M/S. India Metal One Steel Plate Processing Private Limited,Chennai – 600 006 v. The Deputy Commissioner Of Income Tax, Corporate Circle – 2 (2)

IN THE HIGH COURT OF JUDICATURE AT MADRAS THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMandTHE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN TCA.No.322 of 2019and CMP.No.12046 of 2019 M/s. India Metal One Steel Plate Processing Private Limited,Chennai – 600 006... Appellant Vs. The Deputy Commissioner of Income Tax, Corporate Circle – 2 (2)121, Mahatma Gandhi Road,Chennai – 600 034... Respondent* * * Prayer :Tax Case Appeal filed under Section 260A of theIncome Tax Act, 1961, against the order of the Income TaxAppellate Tribunal Chennai 'A' Bench, dated 27.11.2018 inI.T.A.No.3497/CHNY/2016 for the assessment year 2012-13. againstthe order of Commissioner of Income Tax (Appeals) – 6, Chennaiin ITA 185/CIT (A) – 6/15-16 dated 18.10.2016 for assessmentyear 23.03.2015 passed under section 143(3) of the Inocme TaxAct 1961, by the Deputy Commissioner of Income Tax CorporateCircle – (2) Chennai made in ITA.No. 185/CIT (A) – 6/2015-2016in PAN No. AACC 159598. This appeal filed by the assessee under Section 260 A ofthe 'Income Tax Act, 1961' ( hereinafter referred to as the Act)is directed against the order dated 27.11.2018 passed by IncomeTax Appellate Tribunal, Chennai 'A' Bench (for short, theTribunal) in ITA.No.3497/CHNY/2016 for the Assessment Year 2012-13. https://hcservices.ecourts.gov.in/hcservices/ 2. The assessee has raised the following substantialquestions of law: “1) Whether, in law, the Tribunal wasright in holding that interest earned on shortterm deposits out of equity funds for purchase ofassets, prior to commencement of business, is nota capital receipt but is taxable as “Income fromOther Sources”? 2) Whether, in law, the Tribunal was rightin not allowing the expenditure for earninginterest income? 3) Whether, in law, the Tribunal havingheld that interest income should be considered asa revenue receipt chargeable to tax, then theTribunal ought to have consequentially held thatthe expenditure of Rs.2,55,75,842 debited toProfit & Loss Account should be allowed as adeduction? and 4) Whether, in law, the Tribunal was rightin not appreciating that since the interest isdirectly related to the manufacturing facility, itshould be added to the Capital Work in Progress?” 3. We have heard Mr.SP.Chidambaram, learned counselappearing for the appellant/assessee and Mr.KarthickRenganathan, learned Senior Standing Counsel assisted byMr.S.Rajesh, learned counsel for respondent Revenue. 4. The short issue, which is required to be decided inthis case, is as to whether the interest earned by the assesseeon short term deposits out of equity funds for purchase ofassets prior to commencement of business, is a capital receiptor it is taxable as ‘Income from Other Sources’. 5. The Assessing Officer found that such interest istaxable under the head ‘Income from Other Sources’, whichfinding was confirmed by the Commissioner of Income Tax(Appeals), [hereinafter referred to as the CIT(A)] and furtheraffirmed by the Income-Tax Appellate Tribunal. On a perusal ofthe Assessment Order, the orders passed by CIT(A) and that ofthe Tribunal, we have no hesitation to hold that the twoAuthorities below and the Tribunal, proceeded on the legalprinciple without making an in-depth study on the factssituation. The settled legal principle is that the law has to beapplied to the facts of the given case and not in the reverse. 6. We find that such an exercise has not been undertakenby the Assessing Officer at the first instance, as a result ofwhich the matter was proceeded solely based upon theinterpretation of the law laid down by the Hon'ble Supreme Courtin various decisions. We are of the firm view that the factsituation is required to be considered and the Assessing Officerhas to then apply legal principle laid down in various decisionsand come to a conclusion. We find that such an exercise has notbeen done in this case. 6. We find that such an exercise has not been undertakenby the Assessing Officer at the first instance, as a result ofwhich the matter was proceeded solely based upon theinterpretation of the law laid down by the Hon'ble Supreme Courtin various decisions. We are of the firm view that the factsituation is required to be considered and the Assessing Officerhas to then apply legal principle laid down in various decisionsand come to a conclusion. We find that such an exercise has notbeen done in this case. 7. To elaborate, on this issue, we refer to the following facts: The assessee is engaged in the business of ManufacturingSteel Plate Processing and Fabrication for Heavy Machinery partand components. The assessee had filed his return of income forthe Assessment year 2012-13. The return was duly processed underSection 143(1) of the Act on 10.05.2013. The assessee's case wasselected for scrutiny and notice under Section 143(2) of the Actwas issued on 14.08.2013. Subsequently, the case was heard andthe assessee had submitted a written submission during thepersonal hearing on 18.03.2015. On a reading of writtensubmissions, it is seen that the stand of the assessee is thatthe Company commenced commercial production from 1[st] of August2012. As on 31[st] March 2012, the manufacturing facility of theassessee company was not ready and the business operations didnot commence. The assessee had further stated that as thebusiness was not set up, the company did not claim anyexpenditure in the tax return. 8. It was further stated that the assessee received fundsfrom its shareholders as investment in share capital. Thesefunds were for a specific purpose of acquiring plant andmachinery and entering into a lease arrangement for the landused for manufacturing facility. That the funds had been clearlyearmarked for finalization/acquisition of these capitalpurchases. The assessee stated that the lease arrangement forthe land was signed in the last week of May 2011 and the plantand machinery were procured over a period of time and facilitywas set up. On account of time taken for the transaction, theshare capital subscription received, was placed in short termdeposits and then withdrawn as and when required by the assesseefor capital purchases. 9. The assessee further stated that pending suchpurchases, the assessee had parked the funds with the banks inthe form of fixed deposits for a short term period and depositswere generally placed for 7 days to 60 days and couple of https://hcservices.ecourts.gov.in/hcservices/ deposits were placed for 120 days and 180 days. Further, theassessee asserted that during the construction period, theassessee did not borrow any funds, but merely used the equitycapital. Thus, the stand of the assessee is that the funds whichwere in Bank in the form of Fixed Deposit for a short termperiod, were inextricably linked with the process of setting upof the business, the interest income earned from short termdeposits from Bank has been treated as capital in nature and tobe set-off against the pre-operative expenses. https://hcservices.ecourts.gov.in/hcservices/ deposits were placed for 120 days and 180 days. Further, theassessee asserted that during the construction period, theassessee did not borrow any funds, but merely used the equitycapital. Thus, the stand of the assessee is that the funds whichwere in Bank in the form of Fixed Deposit for a short termperiod, were inextricably linked with the process of setting upof the business, the interest income earned from short termdeposits from Bank has been treated as capital in nature and tobe set-off against the pre-operative expenses. 10. After setting out the above and other factualdetails, the assessee referred to various decisions of theHon'ble Supreme Court and the other High Courts. The AssessingOfficer noted the contentions pleaded in the writtensubmissions on 18.03.2015. The same has been extracted inparagraph 3.2 of the Assessment Order dated 23.03.2015.However, the Assessing Officer has not discuss as to whether thestand taken by assessee as regards deployment of the funds,forming part of the fixed deposits, retained as short termdeposits. The discussion in the Assessment Order commences fromparagraph 3.3, the Assessing Officer has straight away referredto the decision of the Hon'ble Supreme Court in Tuticorin AlkaliChemicals & Fertilizers Ltd., Vs. Commissioner of Income Tax[1997] 93 TAXMAN 502 (SC). After referring to two paragraphs ofthe decision, the Assessing Officer held that in the light ofthe decision in Tuticorin Alkali Chemicals & Fertilizers case,before commencement of business, income has to be assessed asIncome from Other Sources and it cannot be said that interestincome is not taxable. Accordingly, the same was added back tothe total income under the head ‘Income from Other Sources’ forthe Financial Year 2011-12 relevant to the Assessment year 2012-13. To be noted, there was no discussion with regard to thestand taken by the assessee as to the reason for parking thefunds in short term deposits with the bank. The assessee carriedthe matter on appeal to the Commissioner of Income Tax (Appeals)[CIT(A)]. We find from the Statement of Facts and Grounds ofAppeal, the assessee reiterated that short term deposits werenot made out of any surplus funds and hence, the relatedinterest income therefrom cannot be treated as 'Income fromother sources”. In the written submissions, the assesseereiterated that since the entire interest income was earned onlyon account of temporary deployment of funds as explained by themand not on account of surplus funds, no source of income hadcome into existence as on March 31[st], 2012. Further, the detailsfrom Balance Sheet as on 31.03.2012 were referred to andreiterated that the entire funds, which were part of fixeddeposits were deployed towards various capital assets. Thoughsuch stand of the assessee and the contentions raised by theassessee in the written submissions were referred to, CIT(A) proceeded solely based on the decision of the Hon'ble SupremeCourt in Tuticorin Alkali Chemicals & Fertilizers case and heldthat in the light of said decision there is no infirmity in theorder of Assessing Officer. Such order has been challengedbefore the Income-Tax Appellate Tribunal reiterating the samestand taken before the Assessing Officer and CIT(A). 11. On a reading of the order of the Tribunal, we findthat the Tribunal concurred with CIT(A) and extractedsubstantial portion of the order passed by CIT(A) and held thatCIT(A) was right in applying the decision of the Hon'ble SupremeCourt in Tuticorin Alkali Chemicals & Fertilizers and held thatinterest earned by the assessee on the investment of sharecapital in call deposits before the commencement of itsproduction could be assessed separately under the head ‘Othersources’. 11. On a reading of the order of the Tribunal, we findthat the Tribunal concurred with CIT(A) and extractedsubstantial portion of the order passed by CIT(A) and held thatCIT(A) was right in applying the decision of the Hon'ble SupremeCourt in Tuticorin Alkali Chemicals & Fertilizers and held thatinterest earned by the assessee on the investment of sharecapital in call deposits before the commencement of itsproduction could be assessed separately under the head ‘Othersources’. 12. A Division Bench of this Court in the case ofCommissioner of Income-Tax Vs. VGR Foundations reported in[2008] 298 ITR 132 considered the decision in Tuticorin AlkaliChemicals & Fertilizers case and made certain observations withregard to whether share application money will fall in to thecategory of 'Borrowed Funds'. At this juncture, it would bebeneficial to refer to paragraph 5 of the said judgment: “In our opinion, in view of the aboveclear cut ruling by the Supreme Court it isnecessary to give a finding of fact in regard tomonies that were kept in deposit from out of theshare application monies. In the light of theSupreme Court decision in Tuticorin AlkaliChemicals and Fertilizers Ltd. [1997] 227 ITR172, it is only in the event of interest earnedfrom out of deposits made from borrowed fundsthat it would be in the nature of income. Shareapplication monies do not fall into the categoryof borrowed funds and do not involve payment ofinterest. In effect share application monies,etc., are gathered for being used in setting upof an industry, unit, purchase of assets, and soon. Till such time the money is required fordeferment of various items, obviously the moneyhas to be kept in deposit with a bank. Keepingthe money i current account would not yield anyinterest income. In can, therefore, be seen thatit is during the course of construction that themonies are kept in deposits with the bank. Inthese circumstances in the light of the SupremeCourt decisions in the case of Bokaro Steel Ltd. [1999] 236 ITR 315, Karnal Co-operative SugarMills Litd. [2000] 243 ITR 2 and Karnataka PowerCorporation [2001] 247 ITR 268, the claim ofthe assessee is reasonable and deserves to beaccepted. We accordingly uphold the claim of theassessee and delete the addition of interestmade to the income. The legal plea was notinsisted upon.” 13. In the above decision, the Division Bench held thatthe share application money are gathered for being used insetting up of an industry, unit, purchase of assets and so onand till such time the money is required for deferment ofvarious items, obviously the money has to be kept in depositwith the bank. Therefore, it held that share application moniesdid not fall into the category of borrowed funds and did notinvolve payment of interest. 13. In the above decision, the Division Bench held thatthe share application money are gathered for being used insetting up of an industry, unit, purchase of assets and so onand till such time the money is required for deferment ofvarious items, obviously the money has to be kept in depositwith the bank. Therefore, it held that share application moniesdid not fall into the category of borrowed funds and did notinvolve payment of interest. 14. The Hon'ble Supreme Court in Commissioner of IncomeTax Vs. Bokaro Steel Ltd. reported in [1999] 236 ITR 315 (SC)held as follows:“7. The appellant, however, relied uponthe decision of this Court in Tuticorin AlkaliChemicals & Fertilizers Ltd.'s case (supra).That case dealt with the question whether theinvestment of borrowed funds prior tocommencement of business, resulting in earningof interest by he assessee, would amount tot heassessee earning any income. This Court heldthat if a person borrows money for businesspurposes, but utilises that money to earninterest, however, temporarily, the interest sogenerated will be his income. This income can beutilised by the assessee whichever way he likes.Merely because he utilised it to repay theinterest on the loan taken will not make theinterest income as a capital receipt. Thedepartment relied upon the observations made inthat judgment (at page 179) to the effect thatif the company, even before it commencesbusiness, invests surplus funds in its hands forpurchase of land or house property and latersells it at profit, the gain made by the companywill be assessable under the head 'Capitalgains'. Similarly, if a company purchases rentedhouse and gets rent, such rent will beassessable to tax under Section 22 as incomefrom house property. Likewise, the company may have income from other sources. The company mayalso, as in that case, keep the surplus funds inshort-term deposits in order to earn interest.Such interest will be chargeable under Section56 of the Act. This Court also emphasised thefact that the company was not bound to utilisethe interest so earned to adjust it against theinterest paid on borrowed capital. The companywas free to use this income in any manner itliked. However, while interest earned byinvesting borrowed capital in short-termdeposits is an independent source of income notconnected with the construction activities orbusiness activities of the assessee, the samecannot be said in the present case where theutilisation of various assets of the company andthe payments received for such utilisation aredirectly linked with the activity of setting upthe steel plant of the assessee. These receiptsare inextricably linked with the setting up ofthe capital structure of the assessee-company.They must, therefore, be viewed as capitalreceipts going to reduce the cost ofconstruction. In the case of Challapalli SugarsLtd. v. CIT [1975] 98 ITR 167, this Courtexamined the question whether interst paidbefore the commencement of production by acompany on amounts borrowed for the acquisitionand installation of plant and machinery wouldform a part of the actual cost of the asset tothe assessee within the meaning of thatexpression in Section 10(5) of the IndianIncome-tax Act, 1922 and whether the assesseewill be entitled to depreciation allowances anddevelopment rebate with reference to suchinterest also. The Court held that the acceptedaccountancy rule for determining cost of fixedassets is to include all expenditure necessaryto bring such assets into existence and to putthem in working condition. In case money isborrowed by a newly started company which is inthe process of constructing and erecting itsplant, the interest incurred before thecommencement of production on such borrowedmoney can be capitalised and added to the costof the fixed assets created as a result of suchexpenditure. By the same reasoning if theassessee receives any amount which areinextricably linked with the process of settingup its plant and machinery, such receipts will go to reduce the cost of its assets. These arereceipts of a capital nature and cannot be taxedas income. (emphasis supplied) 15. While on this issue, it is relevant to take note ofthe decision of the Hon'ble Supreme Court in the case ofCommissioner of Income Tax – IV, Ahmedabad Vs. Shree Rama MultiTech Ltd. reported in [2018] 403 ITR 426 (SC), wherein theCourt held as follows: “12. The common rationale that isfollowed in all these judgment is that if thereis any surplus money which is lying idle and ithas been deposited in the bank for the purposeof earning interest then it is liable to betaxed as income from other sources but if theincome accrued is merely incidental and not theprime purpose of doing the act in question whichresulted into accrual of some additional incomethen the income is not liable to be assessed andis eligible to be claimed as deduction. Puttingthe above rationale in terms of the presentcase, if the share application money that isreceived is deposited in the bank in light ofthe statutory mandatory requirement then theaccrued interest is not liable to be taxed andis eligible for deduction against the publicissue expenses. The issue of share relates tocapital structure of the company and henceexpenses incurred in connection with the issueof shares relates to capital structure of thecompany and hence expenses incurred inconnection with the issue of shares are to becapitalized because the purpose of such depositis not to make some additional income but tocomply with the statutory requirement, andinterest accrued on such deposit is merelyincidental.” 16. In the decision of High Court of Delhi in the case ofIndian Oil Panipat Power Consortium Ltd. Vs. Income Tax Officerreported in [2009] 181 Taxman 249 (Delhi), the Court noted thedecision in Tuticorin Alkali Chemicals & Fertilizers Ltd andBokaro Steel Ltd and held as follows: “5.2 It is clear upon a perusal of thefacts as found by the authorities below that thefunds in the form of share capital were infused https://hcservices.ecourts.gov.in/hcservices/ for a specific purpose of acquiring land and thedevelopment of infrastructure. Therefore, theinterest earned on funds primarily brought forinfusion in the business could not have beenclassified as income from other sources. Sincethe income was earned in a period prior tocommencement of business it was in the nature ofcapital receipt and hence was required to be setoff against pre-operative expenses. In the caseof Tuticorin Alkali Chemicals & Fertilizers Ltd.(Supra) it was found by the authorities that thefunds available with the assessee in that casewere 'surplus' and, therefore, the Supreme Courtheld that the interest earned on surplus fundswould have to be treated as 'income from othersources'. On the other hand in Bokaro SteelLtd.'s (Supra) where the assessee had earnedinterest on advance paid to contractors duringpre-commencement period was found to be'inextricably linked' to the setting up of theplant of the assessee and hence was held to be acapital receipt which was permitted to be setoff against pre-operative expenses.” 17. The High Court of Delhi in the case of Commissionerof Income Tax Vs.Petronet LNG Ltd reported in [2011] 10taxman.com 257 (Delhi) has decided a similar issue where thefunds were parked with the bank and in the process, it generatedthe interest income and as to how such income should be treated.In the said case, the money was contributed by the fourpromoters in the form of share application money for whichshares were to be allotted and the said money was to be utilizedfor the purpose of purchasing requisite plant and machinery andthis application money was thus to be utilized for the purchaseof capital assets. In the said case, pending purchase of saidplant and machinery, money was primarily parked with the bankand in the process, it generated the interest income. Takingnote of the decision in Indian Oil Panipat Power Consrotium Ltd.Vs. ITO [2009] 315 ITR 254 (Delhi) and CIT Vs. Panem Coal MinesLtd. [IT Appeal No.639 of 2008 dated 17.09.2009 it was held thatif the interest earned on the funds which are to be utilized forpurchase of capital asset/setting up of the business and that itis inextricable linked with the setting up of the business, saidinterest will not be treated as income under the head ‘Incomefrom other sources’. 18. One common thread which passes through all the abovedecisions is that the authorities and the Tribunal had made afact finding exercise to ascertain as to whether there was aninextricable link with the setting up the business. As pointedout by us earlier, in the instant case, the Assessing Officer did not examine such aspect though the assessee has specificallystated in the written submissions dated 18.03.2015. 19. In our considered view, the matter shall beconsidered afresh by the Assessing Officer steering clear ofthe factual position, record his finding on facts and then applythe legal principle. As we have found that such procedure wasnot followed in the instant case, we deem it appropriate toremit the matter back to the Assessing Officer for freshconsideration. 18. One common thread which passes through all the abovedecisions is that the authorities and the Tribunal had made afact finding exercise to ascertain as to whether there was aninextricable link with the setting up the business. As pointedout by us earlier, in the instant case, the Assessing Officer did not examine such aspect though the assessee has specificallystated in the written submissions dated 18.03.2015. 19. In our considered view, the matter shall beconsidered afresh by the Assessing Officer steering clear ofthe factual position, record his finding on facts and then applythe legal principle. As we have found that such procedure wasnot followed in the instant case, we deem it appropriate toremit the matter back to the Assessing Officer for freshconsideration. 20. For the above reasons, the appeal filed by theassessee is allowed and the order of the Income Tax AppellateTribunalChennai'A'Bench,dated27.11.2018inI.T.A.No.3497/CHNY/2016, is set aside and the matter is remittedback to the Assessing Officer for a fresh consideration, whoshall take note of the above observations made by us in thisjudgment and proceed to decide the matter uninfluenced by anyobservations or findings recorded earlier. No costs.Consequently, connected miscellaneous petition is closed. Sd/- Assistant Registrar (Insp Cell)//True Copy// mp Sub Assistant Registrar TO 1. The Income Tax Tribunal, Chennai 'A'Bench, Chennai. 2.Deputy Commissioner of Income Tax, Corporate Circle – 2 (2) 121, Mahatma Gandhi Road, Nungambakkam Chennai – 600 034. +1cc to Mr.Karthik Ranganathan, Advocate, S.R.No. 48172+1cc to Mr.S.P.Chidambaram, Advocate, S.R.No. 48907 RGN(CO) GN(29/07/2019) TCA.No.322 of 2019and CMP.No.12046 of 2019