The Commissioner Of Income Tax v. M/S Bhawal Synthetics (India) Udaipur

HIGH COURT OF JUDICATURE FOR RAJASTHAN ATJODHPUR D.B. Income Tax Appeal No. 54 / 2003 The Commissioner Of Income Tax ----Appellant Versus M/S Bhawal Synthetics (India) Udaipur ----Respondent Connected With D.B. Income Tax Appeal No. 46 / 2006 _____________________________________________________For Appellant(s) : Mr. KK BissaFor Respondent(s) : _____________________________________________________ HON'BLE MR. JUSTICE GOVIND MATHUR HON'BLE MR. JUSTICE VINIT KUMAR MATHURJudgment Per Hon’ble Mr. Govind Mathur, J. 05/05/2017 By this judgment we are deciding two appeals beingabsolutely inter-related. It would be appropriate to first dealwith D.B. Income Tax Appeal No.54/2003. This appeal underSection 260(A) of the Income Tax Act, 1961 is before us toquestion correctness of order dated 28.3.2003 passed by theIncome Tax Appellate Tribunal, Jodhpur on the basis of thefollowing substantial questions of law :- “1. Whether in the facts and circumstances of the case,the interest earned on Fixed Deposit receipts used by the assessee as borrowing margin money for funds forsetting up the industry can be termed as inextricablylinked with the process of setting up of industry so asto be considered as capital receipt and not revenueincome ? 2. Whether in the facts and circumstances of the casethe Tribunal was justified in law in holding that theenquiry conducted by the Assessing Officer before theassessment order was passed was proper and adequateenquiry so as not to render the assessment ordererroneous and prejudicial to the interest of therevenue, as held by the CIT in his order u/s.263 of theI.T. Act ?” In brief facts of the case are that the respondent-assesseefiled return with no income, hence, that was selected underscrutiny and a notice as per provisions of Section 143(2) of theIncome Tax Act, 1961 (hereinafter referred to as the ‘Act of 1961’)was issued. The Assessing Officer considering the explanationgiven by the assessee arrived at the conclusion that since noexpenditure or depreciation claimed by the assessee, the additionsought to be made is set off and the returned income be treatedas nil. The Commissioner of Income Tax on subsequentexamination of record found the order passed by the AssessingOfficer erroneous and prejudicial to the interest of revenueinasmuch as the interest earned on Fixed Deposit Receipts (FDRs) amounting to Rs.9,31,572/- had not been brought to tax/wronglyset off and further that the Assessing Officer failed to make dueand proper enquiry as required in the facts and circumstances of the case. A show-cause notice under Section 263 of the Act of1961, thus, was issued. The Commissioner of Income Tax afterconsidering all facts and circumstances and the law applicable,arrived at the conclusion that the order passed by the AssessingOfficer was erroneous and prejudicial to the interest of revenueand, therefore, set aside the order of assessment with a directionthat the same should be made afresh after making due and properenquiry in accordance with the provisions of law laid down byHon`ble the Supreme Court in 227 ITR 172(SC). A challenge wasgiven to the order passed by the Commissioner of Income Taxinvoking powers under Section 263 of the Act of 1961 by way offiling an appeal before the Income Tax Appellate Tribunal, JodhpurBench, Jodhpur. The Tribunal by its order dated 28.3.2003accepted the appeal and set aside the order passed under Section263 of the Act of 1961. To challenge the order passed by the Income Tax AppellateTribunal this appeal is before us with the contention that theinterest earned by the assessee on Fixed Deposits is not businessincome but from other sources and, therefore, is liable to betaxed. It is also stated that the Assessing Officer passed order ofassessment without proper and adequate enquiry and that waserroneous and prejudicial to the interest of revenue, as such, the Income Tax Appellate Tribunal erred while setting aside the orderunder Section 263 of the Act of 1961. Heard learned counsel for the appellant. None is present onbehalf of the respondent-assessee. As already stated, the Commissioner of Income Tax whileinvoking powers under Section 263 of the Act of 1961 held thatthe interest earned on FDRs was taxable as income and that couldhave not been set off by treating the same as margin moneyrequired for obtaining letter of credit or bank guarantee etc.The Income Tax Appellate Tribunal negativated the stand of theCommissioner of Income Tax by holding that the Fixed Depositwas pertaining to the amount that was to be adjusted in projectcost and, therefore, the interest accrued thereon was rightlytreated as business expenditure and was rightly set off by theAssessing Officer. Hon`ble Supreme Court while dealing with theissue of similar nature in Tuticorin Alkali Chemicals & FertilizersLimited Vs. Commissioner of Income Tax reported in 227 ITR172(SC) held that the interest earned on short-term investment offunds borrowed for setting up of factory during construction offactory before commencement of business has to be assessed asincome from other sources and it cannot be said that interestincome is not taxable on the ground that it would go to reduceinterest on borrowed amount which would be capitalized. TheApex Court in the case aforesaid discussed the entire issue in detail and that deserves to be quoted as follows :- “It is true that the company will have to payinterest on the money borrowed by it. But thatcannot be a ground for exemption of interestearned by the company by utilising the borrowedfunds as its income. It was rightly pointed out inthe case of Kedar Narain Singh vs. CIT [1938] 6ITR 157 (All.) that ‘anything which can properlybe described as income is taxable under the Actunless expressly exempted’. The interest earnedby the assessee is clearly its income and unlessit can be shown that any provision like Section10 has exempted it from tax, it will be taxable.The fact that the source of income was borrowedmoney does not detract anything from theRevenue character of the receipt. The questionof adjustment of interest payable by thecompany against the interest earned by it willdepend upon the provisions of the Act. Theexpenditure would have been deductible asincurred for the purpose of business if theassessee’s business had commenced. But that isnot the case here. The assessee may be entitledto capitalise the interest payable by it. But whatthe assessee cannot claim is adjustment of thisexpenditure against interest assessable undersection 56. Section 57 of the Act sets out in itsclauses (i) to (iii) the expenditures which areallowable as deduction from income assessableunder section 56. It is not the case of theassessee that the interest payable by it on termloans are allowable as deduction under section57”. In the case in hand, it is not in dispute that the assessee hadincome of interest through FDRs and while setting off that theAssessing Officer as well as the ITAT did not examine the aspectas to under which provision the assessee claimed deduction or setoff of his income from other sources against interest payable onthe borrowed fund. The reason given is that the amountpertaining to FDR was not surplus amount but part of amount thatwas kept to obtain letter of credit for purchase of machinery. Whileaccepting the fact that the FDR was for obtaining letter of credit topurchase machinery but so far as interest earned thereon isconcerned, that is nothing but income through other sources, assuch, the Commissioner of Income Tax rightly treated the same asincome taxable. So far as the second question is concerned as towhether the Commissioner of Income Tax was justified in invokingpowers under Section 263 of the Act of 1961 by holding that theenquiry conducted by the Assessing Officer before the assessmentorder was neither proper nor adequate, we would like to state thatthe order passed by the Assessing Officer nowhere reflects aboutany enquiry said to be made. It simply refers the explanationgiven by the assessee and nothing beyond that. In view of whatever stated above, we are inclined to acceptthis appeal. Accordingly, the appeal is allowed. The order passedby the Income Tax Appellate Tribunal dated 28.3.2003 is set aside. The order passed by the Commissioner of Income Tax invoking powers under Section 263 of the Act of 1961 stands restored. D.B. Income Tax Appeal No.46/2006 This appeal is directed against the order of the Tribunal dtd.1.4.2005 relating to assessment year 1996-97. It is sequel to the order passed by the Tribunal in ITA No.212/JU/01 on 28.3.2003. The original assessment for assessment year 1996-97 was made at nil income by the assessing officer accepting the contention of the assessee. However, in pursuance of order passed by the CIT in exercise of its power under Section 263, a fresh assessment for the year 1996-97 came into existence which is subject matter of this appeal and relates to including the interest earned on fixed deposit receipt as income of the assessee and not capital receiptresulting in reduction of cost of installation of the assessee’sbusiness. Since the order passed by the CIT under Section 263 itselfwas set aside by the Tribunal vide its above referred orderdtd.28.3.2003, order of assessment giving effect to the orderpassed under Section 263, the appeal of the assessee has beenallowed as foundational order has ceased to exist. A Coordinate Bench of this Court admitted this appealwithout framing any substantial question of law. Having in exercise of its power under Section 263, a fresh assessment for the year 1996-97 came into existence which is subject matter of this appeal and relates to including the interest earned on fixed deposit receipt as income of the assessee and not capital receiptresulting in reduction of cost of installation of the assessee’sbusiness. Since the order passed by the CIT under Section 263 itselfwas set aside by the Tribunal vide its above referred orderdtd.28.3.2003, order of assessment giving effect to the orderpassed under Section 263, the appeal of the assessee has beenallowed as foundational order has ceased to exist. A Coordinate Bench of this Court admitted this appealwithout framing any substantial question of law. Having considered all facts of the case, we are of the opinion that thisappeal involves a substantial question of law in the terms that“Whether the Income Tax Appellate Tribunal was justified insetting aside the order of assessment which was made as aconsequence to a revisional order under Section 263 of theIncome Tax Act on the count that the order passed by therevisional authority was already set aside ?” It is the positionadmitted that the order passed by the revisional authority underSection 263 of the Act of 1961 was set aside by the Income TaxAppellate Tribunal and, therefore, the consequential order ofassessment was certainly not sustainable, as such, the IncomeTax Appellate Tribunal under the order impugned did not commitany wrong in setting aside the same, however, the position hasnow been altered in view of the fact that the revisional order hasalready been restored, therefore, the order or assessment toodeserves to be restored. Accordingly, this appeal is allowed. Theorder passed by the Income Tax Appellate Tribunal dated01.4.2005 is set aside. The order passed by the Assessing Officerstands restored, hence, the ITAT is required to adjudicate thesame on merits. The appeal ITA No.156/JU/2003 (A.Y. 1996-97),accordingly stands restored and is remanded to ITAT foradjudication on merits. (VINIT KUMAR MATHUR)J. (GOVIND MATHUR)J.