$~10
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of decision: 5th March, 2014
+ ITA 572/2013
THE COMMISSIONER OF INCOME TAX-IV ..... Appellant
Through: Mr. Sanjeev Sabharwal, Sr.
Standing Counsel with Mr. Ruchir
Bhatia, Jr. Standing Counsel.
versus
INDIAN VACCINES CORPORATION LTD. ..... Respondent
Through: Mr. Prakash Kumar with Mr. Sheel
Vardhan, Advocates.
CORAM:
MR. JUSTICE S. RAVINDRA BHAT
MR. JUSTICE R.V. EASWAR
R.V. EASWAR, J. (OPEN COURT)
Admit.
Following question of law arises for consideration: -
"Did the Tribunal fall into error in concluding that the
interest to the tune of Rs.90,37,029/- invested through the
Portfolio Management Scheme by the assessee, into which
the amounts were invested, were not taxable as `income
from other sources'?"
ITA No.572/2013 Page 1 of 7
2. In the return filed for the assessment year 1992-93, the assessee
adjusted the interest income of Rs.90,37,029/- against the pre-operative
expenses relating to a project. While completing the assessment,
assessing officer rejected the claim for adjustment and held that the
interest was separately assessable under the head "income from other
sources". He placed reliance on the judgment of the Supreme Court in
the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT, (1997)
227 ITR 172. The matter reached the Income Tax Appellate Tribunal
(hereinafter referred as "Tribunal") which by order dated 21.03.2006
restored the same to the file of the assessing officer for an opportunity of
being heard on the question of applicability of the judgment. In the fresh
assessment made on 15.11.2006, the assessing officer repeated his stand.
The assessee's appeal to the CIT (Appeals) was unsuccessful. In the
further appeal before the Tribunal, the Tribunal held in its impugned
order that the case of the assessee is covered by the ruling of the Supreme
Court in the case of CIT vs. Bokaro Steel Ltd., (1999) 236 ITR 315 (SC)
and, therefore, the interest cannot be separately brought to tax, but has to
be adjusted against the pre-operative expenses relating to the project.
3. Aggrieved by the aforesaid order of the Tribunal passed on
01.03.2013, the revenue is in appeal under Section 260A of the Income
Tax Act, 1961.
ITA No.572/2013 Page 2 of 7
4. We are of the view that the revenue has to succeed. The assessee
was incorporated as a company on 27.03.1989 with the object of
manufacturing human vaccines based on the technology developed by
Pasteur Merieux Serums et Vaccines (PMSV), Lyon France. Under an
agreement dated 02.12.1988 entered into between France and India, the
assessee received substantial financial grant. The grant was to be utilised
for payments to PMSV from whom the technology was to be obtained as
also for obtaining equipment, technical services and training of the
personnel. Company by the name Indian Petrochemicals Corporation
Ltd. assumed the responsibility for project implementation and another
company by the name Engineers India Ltd., a government of India
undertaking, provided the consultancy services for speedy engineering
package, construction, supervision and commission of all utilities. Funds
were also brought in by the promoters to the tune of Rs.17,88,31,000/- as
share capital; Indian Petrochemicals Corporation Ltd. one of the
promoters also granted a loan of Rs.50 lakhs. All these funds were
invested with banks under the "portfolio management scheme" under
which the banks gave an assured earning guarantee. The banks in turn
invested the monies in shares and securities. Any amounts over and
above the assured guarantee earned from the shares and securities were to
be retained by the banks, which were also to suffer the loss in case the
ITA No.572/2013 Page 3 of 7
returns fall below the assured guarantee. On these facts the Tribunal took
the view that the funds which were invested by the assessee were not
borrowed funds but they were funds provided by the promoters. On this
footing, it was held that the promoter's funds were inextricably linked
with the instillation of the project and thus the case attracted the ratio of
Bokaro (supra). It was further held that the interest cannot be separately
assessed under the residual head, but was to be adjusted against the
capital work in progress.
5. We are afraid that the Tribunal fell into error in holding that the
facts of the case attracted the principle laid down in Bokaro (supra)
merely because the funds invested were not borrowed funds but were
provided by the promoters. The source of the funds is not in our opinion
relevant. This was recognized in Tuticorin (supra) itself and we quote
the relevant observation: -
"In other words, if the capital of a company is fruitfully
utilised instead of keeping it idle, the income thus generated
will be of 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 capital receipt. The amount of interest
received by the company flows from its investments and is its
ITA No.572/2013 Page 4 of 7
income and is clearly taxable even though the interest
amount is earned by utilising borrowed capital."
6. Tuticorin (supra) also recognized that even during construction of
the project and when the actual business was not commenced, a company
can earn income from sources other than the business. In that case the
funds were invested during the construction of the project, on which
interest was earned and the Supreme Court held that such interest has to
be brought to tax under the head "income from other sources". Bokaro
(supra) was dealing with an entirely different set of facts. There, during
the construction period the assessee received income under 5 different
heads, all of them inextricably linked to the construction of the project.
For instance, advances were given to the contractors to enable them to
purchase plant and machinery which were to be used in the project.
Interest was received on those advances. Some buildings belonging to
the assessee were let out to the contractors for rent so that the labourers
employed by the contractors can be housed there. The income under the
5 heads were found by the Court to be inextricably linked to the project
under construction. On these facts it was held in Bokaro (supra) that the
interest income cannot be separately assessed under the residual head, but
should be treated as capital receipt, to be reduced from the construction
cost or the capital work in progress.
ITA No.572/2013 Page 5 of 7
7. The facts of the present case are not on all fours with those in
Bokaro (supra). Herein the investment of the funds has nothing to do and
was not inextricably linked with the construction of the project. It was an
investment under the "portfolio management scheme" operated by banks
under which an assured return was guaranteed by the banks. It was a
conscious act of investment of funds by the assessee and if such
investment results in income, the same must be brought to tax under the
residual head, even if the company has not commenced its business, on
the basis of Tuticorin (supra). The Tribunal erred in placing reliance
upon the fact that the present case is not one where borrowed funds were
used for parking them to earn interest and that the funds were those of the
promoters. In the light of the observation of the Supreme Court in
Tuticorin (supra) quoted above, whether the funds were borrowed or
were those of the assessee itself would make no difference to the
principle. In Bokaro (supra), the earlier judgment in Tuticorin (supra)
was referred to and it was observed that interest earned by investing in
short term deposits is an independent source of income, which is not
connected with the construction activities; it is only when the investment
is inextricably linked with the process of setting-up the plant and
machinery that the interest will go to reduce the cost of the assets without
being taxed as income. In the present case there is no such finding by any
ITA No.572/2013 Page 6 of 7
of the authorities below, including the Tribunal. As already pointed out,
the Tribunal placed undue emphasis on the source of the funds instead of
focussing its attention to the utilisation of the fund whether they were
invested in activities which are inextricably linked with the construction
of the project. In fact, the assessee in the present case had invested the
funds under the PMSV operated by the banks for an assured return. That
has nothing to do with the project and there is no inextricably link
between the investment and the project. The interest income cannot,
therefore, be permitted to be adjusted against the capital work in progress
or the pre-operative expenses. Both the assessing officer and the CIT
(Appeals) were right in bringing the interest to tax under the head
"income from other sources".
8. In view of the above discussion, the Court is of the opinion that the
question of law has to be answered in favour of the revenue and against
the assessee. The appeal is accordingly allowed.
(R.V. EASWAR)
JUDGE
(S. RAVINDRA BHAT)
JUDGE
MARCH 5, 2014
hs
ITA No.572/2013 Page 7 of 7
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