The Commissioner Of Income Tax-Iv vs Indian Vaccines Corporation Ltd.
2014 Latest Caselaw 1178 Del

$~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'?"

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.

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

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

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.

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

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