SHREE MAHESHWAR HYDEL POWER CORPORATION LTD, MUMBAI V. DCIT 7(2), MUMBAI

ITA 7768/MUM/2014

• Counselvise Citation: 776819914 RSA 2014
• Duration Of Justice: 2 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-03-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: E
• Assessment Year: 2010-2011
• Appeal Filed On: 31-12-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: NEIL PHILIP
• Assessee Lawyers: VENUGOPAL C NAIN
• Keywords: Business income; Depreciation; Share purchase agreement; Diversion of income; Source of fund; Capital receipt; Revised return; Capital expenditure
• Section: 139(5); 56

Judgement Text

, BZ BZBZ BZ INCOME TAX APPELLATE TRIBUNAL,MUMBAI - E BENCH , !' , ! BEFORE S/SH.JOGINDER SINGH, JUDICIAL MEM BER & RAJENDRA,ACCOUNTANT MEMBER /. ITA NO.7768/MUM/2014, # # # # $ $ $ $ / ASSESSMENT YEAR-2010-11 M/S SHREE MAHESHWAR HYDEL POWER CORPORATION LTD., 99, NIRANJAN GROUND FLOOR, MARINE DRIVE, MUMBAI-400002 PAN: AABCS4176P # VS. DCIT 7(2), R.NO.666, 6TH FLOOR, AAYAKAR BHAVAN, M.K.ROAD, CHURCHGATE, MUMBAI-400020 ( %& / ASSESSEE) ( '(%& / RESPONDENT) #)* #)* #)* #)* + + + + ! !! ! / ASSESSEE BY :SHRI VENUGOPAL C. NAIN , + ! / REVENUE BY : SHRI NEIL PHILIP # # # # , ,, , *- *- *- *- / DATE OF HEARING : 11-02-2015 .$ , *- / DATE OF PRONOUNCEMENT : 18-03-2015 # # # # , 1961 , ,, , 254(1) ! !! ! ** ** ** ** !/ !/ !/ !/ ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA, A.M. ! !' ! # : CHALLENGING THE ORDER DATED 19.12.2014 OF THE CIT(A )-14,MUMBAI,THE ASSESSEE HAD RAISED FOLLOWING GROUNDS OF APPEAL: THE LEARNED CIT(A) ERRED IN FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN CONFIRMING ADDITION THAT THE AO MADE BY TREATING INTEREST EARNED ON FIX ED DEPOSIT PRIOR TO COMMUNICATION OF PROJECT AS INCOME FROM OTHER SOURCES. REASONS GIVEN BY CIT(A) IN CONFIRMING ADDITIONS THA T THE AO MADE ARE WRONG, INSUFFICIENT AND CONTRARY TO FACTS AND EVIDENCE ON RECORD AND IN LAW . 2. THE ASSESSEE-COMPANY,ENGAGED IN THE BUSINESS OF MAN UFACTURING AND POWER AND ENERGY,FILED ITS RETURN OF INCOME ON 15.09.2010 DECLARING TOTAL INCO ME AT RS.7.98 CRORES, INITIALLY THE RETURN WAS PROCESSED U/S.143(1) OF THE ACT.LATER ON IT WAS TAK EN UP FOR SCRUTINY AND ACCORDINGLY NOTICE U/S. 143(2) OF THE ACT WAS ISSUED. FURTHER NOTICES U/S.1 42(1) WAS ALSO ISSUED TO THE ASSESSEE ALONG WITH THE QUESTIONNAIRE.DURING THE COURSE OF ASSESSMENT P ROCEEDINGS,THE ASSESSING OFFICER(AO) DIRECT - ED THE ASSESSEE TO FURNISH DETAILS OF SHARE APPLICA TION MONEY RECEIVED DURING THE YEAR, REHABILITATI -ON AND RESETTLEMENT EXPENSES,PARTIWISE DETAILS OF SUNDRY CREDITORS AND UNSECURED LOANS. VIDE ITS LETTER,DATED 13.03.2013,THE ASSESSEE SUBMITTED THAT IT HAD PREPARED P&L A/C FOR THE YEAR UNDER CONSIDERATION,THAT IT WAS PROCESS OF IMPLEMENTATION OF PROJECT OF MAHESHWAR HYDEL POWER PROJECT (MHPP).DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE FILED A REVISED RETURN OF INCOME.REFERRING TO THE PROVISIONS OF SECTION 139(5 ) OF THE ACT,THE AO HELD THAT ASSESSEE COULD HAVE FILED ITS REVISED RETURN BY 31.03.2012,THAT AN Y RETURN FILED AFTER THAT DAY COULD NOT BE TERMED AS FILING OF REVISED RETURN,THAT THE ALLEGED REVISE D RETURN WAS FILED AS PER THE ACKNOWLEDGEMENT OF RETURN DATED 18.01.2013.THE AO REJECTED THE REVISED RETURN AND DID NOT CONSIDER IT FOR PURPOSE OF ASSESSMENT. RELYING UPON THE CASES OF DEEPNARAIN NAGU & CO.(157 ITR 37-MP), CHITRANJALI (159 ITR 801 - CAL.)AND SUNANDA RAM DEKA (210 ITR 988-GAUHATI),THE AO HELD THAT IN THE ASSESSEE'S CASE THE FACT THAT THE COMPANY HAD ALSO PAID SA TAX PROVED B EYOND DOUBT THAT THE COMPANY WAS FOLLOWING A MANNER OF OFFERING THE INCOME FOR TAX,THAT THERE WAS NO MISTAKE OR WRONG STATEMENT WHILE FILING THE RETURN OF INCOME,THAT SUCH CHANGE OF METHOD WAS NOT PERMISSIBLE AND CURABLE EVEN BY FILING REVISED RETURN OF INCOME, THAT IT HAD MADE VARIOUS TERM DEPOSITS AND FIXED DEPOSITS WITH THE BANK AND HAD EARNED INTEREST INCOME FROM ALL SUCH DEPOSI TS,THAT THE ASSESSEE COMPANY WAS INTO SETTING 2 ITA NO.7768/M/2014 M/S SHREE MAHESHWAR HYDEL POWER CORPORATION LTD. UP OF THE HYDRO POWER PROJECT,THAT THE SAME WAS BEI NG CARRIED OUT AS AN INFRASTRUCTURE PROJECT UNDER CONSTRUCTION, THAT THE ASSESSEE IN FILING TH E TAX RETURN HAD ADOPTED THE METHOD OF OFFERING ALL THE CURRENT INTEREST INCOME AS INCOME TAXABLE U NDER OTHER SOURCES,THAT THE METHOD ADOPTED BY THE ASSESSEE COMPANY WAS ONE OF THE MANNER IN WHICH TAXABLE INCOME WAS OFFERED FOR TAXATION, THAT DURING THE COURSE OF ASSESSMENT THE ASSESSEE C OMPANY HAD OFFERED TO CHANGE THE METHOD OF OFFERING TAXABLE INCOME BY CLAIMING TO WITHDRAW THE CORRECT INCOME FILED IN ITS TAX RETURN AND REDUCING THE SAME FROM THE CAPITAL WIP, THAT THE CH ANGE IN THE METHOD OF OFFERING TAXABLE INCOME COULD NOT BE CLAIMED IN THE COURSE OF ASSESSMENT AN D AS PER LAW THE SAME WAS NOT PERMITTED EVEN BY FILING OF REVISED RETURN U/S. 139(5) OF THE ACT. FINALLY, THE AO REJECTED THE REVISED STATEMENT OF COMPUTATION OF TOTAL INCOME AND ACCEPTED THE INCOME AS FILED IN THE ORIGINAL RETURN I.E. AT RS. 7,98, 08,216/-. 3. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA).BEFORE HIM,IT WAS CONTENDED THAT D UE TO CONFLICTING DECISIONS OF SUPREME COURT,THE ASSESSEE WAS NOT CONVERSANT WITH THE COMP LICATED PROVISIONS OF THE ACTON TAXABILITY OF INTEREST ON TEMPORARY FD KEPT OF BORR OWED FUNDS RAISED SPECIFICALLY FOR SETTING UP A PROJECT,THAT IT RELIED ON ADVICE OF ITS CONSUL TANTS,THAT AS PER THEIR ADVICE IN THE RETURN OF INCOME INTEREST WAS SHOWN AS INCOME FROM OTHER SOUR CES,THAT WHEN THE CORRECT POSITION WAS UNDERSTOOD AS A MATTER OF ABUNDANT CAUTION ASSESSEE FILED REVISED RETURN AND ALSO FURNISHED REVISED COMPUTATION OF INCOME DURING ASSESSMENT PR OCEEDINGS,THAT THE AO OUGHT NOT HAVE REJECTED THE REVISED COMPUTATION OF INCOME, THAT TH ERE WAS NO CONCEPT OF CHANGE OF METHOD OF OFFERING AS TAXABLE INCOME IN THE ACT, THAT THE ACT REQUIRED TAX ON REAL INCOME INDEPENDENT OF THE MANNER IN WHICH ASSESSEE OFFERED IT TO TAXATION,THAT ONLY TWO METHOD OF ACCOUNTING FOR DETERMINATION OF CORRECT INCOME WERE CASH AND MERCANTILE WITH PROHIBITIONS IN CHANGE OF METHOD OPTED,THAT THERE HAD BEEN NO CH ANGE OF ACCOUNTING,THAT THE ASSESSEE WAS CONSISTENTLY FOLLOWING MERCANTILE METHOD,THAT C ORRECTION OF INCORRECT TREATMENT OF RECEIPT WAS NOT SYNONYMOUS TO CHANGE IN METHOD OF A CCOUNTING,THAT IT HAS FOLLOWED CORRECT METHOD OF ACCOUNTING BY ADJUSTING THE CAPITAL RECEI PT AGAINST THE CWP AND REDUCING THE PROJECT COST AND CHARGE DEPRECIATION ON THE CORRECT LOWER CWIP,THAT THE ASSESSEE HAD FULL RIGHT TO RECTIFY THE MISTAKE BY RESORTING TO THE AV ENUES PROVIDED FOR IT BY THE ACT,THAT FILING REVISED COMPUTATION OF INCOME WAS ONE SUCH AVENUE,T HAT THERE WAS NO PRINCIPLE OF ESTOPPELS AGAINST WRONG APPLICATION OF LAW PARTICUL ARLY WHEN THERE WERE MITIGATING CIRCUMSTANCES FOR IT,THAT THREE DECISIONS RELIED UP ON BY THE AO WERE ALSO NOT RELEVANT,THAT THEY ALL DEALT WITH REVISED RETURN OF INCOME, THAT THE AO HAD EXPRESSLY REJECTED THE REVISED RETURN AND HAD CATEGORICALLY REFUSED TO TAKE COGNIS ANCE OF THE REVISED RETURN,THAT DECISIONS ON REVISED RETURN HAD NO RELEVANCE, THAT THERE WAS NO CONCEPT OF CHANGE OF METHOD OF OFFERING AS TAXABLE INCOME IN THE ACT, THAT THE ACT REQUIRED TAX ON REAL INCOME INDEPENDENT OF THE MANNER IN WHICH ASSESSEE OFFERED IT TO TAXAT ION,THAT ONLY TWO METHOD OF ACCOUNTING FOR DETERMINATION OF CORRECT INCOME WERE CASH AND M ERCANTILE WITH PROHIBITIONS IN CHANGE OF METHOD OPTED,THAT THERE HAD BEEN NO CHANGE OF AC COUNTING,THAT THE ASSESSEE WAS CONSISTENTLY FOLLOWING MERCANTILE METHOD,THAT CORRE CTION OF INCORRECT TREATMENT OF RECEIPT WAS NOT SYNONYMOUS TO CHANGE IN METHOD OF ACCOUNTIN G,THAT IT HAS FOLLOWED CORRECT METHOD OF ACCOUNTING BY ADJUSTING THE CAPITAL RECEIPT AGAI NST THE CWP AND REDUCING THE PROJECT COST AND CHARGE DEPRECIATION ON THE CORRECT LOWER C WIP,THAT THE ASSESSEE HAD FULL RIGHT TO RECTIFY THE MISTAKE BY RESORTING TO THE AVENUES PRO VIDED FOR IT BY THE ACT,THAT FILING REVISED COMPUTATION OF INCOME WAS ONE SUCH AVENUE,THAT THER E WAS NO PRINCIPLE OF ESTOPPELS AGAINST WRONG APPLICATION OF LAW PARTICULARLY WHEN THERE WERE MITIGATING CIRCUMSTANCES FOR IT,THAT THREE DECISIONS RELIED UPON BY THE AO WERE ALSO NOT RELEVANT,THAT THEY ALL DEALT WITH REVISED RETURN OF INCOME, THAT THE AO HAD EXPRESSLY REJECTED THE REVISED RETURN AND HAD CATEGORICALLY REFUSED TO TAKE COGNISANCE OF THE REV ISED RETURN,THAT DECISIONS ON REVISED 3 ITA NO.7768/M/2014 M/S SHREE MAHESHWAR HYDEL POWER CORPORATION LTD. RETURN HAD NO RELEVANCE,THAT THE AO HAD NOT BROUGHT OUT ANY COGENT REASON FOR REJECTING THE CONTENTION THAT INTEREST EARNED ON FD OF AMOUNTS RA ISED FOR SETTING UP CAPITAL PROJECT WAS TO BE DEDUCTED FROM CWIP AND NOT TO BE SUBJECTED TO TA X,THAT THE AO MADE INCORRECT STATEMENT THAT ASSESSEE OPTED TO CLAIM HIGHER DEPRE CIATION OF CAPITALISATION AND CHANGE IN METHOD OF ACCOUNTING,THAT THE FINANCIAL STATEMENTS SHOWED THAT THE IT HAD DEDUCTED INTEREST ON FD FROM CAPITAL WIP AND HENCE THE AO'S STATEMENT THAT THE ASSESSEE DECIDED TO CLAIM HIGHER DEPRECIATION ON PLANT AND MACHINERY AFTER TH E SAME WAS COMMISSIONED AND PUT TO USE, WAS INCORRECT AND HENCE SAME COULD NOT JUSTIFY DENIAL OF THEIR CLAIM IN REVISED COMPUTATION OF INCOME, THAT FOR SUBSEQUENT AY. IT W AS GIVEN NO DEDUCTIONS CERTIFICATE U/S.197 OF THE ACT,THAT ISSUE OF NO TDS CERTIFICATE FOR THE AY .S.2013-14 & 2014-15 SUPPORTED THE VIEW THAT THERE WAS NO INCOME ON WHICH TDS WAS TO DEDUCTED. 4. AFTER CONSIDERING THE ASSESSMENT ORDER AND THE SUBM ISSIONS OF THE ASSESSEE,THE FAA HELD THAT THE ASSESSEE WAS IN PROCESS OF SETTING UP OF P OWER PROJECT SINCE 1993 FOR SALE AND SUPPLY OF ENERGY TO MPEEB AS PER THE TERMS AND COND ITION CONTAINED IN THE POWER PURCHASE AGREEMENT (PPA) DATED 11.11.1994,THAT TILL 2004 THE ASSESSEE WAS NOT IN POSITION TO SET THE PROJECT DUE TO SHORTAGE OF FUNDS,THAT IT ENTERED IN TO AN AGREEMENT DTD.23.02.2004 BY WHICH GOVERNMENT OF MP AGREED TO EXECUTE THE GUA RANTEE DEED IN FAVOUR OF POWER FINANCE CORPORATION(PFC)AS A DEFAULT COUNTER GUARAN TEE IN CONSIDERATION OF PFC AGREEING TO EXECUTE A GUARANTEE IN FAVOUR OF THE INVESTORS W HO SUBSCRIBED TO THE CONVERTIBLE BONDS FOR AN AGREEMENT OF RS. 400 CRORES TO BE ISSUED BY THE ASSESSEE,THAT IT WAS AGREED THAT THE AMOUNT,REQUIRED TO SERVICE THE INTEREST ON BONDS TI LL COMMERCIAL OPERATION STARTED,WOULD BE HELD BY NATIONALISED BANKS IN TRUST AND WOULD BE UT ILISED SOLELY FOR PAYMENT OF SUCH INTEREST ON THE BONDS TO THE INVESTORS,THAT LATER ON THE AGREEMENT OF 2004 WAS CANCELLED, THAT AS PER THE NEW AGREEMENT OF 2005 THE ASSESSEE WAS TO ISSUE 15 YEARS BOND WITH AN OPTION TO CONVERT THE BONDS INTO EQUITY SHARES,THAT THE ASSESSEE RAISED RS.400 CRORES ISSUE OF (OPTIONAL FULLY CONVERTIBLE DEBENTURES)OFCD AND SAME WAS DEPOSITED IN THE TRUST ACCOUNT WITH NATIONALISED BANK,THAT INVESTMENT IN FDS WAS O F THE FUNDS RAISED FOR THE PROJECT AS REQUIRED BY TERMS OF GUARANTEE GIVEN BY PFC AS EVIDENCED BY THE SN.12 OF NOTES TO ACCOUNTS, THAT THE INTEREST WAS NOT EARNED ON FD OF ANY SURPLUS FUNDS GENERATED IN DAY TO DAY BUSINESS ACTIVITY BUT ON THE FUNDS SPECIFICALLY RAISED FOR IMPLEMENTATION OF PROJECT.THE FAA HAD DISCUSSED ALL THE AGREEMENTS ENTERED IN TO BY THE ASSESSEE INCLUDING THE AGREEMENT OF 2005. HE ANALYSED THE CLAUSE D AND E OF THE SAID AGREEMENT IN DETAILS HE FOUND T HAT THE ASSESSEE HAS RAISED AMOUNT OF RS.400 CRORES BY ISSUE OF OFCD WHICH WERE DEPOSITED IN THE TRUST ACCOUNT WITH NATIONALIZED BANK. 4.1. IN ORDER TO SEE IF INTEREST DUE TO OFCD HAD BEEN SE RVED,THE FAA SCRUTINISED THE AUDITED ANNUAL ACCOUNTS,A COPY OF WHICH HAD BEEN FILED BY T HE ASSESSEE.HE FOUND THAT AS ON 31/03/2010, THE SECURED LOAN FUND STOOD AT RS.17,00,85,17,958 W HEREAS UNSECURED LOAN STOOD AT RS 400 CRORES, THAT AGAINST THAT APPLICATION OF FUND SHOWE D,PRE OPERATIVE EXPENDITURE DURING CONSTRUCTION PERIOD (PENDING ALLOCATION) AT RS.12,24,34,92,917/- AS ON 31/03/2010,AGAINST RS.10,02,45,14, 040/- AS ON 31/03/2009.ON ANALYSIS OF THE ACCOUNTS IT WAS FOUND THAT PRE-OPERATIVE EXPENDITURE CONS - TRUCTION PERIOD (PENDING ALLOCATION) INCLUDED EXPEN SES ON ACCOUNT OF LOAN, INSURANCE, POWER AND FUEL, REPAIR AND MAINTENANCE PAYMENT AND PROVISION FOR EMPLOYEES, VEHICLE EXPENSES, TRAVEL AND CONVEYANCE, LEASE RENT, TELEPHONE AND POSTAGE, ADVE RTISEMENT, PRINTING AND STATIONERY AND AUDIT FEE,DIRECTORS SITTING FEE,REHABILITATION AND RE-SET TLEMENT, LEGAL AND PROFESSIONAL, LOSS ON SALE OF ASSETS, SECURITY EXPENSES MISC. DEPRECIATION, INTER EST ON TERM LOAN, OFCD HOLDERS AND OTHERS, FINANCIAL EXPENSES FBT AND LOSS FROM FOREIGN EXCHAN GE FLUCTUATIONS.IT WAS ALSO FOUND THAT THERE WAS VERY NORMAL INCREASE IN FIXED ASSET WHICH WERE AT RS.14,93,09,765/ -AS ON 31/03/2009 AND HAD GONE UP TO RS.15,30,27 ,810/- AS ON 31/03/2010. ,THAT THE CAPITAL WIP WERE ON INCREASE FROM RS.8,47,60,97,044/- AS ON 31/03/2009 TO RS.12454162 053/- AS ON 31/03/2010,THAT CAPITAL 4 ITA NO.7768/M/2014 M/S SHREE MAHESHWAR HYDEL POWER CORPORATION LTD. ADVANCES WERE DECREASING,THAT THE AUDIT REPORT DID NOT MENTION ANYTHING UNDER THE HEAD MEANT FOR THE SAME.HE COULD NOT FIND THE BASIS AS TO HOW THE CAPITAL WORK IN PROGRESS WAS VALUED.THE FAA HELD THAT SO FAR THE ASSESSEE HAD EARNED ONLY INTER EST ON FIXED DEPOSITS AND WHICH HAD BEEN CONSISTENTLY OFFERED AS INCOME FROM OTHER SOURCES A GAINST TDS MADE BY THE BANK. IN VIEW OF THIS ASSESSEE WAS ASKED THE STATUS OF THE PROJECT WHEN C OPIES OF ALL THE AGREEMENTS ENTERED BY THE IT WERE PROVIDED.HE GATHERED FROM THESE DOCUMENTS THAT THE PROJECT HAD NOT YET COME IN THE OFFING AND FURTHER THERE WAS ISSUE OF VIABILITY OF THE PRO JECT FOR THE REASON THAT THE TARIFF ON ANTICIPATED COMMENCEMENT WAS STILL IN DISTANT FUTURE, HAD ALREA DY BECOME COSTLIER THAN THE TARIFF OF MP STATE ELECTRICITY BOARD.REFERRING TO THE AUDIT REPORT,HE OBSERVED THAT THAT IN THE YEAR 2007 COMPANY HAD RAISED OPTIONALLY FULLY CONVERTIBLE DEBENTURES AMOU NT RS.2170050 LAKHS @9.75% P.A. AND RS.18250 LAKHS @ 10.75% P.A. ,THAT THE DEBENTURES W ERE REDEEMABLE AT PAR IN 22 EQUALLY HALF YEARLY INSTALLMENT COMMENCING FROM 4 YEARS AND 6 MO NTHS FROM DEEM DATE OF ALLOTMENT,THAT THE DEBENTURES WERE SECURED BY AN UNCONDITIONAL AND IRR EVOCABLE GUARANTEE OF PFC,THAT PENDING FINALISATION OF THE DATE OF THE COMMISSIONING OF TH E PROJECT (DECEMBER 2010) INTEREST DUE TO DEBENTURE HOLDERS FOR 4 YEARS FROM DATE OF ISSUE HA D BEEN KEPT WITH FIXED DEPOSITS WITH VARIOUS BANKS AS PER TERMS OF ISSUE,THAT THE ASSESSEE-COMPA NY WOULD EARN REVENUE ONLY AFTER COMMISSIONING OF THE PROJECT,THAT THE AMOUNT REQUIR ED TO BE TRANSFERRED TO DEBENTURES REDEMPTION RESERVE,AS PER SECTION 117C OF THE COMPANIES,WOULD BE MADE OUT OF THE PROFIT THEREAFTER,THAT THE PROJECT HAD NOT COMMENCED TILL PASSING OF THE APPEL LATE ORDER. 4.2. DEALING WITH THE ISSUE OF OFCD,THE FAA STATED THAT THE MONEY WAS NOT RAISED FOR ANY CONSTRUCTION OF PROJECT OR PURCHASE OF PLANT AND MA CHINERY OR FOR OBTAINING ANY LICENSE OR LETTER OF CREDIT ETC. BUT WAS ONLY DONE WITH A SPECIFIC AND L IMITED PURPOSE TO REDUCE RESULTANT TARIFF OF THE PROJECT WHICH WAS SUBSTANTIAL ON ACCOUNT OF ACTUAL ACCUMULATED INTEREST ON THE PART LOAN RAISED,THAT THE PROJECT WAS NOT VIABLE AND HENCE FI NANCIAL STRUCTURE HAD TO BE REVISED IN ORDER TO ACHIEVE FINANCIAL CLOSER,THAT THE AMOUNT WAS COLLEC TED THROUGH OFCD HAD BEEN KEPT IN BANK SINCE THEN AND HAD NOT BEEN UTILISED FOR ANY OTHER PURPOS E,THAT LOOKING INTO THE FACTS THAT CONSTRUCTION OF THE PROJECT WAS NOT COMPLETED IT COULD NOT BE SAID TO BE A PROJECT UNDER CONSTRUCTION,THAT RATHER IT WAS A PROJECT AT THE VERGE OF BEING ABUNDANT WITH. 4.3. FAA ALSO DISCUSSED THE DECISIONS CITED BY THE ASSES SEE.HE HELD THAT THAT IN THE CASE OF RAJPUTANA TRADING CO.PVT. LTD.(72 ITR 286)IT WAS HE LD THAT WHEN THERE WAS FAIRLY DIRECT AND PROXIMATE RELATIONSHIP, IT WOULD BE ILLOGICAL AND I RRATIONAL TO TREAT PROFIT AS HAVING THE SO CALLED NEUTRAL SOURCE AND NOT SPRINGING OUT OF SAID BUSINE SS,THAT IN THE CASE OF BOKARO STILL LTD.(236 ITR 315)A GOVERNMENT COMPANY,DURING THE PERIOD OF CONST RUCTION PLAN,HAD ADVANCED MONEYS TO CONTRACTORS ON WHICH IT WAS EARNING INTEREST AND RE CEIVED CHARGES FROM QUARTER LET OUT TO EMPLOY - YEES, THAT IN THOSE CIRCUMSTANCES IT WAS HELD THAT THE DEMAND RAISED FOR SUCH UTILISATION WERE DIRECTLY LINKED WITH THE SET UP OF PLANT OF THE ASS ESSEE AS IT WAS NOT A CASE THAT INTEREST WAS EARNED BY INVESTING BORROWING CAPITAL AND SHORT TERM DEPOS IT.REFERRING TO THE CASE OF KARNAL CO- OPERATIVE SUGAR MILL LTD.(242ITR2)HE OBSERVED THAT THE FACTS WERE THAT ASSESSEE DEPOSITED MONEY TO OPEN A LETTER OF CREDIT FOR PURCHASE OF MACHINER Y REQUIRED FOR SETTING UP ITS PLANT IN TERMS OF ASSESSEE'S AGREEMENT WITH THE SUPPLIER AND ON THE M ONEY SO DEPOSITED INTEREST WAS EARNED IN THAT CASE,THAT CONSIDERING THOSE FACTS THE HON'BLE SUPR EME COURT HAD HELD THAT INCOME EARNED WAS INCIDENTAL TO ACQUISITION OF ASSET FOR THE SETTING UP OF ALL THE PLANT AND MACHINERY AND HENCE THE RATIO LAID DOWN BY THIS COURT IN TUTICORIN ALKALI C HEMICALS & FERTILIZERS LTD.(227ITR172) WOULD NOT BE ATTRACTED.ABOUT THE MATTER OF BONGAIGAON REF INERY & PETROCHEMICALS LTD.(251 ITR 351),HE HELD THAT ITEMS OF INCOME DERIVED BY THE ASSESSEE D URING THE FORMATION PERIOD FOR THE MAIN BUSINESS WERE NOT TAXABLE BUT WERE TO BE ADJUSTED A GAINST THE PROJECT COST FOR THE ASSESSEE I.E. OIL REFINERY AND PETRO CHEMICALS, MAIN BUSINESS FOR WH ICH COMPANY WAS SET UP.SIMILARLY,THE FAA REFERRED TO THE FACTS OF OTHER THREE CASES RELIED U PON BY ASSESSEE NAMELY KOSHIKA TELECOM LTD. 5 ITA NO.7768/M/2014 M/S SHREE MAHESHWAR HYDEL POWER CORPORATION LTD. (287ITR479),INTERNATIONAL MARKETING LTD.(292ITR504) , INDIAN OIL PANIPAT POWER CONSORTIUM LTD.(315 ITR 255) AND HELD THAT FACTS OF THOSE CASE S WERE DISTINGUISHABLE.IN SHORT,THE FAA HELD THAT THE RATIO OF ALL THE ABOVE REFERRED CASES WAS THAT THAT INTEREST OR ANY RECEIPT FROM A SOURCE INEXTRICABLY CONNECTED WITH THE CAPITAL PROJECT WAS TO BE DEDUCTED FROM THE COST OF THE PROJECT AND NOT TO BE TAXED AS INCOME FROM OTHER SOURCES AND TH US SAME WERE NOT APPLICABLE TO THE FACTS OF THE CASE UNDER APPEAL.HE MADE A REFERENCE TO THE CASE OF PRODUCTION PVT. LTD.(191 TAXMAN 79)DELIVERED BY THE HON'BLE APEX COURT.IN THAT MATT ER HONBLE COURT HAD DEALT WITH THE ISSUE OF INTEREST INCOME RECEIVED BY ASSESSEES ON SHORT TERM FIXED DEPOSITS.IN THAT MATTER THERE WAS NO DISPUTE THAT THE AMOUNT RECEIVED BY THE ASSESSEE WA S FROM THE AMOUNT IT HAD INVESTED IN FDR BUT THERE WAS NO ACTUAL DATA WHETHER IT WAS PART OF SUR PLUS AT THE HANDS OF THE ASSESSEE COMPANY.HON'BLE COURT SET ASIDE THE MATTER FOR FRES H CONSIDERATION TO DECIDED WHETHER THE RECEIPT FELL U/S.28 OR U/S.56. 4.4. THE FAA FURTHER HELD THAT THE ASSESSEE-COMPANY WAS CLAIMING TO CONSTRUCT THE PROJECT SINCE 1993,THAT IT HAD BEEN NOT ABLE TO ESTABLISH THE PR OJECT EVEN IN 2014-15-LEAVE ASIDE IMPLEMENTATION OF THE SAME IN THE RELEVANT PERIOD TO AY.2010-11,TH AT THE PLEA TAKEN BY THE ASSESSEE THAT THE INTEREST WAS EARNED ON FIXED DEPOSIT WAS INEXTRICAB LY LINKED TO THE CONSTRUCTION WAS TOTALLY UNSUPPORTED, AND IMAGINARY,THAT THE ASSESSEE HAD FA ILED TO EVEN GIVEN DETAILS OF WORK IN PROGRESS NOT ONLY FOR FY.2009-10 BUT EVEN FOR EARLIER AYS.,T HAT IT WAS A MATTER OF PUBLIC KNOWLEDGE AND AGAIN THE DETAILS AVAILABLE ON THE WEBSITE THAT PRO JECT WAS IN THE STAGE OF BEING SHELVED WITH,THAT AS PER NEWS REPORTS A NOTICE HAD BEEN ISSUED BY AUT HORITIES WHICH WAS AVAILABLE ON WEBSITE,THAT AS PER THE NOTE GOVERNMENT AND THE ASSESSEE HAD SIGNED AN 'AMENDATORY AND RESTATED AGREEMENT A&RA)' ON 16.09. 2005,THAT ACCORDING TO THE RA THE COMMERCIAL OPERATION DATE (COD) OF THE PROJECT SHOULD HAVE BEEN FOUR YEARS FROM 09.03.2006 ,THAT FOUR-YEAR WINDOW EXPIRED ON 08. 03. 2010. 4.5. CONSIDERING THOSE FACTS,HE HELD THAT THE PROJECT IT SELF HAD NOT BEEN SET UP,THAT THE PLEA OF THE ASSESSEE WHILE DRAWING ANALOGY FROM THE DECISION GI VEN IN THE CASE OF BOKARO STEEL LTD., INDIAN OIL PANIPAT POWER CONSORTIUM LTD.WAS NOT JUSTIFIABL E,THAT THE PROJECT HAD UNDOUBTEDLY BECOME UNVIABLE, THAT THE ASSESSEE HAD GONE INTO RED AND T HUS HAD NOT BEEN ABLE TO COMMENCE ANY OPERATION IN LAST 21 YEARS,THAT THE DECISION CITED BY IT COULD NOT BE STRETCHED BY WRONGLY TREATING 'NON-COMMENCEMENT' WITH 'PRE-COMMENCEMENT',THAT THE PROJECT HAD NOT SEEN LIGHT OF THE DAY,THAT THE VERY PURPOSE OF ENTERING INTO THE AGREEMENT FOR THE SAID PROJECT HAD ALREADY BEEN DEFEATED,THAT THE COST OF ELECTRICITY EXPECTED TO B E GENERATED IN THE REMOTE FUTURE HAD MADE THE RATE PER UNIT OF ELECTRICITY MUCH HIGHER THAN THE P RESENT RATE OF ELECTRICITY PER UNIT BEING PRODUCED BY MPSEB, THAT THE PROJECT COULD NOT BE SAID AS BEI NG IN PRE-COMMENCEMENT PERIOD,THAT OFCD WERE ISSUED FOR RESTRUCTURING THE CAPITAL AND SAME WAS NOT LINKED WITH THE PROJECT,THAT DECISIONS CITED BY ASSESSEE WERE OF NO HELP FOR THE SIMPLE RE ASON THAT IN THOSE CASES THERE WAS ACTUAL PROJECT UNDER CONSTRUCTION AND THE ISSUE WAS WHETHE R DURING THE PERIOD OF CONSTRUCTION OF PROJECT AND THUS PRIOR TO COMMENCEMENT OF THE PROJECT THE I NTEREST SO EARNED,THAT TOO ON THE FUND INEXTRICABLY LINKED WITH THE BUSINESS,SHOULD BE TAX ED AS INCOME FROM OTHER SOURCES OR BUSINESS INCOME IN ORDER TO REDUCE THE COST OF PROJECT.HE HE LD THAT IN THE CASE UNDER APPEAL FOR SUBSTANTIATE LONG PERIOD OF 20 YEARS FROM THE DATE OF AGREEMENT ENTERED INTO THE ASSESSEE WAS NOT ABLE TO SET UP THE PROJECT,THAT WORK IN PROGRESS FIGURES WERE T OTALLY UNSUPPORTED, THAT THERE WERE NO NOTE OR DETAILS IN AUDITOR'S REPORT GIVEN IN THE ACCOUNT IN THAT REGARD,THAT SIMPLY BECAUSE ASSESSEE HAD RELIED UPON THE DECISIONS WHEN THE FACTS WERE ENTIR ELY DIFFERENT AND THUS NOT APPLICABLE THE RATIO OF THE DECISIONS COULD NOT BE STRETCHED TO THE CASE OF THE ASSESSEE,THAT THE MONEY WAS KEPT IN FIXED DEPOSITS,THAT EARNING INTEREST COULD ONLY BE TREATED SURPLUS AND THUS INCOME FROM OTHER SOURCES,THAT THE ASSESSEE ITSELF HAD OFFERED INTERE ST INCOME EARNED ON THE FIXED DEPOSITS MADE OUT OF MONEY COLLECTED FROM OFCD UNDER THE HEAD INCOME FROM OTHER SOURCES,THAT EVEN UP TO AY.S. 6 ITA NO.7768/M/2014 M/S SHREE MAHESHWAR HYDEL POWER CORPORATION LTD. 2012-13 INTEREST INCOME WAS RIGHTLY BEING OFFERED B Y THE ASSESSEE, UNDER SECTION 56 OF THE ACT. HE MADE A REFERENCE TO THE CASE OF BHARAT REFINERIE S LTD.,BINA,WHERE INTEREST EARNED ON CONVERTIBLE BOND WAS TAXED AS INCOME FROM OTHER SOU RCES. 5 .BEFORE US,AUTHORISED REPRESENTATIVE(AR)CONTENDED T HAT INVESTMENT WAS MADE BY THE ASSESSEE IN PURSUANCE OF THE AGREEMENT ENTERED INTO WITH VAR IOUS AGENCY,THAT IN LATER YEARS ITO TDS HAD ISSUED CERTIFICATE AND HAD HELD THAT NO TDS WAS TO BE MADE,THAT THERE WAS NO CHANGE IN ACCOUNTING POLICY.HE RELIED UPON THE CASES THAT WER E REFERRED TO BEFORE THE FAA.DEPARTMENTAL REPRESENTATIVE (DR)SUPPORTED THE ORDER OF THE FAA A ND RELIED UPON THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD(227ITR172). 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE DISPUTE BETWEEN THE DEPARTMENT AND THE ASSESSEE IS THAT WHETHER THE INTEREST INCOME ORIGINALLY OFFERED AS INCOME FROM OTHER SOURCES SHO ULD BE ALLOWED TO SET OFF AGAINST THE INTEREST EXPENSES INCURRED FOR PROJECT IN ORDER TO REDUCE THE CWIP I.E. PROJECT COST.IN OTHER WORDS THE INTEREST INCOME RECEIVED BY IT SHOULD BE TAXED UNDER SECTION 56 OR AS INCOME FROM BUSINESS AND SHOULD BE ALLOWED TO SET OFF AGAI NST THE INTEREST EXPENSE. UNDISPUTED FACTS OF THE CASE ARE THAT THE ASSESSEE WAS IN THE PROCESS OF SETTING UP OF POWER PROJECT FOR THE SALE AND SUPPLY OF ENERGY TO MPSEB SINCE 1993,THAT TILL THE YEAR 2004-WHEN THE AGREEMENT FOR THE PROJECT WAS ENTERED IN TO-THE ASSESSEE HAD NOT BEEN ABLE TO SET UP THE PROJECT DUE SHORTAGE OF FUNDS,THAT IT ENTERED INTO AGREEMENT DTD 23.03.2004 BY WHICH GOVT. OF MP AGREED TO EXECUTE THE GUARANTEE DEED IN FAVOUR OF PFC AS A DEFAULT COUNTE R GUARANTEE IN CONSIDERATION OF PFC AGREEING TO EXECUTE A GUARANTEE IN FAVOUR OF INVESTORS WHO H AD SUBSCRIBED TO THE CONVERTIBLE BONDS FOR AN AGREEMENT AMOUNT OF RS. 400 CRORES TO BE ISSUED BY THE ASSESSEE, THAT IT WAS ALSO AGREED THAT THE AMOUNT REQUIRED TO SERVICE THE INTEREST ON BOND TIL L COMMERCIAL OPERATION DATE-WHICH WAS 4 YEARS FROM EFFECTIVE DATE OF GOMP-GUARANTEE SHALL BE HELD BY NATIONALISED BANK IN TRUST AND UTILIZED SOLELY FOR PAYMENT OF SUCH INTEREST ON THE BONDS TO THE INVESTORS. THEN AGAIN ANOTHER 'AMENDATORY AND RESTATED' AGREEMENT DATED 16/09/200 5 WAS ENTERED BY THE ASSESSEE WITH S KUMARS LTD (SKL), MPSEB, GOMP AND PFCL FOR OBTAININ G DEFAULT PAYMENT GUARANTEE ISSUED BY PFC IN FAVOUR OF TRUSTEE AS SECURITY FOR RS.400 CRORES BOND ISSUE OF THE ASSESSEE. THE ASSESSEE HAD OFFERED THE INTEREST INCOME UNDER THE HEAD INCO ME FROM OTHER SOURCES,BUT LATER ON REQUESTED THAT SAME SHOULD BE TREATED AS BUSINESS INCOME. 6.1. HERE,WE WOULD LIKE TO REFER TO SOME JUDGMENTS THAT ACCORDING TO US,ARE RELEVANT TO DECIDE THE ISSUE.IN THE CASE OF MANGLAM CEMENT LTD.(217 ITR 36 9)THE HONBLE RAJATHAN COURT HAS HELD THAT INTEREST ON SHORT-TERM DEPOSITS OF SURPLUS MONEY BE FORE THE COMMENCEMENT OF BUSINESS IS AN INCOME FROM OTHER SOURCES AND NOT FROM BUSINESS.FAC TS OF THE CASE ARE AS UNDER: THE ASSESSEE WAS A LIMITED COMPANY INCORPORATED IN OCTOBER, 1976. LOANS WERE OBTAINED BY IT FOR PURCHASE OF CAPITAL EQUIPMENT AND FOR SETTING UP TH E BUSINESS OF THE COMPANY, WHICH WAS MANUFACTURING CEMENT. THE COMPANY HAD PAID INTEREST ON ALL OF ITS BORROWINGS. BESIDES THE LOAN, THE COMPANY HAD ALSO RECEIVED APPLICATION MONEY FOR THE ISSUE OF SHARE CERTIFICATES AND THE APPLICATION MONEY SO RECEIVED WAS DEPOSITED WITH TH E BANK AS SHORT-TERM DEPOSIT BESIDES PART OF THE BORROWINGS. ON SUCH DEPOSIT, THE COMPANY EARNED INTEREST OF RS. 2,58,089. ON THE OTHER HAND, THE AMOUNT OF INTEREST PAID BY THE COMPANY ON ITS B ORROWINGS WAS RS. 14,32,072. THE INCOME-TAX OFFICER HELD THAT THE INTEREST INCOME EARNED BY THE ASSESSEE ON THE AMOUNTS DEPOSITED WITH THE BANK HAD NOTHING TO DO WITH THE CONSTRUCTION ACTIVI TIES AND AS SUCH IT WAS TAXABLE INCOME UNDER THE HEAD 'INCOME FROM OTHER SOURCES' UNDER SECTION 56 OF THE ACT. SINCE THE BORROWING BY THE COMPANY WAS FOR THE PURPOSE OF CONSTRUCTION AND HAD NO RELATION WITH THE EARNINGS OF INTEREST ON THE DEPOSIT, THE INCOME-TAX OFFICER WAS OF THE VIEW THAT THE INTEREST PAID COULD NOT BE DEDUCTED FROM THE INTEREST RECEIVED UNDER SECTION 57 OF THE ACT. HOWEVER, A SUM OF RS. 10,000 WAS ALLOWED WHICH WAS CONSIDERED AS RELATABLE TO THE EARNINGS O F THE INCOME OF INTEREST AS THERE WERE CERTAIN 7 ITA NO.7768/M/2014 M/S SHREE MAHESHWAR HYDEL POWER CORPORATION LTD. ADMINISTRATIVE EXPENSES INCURRED BY THE COMPANY. TH E TRIBUNAL, HOWEVER, HELD THAT THE INTEREST WAS NOT TAXABLE UNDER SECTION 56 AND THAT THE INTER EST RECEIVED ON SHORT-TERM DEPOSITS WITH BANKS WAS TO BE REDUCED FROM THE INTEREST PAYMENTS, WHILE CAPITALISING THE VARIOUS EXPENDITURES TO CAPITAL ACCOUNT. ON A REFERENCE,THE HONBLE COURT D ECIDED THE ISSUE AS UNDER: (I)THAT THE INTEREST OF RS. 2,58,089 RECEIVED ON SH ORT-TERM DEPOSITS WAS TAXABLE UNDER SECTION 56; (II)THAT THE INTEREST RECEIVED ON SHORT-TERM DEPOSI TS COULD NOT BE REDUCED FROM THE INTEREST PAYMENTS WHILE CAPITALISING THE VARIOUS EXPENDITURE S ON THE CAPITAL ACCOUNT.. THERE IS NO NEXUS BETWEEN THE RECEIPT OF INTEREST ON SHORT-TERM DEPOS ITS AND PAYMENT OF INTEREST ON LOANS BORROWED FOR CAPITAL EXPENDITURE. UNDER SECTION 57(III) OF T HE INCOME-TAX ACT, 1961, AN EXPENDITURE MUST BE LAID OUT OR EXPENDED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF EARNING 'INCOME FROM OTHER SOURCES' IN THE CASE OF BONGAIGAON REFINARY AND PETROCHEMICA LS LTD.(251 ITR 329)THE HONBLE SUPREME COURT HELD THAT INCOME FROM HOUSE PROPERTY AND GUES T HOUSE, HIRE CHARGES FOR EQUIPMENT AND RECOVERIES FROM CONTRACTORS ON ACCOUNT OF WATER AND ELECTRICITY SUPPLY, RECEIVED DURING THE PERIOD OF FORMATION OF THE ASSESSEE COMPANYS MAIN BUSINES S OF OIL REFINERY AND PETROCHEMICALS WHICH WAS BEING SET UP, WAS TAXABLE INCOME BUT SAME WAS T O BE ADJUSTED AGAINST THE PROJECT COST FOR THE BUSINESS OF OIL REFINERY AND PETRO-CHEMICALS.WITH R EGARD TO THE INTEREST INCOME THE HONBLE COURT UPHELD THE ORDER OF THE HONBLE GAUHATI HIGH COURT AS UNDER: THE HIGH COURT HAS ALREADY HELD THAT THE INTEREST INCOME DERIVED BY THE ASSESSEE DURING ITS FORMATIVE PERIOD WAS TAXABLE INCOME. THE HONBLE GAUHATI HIGH COURT HAD DISCUSSED THE IS SUE AS UNDER: THE QUESTION AS SET FORTH ABOVE HAS NOW BEEN REFER RED FOR THIS COURTS OPINION. DR. A. K. SARAF,LEARNED STANDING COUNSEL APPEARING FOR THE RE VENUE, CONTENDED WHETHER A PARTICULAR RECEIPT IS OF THE NATURE OF INCOME IS NOT A QUESTION RAISED BEFORE THIS COURT. IT WAS FURTHER CONTENDED THAT CHALLAPALLI SUGARS LTD.S CASE [1975] 98 ITR 167 (S C) HAS BEEN EXPLAINED AND DISTINGUISHED BY THE SUPREME COURT IN TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. V. CIT [1997] 227 ITR 172. THE SUPREME COURT IN THIS CASE HELD THAT TAXABILITY OR NON-TAXABILITY OF INCOME IS TO BE DECIDED ONLY IN ACCORDANCE WITH THE STATUTORY PROVISIONS AN D NOT ON THE BASIS OF EQUITY AND ACCOUNTANCY PRACTICE. IN THE CIRCUMSTANCES, THE CONCEPT OF EQUI TY IS INAPPLICABLE. THIS WAS A CASE WHERE INTEREST EARNED BY AN INCORPORATED COMPANY DURING I TS FORMATIVE PERIOD BY INVESTING PART OF ITS BORROWED FUNDS WAS HELD TAXABLE AS INCOME FROM OTHE R SOURCES AND NOT ADJUSTABLE FROM THE INTEREST PAID FROM THE FUNDS(EMPHASIS SUPPLIED). THE SUPREME COURT IN TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD.S CASE [1997] 227 IT R 172 IN CLEAR TERMS HELD (PAGE 183) : XXXXXXXXXXX MR. TALUKDAR, LEARNED COUNSEL APPEARING FOR THE ASS ESSEE, PLACING RELIANCE ON THE FOLLOWING JUDGMENTS : (1) CIT (ADDL.) V. INDIAN DRUGS AND PHARMACEUTICALS LTD. [1983] 141 ITR 134 (DELHI) ; (2) CIT V. BOKARO STEEL LTD. (NO. 1) [1988] 170 ITR 522 (PATNA) ; (3) CIT V. NAGARJUNA STEELS LTD. [1988] 171 ITR 663 (AP) ; (4) CIT V. ELECTROCHEM ORISSA LTD. [1995] 211 ITR 5 52 (ORISSA) ; AND (5) CIT V. MAHARASHTRA ELECTROSMELT LTD. [1995] 214 ITR 489 (BOM), CONTENDED THAT THE VIEW TAKEN BY THE TRIBUNAL IN TH E FACE OF THESE AUTHORITIES WAS A JUSTIFIABLE VIEW, AND SHOULD NOT, THEREFORE, BE UPSET OR INTERF ERED WITH. THE JUDGMENT IN TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD.S CASE [1997] 227 IT R 172 (SC) WAS NOT AVAILABLE TO THE TRIBUNAL OR THE APPELLATE AUTHORITIES AS INDEED, IT COULD NO T BE, AS IT WAS DECIDED ON JULY 8, 1997, AND CAN ONLY HAVE PROSPECTIVE EFFECT AND OPERATION. THIS NECESSARILY TAKES ME TO THE QUESTION OF THE JU RISPRUDENCE OF PRECEDENTS. WHEN THE COURT DECIDES AND PARTICULARLY THE APEX COURT, DECIDES TH AT THE INTERPRETATION OF A PARTICULAR PROVISION OF LAW AS GIVEN EARLIER WAS NOT LEGAL, IT IN EFFECT CL EARS THAT THE LAW AS IT STOOD FROM THE BEGINNING WAS AS PER ITS DECISION AND THAT IT WAS NEVER THE L AW OTHERWISE. THIS BEING THE CASE, SINCE THE SUPREME COURT HAS TAKEN A VIEW THAT THE INTERPRETAT ION PLACED ON THE PROVISIONS OF LAW OF THE HIGH COURT WAS ERRONEOUS, IT WILL HAVE TO BE HELD THAT T HE ACTION BASED ON THE ERRONEOUS VIEW OF LAW WAS ALSO EQUALLY ERRONEOUS. 8 ITA NO.7768/M/2014 M/S SHREE MAHESHWAR HYDEL POWER CORPORATION LTD. IN VIEW OF THE LEGAL POSITION AS EXPLAINED BY THE A PEX COURT, THERE IS NO FORCE IN THE SUBMISSIONS MADE BY LEARNED COUNSEL APPEARING FOR THE ASSESSEE. OUR ANSWER TO THE QUESTION AS REFERRED IS IN THE NEGATIVE, THAT IS TO SAY, IN FAVOUR OF THE REVE NUE AND AGAINST THE ASSESSEE. HON'BLE KERALA HIGH COURT IN GTN TEXTILES LIMITED.( 326 ITR 352)HAS HELD THAT WHERE AN ASSESSEE WAS NOT ENGAGED IN FINANCIAL BUSINESS,THE INTEREST ON SHORT DEPOSITS WAS TO BE HELD AS INCOME FROM OTHER SOURCES. IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTI LIZERS LTD.S CASE (SUPRA),THE HONBLE APEX COURT HAS HELD AS UNDER: INCOME-TAX IS ATTRACTED AT THE POINT WHEN THE INCOM E IS EARNED. TAXABILITY OF INCOME IS NOT DEPENDENT UPON ITS DESTINATION OR THE MANNER OF ITS UTILISATION. IT HAS TO BE SEEN WHETHER AT THE POINT OF ACCRUAL, THE AMOUNT IS OF A REVENUE NATURE . IF SO, THE AMOUNT WILL HAVE TO BE TAXED. THE QUESTION WHETHER A PARTICULAR RECEIPT IS OF THE NAT URE OF INCOME AND FALLS WITHIN THE CHARGE OF SECTION 4 OF THE INCOME-TAX ACT, 1961, IS A QUESTIO N OF LAW WHICH HAS TO BE DECIDED BY THE COURT ON THE BASIS OF THE PROVISIONS OF THE ACT AND THE INTE RPRETATION OF THE TERM 'INCOME' GIVEN IN A LARGE NUMBER OF DECISIONS OF THE HIGH COURTS, THE PRIVY C OUNCIL AND THE SUPREME COURT. INTEREST INCOME IS ALWAYS OF A REVENUE NATURE, UNLE SS IT IS RECEIVED BY WAY OF DAMAGES OR COMPENSATION. IF A PERSON BORROWS MONEY FOR BUSINES S PURPOSES BUT UTILISES THAT MONEY TO EARN INTEREST, HOWEVER TEMPORARILY, THE INTEREST SO GENE RATED 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 UT ILISED TO REPAY THE INTEREST ON THE LOAN TAKEN BY THE ASSESSEE, IT DID NOT CEASE TO BE HIS INCOME. WH EN THE QUESTION IS WHETHER A RECEIPT OF MONEY IS TAXABLE OR NOT OR WHETHER CERTAIN DEDUCTIONS FROM T HAT RECEIPT ARE PERMISSIBLE IN LAW OR NOT, THE QUESTION HAS TO BE DECIDED ACCORDING TO THE PRINCIP LES OF LAW, AND NOT IN ACCORDANCE WITH ACCOUNTANCY PRACTICE. ACCOUNTING PRACTICE CANNOT OVERRIDE SECTION 56 OR A NY OTHER PROVISION OF THE INCOME-TAX ACT(EMPHASIS SUPPLIED). UNDER THE INCOME-TAX ACT, 1961, THE TOTAL INCOME OF A COMPANY IS CHARGEABLE TO TAX UNDER SECTION 4. THE TOTAL INCOME HAS TO BE COMPUTED IN ACCORDANC E WITH THE PROVISIONS OF THE ACT. SECTION 14 LAYS DOWN THAT FOR THE PURPOSE OF COMPUTATION, INCO ME OF AN ASSESSEE HAS TO BE CLASSIFIED UNDER SIX HEADS. IT IS POSSIBLE FOR A COMPANY TO HAVE SIX DIF FERENT SOURCES OF INCOME, EACH ONE OF WHICH WILL BE CHARGEABLE TO INCOME-TAX. PROFITS AND GAINS OF B USINESS OR PROFESSION IS ONLY ONE OF THE HEADS UNDER WHICH A COMPANY'S INCOME IS LIABLE TO BE ASSE SSED TO TAX. IF A COMPANY HAS NOT COMMENCED BUSINESS, THERE CANNOT BE ANY QUESTION OF ASSESSMEN T OF ITS PROFITS AND GAINS OF BUSINESS. THAT DOES NOT MEAN THAT UNTIL AND UNLESS THE COMPANY COM MENCES ITS BUSINESS, ITS INCOME FROM ANY OTHER SOURCE WILL NOT BE TAXED. THE COMPANY MAY KEE P THE SURPLUS FUNDS IN SHORT-TERM DEPOSITS IN ORDER TO EARN INTEREST. SUCH INTERESTS WILL BE C HARGEABLE UNDER SECTION 56(EMPHASIS SUPPLIED). IN OTHER WORDS, IF THE CAPITAL OF A COMPANY IS FRUI TFULLY UTILISED, INSTEAD OF BEING KEPT IDLE, THE INCOME THUS GENERATED WILL BE OF A REVENUE NATURE A ND NOT AN ACCRETION TO CAPITAL. WHETHER THE COMPANY RAISED THE CAPITAL BY ISSUE OF SHARES OR DE BENTURES OR BY BORROWING, WILL NOT MAKE ANY DIFFERENCE TO THIS PRINCIPLE. IF BORROWED CAPITAL I S 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 PROPER TY WILL BE A CAPITAL RECEIPT. THE AMOUNT OF INTEREST RECEIVED BY THE COMPANY FLOWS FROM ITS INV ESTMENTS AND IS ITS INCOME AND IS CLEARLY TAXABLE EVEN THOUGH THE INTEREST AMOUNT IS EARNED BY UTILIS ING BORROWED CAPITAL. IT IS TRUE THAT THE COMPANY WILL HAVE TO PAY INTEREST ON THE MONEY BORROWED BY IT. BUT THAT CANNOT BE A GROUND FOR EXEMPTION OF INTEREST EARNED BY THE COMPANY BY UTILISING THE BORROWED FUNDS AS ITS INCOME. ANY SET-OFF OR DEDUCTION OF ANY EXPENDITURE CAN ONLY BE MADE IN AC CORDANCE WITH THE PROVISIONS OF THE ACT. HELD, THAT THE COMPANY HAD SURPLUS FUNDS IN ITS HAN DS. IN ORDER TO EARN INCOME OUT OF THE SURPLUS FUNDS, IT HAD INVESTED THE AMOUNT FOR THE PURPOSE O F EARNING INTEREST. THE INTEREST THUS EARNED WAS CLEARLY OF REVENUE NATURE AND WOULD HAVE TO BE TAXE D 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 ASS ESSEE WAS ENTIRELY AT LIBERTY TO DEAL WITH THE 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 SECTI ON 70 OR SECTION 71 SINCE ITS BUSINESS HAD NOT STARTED AND THERE COULD NOT BE ANY COMPUTATION OF BUSINESS INCOME OR 9 ITA NO.7768/M/2014 M/S SHREE MAHESHWAR HYDEL POWER CORPORATION LTD. LOSS INCURRED BY THE ASSESSEE IN THE RELEVANT ACCOU NTING 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 AGAI NST ANY OTHER INCOME UNDER ANY OTHER HEAD. SIMILARLY ANY INCOME FROM A NON-BUSINESS SOURCE COU LD NOT BE SET OFF AGAINST THE LIABILITY TO PAY INTEREST ON FUNDS BORROWED FOR THE PURPOSE OF PURCH ASE OF PLANT AND MACHINERY EVEN BEFORE COMMENCEMENT OF THE BUSINESS OF THE ASSESSEE(EMPHAS IS BY US). FROM THE ABOVE DECISIONS IT IS CLEAR THAT THE BARE FACT THAT THE ASSESSEE DEPOSITED MONEY IN THE BANK IS ITSELF NOT SUFFICIENT TO SHOW THAT THE DEPO SIT WAS MADE WITH A VIEW TO CARRYING OUT THE BUSINESS IN THE SENSE OF EARNING PROFIT BY INVESTME NT. CONSIDERING THE FACTS OF THE PRESENT CASE-THAT THER E WAS NEITHER SETTING UP NOR COMMENCEMENT OF BUSINESS DURING THE YEAR UNDER CONSIDERATION,THAT N ON COMMENCEMENT OF THE PROJECT IS CONTINUING SINCE 1993,THAT THE MONEY RAISED IN FORM OF OFCE WA S NOT RAISED FOR ANY CONSTRUCTION OF PROJECT OR PURCHASE OF PLANT AND MACHINERY OR FOR OBTAINING ANY LICENSE OR LETTER OF CREDIT ETC. BUT WAS ONLY DONE WITH A SPECIFIC AND LIMITED PURPOSE TO RE DUCE RESULTANT TARIFF OF THE PROJECT,THAT INTEREST EARNED BY THE ASSESSEE FROM THE NATIONALISED BANKS HAD NOTHING TO DO WITH THE SETTING UP OR COMMENCING OF THE BUSINESS, THAT IT WAS A PURE AND SIMPLE CASE OF ACCRUING OF INTEREST INCOME FROM DEPOSIT-WE ARE OF THE OPINION THAT THAT THE AS SESSEE EARNED THE INTEREST FROM THE BANK DEPOSITS AND EARNING OF INTEREST WAS PLAINLY NOT IN THE ORDINARY COURSE OF ITS BUSINESS AND THAT THE INTEREST EARNED BY THE ASSESSEE WAS RIGHTLY ASSESSE D UNDER THE HEAD INCOME FROM OTHER SOURCES. WE FIND THAT THE FAA HAS CLEARLY AND LOGICALLY DIST INGUISHED THE CASES RELIED UPON BY THE ASSESSEE.ON THE OTHER HAND,CASES QUOTED BY HIM,WHIL E UPHOLDING THE ORDER OF THE AO,FORTIFY OUR VIEW.HE HAS ALOS ANALYSED THE AUDITED ACCOUNTS AND VARIOUS AGREEMENTS ENTERED INTO BY THE ASSESSEE.IN OUR OPINION,HIS ORDER DOES NOT SUFFER F ROM ANY LEGAL OR FACTUAL INFIRMITY.CONSIDERING THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE FO R THE YEAR UNDER APPEAL,WE DECIDE EFFECTIVE GROUND OF APPEAL AGAINST THE ASSESSEE. AS A RESULT,APPEAL FILED BY THE ASSESSEE STANDS DISALLOWED. 0*1 #)* 2 3 , # 4 , * 5 . ORDER PRONOUNCED IN THE OPEN COURT ON 18TH,M ARCH,2015. !/ , .$ ! 6 7# 18 EKPZ EKPZ EKPZ EKPZ , 201 5 , 8 SD/- SD/- ( /JOGINDER SINGH) ( !' / RAJENDRA) / JUDICIAL MEMBER ! ! ! ! / ACCOUNTANT MEMBER / MUMBAI, 7# /DATE: 18.03.2015 SK !/ !/ !/ !/ , ,, , '*9 '*9 '*9 '*9 :!9$* :!9$* :!9$* :!9$* / COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE / %& 2. RESPONDENT / '(%& 3. THE CONCERNED CIT(A)/ ; < , 4. THE CONCERNED CIT / ; < 5. DR E BENCH, ITAT, MUMBAI / 9= '*# BZ BZBZ BZ , . . . 6. GUARD FILE/ 0 (9* '* //TRUE COPY// !/# / BY ORDER, > / DY./ASST. REGISTRAR , /ITAT,MUMBAI.