"The Account (Savifix Account) as the name denotes acts primarily as a saving account and doubles up as fixed deposit A/c. When the money is deposited in the Account, the moment balance crosses Rs. 25,000-, the exceeding amount in multiple of Rs. 5,000- is automatically converted to Fixed Deposit earning higher interest. Conversely, if funds are insufficient in account for withdrawal or an honour a cheque, the requisite amount will be automatically transferred from the fixed deposit account in units of Rs. 5,000/-.This type of Account offers convenience of a savings account with better interest rates As the name denotes, Account enjoy the freedom of a saving account with the earnings of a fixed deposit account."
This faci;ity though started by ICICI bank.They have discontinued it. However most of the national banks are providing this facility. One has to simply write to them to activate this afcility.
our salary accounts should be opened in the bank which agrres to provide auto sweep facility.
IT : Where after search at business premises of assessee-firm and its partner, books of account were handed over to concerned Assessing Officer, who after recording satisfaction issued notice under section 153C and completed assessment under section 153C/143(3), assessment was in accordance with law
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[2013] 35 taxmann.com 244 (Allahabad)
HIGH COURT ALLAHABAD
Commissioner of Income-tax, (Central)
v.
Classic Enterprises*
UMA NATH SINGH AND DR. SATISH CHANDRA, JJ.
IT APPEAL NOS. 142 TO 148 OF 2009
APRIL 17, 2013
Section 153C of the Income-tax Act, 1961 - Assessment in case of search or requisition - Assessment of income of any other person [Recording of satisfaction] - A search was conducted at business premises of assessee-firm as well as at business premises of its partners - Assessing Officer, after recording satisfaction, handed over books of account and seized material to concerned Assessing Officer, who, after issuing notice under section 153C, passed assessment orders under section 153C/143(3) - Whether on facts, assessment order was passed in accordance with law - Held, yes [In favour of revenue]
FACTS
| ■ | The assessee was a firm consisting of two partners, namely, 'S' and 'F', engaged in the business of running of hospital, building and educational institutions. A search was conducted at the business premises of 'S' as well as at various business premises of the assessees. The Assessing Officer recorded requisite satisfaction and handed over the books of account to the concerned Assessing Officer. | |
| ■ | The Assessing Officer issued notice under section 153C. Later, the assessment orders were passed under section 153C/143(3). | |
| ■ | On appeal, the Commissioner (Appeals) quashed the assessment orders. | |
| ■ | The Tribunal dismissed the revenue's appeal relying upon the judgment of the Apex Court in Manish Maheshwari v. Asstt. CIT [2007] 289 ITR 341/159 Taxman 258 where the Assessing Officer of the person searched and the Assessing Officer of the other person were different. |
HELD
| ■ | Section 153C only prescribes the procedure to be adopted for initiating proceedings under section 153A against a person who has not been searched, that too, in a situation where the Assessing Officer having the jurisdiction over the other persons (not searched) is different from the Assessing Officer having jurisdiction over the person searched. In the case of Manish Maheshwari v. Asstt. CIT [2007] 289 ITR 341/159 Taxman 258 (SC) it was observed by the Supreme Court that the Assessing Officer has not recorded his satisfaction, which is mandatory; nor has he transferred the case to the Assessing Officer having jurisdiction over the matter. So, the order of the High Court was set aside. But in the instant case, the Assessing Officer has recorded his satisfaction, and after recording the satisfaction handed over the books of account and seized material. Thus, the facts of both the cases are quite different. So, the ratio laid down in the case of Manish Maheshwari (supra) is not applicable in the instant case. [Paras 7,8,9] | |
| ■ | In the instant case, the books of account were handed over to the Assessing Officer, after being satisfied that the books belongs to the assessee. After recording the satisfaction, a notice under section 153C was issued and the assessee replied too. So, assessment order was completed under section 153C/143(3). [Para 11] | |
| ■ | Regarding the satisfaction, it may be mentioned that in the case of CIT v. Radhey Shyam Bansal [2011] 337 ITR 217/200 Taxman 138/11 taxmann.com 294 (Delhi), it was observed that in order to initiate block assessment proceedings against a third person in respect of whom search has not been conducted, certain conditions precedent are to be followed and they are mandatory. After amendment of section 158B(b) by the Finance Act, 2002, with retrospective effect from July 1, 1995, it can also include an expense, deduction or allowance which is found to be false. The word 'satisfaction' has not been defined in the Act. The 'satisfaction' by its very nature must precede before the papers/documents are sent by the Assessing Officer of the person searched to the Assessing Officer of the third person. Mere use or mention of the word 'satisfaction' in the order/note will not meet the requirement of the concept of satisfaction as used in section 158BD. The satisfaction has to be in writing and can be gathered from the assessment order, if it is so mentioned/recorded, or from any other order, note or record maintained by the Assessing Officer of the person searched. The word 'satisfaction' refers to the state of mind of the Assessing Officer of the person searched, which gets reflected in a tangible shape/form when it is reduced into writing. It is the conclusion drawn or the finding recorded on the foundation of the material available. The Assessing Officer is satisfied when he makes up his mind or reaches a clear conclusion when he takes a prima facie view that the material available establishes 'undisclosed income' of a third party. The Assessing Officer must reach a clear conclusion that good ground exists for the Assessing Officer of the third person to initiate proceedings as material before him shows or would establish 'undisclosed income' of a third person. At this stage, as the proceedings are at the very initial stage, the 'satisfaction' is neither required to be firm nor to be conclusive. The 'satisfaction' required is to decide whether or not block assessment proceedings are required to be initiated. But 'satisfaction' has to be founded on reasonableness. It cannot be capricious satisfaction. Though it is a subjective satisfaction, it must be capable of being tested on objective parameters. The opinion, though tentative, however, cannot be a product of imagination or speculation. The satisfaction must reflect rational connection with or relevant bearing between the material available and undisclosed income of the third person. The rational connection postulates and requires satisfaction of the Assessing Officer that a third person had 'undisclosed income' on the basis of evidence or material before him. The material itself should not be vague, indefinite, distinct or remote. [Para 12] | |
| ■ | Further, in the case of the CIT v. Panchajanyam Management Agencies & Services [2011] 333 ITR 281/[2012] 20 taxmann.com 584 (Ker.), it was held that on the facts there was no necessity for transferring the file from one officer to another, because the person searched was the managing partner and based on the materials gathered during the search the assessment was made by the same officer on the assessee-firm, wherein the searched assessee was the managing partner. So much so, issuance of notice under section 158BD, read with section 158BC, was sufficient for initiation of assessment which in the instant case was admittedly done and the assessee had filed reply in terms of notice issued. [Para 13] | |
| ■ | From the above, it is clear that the Tribunal erred in not considering the ratio laid down by the Court in the case of Digvijay Chemcials (supra). [Para 14] | |
| ■ | Hence, the impugned order passed by the Tribunal is set aside and the matter is remanded to the Tribunal to decide all the appeals strictly on merits expeditiously. [Para 16] |
CASE REVIEW
Manish Maheshwari v. Asstt. CIT [2007] 289 ITR 341/159 Taxman 258 (SC)distinguished.
Digvijay Chemicals Ltd. v. Asstt. CIT [2001] 248 ITR 381/118 Taxman 1 (All.)followed.
CASES REFERRED TO
Manish Maheshwari v. Asstt. CIT [2007] 289 ITR 341/159 Taxman 258 (SC) (para 8), Digvijay Chemicals Ltd. v. Asstt. CIT [2001] 248 ITR 381/118 Taxman 1 (All.) (para 10), CIT v. Radhey Shyam Bansal ; [2011] 337 ITR 217/200 Taxman 138/11 taxmann.com 294 (Delhi) (para 12) andCIT v. Panchajanyam Management Agencies and Services [2011] 333 ITR 281/[2012] 20 taxmann.com 584 (Ker.) (para 13).
D.D. Chopra for the Petitioner. Mudit Agarwal and Z.M. Siddiqui for the Respondent.
ORDER
Dr. Satish Chandra, J. - All the appeals have been filed under Section 260-A of the Income Tax Act, 1961 against the common judgment and order dated 29.04.2009, passed by the Income Tax Appellate Tribunal, Lucknow in various appeals for the assessment years mentioned above. As the facts and circumstances in all the appeals are identical, so all the appeals are decided by this common judgment for the sake of convenience.
2. All the appeals were admitted with the following substantial questions of law by various orders including the order dated 24.02.2010:
| i. | Whether on the facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal was justified in law in upholding the order of the Commissioner of Income Tax (Appeals) by incorrect interpretation of section 153C of the I.T. Act which only prescribes the procedure to be adopted in a situation where the Assessing Officer having the books of accounts of other person does not have jurisdiction over such person whereas in the case of the assessee the books were already handed over to the Assessing Officer who issued the notice after recording satisfaction thereby, meeting all the substantive requirements of law. | |
| ii. | whether on the facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal has wrongly relied on the judgement of the Apex Court Manish Maheshwari v. ACIT reported in 289 ITR 341 (SC) where the Assessing Officer of the person searched and the Assessing Officer of the other person were different whereas in the instant case the Assessing Officer of the person searched and the other person are one and the same and therefore, the requirement of handing over the books to the Assessing Officer of the other person has no relevance. | |
| iii. | whether the order of the Income Tax Appellate Tribunal is perverse in as much as it is contrary to the decision of the jurisdictional High Court in the case of Digvijay Chemicals Ltd. v. ACIT , 248 ITR 381 (All) wherein the court has clearly held that the even recording of satisfaction in writing for initiating proceedings u/s 158 BD which is identical with the provisions of section 153 C, is not mandatory. | |
| iv. | whether on the facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal is perverse in as much as it has not adjudicated the ground taken by the revenue in appeal questioning the jurisdiction of the Assessing Officer by assessee much after the time permitted u/s 124 (3) (b) of the I.T. Act. |
3. The brief facts of the cases are that the assessee is a registered Firm consisting of two partners namely Sri Siraj Iqbal and Smt. Farjana Siraj engaged in the business of running of hospital, building and educational institutions. On 10.11.2005, a search was conducted at the business premises of Sri Siraj Iqbal as well as at various business premises of the assessees. On 28.09.2006, the books of accounts were handed-over to the AO to pass assessment orders. The A.O. issued notice under section 153 C of the Act. Later, the assessment orders were passed for the assessment years mentioned above under section 153 C /143 (3) of the Act.
4. Aggrieved with the assessment orders, the assessees have filed the first appeals before the CIT (A) who vide his orders including the order dated 19.12.2008 quashed the assessment orders. Being aggrieved, the department filed Second Appeals, which were dismissed. Still not being satisfied, the department has filed these appeals.
5. With this background Sri Prashant Kumar, learned counsel for the revenue justified the order passed by the A.O. On the other hand, Sri Mudit Agarwal, counsel for the assessee relied on the orders passed by the CIT (A) as well as ITAT. No valuable contribution has been made by either the counsel.
6. After hearing both the parties and on perusal of record, it appears that the action under section 132 of the Act was carried out simultaneously in the case of (1) M/s. F. I. Builders (P) Ltd., (2) M/s. Azad Educational Society and (3) M/s. F. I. Hospital and (4) M/s Classic Enterprises. At the time of search i.e. 10.11.2005, the jurisdiction over all the respondent-assessees was with Joint CIT, Range II, Lucknow whereas over the case of Mr. Siraj Iqbal (searched person) was with the Additional CIT, Range-VI Lucknow. Jurisdiction in the case of the assessee and others was transferred from Joint CIT, Range-II, Lucknow to ACIT CC-I Lucknow on 31.10.2006 as per the letter F. No.81-C/Cent/Decent/CIT-I/Tech/2006-07 dated 31.10.2007, whereas the jurisdiction in the case of Mr. Siraj Iqbal was transferred from 'Additional, CIT Range VI Lucknow to ACIT, CC I, Lucknow on 19.10.2007 as per File No.T-33/CIT-II/Lucknow/TRANS/04-05/Vol.I/617 dated 19.10.2007. The Deputy CIT Lucknow after recording the reasons for issuing notices under section 153-C of the Act, issued notices to all the assesses. The reply was furnished on 28.12.2007.
7. Further, Section 153C only prescribes the procedure to be adopted for initiating proceedings under section 153A against a person who has not been searched, that too, in a situation where the A.O. having the jurisdiction over the other persons (not searched) is different from the A.O. having jurisdiction over the person searched.
8. In the case of Manish Maheshwari v. Asstt. CIT [2007] 289 ITR 341/159 Taxman 258 (SC), the Hon'ble Supreme Court observed that in case of block assessment, the A.O. had to (i) record his satisfaction that any undisclosed income belonged to the company; and (ii) hand over the books of account other documents and assets seized to the Assessing Officer having jurisdiction against the company.
9. Thus, it was observed by the Hon'ble Supreme Court that the assessing officer has not recorded his satisfaction, which is mandatory; nor he has transferred the case to the A.O. having jurisdiction over the matter. So, the order of the High Court was set aside. But in the instant case, the A.O. has recorded his satisfaction and after recording the satisfaction on 28.09.2006, handed over the books of accounts and seized material. Thus, the facts of both the cases are quite different. So, the ratio laid down in the case of Manish Maheshwari (supra) is not applicable in the instant case.
10. In the instant case, another admitted substantial question of law was pertaining to the applicability of ratio laid down by the jurisdictional High Court in the case of Digvijay Chemicals Ltd. v. Asstt. CIT [2001] 248 ITR 381/118 Taxman 1 (All.), where it was observed that:
| i. | the explanation and affidavit filed by the appellant relating to undisclosed and unexplained advance was not found acceptable, and the Tribunal had relied in detail on the evidence in support of this finding. It was not necessary that there must be always cross-examination of a witness before discharging his evidence. | |
| ii. | It was evident from the order of the Tribunal that the Deputy Commissioner of Income Tax, Amritsar, was satisfied that the undisclosed income mentioned in the seized documents pertained to the appellant. There was no error in this finding. Findings of fact by the Tribunal could not be interfered with. |
11. This ratio is applicable in the instant case as on 28.09.2006, the books of accounts were handed-over to the A.O., after being satisfied that the books belongs to the assessee. After recording the satisfaction, a notice under section 153-C was issued and the assessee replied too. So, assessment order was completed on 28.12.2007 under section 153-C/143 (3) of the Act.
12. Regarding the satisfaction, it may be mentioned that in the case of CIT v. Radhey Shyam Bansal [2011] 337 ITR 217/200 Taxman 138/11 taxmann.com 294 (Delhi), it was observed that in order to initiate block assessment proceedings against a third person in respect of whom search has not been conducted, certain conditions precedent are to be followed and they are mandatory. After amendment of Section 158B(b) by the Finance Act, 2002, with retrospective effect from July 1, 1995, it can also includes an expense, deduction or allowance which is found to be false. The word 'satisfaction' has not been defined in the Act. The 'satisfaction' by its very nature must precede before the papers/documents are sent by the Assessing Officer of the person searched to the Assessing Officer of the third person. Mere use or mention of the word (satisfaction) in the order/note will not meet the requirement of the concept of satisfaction as used in Section 158BD. The satisfaction has to be in writing and can be gathered from the assessment order, if it is so mentioned/recorded, or from any other order, note or record maintained by the Assessing Officer of the person searched. The word 'satisfaction' refers to the state of mind of the Assessing Officer of the person searched, which gets reflected in a tangible shape/form when it is reduced into writing. It is the conclusion drawn or the finding recorded on the foundation of the material available. The Assessing Officer is satisfied when he makes up his mind or reaches a clear conclusion when he takes a prima facie view that the material available establishes 'undisclosed income' of a third party. The Assessing Officer must reach a clear conclusion that good ground exists for the Assessing Officer of the third person to initiate proceedings as material before him shows or would establish 'undisclosed income' of a third person. At this stage, as the proceedings are at the very initial state, the 'satisfaction' is neither required to be firm or conclusive. The 'satisfaction' required is to decide whether or not block assessment proceedings are required to be initiated. But 'satisfaction' has to be founded on reasonableness. It cannot be capricious satisfaction. Though, it is a subjective satisfaction, it must be capable of being tested on objective parameters. The opinion though tentative, however, cannot be a product of imagination or speculation. The satisfaction must reflect rational connection with or relevant bearing between the material available and undisclosed income of the third person. The rational connection postulates and requires satisfaction of the Assessing Officer that a third person has 'undisclosed income' on the basis of evidence or material before him. The material itself should not be vague, indefinite, distinct or remote.
13. Further, in the case of the CIT v. Panchajanyam Management Agencies and Services [2011] 333 ITR 281/[2012] 20 taxmann.com 584 (Ker.), it was held that on the facts there was no necessity for transferring the file from one officer to another, because the person searched was the managing partner and based on the materials gathered during the search the assessment was made by the same officer on the assessee-firm, wherein the searched assessee was the managing partner. So much so, issuance of notice under section 158BD read with section 158BC was sufficient for initiation of assessment which in this case was admittedly done and the assessee had filed reply in terms of notice issued.
14. From the above, it is clear that the Tribunal erred not to consider the ratio laid down by this Court in the case of Digvijay Chemicals (supra).
15. In the light of above discussion and by considering the totality of the facts and circumstances of the case, we find no reason to sustain the order passed by the Tribunal.
16. Hence, we set aside the impugned order passed by the Tribunal and remanded the matter back to the Tribunal who is directed to decide all the appeals strictly on merits expeditiously say within a period of three months, as the matter is too old.
17. The answer to the Substantial Question of Law (surpa), which are interlinked, is against the assessee and in favour of the revenue.
All the appeals filed by the revenue are allowed.
IT: Interest earned on FDRs prior to commencement of business from fund of debenture loans to be treated as income from other sources and not business income
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[2013] 35 taxmann.com 232 (Indore - Trib.)
IN THE ITAT INDORE BENCH
Bharat Oman Refineries Ltd.
v.
Deputy Commissioner of Income-tax*
JOGINDER SINGH, JUDICIAL MEMBER
AND R.C. SHARMA, ACCOUNTANT MEMBER
AND R.C. SHARMA, ACCOUNTANT MEMBER
IT APPEAL NO. 2 (IND.) OF 2012
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
JULY 30, 2012
Section 56, read with Section 28(i), of the Income-tax Act, 1961 - Income from other sources - Chargeable as [Interest on FDRs] - Assessment year 2008-09 - Whether interest earned on FDRs prior to commencement of business from fund of debenture loans to be treated as income from other sources and not business income - Held, yes [Para 3.2 & 3.3][In favour of revenue]
FACTS
| ■ | The interest earned on FDRs prior to commencement of business from debenture loans was claimed by the assessee as business income. | |
| ■ | The Assessing Officer however held that earning of such interest was to be taxed as income from other source. | |
| ■ | The Commissioner (Appeals) affirmed the stand of the Assessing Officer. | |
| ■ | On second appeal: |
HELD
| ■ | The assessee earned the interest from fixed deposits and such deposit or earning of interest was plainly not in the ordinary course of its business. The bare fact that the assessee deposited money in the bank was itself not sufficient to show that the deposit was made with a view to carrying out the business in the sense of earning profit by investment, therefore, such interest income, earned by the assessee, was not the business income of the assessee but is assessable as income from other sources. Hence the interest earned on FDRs, prior to commencement of business, from the fund of debenture loans is clearly an income from other sources and not the business income. [Para 3.2] | |
| ■ | The question of adjustment of interest payable by the company against the interest earned by it depends upon the provision of the Act. The expenditure would have been deductible as incurred for the purposes of business if the assessee's business had commenced. However, that is not be case here. So far as the scope of the provision of section 56 of the Act is concerned, this provision applies if none of the other heads is applicable. Under the aforementioned facts, the assessee-company cannot claim any relief either under section 70 or section 71 since its business had not started and there could not be any computation of business income or loss incurred by the assessee for the purposes of setting up its business cannot be allowed as deduction nor can it be adjusted against any other income. [Para 3.3] |
CASE REVIEW
G.T.N. Textiles Ltd. v. Dy. CIT [2010] 326 ITR 352 (Ker.)[Para 3.2]; Madhya Pradesh State Industries Corpn. Ltd. v. CIT [1968] 69 ITR 824 (MP) [Para 3.2]; CIT v. Modi Rubber Ltd. [1994] 208 ITR 379/73 Taxman 337 (Delhi) [Para 3.3] and CIT v. Mangal Cements Ltd. [1996] 217 ITR 369/[1995] 81 Taxman 397 (Raj.) [Para 3.3] followed.
CIT v. Karnataka Power Corpn. [2001] 247 ITR 268/112 Taxman 629 (SC) and CIT v. Karnal Co-operative Sugar Mills Ltd. [2000] 243 ITR 2/[2001] 118 Taxman 489 (SC) [Para 3.3] distinguished.
CASES REFERRED TO
CIT v. VGR Foundation [2008] 298 ITR 132 (Mad.) (para 1), CIT v. Modi Rubber Ltd. [1994] 208 ITR 379/73 Taxman 337 (Delhi) (para 3), CITv. Mangal Cements Ltd. [1996] 217 ITR 369/[1995] 81 Taxman 397 (Raj.) (para 3), CIT v. Bokaro Steel Ltd. [1996] 236 ITR 315/102 Taxman 94 (SC) (para 3.1), CIT v. Karnataka Power Corpn. [2001] 247 ITR 268/112 Taxman 629 (SC) (para 3.1), Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502 (SC) (para 3.1), CIT v. Karnal Co-Operative Sugar Mills Ltd. [2000] 243 ITR 2/[2001] 118 Taxman 489 (SC) (para 3.1), Bongaigaon Refinery & Petrochemicals Ltd. v. CIT [2001] 119 Taxman 488/251 ITR 329 (SC) (para 3.1), Madhya Pradesh State Industries Corpn. Ltd. v. CIT [1968] 69 ITR 824 (MP) (para 3.1), G.T.N. Textiles Ltd. v. Dy. CIT [2010] 326 ITR 352 (Ker.) (para 3.1), Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798/91 Taxman 26 (SC) (para 3.1), Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC)(para 3.1), Addl. CIT v. India Drugs & Pharmaceuticals Ltd. [1983] 141 ITR 134/[1982] 9 Taxman 95 (Delhi) (para 3.1), Traco Cable Co. Ltd. v.CIT [1969] 72 ITR 503 (Ker.) (para 3.1), CIT v. Seshasayee Paper & Boards Ltd. [1985] 156 ITR 542 (Mad.) (para 3.1), Bokaro Steel Ltd. v.CIT [1988] 170 ITR 545/37 Taxman 109 (Pat) (para 3.1), CIT v. Derco Cooling Coils Ltd. [1992] 198 ITR 375 (AP) (para 3.1), Andhra Pradesh Carbrides Ltd. v. CIT [1992] 198 ITR 386 (AP) (para 3.1), CIT v. Sponge Iron India Ltd. [1993] 201 ITR 770/67 Taxman 437 (AP) (para 3.1),CIT v. Ajmera Industries (P.) Ltd. [1976] 103 ITR 245 (Cal.) (para 3.1), CIT v. Andhra Farm Chemicals Corpn. [1988] 171 ITR 660 (AP) (para 3.1), CIT v. Cap Steel Ltd.[1986] 162 ITR 533/29 Taxman 125 (Kar.)(para 3.1), Addl. CIT v. Madras Fertilisers Ltd. [1980] 122 ITR 139 (Mad)(para 3.1), CIT v. United Wire Ropes Ltd. [1980] 121 ITR 762 (Bom.) (para 3.1), Nalinikant Ambalal Mody v. S.A.L Narayan Row, CIT [1966] 61 ITR 428 (SC) (para 3.1), S.G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 (SC) (para 3.3), Bihar State Co-Operative Bank Ltd. v.CIT [1960] 39 ITR 114 (SC)(para 3.3), CIT v. Govinda Chaudhary & Sons [1993] 203 ITR 881/[1994] 74 Taxman 331 (SC) (para 3.3) andKarnal Co-operative Sugar Mills Ltd. v. CIT [1998] 233 ITR 53/[1999] 102 Taxman 11 (Punj. & Har.)(para 3.3)
Arun Mehrotra for the Appellant. Keshav Saxena for the Respondent.
ORDER
Joginder Singh, Judicial Member - The assessee is aggrieved by the impugned order dt. 3rd Oct., 2011 passed by the learned first appellate authority, Bhopal, on the ground that on the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the addition of Rs. 31,39,70,137 to the total income on account of interest earned on FDRs made out of zero coupon convertible bonds and further erred in not placing reliance on the decision of Hon'ble Madras High Court in the case of CIT v. VGR Foundation [2008] 298 ITR 132 (Mad.)
2. During hearing, the learned counsel for the assessee, Shri Arun Mehrotra, advanced his arguments which are identical to the ground raised. On the other hand, the learned CIT Departmental Representative, Shri Keshav Saxena, strongly defended the impugned order by submitting that the interest income so earned is income from other sources and not the business income. The learned CIT/Departmental Representative also preferred written submissions in which certain judicial pronouncements have been relied upon.
3. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the learned AO, during the assessment proceedings, noted that in computation of total income of the assessee, an amount of Rs. 74,94,21,146 was offered, and claimed deduction of Rs. 31,39,70,137, being interest earned on FDRs prior to commencement of business from debenture loans. The AO asked the justification of such deduction. The assessee placed reliance upon the decision from Hon'ble Madras High Court in the case of VGR Foundations (supra) and claimed that the deduction was rightly claimed. The AO further noted that the assessee company, in earlier years, issued convertible zero coupon debentures to BPCL which were convertible into equity shares within a period of 36 years. The amount of Rs. 90 crores was received as debenture loans in earlier years. The claim of the assessee is that the interest of Rs. 31,39,70,137 was earned from FDRs made from such debenture loans. On appeal, the learned CIT(A) affirmed the stand of the AO and discussed the decisions in CIT v. Modi Rubber Ltd. [1994] 208 ITR 379/73 Taxman 337 (Delhi) and CIT v. Mangal Cements Ltd. [1996] 217 ITR 369/[1995] 81 Taxman 397 (Raj.) and held that earning of such interest is to be taxed as income from other sources. The aggrieved assessee is in further appeal before the Tribunal.
3.1. Under the facts mentioned hereinabove, now question arises whether the interest income earned from FDRs, made out of zero coupon convertible bonds, is business income or income from other sources. There are so many judicial pronouncements on this issue. The only decision claimed to be in favour of the assessee is VGR Foundations (supra) from Hon'ble Madras High Court wherein the assessee was engaged in real estate business, incurred expenses prior to commencement of business and also earned interest income from fixed deposits with the bank and the income was set off against expenses. The AO held that interest income on short-term deposits in the bank, during preproduction stage, was assessable as income from other sources. The assessment order was affirmed by the learned CIT(A). The Tribunal held that interest on monies borrowed for period prior to the commencement of business could be allowed as deduction from interest under s. 57 of the Act while computing income from other sources in respect of interest received. This stand of the Tribunal was affirmed by the Hon'ble Madras High Court. It is pertinent to mention here that even the Tribunal held such income as income from other sources (interest received from fixed deposits). While coming to this conclusion, the Hon'ble High Court followed the decision from Hon'ble apex Court like CIT v. Bokaro Steel Ltd. [1996] 236 ITR 315/102 Taxman 94 (SC) and CIT v. Karnataka Power Corpn.[2001] 247 ITR 268/112 Taxman 629 (SC) along with other decisions like Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502 (SC), CIT v. Karnal Co-operative Sugar Mills Ltd. [2000] 243 ITR 2/[2001] 118 Taxman 489 (SC) and Bongaigaon Refinery & Petrochemicals Ltd. v. CIT [2001] 119 Taxman 488/251 ITR 329 (SC). The Hon'ble jurisdictional High Court in the case of Madhya Pradesh State Industries Corpn. Ltd. v. CIT [1968] 69 ITR 824 (MP) wherein the shares monies received by the company, not being immediately required, were deposited in call deposits in certain banks. The assessee received interest on such deposits. The AO assessed such interest income as income from other sources which was affirmed by AAC and the Tribunal. On reference to the Hon'ble High Court, it was held that "deposit of share capital in a bank cannot be said to be an act of moneylending and hence the interest income was assessable as income from other sources under s. 56 of the IT Act, 1961 and not as a business income under s. 28 of the Act. The Hon'ble Kerala High Court in G.T.N. Textiles Ltd. v. Dy. CIT [2010] 326 ITR 352 (Ker.)held that interest from share application money placed in deposit and interest thereon is income from other sources. While coming to this conclusion, the Hon'ble High Court followed the decision in Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798/91 Taxman 26 (SC) and Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) wherein interest was earned from investment of borrowed funds prior to commencement of business, such interest was held to be assessable under the IT Act. It was held that no deduction or set off is permissible against such interest. The relevant portion from the order is reproduced hereunder :
"Interest income is always of a revenue nature, unless it is received by way of damages or compensation. If a person borrows money for business purposes but utilizes that money to earn interest, however temporarily, the interest so generated will be his income. This income can be utilized by the assessee whichever way he likes. He may or may not discharge his liability to pay interest with this income. Merely because it was utilized to repay the interest on the loan taken by the assessee, it did not cease to be his income. When the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law, and not in accordance with accountancy practice. Accounting practice cannot override s. 56 or any other provision of the IT Act.
Under the IT Act, 1961, the total income of a company is chargeable to tax under s. 4. The total income has to be computed in accordance with the provisions of the Act. Sec. 14 lays down that for the purpose of computation, income of an assessee has to be classified under six heads, it is possible for a company to have six different sources of income, each one of which will be chargeable to income-tax. Profits and gains of business or profession is only one of the heads under which a company's income is liable to be assessed to tax. If a company has not commenced business, there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed. The company may keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under s. 56. In other words, if the capital of a company is fruitfully utilized instead of being kept idle, the income thus generated will be of a revenue nature and not an accretion to capital. Whether the company raised the capital by issue of shares or debentures or by borrowing, will not make any difference to this principle. If borrowed capital is used for the purpose of earning income, that income will have to be taxed in accordance with law. Income is something which flows from the property. Something received in place of the property will be a capital receipt. The amount of interest received by the company flows from its investments and is its income and is clearly taxable even though the interest amount is earned by utilizing borrowed capital. It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilizing the borrowed funds as its income. Any set off or deduction of any expenditure can only be made in accordance with the provisions of the Act."
The Hon'ble Delhi High Court in the case of Modi Rubber Ltd. (supra) wherein the money received from shareholders towards share capital was deposited in banks and earned interest from such deposits, held the same to be income from other sources. While coming to this conclusion, the Hon'ble Court distinguished the decision in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC) and further held that the observation in Addl. CIT v. India Drugs & Pharmaceuticals Ltd. [1983] 141 ITR 134/[1982] 9 Taxman 95 (Delhi), though obiter, but held the correct law (see p. 393A). While coming to this conclusion, the Hon'ble Court also considered following judicial pronouncements :
| (a) | Madhya Pradesh State Industries Corpn. Ltd. (supra) | |
| (b) | Traco Cable Co. Ltd. v. CIT [1969] 72 ITR 503 (Ker.) | |
| (c) | CIT v. Seshasayee Paper & Boards Ltd. [1985] 156 ITR 542 (Mad.) | |
| (d) | Bokaro Steel Ltd. v. CIT [1988] 170 ITR 545/37 Taxman 109 (Pat) | |
| (e) | CIT v. Derco Cooling Coils Ltd. [1992] 198 ITR 375 (AP) | |
| (f) | Andhra Pradesh Carbrides Ltd. v. CIT [1992] 198 ITR 386 (AP) | |
| (g) | CIT v. Sponge Iron India Ltd. [1993] 201 ITR 770/67 Taxman 437 (AP) | |
| (h) | CIT v. Ajmera Industries (P.) Ltd. [1976] 103 ITR 245 (Cal.) | |
| (i) | CIT v. Andhra Farm Chemicals Corpn. [1988] 171 ITR 660 (AP) | |
| (j) | Bokaro Steel Ltd. (supra) | |
| (k) | CIT v. Cap Steel Ltd. [1986] 162 ITR 533/29 Taxman 125 (Kar.) | |
| (l) | Addl. CIT v. Madras Fertilisers Ltd. [1980] 122 ITR 139 (Mad) | |
| (m) | CIT v. United Wire Ropes Ltd. [1980] 121 ITR 762 (Bom.) and | |
| (n) | Nalinikant Ambalal Mody v. S.A.L Narayan Row, CIT [1966] 61 ITR 428 (SC). |
Another decision mentioned by the learned counsel for the assessee is Karnataka Power Corporation (supra) wherein the addition of Rs. 1,30,44,518, being interest and hire charges from the contractors, were held to be in the nature of capital receipt which would go to reduce capital cost. However, in the present appeal, the interest receipt is from fixed deposits, therefore, the facts are different.
3.2. If the assertions made by respective learned counsel, facts of the impugned appeal and the judicial pronouncements discussed hereinabove are kept in juxtaposition, we find that the assessee earned the interest from fixed deposits and such deposit or earning of interest was plainly not in the ordinary course of its business. The bare fact that the assessee deposited money in the bank was itself not sufficient to show that the deposit was made with a view to carrying out the business in the sense of earning profit by investment, therefore, such interest income, earned by the assessee, was not the business income of the assessee but is assessable as income from other sources. Our view is supported by the decision from Hon'ble Kerala High Court in GTN Textiles Ltd. (supra) wherein during the previous year, relevant to the asst. yr. 1993-94, the assessee made public issue of shares for raising capital. The expenditure incurred for raising capital was claimed as deduction. The assessee made short-term deposit of share application money/share allotment money and earned interest therefrom. Of this, a part was assessed as income from other sources and balance was allowed as deduction because the AO accepted this as expenditure incurred in relation to shares allotted to the assessee by the subsidiary company. The disallowance towards expenditure claimed for raising share capital was confirmed by the Tribunal. Since the assessee was not engaged in financing, the interest on short-term deposit was rightly assessed as income from other sources. While coming to this conclusion, the Hon'ble Court followed the decision in Brooke Bond India Ltd.(supra) and Tuticorin Alkali Chemicals & Fertilizers (supra). Even otherwise, the decision of Hon'ble jurisdictional High Court in Madhya Pradesh State Industries Corpn. (supra) is of binding nature, consequently, we are of the considered opinion that the interest of Rs. 31,39,70,137 earned on FDRs, prior to commencement of business, from the fund of debenture loans amounting to Rs. 900 crores is clearly an income from other sources and not the business income.
3.3. The question of adjustment of interest payable by the company against the interest earned by it depends upon the provision of the Act. The expenditure would have been deductible as incurred for the purposes of business if the assessee's business had commenced. However, that is not the case here. So far as the scope of the provision of s 56 of the Act is concerned, this provision applies if none of the other heads is applicables was held inS.G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 (SC) and Bihar State Co-Operative Bank Ltd. v. CIT [1960] 39 ITR 114 (SC). The Hon'ble Apex Court in CIT v. Govinda Choudhury & Sons [1993] 203 ITR 881/[1994] 74 Taxman 331 (SC) held that it is well settled that interest can be assessed under the head "income from other sources" only if it cannot be brought within one of the other specified heads of charge. Under the aforementioned facts, the assessee company cannot claim any relief either under s. 70 or s. 71 since its business had not started and there could not be any computation of business income or loss incurred by the assessee for the purposes of setting up its business cannot be allowed as deduction nor can it be adjusted against any other income. As discussed above, the assessee made FDRs of the funds, therefore making such FDRs was not at all related to the construction activity or any other capital installation, therefore, earning of interest on FDRs, before commencement of business, is income from other sources. So far as the decision in the case of Karnal Co-operative Sugar Mills Ltd. (supra) is concerned, it is distinguishable on facts because in that case, the assessee deposited money to open a letter of credit for purchase of machinery required for setting up its plant in terms of the agreement with the supplier. It was on this money so deposited, the interest was earned, therefore, this is not a case where any surplus share capital money or loan amount which was lying idle was deposited in the bank for the purpose of earning interest. The deposit of money in that case was directly linked with the purchase of plant and machinery, hence, income so earned from such deposits was incidental to the acquisition of asset for setting up of plant and machinery, therefore, the Hon'ble Supreme Court held the same to be capital receipt which would go to reduce the cost of asset. The Hon'ble apex Court affirmed the decision of the Hon'ble Punjab & Haryana High Court in the same case Karnal Cooperative Sugar Mills Ltd. v. CIT (1998) 233 ITR 531/[1999] 102 Taxman 11. So far as the contention of the learned counsel for the assessee that the learned first appellate authority erred in not placing reliance upon the latest decision of Hon'ble High Court in VGR foundation (supra) is concerned, we have gone through the same and find that while coming to that conclusion, the Hon'ble High Court relied upon the decision in the case of Bokaro Steel Ltd. (supra) wherein the facts were that the Government company was set up to produce steel.
There was interest on advances to contractors and rent from quarters let out to employees of the contractor. The amounts were directly connected to and incidental to construction of plant by the assessee, therefore, the amounts were held to be capital receipt and not income from any independent source. This decision of the Hon'ble Madras High Court is of 14th June, 2007 whereas the Hon'ble Kerala High Court in a later decision on 17th Dec, 2009 inGTN Textiles Ltd. (supra) wherein the assessee was not engaged in financial business, therefore, the interest on short deposits was held as income from other sources. It is also noted that while coming to this conclusion, the Hon'ble High Court also followed the decision in the case of Brooke Bond India(supra), Tuticorin Alkali & Fertilizers Ltd. (supra), therefore, even otherwise we are supposed (sic) the latter decision. As mentioned earlier, the decision from Hon'ble jurisdictional High Court in Madhya Pradesh State Industries Corpn. (supra) is of binding nature. The decisions in the case ofModi Rubber Ltd. (supra) and Manglam Cement Ltd. (supra) are on identical facts wherein it was held that the interest on FDRs, etc., before commencement of business, is to be taxed as income from other sources. In view of the above, we find no infirmity in the conclusion drawn in the impugned order.
Finally, the appeal of the assessee is dismissed.
UPSRegards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
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