INDIAN TOOLS TECHNOLOGY CENTRE , JALANDHAR V. INCOME TAX OFICER WARD II(1), JALANDHAR

ITA 234/ASR/2018

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 8522 (ITAT-AMRITSAR)
• Duration Of Justice: 3 year(s) 9 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-02-2022
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2014-2015
• Appeal Filed On: 23-04-2018
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Diversion of income; Question of law; Capital receipt; Set aside
• Section: 37; 56; 133(6); 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH, AMRITSAR. BEFORE SH. RAVISH SOOD, JUDICIAL MEMBER AND Dr. M. L. MEENA, ACCOUNTANT MEMBER ITA No. 234/(Asr)/2018 Assessment Year: 2014-15 Indian Tools Technology Centre, C/o Forging & Chemicals, GT Road, Jalandhar. [PAN: AACC13668M] Vs. Income Tax Officer, Ward-II(1), Jalandhar (Appellant) (Respondent) Appellant by : Sh. J. S. Bhasin, Adv. Respondent by: Sh. Rohit Mehra, D.R. Date of Hearing: 20.12.2021 Date of Pronouncement: 21.02.2022 ORDER Per Dr. M. L. Meena, AM: The appeal has been filed by the Assessee against the impugned order dated 04.01.2018, passed by Ld. Commissioner of Income Tax (Appeals)-I, Jalandhar pertaining assessment order passed u/s.143(3), for the Assessment Year 2014-15. In the grounds of appeal, the Assessee has raised the following grounds: “1 That the Id. CIT(A) has gross erred in facts and on law, in sustaining the addition of Rs. 1,74,80,000/-, as made by the Id ITO, on highly erroneous and insufficient grounds. ITA No. 234/ASR/2018 2 2. That the Id.CIT(A), while upholding the above addition, was not justified in wholly ruling out the assessee's claim as not maintainable under section 57(iii), without appreciating the AO's standpoint and assessee's contentions thereon, in correct perspective. 3. That the "Grant in aid" neither being "unconditional" nor being the property of the assessee, the interest earned on grant in aid was also not the property of assessee, and therefore, it could not be brought to tax in assessee's hand as 'hypothetical income'. 4. That the entire Grant in aid, loaded with interest @ 10%, having been paid back by assessee, even at a later date, would not disentitle the assessee to claim the expense thus incurred from its income, if any. 5. That by any reckoning, the Grant in aid being capital receipt, even the interest accrued thereon was also a capital receipt, not liable to tax, and the contrary view taken by the Id.CIT(A) to reject this ground is wholly unlawful and hence not sustainable. 6. That the order under appeal is against law and facts and hence liable to be set aside.” 2. In nutshell, there are three issues for adjudication before us, as regards to expenses claimed under section 57 (iii) against interest income, no real income and being a capital receipt was not taxable. 3. Briefly, the facts as per record are that return of income for the Assessment Year 2014-15, declaring total income of Rs. 168761/- was filed on 02.02.2016. The assessee company was incorporated on 28.06.2010 u/s 25 of Companies Act, 1956 with the main object to establish a Common Facility Center (CPC) for use of hand tool manufactures by providing various facilities for manufacturing activities ITA No. 234/ASR/2018 3 like forging, heat treatment, packaging, finishing, testing etc. under one roof. The proposed project was approved by the Department of industrial Policy and Promotion (DIPP), Ministry of Commerce, Government of India on 01.10.2010. The department of DIPP, while approving total central grant of Rs. 58.25/- crores for the proposed project, released the first installment of grant in aid of Rs. 17.48/- cores to assessee company on 24.11.2010. The company was also granted 33 year of lease of 62 Kanals 2 marlas of land in village Gadaipur, Distt. Jalandhar and possession was given as per registered lease deed dated 25.08.2011 by Municipal Corporation Jalandhar, to be utilized for the purpose of undertaking various activities towards fulfillment of the above objects of the company. The grant in aid released by the government of India was subject to the condition that whole of the amount if not utilized in 1 year from the date of its receipt was recoverable from the assessee along with the interest @ 10% PA. The proposed project for which the grant was released failed to take off, was finally returned back in the subsequent years as under:- S.No. Date of payment (from Bank A/c Amount (Principal) Interest Total 1. 10.04.2014 15,00,00,000/- 4,40,00,276/ - 19,40,00,276/ 2. 19.04.2014 18,480/- 18,480/- 3. 03.07.2015 2,47,81,520/- 86,35,795/- 3,34,17,315/- 17,48,00,000/- 3.1 Thus, in the subsequent year, entire amount of Rs. 17.48 erores was returned to the DIPP along with interest. The assessee argued during assessment ITA No. 234/ASR/2018 4 proceedings that interest paid was on account of funds received from DIPP which had been paid given the fact that the amount of grant in aid was to be spent within a specific period of one year from the receipt of grant. Since the assessee is following mercantile system of account in, the expenses relevant to the year under reference have to be claimed in the year under consideration. Moreover, since the assessee was aware that interest was to be charged, the same was shown as payable in the balance sheet. The assessee further argued that the interest income received from the Bank was assessable under the head ‘other sources’ and when no business had been undertaken by the Company, the expenses incurred were also liable to be adjusted against interest under the same head, by virtue of section 57(iii) which permits such expenses to be allowed when incurred for the purposes of earning such income. It was argued by the assessee that since the assessee received monies/ funds from DIPP for the purpose of setting up common facility centre and interest thereon during the accounting period relevant the A.Y. was shown as payable and the interest payable has been set off against interest income received/ earned from the FDRs made from funds received from DIPP, the payment of interest @ 10% was a precondition in the agreement and accordingly, the interest provided qualifies for the purpose and is admissible as a deduction under section 57(iii) the income Tax Act, 1961 in computing its income from interest under the head “income from other sources” 3.2 Upon due consideration of facts, Ld. assessing officer has disallowed the claim of deduction u/s 57 of the I.T. Act 1961 amounting to Rs. 1,74,80,000/- for interest shown as payable in the P & L account during the F.Y. 2013-14 to DIPP against the interest income received from the bank on deposit of grant in aid of Rs. 17,48,00,000/-. Information u/s 133(6) of I.T. Act 1961 was called from the Manager, State Bank of Patiala Jalandhar, regarding whether any interest has been ITA No. 234/ASR/2018 5 paid by the company to DIPP during the period from 01.04.2013 to 31.03.2014. In response, the Bank informed it had not remitted any amount to DIPP during the period 01.04.2013 to 31.03.2014. Moreover, the assessee has shown interest payable from 01.04.2012 to 31.03.2014 amounting to Rs. 5,24,40,000/- as per details furnished during the assessment proceeding. 3.3 The expenditure of Rs. 1,74,80,000/- was thus not an expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income, i.e., Bank interest, so as to fall within sec 57(iii). The assessee has not incurred any expenditure to earn interest income from Bank against fixed deposit. Therefore, the deduction u/s.57 claimed by the assessee amounting to Rs. 1,74,48,000/- was disallowed and accordingly, addition of Rs. 1,74,48,000/- was made to the income of the assessee. 4. The aggrieved assessee went before the Ld. CIT(A) who has confirmed the addition by observing as under: 6.3 I have carefully considered the facts of the case and submissions of the appellant. During the relevant assessment year, the assessee had received funds from the Govt, as Grant-in-aid for the specific purpose of investing in the SPV for generating the facility as per terms and conditions laid out. The claim of interest paid u/s 57(iii) of the Income Tax Act 1961 can be considered only if the expenditure was incurred to earn the income. The funds were put at the disposal of the assessee free of cost by the Govt. The Grant-in-aid was treated as capital receipt in the hands of assessee. The assessee did not incur any expenditure to obtain these funds. Therefore, the claim of any expenditure u/s 57(iii) of the Income Tax Act against the interest income is not allowable. Since, the funds were not utilised as per ITA No. 234/ASR/2018 6 the laid out specific purpose, therefore, there were surplus funds with the assessee which were invested in FDRs and interest income of Rs. 1,78,58,277/- was actually earned thereon. The interest income was accordingly declared in the return of income by the appellant. Thus, no expenditure was incurred by the appellant to earn interest income. 6.4 During the appeal proceedings, the Ld. Counsel has relied on judgement of the Hon’ble Apex Court decision in CIT Vs. Rajendra Prasad Moody (1978) 115 ITR 519 (SC) as followed by Hon’ble Delhi High Court in DDIT Vs. Petroleum Sports Promotion Board III DTR Delhi 55, holding that section 57(iii) must be construed broadly and the somewhat wider language of section 37 should not affect the interpretation of section 57 (iii) of the Income Tax Act, 1961. 6.5 As far as question of claim of deduction u/s 57(iii) of the Income Tax Act, 1961 is concerned, the issue has been decided by the Hon’ble ITAT Amritsar in case of assessee for A.Y. 2011-12 as under, “As regards the alternative contention of Ld. AR that expenditure should have been allowed u/s 57(iii) of the Act, we do not agree with the contentions of Ld. AR as section 57(iii) clearly lays down that deduction is allowed for any other expenditure (not being in the nature of Capital Expenditure) laid out or wholly and exclusively for the purpose of making or earning of such income. In the present case the assessee had not incurred such expenditure for the purpose of earning income and rather it is other way round as in the present case the expenditure has been earned out of income and therefore, deduction cannot be allowed u/s 57(iii) of ITA No. 234/ASR/2018 7 the Act. The case law of Hon’ble Delhi High Court in the case of DC1T vs. Petroleum Sports Board is not applicable and is distinguishable as in that case the assessee had received grants from various Oil Companies and expenditure was incurred for collecting such grants and therefore, the Hon’ble Court had rightly held such expenditure as deductible u/s 57 (iii) of the Act whereas in the present case no expenditure was incurred for earning interest income and rather expenditure was incurred out of interest income.” Respectfully, following the decision of the Hon’ble ITAT Amritsar in case of assessee, claim of deduction u/s 57 of the Income Tax Act, 1961 is rejected. 5. The Ld. AR submitted that the Id. CIT(A) has erred in facts and on law, in sustaining the addition of Rs. 1,74,80000,/-; that he was not justified in upholding the above addition, while ruling out the assessee's claim as not maintainable under section 57(iii), without appreciating the AO's standpoint and assessee's contentions thereon, in correct perspective; that the "Grant in aid" neither being "unconditional" nor being the property of the assessee, the interest earned on grant in aid was also not the property of assessee, and therefore, it could not be brought to tax in assessee's hand as 'hypothetical income' and that the entire Grant in aid, loaded with interest @ 10%, having been paid back by assessee, even at a later date, would not disentitle the assessee to claim the expense thus incurred from its income, if any. He further argued that by any reckoning, the Grant in aid being capital receipt, even the interest accrued thereon was also a capital receipt, not liable to tax, and the contrary view taken by the Id. CIT(A) to reject this ground is wholly unlawful and hence not sustainable. He has reiterated the contentions ITA No. 234/ASR/2018 8 raised before the ld.CIT(A) and contended that the CIT(A) had declined to accept claim of expenses of 10% interest paid on govt grants, receipt was a hypothetical income and a capital receipt. 6. Per contra, the ld. DR relied upon the order of the CIT(A). 7. We have heard the rival contentions, perused the material record, in the case last relied upon by both the sides. Admittedly, the return filed for the assessment year under consideration, the assessee has declared interest income earned on government grants, invested in FDRs, and the expenses incurred during installation of the project claimed against the said income were claimed as finance expenses. 6.1 The landed CIT appeal rejected the claim of expenses under section 57(iii) by following the tribunal decision in the assesses own case for the assessment year 2011-12 in ITA no. 197/ASR/2015, order dated 27.03.2017 (Supra) wherein the bench did not agree with the contentions of Ld. AR as section 57(iii) clearly lays down that deduction is allowed for any other expenditure (not being in the nature of Capital Expenditure) laid out or wholly and exclusively for the purpose of making or earning of such income. It was further observed that in the present case the assessee had not incurred such expenditure for the purpose of earning income and rather it is other way round as in the present case the expenditure has been earned out of income and therefore, deduction cannot be allowed u/s 57(iii) of the Act. 6.2 The case law of Hon’ble Delhi High Court in the case of DC1T vs. Petroleum Sports Board is distinguishable on facts as in that case the assessee had received grants from various Oil Companies and expenditure was incurred for collecting such grants and therefore, the Hon’ble Court had rightly held such ITA No. 234/ASR/2018 9 expenditure as deductible u/s 57 (iii) of the Act whereas in the present case no expenditure was incurred for earning interest income. We have examined the other decisions relied upon by the assessee including Amritsar bench in the case of Arya Samaj Trust where various expenses were incurred in furtherance of the object of the trust whereas in the present case no such expenditure was incurred for earning such interest income on the bank deposits in the form of FDRs, hence they are distinguishable on facts. 6.3 In view of above, we find no infirmity in the decision of the CIT appeal in rejecting assessee’s claim of deduction under section 57(iii) of the income tax act. 7. The next issue contested by the appellant is that that the CIT appeal declined to accept the alternatively plea of real income vide para 7.4, page 27 of the impugned order, for the reason that the interest on government grants had accrued during this year under appeal and it was not remitted back to the government in the relevant year but in the subsequent years. The learned AR argued that by misreading the decision of Hon’ble epics court in the case of CIT versus Excel industries Ltd dated 8.10.2013 civil appeal number 125 of 2013, CA and further it was no hypothetical income but actually received. He further argued that see has misunderstood that the assessee company was continuing, it was reluctant in returning the money and it had not brought on record how and why the Grant was not utilised for specific purpose. 7.1 The CIT appeal as stated that the grant-in-aid along with interest was returned back to the above and in the subsequent assessment years. Admittedly income on account of FDRs interest was earned and declared by the appellant in the return of income. Therefore, the assessing officer has not brought to tax in a hypothetical income. In support, he placed reliance on the judgement of Hon’ble ITA No. 234/ASR/2018 10 epics court in the case of Tuticorin alkali chemicals and fertilisers Ltd madras versus CIT, dated 08.07.1997 wherein it was held that- “It has been argued that the source from which the company has earned interest is borrowed capital. The company has to pay interest to its creditors on the same borrowed capital. Having regard to the identity of the fund on which interest is ordered and interest is payable, the completion allowed to set off its income against interest payable by it on the same fund. We are of the view that no adjustment can be allowed except in accordance with the provisions of income tax act. However desirable it may be from the point of view of equity, this adjustment can’t not be made unless the law specifically permits such adjustment.” 7.2 The appellant has not brought on record, either before the CIT appeal or before us, as to under which section of the income tax act 1961, the claim of interest on grant in ad returned back by it in the subsequent years could be allowed. The Hon’ble Apex Court in the case of Tuticorin alkali chemicals and fertilisers Ltd., Madras (supra) laid down the principal that no adjustment can be allowed against the income except in accordance with the provisions of income tax act, however desirable it may be from the point of view of equity, this adjustment can’t be made unless the law specifically permits such adjustment. 7.3 The Ld. Counsel further argued regarding no real income to the assessee by referring to the case of M/s Metal Box Company Ltd Vs. Their Workman (1969) 73 ITR 53 (SC) delivered in the context of Section 37(1). The Hon’ble Supreme Court has held that just as receipts, though not actual receipts but accrued due are brought in for Income Tax Assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business. It is ITA No. 234/ASR/2018 11 noticed that this decision was in respect of Bonus Act 1965, wherein the appeal by the workmen was dismissed, and appeal of the company was partly allowed. This judgement was not delivered in the context of the Income tax act 1961. Further, there was no interest income earned nor received by the assessee or declared in return of income in that case. Therefore, reliance placed on this judgement by the Ld. Counsel is misplaced. 7.4. Apart from above, the Ld. counsel cited a number of decisions on real income. These decisions have been considered by the Hon’ble SC in the case of CIT Vs. M/S Excel Industries Ltd., Civil Appeal No. 125 of 2013 wherein it was held that tax cannot be levied on hypothetical income which does not materialize. It has been further noted that where income has, in fact, been received and is subsequently given up in such circumstances it remains the income of the recipient, even though given up, the tax may be payable. In the present case of the assessee, interest income was earned by it, and it has been declared its income in the return of income for the relevant assessment year which is exigible to tax. The income so declared by the assessee is not hypothetical income. 7.5 In the case of “Commissioner of Income Tax vs. V.P. Gopinathan on 27 February, 2001”, AIR 2001 SC 1390, 2001 248 ITR 449 the Hon’ble Apex Court observed that- 6. It was not disputed, as it could not be, that if the assessee had taken a loan from another bank and paid interest thereon his real income would not diminish to the extent thereof. The only question then is: does it make any difference that he took the loan from the same bank in which he had placed the fixed deposit. There is no difference in the eye of the law. The interest that the assessee received from the bank was income in his hands. ITA No. 234/ASR/2018 12 It could stand diminished only if there was a provision in law which permits such diminution. There is none, and, therefore, the amount paid by the assessee as interest on the loan that he took from the bank did not reduce his income by way of interest on the fixed deposit placed by him in the bank. 7.6 In the backdrop of the discussion and factual matrix of this case, we hold that the CIT appeal was justified in deciding the issue of real income against the assessee. As such, the grounds on this issue is rejected. 8. As regards to the appellant’s plea that the income was not taxable as it was a capital receipt, the CIT appeal observed that the Grant had issued by the assessee from the government was treated as capital receipt. However, interest income earned from FDRs is of revenue nature and exigible to tax. He has placed reliance on the judgement of the Hon’ble Supreme Court in the case of Tuticorin alkali chemicals and fertilizers Ltd., Madras versus CIT dated 08.07.1997 wherein the Hon’ble Apex Court decided the following question of law: "Whether, on the facts and in the circumstances of the case, interest derived by the assessee from the borrowed funds which were invested in short term deposits with banks would be chargeable to tax under the head 'Income from other sources' or would go to reduce the interest payable by the assessee on the term loans secured by the assessee from financial institutions, which would be capitalised after the commencement of commercial production?" 8.1 The Hon’ble Apex Court while deciding the aforesaid question of law,observed as under: ITA No. 234/ASR/2018 13 “In other words, if the capital of a Company is fruitfully utilised instead of keeping it idle the income thus generated will be of revenue and not accretion of capital. Whether the Company raised the capital by issue of shares or debentures or by borrowing will not make any difference to this principle. If borrowed Capital is used for the purpose of earning income that income will have to be taxed in accordance with law. Income is something which flows from the property. Something received in place of the property will be capital receipt. The amount of interest received by the Company flows from its investments and is its income and is clearly taxable even though the interest amount is earned by utilising borrowed capital.” 8.1 The computation of income under each assessment year will have to be made independently and separately. There are specific rules of deduction and allowances under each head. No deduction or adjustment on account of any expenditure can be can made except as provided by the Act. Profits and gains of business or profession is only one of the heads under which the company's income is liable to be assessed to tax. If a company has not commenced business, there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed. If the company, even before it commences business, invests the surplus fund in its hand irrespective of the source of fund , including government grant in aid, for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head 'Capital gains'. Similarly, if a company purchases a rented house and gets rent, such rent will be assessable to tax under Section 22 as income from House property. Likewise, a company may have income from other sources. It may buy shares and get dividends. Such dividends will be taxable under Section 56 of the Act. The Company may also, as in the present case, keep the surplus fund in short-term FDRs in order to earn interest. Such interests will be chargeable under Section 56 of the Act. ITA No. 234/ASR/2018 14 8.2. The department of DIPP, while approving total central grant of Rs. 58.25/- crores for the proposed project, released the first installment of grant in aid of Rs. 17.48/- cores to assessee company on 24.11.2010 to establish a Common Facility Center (CPC) for use of hand tool manufactures by providing various facilities for manufacturing activities like forging, heat treatment, packaging, finishing, testing etc. under one roof. The assessee utilised that grant to earn interest, however temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. He may or may not discharge his liability to pay interest with this income. Merely because it was utilised to repay the principal amount of grant in aid received by the assessee along along with interest as penalty, it did not cease to be his income. The interest earned by the assessee could have been used for many other purposes. This is not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as he liked. The application of the income for repayment of principle amount of grant in aid in the subsequent year could not affect its taxability in any way. 8.3 In the backdrop of the above discussion and factual matrix of the case, we find no merits in the contentions raised by the ld. Counsel for the assessee. In our view, the Ld. CIT(A) was justified in rejecting the assessee’s plea that interest received on FDRs was a capital receipt. In conclusion, we dismiss all the three pleas and the grounds of appeal in the terms indicated hereinabove. Order pronounced under Rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1963 by placing the details on the notice board. Sd/- Sd/- (Ravish Sood) (Dr. M. L. Meena) Judicial Member Accountant Member ITA No. 234/ASR/2018 15 Date: 21.02.2022 prabhat Copy of the order forwarded to: (1) The Appellant: (2) The Respondent: (3) The CIT(Appeals) (4) The CIT concerned (5) The Sr. DR, I.T.A.T By Order