARE KEPT IN VESTED IN SHORT TERM DEPOSITS WITH BANKS. SUCH INVESTMENTS WE RE SPECIFICALLY PERMITTED BY THE MEMORANDUM AND ARTICL ES OF ASSOCIATION OF THE COMPANY. THE COMPANY HAS ALSO DEPOSITED CERTAIN SUMS WITH TH E TAMIL NADU ELECTRICITY BOARD. IT HAS ALSO GIVEN INTEREST- BEARING LOANS TO ITS EMPLOYEES TO PURCHASE VEHICLES. ----------- IT IS WELL SETTLED THAT TAX IS ATTRACTED AT THE POI NT WHEN INCOME IS EARNED. TAXABILITY OF INCOME IS NOT DEPENDENT UP ON ITS DESTINATION OR THE MANNER OF ITS UTILIZATION. IT HA S TO BE SEEN WHETHER AT THE POINT OF ACCRUAL, THE AMOUNT IS OF R EVENUE NATURE. IF SO, THE AMOUNT WILL HAVE TO BE TAXED.' FROM THE ABOVE IT IS CLEAR THAT APART FROM INVESTME NT OF TEMPORARY SURPLUS FUNDS, THE DEPOSIT WITH ELECTRICI TY BOARD OR LOAN TO EMPLOYEES ALSO PROVIDED INTEREST INCOME WHI CH WAS NOT CONSIDERED A PART OF THE PROJECT BUT TREATED AS REVENUE RECEIPT TAXABLE UNDE R SECTION 56 OF I.T. ACT. IN THE CASE OF APPELLANT ALSO THE I NVESTMENT IN BONDS MIGHT BE REQUIRED FOR THE PURPOSE OF ENTERING INTO POWER PURCHASES AGREEMENT BUT REVENUE IS FLOWING FR OM INVESTMENT IN BONDS AND NOT FROM THE IMPLEMENTATION OF PROJECTS OR PURCHASES OF PLANT & MACHINERY. LC MARGIN MONEY INTEREST WAS CONSIDERED INEXTRICABLY LINKED T O THE PROJECT BY THE ASSESSING OFFICER AND ACCORDINGLY HE ALLOWED THE SAME TO BE REDUCED FROM PROJECT COST. APART FRO M THIS NO OTHER INTEREST INCOME IS DIRECTLY COMING FROM IMPLE MENTATION OF THE PROJECT OR PURCHASES OF PLANT & MACHINERY. POWER PURCHASES AGREEMENT MAY REQUIRE SOME SECURITY IN TH E FORM OF BOND BUT THAT DOES NOT MEAN THAT INVESTMENT WAS LINKED TO THE IMPLEMENTATION OF PROJECT. SINCE HONBLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALIES CHEMICALS AND FER TILIZERS LTD., HAD CONSIDERED EVEN INTEREST ON DEPOSIT 'WITH ELECTRICITY BOARD AS TAXABLE INCOME, THERE IS NO BASIS FOR NOT OFFERING THE SAME AS TAXABLE IN OTHER SOURCES HEAD. NONE OF THE DECISION REFERRED BY THE APPELLANT HAS OVERRULED THE LANDMAR K DECISION OF SUPREME COURT IN THE CASE OF TUTICORIN ALKALIES, CHEMICALS AND FERTILIZERS LTD. IN VIEW OF THIS, UNLESS THE IN COME IS INEXTRICABLY LINKED TO THE IMPLEMENTATION OF THE PR OJECT, THE SAME CANNOT BE REDUCED FROM THE COST OF THE PROJECT AND ACCORDINGLY THE INCOME WILL BE TAXED. THE DECISION OFHON'BLE SUPREME COURT IN THE CASE OF BOKARO STEEL LTD., AND KARNAL CO-OPERATIVE SUGAR MILLS LTD., DO NOT SUPPORT THE A PPELLANT'S ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 1 5 - CLAIM SINCE IN BOTH THE CASES, INTEREST INCOME WAS DIRECTLY COMING FROM THE IMPLEMENTATION OF THE PROJECT. IN T HE APPELLANT'S CASE, THE SAME IS FROM INVESTMENT IN BO ND REQUIRED AS SECURITY FOR PPA AND NOT FOR SETTING UP THE PROJ ECT. PPA IS NOT FOR IMPLEMENTATION OF THE PROJECT BUT THE SAME IS FOR SALE OF ELECTRICITY AFTER COMMENCEMENT OF BUSINESS. THER EFORE, APPELLANT DOES NOT GET BENEFIT FROM THESE DECISIONS . THE OTHER DECISIONS RELIED UPON BY THE APPELLANT ARE ON THE INTERPRETATION OF APEX COURT DECISIONS REFERRED EAR LIER. SINCE FACTS OF THE APPELLANT'S CASE ARE SIMILAR TO THE DECISIONS OF APEX COURT, APPELLANT IS LIABLE FOR TAX ON INTER EST. THE ADDITION MADE BY THE ASSESSING OFFICER IS ACCORDING LY CONFIRMED. FACTS REMAINING THE SAME IN THE YEAR UNDER CONSIDER ATION, FOLLOWING THE ABOVE ORDER, ASSESSMENT OF INTEREST E ARNED ON BID-BONDS OF RS. 1,46,60,271 AS INCOME FROM OTHER S OURCES IS UPHELD. ' IN THE INSTANT CASE, THE APPELLANT HAD MADE FIXED D EPOSIT WITH IDBI BANK FOR OBTAINING BANK GUARANTEE FOR THE PURPOSE O F ISSUANCE OF THE CONTRACT PERFORMANCE GUARANTEE IN RESPECT OF THE RE QUEST FOR PROPOSAL (REP) FLOATED BY RAJASTHAN RAJYA VIDYUT PR ASARAN NIGAM LTD. FOR SUPPLY OF UPTO 1200 MW POWER BY APPELLANT, WITH SPECIFIC VALIDITY PERIOD. POWER PURCHASE AGREEMENT MAY REQUI RE SOME SECURITY IN THE FORM OF BANK GUARANTEE, BUT THAT DO ES NOT MEAN THAT THE INVESTMENT IS INEXTRICABLY LINKED TO THE IMPLEM ENTATION OF THE PROJECT. THEREFORE, FOLLOWING THE ABOVE MENTIONED O RDER, A.O.'S ACTION IN ASSESSING THE INTEREST INCOME RECEIVED FR OM IDBI BANK OF RS. 2,23,06,911/- U/S 56 AS INCOME FROM OTHER SOURC ES IS UPHELD. 4.4 INTEREST INCOME FROM STATE BANK OF INDIA RS. 1,45,50,007 IDENTICAL ISSUE CAME UP IN THE CASE OF ADAM POWER M AHARASHTRA LTD., IN A.Y. 2009-10 VIDE ORDER DATED 11.11.2013 IN APPE AL NO. CIT(A)- VI/ITO/WD.L(L)/194/11-12, IT WAS HELD BY ME AS UNDE R: '3.2 IN THE ASSESSMENT ORDER, ASSESSING OFFICER OBS ERVED THAT THE APPELLANT HAD EARNED INTEREST OF RS. 46,12,671; IT HAD SHOWN INTEREST INCOME OF ONLY RS. 4,15,371; ALL WAS ASKED-TO EXPLAIN AS TO WHY THE DIFFERENCE AMOUNT OF RS. 41,9 7,298 WAS NOT OFFERED TO TAX UNDER THE HEAD INCOME FROM OTHER SOURCES; AFTER CONSIDERING THE EXPLANATION FURNISHED, THE IN TEREST INCOME EARNED ON THE FIXED DEPOSITS (ON MARGIN MONE Y WITH SBI IN FULL AND WITH AXIS BANK PARTLY) OF RS. 33,35 ,591 WAS FOUND TO BE DIRECTLY LINKED WITH PURCHASE OF PLANT & MACHINERY; AS REGARDS THE INTEREST EARNED OF RS. 5, 01,028 FROM AXIS BANK, APPELLANT HAD NOT BEEN ABLE TO ESTABLISH THE PURPOSE OF KEEPING THE FDS AS MARGIN MONEY AND, THE REFORE, ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 1 6 - THE SAID INTEREST WAS TO BE ASSESSED AS INCOME FROM OTHER SOURCES; AS REGARDS THE INTEREST INCOME OF RS. 3,60 ,678 EARNED ON SECURITY DEPOSIT WITH MAHARASHTRA STATE ELECTRIC ITY DISTRIBUTION CO. LTD. (MSEDC), THE DEPOSIT HAD NOTH ING TO DO WITH THE PURCHASE OF PLANT AND MACHINERY AND, THERE FORE, THE INTEREST WAS ASSESSABLE AS INCOME FROM OTHER SOURCE S AND ACCORDINGLY BOTH THE SUMS TOTALING TO RS. 8,61,706 WERE BEING ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES. 3.3 THE CONTENTIONS OF THE LEARNED AR ARE THAT THE APPELLANT HAD OFFERED INTEREST INCOME OF RS. 4,15,371 AS INCO ME FROM OTHER SOURCES, SINCE THIS INTEREST WAS EARNED ON TH E SURPLUS FUNDS INVESTED IN FDS; BALANCE INTEREST INCOME OF RS, 41,97,298 WAS ADJUSTED AGAINST FINANCIAL CHARGES AN D NET INTEREST EXPENDITURE WAS CAPITALIZED AS PROJECT DEV ELOPMENT EXPENDITURE; SUCH BALANCE INTEREST EARNED ON FD/SEC URITY DEPOSIT WAS INEXTRICABLY LINKED WITH THE IMPLEMENTA TION OF THE POWER PROJECT; ASSESSING OFFICER TAXED THE INTEREST INCOME EARNED ON FD WITH AXIS BANK AND SECURITY DEPOSIT WI TH MSEDC AS INCOME FROM OTHER SOURCES; THE MARGIN MONE Y KEPT WITH AXIS BANK WAS AGAINST THE LETTER OF CREDIT AS CONFIRMED BY THE CERTIFICATE ISSUED BY THE BANK; THIS DEPOSIT WA S DIRECTLY LINKED TO THE ACQUISITION OF PLANT & MACHINERY; ASSESSING OFFICER ACCEPTED PART OF THE DEPOSIT PERTAINING TO THE SAME LOAN AS LINKED WITH THE BUSINESS AND DID NOT ACCEPT PART OF THE SAME CERTIFICATE; AS REGARDS THE SECURITY DEPOSIT W ITH MSEDC, IT WAS NOT WITH THE INTENTION OF EARNING INTEREST I NCOME; RATHER IT WAS A PRE-REQUISITE FOR SECURING ELECTRICITY CON NECTION TO IMPLEMENT THE PROJECT; THEREFORE, THIS DEPOSIT WAS INEXTRICABLY LINKED WITH THE POWER PROJECT OF THE APPELLANT COMP ANY AND IN VIEW OF VARIOUS CASE LAWS RELIED ON, IMPUGNED ASSES SMENT UNDER THE HEAD INCOME FROM OTHER SOURCES IS NOT IN ACCORDANCE WITH LAW. 3.4 THE CONTENTIONS OF THE LEARNED AR ARE COGENT AN D TENABLE. APPELLANT ITSELF OFFERED RS, 4,15,371 AS I NCOME FROM OTHER SOURCES. AS REGARDS THE MARGIN MONEY KEPT WIT H SBI AND AXIS BANK, IT WAS ABLE TO DEMONSTRATE THAT THE MARG IN MONEY WAS FOR THE PURPOSES OF OBTAINING LOAN FOR ACQUISIT ION OF PLANT & MACHINERY AND AGAINST LETTER OF CREDIT. SIMILARLY , SECURITY DEPOSIT WAS MANDATORY FOR OBTAINING ELECTRICITY CON NECTION AND, THEREFORE, IT CANNOT BE SAID THAT THE INTEREST WAS ON THE SURPLUS FUNDS INVESTED. KEEPING IN VIEW THE FACTS O F THE CASE AND THE VARIOUS CASE LAWS RELIED ON BY THE LEARNED AR, A. O. IS DIRECTED TO DELETED IMPUGNED ADDITION MADE UNDER THE HEAD INCOME FROM OTHER SOURCES. THESE GROUNDS OF APPEAL ARE ALLOWED. ' FURTHER IT IS SEEN THAT IN THE CASE OF CIT V/S L.G. ELECTRONICS INDIA P. LTD. (2009) (309 ITR 265) (DELHI), IT WAS HELD A S UNDER: ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 1 7 - '4. IT APPEARS THAT THE ASSESSEE HAD DEPOSITED WITH THE BANK CERTAIN AMOUNTS TOWARDS MARGIN MONEY FOR I NSURANCE OF LETTERS OF CREDIT FOR IMPORT OF CAPITAL GOODS. O N THIS AMOUNT, THE ASSESSEE EARNED AN INTEREST OF RS. 5,25,385.87. THE ASSESSING OFFICER TREATED THIS AMOUNT AS INCOME FRO M OTHER SOURCES AND TAXED IT ACCORDINGLY. 5. THE COMMISSIONER OF INCOME TAX (APPEALS) [CIT(A) ] DECIDED AGAINST THE ASSESSEE BUT THE TRIBUNAL DECID ED IN FAVOUR OF THE ASSESSEE AND HELD THAT THE AMOUNT CAN NOT BE TAXED AS INCOME FROM OTHER SOURCES. THAT IS HOW, TH E REVENUE IS BEFORE US. 6. WE HAVE HEARD LEARNED COUNSEL FOR THE PARTIES AN D FIND THAI THE ISSUE IS SQUARELY COVERED IN FAVOUR O F THE ASSESSEE IN VIEW OF THE DECISION OF THE SUPREME COU RT IN CIT V/S KARNAL CO-OPERATIVE SUGAR MILLS LTD. (2000) 161 CTR (SC) 241: (2000) 243 ITR 2 (SC). IN THAT CASE ALSO THE A SSESSEE HAD DEPOSITED SOME MONEY WITH THE BANK FOR OPENING A LE TTER OF CREDIT FOR THE PURCHASE OF MACHINERY REQUIRED FOR S ETTING UP ITS PLANT IN TERMS OF THE ASSESSEE'S AGREEMENT WITH THE SUPPLIER. THE ASSESSEE HAD EARNED INTEREST ON THE AMOUNT DEPO SITED AND THE SUPREME COURT HELD THAT SINCE IT WAS NOT AN INV ESTMENT OF MONEY THAT WAS LYING IDLE WITH THE ASSESSEE, THE IN TEREST HAD TO BE ADJUSTED AGAINST THE COST OF THE MACHINERY. 7. INSOFAR AS THE PRESENT CASE IS CONCERNED, THE AS SESSEE COMMENCED ITS BUSINESS IN THE SUBSEQUENT ASSESSMENT YEAR AND THERE IS NO DISPUTE ABOUT THE FACT THAT THE AMOUNT DEPOSITED BY THE ASSESSEE WAS NOT IDLE MONEY ON WHICH IT WAS EAR NING INTEREST. 8. UNDER THE CIRCUMSTANCES, THE INTEREST EARNED TO THE TUNE OF RS. 5,25,385,87 IS REQUIRED TO BE CREDITED AGAINST PRE- OPERATIVE EXPENSES INCURRED BY THE ASSESSEE.' IN THE INSTANT CASE, APPELLANT KEPT FIXED DEPOSIT A S MARGIN MONEY WITH SBI FOR OBTAINING BANK GUARANTEE TO AVAIL TERM LOAN FACILITY FOR THE PROJECT RELATED WORKS. T HE MARGIN MONEY KEPT IS 10 % OF THE BANK GUARANTEE OF RS. 150 CRORES OBTAINED FROM SBI. KEEPING THESE FACTS AND THE ABOV E MENTIONED DECISIONS I AM OF THE VIEW THAT THE INTER EST EARNED IS REQUIRED TO BE CREDITED AGAINST PRE OPERATIVE EXPEN SES INCURRED BY THE APPELLANT. THEREFORE ASSESSING THE INTEREST INCOME AS INCOME FROM OTHER SOURCES U/S 56 IS NOT I N ACCORDANCE WITH LAW. ADDITION OF THE INTEREST RECEI VED FROM SBI OF RS. 1,45,50,007/- IS DELETED. THESE GROUNDS OF APPEAL ARE PARTLY ALLOWED. 5. GROUND NO. 4 & 5 ARE AS UNDER: ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 1 8 - 4. WITHOUT PREJUDICE TO THE ABOVE, THE ASSESSING OF FICER OUGHT TO HAVE ALLOWED NETTING OFF OF INTEREST INCOM E OF RS.3,68,56,918/- AGAINST HUGE INTEREST EXPENDITURE OF RS.842,619,593 INCURRED BY THE APPELLANT-COMPANY. 5. WITHOUT PREJUDICE AND WITHOUT ADMITTING, THAT TH E INCOME IS TAXABLE AS INCOME FROM OTHER SOURCES, EVEN IF IT IS HELD THAT INTEREST INCOME IS TAXABLE U/S, 56, THE ASSESSING O FFICER MAY BE DIRECTED TO ALLOW EXPENSES OF RS.9,54,35,279/- INCU RRED TOWARDS INTEREST EXPENSES ON BORROWED FUNDS UTILIZE D FOR MAKING DEPOSITS, GUARANTEE FEES, BANK CHARGES AND O THER EXPENSES INCURRED IN ORDER TO AVAIL THE CREDIT FACI LITIES FROM STATE BANK OF INDIA AND IDBI BANK LTD, UNDER SECTIO N 57 (III) OF THE ACT. 5.1 WRITTEN SUBMISSION FILED IS AS UNDER: WITHOUT PREJUDICE TO WHAT IS STATED ABOVE, AND AS S TATED EARLIER IN THE STATEMENT OF FACTS, THE APPELLANT CO MPANY HAD RAISED SECURED AS WELL AS UNSECURED LOANS FOR THE P URPOSE OF SETTING UP OF THE POWER PLANT. THE OUTSTANDING LOAN AS ON 31.03.2011 AMOUNTS TO RS. 12,867,966,800/-, AND THE APPELLANT COMPANY HAS INCURRED AN EXPENDITURE OF RS.842,619,5 93/- TOWARDS INTEREST WHICH HAS BEEN DEBITED TO 'PROJECT DEVELOPMENT EXPENDITURE' UNDER SCHEDULE-6 OF THE BA LANCE SHEET. 3.1. EVEN IF THE APPELLANT'S CONTENTION REGARDING S ET OFF OF INTEREST INCOME AGAINST CAPITALIZED EXPENSES IS NOT ACCEPTED AND THE LD. A.O.'S ADDITION U/S 56 OF THE ACT IS SU STAINED, THEN THE APPELLANT IS ENTITLED TO CLAIM DEDUCTION OF INT EREST AND FINANCIAL CHARGES ON BORROWED FUNDS U/S 57 OF THE A CT. SUBSEQUENTLY, THE INTEREST AND FINANCIAL CHARGES CA PITALIZED SHALL BE REDUCED FORM THE HEAD 'PROJECT DEVELOPMENT EXPENDITURE'. SECTION 57(III) OF THE ACT IS REPRODU CED HERE UNDER FOR YOUR KIND REFERENCE. '57(III) ANY OTHER EXPENDITURE (NOT BEING IN THE NA TURE OF CAPITAL EXPENDITURE) LAID OUT OR EXPENDED WHOLLY AN D EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING SU CH INCOME;' THUS, ONCE IT IS ESTABLISHED THAT THE EXPENDITURE HAS BEE N LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF EARNING SUCH INCOME, THE SAME MUST BE SET OFF AGAINST THE INCOME EARNED U/S. 56 OF THE ACT. 3.2. THE APPELLANT FURTHER SUBMITS THE FOLLOWING FA CTS TO ESTABLISH THE DIRECT NEXUS BETWEEN BORROWED FUNDS A ND FIXED DEPOSIT PLACED FOR PROVIDING BANK GUARANTEES: ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 1 9 - 3.3.1 FOR FIXED DEPOSIT PLACED FOR PROVIDING MARGIN MONEY FOR PPA: (I) ON 11.01.2010, THE APPELLANT COMPANY RECEIVED A N UNSECURED LOAN AMOUNTING TO RS.41 CRORES FROM ADANI POWER LTD AN SUCH LOAN WAS USED FOR MAKING INVESTMENTS IN FD REQUIRED FOR PROVIDING MARGIN MONEY FOR PPA WITH RAJASTHAM RAJYA VIDYUT PRASARAN NIGAM LTD. (II) THE INTEREST HAS BEEN CHARGED ON SUCH LOAN DUR ING THE CURRENT ASSESSMENT YEAR. (III) A BANK STATEMENT SHOWING TRANSFER OF FUNDS (R S.41 CRORE) FROM AXIS BANK TO IDBI BANK HAS BEEN ATTACHED HEREW ITH . IT IS SUBMITTED THAT AFORESAID FD WAS KEPT FROM IDBI BANK ACCOUNT. 3.3.2 FIXED DEPOSIT WITH SBI USED FOR PROVIDING BAN K DURING CONSTRUCTION OF POWER PROJECT: (I) THE DEPOSIT MADE IN SBI WAS ALSO OUT OF BORROWE D FUNDS. (II) VIDE LETTER DATED 11.02.2014, ANNEXURE-6 SUBMI TTED DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT IS CLEARLY SEEN THAT THE APPELLANT HAS RECEIVED MONEY FROM ADANI PO WER LTD. AMOUNTING TO RS.10 CRORE-WHICH WAS CREDITED TO IDBI BANK LTD. AND OUT OF THE SAME, RS.8.5 CRORE HAS BEEN TRA NSFERRED TO SBI FROM WHICH FD OF 7,51,03,000/- HAS BEEN MADE. (III) FROM THE ABOVE FACTS, YOUR GOOD SELF MAY APPR ECIATE THAT THE APPELLANT COMPANY HAS BROUGHT ON RECORD ALL FAC TS WHICH SHOW THAT THE INTEREST EXPENSES INCURRED ARE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF EARNING INCOME AND T HE SAME MUST BE ALLOWED TO BE SET OFF WITHIN THE PURVIEW OF SECTION 57 (III) OF THE ACT. 3.3. IT IS FURTHER SUBMITTED THAT THE SAME ISSUE HA D ARISEN IN THE CASE OF M/S. ADANI POWER LTD. (A.Y.2009-10) , IN WHICH THE APPELLANT HAD TAKEN THE SAME ALTERNATIVE CLAIM. THE CIT(A), VIDE ORDER DATED 25/03/2014 , RELYING ON THE DECISION OF THE HON'BLE ITAT IN THE CASE OF JCIT VS. STEELCO GUJARA T LIMITED (99 ITD 408) , STATED THAT 'AS REGARDS BALANCE INTEREST INCOME OF RS.1,92,87,348/- OFFERED TO TAX IN THE RETURN OF INCOME, THE CONTENTION OF THE LEARNED AR IS THAT LONG TERM LOAN TAKEN WAS KEPT AS SHORT TERM DEPOSIT WITH THE BANKS (PENDING FINALIZATION OF PURCHASE OF PLANT AND MACHINERY) AND THE INTERES T INCOME WAS EARNED ON THE SAID DEPOSIT. IT IS CONTENDED THA T THE NEXUS BETWEEN THE INTEREST INCOME AND THE INTEREST EXPEND ITURE IS CLEARLY DEMONSTRATED........NETTING OF INTEREST IS TO BE ALLOWED IF THE INTEREST EXPENDITURE WAS RELATED TO THE INTERES T INCOME EARNED. A. O. IS DIRECTED TO VERIFY THE CONTENTIONS OF THE LD.A.R. THAT THERE IS A CLOSE NEXUS BETWEEN THE INT EREST EXPENDITURE AND INTEREST INCOME AND THAT THE INTERE ST PAID IS MORE THAN THE INTEREST EARNED. IF IT IS FOUND TO BE CORRECT, HE SHALL REDUCE THE AMOUNT OF RS.1,92,87,348/-FROM THE INCOME ASSESSED UNDER THE HEAD 'INCOME FROM OTHER SOURCES' ' ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 2 0 - CONSIDERING THE ABOVE, THE APPELLANT MUST BE ALLOWE D TO SET OFF THE INTEREST ON BORROWED FUNDS IN ACCORDANCE WITH T HE PROVISIONS OF SECTION 57(III). 5.2 IDENTICAL ISSUE CAME UP IN THE CASE OF ADANI PO WER LIMITED IN A.Y. 2009-2010. VIDE THE ORDER DATED 25/03/2014 IN APPEAL NO. CIT(A)-VI/DCIT/CIR-1/311/11-12, IT WAS HELD BY ME A S UNDER: '5.6 HOWEVER, IN THE YEAR UNDER CONSIDERATION, APPE LLANT HAS TAKEN A NEW PLEA THAT THE INTEREST EXPENDITURE INCU RRED TO EARN THE INTEREST INCOME IS ALLOWABLE EXPENDITURE UNDER SECTION 57(III). IN THIS REGARD, IT IS SEEN THAT THE SAID A MOUNT OF INTEREST INCOME ADMITTED IN THE RETURN OF INCOME OF RS. 2,59,19,961 COMPRISES OF RS. 17,63,014 BEING THE IN TEREST EARNED ON INTER-CORPORATE DEPOSITS OUT OF UNUTILIZE D FUNDS IN THE FORM OF EQUITY SHARE CAPITAL AND RS. 1,317 BEIN G OTHER INTEREST. OUT OF THE BALANCE AMOUNT, INTEREST INCOM E OF RS. 48,68,282 WAS EARNED ON THE SURPLUS OWN FUNDS KEPT AS DEPOSITS. IN RESPECT OF THESE THREE AMOUNTS NETTIN G OF INTEREST IS NOT PERMISSIBLE AS THERE IS NO NEXUS BETWEEN THE INTEREST INCOME EARNED AND THE INTEREST EXPENDITURE INCURRED . THE LEARNED AR FAIRLY CONCEDED THAT NO INTEREST EXPENDI TURE WAS INCURRED IN CONNECTION WITH EARNING OF THESE THREE SUMS OF INTEREST INCOME. ASSESSING THE SAID SUMS TOTALING T O RS. 66,32,613 AS INCOME FROM OTHER SOURCES IS UPHELD. AS REGARDS THE BALANCE INTEREST INCOME OF RS. 1,92,87,348 OFFE RED TO TAX IN THE RETURN OF INCOME, THE CONTENTION OF THE LEARNED AR IS THAT TERM LOAN TAKEN WAS KEPT AS SHORT TERM DEPOSIT WITH THE BANKS (PENDING FINALIZATION OF PURCHASE OF PLANT & MACHIN ERY) AND THE INTEREST INCOME WAS EARNED ON THE SAID DEPOSIT. IT IS CONTENDED THAT THE NEXUS BETWEEN THE INTEREST INCOM E EARNED AND THE INTEREST EXPENDITURE INCURRED IS CLEARLY DE MONSTRATED. IN SUPPORT THEREOF HE RELIED ON THE AHMEDABAD TRIB UNAL DECISION IN THE CASE OF JCIT V/S STEELCO GUJARAT LI MITED (99 ITD 408), WHEREIN IT WAS HELD THAT NETTING OF INTER EST IS TO BE ALLOWED IF THE INTEREST EXPENDITURE WAS RELATED TO THE INTEREST INCOME EARNED. ASSESSING OFFICER IS DIRECTED TO VER IFY THE CONTENTIONS OF THE LEARNED AR THAT THERE IS A CLOSE NEXUS BETWEEN THE INTEREST EXPENDITURE AND THE INTEREST I NCOME AND THAT THE INTEREST PAID WAS MORE THAN THE INTEREST E ARNED. IF IT IS FOUND TO BE CORRECT HE SHALL REDUCE THE AMOUNT O F RS. 1,92,87,348 FROM THE INCOME ASSESSED UNDER THE HEAD 'INCOME FROM THE OTHER SOURCES'. SUBJECT TO VERIFICATION, THIS GROUND OF APPEAL IS P ARTLY ALLOWED. THESE ALTERNATE GROUNDS OF APPEAL ARE TO THE EFFECT THAT NETTING OF INTEREST MAY BE ALLOWED WHILE ASSESSING THE INTERES T AS INCOME FROM OTHER SOURCES. THE FIXED DEPOSITS WITH THE IDBI BAN K WERE KEPT OUT OF THE BORROWED FUNDS (AS SEEN FROM THE APPELLANT'S RE PLY TO THE A.O. ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 2 1 - REPRODUCED AT PARA 2 OF THE ASSESSMENT ORDER). THER EFORE FOLLOWING THE ABOVE MENTIONED ORDER, A.O. IS DIRECTED TO VERI FY AND COMPUTE THE INTEREST EXPENDITURE ON THE MONEY BORROWED (AND INVESTED WITH IDBI IN THE FORM OF FIXED DEPOSITS) AND ALLOW DEDUC TION OF THE SAID AMOUNT FROM THE INTEREST INCOME EARNED ON THE FDS W ITH IDBI. AS REGARDS THE INTEREST RECEIVED FROM SBI, IN VIEW OF MY FINDING AT PARA 4.4, THIS PLEA OF THE APPELLANT HAS BECOME INFRUCTU OUS AND IS DISMISSED AS SUCH. THESE GROUNDS OF APPEAL ARE TRE ATED AS PARTLY ALLOWED. 8. THE CIT(A) ACCORDINGLY ACCEPTED THE GRIEVANCE OF THE ASSESSEE AFFIRMATIVELY IN PART IN TERMS OF PRECEDING PARAS. 9. AGGRIEVED BY THE ORDER OF THE CIT(A), BOTH REVEN UE AND ASSESSEE ARE IN APPEAL BEFORE THE TRIBUNAL. WHILE THE REVENUE HAS CHALLENGED THE ACTION OF THE CIT(A) IN ACCEPTING TH E PLEA OF THE ASSESSEE THAT INTEREST RS.1,45,50,007/- EARNED ON T EMPORARY DEPOSITS WITH SBI WOULD GO TO REDUCE THE PROJECT DEVELOPMENT EXPENDITURE (RS.145.52 CRORES) AND THUS, IS NOT LIABLE TO BE TR EATED AS TAXABLE INCOME OF REVENUE NATURE. THE ASSESSEE, ON THE OTH ER HAND, HAS QUESTIONED THE STAND OF THE CIT(A) IN CONFIRMING TH E ACTION OF THE AO THAT INTEREST INCOME AMOUNTING TO RS.2,23,06,911/- DERIVED FROM DEPOSITS PLACED WITH IDBI IS TAXABLE INCOME OF REVE NUE NATURE AND NOT LIABLE TO BE REDUCED AGAINST THE ONGOING POWER PROJ ECT DEVELOPMENT COSTS. 10. WHEN THE MATTER WAS CALLED FOR HEARING, THE LEA RNED DR FOR THE REVENUE RELIED UPON THE ORDER OF THE AO AND SUBMITT ED THAT THE INTEREST EARNED ON MONEY PARKED WITH SBI PENDING IT S UTILIZATION IN SET UP THE POWER PLANT CANNOT BE CLAIMED FOR ADJUSTMENT AND REDUCTION FROM THE PROJECT COSTS IN THE LIGHT OF THE DECISION S OF THE HONBLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMI CALS & FERTILIZERS LTD. VS. CIT (1997) 227 ITR 172 (SC). ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 2 2 - 11. THE LEARNED SENIOR COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, PROFESSED THAT THE ISSUE STANDS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HONBLE SUPREME COU RT IN THE CASE OF CIT VS. BOKARO STEEL LTD. (1999) 236 ITR 315 (SC) A ND KARNATAKA POWER CORPORATION 247 ITR 268 (SC). TO BUTTRESS IT S CLAIM ON MERITS THAT ACCRUED INTEREST ON EARMARKED FUNDS WOULD GO T O REDUCE THE COST OF THE PROJECT AND DOES NOT REPRESENT REVENUE NATUR E AND CHARGEABLE NATURE, THE LEARNED AR SUBMITTED THAT ON THE SIMILA R ANALOGY, ASSESSEE HAS SIMULTANEOUSLY CAPITALISED INTEREST AND FINANCE COSTS OF RS.136.80 CRORES AND ADDED THE SAME TO THE CAPITAL COSTS INCU RRED FOR DEVELOPMENT OF POWER PROJECT OF HIGHLY CAPITAL INTE NSIVE NATURE INVOLVING LONG GESTATION PERIOD. THE LEARNED AR SU BMITTED THAT THERE IS NO REASON TO TREAT INTEREST COSTS AND INTEREST I NCOME ON DIFFERENT FOOTINGS IN THE SIMILARLY PLACED CIRCUMSTANCES. TH E LEARNED AR THEREAFTER ADVERTED OUR ATTENTION TO THE DECISION O F THE CO-ORDINATE BENCH RENDERED IN THE CASE OF HOLDING COMPANY IN TH E IDENTICAL FACTS IN DCIT VS. ADANI POWER LTD. ITA NO. 1663/AHD/2014. T HE LEARNED AR POINTED OUT THAT THE CO-ORDINATE BENCH IN THE AFORE SAID CASE HAS ADJUDICATED THE ISSUE IN FAVOUR OF THE ASESSEE AND UPHELD THE ACTION OF THE CIT(A) AFTER TAKING NOTE OF HOST OF JUDICIAL PR ECEDENTS. IT WAS THUS CONTENDED THAT THE ISSUE IS NO LONGER RES INTEGRA. THE LEARNED AR NEXT EMPHATICALLY REFERRED TO FINANCIAL STATEMENT A ND POINTED OUT THAT IT IS PERTINENT TO NOTE THAT ENTIRE PROJECT IS NEAR LY FINANCED BY BORROWED FUNDS (1396.86 CRORES) AND OWN CAPITAL IS MERELY RS.4.90 CRORES ONLY. THUS, IT WAS ARGUED THAT THE INTEREST EARNED HAS ONLY GONE TO REDUCE THE COST OF BORROWINGS. 12. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. THE ESSENTIAL CONTROVERSY INVOLVED IN THE INSTANT CASE IS; WHETHER INTEREST INCOME DERIVED FROM CERTAIN DEPOSITS PLACED WITH BA NKS [WHILE THE POWER PROJECT CONSTRUCTION IS UNDER PROGRESS AND IN THE PROCESS OF ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 2 3 - BEING SET UP AND HAS NOT COMMENCED GENERATING ELECT RICITY] CAN BE SET OFF AGAINST THE ONGOING POWER PROJECT COSTS INCURRE D OF CAPITAL NATURE AND CONSEQUENTLY; WHETHER SUCH INTEREST INCOME WOUL D GO TO REDUCE THE PROJECT COSTS PRIOR TO ITS COMMENCEMENT OR NOT. 13. IT IS THE CASE OF THE ASSESSEE THAT WHILE THE A O COMMITTED ERROR IN CHARACTERIZING INTEREST INCOME EARNED RS.3,68,56 ,918/- COMPRISING OF INTEREST INCOME FROM IDBI BANK RS.2,23,06,911/- AND INTEREST INCOME FROM SBI RS.1,45,50,007/- ON DEPOSITS PLACED FOR AVAILING CREDIT FACILITIES ARE LIABLE TO BE TAXED AS INCOME FROM OTHER SOURCES UNDER S.56 OF THE ACT, THE CIT(A) WAS PARTLY RIGHT TO THE EXTENT OF HOLDING THAT THE INTEREST INCOME EARNED AMOUNTING T O RS.1,45,50,007/- FROM SBI BEARS THE CHARACTER OF CAPITAL NATURE AND WOULD CONSEQUENTLY GO TO REDUCE THE POWER PROJECT COSTS BEING SET UP. THE ASSESSEE HOWEVER HAS SIMULTANEOUSLY FAULTED THE CIT(A) IN NO T ALLOWING THE INTEREST INCOME OF RS.2,23,06,911/- TO BE REDUCED F ROM THE PROJECT COSTS. IT IS PRIMARILY THE CASE OF THE ASSESSEE TH AT BOTH INTEREST EXPENDITURE (AMOUNTING TO RS.3.68 CRORE) AS WELL AS IMPUGNED INTEREST INCOME ARE INEXTRICABLY LINKED TO THE PROJECT BEING SET UP. HENCE, WHERE THE INTEREST EXPENDITURE HAS BEEN REGARDED AS CAPITAL EXPENDITU RE FOR THE PURPOSES OF PROJECT, SAME PRINCIPLE REQUIRE S TO BE ACKNOWLEDGED FOR TREATMENT OF INTEREST INCOME. PEND ING COMPLETION OF POWER PROJECT, THE INTEREST INCOME THUS IS ALSO ON THE SAME PEDESTAL (CAPITAL NATURE) SIMILAR TO INTEREST OUTGO. IT IS THUS THE CASE OF THE ASSESSEE THAT WHILE THE INTEREST OUTGO HAS BEEN ADD ED TO THE CAPITAL COSTS ON POWER PROJECT IN PROGRESS; INTEREST INCOME SO EARNED ON DEPOSITS PLACED WITH BANKS HAVE BEEN RIGHTLY REDUCE D FROM THE PROJECT DEVELOPMENT EXPENDITURE INCURRED FOR SET UP OF PO WER PLANT IN THE SAME MEASURE. WE FIND THAT THE IDENTICAL ISSUE CAM E UP FOR CONSIDERATION OF THE CO-ORDINATE BENCH IN A GROUP C ASE IN A SIMILARLY PLACED SITUATION. ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 2 4 - 14. IT WILL BE APT TO REPRODUCE THE RELEVANT OPERAT IVE PARA OF THE DECISION IN ADANI POWER LTD. (SUPRA) RELIED UPON BY THE ASSESEE: 16. NEXT QUESTION RELATES TO QUANTIFICATION OF INT EREST INCOME AVAILABLE WITH THE ASSESSEE FOR SET OFF AGAINST PRE -OPERATIVE EXPENDITURE IN POWER PROJECT IMPLEMENTATION. WE FIN D THAT THE LD.CIT(A) HAS NOT INDEPENDENTLY EXAMINED ANY ISSUE IN THIS ORDER, RATHER FOLLOWED ORDER OF HIS PREDECESSOR IN THE ASS ESSMENT YEAR 2008-09. THE ITAT DID NOT APPROVE THE ORDER OF THE LD.CIT(A) IN THE ASSESSMENT YEAR 2008-09 AND RESPECTFULLY FOLLOWING THE ORDER OF THE ITAT IN THE ASSESSMENT YEAR 2008-09, WE ARE OF THE VIEW THAT INTEREST INCOME OF RS.8,17,60,319/- IS AVAILABLE WITH THE AS SESSEE FOR SET OFF AGAINST PRE-OPERATIVE EXPENDITURE WHICH IS TITLED A S 'PROJECT DEVELOPMENT EXPENDITURE'. DISCUSSION MADE BY THE TR IBUNAL IN THE ASSESSMENT YEAR 2008-09 ON THIS ISSUE READS AS UNDE R: '18. WE FIND THAT BOTH THE PARTIES HAVE RELIED UPON THE DECISIONS OF THE HON'BLE APEX COURT AND IN ADDITION , THE ASSESSEE HAS RELIED UPON THE DECISION OF HON'BLE DE LHI HIGH COURT. THEREFORE, IT WOULD BE APPROPRIATE TO FIRST REFER TO THOSE DECISIONS. IN THE CASE OF TUTICORIN ALKALI CH EMICALS & FERTILIZERS LTD. (SUPRA), THE HON'BLE APEX COURT HE LD AS UNDER:- '...THAT THE COMPANY HAD SURPLUS FUNDS IN ITS HANDS . IN ORDER TO EARN INCOME OUT OF THE SURPLUS FUNDS, IT H AD INVESTED THE AMOUNT FOR THE PURPOSE OF EARNING INTE REST. THE INTEREST THUS EARNED WAS CLEARLY OF REVENUE NAT URE AND WOULD HAVE TO BE TAXED ACCORDINGLY. THE ACCOUNTANTS MIGHT HAVE TAKEN SOME OTHER VIEW BUT ACCOUNTANCY PRACTICE WAS NOT NECESSARILY GOOD LAW. THIS WAS NOT A CASE OF DIVERSION OF INCOME BY OVERRIDING TITLE. THE ASSESSEE WAS ENTIRELY AT LIBERTY TO DEAL WITH T HE INTEREST AMOUNT AS IT LIKED. THE APPLICATION OF THE INCOME FOR PAYMENT OF INTEREST WOULD NOT AFFECT ITS TAXABILITY IN ANY WAY. THE COMPANY COULD NOT CLAIM ANY RELIEF UNDER SECTION70 OR SECTION 71 SINCE ITS BUSI NESS HAD NOT STARTED AND THERE COULD NOT BE ANY COMPUTAT ION OF BUSINESS INCOME OR LOSS INCURRED BY THE ASSESSEE IN THE RELEVANT ACCOUNTING YEARS. IN SUCH A SITUATION, THE EXPENDITURE INCURRED BY THE ASSESSEE FOR THE PURPOS E OF SETTING UP ITS BUSINESS COULD NOT BE ALLOWED AS DEDUCTION, NOR COULD IT BE ADJUSTED AGAINST ANY OTH ER INCOME UNDER ANY OTHER HEAD. SIMILARLY ANY INCOME F ROM A NON-BUSINESS SOURCE COULD NOT BE SET OFF AGAINST THE LIABILITY TO PAY INTEREST ON FUNDS BORROWED FOR THE PURPOSE OF PURCHASE OF PLANT AND MACHINERY EVEN BEF ORE COMMENCEMENT OF THE BUSINESS OF THE ASSESSEE.' ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 2 5 - 19. IN THE CASE OF BOKARO STEEL LTD. (SUPRA), THE H ON'BLE APEX COURT, AFTER CONSIDERING THE DECISION OF TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. (SUPRA), HELD AS UNDER :- '..., DISMISSING THE APPEAL, THAT THE FIRST THREE H EADS OF INCOME WERE (I) THE RENT CHARGED BY THE ASSESSEE TO ITS CONTRACTORS FOR HOUSING WORKERS AND STAFF EMPLOYED BY THE CONTRACTOR FOR THE CONSTRUCTION WORK OF THE ASS ESSEE INCLUDING CERTAIN AMENITIES GRANTED TO THE STAFF BY THE ASSESSEE, (II) HIRE ITA NO. 2755/AHD/2011 ADANI POW ER LTD VS. ACIT AYS 2008-09CHARGES FOR PLANT AND MACHINERY WHICH WAS GIVEN TO THE CONTRACTORS BY THE ASSESSEE FOR USE IN THE CONSTRUCTION WORK OF THE AS SESSEE, AND (III) INTEREST FROM ADVANCES MADE TO THE CONTRA CTORS BY THE ASSESSEE FOR THE PURPOSE OF FACILITATING THE WORK OF CONSTRUCTION. THE ACTIVITIES OF THE ASSESSEE IN CONNECTION WITH ALL THESE THREE RECEIPTS WERE DIREC TLY CONNECTED WITH OR INCIDENTAL TO THE WORK OF CONSTRU CTION OF ITS PLANT UNDERTAKEN BY THE ASSESSEE. THE ADVANC ES WHICH THE ASSESSEE MADE TO THE CONTRACTORS TO FACIL ITATE THE CONSTRUCTION ACTIVITY OF PUTTING TOGETHER A VER Y LARGE PROJECT WAS AS MUCH TO ENSURE THAT THE WORK OF THE CONTRACTORS PROCEEDED WITHOUT ANY FINANCIAL HITCH A S TO HELP THE CONTRACTORS. THE ARRANGEMENTS WHICH WERE M ADE BETWEEN THE ASSESSEE-COMPANY AND THE CONTRACTORS PERTAINING TO THESE THREE RECEIPTS WERE ARRANGEMENT S WHICH WERE INTRINSICALLY CONNECTED WITH THE CONSTRU CTION OF ITS STEEL PLANT. THE RECEIPTS HAD BEEN ADJUSTED AGAINST THE CHARGES PAYABLE TO THE CONTRACTORS AND HAD GONE TO REDUCE THE COST OF CONSTRUCTION. THEY HAD, THEREFOR E, BEEN RIGHTLY HELD AS CAPITAL RECEIPTS AND NOT INCOM E OF THE ASSESSEE FROM ANY INDEPENDENT SOURCE.' 20. IN THE CASE OF KARNAL CO-OPERATIVE SUGAR MILLS LTD. (SUPRA), THEIR LORDSHIPS OF HON'BLE APEX COURT, AFT ER APPLYING THE DECISION OF BOKARO STEEL LTD. (SUPRA), HELD AS UNDER:- 'HELD, THAT, IN THE PRESENT CASE, THE ASSESSEE HAD DEPOSITED MONEY TO OPEN A LETTER OF CREDIT FOR THE PURCHASE OF THE MACHINERY REQUIRED FOR SETTING UP I TS PLANT IN TERMS OF THE ASSESSEE'S AGREEMENT WITH THE SUPPLIER. IT WAS ON THE MONEY SO DEPOSITED THAT SOM E INTEREST HAD BEEN EARNED. THIS WAS, THEREFORE, NOT A CASE WHERE ANY SURPLUS SHARE CAPITAL MONEY WHICH WAS LYI NG IDLE HAD BEEN DEPOSITED IN THE BANK FOR THE PURPOSE OF EARNING INTEREST. THE DEPOSIT OF MONEY IN THE PRESE NT CASE WAS DIRECTLY LINKED WITH THE PURCHASE OF PLANT AND MACHINERY. HENCE, ANY INCOME EARNED ON SUCH DEPOSIT WAS INCIDENTAL TO THE ACQUISITION OF ASSETS FOR THE SETTING UP OF THE PLANT AND MACHINERY. THE INTEREST WAS A C APITAL RECEIPT, WHICH WOULD GO TO REDUCE THE COST OF ASSET . ' ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 2 6 - 21. IN THE CASE OF KARNATAKA POWER CORPORATION (SUP RA), THEIR LORDSHIPS OF HON'BLE APEX COURT, FOLLOWING THE DECI SION OF BOKARO STEEL LTD. (SUPRA), HELD AS UNDER:- '...ALSO, (I) THAT THE TRIBUNAL WAS RIGHT IN LAW IN UPHOLDING THE ORDER OF THE COMMISSIONER (APPEALS) W HO DELETED THE ADDITION OF RS.1,30,44,518/- BEING INTE REST RECEIPTS AND HERE CHARGES FROM CONTRACTORS BY HOLDI NG THAT THE SAME WERE IN THE NATURE OF CAPITAL RECEIPT S WHICH WOULD GO TO REDUCE CAPITAL COST.' 22. IN THE CASE OF BONGAIGAON REFINERY & PETROCHEMI CALS LTD. (SUPRA), THE HON'BLE APEX COURT, AFTER CONSIDERING THE DECISION OF BOKARO STEEL LTD. (SUPRA), HELD AS UNDER:- ' REVERSING THE DECISION OF THE HIGH COURT IN RELAT ION TO THESE ITEMS OF INCOME, THAT THESE ITEMS OF RECEIPTS WERE NOT TAXABLE INCOME BUT WERE TO BE ADJUSTED AGAINST THE PROJECT COST FOR THE BUSINESS OF OIL REFINERY AND P ETRO- CHEMICALS.' 23. THAT THE HON'BLE DELHI HIGH COURT IN THE CASE O F INDIAN OIL PANIPAT POWER CONSORTIUM LTD. (SUPRA), AFTER CO NSIDERING THE DECISIONS IN THE CASE OF TUTICORIN ALKALI CHEMI CALS & FERTILIZERS LTD. (SUPRA) AND BOKARO STEEL LTD. (SUP RA) AT LENGTH, HELD AT PAGES 258, 259 AND 260 OF REPORT, I .E., 315 ITR 255, AS UNDER:- 5. IN OUR OPINION THE TRIBUNAL HAS MISCONSTRUED THE RATIO OF THE JUDGMENT OF THE SUPREME COURT IN THE C ASE OF TUTICORIN ALKALI CHEMICALS [1997] 227 ITR 172 AND T HAT OF BOKARO STEEL LTD. [1999] 236 ITR 315. THE TEST W HICH PERMEATES THROUGH THE JUDGMENT OF THE SUPREME COURT IN TUTICORIN ALKALI CHEMICALS [1997] 227 ITR 172 IS TH AT IF FUNDS HAVE BEEN BORROWED FOR SETTING UP OF A PLANT AND IF THE FUNDS ARE 'SURPLUS' AND THEN BY VIRTUE OF THAT CIRCUMSTANCE THEY ARE INVESTED IN FIXED DEPOSITS TH E INCOME EARNED IN THE FORM OF INTEREST WILL BE TAXAB LE UNDER THE HEAD 'INCOME FROM OTHER SOURCES'. ON THE OTHER HAND THE RATIO OF THE SUPREME COURT JUDGMENT IN BOKARO STEEL LTD. [1999] 236 ITR 315 TO OUR MIND IS THAT IF INCOME IS EARNED, WHETHER BY WAY OF INTEREST OR IN ANY OTHER MANNER ON FUNDS WHICH ARE OTHERWISE 'INEXTRIC ABLY LINKED' TO THE SETTING UP OF THE PLANT, SUCH INCOME IS REQUIRED TO BE CAPITALIZED TO BE SET OFF AGAINST PR E- OPERATIVE EXPENSES. 5.1 THE TEST, THEREFORE, TO OUR MIND IS WHETHER THE ACTIVITY WHICH IS TAKEN UP FOR SETTING UP OF THE BU SINESS AND THE FUNDS WHICH ARE GARNERED ARE INEXTRICABLY CONNECTED TO THE SETTING UP OF THE PLANT. THE CLUE IS ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 2 7 - PERHAPS AVAILABLE IN S. 3 OF THE ACT WHICH STATES T HAT FOR NEWLY SET UP BUSINESS THE PREVIOUS YEAR SHALL BE TH E PERIOD BEGINNING WITH THE DATE OF SETTING UP OF THE ITA NO. 2755/AHD/2011 ADANI POWER LTD VS. ACIT AYS 2008 - 09 BUSINESS. THEREFORE, AS PER THE PROVISION OF S. 4 OF THE ACT WHICH IS THE CHARGING SECTION INCOME WHICH ARISES TO AN ASSESSEE FROM THE DATE OF SETTING OF T HE BUSINESS BUT PRIOR TO COMMENCEMENT IS CHARGEABLE TO TAX DEPENDING ON WHETHER IT IS OF A REVENUE NATURE OR C APITAL RECEIPT. THE INCOME OF A NEWLY SET UP BUSINESS, POS T THE DATE OF ITS SETTING UP CAN BE TAXED IF IT IS OF A R EVENUE NATURE UNDER ANY OF THE HEADS PROVIDED UNDER S. 14 IN CHAPTER IV OF THE ACT. FOR AN INCOME TO BE CLASSIFI ED AS INCOME UNDER THE HEAD 'PROFITS AND GAINS OF BUSINES S OR PROFESSION' IT WOULD HAVE TO BE AN ACTIVITY WHICH I S IN SOME MANNER OR FORM CONNECTED WITH BUSINESS. THE WO RD 'BUSINESS' IS OF WIDE IMPORT WHICH WOULD ALSO INCLU DE ALL SUCH ACTIVITIES WHICH COALESCE INTO SETTING UP OF THE BUSINESS. SEE MAZAGAON DOCK LTD. VS. CIT/CEPT (1958 ) 34 ITR 368 (SC) AND NARAIN SWADESHI WEAVING MILLS V S. CEPT (1954) 26 ITR 765 (SC). ONCE IT IS HELD THAT T HE ASSESSEE'S INCOME IS AN INCOME CONNECTED WITH BUSIN ESS, WHICH WOULD BE SO IN THE PRESENT CASE, IN VIEW OF T HE FINDING OF FACT BY THE CIT(A) THAT THE MONIES WHICH WERE INDUCTED INTO THE JOINT VENTURE COMPANY BY THE JOIN T VENTURE PARTNERS WERE PRIMARILY INFUSED TO PURCHASE LAND AND TO DEVELOP INFRASTRUCTURE THEN IT CANNOT B E HELD THAT THE INCOME DERIVED BY PARKING THE FUNDS TEMPOR ARILY WITH TOKYO MITSUBISHI BANK, WILL RESULT IN THE CHAR ACTER OF THE FUNDS BEING CHANGED, IN AS MUCH AS THE INTER EST EARNED FROM THE BANK WOULD HAVE A HUE DIFFERENT THA N THAT OF BUSINESS AND BE BROUGHT TO TAX UNDER THE HE AD 'INCOME FROM OTHER SOURCES'. IT IS WELL-SETTLED THA T AN INCOME RECEIVED BY THE ASSESSEE CAN BE TAXED UNDER THE HEAD 'INCOME FROM OTHER SOURCES' ONLY IF IT DOES NO T FALL UNDER ANY OTHER HEAD OF INCOME AS PROVIDED IN S. 14 OF THE ACT. THE HEAD 'INCOME FROM OTHER SOURCES' IS A RESIDUARY HEAD OF INCOME. SEE S.G. MERCANTILE CORPORATION (P) LTD. VS. CIT1972 CTR (SC) 8 : (1972 ) 83 ITR 700 (SC) AND CIT VS. GOVINDA CHOUDHURY & SON S (1994) 116 CTR (SC) 61 : (1993) 203 ITR 881 (SC). 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 SHA RE CAPITAL WERE INFUSED FOR A SPECIFIC PURPOSE OF ACQU IRING LAND AND THE DEVELOPMENT OF INFRASTRUCTURE. THEREFO RE, THE INTEREST EARNED ON FUNDS PRIMARILY BROUGHT FOR INFUSION IN THE BUSINESS COULD NOT HAVE BEEN CLASSI FIED AS INCOME FROM OTHER SOURCES. 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 ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 2 8 - REQUIRED TO BE SET OFF AGAINST PRE-OPERATIVE EXPENS ES. IN THE CASE OF TUTICORIN ALKALI CHEMICALS [1997] 227 I TR 172 IT WAS FOUND BY THE AUTHORITIES THAT THE FUNDS AVAILABLE WITH THE ASSESSEE IN THAT CASE WERE 'SURP LUS' AND, THEREFORE, THE SUPREME COURT HELD THAT THE INT EREST EARNED ON SURPLUS FUNDS WOULD HAVE TO BE TREATED AS 'INCOME FROM OTHER SOURCES'. ON THE OTHER HAND IN BOKARO STEEL LTD. [1999] 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 TH E PLANT OF THE ASSESSEE AND HENCE WAS HELD TO BE A CAPITAL RECEIPT WHICH WAS PERMITTED TO BE SET OFF AGAINST P RE- OPERATIVE EXPENSES. (UNDERLINED OURS TO SUPPLY EMPHASIS) 24. FROM THE ABOVE, IT IS EVIDENT THAT THE HON'BLE DELHI HIGH COURT HAS CONSIDERED AND INTERPRETED THE DECISIONS OF HON'BLE APEX COURT IN THE CASE OF TUTICORIN ALKALI CHEMICAL S & FERTILIZERS LTD. (SUPRA) AS WELL AS BOKARO STEEL LT D. (SUPRA). THE CONCLUSION OF THE DELHI HIGH COURT IS IN FACT T HE LAW WHICH EMERGES AS PER THE DECISION OF HON'BLE APEX C OURT. THEREFORE, IN OUR OPINION, THE CIT(A) WAS NOT JUSTI FIED IN IGNORING THE DECISION OF HON'BLE DELHI HIGH COURT B Y SIMPLY MENTIONING THAT THE ISSUE IS COVERED BY THE DECISIO N OF HON'BLE APEX COURT IN THE CASE OF TUTICORIN ALKALI CHEMICAL S & FERTILIZERS LTD. (SUPRA). AFTER CONSIDERING THESE T WO DECISIONS OF THE HON'BLE APEX COURT AND ALSO SOME OTHER DECIS IONS OF THE HON'BLE APEX COURT, THEIR LORDSHIPS OF THE DELHI HI GH COURT ARRIVED AT THE CONCLUSION 'IT IS CLEAR UPON A PERUS AL OF THE FACTS AS FOUND BY THE AUTHORITIES BELOW THAT THE FU NDS IN THE FORM OF SHARE CAPITAL WERE INFUSED FOR THE SPECIFIC PURPOSE OF ACQUIRING LAND AND THE DEVELOPMENT OF INFRASTRUCTUR E. THEREFORE, THE INTEREST EARNED ON FUNDS PRIMARILY B ROUGHT FOR INFUSION IN THE BUSINESS COULD NOT HAVE BEEN CLASSI FIED AS INCOME FROM OTHER SOURCES. SINCE THE INCOME WAS EAR NED IN A PERIOD PRIOR TO COMMENCEMENT OF BUSINESS, IT WAS IN THE NATURE OF CAPITAL RECEIPT AND HENCE WAS REQUIRED TO BE SET OFF AGAINST THE PRE-OPERATIVE EXPENSES.' THAT, THE RATIO OF THE ABOVE FINDING OF THE HON'BLE DELHI HIGH COURT WOULD BE SQ UARELY APPLICABLE TO THE FACTS OF THE ASSESSEE'S CASE, BEC AUSE ADMITTEDLY IN THE CASE UNDER APPEAL BEFORE US THE S HARE CAPITAL AS WELL AS LOANS WERE RAISED FOR THE SPECIFIC PURPO SE OF SETTING UP OF THE POWER GENERATION PLANTS. THE BUSINESS OF THE ASSESSEE HAS NOT BEEN COMMENCED AND THEREFORE, AS PER ABOVE DECISION, THE INTEREST RECEIVED IN THE PERIOD PRIOR TO COMMEN CEMENT OF BUSINESS WAS IN THE NATURE OF CAPITAL RECEIPT AND H ENCE WAS REQUIRED TO BE SET OFF AGAINST THE PRE-OPERATIVE EX PENSES. THE ASSESSEE HAS ALREADY SET OFF THE INTEREST INCOME AG AINST THE PRE-OPERATIVE EXPENSES WHICH IS TITLED AS 'PROJECT DEVELOPMENT EXPENDITURE'. IN VIEW OF ABOVE, WE ARE OF THE OPINI ON THAT THE ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 2 9 - INTEREST INCOME OF RS.1,35,87,158/- AS WELL AS RS.7 ,91,51,306/- WAS A CAPITAL RECEIPT NOT CHARGEABLE TO TAX DURING THE YEAR UNDER CONSIDERATION. ACCORDINGLY, GROUND NOS. 2 AND 4 OF THE ASSESSEE'S APPEAL ARE ALLOWED.' 17. THERE IS NO DISPARITY ON FACTS. THE LD.CIT(A) H AS SIMPLY FOLLOWED THE ORDER OF THE LD.CIT(A) IN THE ASSESSMENT YEAR 2 008-09. THEREFORE, RESPECTFULLY FOLLOWING THE ORDER OF THE ITAT IN THE ASSESSMENT YEAR 2008-09, WE REJECT THE GROUND OF APPEAL TAKEN BY TH E REVENUE AND ALLOW THE GROUNDS OF APPEAL TAKEN BY THE ASSESSEE. 15. APART FROM THE DECISION OF CO-ORDINATE BENCH AD JUDICATING THE ISSUE IN FAVOUR OF THE ASSESSEE, WE ALSO TAKE NOTIC E OF THE PROCESS OF REASONING APPLIED BY CIT(A) AND APPROVE HIS ACTION AFFIRMATIVELY IN SO FAR AS INTEREST GENERATED ON DEPOSITS PLACED WIT H SBI. THE CIT(A) HAS RIGHTLY HELD THAT INTEREST INCOME TO BE OF CAPI TAL NATURE LINKED WITH THE PROCESS OF SETTING UP OF ITS POWER PLANT AND SU CH RECEIPTS WOULD GO TO REDUCE THE COST OF THE PROJECT WHICH ALSO INCLUD ES HUGE INTEREST COSTS AS CAPITALIZED. FOR COMING TO SUCH CONCLUSION , THE CIT(A) HAS TAKEN COGNIZANCE OF THE DECISION OF THE HONBLE SUP REME COURT IN THE CASE OF BOKARO STEEL LTD. (SUPRA), KARNATAKA CORPOR ATION SUGAR MILLS LTD. & BONGAIGAON REFINERY & PETRO CHEMICALS LTD. V S. CIT [2001] 251 ITR 329 WHICH IN TURN DISTINGUISH THE DECISION OF THE HONBLE SUPREME COURT IN TUTICORIN ALKALI CHEMICALS FERTILI ZERS LTD. (SUPRA). THE CIT(A) HAS OBSERVED ON FACTS THAT ASSESSEE KEPT FIXED DEPOSIT AS MARGIN MONEY WITH SBI FOR OBTAINING BANK GUARANTEE TO AVAIL TERM LOAN FACILITY FOR THE PROJECT RELATED WORKS. THE M ARGIN MONEY KEPT IS 10% OF THE BANK GUARANTEE OF RS.150 CRORES OBTAINED FROM SBI. THE CIT(A) THUS FOUND THAT DEPOSITS WERE INTEGRALLY CON NECTED WITH THE SETTING UP OF POWER PLANT. THUS, WE FIND OURSELVES IN COMPLETE AGREEMENT WITH THE ACTION OF THE CIT(A) IN UPHOLDIN G THE ACTION OF AO TO REDUCE INTEREST INCOME ARISING FROM DEPOSITS PLA CED WITH SBI OUT OF PROJECT DEVELOPMENT EXPENDITURE AND IN REVERSING TH E ACTION OF THE AO IN TREATING THE SAME AS REVENUE INCOME DE HORS THE PROJECTS ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 3 0 - DEVELOPMENT IN PROGRESS. THE GRIEVANCE OF THE REVE NUE THUS IS BEREFT OF ANY MERITS. 16. THE APPEAL OF THE REVENUE IS DISMISSED. 17. WE NOW ADVERT TO THE CROSS OBJECTION FILED BY T HE ASSESSEE TO IMPUGN THE ACTION OF THE CIT(A) IN SUSTAINING THE I NTEREST INCOME ON FUNDS KEPT AS FIXED DEPOSITS AMOUNTING TO RS.2,23,0 6,911/- TO BE REVENUE INCOME AND CONSEQUENTLY NOT LIABLE TO BE SE T OFF AGAINST PROJECT DEVELOPMENT COSTS. IN THIS REGARD, WE TAKE NOTE OF THE SIGNIFICANT PLEA ON BEHALF OF THE ASSESSEE THAT IT HAS NOT CARRIED OUT ANY ACTIVITY OTHER THAN CONSTRUCTION OF THE POWER P LANT AND THEREFORE THE MAKING OF DEPOSIT IS INEVITABLY LINKED WITH THE SETTING OF THE PROJECT. THE DEPOSITS HAVE BEEN PLACED OUT OF FUND S PREDOMINANTLY MOBILIZED BY WAY OF BORROWED FUNDS ONLY FOR THE PUR POSES OF SETTING UP OF THE POWER PLANT. THIS BEING SO, WHERE THE IN TEREST AND FINANCE CHARGES ON BORROWED FUNDS (RS.136.80 CRORES) ARE TO BE TREATED AS COST OF THE PROJECT I.E. CAPITAL EXPENDITURE, THE INTERE ST INCOME ON FIXED DEPOSITS ALSO REQUIRES TO BE TREATED IN THE IDENTIC AL MANNER I.E. INCOME OF CAPITAL NATURE DESERVING TO BE SET OFF AGAINST T HE PROJECT COSTS. THE CIT(A) IN OUR VIEW, HAS FAILED TO TAKE NOTICE OF TH E PLEA THAT INTEREST EXPENDITURE AND INTEREST INCOME ARISE FROM THE SAM E SOURCE I.E. BORROWED FUNDS. THE INCOME AND EXPENDITURE ARE THU S INEXTRICABLY LINKED. WE THUS ARE OF THE VIEW THAT WHEN THE FACT S ARE SEEN IN PERSPECTIVE, THE ACTION OF THE CIT(A) APPEARS TO SU FFER FROM THIS CARDINAL ERROR. IN THE ABSENCE OF ANY OTHER ACTIVI TY OTHER THAN THE CONSTRUCTION OF POWER PLANT, THE INTEREST EXPENDITU RE ON BORROWED FUNDS AND INCIDENTAL INCOME BY WAY OF INTEREST MOBI LIZED ARE REQUIRED TO BE TREATED AT PAR. THE INTEREST INCOME THEREFOR E IN OUR VIEW IS ELIGIBLE FOR SET OFF AGAINST THE CORRESPONDING INTE REST COSTS AND ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 3 1 - CONSEQUENTLY, SUCH INCOME SHOULD BE REDUCED OUT OF INTEREST COSTS WHICH ALSO FORM PART OF THE CAPITAL EXPENDITURE. 18. THIS APART, WE ALSO OBSERVE THAT THE CIT(A) ITS ELF HAS OBSERVED THAT FIXED DEPOSITS WITH IDBI BANK WERE PLACED WITH AN OBJECT TO OBTAIN WHEN GUARANTEE FOR THE PURPOSE OF ISSUANCE O F THE CONTRACT PERFORMANCE GUARANTEE IN RESPECT OF REQUEST FOR PRO POSAL (REP) FLOATED BY RAJASTHAN RAJYA VIDYUT PRASARAN NIGAM LT D. FOR SUPPLY UPTO 1200 MW POWER BY ASSESSEE, WITH SPECIFIC VALID ITY PERIOD. THE CIT(A) WHILE ADMITTING THAT POWER PURCHASE AGREEMEN T MAY REQUIRE SOME SECURITY IN THE FORM OF BANK GUARANTEE BUT INE XPLICABLY HELD THAT SUCH ACT DOES NOT MEAN THAT INVESTMENT IS INEXTRICA BLY LINKED TO THE IMPLEMENTATION OF PROJECT. IN OUR VIEW, THE CONCLU SION DRAWN BY THE CIT(A) ADVERSED TO THE ASSESSEE IS OUTRIGHT BIZARRE ; AND TOTALLY UNPALATABLE JUDICIALLY. THE CIT(A) HAS IGNORED THE VITAL CONSIDERATION THAT THE FIXED DEPOSITS HAVE NOT BEEN PLACED TO PAR K IDLE AND SURPLUS FUND BUT BORROWED MONEY HAS BEEN UTILIZED BY WAY OF FIXED DEPOSIT FOR OBTAINING THE BANK GUARANTEE FOR THE PURPOSE OF THE PROJECT BEING SET UP. THE ACTION OF THE ASSESSEE MERELY REDUCES THE INTEREST COSTS ON BORROWED FUNDS TO SOME EXTENT. THEREFORE, INTEREST ON BORROWED FUNDS AND INTEREST EARNED ON FIXED DEPOSITS CANNOT BE GIV EN VARIED TREATMENT WHERE THE INTEREST COSTS HAVE BEEN CAPITALIZED TO T HE POWER PROJECT. WE DO NOT VISUALIZE ANY JUSTIFIABLE REASON FOR HOLD ING THE INTEREST INCOME ON FIXED DEPOSITS OUT OF BORROWED FUNDS AND UTILIZED FOR FURTHERANCE OF THE PROJECT TO BE OF REVENUE CHARACT ER. THE CONCLUSION DRAWN BY THE CIT(A) IS THUS MANIFESTLY MIS-CONCEIVE D AND THUS DESERVES TO BE SET ASIDE AND REVERSED. THE ACTION OF THE CI T(A) IN UPHOLDING THE INTEREST INCOME RECEIVED FROM IDBI BANK AS TAXABLE REVENUE INCOME UNDER S.56 OF THE ACT IS THUS WHOLLY UNTENABLE AND CONSEQUENTLY, THE TREATMENT ADOPTED BY THE ASSESSEE IN THIS REGARD RE QUIRES TO BE ITA NO. 1430/AHD/15 WITH CO NO. 114/AHD/2015 [ITO VS. M/S. ADANI POWER RAJASTHAN LTD.] A.Y. 2011 -12 - 3 2 - RESTORED. IN THIS VIEW OF THE MATTER, WE SET ASIDE THE ACTION OF THE CIT(A) AND DIRECT THE AO TO DELETE THE ADDITION MAD E ON THIS SCORE. 19. IN THE RESULT, CROSS OBJECTION OF THE ASSESSEE ON THIS SCORE STANDS ALLOWED. 20. IN THE COMBINED RESULT, REVENUES APPEAL IS DIS MISSED AND CROSS OBJECTION OF THE ASSESSEE IS ALLOWED. SD/- SD/- (MAHAVIR PRASAD) (PRADIP KUMA R KEDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD: DATED 18/01/2019 TRUE COPY S. K. SINHA !'#' / COPY OF ORDER FORWARDED TO:- $. / REVENUE 2. / ASSESSEE &. '() * / CONCERNED CIT 4. *- / CIT (A) -. ./0 122()3 ()!3 45' / DR, ITAT, AHMEDABAD 6. 078 9 / GUARD FILE. BY ORDER / 3 /4 ()!3 45' THIS ORDER PRONOUNCED IN OPEN COURT ON 18/01/20 19