Shree Maheshwar Hydel Power ... vs Assessee

आयकर अपीलीय अिधकरण, अिधकरण "bZ" खंडपीठ मुंबई INCOME TAX APPELLATE TRIBUNAL,MUMBAI - 'E' BENCH सव ौी जोिग दर िसंह, याियक सदःय एवं राजे ि, लेखा सदःय Before S/Sh.Joginder Singh, Judicial Member & Rajendra,Accountant Member आयकर अपील सं/.ITA No.7768/Mum/2014,िनधा िनधा रण वष /Assessment Year-2010-11 M/s Shree Maheshwar Hydel Power DCIT 7(2), Corporation Ltd., 99, Niranjan बनाम R.No.666, 6th Floor, Ground Floor, Marine Drive, Vs. Aayakar Bhavan, M.K.Road, Mumbai-400002 Churchgate, Mumbai-400020 PAN: AABCS4176P (अपीलाथ& /Assessee) (ू(यथ& / Respondent) िनधा )रती ओर से / Assessee by :Shri Venugopal C. Nain राजःव क, ओर से/ Revenue by : Shri Neil Philip सुनवाई क, तार-ख/ Date of Hearing : 11-02-2015 घोषणा क, तार-ख / Date of Pronouncement : 18-03-2015 आ यकर अ िधिनयम, िधिनयम 1961 क, धारा 254(1) के अ तग त आदे श Order u/s.254(1)of the Income-tax Act,1961(Act) Per Rajendra, A.M.लेखा सदःय राजे ि के अनुसार:

Challenging the order dated 19.12.2014 of the CIT(A)-14,Mumbai,the assessee had raised following grounds of appeal:

The learned CIT(A) erred in facts and circumstances of the case and in law in confirming addition that the AO made by treating interest earned on Fixed Deposit prior to communication of project as income from other sources.

Reasons given by CIT(A) in confirming additions that the AO made are wrong, insufficient and contrary to facts and evidence on record and in law.

2.The assessee-company,engaged in the business of manufacturing and power and energy,filed its return of income on 15.09.2010 declaring total income at Rs.7.98 Crores, initially the return was processed u/s.143(1) of the Act.Later on it was taken up for scrutiny and accordingly notice u/s. 143(2) of the Act was issued. Further notices u/s.142(1) was also issued to the assessee along with the questionnaire.During the course of assessment proceedings,the Assessing Officer(AO) direct - ed the assessee to furnish details of share application money received during the year, rehabilitati

-on and resettlement expenses,partiwise details of sundry creditors and unsecured loans. Vide its letter,dated 13.03.2013,the assessee submitted that it had prepared P&L A/c for the year under consideration,that it was process of implementation of project of Maheshwar Hydel Power Project (MHPP).During the course of assessment proceedings, the assessee filed a revised return of income.Referring to the provisions of section 139(5) of the Act,the AO held that assessee could have filed its revised return by 31.03.2012,that any return filed after that day could not be termed as filing of revised return,that the alleged revised return was filed as per the acknowledgement of return dated 18.01.2013.The AO rejected the revised return and did not consider it for purpose of assessment.

Relying upon the cases of Deepnarain Nagu & Co.(157 ITR 37-MP), Chitranjali (159 ITR 801 - Cal.)and Sunanda Ram Deka (210 ITR 988-Gauhati),the AO held that in the assessee's case the fact that the company had also paid SA Tax proved beyond doubt that the company was following a manner of offering the income for tax,that there was no mistake or wrong statement while filing the return of income,that such change of method was not permissible and curable even by filing revised return of income, that it had made various term deposits and fixed deposits with the bank and had earned Interest Income from all such deposits,that the assessee company was into setting 2 ITA No.7768/M/2014 M/s Shree Maheshwar Hydel Power Corporation Ltd.

up of the hydro power project,that the same was being carried out as an infrastructure project under construction, that the assessee in filing the tax return had adopted the method of offering all the current interest income as income taxable under other sources,that the method adopted by the assessee company was one of the manner in which taxable income was offered for taxation, that during the course of assessment the assessee company had offered to change the method of offering taxable income by claiming to withdraw the correct income filed in its tax return and reducing the same from the capital WIP, that the change in the method of offering taxable income could not be claimed in the course of assessment and as per law the same was not permitted even by filing of revised return u/s. 139(5) of the Act.Finally, the AO rejected the revised statement of computation of total income and accepted the income as filed in the original return i.e. at Rs. 7,98, 08,216/-.

3.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority (FAA).Before him,it was contended that due to conflicting decisions of Supreme Court,the assessee was not conversant with the complicated provisions of the Acton taxability of interest on temporary FD kept of borrowed funds raised specifically for setting up a project,that it relied on advice of its consultants,that as per their advice in the return of income interest was shown as Income from other sources,that when the correct position was understood as a matter of abundant caution assessee filed revised return and also furnished revised computation of income during assessment proceedings,that the AO ought not have rejected the revised computation of income, that there was no concept of change of method of offering as taxable income in the Act, that the Act required tax on real income independent of the manner in which assessee offered it to taxation,that only two method of accounting for determination of correct income were Cash and mercantile with prohibitions in change of method opted,that there had been no change of accounting,that the assessee was consistently following mercantile method,that correction of incorrect treatment of receipt was not synonymous to change in method of accounting,that it has followed correct method of accounting by adjusting the capital receipt against the CWP and reducing the project cost and charge depreciation on the correct lower CWIP,that the assessee had full right to rectify the mistake by resorting to the avenues provided for it by the Act,that filing revised computation of income was one such avenue,that there was no principle of estoppels against wrong application of law particularly when there were mitigating circumstances for it,that three decisions relied upon by the AO were also not relevant,that they all dealt with revised return of income, that the AO had expressly rejected the revised return and had categorically refused to take cognisance of the revised return,that decisions on revised return had no relevance, that there was no concept of change of method of offering as taxable income in the Act, that the Act required tax on real income independent of the manner in which assessee offered it to taxation,that only two method of accounting for determination of correct income were Cash and mercantile with prohibitions in change of method opted,that there had been no change of accounting,that the assessee was consistently following mercantile method,that correction of incorrect treatment of receipt was not synonymous to change in method of accounting,that it has followed correct method of accounting by adjusting the capital receipt against the CWP and reducing the project cost and charge depreciation on the correct lower CWIP,that the assessee had full right to rectify the mistake by resorting to the avenues provided for it by the Act,that filing revised computation of income was one such avenue,that there was no principle of estoppels against wrong application of law particularly when there were mitigating circumstances for it,that three decisions relied upon by the AO were also not relevant,that they all dealt with revised return of income, that the AO had expressly rejected the revised return and had categorically refused to take cognisance of the revised return,that decisions on revised 3 ITA No.7768/M/2014 M/s Shree Maheshwar Hydel Power Corporation Ltd.

return had no relevance,that the AO had not brought out any cogent reason for rejecting the contention that interest earned on FD of amounts raised for setting up capital project was to be deducted from CWIP and not to be subjected to tax,that the AO made incorrect statement that assessee opted to claim higher depreciation of capitalisation and change in method of accounting,that the financial statements showed that the it had deducted interest on FD from Capital WIP and hence the AO's statement that the assessee decided to claim higher depreciation on plant and machinery after the same was commissioned and put to use, was incorrect and hence same could not justify denial of their claim in revised computation of income, that for subsequent AY. it was given no deductions certificate u/s.197 of the Act,that issue of no TDS certificate for the AY.s.2013-14 & 2014-15 supported the view that there was no income on which TDS was to deducted.

4.After considering the assessment order and the submissions of the assessee,the FAA held that the assessee was in process of setting up of power project since 1993 for sale and supply of energy to MPEEB as per the terms and condition contained in the Power Purchase Agreement (PPA) dated 11.11.1994,that till 2004 the assessee was not in position to set the project due to shortage of funds,that it entered in to an agreement dtd.23.02.2004 by which government of MP agreed to execute the guarantee deed in favour of Power Finance Corporation(PFC)as a default Counter guarantee in consideration of PFC agreeing to execute a guarantee in favour of the investors who subscribed to the convertible bonds for an agreement of Rs. 400 Crores to be issued by the assessee,that it was agreed that the amount,required to service the interest on bonds till commercial operation started,would be held by Nationalised Banks in trust and would be utilised solely for payment of such interest on the bonds to the investors,that later on the agreement of 2004 was cancelled, that as per the new agreement of 2005 the assessee was to issue 15 years bond with an option to convert the bonds into equity shares,that the assessee raised Rs.400 Crores issue of (Optional Fully Convertible Debentures)OFCD and same was deposited in the trust account with nationalised bank,that investment in FDS was of the funds raised for the project as required by Terms of guarantee given by PFC as evidenced by the SN.12 of Notes to accounts, that the interest was not earned on FD of any surplus funds generated in day to day business activity but on the funds specifically raised for implementation of project.The FAA had discussed all the agreements entered in to by the assessee including the agreement of 2005. He analysed the clause D and E of the said agreement in details he found that the assessee has raised amount of Rs.400 crores by issue of OFCD which were deposited in the trust account with nationalized bank.

4.1.In order to see if interest due to OFCD had been served,the FAA scrutinised the Audited Annual Accounts,a copy of which had been filed by the assessee.He found that as on 31/03/2010, the secured loan fund stood at Rs.17,00,85,17,958 whereas unsecured loan stood at Rs 400 Crores, that against that application of fund showed,pre operative expenditure during construction period (pending allocation) at Rs.12,24,34,92,917/-as on 31/03/2010,against Rs.10,02,45,14, 040/- as on 31/03/2009.On analysis of the accounts it was found that Pre-operative Expenditure cons - truction period (pending allocation) included expenses on account of loan, insurance, power and fuel, repair and maintenance payment and provision for employees, vehicle expenses, travel and conveyance, lease rent, telephone and postage, advertisement, printing and stationery and audit fee,directors sitting fee,rehabilitation and re-settlement, legal and professional, loss on sale of assets, security expenses misc. depreciation, interest on term loan, OFCD holders and others, financial expenses FBT and loss from foreign exchange fluctuations.It was also found that there was very normal increase in fixed asset which were at Rs.14,93,09,765/ -as on 31/03/2009 and had gone up to Rs.15,30,27 ,810/- as on 31/03/2010.,that the Capital WIP were on increase from Rs.8,47,60,97,044/- as on 31/03/2009 to Rs.12454162053/- as on 31/03/2010,that capital 4 ITA No.7768/M/2014 M/s Shree Maheshwar Hydel Power Corporation Ltd.

advances were decreasing,that the audit report did not mention anything under the head meant for the same.He could not find the basis as to how the capital work in progress was valued.The FAA held that so far the assessee had earned only interest on Fixed Deposits and which had been consistently offered as income from other sources against TDS made by the bank. In view of this assessee was asked the status of the project when copies of all the agreements entered by the it were provided.He gathered from these documents that the project had not yet come in the offing and further there was issue of viability of the project for the reason that the tariff on anticipated commencement was still in distant future, had already become costlier than the tariff of MP State Electricity Board.Referring to the audit report,he observed that that in the year 2007 company had raised optionally fully convertible debentures amount RS.2170050 lakhs @9.75% p.a. and RS.18250 lakhs @ 10.75% p.a. ,that the debentures were redeemable at par in 22 equally half yearly installment commencing from 4 years and 6 months from deem date of allotment,that the debentures were secured by an unconditional and irrevocable Guarantee of PFC,that pending finalisation of the date of the commissioning of the project (December 2010) interest due to debenture holders for 4 years from date of issue had been kept with fixed deposits with various banks as per terms of issue,that the assessee-company would earn revenue only after commissioning of the project,that the amount required to be transferred to debentures redemption reserve,as per section 117C of the Companies,would be made out of the profit thereafter,that the project had not commenced till passing of the appellate order.

4.2.Dealing with the issue of OFCD,the FAA stated that the money was not raised for any construction of project or purchase of plant and machinery or for obtaining any license or letter of credit etc. but was only done with a specific and limited purpose to reduce resultant tariff of the project which was substantial on account of actual accumulated interest on the part loan raised,that the project was not viable and hence financial structure had to be revised in order to achieve financial closer,that the amount was collected through OFCD had been kept in bank since then and had not been utilised for any other purpose,that looking into the facts that construction of the project was not completed it could not be said to be a project under construction,that rather it was a project at the verge of being abundant with.

4.3.FAA also discussed the decisions cited by the assessee.He held that that in the case of Rajputana Trading Co.Pvt. Ltd.(72 ITR 286)it was held that when there was fairly direct and proximate relationship, it would be illogical and irrational to treat profit as having the so called neutral source and not springing out of said business,that in the case of Bokaro Still Ltd.(236 ITR

315)a government company,during the period of construction plan,had advanced moneys to contractors on which it was earning interest and received charges from quarter let out to employ - yees, that in those circumstances it was held that the demand raised for such utilisation were directly linked with the set up of plant of the assessee as it was not a case that interest was earned by investing borrowing capital and short term deposit.Referring to the case of Karnal Co- operative Sugar Mill Ltd.(242ITR2)he observed that the facts were that assessee deposited money to open a letter of credit for purchase of machinery required for setting up its plant in terms of assessee's agreement with the supplier and on the money so deposited interest was earned in that case,that considering those facts the Hon'ble Supreme Court had held that income earned was incidental to acquisition of asset for the setting up of all the plant and machinery and hence the ratio laid down by this court in Tuticorin Alkali Chemicals & Fertilizers Ltd.(227ITR172) would not be attracted.About the matter of Bongaigaon Refinery & Petrochemicals Ltd.(251 ITR 351),he held that items of income derived by the assessee during the formation period for the main business were not taxable but were to be adjusted against the project cost for the assessee i.e. oil refinery and petro chemicals, main business for which company was set up.Similarly,the FAA referred to the facts of other three cases relied upon by assessee namely Koshika Telecom Ltd.

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(287ITR479),International Marketing Ltd.(292ITR504), Indian Oil Panipat Power Consortium Ltd.(315 ITR 255) and held that facts of those cases were distinguishable.In short,the FAA held that the ratio of all the above referred cases was that that interest or any receipt from a source inextricably connected with the capital project was to be deducted from the cost of the project and not to be taxed as income from other sources and thus same were not applicable to the facts of the case under appeal.He made a reference to the case of Production Pvt. Ltd.(191 Taxman

79)delivered by the Hon'ble Apex Court.In that matter Hon'ble Court had dealt with the issue of interest income received by assessees on short term fixed deposits.In that matter there was no dispute that the amount received by the assessee was from the amount it had invested in FDR but there was no actual data whether it was part of surplus at the hands of the assessee company.Hon'ble court set aside the matter for fresh consideration to decided whether the receipt fell u/s.28 or u/s.56.

4.4.The FAA further held that the assessee-company was claiming to construct the project since 1993,that it had been not able to establish the project even in 2014-15-leave aside implementation of the same in the relevant period to AY.2010-11,that the plea taken by the assessee that the interest was earned on fixed deposit was inextricably linked to the construction was totally unsupported, and imaginary,that the assessee had failed to even given details of work in progress not only for FY.2009-10 but even for earlier AYs.,that it was a matter of public knowledge and again the details available on the website that project was in the stage of being shelved with,that as per news reports a notice had been issued by authorities which was available on website,that as per the note Government and the assessee had signed an "Amendatory and Restated Agreement A&RA)" on 16.09. 2005,that according to the RA the Commercial operation Date (CoD) of the project should have been four years from 09.03.2006,that four-year window expired on 08. 03. 2010.

4.5.Considering those facts,he held that the project itself had not been set up,that the plea of the assessee while drawing analogy from the decision given in the case of Bokaro Steel Ltd., Indian Oil Panipat Power Consortium Ltd.was not justifiable,that the project had undoubtedly become unviable, that the assessee had gone into red and thus had not been able to commence any operation in last 21 years,that the decision cited by it could not be stretched by wrongly treating 'non-commencement' with 'pre-commencement',that the project had not seen light of the day,that the very purpose of entering into the agreement for the said project had already been defeated,that the cost of electricity expected to be generated in the remote future had made the rate per unit of electricity much higher than the present rate of electricity per unit being produced by MPSEB, that the project could not be said as being in pre-commencement period,that OFCD were issued for restructuring the capital and same was not linked with the project,that decisions cited by assessee were of no help for the simple reason that in those cases there was actual project under construction and the issue was whether during the period of construction of project and thus prior to commencement of the project the interest so earned,that too on the fund inextricably linked with the business,should be taxed as income from other sources or business income in order to reduce the cost of project.He held that in the case under appeal for substantiate long period of 20 years from the date of agreement entered into the assessee was not able to set up the project,that work in progress figures were totally unsupported, that there were no note or details in auditor's report given in the account in that regard,that simply because assessee had relied upon the decisions when the facts were entirely different and thus not applicable the ratio of the decisions could not be stretched to the case of the assessee,that the money was kept in fixed deposits,that earning interest could only be treated surplus and thus income from other sources,that the assessee itself had offered interest income earned on the fixed deposits made out of money collected from OFCD under the head income from other sources,that even up to AY.s.

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2012-13 interest income was rightly being offered by the assessee, under section 56 of the Act. He made a reference to the case of Bharat Refineries Ltd.,Bina,where interest earned on convertible bond was taxed as income from other sources.

5.Before us,Authorised Representative(AR)contended that investment was made by the assessee in pursuance of the agreement entered into with various agency,that in later years ITO TDS had issued certificate and had held that no TDS was to be made,that there was no change in accounting policy.He relied upon the cases that were referred to before the FAA.Departmental Representative (DR)supported the order of the FAA and relied upon the case of Tuticorin Alkali Chemicals and Fertilizers Ltd(227ITR172).

6.We have heard the rival submissions and perused the material before us.We find that the dispute between the department and the assessee is that whether the interest income originally offered as income from other sources should be allowed to set off against the interest expenses incurred for project in order to reduce the CWIP i.e. project cost.In other words the interest income received by it should be taxed under section 56 or as income from business and should be allowed to set off against the interest expense. Undisputed facts of the case are that the assessee was in the process of setting up of power project for the sale and supply of energy to MPSEB since 1993,that till the year 2004-when the agreement for the project was entered in to-the assessee had not been able to set up the project due shortage of funds,that it entered into agreement dtd 23.03.2004 by which Govt. of MP agreed to execute the guarantee deed in favour of PFC as a default Counter guarantee in consideration of PFC agreeing to execute a guarantee in favour of investors who had subscribed to the convertible bonds for an agreement amount of Rs. 400 crores to be issued by the assessee, that it was also agreed that the amount required to service the interest on bond till commercial operation date-which was 4 years from effective date of GoMP-guarantee shall be held by Nationalised Bank in trust and utilized solely for payment of such interest on the bonds to the investors. Then again another 'Amendatory and restated' agreement dated 16/09/2005 was entered by the assessee with S Kumars Ltd (SKL), MPSEB, GoMP and PFCL for obtaining default payment guarantee issued by PFC in favour of trustee as security for Rs.400 crores bond issue of the assessee. The assessee had offered the interest income under the head income from other sources,but later on requested that same should be treated as business income.

6.1.Here,we would like to refer to some judgments that according to us,are relevant to decide the issue.In the case of Manglam Cement Ltd.(217 ITR 369)the Hon'ble Rajathan Court has held that interest on short-term deposits of surplus money before the commencement of business is an income from other sources and not from business.Facts of the case are as under:

The assessee was a limited company incorporated in October, 1976. Loans were obtained by it for purchase of capital equipment and for setting up the business of the company, which was manufacturing cement. The company had paid interest on all of its borrowings. Besides the loan, the company had also received application money for the issue of share certificates and the application money so received was deposited with the bank as short-term deposit besides part of the borrowings. On such deposit, the company earned interest of Rs. 2,58,089. On the other hand, the amount of interest paid by the company on its borrowings was Rs. 14,32,072. The Income-tax Officer held that the interest income earned by the assessee on the amounts deposited with the bank had nothing to do with the construction activities and as such it was taxable income under the head "Income from other sources" under section 56 of the Act. Since the borrowing by the company was for the purpose of construction and had no relation with the earnings of interest on the deposit, the Income-tax Officer was of the view that the interest paid could not be deducted from the interest received under section 57 of the Act. However, a sum of Rs. 10,000 was allowed which was considered as relatable to the earnings of the income of interest as there were certain

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administrative expenses incurred by the company. The Tribunal, however, held that the interest was not taxable under section 56 and that the interest received on short-term deposits with banks was to be reduced from the interest payments, while capitalising the various expenditures to capital account. On a reference,the Hon'ble Court decided the issue as under:

(i)that the interest of Rs. 2,58,089 received on short-term deposits was taxable under section 56;

(ii)that the interest received on short-term deposits could not be reduced from the interest payments while capitalising the various expenditures on the capital account.. ...There is no nexus between the receipt of interest on short-term deposits and payment of interest on loans borrowed for capital expenditure. Under section 57(iii) of the Income-tax Act, 1961, an expenditure must be laid out or expended wholly or exclusively for the purpose of earning "income from other sources"

In the case of Bongaigaon Refinary and Petrochemicals Ltd.(251 ITR 329)the Hon'ble Supreme Court held that income from house property and guest house, hire charges for equipment and recoveries from contractors on account of water and electricity supply, received during the period of formation of the assessee company's main business of oil refinery and petrochemicals which was being set up, was taxable income but same was to be adjusted against the project cost for the business of oil refinery and petro-chemicals.With regard to the interest income the Hon'ble Court upheld the order of the Hon'ble Gauhati High Court as under:

"The High Court has already held that the interest income derived by the assessee during its formative period was taxable income."

The Hon'ble Gauhati High Court had discussed the issue as under:

"The question as set forth above has now been referred for this court's opinion. Dr. A. K. Saraf,learned standing counsel appearing for the Revenue, contended whether a particular receipt is of the nature of income is not a question raised before this court. It was further contended that Challapalli Sugars Ltd.'s case [1975] 98 ITR 167 (SC) has been explained and distinguished by the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172. The Supreme Court in this case held that taxability or non-taxability of income is to be decided only in accordance with the statutory provisions and not on the basis of equity and accountancy practice. In the circumstances, the concept of equity is inapplicable. This was a case where interest earned by an incorporated company during its formative period by investing part of its borrowed funds was held taxable as income from other sources and not adjustable from the interest paid from the funds(emphasis supplied).The Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd.'s case [1997] 227 ITR 172 in clear terms held (page 183) :

XXXXXXXXXXX Mr. Talukdar, learned counsel appearing for the assessee, placing reliance on the following judgments :

(1) CIT (Addl.) v. Indian Drugs and Pharmaceuticals Ltd. [1983] 141 ITR 134 (Delhi) ; (2) CIT v. Bokaro Steel Ltd. (No. 1) [1988] 170 ITR 522 (Patna) ; (3) CIT v. Nagarjuna Steels Ltd. [1988] 171 ITR 663 (AP) ;

(4) CIT v. Electrochem Orissa Ltd. [1995] 211 ITR 552 (Orissa) ; and (5) CIT v. Maharashtra Electrosmelt Ltd. [1995] 214 ITR 489 (Bom), contended that the view taken by the Tribunal in the face of these authorities was a justifiable view, and should not, therefore, be upset or interfered with. The judgment in Tuticorin Alkali Chemicals and Fertilizers Ltd.'s case [1997] 227 ITR 172 (SC) was not available to the Tribunal or the appellate authorities as indeed, it could not be, as it was decided on July 8, 1997, and can only have prospective effect and operation.

This necessarily takes me to the question of the jurisprudence of precedents. When the court decides and particularly the apex court, decides that the interpretation of a particular provision of law as given earlier was not legal, it in effect clears that the law as it stood from the beginning was as per its decision and that it was never the law otherwise. This being the case, since the Supreme Court has taken a view that the interpretation placed on the provisions of law of the High Court was erroneous, it will have to be held that the action based on the erroneous view of law was also equally erroneous.

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In view of the legal position as explained by the apex court, there is no force in the submissions made by learned counsel appearing for the assessee. Our answer to the question as referred is in the negative, that is to say, in favour of the Revenue and against the assessee." Hon'ble Kerala High Court in GTN Textiles Limited.(326 ITR 352)has held that where an assessee was not engaged in financial business,the interest on short deposits was to be held as income from other sources.

In the case of Tuticorin Alkali Chemicals and Fertilizers Ltd.'s case (supra),the Hon'ble Apex Court has held as under:

Income-tax is attracted at the point when the income is earned. Taxability of income is not dependent upon its destination or the manner of its utilisation. It has to be seen whether at the point of accrual, the amount is of a revenue nature. If so, the amount will have to be taxed. The question whether a particular receipt is of the nature of income and falls within the charge of section 4 of the Income-tax Act, 1961, is a question of law which has to be decided by the court on the basis of the provisions of the Act and the interpretation of the term "income" given in a large number of decisions of the High Courts, the Privy Council and the Supreme Court. 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 utilises that money to earn interest, however temporarily, the interest so generated will be his income. This income can be utilised 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 utilised 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 section 56 or any other provision of the Income-tax Act(emphasis supplied).

Under the Income-tax Act, 1961, the total income of a company is chargeable to tax under section

4. The total income has to be computed in accordance with the provisions of the Act. Section 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 interests will be chargeable under section 56(emphasis supplied).

In other words, if the capital of a company is fruitfully utilised, 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 utilising 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 utilising 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. Held, that the company had surplus funds in its hands. In order to earn income out of the surplus funds, it had invested the amount for the purpose of earning interest. The interest thus earned was clearly of revenue nature and would have to be taxed accordingly. The accountants might have taken some other view but accountancy practice was not necessarily good law. This was not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as it liked. The application of the income for payment of interest would not affect its taxability in any way. The company could not claim any relief under section 70 or section 71 since its business had not started and there could not be any computation of business income or 9 ITA No.7768/M/2014 M/s Shree Maheshwar Hydel Power Corporation Ltd.

loss incurred by the assessee in the relevant accounting years. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business could not be allowed as deduction, nor could it be adjusted against any other income under any other head. Similarly any income from a non-business source could not be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee(emphasis by us).

From the above decisions it is clear that the bare fact that the assessee deposited money in the bank is 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.

Considering the facts of the present case-that there was neither setting up nor commencement of business during the year under consideration,that non commencement of the project is continuing since 1993,that the money raised in form of OFCE was not raised for any construction of project or purchase of plant and machinery or for obtaining any license or letter of credit etc. but was only done with a specific and limited purpose to reduce resultant tariff of the project,that interest earned by the assessee from the nationalised banks had nothing to do with the setting up or commencing of the business, that it was a pure and simple case of accruing of interest income from deposit-we are of the opinion that that the assessee earned the interest from the bank deposits and earning of interest was plainly not in the ordinary course of its business and that the interest earned by the assessee was rightly assessed under the head income from other sources. We find that the FAA has clearly and logically distinguished the cases relied upon by the assessee.On the other hand,cases quoted by him,while upholding the order of the AO,fortify our view.He has alos analysed the audited accounts and various agreements entered into by the assessee.In our opinion,his order does not suffer from any legal or factual infirmity.Considering the peculiar facts and circumstances of the case for the year under appeal,we decide effective ground of appeal against the assessee.

As a result,appeal filed by the assessee stands disallowed.

फलतः िनधा )रती 2ारा दा3खल क, गई अपील नामंजरू क, जाती है .

Order pronounced in the open court on 18th,March,2015.

आदे श क, घोषणा खुले यायालय म6 7दनांक 18 ekpZ,2015 को क, गई ।

Sd/- Sd/- (जोिग दर िसंह /JOGINDER SINGH) (राजे ि / RAJENDRA) याियक सदःय / JUDICIAL MEMBER लेखा सदःय / ACCOUNTANT MEMBER मुंबई/Mumbai,7दनांक/Date: 18.03.2015 SK आदे श क, ूितिल9प अमे9षत/Copy षत of the Order forwarded to : 1. Assessee /अपीलाथ& 2. Respondent /ू(यथ&

3.The concerned CIT(A)/संब; अपीलीय आयकर आयु<, 4.The concerned CIT /संब; आयकर आयु<

5. DR "E" Bench, ITAT, Mumbai /9वभागीय ूितिनिध bZ खंडपीठ,आ.अ. याया.मुंबई

6. Guard File/गाड फाईल स(या9पत ूित //True Copy//

आदे शानुसार/ BY ORDER,

उप/सहायक पंजीकार Dy./Asst. Registrar आयकर अपीलीय अिधकरण, मुंबई /ITAT,Mumbai.