Electrosteel Steels Limited, Kolkata V. DCIT, CEN, CIR-XXI, KOLKATA, Kolkata

ITSSA 30/KOL/2014

• Counselvise Citation: [2017] 122 COUNSELVISE.COM (IT) 3473 (ITAT-KOLKATA)
• Duration Of Justice: 3 year(s) 8 month(s) 8 day(s)
• Appeal Type: Income Tax (Search & Seizure) Appeal
• Pronouncement Date: 15-11-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2009-2010
• Appeal Filed On: 07-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Search and seizure; Capital receipt; Revised return; Documents seized; Capital expenditure
• Section: 143(3); 132

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : KOLKATA [BEFORE HONBLE SHRI ABY. T. VARKEY, JM & SHRI M. BALAGANESH, AM ] I.T.(SS).A NOS. 29 & 30/KOL/2014 ASSESSMENT YEARS : 2008- 09 & 2009-10 ELECTROSTEEL STEELS LTD. -VS- DCIT, CC-XXI, KOLKATA (FORMERLY KNOWN AS ELECTROSTEEL INTEGRATED LTD.) [PAN: AABCE 6875 H] (APPELLANT) (RESPON DENT) FOR THE APPELLANT : SHRI PRITAM CHOWDH URY, AR FOR THE RESPONDENT : SHRI GOULEAN HANGSHING, CIT, DR DATE OF HEARING : 02.112017 DATE OF PRONOUNCEMENT : 15.11.2017 ORDER PER M.BALAGANESH, AM 1. THESE APPEALS ARE PREFERRED BY THE ASSESSEE AGAI NST THE ORDERS OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) , CENTRAL-II, KOLKATA [IN SHORT THE LD CITA] VIDE APPEAL NOS. 196 & 197 /CC-XXI/CIT(A)C-II/11-12 DATED 30.12.2013 FOR ASST YEARS 2008-09 AND 2009-10 RESPECTIVELY. ASSESSMENTS WERE FRAMED BY THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE XXI, KOLKATA [ IN SHORT THE LD AO] U/S 153C/ 143(3) OF THE INCOME TAX ACT, 1961 (H EREINAFTER REFERRED TO AS THE ACT) FOR ASST YEAR 2008-09 AND U/S 143(3) OF THE ACT FOR THE ASST YEAR 2009-10 DATED 21.12.2011. SINCE IDENTICAL FACTS ARE INVOLVED IN BOTH THE APPEALS, THEY ARE TAKEN UP TOGETHER AND DISPOSED OFF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. WE FIND THAT THE ASSESSEE HAD RAISED SEVERAL GRO UNDS REVOLVING AROUND ONE ISSUE I.E THE CHARGEABILITY OF INTEREST INCOME ON DEPOSITS TO TAX. THE CENTRAL ISSUE INVOLVED IN THESE APPEALS IS AS TO WHETHER THE LD CITA WAS JUST IFIED IN CONFIRMING THE ADDITION MADE 2 IT(SS)A NOS.29 & 30/KOL/2014 ELECTROSTEEL STEELS LTD. (FORMERLY KNOWN AS ELECTROSTEEL INTEGRATED LTD. A.YRS.2008-09 & 2009-10 2 ON ACCOUNT OF INTEREST INCOME ON DEPOSITS EARNED BY THE ASSESSEE, IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 3. THE BRIEF FACTS OF THIS ISSUE IS THAT THE ASSESS EE IS A COMPANY INCORPORATED ON 20.12.2006 UNDER THE COMPANIES ACT, 1956. THE ASSE SSEE IS ENGAGED IN THE BUSINESS OF SETTING UP A 2.2 MTPA IRON & STEEL PLANT INCLUDING A DUCTILE IRON PIPES AND FITTING PLANT (IN SHORT THE PLANT) IN THE STATE OF JHARK HAND,, INTERALIA, TO MANUFACTURE STRAIGHT BARS, IRON RODS AND DUCTILE IRON PIPES. THE ASSESS EE WAS INCORPORATED FOR SETTING OF THE STEEL PLANT AND THE SAME WAS IN PROGRESS AND PRODUC TION AT THE STEEL PLANT HAD NOT STARTED. THE ASSESSEE FILED ITS ORIGINAL RETURN OF INCOME FOR THE ASST YEAR 2008-09 ON 29.9.2008 SHOWING TOTAL INCOME OF RS 3,69,38,763/- UNDER THE NORMAL PROVISIONS OF THE ACT AND TAX LIABILITY OF RS 1,26,61,361/- WAS DISCH ARGED BY TAX DEDUCTED AT SOURCE OF RS 83,69,850/- , ADVANCE TAX OF RS 39,50,000/- AND PAY MENT OF SELF ASSESSMENT TAX OF RS 3,41,510/-. SUBSEQUENTLY THE ASSESSEE FILED THE REV ISED RETURN OF INCOME ON 31.8.2009 SHOWING TOTAL INCOME AT RS NIL AND CLAIMING REFUND OF RS 1,26,61,361/- UNDER THE NORMAL PROVISIONS OF THE ACT AND THE SAME WAS INTIM ATED TO ERSTWHILE AO VIDE LETTER DATED 31.8.2009. 3.1. M/S ELECTROSTEEL CASTING LTD IS THE RELATED PA RTY OF THE ASSESSEE. A SEARCH AND SEIZURE OPERATION U/S 132 OF THE ACT WAS CONDUCTED ON 19.3.2009 AT THE PREMISES OF ELECTROSTEEL CASTING LTD, WHEREIN CERTAIN DOCUMENTS / DETAILS IN RELATION TO THE ASSESSEE WERE SEIZED BY INCOME TAX DEPARTMENT. BASED ON THE DOCUMENTS SEIZED THEREON, PROCEEDINGS U/S 153C WERE INITIATED ON THE ASSESSEE AND ASSESSEE VIDE ITS LETTER DATED 23.8.2011 SUBMITTED THAT THE REVISED RETURN FILED O N 31.8.2009 SHOULD BE TREATED AS A RETURN FILED IN RESPONSE TO NOTICE ISSUED U/S 153C OF THE ACT. THE ASSESSEE FURNISHED THE DETAILS / EXPLANATION AS DESIRED BY THE LD AO IN TH E ASSESSMENT PROCEEDINGS. THE ASSESSEE EARNED INTEREST INCOME OF RS 3,69,36,403/- IN THE ASST YEAR 2008-09 AS BELOW:- 3 IT(SS)A NOS.29 & 30/KOL/2014 ELECTROSTEEL STEELS LTD. (FORMERLY KNOWN AS ELECTROSTEEL INTEGRATED LTD. A.YRS.2008-09 & 2009-10 3 PARTICULARS INTEREST INTEREST TOTAL RECEIVED ACCRUED INTEREST INCOME INTEREST ON FD WITH SBI CAG BRANCH FROM TEMPORARILY PARKED MONEY OUT OF EQUITY FUNDS 1,92,73,564 1,57,74,280 3,50,47,844 INTEREST ON FD WITH SBI CAG BRANCH FROM TEMPORARILY PARKED MONEY OUT OF TERM LOAN FUNDS 18,88,559 18,8 8,559 --------------------------------------- ------------- 1,92,73,564 1,76,62,839 3,69,36,403 ---------------------------------------- ------------- 3.2. THE LD AO ASKED THE ASSESSEE TO SHOW CAUSE AS TO WHY INTEREST INCOME OF RS 3,69,36,403/- EARNED DURING THE ASST YEAR 2008-09 S HOULD NOT BE TAXED AS INCOME FROM OTHER SOURCES. IN RESPONSE, THE ASSESSEE VIDE ITS LETTER DATED 15.11.2011 SUBMITTED AS UNDER:- 4. IN THE INSTANT CASE, DURING THE AY 2008-09 THE COMPANY WAS SETTING UP A 2.2 MTPA IRON & STEEL PLANT INCLUDING A DUCTILE IRON PIPES A ND FITTING PLANT ('THE PLANT') IN THE STATE OF JHARKHAND, INTER ALIA, TO MANUFACTURE, STR AIGHT BARS, IRON RODS AND DUCTILE IRON PIPES. FURTHER THE OBJECT OF THE COMPANY AS PE R THE MEMORANDUM AND ARTICLES OF ASSOCIATION OF THE COMPANY INCLUDE INVESTING SURPLU S FUND OF THE COMPANY FOR EARNING INTEREST INCOME. COPY OF THE MEMORANDUM AND ARTICLE S OF ASSOCIATION OF THE COMPANY. RELEVANT EXTRACTS OF THE MEMORANDUM AND ARTICLES OF ASSOCIATION, HAS BEEN REPRODUCED HEREWITH AS BELOW: '9. TO INVEST ANY MONEYS OF THE COMPANY OUT OF OWN SURPLUS FUND OF THE COMPANY NOT IMMEDIATELY REQUIRED IN SUCH INVESTMENT AS MAY BE THOUGHT PROPER. 5. THEREFORE, THE COMPANY AS PER THE OBJECTS OF THE MEMORANDUM AND ARTICLES OF ASSOCIATION HAS INVESTED THE AMOUNT AND EARNED INTE REST INCOME. THE INTEREST INCOME EARNED BY THE COMPANY DOES NOT DE HORS THE BUSINESS WHICH IS CARRIED ON BY IT BUT IS ATTRIBUTABLE AND INCIDENTAL TO THE BUSINESS CARRIED ON BY COMPANY. THE MONIES WHICH WERE INDUCTED BY THE SHAREHOLDERS INTO THE COMPANY AND BORROWED BY THE COMPANY WERE PRIMARILY INFUSED FOR THE PURPOSE OF BUSINESS I.E. FOR SETTING UP THE .PLANT. THE FUNDS WERE PLACED IN FIXED DEPOSIT SO THAT THE LIQU IDITY WAS ENSURED AND MONEY WOULD REMAIN AVAILABLE WHEN REQUIRED FOR SETTING UP THE P LANT AND HENCE IS ATTRIBUTABLE AND INCIDENTAL TO THE BUSINESS CARRIED ON BY COMPANY. T HUS THE INTEREST INCOME EARNED OUT 4 IT(SS)A NOS.29 & 30/KOL/2014 ELECTROSTEEL STEELS LTD. (FORMERLY KNOWN AS ELECTROSTEEL INTEGRATED LTD. A.YRS.2008-09 & 2009-10 4 OF SUCH MONEY IS CHARGEABLE UNDER THE HEAD 'BUSINES S AND PROFESSION'. IN THIS REGARD IT IS PERTINENT TO NOTE THAT AN INCOME RECEIVED BY THE ASSESSEE CAN BE TAXED UNDER THE HEAD 'INCOME FROM OTHER SOURCES' ONLY IF IT DOES NOT FAL L 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. IN THE INSTANT CASE SINCE THE INTEREST I NCOME IS CHARGEABLE UNDER THE HEAD 'BUSINESS AND PROFESSION' HENCE THE SAME CANNOT BE CHARGEABLE TO TAX UNDER THE HEAD 'INCOME FROM OTHER SOURCES'. RELIANCE IN THIS REGAR D IS PLACED ON THE FOLLOWING DECISIONS: 6. THE HON'BIE SUPREME COURT IN COMMISSIONER OF INC OME-TAX VS GOVINDA CHOUDHURY & SONS REPORTED IN (1994) 74 TAXMAN 331(SC) HAS HEL D AS FOLLOWS: 'THIS BRINGS US TO A CONSIDERATION OF THE SECOND QU ESTION. THE SUM OF RS. 2,77,692 WAS RECEIVED BY THE ASSESSEE AS INTEREST O N THE AMOUNTS WHICH WERE DETERMINED TO BE PAYABLE BY THE ASSESSEE IN RESPECT OF CERTAIN CONTRACTS EXECUTED BY THE ASSESSEE AND IN REGARD TO THE PAYME NTS UNDER WHICH THERE WAS A DISPUTE BETWEEN THE TWO PARTIES. THE ASSESSEE IS A CONTRACTOR. ITS BUSINESS IS TO ENTER INTO CONTRACTS. IN THE COURSE OF THE EXECUTIO N OF THESE CONTRACTS, IT HAS ALSO TO FACE DISPUTES WITH THE STATE GOVERNMENT AND IT H AS ALSO TO RECKON WITH DELAY IN PAYMENT OF AMOUNTS THAT ARE DUE TO IT. IF THE AM OUNTS ARE NOT PAID AT THE PROPER TIME AND INTEREST IS AWARDED OR PAID FOR SUC H DELAY, SUCH INTEREST IS ONLY AN ACCRETION TO THE ASSESSEE'S RECEIPTS FROM THE CO NTRACTS. IT IS OBVIOUSLY ATTRIBUTABLE AND INCIDENTAL TO THE BUSINESS CARRIED ON BY IT. IT WOULD NOT BE CORRECT TO SAY, AS THE TRIBUNAL HAS HELD, THAT THIS INTEREST IS TOTALLY DE HORS THE CONTRACT BUSINESS CARRIED ON BY THE ASSESSEE. IT IS WELL-SETTLED THAT INTEREST CAN BE ASSESSED UNDER THE HEAD 'INCOME FROM OTHER SOURC ES' ONLY IF IT CANNOT BE BROUGHT WITHIN ONE OR THE OTHER OF THE SPECIFIC HEA DS OF CHARGE. WE FIND IT DIFFICULT TO COMPREHEND HOW THE INTEREST RECEIPTS B Y THE ASSESSEE CAN BE TREATED AS RECEIPTS WHICH FLOW TO IT DE HORS THE BUSINESS W HICH IS CARRIED ON BY IT. IN OUR VIEW, THE INTEREST PAYABLE TO IT CERTAINLY PARTAKES OF THE SAME CHARACTER AS THE RECEIPTS FOR THE PAYMENT OF WHICH IT WAS OTHERWISE ENTITLED UNDER THE CONTRACT AND WHICH PAYMENT HAS BEEN DELAYED AS A RESULT OF C ERTAIN DISPUTES BETWEEN THE PARTIES. IT CANNOT BE SEPARATED FROM THE OTHER AMOU NTS GRANTED TO THE ASSESSEE UNDER THE AWARD AND TREATED AS 'INCOME FROM OTHER S OURCES'. THE SECOND QUESTION IS, THEREFORE, ANSWERED IN FAVOUR OF THE A SSESSEE AND AGAINST THE REVENUE. ' 7. THE HON'BLE MADRAS HIGH COURT IN CIT VS TAMIL NA DU DAIRY DEVELOPMENT CORPN. LTD REPORTED IN (1995) 216 ITR 535 (MAD) HAS HELD AS F OLLOWS: 'IN CIT V. CALCUTTA NATIONAL BANK LTD. [1959J 37 IT R 171, THE SUPREME COURT HAS OBSERVED AS FOLLOWS: 'THE TERM, 'BUSINESS' IS A WORD OF VERY WIDE, THOUGH BY NO MEANS DETERMINATE, SCOPE. IT HAS RIGHTLY BEEN OB SERVED IN JUDICIAL DECISIONS OF HIGH AUTHORITY THAT IT IS NEITHER PRACTICABLE NO R DESIRABLE TO MAKE ANY ATTEMPT AT DE-LIMITING THE AMBIT OF ITS CONNOTATION . EACH CASE HAS TO BE DETERMINED WITH REFERENCE TO THE PARTICULAR KIND OF ACTIVITY AND OCCUPATION OF THE PERSON CONCERNED. THOUGH ORDINARILY, 'BUSINESS' IMPLIES A CONTINUOUS 5 IT(SS)A NOS.29 & 30/KOL/2014 ELECTROSTEEL STEELS LTD. (FORMERLY KNOWN AS ELECTROSTEEL INTEGRATED LTD. A.YRS.2008-09 & 2009-10 5 ACTIVITY IN CARRYING ON A PARTICULAR TRADE OR AVOCA TION, IT MAY ALSO INCLUDE AN ACTIVITY WHICH MAY BE CALLED, 'QUIESCENT'.' UPON TH E FACTS OF THE CASE, THE SUPREME COURT HELD THAT THE REALISATION OF RENTAL I NCOME BY THE ASSESSEE-BANK, WAS IN THE COURSE OF ITS BUSINESS IN PROSECUTION OF ONE OF THE OBJECTS IN ITS MEMORANDUM; IT WAS, THEREFORE, LIABLE TO BE INCLUDE D IN ITS BUSINESS PROFITS. ' 8. THE HON'BLE CALCUTTA HIGH COURT IN EVEREADY INDU STRIES INDIA LIMITED VS. CIT REPORTED IN (2010) 323 ITR 312 (CAL) HAS HELD AS FOLLOWS: 'THE ASSESSEE EARNED INTEREST ON SUCH SHORT-TERM FI XED DEPOSITS MADE OUT OF THE BUSINESS FUNDS AVAILABLE WITH THE ASSESSEE BEFO RE THEY WERE UTILIZED FOR ACTUAL BUSINESS AND, THEREFORE, THE SAME WAS INCIDE NTAL TO THE BUSINESS ACTIVITY OF THE ASSESSEE-COMPANY AND INTEREST ON SUCH SHORT- TERM DEPOSIT MUST BE TREATED AS BUSINESS INCOME. THE ASSESSEE, A TEA GRO WING AND MANUFACTURING COMPANY, WAS LEFT WITH SURPLUS FUNDS. THE ASSESSEE INVESTED SUCH SURPLUS FUNDS IN SHORT-TERM DEPOSITS TO EXPLOIT THE BUSINESS FUND S OF THE COMPANY AND EARNED INTEREST. THEREFORE, THE INTEREST INCOME OF THE ASS ESSEE IS BUSINESS INCOME AND NOT INCOME FROM OTHER SOURCES' (EMPHASIS ADDED) 9. THE HON'BLE MADRAS HIGH COURT IN COMMISSIONER O F INCOME-TAX VS. SOUTH INDIA SHIPPING CORPN. LTD REPORTED IN (1996) 87 TAXMAN 23 (MAD) HAS HELD AS FOLLOWS: 'TAKING INTO CONSIDERATION THE ABOVE RULINGS OF THE SUPREME COURT AND OF THIS COURT, WE ARE OF THE CONSIDERED VIEW THAT A SUM REP RESENTING INTEREST FROM LONDON BROKERS, OTHER INTEREST AND MISCELLANEOUS RE CEIPTS OF THE ASSESSEE- COMPANY SHOULD BE TREATED AS INCOME DERIVED FROM TH E ACTIVITY OF SHIPPING BUSINESS AND SHOULD BE TREATED AS BUSINESS INCOME. IN THE INSTANT CASE, THE ASSESSEES, A PUBLIC LIMITED COMPANY, WHOSE PRINCIPA L BUSINESS IS SHIPPING AND THE AFORESAID INTEREST AMOUNTS ARE DERIVED FROM THE FOREIGN BUSINESS ACTIVITY OF THE SHIPPING COMPANY AND THERE IS A NEXUS BETWEEN T HE SHIPPING BUSINESS OF THE ASSESSEE-COMPANY AND ACCRUED INTEREST ON THE LONDON BROKERS' BUSINESS ACTIVITY. FURTHER, THE LONDON BROKERS OF THE ASSESS EE-COMPANY ARE MERELY CARRYING ON THE SHIPPING BUSINESS OF THE ASSESSEE-C OMPANY IN A FOREIGN COUNTRY WHICH IS INCIDENTAL TO THE PRINCIPAL BUSINESS OF SH IPPING OF THE ASSESSEE- COMPANY. ACCORDINGLY, THE INCOME DERIVED BY WAY OF INTEREST FROM THE LONDON BROKERS OF THE ASSESSEE-COMPANY ARE ENTITLED TO THE BENEFIT UNDER SECTION 80J. 10. FURTHER RELIANCE IN THIS REGARD IS PLACED ON TH E DECISION OF THE HON 'BLE HIGH COURT WHERE THE ABOVE VIEW HAS BEEN FOLLOWED COMMISSIONER OF INCOME TAX VS. TIRUPATI WOOLLEN MIL LS LTD REPORTED IN (1992) 193 ITR 252 (CAL) COMMISSIONER OF INCOME TAX VS. PRODUCIN (P) LTD REP ORTED IN (2007) 290 ITR 598 (KAR) 11. IN VIEW OF OUR SUBMISSION ABOVE, WE HUMBLY SUBM IT BEFORE YOUR GOODSELF THAT THE INTEREST INCOME EARNED DURING THE AY 2008-09 IS CHARGEABLE U NDER THE HEAD 'BUSINESS AND PROFESSION' . HOWEVER IN THE INSTANT CASE, IT IS AN ADMITTED POSI TION THAT DURING THE AY 2008-09, THE BUSINESS OF THE ASSESSEE HAS NOT COMMENCED. IF A COMPANY HAS NOT COMMENCED BUSINESS, THERE CANNOT BE ANY QUESTION OF ASSESSMENT OF ITS 'PROFITS AND GAIN S OF BUSINESS. SINCE THE BUSINESS HAD NOT STARTED, THERE COULD NOT BE ANY COMPUTATION OF BUS INESS INCOME OR LOSS INCURRED BY THE ASSESSEE 6 IT(SS)A NOS.29 & 30/KOL/2014 ELECTROSTEEL STEELS LTD. (FORMERLY KNOWN AS ELECTROSTEEL INTEGRATED LTD. A.YRS.2008-09 & 2009-10 6 IN THE RELEVANT AY. SINCE THE INCOME WAS EARNED IN A PERIOD PRIOR TO COMMENCEMENT OF BUSINESS IT WAS IN THE NATURE OF CAPITAL RECEIPT AND HENCE H AS TO BE SET OFF AGAINST PRE-OPERATIVE EXPENSES. 12. FURTHER, THE AMOUNT INVESTED BY THE SHAREHOLDER S AND BORROWED FROM BANKS WAS INEXTRICABLY LINKED WITH THE SETTING UP OF THE PLAN T, AND HENCE THE INTEREST EARNED BY THE ASSESSEE IS OF CAPITAL NATURE AND CANNOT BE TAXED AS INCOME. IN THE INSTANT CASE, THE MONIES WHICH WERE INDUCTED BY THE SHAREHOLDERS INTO THE COMPANY AND B ORROWED BY THE COMPANY WERE PRELIMINARY INFUSED FOR THE PURPOSE OF BUSINESS I.E. FOR SETTIN G UP THE PLANT. THE FUNDS WERE PLACED IN FIXED DEPOSIT SO THAT THE LIQUIDITY WAS ENSURED AND MONEY WOULD REMAIN AVAILABLE WHEN REQUIRED FOR SETTING UP THE PLANT AND HENCE IS INEXTRICABLY LINK ED WITH THE SETTING UP OF THE PLANT. SINCE, THE INCOME WAS EARNED PRIOR TO COMMENCEMENT OF BUSINESS IT IS IN THE NATURE OF CAPITAL RECEIPT AND IS REQUIRED TO BE SET OFF AGAINST PRE-OPERATIVE EXP ENSES. 3.3. THE ASSESSEE FURTHER PLACED RELIANCE ON THE FO LLOWING DECISIONS IN SUPPORT OF ITS CONTENTIONS:- A) DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF INDIAN OIL PANIPAT POWER CONSORTIUM LIMITED VS INCOME TAX OFFICER REPORTED I N (2009) 315 ITR 255 (DEL) B) DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS PETRONET LNG LTD REPORTED IN 2011-TIOL-316-HC-DEL-IT 3.4. THE ASSESSEE FURTHER SUBMITTED THAT THE DECISI ON OF THE HONBLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILISERS LIMITED VS CIT REPORTED IN (1997) 227 ITR 172 (SC) HAS BEEN SUBSEQUENTLY DISTINGUISHED BY THE HONBLE SUPREME COURT IN CIT VS BOKARO STEEL LTD REPORTED IN (1999) 236 ITR 315 (SC) ; CIT VS KARNATAKA POWER CORPORATION REPORTED IN (2001) 247 ITR 268 (S C) ; CIT VS KARNAL CO-OPERATIVE SUGAR MILLS LTD REPORTED IN (2000) 243 ITR 2 (SC) ; BONGAIGAON REFINERY & PETROCHEMICALS LTD VS CIT REPORTED IN (2001) 251 IT R 329 (SC) AND DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF INDIAN OIL PANIPAT POWER CONSORTIUM LIMITED VS ITO REPORTED IN (2009) 315 ITR 255 (DEL) . IT WAS FURTHER SUBMITTED THAT IN THE CASE OF TUTICORIN ALKALI CHEMICALS SUPRA, THE ISSUE INVO LVED WAS WHETHER INCOME EARNED BY THE ASSESSEE OUT OF SURPLUS FUNDS SHOULD BE TAXED U NDER THE HEAD INCOME FROM OTHER SOURCES OR NOT. HOWEVER, IN THE INSTANT CASE, AS SUBMITTED ABOVE THE INCOME FROM INTEREST WERE INCIDENTAL TO THE BUSINESS CARRIED ON BY THE COMPANY AND INEXTRICABLY 7 IT(SS)A NOS.29 & 30/KOL/2014 ELECTROSTEEL STEELS LTD. (FORMERLY KNOWN AS ELECTROSTEEL INTEGRATED LTD. A.YRS.2008-09 & 2009-10 7 LINKED WITH THE SETTING UP OF THE PLANT AND HENCE D ECISION OF THE HONBLE SUPREME COURT IN BOKARO STEEL LTD AND OTHER SUPRA WOULD BE APPLIC ABLE. ACCORDINGLY IT WAS PLEADED THAT INTEREST INCOME EARNED DURING THE ASST YEAR 20 08-09 IS REQUIRED TO BE SET OFF AGAINST PRE-OPERATIVE EXPENSES AND IS NOT LIABLE TO BE TAXED. 3.5. THE ASSESSEE FURTHER SUBMITTED THAT AS PER ACC OUNTING PRINCIPLES AND ACCOUNTING STANDARD ISSUED BY THE INSTITUTE OF CHARTERED ACCOU NTANTS OF INDIA (ICAI), IT HAS IN ITS AUDITED ACCOUNTS FOR THE YEAR ENDED 31.3.2008 , SET OFF THE INTEREST INCOME FROM THE EXPENSES INCURRED PRIOR TO COMMENCEMENT OF BUSINESS . RELIANCE WAS PLACED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F CIT VS U.P.STATE INDUSTRIAL DEVELOPMENT CORPORATION REPORTED IN (1997) 225 ITR 703(SC) WHEREIN IT WAS HELD AS FOLLOWS:- IT IS A WELL ACCEPTED PROPOSITION THAT FOR THE PU RPOSES OF ASCERTAINING PROFITS AND GAINS THE ORDINARY PRINCIPLES OF COMMERCIAL ACC OUNTING SHOULD BE APPLIED, SO LONG AS THEY DO NOT CONFLICT WITH ANY EXPRESS PR OVISION OF THE RELEVANT STATUTES. 3.5.1. FURTHER RELIANCE WAS PLACED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF P.M.MOHAMMED MEERAKHAN VS CIT REPORTED IN (1969) 73 ITR 735 (SC) WHEREIN IT WAS HELD AS FOLLOWS:- FOR THAT PURPOSE IT WAS THE DUTY OF THE INCOME TAX OFFICER TO FIND OUT WHAT PROFIT THE BUSINESS HAS MADE ACCORDING TO THE TRUE ACCOUNTANCY PRACTICE. 3.5.2. THE ASSESSEE ALSO PLACED RELIANCE ON THE DEC ISION OF THE HONBLE SUPREME COURT IN THE CASE OF CHALLAPALLI SUGARS LTD VS CIT REPORTED IN (1975) 98 ITR 167 (SC) WHEREIN IT WAS HELD THAT INTEREST PAID BEFORE COMME NCEMENT OF PRODUCTION ON AMOUNT BORROWED BY THE ASSESSEE FOR THE ACQUISITION AND IN STALLATION OF PLANT AND MACHINERY FORMS PART OF THE ACTUAL COST. 8 IT(SS)A NOS.29 & 30/KOL/2014 ELECTROSTEEL STEELS LTD. (FORMERLY KNOWN AS ELECTROSTEEL INTEGRATED LTD. A.YRS.2008-09 & 2009-10 8 3.6. BASED ON THE AFORESAID JUDGMENTS, THE ASSESSEE PLEADED THAT IT IS EVIDENT THAT THE RULE OF ACCOUNTANCY SHOULD BE ADOPTED IN ABSENCE OF ANY CONTRARY STATUTORY PROVISIONS IN THE ACT AND PLEADED THAT THE INTEREST INCOME IS TO BE CONSTRUED AS A CAPITAL RECEIPT ELIGIBLE TO BE SET OFF AGAINST THE EXPENSES INCURRE D PRIOR TO COMMENCEMENT OF PRODUCTION AND WOULD GO TO REDUCE THE TOTAL PROJECT COST. 3.7. WITHOUT PREJUDICE TO THE AFORESAID SUBMISSION S, IT WAS SUBMITTED THAT THE ASSESSEE HAD EARNED INTEREST INCOME OF RS 18,88,559/- OUT OF AMOUNT INVESTED SOURCED OUT OF TERM LOANS AND HAS INCURRED EXPENSES OF RS 41,36,84 9/- TOWARDS INTEREST PAID ON TERM LOAN FOR EARNING INTEREST INCOME. HENCE AS PER SEC TION 57 OF THE ACT, THE EXPENSES WHICH ARE NOT IN THE NATURE OF CAPITAL EXPENDITURE AND HAS BEEN LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING INTEREST INCOME CAN BE CLAIMED AS DEDUCTIBLE EXPENSE IN COMPUTING INCOME F ROM OTHER SOURCES. THUS INTEREST EXPENSES OF RS 41,36,849/- INCURRED FOR EARNING INT EREST INCOME HAS TO BE ALLOWED AS DEDUCTION U/S 57 (III) OF THE ACT IF ANY AMOUNT IS CHARGED TO TAX. RELIANCE WAS PLACED ON THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS VGR FOUNDATIONS REPORTED IN (2008) 298 ITR 132 (MAD) . THE FACTS OF THAT CASE WERE AS FOLLOWS:- THE ASSESSEE HAD INCURRED INTEREST EXPENSES PRIOR T O COMMENCEMENT OF BUSINESS AND THE ASSESSEE HAD ALSO EARNED INTEREST INCOME FR OM OUT OF THE FIXED DEPOSITS WITH BANK OUT OF SHARE APPLICATION MONEY BEFORE THE COMMENCEMENT OF BUSINESS. THE HONBLE HIGH COURT HAS HELD THAT INTEREST ON MO NEYS BORROWED FOR THE PERIOD PRIOR TO THE COMMENCEMENT OF BUSINESS CAN BE ALLOWED AS DEDUCTION FROM THE INTEREST UNDER SECTION 57 OF THE ACT WHILE COMP UTING INCOME FROM OTHER SOURCES IN RESPECT OF THE INTEREST RECEIVED. 9 IT(SS)A NOS.29 & 30/KOL/2014 ELECTROSTEEL STEELS LTD. (FORMERLY KNOWN AS ELECTROSTEEL INTEGRATED LTD. A.YRS.2008-09 & 2009-10 9 4. THE LD AO OBSERVED THAT THE CASE LAWS RELIED UPO N BY THE ASSESSEE ARE FACTUALLY DISTINGUISHABLE AS UNDER:- A) THE EXTRACT IN CIT VS. GOVINDA CHOUDHURY & SON S (74 TAXMAN 331) DEALS WITH THE SUM OF RS. 2,77,692 RECEIVED BY THE ASSESSEE AS INT EREST ON THE AMOUNTS WHICH WERE DETERMINED TO BE PAYABLE BY THE ASSESSEE IN RESPECT OF CERTAIN CONTRACTS EXECUTED BY THE ASSESSEE AND IN REGARD TO THE PAYMENTS UNDER WHICH THERE WAS A DISPUTE BETWEEN THE TWO PARTIES. THIS DECISION IS MISPLACED IN THE CONTEXT OF THE PR ESENT CASE, .HERE NO DISPUTES ARE IN PICTURE. B) THE DECISION IN CIT VS BOKARO STEELS LTD. (236 I TR 315) HAS NO BEARING UPON THIS ASSESSMENT AS THE FOLLOWING EXTRACT FROM THE DECISI ON WOULD PROVE:- 'DURING THESE ASSESSMENT YEARS, THE RESPONDENT-ASSE SSEE HAD INVESTED THE AMOUNTS BORROWED BY IT FOR THE CONSTRUCTION WORK WHICH WERE NOT IMMEDIATELY REQUIRED, IN SHORT- TERM DEPOSITS AND EARNED INTEREST. IT HAS BEEN HELD IN THESE PROCEEDINGS THAT THE RECEIPT OF INTEREST AMOUNTS TO INCOME OF THE ASSESSEE FROM OTHER SOURCES. THE ASSESSEE HAS NOT FILED ANY APPEAL FROM THIS FINDING WHICH IS GIVEN A GAINST IT. IN ANY CASE, THIS QUESTION IS NOW CONCLUDED BY A DECISION OF THIS COURT IN TUTICO RIN ALKALI CHEMICALS & FERTILIZERS LTD. V. CIT (1991) 227 ITR 172. HENCE, WE ARE NOT CALLED UPON TO EXAMINE THAT ISSUE.' HENCE THE QUESTION OF TAXABILITY OF INTEREST EARNED FROM SHORT TERM DEPOSITS NEVER CAME UP BEFORE THE HON'BLE SC IN THIS - CASE. ON THE CONTRA RY, THIS DECISION GOES ON TO SAY, AS WOULD BE EVIDENT FROM THE ABOVE EXTRACT, THAT THE INTEREST E ARNED FROM THE SHORT TERM DEPOSITS WILL HAVE TO BE TAXED AS REVENUE RECEIPTS, AND ONLY STRENGTHE NS THE VIEW POINT TAKEN BY ME, CITING THE TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. DECIS ION IN THE PROCESS. C) ON THE OTHER HAND, THE DECISION OF CIT VS KARNAL CO- OPERATIVE SUGAR MILLS LTD.(243 ITR 2) SEEKS TO DIFFERENTIATE BETWEEN DEPOSITS FROM IDLE/SURPLUS FUNDS AND THOSE THAT HAVE TO BE COMPULSORILY MADE IN THE PROCESS OF INVE STMENT IN MACHINERY.ETC., VIZ.. INTEREST FROM DEPOSITS THAT HAVE A 'LIEN' TAG. IN THIS CONTEXT, IT IS SEEN THAT OUT OF THE INTERES T RECEIVED OF RS. 3,69,36,403/- DURING THE PREVIOUS YEAR, THERE IS NO PORTION THAT CAN BE APPO RTIONED AS INTEREST RECEIVED BY VIRTUE OF BUSINESS INVESTMENTS, AND HENCE, THE ENTIRE AMOU NT OF INTEREST RECEIVED IS BEING TREATED AS INTEREST FROM IDLE/SURPLUS FUNDS AND IS BEING TAXED AS INCOME FROM OTHER SOURCES. D) THE BONGAIGAON REFINERY & PETROCHEMICALS LTD. DE CISION HAS BEEN NEEDLESSLY QUOTED BY THE ASSESSEE, SINCE THE EXTRACT OF THE D ECISION RELIED UPON BY THE ASSESSEE SAYS THAT THE HIGH COURT HAS ALREADY HELD THAT THE INTEREST INCOME DERIVED BY THE ASSESSEE DURING ITS FORMATIVE PERIOD WAS TAXABLE IN COME. 10 IT(SS)A NOS.29 & 30/KOL/2014 ELECTROSTEEL STEELS LTD. (FORMERLY KNOWN AS ELECTROSTEEL INTEGRATED LTD. A.YRS.2008-09 & 2009-10 10 IN VIEW OF THE DISCUSSIONS ABOVE, THE INTEREST INCO ME OF RS. 3,69,36,403/- RECEIVED BY THE ASSESSEE DURING THE PREVIOUS YEAR, IS LIABLE TO BE TAXED AS INCOME FROM OTHER SOURCES, AND IS BEING DONE SO BY ME. ACCORDINGLY THE LD AO PLACED RELIANCE ON THE DECISI ON OF TUTICORIN ALKALI CHEMICALS SUPRA AND BROUGHT THE INTEREST INCOME OF RS 3,69,36 ,403/- TO TAX UNDER THE HEAD INCOME FROM OTHER SOURCES. 5. THE LD CITA OBSERVED IN HIS ORDER AS UNDER:- 5.1 IN THE COURSE OF ASSESSMENT PROCEEDINGS AS WEL L AS IN THE APPELLATE PROCEEDINGS, THE APPELLANT SUBMITTED THE DETAILS OF INTEREST REC EIVED/RECEIVABLE IN THE YEAR UNDER APPEAL AGGREGATING TO RS. 3,69,36,403/-. IT IS SUBM ITTED BY THE APPELLANT THAT THE INTEREST OF RS. 3,50,47,844/- WAS RECEIVED ON FD WITH SBI CA G BRANCH, KOLKATA FROM TEMPORARILY PARKED MONEY WHOSE SOURCE WAS EQUITY FU ND. THUS, IT IS APPARENT THAT THE FIXED DEPOSITS WERE TAKEN BY THE APPELLANT FROM THE SURPLUS FUND WHICH WAS NOT REQUIRED IMMEDIATELY FOR THE PURPOSE OF BUSINESS I. E. THE SETTING UP OF THE PLANT. IN FACT, THIS HAS ALREADY BEEN ADMITTED BY THE APPELLANT IN ITS SUBMISSION THAT THE MONEY WHICH WAS NOT UTILIZED IMMEDIATELY WAS INVESTED IN FIXED DEPOSITS, SO THAT THE LIQUIDITY WAS ENSURED AND MONEY WOULD REMAIN AVAILABLE WHEN REQUI RED FOR SETTING UP THE PLANT. IT MEANS THAT THE FIXED DEPOSITS WERE NOT TAKEN BY THE APPELLANT FOR THE PURPOSE OF ITS BUSINESS I.E. TO KEEP MARGIN MONEY ETC. OR AS A PRE -CONDITION TO MAKE IMPORT ETC. THE FIXED DEPOSITS WERE TAKEN PURELY OUT OF THE SURPLUS FUND. UNDER THE CIRCUMSTANCES, I AM OF THE OPINION THAT THE AO WAS JUSTIFIED IN HOLDI NG THAT THE INTEREST INCOME OF RS. 3,69,36,403/- IS ASSESSABLE TO TAX IN PRE-COMMENCEM ENT PERIOD AS INCOME FROM OTHER SOURCES. 5.1. THE LD CITA DISTINGUISHED THE VARIOUS CASE LA WS RELIED UPON BY THE ASSESSEE AS UNDER:- 5.2 IN THE COURSE OF ASSESSMENT PROCEEDINGS AS WEL L AS THE APPELLATE PROCEEDINGS, THE APPELLANT HAS PLACED ITS RELIANCE ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF BOKARO STEEL LTD. (SUP RA). HOWEVER, I AM OF THE OPINION THAT THE DECISION IN THE CASE OF BOKARO STE EL IS NOT APPLICABLE IN THE CASE OF APPELLANT. IN THAT CASE, IN ADDITION TO THE ISSU E OF INTEREST RECEIVED ON SHORT TERM DEPOSITS IN PRE-COMMENCEMENT PERIOD, THERE WER E THREE MORE ISSUES I.E. THE RENT CHARGED BY THE ASSESSEE TO ITS CONTRACTORS FOR HOUSING WORKERS AND STAFF EMPLOYED BY THE CONTRACTOR FOR CONSTRUCTION WORK OF THE ASSESSEE, SECONDLY, HIRE CHARGES FOR PLANT AND MACHINERY WHICH WAS GIVEN TO THE CONTRACTORS BY THE ASSESSEE FOR USE IN THE CONSTRUCTION WORK OF THE AS SESSEE, AND THIRDLY, INTEREST FROM ADVANCES MADE TO THE CONTRACTORS BY THE ASSESS EE FOR FACILITATING THE WORK OF CONSTRUCTION. WITH REFERENCE TO AFORESAID THREE TYPES OF RECEIPTS, IT WAS HELD 11 IT(SS)A NOS.29 & 30/KOL/2014 ELECTROSTEEL STEELS LTD. (FORMERLY KNOWN AS ELECTROSTEEL INTEGRATED LTD. A.YRS.2008-09 & 2009-10 11 THAT THE AMOUNTS WHICH ARE INEXTRICABLY LINKED WITH THE PROCESS OF SETTING UP ITS PLANT AND MACHINERY, SUCH RECEIPTS WILL GO TO REDUC E THE COST OF ITS ASSETS. THESE RECEIPTS ARE OF CAPITAL NATURE AND CANNOT BE TAXED AS INCOME. HOWEVER, WITH REFERENCE TO THE INTEREST EARNED ON SHORT TERM DEPO SITS MADE OUT OF THE SURPLUS FUNDS WHICH WERE NOT IMMEDIATELY REQUIRED, THE HON' BLE SUPREME COURT OBSERVED AS UNDER: 'DURING THESE ASSESSMENT YEARS, THE RESPONDENT - AS SESSEE HAD INVESTED THE AMOUNTS BORROWED BY IT FOR THE CONSTRUCTION WORK WH ICH WERE NOT IMMEDIATELY REQUIRED, IN SHORT-TERM DEPOSITS AND EARNED INTERES T. IT HAS BEEN HELD IN THESE PROCEEDINGS THAT THE RECEIPT OF INTEREST AMOUNTS' T O INCOME OF THE ASSESSEE FROM OTHER SOURCES. THE ASSESSEE HAS NOT FILED ANY APPEA L FROM THIS FINDING WHICH IS GIVEN AGAINST IT. IN ANY CASE, THIS QUESTION IS NOW CONCLUDED BY A DECISION OF THIS COURT IN TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. VS. CIT, 227 ITR 172. HENCE, WE ARE NOT CALLED UPON TO EXAMINE THAT ISSUE .' THUS, IN THE CASE OF BOKARO STEEL, THE ISSUE OF TAX ABILITY OF INTEREST ON SHORT-TERM DEPOSITS WAS NOT ADJUDICATED BY THE APEX COURT AND, THEREFORE, IS NOT RELEVANT IN THE CASE OF APPELLANT. THE HON'BLE APE X COURT HAS OBSERVED THAT THIS ALREADY BEEN CONCLUDED IN THE CASE OF TUTICORIN ALK ALI. IN THE INSTANT CASE, THERE IS NO DISPUTE THAT THE INTEREST INCOME WAS EARNED B Y MAKING SHORT- TERM DEPOSITS OF THE SURPLUS FUND NOT REQUIRED IMMEDIATELY FOR SE TTING UP THE PLANT. HENCE, IT IS TAXABLE AS INCOME FROM OTHER SOURCES. IT CANNOT BE SAID THAT THE INTEREST INCOME WAS INEXTRICABLY LINKED WITH THE BUSINESS OF THE AP PELLANT COMPANY. 5.3 THE APPELLANT RELIED ON THE DECISION OF SUPREME COURT IN THE CASE OF BONGAIGAON REFINERY AND PERTOCHEMICALS LTD. (SUPRA) . BUT, IN THIS CASE ALSO IT IS HELD THAT THE INTEREST INCOME DERIVED BY THE ASSESS EE DURING ITS FORMATIVE PERIOD WAS TAXABLE INCOME. HOWEVER, THE INCOME DERIVED BY THE ASSESSEE FROM HOUSE PROPERTY, ITS GUEST HOUSE, CHARGES FOR EQUIPMENT AN D RECOVERIES FROM CONTRACTORS ON ACCOUNT OF WATER AND ELECTRICITY SUP PLY WERE COVERED BY THE DECISION IN BOKARO STEEL LTD.'S CASE. THUS, THIS DE CISION IS ALSO OF NO HELP TO THE APPELLANT COMPANY BECAUSE THE INTEREST INCOME DERIV ED DURING THE FORMATIVE PERIOD HAS BEEN HELD TO BE TAXABLE INCOME. 5.4 THE APPELLANT HAS RELIED ON THE DECISION OF HON 'BLE DELHI HIGH COURT IN THE CASE OF NTPC SAIL POWER COMPANY PVT. LTD., 2012-TIO L-652-HC-DEL-IT. IN THIS CASE THE ASSESSEE COMPANY EARNED TOTAL INTERES T RECEIPTS OF RS.616.73 LAKHS DURING THE YEAR. THE INTEREST WAS EARNED ON TEMPORA RY DEPOSITS MADE FROM SURPLUS FUNDS AND ON THE DEPOSITS MADE WITH BANKS B Y WAY OF MARGIN OR GIVING ADVANCES ETC. FOR THE PURPOSE OF EXPANSION. THE INT EREST EARNED FROM SUCH DEPOSITS AND ADVANCES WAS RS.331.58 LAKHS. THE ASSE SSEE ADJUSTED INTEREST OF RS.331.58 LAKHS FROM THE COST OF PROJECT AND ADMITT ED THE BALANCE INTEREST OF RS.28S.15 LAKHS I.E. (RS.616.73 LAKH - RS.331.58 LA KH) AS NORMAL INCOME. THE AO BROUGHT TO TAX THE INTEREST INCOME OF RS.331.58 LAKHS ALSO AS INCOME FROM 12 IT(SS)A NOS.29 & 30/KOL/2014 ELECTROSTEEL STEELS LTD. (FORMERLY KNOWN AS ELECTROSTEEL INTEGRATED LTD. A.YRS.2008-09 & 2009-10 12 OTHER SOURCES. HOWEVER, IN APPEAL, THE SAID AMOUNT OF INTEREST OF 331.58 LAKHS WAS HELD TO BE INEXTRICABLY LINKED WITH THE PROJECT OF THE ASSESSEE BEING THE INTEREST ON MARGIN MONEY AND ADVANCES AND, THEREFOR E, CAPITAL IN NATURE WHICH WOULD GO TO REDUCE THE COST OF THE PROJECT. IN THE CASE OF APPELLANT COMPANY, THE FACTS ARE DISTINGUISHABLE AS NO AMOUNT OF INTEREST WAS RECEIVED BY THE COMPANY ON ACCOUNT OF DEPOSITS FOR MARGIN OR ADVANCES FOR T HE PURPOSE OF ITS SETTING UP OF STEEL PLANT. THUS, THE DECISION RELIED UPON BY T HE APPELLANT IS NOT APPLICABLE IN ITS CASE. SIMILARLY, OTHER JUDICIAL DECISIONS RELIE D UPON BY THE APPELLANT ARE ALSO DISTINGUISHABLE ON FACTS. 5.2 THE LD CITA OBSERVED THAT THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS SUPRA WOULD SUIT THE FACTS OF THE INSTANT CASE MORE APPROPRIATELY AND ACCORDINGLY UPHELD THE ADDIT ION MADE BY THE LD AO. THE LD CITA ALSO OBSERVED THAT IT IS IMMATERIAL AS TO WHET HER THE INVESTMENT WAS MADE IN SHORT TERM DEPOSITS OUT OF SHAREHOLDERS FUNDS OR THE BORR OWED FUNDS. THE INTEREST RECEIVED ON SUCH SHORT TERM DEPOSITS WOULD BE TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US ON T HE FOLLOWING GROUNDS:- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) WAS NOT JUSTIFIED AND ERRED IN UPHOLDING THE ORDER OF THE L EARNED AO IN DETERMINING THE TOTAL INCOME UNDER THE NORMAL PROVISIONS OF THE AC T AT RS. 36,936,403/- DISREGARDING THE SUBMISSIONS MADE BY THE APPELLANT. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) WAS NOT JUSTIFIED AND ERRED IN UPHOLDING THE ORDER OF THE L EARNED AO IN TAXING THE INTEREST INCOME OF RS. 36,936,403/- UNDER THE HEAD INCOME FROM OTHER SOURCESDISREGARDING THE SUBMISSIONS MADE BY THE AP PELLANT. 3. WITHOUT PREJUDICE TO GROUNDS 1 & 2, ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) WAS NOT JUSTIFIED AND ERRE D IN UPHOLDING THE ORDER OF THE LEARNED AO IN DISALLOWING THE CLAIM OF THE APPE LLANT IN RESPECT OF DEDUCTION OF EXPENSES INCURRED OF RS. 4,136,849/- AS PER SECT ION 57 OF THE ACT, AGAINST INTEREST INCOME OF RS. 1,888,559/- EARNED ON FIXED DEPOSITS WITH BANKS WHOSE SOURCE WAS TERM LOAN. 4. THAT, ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LEARNED CIT(A) WAS NOT JUSTIFIED AND ERRED IN UPHOLDING THE ORDER OF THE L EARNED AO IN LEVYING INTEREST UNDER THE PROVISIONS OF 234C OF THE ACT. 13 IT(SS)A NOS.29 & 30/KOL/2014 ELECTROSTEEL STEELS LTD. (FORMERLY KNOWN AS ELECTROSTEEL INTEGRATED LTD. A.YRS.2008-09 & 2009-10 13 5. THAT, ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LEARNED CIT(A) WAS NOT JUSTIFIED AND ERRED IN UPHOLDING THE ORDER OF THE L EARNED AO IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT IGNO RING THE FACT THAT THE APPELLANT HAS NOT FILED INACCURATE PARTICULARS OF I NCOME OR CONCEALED ITS INCOME. 6. THAT THE APPELLANT CRAVES LEAVE TO ADD, ALTER AN D AMEND THE GROUNDS OF APPEAL ON OR BEFORE THE DATE OF HEARING. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. IT IS NOT IN DISPUTE THAT THE BUSINESS OF SETTING U P OF A STEEL PLANT HAD NOT COMMENCED DURING THE YEAR UNDER APPEAL. IT IS NOT IN DISPUTE THAT THE ASSESSEE HAD RECEIVED SHARE CAPITAL FROM ITS SHAREHOLDERS AND ALSO TERM LOANS F ROM BANKS FOR THE PURPOSE OF ITS BUSINESS OF SETTING UP OF A STEEL PLANT. THE UNUTI LIZED PORTION OF THE SAID FUNDS WERE INVESTED IN SHORT TERM DEPOSITS WITH BANKS AND INTE REST INCOME DERIVED THEREON BY THE ASSESSEE AS UNDER:- PARTICULARS INTEREST INTEREST TOTAL RECEIVED ACCRUED INTEREST INCOME INTEREST ON FD WITH SBI CAG BRANCH FROM TEMPORARILY PARKED MONEY OUT OF EQUITY FUNDS 1,92,73,564 1,57,74,280 3,50,47,844 INTEREST ON FD WITH SBI CAG BRANCH FROM TEMPORARILY PARKED MONEY OUT OF TERM LOAN FUNDS 18,88,559 18,8 8,559 --------------------------------------- ------------- 1,92,73,564 1,76,62,839 3,69,36,403 ---------------------------------------- ------------- 6.1. IT IS NOT IN DISPUTE THAT THE ASSESSEE HAD VOL UNTARILY OFFERED THE AFORESAID INTEREST INCOME OF RS 3,69,36,403/- AS INCOME FROM OTHER SOU RCES IN THE ORIGINAL RETURN OF INCOME AND PAID TAXES ACCORDINGLY. LATER IN THE RE VISED RETURN, IT HAD WITHDRAWN THE SAME BY STATING THAT THE SAID INTEREST INCOME WOULD ONLY GO TO REDUCE THE TOTAL PROJECT COST OF THE STEEL PLANT AS THE FUNDS UTILIZED FOR M AKING INVESTMENTS IN DEPOSITS WERE ONLY 14 IT(SS)A NOS.29 & 30/KOL/2014 ELECTROSTEEL STEELS LTD. (FORMERLY KNOWN AS ELECTROSTEEL INTEGRATED LTD. A.YRS.2008-09 & 2009-10 14 BUSINESS FUNDS WHICH REMAINED UNUTILIZED BY THE ASS ESSEE. SINCE THE BUSINESS FUNDS WERE UTILIZED, THE ASSESSEE PLEADED THAT THE INTERE ST INCOME DERIVED FROM THOSE BUSINESS FUNDS WOULD BE BUSINESS INCOME AND SINCE THE BUSINE SS HAD NOT BEEN COMMENCED, THE SAME WOULD GO TO REDUCE THE TOTAL PROJECT COST OF T HE STEEL PLANT OF THE ASSESSEE. THE ASSESSEE ALSO PLACED RELIANCE ON CLAUSE 9 OF ITS ME MORANDUM OF ASSOCIATION, WHEREIN , THE ASSESSEE WAS ENTITLED TO INVEST ITS SURPLUS FUN DS IN THE FORM OF DEPOSITS ETC AND DERIVE INTEREST INCOME. PURSUANT TO THE SEARCH AN D SEIZURE OPERATION CONDUCTED U/S 132 OF THE ACT ON 19.3.2009, THE LD AO IN THE ASSESSMEN T FRAMED, TREATED THE INTEREST INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES BY PLACI NG RELIANCE ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF TUTIKORIN ALKA LI CHEMICALS SUPRA. IT IS NOT IN DISPUTE THAT THE MAIN SHARE CAPITAL OF THE ASSESSEE COMPANY WAS SUBSCRIBED BY ELECTROSTEEL CASTINGS LTD AS PER SUBSCRIPTION AGREE MENT DATED 8.5.2007. THE SUBSCRIBER OF THE SHARE CAPITAL HAD AGREED TO INVEST IN THE AS SESSEE COMPANY BASED ON THEIR ASSESSMENT OF FUTURE GROWTH PROSPECT AND POTENTIAL OF THE COMPANY. THE INVESTOR HAD AGREED TO SUBSCRIBE RS 500 CRORES IN EQUITY SHARES FOR SETTING UP THE PLANT BY THE ASSESSEE COMPANY. IT WAS CONTENDED BY THE LD AR TH AT AS PER THE AGREEMENT WITH ELECTROSTEEL CASTINGS LTD, THE ASSESSEE COMPANY HAD TO INVEST THE MONEY IN SETTING UP THE PLANT. ACCORDINGLY IT WAS CONTENDED BY THE LD AR THAT THE MONEY RECEIVED HAD INEXTRICABLE LINK WITH THE PROCESS OF SETTING UP TH E PLANT AND MACHINERY AND THE MONEY WHICH WAS NOT UTILIZED IMMEDIATELY WAS INVESTED IN FIXED DEPOSIT, SO THAT LIQUIDITY WAS ENSURED AND MONEY WOULD REMAIN AVAILABLE WHEN REQUI RED FOR SETTING UP THE PLANT. WE FIND THAT THE LD AR PLACED RELIANCE ON THE CO-ORDINATE BENCH OF MUMBAI TRIBUNAL IN THE CASE OF SOLARFIELD ENERGY TWO PVT LTD VS ITO IN ITA NO. 5076/MUM/2016 FOR ASST YEAR 2012-13 DATED 11.9.2017 WHEREIN IT WAS HELD AS UNDER:- WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE MAT ERIAL AVAILABLE ON RECORD IN THE LIGHT OF DECISIONS RELIED UPON. WE HAVE ALSO APPLIE D OUR MIND TO THE DECISIONS RELIED UPON. UNDISPUTED FACTS ARE, THE ASSESSEE WAS AWARDE D THE WORK OF SETTING-UP OF SOLAR POWER PLANT PROJECT IN RAJASTHAN BY NVVNL. IT IS AL SO EVIDENT, NVVNL HAS ENTERED INTO 15 IT(SS)A NOS.29 & 30/KOL/2014 ELECTROSTEEL STEELS LTD. (FORMERLY KNOWN AS ELECTROSTEEL INTEGRATED LTD. A.YRS.2008-09 & 2009-10 15 A POWER PROJECTS AGREEMENT WITH THE ASSESSEE ON 25T H JANUARY 2012. AS PER THE TERMS AND CONDITIONS STIPULATED IN THE BID ONE OF THE FIN ANCIAL CRITERIA IN REQUEST FOR SELECTION (RFS) DOCUMENT REQUIRES A NEWLY INCORPORA TED COMPANY TO HAVE THE REQUIRED NET WORTH CONNECTED TO THE CAPACITY OF THE POWER PR OJECT. THUS, AS PER THE PRE- CONDITION, THE ASSESSEE WAS REQUIRED TO HAVE THE NE T WORTH OF RS. 60 CRORE. SINCE, THE ASSESSEE WAS NOT HAVING THE REQUIRED NET WORTH IT H AD TO INFUSE FUND FOR ENABLING ITSELF TO MEET THE QUALIFICATION CRITERIA AND FOR THIS PUR POSE, ASSESSEE'S PARENT COMPANY KESPPL STEPPED IN AND INVESTED FUND IN ACQUIRING 98 ,500 EQUITY SHARES AND 1,00,000 COMPULSORILY CONVERTIBLE PREFERENCE SHARES OF THE A SSESSEE COMPANY, THEREBY, ENABLING THE ASSESSEE TO HAVE THE REQUIRED NET WORTH. THUS, AS COULD BE SEEN, THE INFUSION OF FUND WAS INTEGRALLY AND INEXTRICABLY CONNECTED WITH THE SETTING-UP OF THE POWER PROJECT. AS EVIDENT FROM THE FACTS ON RECORD, OUT OF THE FUNDS AVAILABLE WITH THE ASSESSEE FROM ISSUE OF EQUITY SHARES AN AMOUNT OF RS. 40 CRORE WAS TEMP ORARILY PARKED IN FIXED DEPOSIT WITH HDFC BANK LTD. ON 1ST MARCH 2012, SINCE, WASN'T IMM EDIATELY REQUIRED FOR IMPLEMENTATION OF THE POWER PROJECT. IT IS ALSO EVI DENT THAT THE ASSESSEE ONLY ON 29TH MAY 2012, ENTERED INTO A EPC CONTRACT WITH LARSEN & TOUBRO LTD. FOR DEVELOPING THE 20 MW SOLAR PHOTO VOLTAIC POWER PLANT. THESE FACTS CLEARLY DEMONSTRATE, THE FUNDS REQUIRED FOR SETTING UP OF POWER PROJECT WAS TEMPOR ARILY PARKED IN FIXED DEPOSIT, THEREBY, INDICATING THAT THE INTEREST EARNED ON SUC H FIXED DEPOSIT HAS AN IMMEDIATE AND PROXIMATE NEXUS WITH THE SETTING UP OF POWER PROJEC T. NOTABLY, THE DEPARTMENTAL AUTHORITIES HAVE REJECTED ASSESSEE'S CLAIM THAT THE INTEREST EARNED IS A CAPITAL RECEIPT RELYING UPON THE DECISION OF THE HON'BLE SUPREME CO URT IN TUTICORIN ALKALI CHEMICALS AND FERTILISERS LTD. (SUPRA). ON A CAREFUL READING OF THE SAID JUDGMENT, WE ARE OF THE VIEW THAT THE RATIO LAID DOWN THEREIN WILL NOT APPL Y TO THE FACTS OF THE PRESENT CASE. IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILIS ERS LTD. THE ASSESSEE HAS BORROWED FUNDS FOR SETTING UP OF A PLANT. HOWEVER, THE SURPL US FUND AVAILABLE OUT OF THE BORROWED FUND WAS INVESTED IN FIXED DEPOSIT AND ASSESSEE EAR NED INTEREST. THE DEPARTMENT HELD THAT THE INTEREST EARNED FROM FIXED DEPOSIT ON INVE STMENT OF SURPLUS FUND DURING THE PRE- CONSTRUCTION PERIOD IS ASSESSABLE AS INCOME FROM OT HER SOURCES. HOWEVER, THE HON'BLE SUPREME COURT IN CASE OF BOKARO STEELS LTD. (SUPRA) TOOK NOTE OF THE DECISION IN TUTICORIN ALKALI CHEMICALS AND FERTILISERS LTD. (SU PRA) REFERRED TO BY THE DEPARTMENTAL AUTHORITIES. FURTHER, THE HON'BLE SUPREME COURT TOO K NOTE OF THE DECISION OF THE HON'BLE SUPREME COURT IN CHALLAPALLI SUGARS LTD. VS CIT, [1995] 98 ITR 167 (SC) WHEREIN IT WAS HELD THAT ACCEPTED ACCOUNTANCY RULE FOR DETERMINING COST OF FIXED DEPOSIT IS TO INCLUDE ALL EXPENDITURE NECESSARY TO BRING SU CH ASSETS INTO EXISTENCE AND TO PAY THEM IN WORKING CONDITION. IN CASE MONEY IS BORROWE D BY NEWLY STARTED COMPANY WHICH IS IN THE PROCESS OF CONSTRUCTING AND ERECTING ITS PLANT, THE INTEREST INCURRED BEFORE THE COMMENCEMENT OF PRODUCTION ON SUCH BORROWED MONEY C AN BE CAPITALIZED AND ADDED TO THE COST OF FIXED ASSET CREATED AS A RESULT OF SUCH EXPENDITURE. FOLLOWING THE AFORESAID REASONING, THE HON'BLE SUPREME COURT IN BOKARO STEE LS LTD. (SUPRA) HELD THAT BY APPLYING THE SAME REASONING IF THE ASSESSEE RECEIVE S ANY AMOUNTS WHICH ARE INEXTRICABLY LINKED WITH THE PROCESS OF SETTING-UP OF PLANT AND MACHINERY SUCH RECEIPTS WILL COME TO REDUCE THE COST OF ITS ASSETS, HENCE, ARE OF CAPITAL NATURE. THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN BOKARO STEELS LTD. (SUPRA) WAS FOLLOWED BY THE HON'BLE DELHI HIGH COURT IN INDIAN OIL PANIPAT POWE R CONSORTIUM LTD. (SUPRA). THE 16 IT(SS)A NOS.29 & 30/KOL/2014 ELECTROSTEEL STEELS LTD. (FORMERLY KNOWN AS ELECTROSTEEL INTEGRATED LTD. A.YRS.2008-09 & 2009-10 16 FACTS OF THIS CASE ARE, THE ASSESSEE A JOINT VENTUR E COMPANY WAS TO SET-UP A POWER PROJECT TO EFFECTUATE THE PURPOSE FOR WHICH JOINT V ENTURE WAS CREATED. THE JOINT VENTURE PARTNERS CONTRIBUTED SHARE CAPITAL WHICH INCLUDED A SUM BY WAY OF ADDITIONAL SHARE CAPITAL. THE SAID FUND, THOUGH, WAS REQUIRED FOR PU RCHASE OF LAND AND DEVELOPMENT OF INFRASTRUCTURE, HOWEVER, DUE TO LEGAL ENTANGLEMENT WITH REGARD TO TITLE OF LAND, THE FUNDS WERE TEMPORARILY INVESTED IN FIXED DEPOSIT WITH BAN K EARNING INTEREST THEREON. THE ASSESSEE CLAIMED SUCH INTEREST AS CAPITAL RECEIPT A ND SET IT OFF AGAINST PRE-OPERATIVE EXPENDITURE. HOWEVER, THE ASSESSING OFFICER ASSESSE D THE INTEREST AS INCOME FROM OTHER SOURCES. THE LEARNED COMMISSIONER (APPEALS) HAVING FOUND THAT INTEREST EARNED WAS INEXTRICABLY LINKED WITH THE SETTING-UP OF THE POWE R PLANT ALLOWED THE CLAIM OF THE ASSESSEE FOLLOWING THE DECISIONS OF THE HON'BLE SUP REME COURT IN BOKARO STEELS LTD. (SUPRA). HOWEVER, WHILE DECIDING DEPARTMENT'S APPEA L, THE TRIBUNAL FOLLOWED THE DECISION IN TUTICORIN ALKALI CHEMICALS AND FERTILIS ERS LTD. (SUPRA) AND REVERSED THE ORDER OF THE LEARNED COMMISSIONER (APPEALS). WHEN T HE MATTER CAME UP BEFORE THE HIGH COURT, THE HIGH COURT FOLLOWING THE DECISION O F THE HON'BLE SUPREME COURT IN BOKARO STEELS LTD. (SUPRA) HELD THAT, SINCE, THE IN TEREST INCOME WAS INEXTRICABLY LINKED TO THE SET-UP OF POWER PROJECT, IT WILL BE A CAPITA L RECEIPT AND WILL COME TO REDUCE THE COST OF THE PROJECT AND ACCORDINGLY ALLOWED ASSESSE E'S CLAIM. IN OUR VIEW, THE RATIO LAID DOWN IN CASE OF BOKARO STEELS LTD. (SUPRA) AND INDI AN OIL PANIPAT POWER CONSORTIUM LTD. (SUPRA) ARE SQUARELY APPLICABLE TO THE FACTS O F THE PRESENT CASE. UNDISPUTEDLY, IN CASE OF ASSESSEE, THE FUNDS INVESTED TEMPORARILY I N THE FIXED DEPOSIT WERE FOR THE PURPOSE OF SETTING-UP OF THE POWER PROJECT. THEREFO RE, THE INTEREST EARNED IS INEXTRICABLY LINKED WITH THE POWER PROJECT. THE OTHER DECISIONS RELIED UPON BY THE LEARNED SR. COUNSEL INCLUDING THE DECISION IN CASE OF CIT VS. K ARNAL CO-OPERATIVE SUGAR MILLS LTD. (SUPRA) EXPRESS SIMILAR VIEW. THAT BEING THE CASE, APPLYING THE RATIO LAID DOWN IN THE DECISIONS REFERRED TO ABOVE, WE HOLD THAT THE INTER EST EARNED ON FIXED DEPOSIT IS CAPITAL RECEIPT AND HAS TO BE SET-OFF AGAINST PRE-OPERATIVE S EXPENDITURE THEREBY WILL GO TO REDUCE THE COST OF CWIP. GROUNDS RAISED IS ALLOWED. 9. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. 6.2. WE ALSO FIND THAT THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF INDIAN OIL PANIPAT POWER CONSORTIUM LTD VS ITO REPORTED IN (2009) 315 ITR 255 (DEL) CLEARLY SUPPORTS THE CASE OF THE ASSESSEE WHEREIN IT WAS HE LD THAT :- 5. IN OUR OPINION, THE TRIBUNAL HAD MISCONSTRUED TH E RATIO OF THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. ( SUPRA ) AND THAT OF BOKARO STEEL LTD.'S CASE ( SUPRA ). THE TEST, WHICH PERMEATED THROUGH THE JUDGMENT O F THE SUPREME COURT IN TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD.'S CASE ( SUPRA ), WAS THAT 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, THE INCOME EARNED IN THE FORM OF INTEREST WILL BE TAXABLE UNDER THE HEAD 'IN COME FROM OTHER SOURCES'. ON THE OTHER HAND, THE RATIO OF THE SUPREME COURT JUDGMENT IN BOKARO STEEL LTD.'S CASE( SUPRA ) IS THAT IF 17 IT(SS)A NOS.29 & 30/KOL/2014 ELECTROSTEEL STEELS LTD. (FORMERLY KNOWN AS ELECTROSTEEL INTEGRATED LTD. A.YRS.2008-09 & 2009-10 17 INCOME IS EARNED, WHETHER BY WAY OF INTEREST OR IN ANY OTHER MANNER ON FUNDS WHICH ARE OTHERWISE 'INEXTRICABLY LINKED' TO THE SETTING UP O F THE PLANT, SUCH INCOME IS REQUIRED TO BE CAPITALIZED TO BE SET OFF AGAINST PRE-OPERATIVE EXP ENSES. 5.1. THE TEST, THEREFORE, IS WHETHER THE ACTIVITY W HICH IS TAKEN UP FOR SETTING UP OF THE BUSINESS AND THE FUNDS WHICH ARE GARNERED ARE INEXT RICABLY CONNECTED TO THE SETTING UP OF THE PLANT. THE CLUE IS PERHAPS AVAILABLE IN SECTION 3 WHICH STATES THAT FOR NEWLY SET-UP BUSINESS, THE PREVIOUS YEAR SHALL BE THE PERIOD BEG INNING WITH THE DATE OF SETTING UP OF THE BUSINESS. THEREFORE, AS PER THE PROVISION OF SECTIO N 4 WHICH IS THE CHARGING SECTION, INCOME, WHICH ARISES TO AN ASSESSEE FROM THE DATE O F SETTING UP OF THE BUSINESS BUT PRIOR TO COMMENCEMENT, IS CHARGEABLE TO TAX, DEPENDING ON WH ETHER IT IS OF A REVENUE NATURE OR A CAPITAL RECEIPT. THE INCOME OF A NEWLY SET-UP BUSIN ESS, POST THE DATE OF ITS SETTING UP, CAN BE TAXED IF IT IS OF A REVENUE NATURE UNDER ANY OF THE HEADS PROVIDED UNDER SECTION 14 IN CHAPTER IV. FOR AN INCOME TO BE CLASSIFIED AS AN IN COME UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION', IT WOULD HAVE TO BE AN ACTIVITY WHICH IS IN SOME MANNER OR FORM CONNECTED WITH BUSINESS. THE WORD 'BUSINESS' IS OF WIDE IMPORT WHICH WOULD ALSO INCLUDE ALL SUCH ACTIVITIES WHICH COALESCE INTO SETTING UP OF THE BUSINESS. ONCE IT IS HELD THAT THE ASSESSEE'S INCOME IS AN INCOME CONNECTED WITH BUSIN ESS, AS IN THE INSTANT CASE IN VIEW OF THE FINDING OF FACT BY THE COMMISSIONER (APPEALS) T HAT THE MONIES WHICH WERE INDUCTED INTO THE JOINT VENTURE COMPANY BY THE JOINT VENTURE PARTNERS WERE PRIMARILY INFUSED TO PURCHASE LAND AND TO DEVELOP INFRASTRUCTURE, THEN I T COULD NOT BE HELD THAT THE INCOME DERIVED BY PARKING THE FUNDS TEMPORARILY WITH BANK, WOULD RESULT IN THE CHARACTER OF THE FUNDS BEING CHANGED INASMUCH AS THE INTEREST EARNED FROM THE BANK WOULD HAVE A HUE DIFFERENT THAN THAT OF BUSINESS AND BE BROUGHT TO T AX UNDER THE HEAD 'INCOME FROM OTHER SOURCES'. IT IS WELL-SETTLED THAT AN INCOME RECEIVE D 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 SECTION 14. THE HEAD 'INCOME FROM OTHER SOURCES' IS A RESIDUARY HEAD OF INCOME. SEE S.G.MERCANTILE CORPN. (P) LTD VS CIT [1 972] 83 ITR 700 (SC) AND CIT VS GOVINDA CHOUDHURY & SONS [1993] 203 ITR 881 (SC). 5.2. IN THE INSTANT CASE, IT WAS CLEAR UPON A PERU SAL OF THE FACTS AS FOUND BY THE AUTHORITIES BELOW THAT THE FUNDS IN THE FORM OF SHARE CAPITAL W ERE INFUSED FOR A SPECIFIC PURPOSE OF ACQUIRING LAND AND THE DEVELOPMENT OF INFRASTRUCTUR E. THEREFORE, THE INTEREST EARNED ON FUNDS PRIMARILY BROUGHT FOR INFUSION IN THE BUSINES S COULD NOT HAVE BEEN CLASSIFIED AS 'INCOME FROM OTHER SOURCES'. SINCE THE INCOME WAS E ARNED IN A PERIOD PRIOR TO COMMENCEMENT OF BUSINESS, IT WAS IN THE NATURE OF C APITAL RECEIPT AND, HENCE, WAS REQUIRED TO BE SET OFF AGAINST PRE-OPERATIVE EXPENSES. 6. THERE IS ANOTHER PERSPECTIVE FROM WHICH THE PRES ENT ISSUE CAN BE EXAMINED. UNDER SECTION 208 OF THE COMPANIES ACT, 1956 A COMPANY CA N PAY INTEREST ON SHARE CAPITAL WHICH IS ISSUED FOR A SPECIFIC PURPOSE TO DEFRAY EX PENSES FOR CONSTRUCTION OF ANY WORK AND WHICH CANNOT BE MADE PROFITABLE FOR A LONG PERIOD S UBJECT TO CERTAIN RESTRICTIONS CONTAINED IN SUB-SECTIONS (2) TO (7) OF SECTION 208. THIS SEC TION WAS SPECIFICALLY NOTED BY THE SUPREME COURT IN CHALLAPALLI SUGARS LTD. V. CIT [1975] 98 ITR 167 . THE SUPREME COURT WENT ON TO OBSERVE AS FOLLOWS: 18 IT(SS)A NOS.29 & 30/KOL/2014 ELECTROSTEEL STEELS LTD. (FORMERLY KNOWN AS ELECTROSTEEL INTEGRATED LTD. A.YRS.2008-09 & 2009-10 18 'WE HAVE ALREADY REFERRED TO SECTION 208 OF THE COM PANIES ACT WHICH MAKES PROVISION FOR PAYMENT OF INTEREST ON SHARE CAPITAL IN CERTAIN CONTINGENCIES. CLAUSE (B) OF SUB- SECTION (1) OF THAT SECTION PROVIDES THAT IN CASE I NTEREST IS PAID ON SHARE CAPITAL ISSUED FOR THE PURPOSE OF RAISING MONEY TO DEFRAY THE EXPE NSES OF CONSTRUCTING ANY WORK OR BUILDING OR THE PROVISION OF ANY PLANT IN CONTINGEN CIES MENTIONED IN THAT SECTION, THE SUM SO PAID BY WAY OF INTEREST MAY BE CHARGED TO CA PITAL AS PART OF THE COST OF CONSTRUCTION OF THE WORK OR BUILDING OR THE PROVISI ON OF THE PLANT. THE ABOVE PROVISION THUS GIVES STATUTORY RECOGNITION TO THE PRINCIPLE O F CAPITALIZING THE INTEREST IN CASE THE INTEREST IS PAID ON MONEY RAISED TO DEFRAY EXPENSES OF THE CONSTRUCTION OF ANY WORK OR BUILDING OR THE PROVISION OF ANY PLANT IN CONTINGEN CIES MENTIONED IN THAT SECTION EVEN THOUGH SUCH MONEY CONSTITUTES SHARE CAPITAL. THE SA ME PRINCIPLE, IN OUR OPINION, SHOULD HOLD GOOD IF INTEREST IS PAID ON MONEY NOT RAISED B Y WAY OF SHARE CAPITAL BUT TAKEN ON LOAN FOR THE PURPOSE OF DEFRAYING THE EXPENSES OF T HE CONSTRUCTION OF ANY WORK OR BUILDING OR THE PROVISION ANY PLANT. THE REASON IND EED WOULD BE STRONGER IN CASE SUCH INTEREST IS PAID ON MONEY TAKEN ON LOAN FOR MEETING THE ABOVE EXPENSES.' (P. 175) 6.1. IN OUR VIEW THE SITUATION IN THE INSTANT CASE IS QUITE SIMILAR EXCEPT HERE INSTEAD OF PAYING INTEREST ON FUNDS BROUGHT IN FOR SPECIFIC PU RPOSE INTEREST IS EARNED ON FUNDS BROUGHT IN BY WAY OF SHARE CAPITAL FOR A SPECIFIC P URPOSE. COULD IT BE SAID THAT IN THE FORMER SITUATION INTEREST COULD HAVE BEEN CAPITALIZ ED AND IN THE LATER SITUATION IT CANNOT BE CAPITALIZED. TO TEST THE PRINCIPLE WE COULD EXTEND THE EXAMPLE, THAT IS, WOULD OUR ANSWER BE ANY DIFFERENT HAD ASSESSEE PASSED ON THE INTERES T TO THE RESPECTIVE SHAREHOLDERS. IF NOT, THEN IN OUR VIEW THE ONLY CONCLUSION POSSIBLE IS TH AT INTEREST EARNED IN THE PRESENT CIRCUMSTANCES OUGHT TO BE CAPITALIZED. 7.IN VIEW OF THE DISCUSSION ABOVE, THE TRIBUNAL MIS DIRECTED ITSELF IN APPLYING THE DECISION OF THE SUPREME COURT IN TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. (SUPRA ) IN THE FACTS OF THE INSTANT CASE. ON ACCOUNT OF THE FINDING OF F ACT RETURNED BY THE COMMISSIONER (APPEALS) THAT THE FUNDS INFUSED BY THE JOINT VENTU RE PARTNERS IN THE ASSESSEE-COMPANY WERE INEXTRICABLY LINKED WITH THE SETTING UP OF THE POWER PLANT, THE INTEREST EARNED BY THE ASSESSEE COULD NOT BE TREATED AS 'INCOME FROM OTHER SOURCES'. THEREFORE, THE IMPUGNED JUDGMENT WAS TO BE SET ASIDE. 6.3. IN VIEW OF THE AFORESAID DECISION, WE ARE UNAB LE TO SUSTAIN THE VIEW TAKEN BY THE LD CITA BY PLACING RELIANCE ON TUTICORIN ALKALI CHEMIC ALS SUPRA. RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF HONBLE DELHI HIGH COURT SUPRA AND DECISION OF MUMBAI TRIBUNAL SUPRA , WHICH HAD CONSIDERED ALL THE DECIS IONS RELIED UPON HEREINABOVE, WE HOLD THAT THE INTEREST INCOME DERIVED BY THE ASSESS EE IN THE SUM OF RS 3,50,47,844/-, BEING THE AMOUNTS INVESTED IN DEPOSITS OUT OF SHARE CAPITAL, WOULD BE CAPITAL RECEIPT AND WOULD GO TO REDUCE THE PROJECT COST OF STEEL PLANT AS IT IS INEXTRICABLY LINKED WITH THE 19 IT(SS)A NOS.29 & 30/KOL/2014 ELECTROSTEEL STEELS LTD. (FORMERLY KNOWN AS ELECTROSTEEL INTEGRATED LTD. A.YRS.2008-09 & 2009-10 19 SETTING UP OF THE POWER PLANT. FOLLOWING THE SAME JUDGEMENT, WE HOLD THAT THE INTEREST INCOME DERIVED IN THE SUM OF RS 18,88,559/- FROM DE POSITS INVESTED OUT OF BORROWED FUNDS, WOULD BE LIABLE TO TAX UNDER THE HEAD INCOME FROM OTHER SOURCES, WHICH WOULD BE IN LINE WITH THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS SUPRA. ACCORDINGLY, THE GROUNDS RAISED B Y THE ASSESSEE FOR THE ASST YEAR 2008-09 ARE PARTLY ALLOWED. 7. NOW LET US COME TO THE GROUNDS RAISED IN THE ASS T YEAR 2009-10. THE ISSUE INVOLVED IN THIS APPEAL IS SIMILAR TO ASST YEAR 2008-09. TH E ASSESSEE DURING THE ASST YEAR 2009- 10 HAD EARNED INTEREST INCOME ON DEPOSITS AS UNDER: - PARTICULARS INTEREST INTEREST TOTAL RECEIVED ACCRUED INTEREST INCOME INTEREST ON FD WITH SBI CAG BRANCH FROM TEMPORARILY PARKED MONEY OUT OF EQUITY FUNDS 1,79,65,828 1,79,65,82 8 (A) INTEREST ON FD WITH SBI CAG BRANCH FROM TEMPORARILY PARKED MONEY OUT OF TERM LOAN FUNDS 2,42,96,798 2,42,96, 798 (B) INTEREST ON FD AS LIEN FOR BANK GUARANTEE IN FAVOUR OF CUSTOMS 1,83,36,986 51,47, 810 2,34,84,796 (C ) --------------------------------------- ------------- 6,05,99,612 51,47,810 6,57,47,422 ---------------------------------------- ------------- AS FAR AS INTEREST REFERRED TO IN (A) ABOVE, THE DE CISION RENDERED IN ASST YEAR 2008-09 WOULD APPLY WITH EQUAL FORCE FOR THIS ASST YEAR ALS O. ACCORDINGLY THE GROUNDS RAISED IN THIS REGARD ARE ALLOWED. 20 IT(SS)A NOS.29 & 30/KOL/2014 ELECTROSTEEL STEELS LTD. (FORMERLY KNOWN AS ELECTROSTEEL INTEGRATED LTD. A.YRS.2008-09 & 2009-10 20 AS FAR AS INTEREST REFERRED TO IN (B) ABOVE, THE DE CISION RENDERED IN ASST YEAR 2008-09 WOULD APPLY WITH EQUAL FORCE FOR THIS ASST YEAR ALS O. ACCORDINGLY THE GROUNDS RAISED IN THIS REGARD ARE DISMISSED. AS FAR AS INTEREST REFERRED TO IN (C ) ABOVE, THE D EPOSITS WERE INVESTED WITH BANK FOR OBTAINING BANK GUARANTEES IN FAVOUR OF CUSTOMS DEPA RTMENT WHICH IS INEXTRICABLY LINKED WITH THE BUSINESS OF SETTING UP OF STEEL PLA NT OF THE ASSESSEE. HENCE THE RATIO LAID DOWN IN THE DECISIONS OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS BOKARO STEEL LTD REPORTED IN (1999) 236 ITR 315 (SC) ; CIT VS KA RNAL CO-OPERATIVE SUGAR MILLS LTD REPORTED IN (2000) 243 ITR 2 (SC) ; AND BONGAIGAON REFINERY & PETROCHEMICALS LTD VS CIT REPORTED IN (2001) 251 ITR 329 (SC) WOULD BE SQUARELY APPLICABLE TO THE INSTANT CASE AND HENCE THE INTEREST INCOME DERIVED THEREON WOULD ONLY GO TO REDUCE THE PROJECT COST OF STEEL PLANT AND HENCE HAD TO BE CONSTRUED A S CAPITAL RECEIPT. ACCORDINGLY, THE GROUNDS RAISED IN THIS REGARD BY THE ASSESSEE ARE A LLOWED. 8. IN THE RESULT, THE APPEALS OF THE ASSESSEE IN IT (SS)A NOS . 29 & 30 /KOL/2014 FOR ASST YEARS 2008-09 AND 2009-10 RESPECTIVELY ARE PARTLY A LLOWED. ORDER PRONOUNCED IN THE COURT ON 15.11.2017 SD/- SD/- [A.T. VARKEY] [ M.BALAGANESH ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 15.11.2017 SB, SR. PS 21 IT(SS)A NOS.29 & 30/KOL/2014 ELECTROSTEEL STEELS LTD. (FORMERLY KNOWN AS ELECTROSTEEL INTEGRATED LTD. A.YRS.2008-09 & 2009-10 21 COPY OF THE ORDER FORWARDED TO: 1. ELECTROSTEEL STEELS LTD. (FORMERLY KNOWN AS ELEC TROSTEEL INTEGRATED LTD.), 19, CAMAC STREET, KOLKATA-700017 2. DCIT, CC-XXI, 18, RABINDRA SARANI, PODDAR COURT, 5 TH FLOOR, KOLKATA-700001 3. C.I.T(A)- 4. C.I.T.- KOLKAT A. 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER SENIOR PRIVAT E SECRETARY HEAD OF OFFICE/D.D.O., ITAT, KOLKATA BENCHE S