Gujarat High Court
The Principal Commissioner Of Income ... vs Adani Power Ltd on 12 September, 2025
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
NEUTRAL CITATION
C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 160 of 2016
With
R/TAX APPEAL NO. 416 of 2019
With
R/TAX APPEAL NO. 417 of 2019
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR. JUSTICE PRANAV TRIVEDI
==================================================
Approved for Reporting Yes No
✔
================================================== THE PRINCIPAL COMMISSIONER OF INCOME TAX-1 Versus ADANI POWER LTD ================================================== Appearance:
MS MAITHILI D MEHTA(3206) for the Appellant(s) No. 1 MR SAURABH SOPARKAR SR. ADVOCATE with MR B S SOPARKAR(6851) with MR MANYA ANJARIA for the Opponent(s) No. 1 ================================================== CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA and HONOURABLE MR. JUSTICE PRANAV TRIVEDI Date : 12/09/2025 ORAL COMMON JUDGMENT (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1. Heard learned Senior Standing Counsel Ms. Maithili Mehta for the appellant and learned Senior Advocate Mr. Saurabh Soparkar with learned advocates Mr. B.S. Soparkar and Mr. Manya Anjaria for the respondent.Page 1 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025
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2. These appeals are preferred by the appellant Revenue under Section 260A of the Income Tax Act, 1961 (For Short "the Act").
3. Tax Appeal No. 160 of 2016 is arising out of the judgment and order dated 27.07.2015 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench 'B', Ahmedabad (For short "the Tribunal") in ITA No. 2755/Ahd/2011 for the Assessment Year 2008-09.
3.1. Tax Appeal No. 160 of 2016 is admitted vide order dated 16.06.2016 for consideration on following substantial question of law:
"Whether the Income Tax Appellate Tribunal has erred in deleting the interest income of Rs.9,31,33,148/- earned by the assessee before commencement of business?"
4. Tax Appeal No. 416 of 2019 and Tax Appeal No. 417 of 2019 are arising out of the judgment and order dated 18.01.2019 passed by the Tribunal in ITA No. 1430/Ahd/2015 and Cross Objection (CO) No. 114/Ahd/2015 for Assessment Year 2011-12.
4.1. Tax Appeal No. 416 of 2019 is admitted vide order dated Page 2 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined 16.07.2019 for consideration on the following substantial question of law :
"Whether the Appellate Tribunal has erred in law and on facts in deleting the interest income of Rs.1,45,50,007/- earned by the assessee before commencement of business?"
4.2. Tax Appeal No. 417 of 2019 is admitted vide order dated 16.07.2019 for consideration on the following substantial question of law :
"Whether the Appellate Tribunal has erred in law and on facts in deleting the interest income of Rs.2,23,06,911/- earned by the assessee before commencement of business?"
5. The brief facts of the case for Assessment Year 2009-10 giving rise to these appeals can be summarized as under :-
5.1. The respondent assessee is a limited Company engaged in business of developing, operating, maintenance of power projects and sale of power. During the years under consideration, the power projects of the respondent assessee were under implementation and therefore did not start any commercial activities. Therefore, no Profit and Loss Account for the year under consideration was prepared and the expenditure incurred during the construction period was shown in the Page 3 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined balance sheet as the Project Development Expenditure and Capital Work in Progress. The balance sheet as on 31.03.2008 shows the total Project Development Expenditure at Rs.178.56 crores as reflected in Schedule VI of respondent assesses balance sheet. The respondent assessee carried forward a sum of Rs.162.45 crores after setting off Rs.16.11 crore from the total Project Development Expenditure in the balance sheet as Project Development Expenditure. The Income of Rs.16.11 crore included interest income of Rs.11,66,14,614/- and interest income upto 31.03.2007 of Rs.2,34,81,466/-. Therefore, the interest income pertaining to the accounting year 2008-09, relevant to Assessment Year 2009-10 under consideration was Rs.9,31,33,148/- (Rs.11,66,14,614 - Rs.2,34,81,466/-).
5.2. In the return of income the respondent assessee offered the income of Rs.7,91,51,306/- as under :-
Interest income offered to Tax Particulars Amount Rs.
Interest on ICD 58, 814, 370
Interest on general purpose 1, 765, 955
Interest on general purpose 6, 829, 678
Interest from Securities 11, 739, 986
Interest receivable on N.S.C. 1, 317
Total 79, 151, 306
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NEUTRAL CITATION
C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025
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5.3. The respondent assessee claimed the interest income of Rs.1,39,81,841/- ( Rs.9,31,33,148 - Rs.79,151,306) to be capital receipts not liable to be taxed. The details of which are as under:-
Interest Income not offered to Tax Purpose FD Amount Rate Int.
of Int.
GUVNL BID BOND 40, 000, 000 8.25% 3, 012, 276
GUVNL BID BOND 37, 500, 000 7.75% 3, 433, 559
HPGCL BID BOND 72, 000, 000 8.50% 2, 186, 349
HPGCL BID BOND 13, 500, 000 8.50% 409, 940
MSEDCL -BG 30, 000, 000 8.25% 284, 016
MSEDCL -BG 30, 000, 000 8.25% 284, 016
MSEDCL -BG 30, 000, 000 8.25% 284, 016
GUVNL BID BOND 17, 500, 000 9.15% 1, 681, 897
Chhattisgarh BID BIND 60, 000, 000 7.00% 1, 004, 839
Margin Money -LC Dalian Insular 30, 000, 000 3.50% 3, 94, 683
Margin Money - Coal Mining 90, 000, 000 8.75% 1, 006, 250
Total 13, 981, 841
5.4. However, during the course of assessment proceedings, by letter dated 24.08.2010, the assessee claimed that out of interest income of Rs.7,91,51,306/- which was offered as interest income in the return of income, a sum of Rs.2,03,36,936/- was from Fixed Deposits and Government Securities and therefore claimed the same as exempt income.Page 5 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025
NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined 5.5. The Assessing Officer accepted the claim of Rs.3,94,683/- only with regard to interest income having been earned from the margin money of Rs.3 crores and therefore, out of sum of Rs.1,39,81,841/- claimed as exempt in return of income, the Assessing Officer made addition of Rs.1,35,87,158/- (Rs.1,39,81,841 - Rs.3,94,683).
5.6. With regard to the interest income offered by the respondent assessee at Rs.7,91,51,306/-, the Assessing Officer rejected the contention of the assessee that sum of Rs.2,03,36,936/- was capital receipt and accordingly assessed the entire sum of Rs.7,91,51,306/- as interest income offered by the respondent assessee in the return of income.
6. Feeling aggrieved, the respondent assessee filed an appeal before the CIT (Appeals). Before the CIT (Appeals), the assessee claimed the entire interest income to be capital receipt and claimed that income of Rs.1,35,87,158/- to be non-taxable as per ground no. 2 and also claimed the entire remaining interest income of Rs.7,91,51,306/- to be non-taxable as per ground no.4 raised before the CIT (Appeals).
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7. The CIT (Appeals) rejected ground no.2 of the appeal with regard to the claim of the non-taxability of Rs.1,35,87,158/- with the following findings in the order :
3.3. I have considered the facts of the case; assessment order and appellant's submission. It is not in dispute that appellant's business is being setup and accordingly appellant did not offer any business income. Appellant raised funds for setting up project however during the construction period of the project, surplus funds were invested on which interest and other income were received. In the return of income filed appellant offered interest income of Rs.79,151,306 and claimed that interest income of Rs. 1,39,81,841 was earned from deposits which were given as lien against opening of LC, bid bonds and bank guarantees. This income was not offered for tax on the ground that the same is inextricably linked with capital projects and hence to be reduced from capital cost. Assessing officer after examining the various issues found that appellant's claim is not justified in view of the Supreme Court decision in the case of Tuticorin Alkalies chemicals and fertilizers Ltd, 227 ITR 172.
Appellant relied upon the other decisions. However the following extract from the decision of apex court in the case of Tuticorin Alkalies chemicals and fertilizers Ltd is quite relevant to decide the issue-
"For the purpose of setting up of the factories, the company has taken term loan from various banks and financial institutions. That part of borrowed funds which were not immediately required by the company but are kept invested in short-term deposits with banks. Such investments were specifically permitted by the memorandum and articles of association of the company.
The company has also deposited certain sums with the Tamil Nadu electricity board. It has also given interest- bearing loans to its employees to purchase vehicles.
It is well settled that tax is attracted at the point when income is earned. Taxability of income is not dependent upon its destination or the manner of its utilization. It has to be seen whether at the point of accrual, the amount is of revenue nature. If so, the amount will have to be taxed."Page 7 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025
NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined From the above it is clear that apart from investment of temporary surplus funds, the deposit with electricity board or loan to employee's also provided interest income which was not considered a part of the project but treated as revenue receipt taxable under section 56 of IT act. In the case of appellant also the investment in bonds might be required for the purpose of entering into power purchases agreement but revenue is flowing from investment in bonds and not from the implementation of projects or purchases of plant and machinery. LC margin money interest was considered inextricably linked to the project by the assessing officer and accordingly he allowed the same to be reduced from project cost. Apart from this no other interest income is directly coming from implementation of the project or purchases of plant and machinery. Power purchases agreement may require some security in the form of bond but that does not mean that investment was linked to the implementation of project. Since honourable Supreme Court in the case of Tuticorin Alkalies chemicals and fertilizers Ltd had considered even interest on deposit with electricity board as taxable income, there is no basis for not offering the same as taxable in other sources head. None of the decision referred by the appellant has overruled the landmark decision of Supreme Court in the case of Tuticorin Alkalies chemicals and fertilizers Ltd. In view of this, unless the income is inextricably linked to the implementation of the project, the same cannot be reduced from the cost of the project and accordingly the income will be taxed. The decision of honourable Supreme Court in he case of Bokaro steel Ltd and Karnal corporate sugar Mills Ltd do not support the appellant's claim since in both the cases, interest income was directly coming from the implementation of the project. In the appellant's case, the same is from investment in bond required as security for PPA and not for setting up the project. PPA is not for implementation of the project but the same is for sale of electricity after commencement of business. Therefore appellant does not get benefit from these decisions. The other decisions relied upon by the appellant are on the interpretation of apex court decisions referred earlier. Since facts of the appellant's case are similar to the decisions of apex court, appellant is liable for tax on interest. The addition made by the assessing officer is accordingly confirmed."
7.1. The CIT (Appeals) also rejected ground no. 4 of the appeal Page 8 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined with regard to the claim of non-taxability of Rs.7,91,51,306/- with the following findings:
"5. I have considered the facts of the case and appellant's submission. Appellant earned interest on intercorporate deposits deployed out of surplus funds available. The said interest was duly offered for tax in other sources head. The said income was never claimed as exempt during assessment proceedings. Only in appeal claim was made that this interest income is not taxable in view of Delhi High Court decision in the case of Indian oil Corporation Ltd and another decision in the case of Jaypee DSC Ventures Ltd. I have gone through both the decisions and none of the decision applies to the facts of the appellant. Appellant used the surplus fund in inter corporate deposits and earned interest income on the same. The earning of interest income is not inextricably linked to the construction of project. In the identical facts, honourable Supreme Court held that interest income earned from temporary deployment of surplus fund is taxable in other sources head. In view of the decision of honourable Supreme Court, this ground which is taken for the first time in appeal is not sustainable. Accordingly the same is dismissed."
8. The respondent assessee therefore preferred an appeal before the Tribunal. Before the Tribunal, it was contended on behalf of the respondent assessee that the entire interest income received by the assessee was out of the funds brought in for the purpose of power projects and part of the funds were invested in securities and bonds which were required for giving bank guarantee or for giving as margin money and such investment was necessary and integral to the implementation of the power projects. It was also contended that some interest income was earned out of temporary availability of funds which Page 9 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined were brought in for the purpose of power projects and utilized for earning interest income till the fund was actually utilized in the implementation of the power projects. The Tribunal after considering the rival submissions allowed the appeal filed by the respondent assessee.
9. Being aggrieved, the Revenue has preferred these appeals which are admitted for consideration of the substantial questions of law reproduced herein above.
10. Insofar as Tax Appeal No. 416 of 2019 and Tax Appeal No. 417 of 2019 are concerned, the similar issue came up for consideration before the Tribunal with regard to taxability of interest income earned by the assessee prior to the implementation of the power projects. The Assessing Officer made additions of Rs.3,68,56,918/- earned by the respondent assessee on Fixed Deposit as income from other sources under Section 56 of the Act. The CIT (Appeals), however, partly allowed the appeal of the assessee by order dated 09.03.2015 by deleting the addition to the extent of Rs.1,45,50,007/- observing that the assessee had made fixed deposit with IDBI Bank for Page 10 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined obtaining bank guarantee for the purpose of issuance of the contract performance guarantee in respect of the request for proposal floated by the Rajasthan Rajya Vidyut Prasaram Nigam Ltd., for supply upto 1200 MW power by the assessee with specific validity period.
11. Being aggrieved by the order of the CIT (Appeals), the appellant Revenue preferred appeal before the Tribunal being ITA No. 1430/Ahd/2015 for deletion of the interest income of Rs.1,45,50,007/- and the respondent assessee preferred Cross Objection (CO) for the additions sustained by the CIT (Appeals). The Tribunal following its decision for the Assessment Year 2009-10 dismissed the appeal filed by the Revenue and also allowed the Cross Objections filed by the respondent assessee.
12. Learned Senior Standing Counsel Ms. Maithili D. Mehta for the appellant Revenue submitted that the Tribunal has committed an error in not following the decision of the Hon'ble Apex Court in case of M/s. Tuticorin Alkali Chemicals and Fertilizers Ltd. v. Commissioner of Income Tax reported in [1997] 227 ITR 172 (SC).
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NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined 12.1. It was submitted that the Tribunal instead of relying upon the aforesaid decision has committed an error by relying upon the decision in case of Indian Oil Panipat Power Consortium Ltd. v. Income Tax Officer reported in [2009] 315 ITR 255 wherein only emphasis was on inextricable connection between setting up of plant/assets in various financial and other transactions that is closely linked with such activity. It was submitted that in the facts of the case there is no inextricable connection of the interest income earned by the respondent assessee and the idle amount invested during the implementation of the power projects.
12.2. It was further submitted that reliance placed by the Tribunal upon the decision in case of Commissioner of Income Tax v. Bokaro Steel Ltd., reported in [1999] 236 ITR 315 (SC) is also without any basis as in the said decision the Hon'ble Apex Court has after referring to the decision in case of M/s. Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra) on the facts of the said case held that the interest income having inextricable connection with the implementation Page 12 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined of the project has to be treated as capital receipt. It was therefore submitted that the impugned order of the Tribunal is contrary to the facts as well as the law laid down by the Hon'ble Apex Court in case of M/s. Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra).
13. Per contra, learned Senior Advocate Mr. Saurabh Soparkar with learned advocate Mr. B.S. Soparkar for the respondent assessee submitted that though the assessee initially had offered the interest income of Rs.7,91,51,306/- in the return of income as taxable income, it was realized by the assessee before the CIT (Appeals) that the entire interest income earned by the respondent assessee was prior to implementation of the power project which was demonstrated by the respondent assessee before the CIT (Appeals) and the Tribunal. It was, therefore, submitted that the reliance place by the Revenue on the decision in case of M/s. Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra) would not be applicable in the facts of the case and in view of the subsequent decision of the Hon'ble Apex Court in case of Commissioner of Income Tax v. Autokast Ltd., reported in [2001] 248 ITR 110 (SC) Page 13 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined and in case of Bokaro Steel Limited (supra). 13.1 Learned Senior Advocate Mr. Saurabh Soparkar also referred to and relied upon the decision of Hon'ble Apex Court in case of Commissioner of Income Tax v. Karnal Co- operative Sugar Mills Ltd., reported in [2000] 243 ITR 2 (SC), wherein the Hon'ble Apex Court held that when the assessee had deposited the money to open a letter of credit for the purchase of the machinery required for setting up its plant in terms of the agreement with the supplier and in such circumstances, the interest earned on such deposit is directly linked with the purchase of plant and machinery. Hence, the ratio laid down in case of M/s. Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra) will not be attracted. 13.2 It was submitted that in the facts of the case, in order to enter into power projects agreement as placed was required to give counter guarantee for which fixed deposits was placed by the petitioner and the interest was earned, so far as amount of Rs.2,03,36,936/- is concerned. It was submitted that the Hon'ble Delhi High Court in case of Indian Oil Panipat Power Page 14 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined Consortium Ltd. (supra), after considering the decisions of Hon'ble Apex Court in case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra) and Bokaro Steel Ltd. (supra) has held that the interest earned by the assessee on the surplus funds invested prior to implementation of the power project would be capital receipt.
13.3. Learned Senior Advocate Mr. Saurabh Soparkar has further referred to and relied upon the following decisions :-
(1) In case of Principal Commissioner of Income Tax v.
Brahmaputra Cracker & Polymer Ltd., reported in [2023] 454 ITR 202 (Gauhati).
(2) In case of Principal Commissioner of Income Tax v. Jaypee Powergrid Ltd. reported in [2024] 158 Taxmann.com 86 (Delhi). (3) In case of Commissioner of Income Tax v. Shree Rama Multitech Ltd. reported in [2013] 32 Taxmann.com 296 (Gujarat).
(4) In case of Commissioner of Income Tax-IV, Ahmedabad v. Shree Rama Multitech Ltd. reported in [2018] 92 Taxmann.com 363 (SC).
14. Reliance was also placed on the decision of Hon'ble Orissa High Court in case of Neelachal Ispat Nigam Ltd. v. Page 15 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025
NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined Assistant Commissioner of Income Tax reported in [2022] 284 Taxmann.com 527 (Orissa), the decision of the Hon'ble Delhi High Court in case of Principal Commissioner of Income Tax v. Facor Power Ltd. reported in [2016] 380 ITR 474 (Delhi) and the decision in case of Commissioner of Income Tax v. Petronet LNG Ltd., reported in [2011] 199 Taxman 118 (Delhi).
15. The thrust of the submissions made by the learned advocate for the respondent assessee was to demonstrate that there was an inextricable link between the investment of surplus funds and setting up of power projects and, therefore, the interest earned by the respondent assessee was rightly held to be capital receipt by the Tribunal.
16. Before we advert to consider the rival submissions made by both the sides, it would be germane to refer to the findings recorded by the Tribunal for allowing the appeals filed by the respondent assessee for the Assessment Year 2009-10 which was followed in the decision rendered by the Tribunal for Assessment Year 2011-12 as under :-
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18. We find that both the parties have relied upon the decisions of the Hon'ble Apex Court and in addition, the assessee has relied upon the decision of Hon'ble Delhi High Court. Therefore, it would be appropriate to first refer to those decisions. In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), the Hon'ble Apex Court held as under:-
"...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 section70 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 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."
19. In the case of Bokaro Steel Ltd. (supra), the Hon'ble Apex Court, after considering the decision of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), held as under:-
"..., dismissing the appeal, that the first three heads of income were (i) the rent charged by the assessee to its contractors for housing workers and staff employed by the contractor for the construction work of the assessee including certain amenities granted to the staff by the assessee, (ii) hire charges for plant and machinery which was given to the contractors by the assessee for use in the construction work of the assessee, and
(iii) interest from advances made to the contractors by the assessee for the purpose of facilitating the work of construction.
The activities of the assessee in connection with all these three receipts were directly connected with or incidental to the work of construction of its plant undertaken by the assessee. The advances which the assessee made to the contractors to facilitate the construction activity of putting together a very large project Page 17 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined was as much to ensure that the work of the contractors proceeded without any financial hitch as to help the contractors. The arrangements which were made between the assessee- company and the contractors pertaining to these three receipts were arrangements which were intrinsically connected with the construction of its steel plant. The receipts had been adjusted against the charges payable to the contractors and had gone to reduce the cost of construction. They had, therefore, been rightly held as capital receipts and not income of the assessee from any independent source."
20. In the case of Karnal Co-operative Sugar Mills Ltd. (supra), their Lordships of Hon'ble Apex Court, after applying the decision of Bokaro Steel Ltd. (supra), held as under:-
"Held, that, in the present case, the assessee had deposited money to open a letter of credit for the purchase of the machinery required for setting up its plant in terms of the assessee's agreement with the supplier. It was on the money so deposited that some interest had been earned. This was, therefore, not a case where any surplus share capital money which was lying idle had been deposited in the bank for the purpose of earning interest. The deposit of money in the present case was directly linked with the purchase of plant and machinery. Hence, any income earned on such deposit was incidental to the acquisition of assets for the setting up of the plant and machinery. The interest was a capital receipt, which would go to reduce the cost of asset. "
21. In the case of Karnataka Power Corporation (supra), their Lordships of Hon'ble Apex Court, following the decision of Bokaro Steel Ltd. (supra), held as under:-
"...also, (i) that the Tribunal was right in law in upholding the order of the Commissioner (Appeals) who deleted the addition of Rs. 1,30,44,518/- being interest receipts and here charges from contractors by holding that the same were in the nature of capital receipts which would go to reduce capital cost."
22. In the case of Bongaigaon Refinery & Petrochemicals Ltd. (supra), the Hon'ble Apex Court, after considering the decision of Bokaro Steel Ltd. (supra), held as under:
"reversing the decision of the High Court in relation to these items of income, that these items of receipts were not taxable income but were to be adjusted against the project cost for the business of oil refinery and petrochemicals."Page 18 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025
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23. That the Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. (supra), after considering the decisions in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and Bokaro Steel Ltd. (supra) at length, held at pages 258, 259 and 260 of report, i.e., 315 ITR 255, as under:-5. In our opinion the Tribunal has misconstrued the ratio of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals [1997] 227 ITR 172 and that of Bokaro Steel Ltd. [1999] 236 ITR 315. The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals [1997] 227 ITR 172 is that if funds have been borrowed for setting up of a plant and if the funds are 'surplus' and then by virtue of that circumstance they are invested in fixed deposits the income earned in the form of interest will be taxable under the head "Income from other sources'. On the other hand the ratio of the Supreme Court judgment in Bokaro Steel Ltd. [1999] 236 ITR 315 to our mind is that if income is earned, whether by way of interest or in any other manner on funds which are otherwise 'inextricably linked to the setting up of the plant, such income is required to be capitalized to be set off against pre-operative expenses.
5.1 The test, therefore, to our mind is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the plant. The clue is perhaps available in s. 3 of the Act which states that for newly set up business the previous year shall be the period beginning with the date of setting up of the business. Therefore, as per the provision of s. 4 of the Act which is the charging section income which arises to an assessee from the date of setting of the business but prior to commencement is chargeable to tax depending on whether it is of a revenue nature or capital receipt. The income of a newly set up business, post the date of its setting up can be taxed if it is of a revenue nature under any of the heads provided under s. 14 in Chapter IV of the Act. For an income to be classified as income under the head "Profits and gains of business or profession" it would have to be an activity which is in some manner or form connected with business. The word "business" is of wide import which would also include all such activities which coalesce into setting up of the business. See Mazagaon Dock Ltd. vs. CIT/CEPT (1958) 34 ITR 368 (SC) and Narain Swadeshi Weaving Mills vs. CEPT (1954) 26 ITR 765 (SC). Once it is held that the assessee's income is an income connected with business, which would be so in the present case, in view of the finding of fact by the CIT(A) that the monies which were inducted into the joint venture company by Page 19 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined the joint venture partners were primarily infused to purchase land and to develop infrastructure then it cannot be held that the income derived by parking the funds temporarily with Tokyo Mitsubishi Bank, will result in the character of the funds being changed, in as much as the interest earned from the bank would have a hue different than that of business and be brought to tax under the head 'Income from other sources'. It is well-settled that an income received by the assessee can be taxed under the head "Income from other sources" only if it does not fall under any other head of income as provided in s. 14 of the Act. The head "Income from other sources" is a residuary head of income. See S.G. Mercantile Corporation (P) Ltd. vs. CIT 1972 CTR (SC) 8:
(1972) 83 ITR 700 (SC) and CIT vs. Govinda Choudhury & Sons (1994) 116 CTR (SC) 61: (1993) 203 ITR 881 (SC).
5.2 It is clear upon a perusal of the facts as found by the authorities below that the funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre-operative expenses. In the case of Tuticorin Alkali Chemicals [1997] 227 ITR 172 it was found by the authorities that the funds available with the assessee in that case were 'surplus' and, therefore, the Supreme Court held that the interest earned on surplus funds would have to be treated as 'income from other sources'. On the other hand in Bokaro Steel Ltd. [1999] 236 ITR 315 (SC) where the assessee had earned interest on advance paid to contractors during pre- commencement period was found to be 'inextricably linked' to the setting up of the plant of the assessee and hence was held to be a capital receipt which was permitted to be set off against pre- operative expenses. (underlined ours to supply emphasis)
24. From the above, it is evident that the Hon'ble Delhi High Court has considered and interpreted the decisions of Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) as well as Bokaro Steel Ltd. (supra). The conclusion of the Delhi High Court is in fact the law which emerges as per the decision of Hon'ble Apex Court. Therefore, in our opinion, the CIT(A) was not justified in ignoring the decision of Hon'ble Delhi High Court by simply mentioning that the issue is covered by the decision of Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). After considering these two decisions of the Hon'ble Apex Court and also some other Page 20 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined decisions of the Hon'ble Apex Court, their Lordships of the Delhi High Court arrived at the conclusion "it is clear upon a perusal of the facts as found by the authorities below that the funds in the form of share capital were infused for the specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources. Since the income was earned in a period prior to commencement of business, it was in the nature of capital receipt and hence was required to be set off against the pre- operative expenses. "That, the ratio of the above finding of the Hon'ble Delhi High Court would be squarely applicable to the facts of the assessee's case, because admittedly in the case under appeal before us the share capital as well as loans were raised for the specific purpose of setting up of the power generation plants. The business of the assessee has not been commenced and therefore, as per above decision, the interest received in the period prior to commencement of business was in the nature of capital receipt and hence was required to be set off against the pre-operative expenses. The assessee has already set off the interest income against the pre-operative expenses which is titled as "project development expenditure". In view of above, we are of the opinion that the interest income of Rs. 1,35,87, 158/ as well as Rs.7,91,51,306/- was a capital receipt not chargeable to tax during the year under consideration. Accordingly, Ground Nos. 2 and 4 of the assessee's appeal are allowed."
18. The Hon'ble Apex Court in case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra) while dealing with the issue of taxability of the interest earned on the surplus fund by the Company from the Bank deposits and loans was held to be taxable income under the head 'Income from other sources' under Section 56 of the Act and in the event the income derived out of the funds borrowed for setting up of factory of the Company, the same should be adjusted against the interest Page 21 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined payable on the borrowed funds. The Hon'ble Apex Court has held as under :
"The Company has chosen not to keep its surplus capital idle, but has decided to invest it fruitfully. The fruits of such investment will clearly be of revenue nature. This position in law was explained by Sir George Lowndes in the off-quoted passage in the case of Commissioner of Income Tax, Bengal v.Shaw Wallace & Co., (1932) 59 I.A. 206 :
"Income, their Lordships think, in this Act connotes a periodical monetary return 'coming in', with some sort of regularity or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. This income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something which is often loosely spoken of as 'capital'."
14. 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 and not accretion of 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 income and is clearly taxable even though the interest amount is earned by utilising borrowed capital.
15. 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. It was rightly pointed out in the case of Kedar Narain Singh v. Commissioner of Income Tax, (6 I.T.R. 157) that "anything which can properly be described as income is taxable under the Act unless expressly exempted". The interest earned by the assessee is clearly its income and unless it can be shown that any provision like Section 10 has exempted it from tax, it will be taxable. The fact that the source of income was borrowed money does not detract anything from the revenue Page 22 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined character of the receipt. The question of adjustment of interest payable by the Company against the interest earned by it will depend upon the provisions of the Act. The expenditure would have been deductible as incurred for the purpose of business if the assessee's business had commenced. But that is not the case here. The assessee may be entitled to capitalise the interest payable by it. But what the assessee cannot claim is adjustment of this expenditure against interest assessable under Section 56. Section 57 of the Act sets out in its clauses (i) to (iii) the expenditures which are allowable as deduction from income assessable under Section 56. It is not the case of the assessee that the interest payable by it on term loans are allowable as deduction under Section 57 of the Act.
16. If that be so, under which other provision of law can the assessee claim deduction or set-off of his income from other source against interest payable on the borrowed fund?
17. There are specific provisions in the Income Tax Act of setting off of loss from one source against income from another source under the same head of income (Section 70), as well as setting off of loss from one head against income from another (Section
71). In the facts of this case the Company cannot claim any relief under any of these two Sections, since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting year. In such a situation the expenditure incurred by the assessee for the purpose of setting up its business cannot be allowed as deduction, nor can it be adjusted against any other income under any other head. Similarly any income from a non- business source cannot be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plants and machineries even before commencement the business of the assessee.
28. It is true that this Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But 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 Act. As was pointed out by Lord Russell in the case of B.S.C. Footwear Ltd, the Income Tax law does not march step by step in the footprints of the accountancy profession. Page 23 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025
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29. The question in Challapalli Sugar Ltd. 's case was about computation of depreciation and development rebate under the Indian Income Tax Act, 1922. In order to calculate depreciation and development rebate it was necessary to find out 'the actual cost' of the plant and machinery purchased by the Company. This Court held that 'cost' is a word of wider connotation than 'price'. There was a difference between the price of a machinery and its cost. This Court thereafter pointed out that the expression "actual cost" had not been defined in the Act. It was, therefore, necessary to find out the commercial sense of the phrase. Khanna, J. (as his Lordship then was) observed :
"As the expression "actual cost" has not been defined, it should, in our opinion, be construed in the sense which no commercial man would misunderstand. For this purpose it would be necessary to ascertain the connotation of the above expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure."
32. But this is an entirely different case. Whether a particular receipt is of the nature of income and falls within the charge of Section 4 of the Income-Tax Act 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 also this Court. It is well-settled that income attracts tax as soon as it accrues. The application or destination of the income has nothing to do with its accrual or taxability. It is also well-settled that interest income is always of a revenue nature unless it is received by way of damages or compensation."
19. The aforesaid decision by the Hon'ble Apex Court has been followed and relied upon in case of Autokast Limited (supra). The Hon'ble Apex Court in case of Bokaro Steel Limited Page 24 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined (supra) has considered the decision of the Hon'ble Apex Court in case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra) and has held as under :-
"5. We will take the first three heads under which the assessee has received certain amounts. These are, the rent charged by the assessee to its contractors for housing workers and staff employed by the contractor for the construction work of the assessee including certain amenities granted to the staff by the assessee. Secondly, hire charges for plant and machinery which was given to the contractors by the assessee for the purpose of facilitating the work of construction. The activities of the assessee in connection with all these three receipts are directly connected with or are incidental to the work of construction of its plant undertaken by the assessee. Broadly speaking, these pertain to the arrangements made by the assessee with its contractors pertaining to the work of construction. To facilitate the work of the contractor, the assessee permitted the contractor to use the premises of the assessee for housing its staff and workers engaged in the construction activity of the assessee's plant. This was clearly to facilitate the work of construction. Had this facility not been provided by the assessee, the contractors would have had to make their own arrangements and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee had provided these facilities. The same is true of the hire charges for plant and machinery which was given by the assessee to the contractor for the assessee's construction work. The receipts in this connection also go to compensate the assessee for the wear and tear on the machinery. The advances which the assessee made to the contractor to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitches as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts are arrangements which are intrinsically connected with the construction of its steel plant. The receipts have been adjusted against the charges payable to the contractors and have gone to reduce the cost of construction. They have, therefore, been rightly held as capital receipts and not income of the assessee from any independent source.
6. In the case of Addl. Commissioner of Income-tax, New Delhi Page 25 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined V. Indian Drugs and Pharmaceuticals ltd. ([1983] 141 ITR 134), the Delhi High Court considered a case where the work of construction of the factory of the assessee was in progress and production had not commenced. receipts from sale of tender forms and supply of water and electricity to the contractors engaged in construction as also receipts on account of sale of stones, boulders, grass and trees were held to be receipts not from independent sources but were considered as inextricably linked with the process of setting up of business. These were directly related to the capital structure of business and were held to be capital in nature. We agree with this view taken by the Delhi High Court.
7. The appellant, however, relied upon the decision of this Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. Commissioner of Income-tax (supra). That case dealt with the question whether investment of borrowed funds prior to commencement of business, resulting in earning of interest by the assessee would amount to the assessee earning any income. This Court held that 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. Merely because he utilized it to re-pay the interest on the loan taken, will not make the interest income as a capital receipt. The department relied upon the observations made in that judgment (at page 179) to the effect that it the company, even before it commences business, invests surplus funds in its hands for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head "capital gains". Similarly, if a company purchases rented house and gets rent, such rent will be assessable to tax under Section 22 as income from house property. Likewise, the company may have income from other sources. The company may also, as in that case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under Section 56 of the Income-tax Act. This Court also emphasised the fact that the company was not bound to utilize the interest so earned to adjust it against the interest paid on borrowed capital. The company was free to use this income in any manner it liked. However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee-company. They must, therefore, be Page 26 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined viewed as capital receipts going to reduce the cost of construction. In the case of Challapalli Sugars Ltd. v. Commissioner of Income- tax, A.P. ([1975] 98 ITR 167), this Court examined the question whether interest paid before the commencement of production by a company on amounts borrowed for the acquisition and installation of plant and machinery would form a part of the actual cost of the asset to the assessee within the meaning of that expression in Section 10(5) of the Indian Income-tax Act, 1922 and whether the assessee will be entitled to depreciation allowances and development rebate with reference to such interest also. The Court held that the accepted accountancy rule for determining cost off fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production of such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income."
20. From the above decision of the Hon'ble Apex Court in case of Bokaro Steel Limited (supra), the only exception is carved out for considering the interest income earned by the Company as capital receipt when such amount received is inextricably linked with process of setting up of plant and machinery which would reduce the cost of assets and shall be treated as capital nature and such receipts would be considered as of capital nature not liable to tax.
21. In case of Karnal Co-operative Sugar Mills Ltd. (supra) Page 27 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined also the Hon'ble Apex Court in the facts of the case where the interest was earned on the money deposited to open a letter of credit for purchase of machinery applied the decision in the case of Bokaro Steel Ltd. (supra) and held that in the facts of the case the ratio laid down in case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) would not be attracted.
22. The Hon'ble Apex Court in case of Karnataka Power Corporation (supra) while considering the provisions of Section 43 read with Section 32A of the Income Tax Act, 1961 for granting claim of investment allowance as applicable to the plant in respect of its power generating station building held that where it is found as a fact that the building has been so planned and constructed as to serve an assesse's special technical requirements it will qualify to be treated as a plant for purpose of investment allowance. While answering the question, the Hon'ble Apex Court has referred to and relied upon the decision in case of Bokaro Steel Limited (supra) and Commissioner of Income Tax v. Alcock Ashdown & Co. Ltd. reported in [1997] 224 ITR 353. While distinguishing the decision in case of Commissioner of Income Tax v. Anand Page 28 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined Theatres reported in [2000] 244 ITR 192 where the question before the Court was whether a building that was used as a hotel or a cinema theatre could be given depreciation on the basis that it was a 'plant' and in relation to that question, the Court came to the conclusion that the building which was used as a hotel or a cinema theatre could not be given depreciation on the basis that it was a plant. But when the building has been so planned and constructed as to serve an assessee's special technical requirement, it will qualified to be treated as a plant for the purposes of investment allowance.
23. Reliance placed by the learned counsel for the respondent assessee on the decisions in cases of Brahmaputra Cracker and Polymer Ltd. (supra), Jaypee Powergrid Ltd. (supra), Shree Rama Multitech Ltd. (supra), and Indian Oil Panipat Power Consortium Ltd. (supra) of Gauhati High Court, this Court and Delhi High Court respectively are based upon the findings recorded by the Courts. The findings of fact recorded by the Tribunal that the interest earned on the funds invested by the assessee is inextricably linked with setting up of the plant and machinery.
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24. In case of Brahmaputra Cracker & Polyester Ltd. (supra) the assessee was a public sector enterprise working under the Ministry of Chemicals and Fertilizers and received capital subsidy for setting up of the project. The excess amount not being utilized was temporarily parked in short-term deposits in banks and interest was earned thereupon. It was held to be having clear inextricable link between the interest received on temporary investment with the setting up of the project and there was no indication in the facts of the case that the assessee utilized such funds for any purpose other than the development of the infrastructure of the plant to be set up. There was a clear guidelines from the Ministry of Chemical and Fertilizers that the interest earned from the temporary parking of capital subsidy will be treated to be part of capital subsidy and it will be correspondingly reduced from the amount of capital subsidy sought from the Government. In such circumstances, it was held by the Hon'ble Gauhati High Court upholding the order passed by the Tribunal that the interest received from the short term deposits made out of unutilized capital subsidy, unutilized debt funds, unutilized equity funds received as capital during the Page 30 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined formative years till the project was completed was rightly claimed by the assessee under the head of capital receipts.
25. Similarly in case of Indian Oil Panipat Power Consortium Ltd. (supra) the assessee company was incorporated in pursuance of a joint venture entered into between an Indian company and a Japanese company to set up a power project and both the joint venture partners contributed share capital which included a sum by way of additional share capital which was required for the purchase of land and development of infrastructure, but due to legal entanglements with respect to title of land, the said fund was temporarily put in fixed deposit with the Bank and interest was earned thereon which was claimed as capital receipt to be set off against pre-operative expenses. In such facts, the Hon'ble Delhi High Court has held that in the facts of the case funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion of the business could not have been classified as income from other sources and since the Page 31 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined income was earned in a period prior to commencement of the business, it was in the nature of capital receipt and hence was required to be set off against pre-operative expenses. 25.1. The Hon'ble Delhi High Court distinguished the facts in the decision of Hon'ble Apex Court in case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra). In the said decision, it was found by the authorities that the funds available with the assessee in the case were 'surplus' and therefore, the Hon'ble Apex Court held that the interest earned on surplus funds would have to be treated as 'income from other sources'. The Hon'ble Delhi High Court also referred to and relied upon the provisions of Section 208 of the Companies Act, 1956 which provides that a Company can pay interest on share capital which is issued for a specific purpose to defray expenses for construction of any work and which cannot be made profitable for a long period subject to certain restrictions and relied upon the decision of Hon'ble Apex Court in case of Challapalli Sugars Ltd. v. Commissioner of Income Tax reported in [1975] 98 ITR 167, the Hon'ble Apex Court held that in view of the facts of the case instead of paying interest on funds brought in for specific Page 32 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined purpose interest is earned on funds brought in by way of share capital for a specific purpose.
26. In case of Jaypee Powergrid Ltd. (supra), the Hon'ble Delhi High Court followed the decision in case of Indian Oil Panipat Power Consortium Ltd. (supra) and in the facts of the case held that the test for deciding as to whether the interest earned on the fixed deposit should be treated as 'capital receipt' or 'income from other sources' is dependent on whether the invested funds were inextricably linked with the setting up of the power transmission system or not. After analyzing the facts of the case, it was found that on holistic reading of the clauses of Trust and Retention Account Agreement (TRA), the Common Facility Agreement (Loan Agreement), there was an inextricable link between the investment of the surplus funds and the setting up of the power transmission system. Accordingly, it was held that the interest income earned by the assessee was a 'capital receipt'.
27. This Court in case of Shree Rama Multi Tech Ltd. (supra) while considering the issue of setting up of interest income from Page 33 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined share application money against the public issue expenses under Section 35D of the Act and by relying upon the decision of the Hon'ble Apex Court in case of Bokaro Steel Ltd. (supra), in case of Karnal Co-operative Sugar Mills Ltd. (supra) and Bongaigaon Refinary and Petrochemicals Ltd. referred to in the order of Tax Appeal No. 315 of 2010 held that the Tribunal was justified in permitting the set up of interest income from share application money against public issue expenses. The Hon'ble Apex Court while confirming the decision in case of Shree Rama Multi Tech Ltd. (supra) upholding the decision of this Court in case of Commissioner of Income Tax-IV v. Shree Rama Multitech Ltd. (supra) found that the respondent assessee was statutorily required to keep share application money in the separate account till the allotment of shares was completed and interest earned on such separately kept amount was to be adjusted towards expenditure for raising share capital and in view of such facts, it was held that the interest earned was inextricably linked with requirement of company to raise share capital and was thus adjustable towards the expenditure involved for the share issue.
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28. The Hon'ble Apex Court therefore, followed the decision in case of Bokaro Steel Ltd. (supra), Karnal Co-operative Sugar Mills Ltd. (supra) and held that common rationale that is followed in all these decisions that if there is any surplus money which is lying idle and it has been deposited in the bank for the purpose of earning interest then it is liable to be taxed as income from other sources but if the income accrued is merely incidental and not the prime purpose of doing the act in question which resulted into accrual of some additional income then the income is not liable to be assessed and is eligible to be claimed as deduction.
29. Applying the above ratios in the facts of the case, it emerges from the record as per the finding of fact arrived at by the CIT (Appeals), which is not disturbed by the Tribunal, the respondent assessee initially offered interest income for tax of Rs.79,151,306 out of the total interest income for the year under consideration of Rs.9,31,33,148/- which comprises of Interest on ICD, interest on general purpose from securities and investment in NSC and did not offer to tax the interest earned Page 35 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined on GUVNL bid bond, bank guarantees and margin money kept for the purpose of entering into power purchase agreement.
30. The contention raised on behalf of the appellant regarding claim of non-taxability interest income which was offered to tax at the time of filing of return amounting to Rs.79,151,306/- is concerned, no reasons are assigned by the Tribunal in the impugned order and only reliance was placed on the decision of the Hon'ble Delhi High Court in case of Indian Oil Panipat Power Consortium Ltd. (supra) which in turn followed the decision of the Hon'ble Apex Court in case of Bokaro Steel Ltd. (supra). As discussed herein-above, the decision of the Hon'ble Delhi High Court as well as the decision of the Hon'ble Apex Court in case of Bokaro Steel Ltd. (supra) would not be applicable to the facts of the case as the respondent assessee has invested the surplus funds borrowed for the purpose of setting up power plant, which is not inextricably linked with the setting up of the plant and machinery so as to consider the interest income earned on such short term investments as capital receipt in contrary to the settled legal position as held by the Hon'ble Apex Court in case of Tuticorin Alkali Chemicals Page 36 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined and Fertilizers Ltd. (supra).
31. The decision of Hon'ble Delhi High Court would not at all be applicable though held by the Tribunal as squarely applicable to the facts of the case of the assessee as the Tribunal has only considered that the amount was borrowed by the respondent assessee for the specific purpose of setting up of the power plant, however, the Tribunal has ignored the vital fact that there is no inextricable link between the investments made by the assessee out of such borrowed funds and setting up of the power plant. The assesse has made investments in ICD, General purpose investment, in securities and NSC, resulting into income of Rs.79,151,306/- which the Tribunal on its own without any reason has treated as capital receipt.
32. So far as the amount of interest of Rs.1,35,87,158/- is concerned, the same is received from the amount invested for bank guarantees for power purchase agreement which is for the general business purpose of the respondent assessee and not for specific purpose of setting up of power generation plant. Therefore the Tribunal was not justified in considering the Page 37 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025 NEUTRAL CITATION C/TAXAP/160/2016 JUDGMENT DATED: 12/09/2025 undefined entire interest of Rs.79,151,306/- as capital receipt. In absence of any material fact available on record to show that the investments made by the respondent assessee was inextricably linked for setting up of the power plant.
33. In view of the above, we are of the opinion that the impugned order passed by the Tribunal is a perverse order, contrary to the facts and therefore, liable to be quashed and set aside.
34. In the result, Tax Appeals are allowed. The additions made in the Assessment Order passed by the Assessing Officer is hereby restored and the entire interest income of Rs.9,31,33,148/- is to be treated as taxable interest under the head income from other sources.
35. The Tax Appeals are accordingly disposed of by giving answers in favour of the Revenue and against the respondent assessee.
(BHARGAV D. KARIA, J) (PRANAV TRIVEDI,J) phalguni Page 38 of 38 Uploaded by PHALGUNI PATEL(HC00175) on Fri Oct 03 2025 Downloaded on : Sat Oct 04 01:26:54 IST 2025