M/s Sidharth Tubes Ltd., V. The DCIT, 4(1),

ITSSA 75/IND/2007

• Counselvise Citation: [2010] 124 COUNSELVISE.COM (IT) 9460 (ITAT-INDORE)
• Duration Of Justice: 2 year(s) 7 month(s) 24 day(s)
• Appeal Type: Income Tax (Search & Seizure) Appeal
• Pronouncement Date: 02-02-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 15-01-2010
• Assessment Year: 2000-2001
• Appeal Filed On: 08-06-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: APARNA KARAN; K K SINGH
• Keywords: Depreciation; Capital receipt; Revenue expenditure
• Section: 56

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, INDORE BENCH, INDORE BEFORE SHRI JOGINDER SINGH AND SHRI V.K. GUPTA, AM IT(SS)A NOS.74 & 75/IND/2007 ASSESSMENT YEARS: 1999-00 & 2000-01 M/S. SIDHARTH TUBES LTD., 13-14, JAWAHAR MARG, INDORE PAN AAECS 3300 C APPELLANT VS DY. COMMISSIONER OF INCOME TAX, 4(1), INDORE RESPONDENT DEPARTMENT BY SHRI K.K. SINGH, CIT, DR & SMT. APARN A KARAN, SR. DR ASSESSEE BY SHRI PRAKASH JAIN, CA O R D E R PER JOGINDER SINGH, JM THESE TWO APPEALS ARE BY THE ASSESSEE DIRECTED AGAI NST THE SEPARATE ORDERS OF THE COMMISSIONER OF INCOME TAX (APPEALS) II, INDORE D ATED 30.3.07 RELATING TO THE ASSESSMENT YEARS 1999-2000 AND 2000-2001. THESE APPEALS ARE DISPOSED OF BY THIS COMMON ORDER SINCE GROUNDS OF APPEAL IN BOTH THE APPEALS ARE COMMON WHEREIN FOLLOWING CO MMON GROUNDS HAVE BEEN RAISED: 1. THAT THE IMPUGNED ORDER OF THE LD. CIT(A) IS BAD IN LAW AS WELL AS ON FACTS, INCORRECT INTERPRETATION OF LAW 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN UPHOL DING THE ACTION IN 2 RESPECT OF ADDITION OF RS.2,27,481/- AND RS.35,08,3 71/-, MADE ON ACCOUNT OF INTEREST EARNED ON FIXED DEPOSIT. 2.1 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) FAILED TO APPR ECIARTE THAT THE FIXED DEPOSITS WERE MADE OUT OF FUNDS RECEIVED FOR ESTABL ISHING CRM DIVISION WHICH HAS NOT YET COMMENCED COMMERCIAL PRODUCTION A S SUCH THE ASSESSEE CO. HAS RIGHTLY CREDITED THE AMOUNT OF INT EREST EARNED TO THE CAPITAL WORK-IN-PROGRESS. 2 DURING HEARING OF THESE APPEALS, WE HAVE HEARD SH RI PRAKASH JAIN, LD. COUNSEL FOR THE ASSESSEE AND SHRI K.K. SINGH, LD. C IT, DR ALONG WITH SMT. APARNA KARAN, LD. SR. DR FOR THE REVENUE. THE CONTE NTION OF THE LD. COUNSEL OF THE ASSESSEE IS THAT THE ASSESSEE COMPANY IS A PUBL IC LIMITED COMPANY ENGAGED IN MANUFACTURE OF TUBES AND IRON SHEETS WHI CH ARE TERMED AS TUBE DIVISION AND CRM DIVISION. IT WAS PLEADED THAT THE TUBE DIVISION WAS ALREADY IN OPERATION AND THE ERECTION WORK OF CRM DIVISION UP TO THE 6 HI- REVERSIBLE MILL WAS STARTED IN THE FINANCIAL YEAR 1 995-96 WHICH CONTINUED TILL THE ASSESSMENT YEARS IN QUESTION. PLEA WAS AL SO RAISED THAT DURING THE ASSESSMENT YEAR 1999-2000 THE COMPANY STARTED TRIAL RUN OF 4-HI- REVERSIBLE MILL AND THERE WAS FREQUENT BREAKDOWN DU E TO CERTAIN TECHNICAL PROBLEM, THUS, THE COMPANY COULD NOT STAR T COMMERCIAL PRODUCTION AND AS SUCH IT HAS CAPITALIZED ALL THE EXPENSES OF TRIAL RUN. IT WAS ALSO SUBMITTED THAT NO DEPRECIATION WAS CLAIMED ON THE M ACHINERIES USED IN TRIAL RUN. IT WAS CLAIMED THAT IN THE ABSENCE OF COMMISSI ONING OF PLANT UP TO 6-HI- REVERSIBLE MILL, IT WAS NOT VIABLE FOR THE ASSESSEE COMPANY TO RUN THE PLANT, MOREOVER, IN THE CRM PLANT AFTER COMMISSIONI NG OF EVERY STAGE OF 3 PLANT, IT WAS NECESSARY TO TAKE TRIAL RUN TO SEE WH ETHER TILL THAT STAGE PLANT IS SUCCESSFULLY COMMISSIONED ARE NOT. THE PROJECT IS STILL INCOMPLETE AS DUE TO FINANCIAL DIFFICULTIES COMPANY COULD NOT COMMISSION ED IT UP TO THE STAGE OF 6- HIGH-REVERSABLE MILLS AS PROJECTED. IT WAS PLEADED THAT THERE WAS NO ELECTRIC CONNECTION FOR CRM DIVISION TILL THE MONTH OF MARCH, 2000 AND TRIAL RUN WAS DONE WITH THE HELP OF DG SET. THE LD. COUNSEL F OR THE ASSESSEE CLAIMED THAT UNDER THE AFOREMENTIONED FACTS, IT COULD NOT B E SAID THAT ANY BUSINESS WAS COMMENCED BY THE CRM DIVISION IN BOTH THE ASSES SMENT YEARS. IT WAS CLAIMED BY THE LD. COUNSEL FOR THE ASSESSEE THAT TH E LD. A.O. IN THE ASSESSMENTS ACCEPTED THE FACT THAT CRM DIVISION OF COMPANY HAS NOT COMMENCED ANY BUSINESS DURING THESE YEARS FOR THE R EASON THAT DUE TO TECHNICAL PROBLEM IN COMMISSIONING AND ERECTION OF PLANT THERE WAS FREQUENT BREAKDOWN UP TO 4-HI-REVERSIBLE MILL AND COMMISSION ING UP TO 6-HI- REVERSIBLE MILL IS NOT COMPLETE. THUS, HE ALLOWED T HE CAPITALIZATION OF ENTIRE TRIAL RUN EXPENSES / LOSS. IT WAS FURTHER CONTENDED BY THE LD. COUNSEL FOR ASS ESSEE THAT AS A MATTER OF FACT THAT FOR THE PURPOSE OF FINANCES OF CRM DIVISION COMPANY OPENED CASH CREDIT ACCOUNT WITH THE STATE BANK OF I NDIA, DENA BANK AND THE COSMOS CO-OPERATIVE BANK LTD. FOR PURCHASE OF PLANT AND MACHINERY, LETTER OF CREDIT WAS REQUIRED TO BE OPENED IN FAVOUR OF TH E SUPPLIERS OF PLANT AND MACHINERY. FOR OPENING OF LETTER OF CREDIT BANK REQ UIRED SECURITY THUS, THE COMPANY TRANSFERRED MONEY FROM CASH CREDIT ACCOUNT WITH STATE BANK OF INDIA AND DENA BANK AND KEPT THE SAME WITH THOSE BANKS AS FIXED DEPOSITS, ACCORDINGLY FIXED DEPOSITS CAME INTO EXISTENCE. THE SE FIXED DEPOSITS RECEIPTS WERE PLEDGED AS SECURITIES WITH THE STATE BANK OF I NDIA AND DENA BANK FOR 4 OPENING OF LETTER OF CREDIT ACCOUNT IN FAVOUR OF TH E SUPPLIERS. IT WAS FURTHER CLAIMED THAT THE ASSESSEE PAID INTEREST ON CASH CRE DIT ACCOUNT / TERM LOAN ACCOUNT AND ALSO PAID BANK CHARGES ON LETTER OF CRE DIT ACCOUNT AND RECEIVED THE INTEREST ON FDRS KEPT PLEDGED FOR OPENING OF L ETTER OF CREDIT ACCOUNT. THE COMPANY DEDUCTED THE INTEREST RECEIVED ON FDRS FRO M THE INTEREST PAID ON TERM ACCOUNT AND CASH CREDIT ACCOUNT ALONG WITH THE LETTER OF CREDIT CHARGES PAID TO THE BANK AND THE NET INTEREST WAS CAPITALIZ ED. HE CONTENDED THAT THE DECISION IN TUTICORIN ALKALI CHEMICALS AND FERTILIZ ERS LTD. VS. CIT 227 ITR 172 (SC) IS NOT AT ALL APPLICABLE TO THESE CASES AS IN THAT CASE PART OF THE BORROWED FUND WHICH WERE NOT IMMEDIATELY REQUIRE BY THE COMP ANY WAS KEPT INVESTED IN SHORT TERM DEPOSIT WITH BANKS AND EARNED INTEREST. WHILE THE ASSESSEE COMPANY HAS NOT INVESTED BORROWED FUNDS WHICH WERE NOT IMMEDIATELY REQUIRED BUT IT HAS USED BORROWED FUND FOR PURCHASE OF FDRS TO BE PLEDGED WITH BANK AS SECURITY FOR OPENING OF LETTER OF CRED IT ACCOUNT IN THE FAVOUR OF SUPPLIERS. THUS, THE BORROWED FUNDS WERE CLAIMED TO BE UTILIZED FOR THE PURPOSE OF COMMISSIONING AND ERECTION OF PLANT AND MACHINERY AS PER THE TERMS & CONDITIONS WITH SUPPLIERS. PLEA WAS ALSO RA ISED THAT IT IS NOT A CASE WHERE SURPLUS SHARE CAPITAL MONEY LYING IDLE AND UN USED HAD BEEN DEPOSITED IN THE BANK WITH THE OBJECT TO EARN INTEREST INCOME . HERE THE MONEY WAS DEPOSITED TO MEET OUT THE NECESSITY FOR THE PURPOSE OF ACQUIRING AN ASSET. THE LD. CIT(A) HAS NOT CONTROVERTED THE PLEA OF THE COMPANY THAT THE MONEY HAD BEEN DEPOSITED SO AS TO OPEN A LETTER OF CREDIT WITH A DEFINITE PURPOSE TO EXECUTE AN AGREEMENT FOR THE PURPOSE OF ACQUIRING T HE ASSETS, THUS THERE IS A DIRECT NEXUS BETWEEN THE ACQUISITION OF ASSETS AND THE DEPOSIT OF MONEY IN THE BANK. IF THE ASSESSEES SAID PLEA IS NOT ACCEPT ED IN THAT CASE ENTIRE 5 EXPENSES/LOSS INCURRED DUE TO TRIAL RUN BE ALLOWED AS A REVENUE EXPENDITURE. IT WAS STRONGLY PLEADED THAT THE FACTS OF THE ASSES SEES CASE IS SQUARELY COVERED BY THE DECISION OF SUPREME COURT IN THE CAS E OF CIT VS. KARNAL CO- OPERATIVE SUGAR MILLS LTD. 243 ITR 2 (SC) WHICH CAM E BEFORE THE HONBLE SUPREME COURT FROM THE JUDGMENT OF THE HONBLE PUNJ AB AND HARYANA HIGH COURT REPORTED IN 233 ITR 531 (P&H) (KARNAL CO-OPER ATIVE SUGAR MILLS LTD. VS. CIT). HE ALSO PLACED RELIANCE ON CIT VS. BOKARO STEELS LTD. (236 ITR 315 (SC). 3. ON THE OTHER HAND, THE LD. CIT, DR/SR.DR CONTEND ED THAT THAT THERE IS ABSOLUTELY NO EVIDENCE ON RECORD THAT THERE WAS EVE N TRIAL PRODUCTION IN THE LAST 10 DAYS AT THE END OF THE ACCOUNTING PERIOD. A STRONG PLEA WAS RAISED THAT THE AMOUNT WITHDRAWN FROM THE CC A/C MUST BE T AKEN AS BORROWED FUND FROM WHICH THE FDRS WERE PURCHASED AND THEREFORE TH E CASE OF TUTICORIN ALKALI (SUPRA) SQUARELY APPLIES TO THE CASE OF THE ASSESSEE. THE LD. COUNSEL FOR THE REVENUE PLACED RELIANCE UPON THE DECISIONS WHICH ARE MENTIONED IN THE IMPUGNED ORDER, THEREFORE, WE ARE NOT REPRODUCING T HEM BEING MATTER OF RECORD. THE CRUX OF ARGUMENT ON BEHALF OF THE REVEN UE IS IN SUPPORT TO THE IMPUGNED ORDER. 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS OF LD. REPRESENTATIVES OF BOTH SIDES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. BOTH THESE APPEALS WERE HEARD/ARGUED TOGETHER, THEREFORE, THESE CAN BE DISP OSED OF BY THIS COMMON AND CONSOLIDATED ORDER FOR THE SAKE OF BREVITY. BRI EF FACTS OF BOTH THE CASES ARE THAT ASSESSEE COMPANY IS A PUBLIC LIMITED COMPA NY ENGAGED IN MANUFACTURE OF TUBES AND IRON SHEETS WHICH ARE TERM ED AS TUBE DIVISION AND CRM DIVISION. THE TUBE DIVISION WAS ALREADY IN OPE RATION. THE ASSESSEE 6 ERECTED CRM DIVISION IN THESE TWO YEARS. FOR THE P URPOSE OF FINANCES FOR THIS DIVISION, THE ASSESSEE OPENED CASH CREDIT ACCOUNT, (SHORTLY KNOWN AS CC A/C), WITH THE STATE BANK OF INDIA, DENA BANK AND C OSMOS CO-OPERATIVE BANK. FOR PURCHASE OF PLANT & MACHINERY, LETTER OF CREDIT, (SHORTLY KNOWN AS L/C A/C), WAS REQUIRED TO BE OPENED IN FAVOUR OF TH E SUPPLIER OF THE PLANT & MACHINERY. FOR OPENING L/C A/C, BANK REQUIRED SECU RITY. THE ASSESSEE TRANSFERRED MONEY FROM CC A/C WITH THE STATE BANK O F INDIA AND THE DENA BANK AND KEPT THE SAME WITH THOSE BANKS AS FIXED DE POSITS AND THUS THE FIXED DEPOSITS, (SHORTLY KNOWN AS FDR) CAME INTO EX ISTENCE. THESE FDRS WERE PLEDGED AS SECURITIES WITH THE STATE BANK OF I NDIA AND THE DENA BANK FOR OPENING L/C A/C IN FAVOUR OF THE SUPPLIERS OF PLANT & MACHINERY. THE ASSESSEE PAID INTEREST ON CC A/C AND ALSO PAID BANK CHARGES ON L/C A/C. AND AFTER DEDUCTING INTEREST RECEIVED ON FDRS NET INTEREST P AID AT RS.20,58,52,690/- FOR THE ASSESSMENT YEAR 1999-00 AND RS.24,49,48,744/- F OR ASSESSMENT YEAR 2000-01 TRANSFER TO CAPITAL WORKING IN PROGRESS. 5. THE LD. ASSESSING OFFICER TOOK INCOME OF INTERES T ON FDRS AS INCOME OF THE ASSESSEE UNDER THE HEAD INCOME FROM OTHER SOURCES UNDER SECTION 56 OF THE I.T. ACT. HE ADDED RS.2,27,481/- IN A.Y. 1999-200 0 AND RS.35,08,731/- IN A.Y. 2000-2001 AS INCOME FROM INVESTMENT OF SURPLUS BORROWED FUNDS. HE PLACED RELIANCE UPON TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. VS. CIT 227 ITR 172 (S.C.). THE ASSESSMENT ORDER WAS CARRIE D IN APPEAL BEFORE THE LD. CIT(A) WHERE IT WAS CONFIRMED. 6 UNDER THE AFOREMENTIONED FACTS, IT IS SEEN THAT T HERE IS NO EVIDENCE ON RECORD TO SUPPORT THAT CRM DIVISION HAS COMMENCED THE PROD UCTION IN THESE YEARS AS THE PROJECT WAS AT THE STAGE OF ERECTION, THE SA ID FACT FIND SUPPORT FROM THE 7 FACT THAT THE ASSESSING OFFICER HIMSELF HAS ACCEPTE D THAT THE ERECTION WAS UNDER PROGRESS THEREFORE HE ALLOWED THE CAPITALIZAT ION OF ENTIRE EXPENSES / LOSS OF TRIAL RUN OTHERWISE HE COULD HAVE ALLOWED T HE TRAIL RUN EXPENSES / LOSS AS A REVENUE EXPENSES ,THEREFORE, THERE IS NO FORCE IN THE CONTENTION OF THE REVENUE THAT THERE WAS COMMERCIAL PRODUCTION DURING THE PERIOD FROM 21.3.2000 TO 31.3.2000. THERE IS NO EVIDENCE ON RE CORD TO SUPPORT SUCH CONTENTION BECAUSE ANY ENTRY IN THE ACCOUNT BOOKS B Y THE ASSESSEE IS SELF SERVING AND OF NO VALUE. IN VIEW OF THESE FACTS, T HE ASSESSEE FIND SUPPORT FROM THE DECISION IN KARNAL CO-OPERATIVE SUGAR MILL S LTD. VS. CIT 233 ITR 531 CONFIRMED BY THE HONBLE SUPREME COURT (243 ITR 2) WHICH IS FULLY APPLICABLE TO THE CASE OF THE ASSESSEE. THESE OBSERVATIONS OF THE HONBLE HIGH COURT ARE PERTINENT: IN THE CASE OF THE ASSESSEE BEFORE US, IT HAS ALRE ADY BEEN SEEN THAT MONEY WAS DEPOSITED, TO OPEN A LETTER OF CREDIT UNDER THE TERMS OF THE AGREEMENT WITH THE SUPPLIER OF THE MACHINE. IT WAS, THEREFORE, NOT A CASE WHERE SURPL US SHARE CAPITAL MONEY LYING IDLE AND UNUSED HAD BEEN DEPOSI TED IN THE BANK. HERE THE MONEY WAS DEPOSITED OUT OF NECE SSITY FOR THE PURPOSE OF ACQUIRING AN ASSET. THE PLEA O F THE DEPARTMENT THAT UNUTILIZED AND SURPLUS MONEY HAS BE EN DEPOSITED BY THE ASSESSEE, DOES NOT APPEAR TO BE CO RRECT. THE ASSESSEES PLEA THAT MONEY HAD BEEN DEPOSITED S O AS TO OPEN A LETTER OF CREDIT HAS NOT BEEN CONTROVERTE D. THEREFORE, THE ACTIVITY OF DEPOSITING MONEY OUT OF THE SHARE CAPITAL WAS AN ACTIVITY INCIDENTAL TO THE ACQ UISITION OF THE ASSET. IT WAS NOT A CASE WHERE SURPLUS SHARE C APITAL MONEY WAS DEPOSITED WITH THE BANK BECAUSE IT WAS LY ING UNUTILIZED AND IDLE. THE ASSESSEE DEPOSITED THE MO NEY WITH THE BANK WITH A DEFINITE PURPOSE TO EXECUTE AN AGREEMENT FOR THE PURPOSE OF ACQUIRING THE MACHINE. 8 THERE IS, HOWEVER, NO EVIDENCE ON RECORD TO SHOW TH AT THE FIXED DEPOSIT HAS BEEN MADE BY THE ASSESSEE OUT OF THE BORROWINGS. IT WAS THE SHARE CAPITAL WHICH WAS DEP OSITED. THE QUESTION, THEREFORE, ARISES AS TO WHETHER THE D EPOSIT OF THE SHARE CAPITAL MONEY WAS MADE BECAUSE THE ASSESS EE DID NOT FOR THE TIME BEING, REQUIRE THE MONEY FOR I TS BUSINESS. THE ASSESSEE PURCHASED FIXED DEPOSITS IN THE COURSE OF AN ACTIVITY DIRECTLY RELATABLE TO THE ACQ UISITION OF AN ASSET. THERE IS, THUS, A DIRECT NEXUS BETWEEN T HE PURCHASE OF THE MACHINERY AND THE DEPOSIT OF MONEY IN THE BANK. THIS NEXUS SHALL BRING ABOUT A PRESUMPTION I N THE ASSESSEES FAVOUR THAT THE MONEY WAS DEPOSITED NOT WITHOUT A PURPOSE BUT WITH THE OBJECT OF ACQUIRING A MACHINE FROM THE SUPPLIER. SUCH INTEREST INCOME B EING DIRECTLY RELATABLE TO THE TERMS OF THE CONTRACT FOR ACQUIRING A BUSINESS ASSET SHOULD GO TO REDUCE THE COST OF THE ASSET. ---------- THAT THE INTEREST INCOME EARNED BY THE ASSESSEE WAS DIRECTLY RELATABLE TO THE ACTIVITY OF ACQUIRING AN ASSET FROM A SUPPLIER IN WHOSE FAVOUR A LETTER OF CREDIT WAS OPENED AFTER PAYING MONEY IN FIXED DEPOSITS. SINCE , THE TWO ACTIVITIES, NAMELY, DEPOSITS MADE IN THE BANK A ND THE ACQUISITION OF MACHINERY HAVE A DIRECT NEXUS, THE I NTEREST INCOME HAS TO BE ASSOCIATED WITH THE COST OF THE AS SET SO ACQUIRED. IT WAS NOT A CASE OF DEPOSIT OF SURPLUS MONEY, ENTIRELY UNCONNECTED WITH ANY OTHER ACTIVITY OF THE ASSESSEE. THE DEPOSIT OF SHARE CAPITAL MONEY WITH THE BANK HAD A DEFINITE PURPOSE AND OBJECT. IN THIS LI GHT, THE INTEREST EARNED BY THE ASSESSEE SHALL GO TO REDUCE THE COST OF THE ASSET ACQUIRED OUT OF THE TRANSACTION. IN THE CASE OF CIT VS. BOKARO STEELS LTD. 236 ITR 3 15 THE HONBLE SUPREME COURT HELD AS UNDER:- 9 IN CASE MONEY IS BORROWED BY A NEWLY STARTED COMPA NY WHICH IS IN THE PROCESS OF CONSTRUCTING AND ERECTING ITS PLANT, THE INTEREST INCURRED BEFORE THE COMMENCEMENT OF PRODUC TION ON SUCH BORROWED MONEY CAN BE CAPITALIZED AND ADDED TO THE COST OF THE FIXED ASSETS CREATED AS A RESULT OF SUCH EXP ENDITURE. BY THE SAME REASONING IF THE ASSESSEE RECEIVES ANY AMO UNTS WHICH ARE INEXTRICABLY LINKED WITH THE PROCESS OF SETTING UP ITS PLANT & MACHINERY, SUCH RECEIPTS WILL GO TO REDUCE THE COST OF ITS ASSETS. THESE ARE RECEIPTS OF CAPITAL NATURE AND CANNOT BE TREATED AS INCOME. THE HONBLE COURT FURTHER HELD: DISMISSING THE APPEAL, THAT THE FIRST THREE HEADS OF INCOME WERE (I) THE RENT CHARGED BY THE ASSESSEE TO ITS CONTRAC TORS FOR HOUSING WORKERS AND STAFF EMPLOYED BY THE CONTRACTO R FOR THE CONSTRUCTION WORK OF THE ASSESSEE INCLUDING CERTAIN AMENITIES GRANTED TO THE STAFF BY THE ASSESSEE, (II) HIRE CHA RGES FOR PLANT AND MACHINERY WHICH WAS GIVEN TO THE CONTRACTORS BY THE ASSESSEE FOR USE IN THE CONSTRUCTION WORK OF THE AS SESSEE, AND (III) INTEREST FROM ADVANCES MADE TO THE CONTRACTOR S BY THE ASSESSEE FOR THE PURPOSE OF FACILITATING THE WORK O F CONSTRUCTION. THE ACTIVITIES OF THE ASSESSEE IN CONNECTION WITH A LL THESE THREE RECEIPTS WERE DIRECTLY CONNECTED WITH OR INCIDENTAL TO THE WORK OF CONSTRUCTION OF ITS PLANT UNDERTAKEN BY THE ASSESSE E. THE ADVANCES WHICH THE ASSESSEE MADE TO THE CONTRACTORS TO FACILITATE THE CONSTRUCTION ACTIVITY OF PUTTING TOG ETHER A VERY LARGE PROJECT WAS AS MUCH TO ENSURE THAT THE WORK OF THE CONTRACTORS PROCEEDED WITHOUT ANY FINANCIAL HITCH AS TO HELP TH E CONTRACTORS. THE ARRANGEMENTS WHICH WERE MADE BETWEEN THE ASSESS EE COMPANY AND THE CONTRACTORS PERTAINING TO THESE THR EE RECEIPTS WERE ARRANGEMENTS WHICH WERE INTRINSICALLY CONNECTE D WITH THE CONSTRUCTION OF ITS STEEL PLANT. THE RECEIPTS HAD B EEN ADJUSTED AGAINST THE CHARGES PAYABLE TO THE CONTRACTORS AND HAD GONE TO REDUCE THE COST OF CONSTRUCTION. THEY HAD, THEREFOR E, BEEN RIGHTLY HELD AS CAPITAL RECEIPTS AND NOT INCOME OF THE ASSE SSEE FROM ANY INDEPENDENT SOURCE. 10 THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS . VGR FOUNDATIONS 298 ITR (32) (MADRAS) HELD AS UNDER: - ------------ INTEREST ON MONEYS BORROWED FOR THE PERIOD PRIOR TO THE COMMENCEMENT OF BUSINESS COULD BE ALLOWED AS DE DUCTION FROM THE INTEREST U/S 57 WHILE COMPUTING INCOME FRO M OTHER SOURCES IN RESPECT OF THE INTEREST RECEIVED. WHILE COMING TO THE AFORESAID CONCLUSION, THE HONB LE MADRAS HIGH COURT PLACED RELIANCE UPON THE DECISIONS IN BOKARO STEELS (SUPRA ) AND KARNATAKA POWER CORPORATION 247 ITR 268 (SC). 7. IN THE PRESENT APPEALS, THE ASSESSEE OPENED CC A/C IN THE BANKS FOR FINANCING THE ERECTION AND CONSTRUCTION OF PLANT & MACHINERY OF THE CRM DIVISION; TRANSFERRED CERTAIN AMOUNT THERE FOR PURC HASE OF FDRS AND PLEDGED THOSE FDRS WITH THE BANKS AS SECURITIES FOR OPENING L/C A/C IN FAVOUR OF THE SELLERS OF THE PLANT & MACHINERY. THIS IS A CONNEC TED TRANSACTION AS A WHOLE. THE ASSESSEE RECEIVED INTEREST ON FDRS. THUS RECEI PT OF INTEREST ON FDRS ARE INEXTRICABLY LINKED WITH THE PROCESS OF SETTING UP ITS PLANT & MACHINERY. THE CIT(A) HAS NOT MENTIONED IN THE ORDER AS TO HOW THE CASE OF CIT VS. BOKARO STEELS LTD. [236 ITR 315 (SC)] IS NOT APPLIC ABLE SINCE THE RECEIPTS WERE INEXTRICABLY LINKED WITH THE SETTING UP OF THE CAPITAL STRUCTURE. IT IS NOT A CASE WHERE SURPLUS SHARE CAPITAL/MONEY WAS LYING ID LE/ UNUSED WAS DEPOSITED IN THE BANK WITH THE OBJECT TO EARN INTEREST INCOME RATHER THE MONEY WAS DEPOSITED TO MEET OUT THE NECESSITY FOR THE PURPOSE OF ACQUIRING AN ASSET, THEREFORE, WE HOLD THAT SINCE THE INTEREST INCOME I S DIRECTLY RELATABLE TO THE OPENING OF L/C ACCOUNT ON THE BASIS OF SECURITY OF THE FDRS IN TERMS OF THE CONTRACT FOR ACQUIRING BUSINESS ASSETS, THEREFORE, IT SHOULD GO TO REDUCE THE 11 COST OF THE ASSETS, CONSEQUENTLY, THE INCOME FROM T HE FDRS CANNOT BE SEPARATELY TAXED UNDER THE HEAD INCOME FROM OTHER SOURCES. RESULTANTLY, BOTH THESE APPEALS OF THE ASSESSEE AR E ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 02.2.2010. (V.K. GUPTA) (JOGINDER SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 02.2.2010 {VYAS} COPY TO: APPELLANT/RESPONDENT/CIT/CIT(A)/DR/GUARD F ILE