Commissioner Of Income-Tax-Vi,Chennai v. Vgr Foundations,Flat

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 14.06.2007 Coram : THE HONOURABLE MR.JUSTICE P.D.DINAKARAN AND THE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Appeal) Nos.609 and 610 of 2007 Commissioner of Income-tax-VI,Chennai. ..Appellant in both the T.C.(A)s. Vs. VGR Foundations,Flat No.6, 31, II Main Road,Kasturba Nagar,Chennai-20. ..Respondent in both the T.C.(A)s. Appeals under Section 260A of the Income-tax Act, 1961 against theorder of the Income-tax Appellate Tribunal, 'B' Bench, Chennai in I.T.A.Nos.5/Mds/2003 and 906/Mds/2003 dated 15.07.2004, for the assessment year1997-98 and 1998-99 respectively, against the order of the Commissioner ofIncome Tax Appeal VII chennai in ITA.No.71/02-03 dated.27.11.2002,and theorder of the Commissioner of Income Tax Appeal-VIII, Chennai inITA.No.68/02-03 dated 21.3.2003, against the order in PAN/GI.No.752428-Vof Income Tax officer, ward V(4) Chennai-34,Assessment order 1997-98 dated14.3.02 the order in PAN/GI.No.752428-V OF Income Tax Officer,WardV(4,Chennai-34 Assesment order of 1998-99 dated 14.3.02. For Appellant :Mr.T.Ravi Kumar, Standing Counsel forIncome-tax Department JUDGMENT (Judgment of the Court was delivered byP.P.S.Janarthana Raja, J.)These appeals are filed by the Revenue against the order of theIncome-tax Appellate Tribunal, 'B' Bench, Chennai in I.T.A. Nos.5/Mds/2003and 906/Mds/2003 dated 15.07.2004, raising the following commonsubstantial question of law:- https://hcservices.ecourts.gov.in/hcservices/ Whether on the facts and in the circumstances of thecase, the Income Tax Appellate Tribunal was right inholding that interest on moneys borrowed for the periodprior to the commencement of business can be allowed asdeduction from the interest u/s 57 of the Act whilecomputing "Income from Other Sources" in respect of theinterest received? 2.The facts leading to the above substantial question of law areas under: The assessee is a Partnership Firm, engaged in the Real Estatebusiness. The relevant assessment years 1997-98 and 1998-99 and thecorresponding accounting years ended on 31.03.1997 and 31.03.1998,respectively. A survey under Section 133A of the Income-tax Act ("Act" inshort) was conducted on 27.1.2000. Notices under Section 148 were issuedon 09.03.2000. The assessee-firm filed "nil" Returns of Income and alsofiled letters stating that the Returns filed vide Acknowledgement No.8869dated 14.02.2000 for the assessment year 1997-98 and AcknowledgementNo.8871 dated 14.02.2000 for the assessment year 1998-99, have to betreated as Returns in response to the notices issued under Section 148 ofthe Act. Further, notices under Section 143(2) were issued on 20.11.2001.The Assessing Officer noticed that the statements filed along with theReturns of income reveal that the assessee had incurred expenses prior tocommencement of business and the assessee had also earned interest incomefrom out of the fixed deposits with bank and the said income had been setoff against the expenses. The Assessing Officer was of the view that theinterest received on short term deposits in bank during pre-productionstage is assessable as income from other sources. Hence the same wasconsidered as income from other sources, determining the total income atRs.1,59,350/- and Rs.1,16,400/- for the assessment years 1997-98 and 1998-99, respectively. Aggrieved by the orders, the assessee filed appeals tothe Commissioner of Income-tax (Appeals). The C.I.T.(A) dismissed theappeals and confirmed the orders of the Assessing Officer. Aggrieved, theassessee filed appeals to the Income-tax Appellate Tribunal ("Tribunal" inshort). The Tribunal allowed the assessee's appeals and set aside theorders of the C.I.T.(A). Hence the present tax cases by the Revenue. 3.Learned Standing Counsel appearing for the Revenue submittedthat the assessee had set off interest earned, prior to commencement ofthe business operation, against the expenses. The assessee is wrong insetting off the interest prior to the commencement of the businessoperation against expenses. The interest income earned prior tocommencement of the business has to be assessed under the head "incomefrom other sources". Hence, the Assessing Officer is right in assessingthe interest income under the head "income from other sources". 4.Heard the counsel. The Tribunal allowed the appeals byfollowing its own earlier order and accepted the contention of theassessee. The Tribunal, in its order, held as follows:-"5. Before me the learned counsel for the assessee also reliedon the decision of the Supreme Court in the case of CIT v. https://hcservices.ecourts.gov.in/hcservices/ Karnataka Power Corporation (247 ITR 268) (SC), wherein it washeld that interest receipts / hire charges received during pre-production is on capital account. The learned counsel for theassessee also relied on various decisions in support of hiscase. At the time of hearing he had also filed a copy of theorder of this Tribunal in I.T.A. No.1369/Mds/02 dated 11-11-2002wherein on identical issue the Tribunal considering the variousSupreme Court decisions observed and held as under:- "4. The Supreme Court in Tuticorin Alkali Chemicals andFertilizers Ltd. (supra) was considering investment ofborrowed funds prior to commencement of business andheld that the interest earned was taxable. In BokaroSteel Ltd. (supra), it was a case of a Govt. companywhich during the period of construction of the planthad advanced monies to contractors on which it wasearning interest, received rent from quarters let outto employees, received hire charges on plant let out tocontractors and received royalty on stones removed fromthe assessee's lands. The Supreme Court considered allthese activities to be intricately connected with theconstruction activity and accordingly held thatinterest received, rent received, hire charges androyalty etc. would be reduced from the cost of theassets and it would not be treated as income. Similarview was expressed by the Supreme Court in the caseKarnal Cooperative Sugar Mills Ltd. (supra). Identicalview was also taken by the Supreme Court in the case ofBongaigaon Refinary and Petrochemicals Ltd. andKarnataka Power Corporation (supra).5. In our opinion, in view of the above clear cutruling by the Supreme Court it is necessary to give afinding of fact in regard to monies that were kept indeposit from out of the share application monies. Inthe light of the Supreme Court decision in TuticorinAlkali Chemicals and Fertilizers Ltd. (supra), it isonly in the event of interest earned from out ofdeposits made from borrowed funds that it would be inthe nature of income. Share application monies do notfall into the category of borrowed funds and do notinvolve payment of interest. In effect shareapplication monies etc. are gathered for being used insetting up of an industry, unit, purchase of assets,and so on. Till such time the money is required fordeferment of various items, obviously the money has tobe kept in deposit with a bank. Keeping the money incurrent account would not yield any interest income.It can therefore be seen that it is during the courseof construction that the monies are kept in depositswith the bank. In these circumstances in the light ofthe Supreme Court decisions in the cases of BokaroSteel Ltd. (supra), Karnal Co-operative Sugar MillsLtd. (supra) and Karnataka Power Corporation (supra), the claim of the assessee is reasonable and deserves tobe accepted. We accordingly uphold the claim of the assessee and delete the addition of interest made to the claim of the assessee is reasonable and deserves tobe accepted. We accordingly uphold the claim of the assessee and delete the addition of interest made to the income. The legal plea was not insisted upon.""From a reading of the above, it is seen that the Tribunal has followed theprinciples enunciated in the Supreme Court judgments in the case of C.I.T.Vs. Bokaro Steel Ltd. (236 ITR 315) and in the case of C.I.T. Vs.Karnataka Power Corporation (247 ITR 268) and came to the correctconclusion. The Revenue is unable to give any further materials orevidence and also not able to furnish information as to whether they havefiled any appeal against their earlier order or not. 5.Under the circumstances, we do not find any error or legalinfirmity in the order of the Tribunal so as to warrant interference.Hence, no substantial question of law arises for consideration of thisCourt and accordingly the tax cases are dismissed. Consequently, M.P.No.1of 2007 in T.C.(A) No.610 of 2007 is closed. No costs. km Sd/- Asst.Registrar /true copy/ Sub Asst.Registrar To 1. The Assistant Registrar, Income-tax Appellate Tribunal, 'B' Bench, Chennai. 2. The Commissioner of Income-tax (Appeals) VIII, Chennai. 3. The Commissioner of Income-tax (Appeals) VII, Chennai-600 034. 4. The Income-tax Officer, Ward V(4), Chennai-34. 5. The Commissioner of Income tax -VI , Chennai.+1 cc to Mr.N.Muralikumaran,Advocate Sr.No.34893. SA(CO)dcp/2.7.07 T.C.(A) Nos.609 and 610 of 2007