HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR D.B. Income Tax Appeal No. 54 / 2003 Commissioner Of Income Tax ----Appellant Versus M/S Bhawal Synthetics (India) Udaipur ----Respondent Connected With D.B. Income Tax Appeal No. 46 / 2006 For Appellant(s) : Mr. KK Bissa For Respondent(s) : HON'BLE MR. JUSTICE GOVIND MATHUR HON'BLE MR. JUSTICE VINIT KUMAR MATHUR Judgment Per Hon ble Mr. Govind Mathur, J. 05/05/2017 By this judgment we are deciding two appeals being absolutely inter-related. It would be appropriate to first deal with D.B. Income Tax Appeal No.54/2003. This appeal under Section 260(A) of Income Tax Act, 1961 is before us to question correctness of order dated 28.3.2003 passed by Income Tax Appellate Tribunal, Jodhpur on basis of following substantial questions of law :- 1. Whether in facts and circumstances of case, interest earned on Fixed Deposit receipts used by (2 of 8) [ ITA-54/2003] assessee as borrowing margin money for funds for setting up industry can be termed as inextricably linked with process of setting up of industry so as to be considered as capital receipt and not revenue income ? 2. Whether in facts and circumstances of case Tribunal was justified in law in holding that enquiry conducted by Assessing Officer before assessment order was passed was proper and adequate enquiry so as not to render assessment order erroneous and prejudicial to interest of revenue, as held by CIT in his order u/s.263 of I.T. Act ? In brief facts of case are that respondent-assessee filed return with no income, hence, that was selected under scrutiny and notice as per provisions of Section 143(2) of Income Tax Act, 1961 (hereinafter referred to as Act of 1961 ) was issued. Assessing Officer considering explanation given by assessee arrived at conclusion that since no expenditure or depreciation claimed by assessee, addition sought to be made is set off and returned income be treated as nil. Commissioner of Income Tax on subsequent examination of record found order passed by Assessing Officer erroneous and prejudicial to interest of revenue inasmuch as interest earned on Fixed Deposit Receipts (FDRs) (3 of 8) [ ITA-54/2003] amounting to Rs.9,31,572/- had not been brought to tax/wrongly set off and further that Assessing Officer failed to make due and proper enquiry as required in facts and circumstances of case. show-cause notice under Section 263 of Act of 1961, thus, was issued. Commissioner of Income Tax after considering all facts and circumstances and law applicable, arrived at conclusion that order passed by Assessing Officer was erroneous and prejudicial to interest of revenue and, therefore, set aside order of assessment with direction that same should be made afresh after making due and proper enquiry in accordance with provisions of law laid down by Hon`ble Supreme Court in 227 ITR 172(SC). challenge was given to order passed by Commissioner of Income Tax invoking powers under Section 263 of Act of 1961 by way of filing appeal before Income Tax Appellate Tribunal, Jodhpur Bench, Jodhpur. Tribunal by its order dated 28.3.2003 accepted appeal and set aside order passed under Section 263 of Act of 1961. To challenge order passed by Income Tax Appellate Tribunal this appeal is before us with contention that interest earned by assessee on Fixed Deposits is not business income but from other sources and, therefore, is liable to be taxed. It is also stated that Assessing Officer passed order of assessment without proper and adequate enquiry and that was erroneous and prejudicial to interest of revenue, as such, (4 of 8) [ ITA-54/2003] Income Tax Appellate Tribunal erred while setting aside order under Section 263 of Act of 1961. Heard learned counsel for appellant. None is present on behalf of respondent-assessee. As already stated, Commissioner of Income Tax while invoking powers under Section 263 of Act of 1961 held that interest earned on FDRs was taxable as income and that could have not been set off by treating same as margin money required for obtaining letter of credit or bank guarantee etc. Income Tax Appellate Tribunal negativated stand of Commissioner of Income Tax by holding that Fixed Deposit was pertaining to amount that was to be adjusted in project cost and, therefore, interest accrued thereon was rightly treated as business expenditure and was rightly set off by Assessing Officer. Hon`ble Supreme Court while dealing with issue of similar nature in Tuticorin Alkali Chemicals & Fertilizers Limited Vs. Commissioner of Income Tax reported in 227 ITR 172(SC) held that interest earned on short-term investment of funds borrowed for setting up of factory during construction of factory before commencement of business has to be assessed as income from other sources and it cannot be said that interest income is not taxable on ground that it would go to reduce interest on borrowed amount which would be capitalized. Apex Court in case aforesaid discussed entire issue in (5 of 8) [ ITA-54/2003] detail and that deserves to be quoted as follows :- It is true that company will have to pay interest on money borrowed by it. But that cannot be ground for exemption of interest earned by company by utilising borrowed funds as its income. It was rightly pointed out in case of Kedar Narain Singh vs. CIT [1938] 6 ITR 157 (All.) that anything which can properly be described as income is taxable under Act unless expressly exempted . interest earned by 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. fact that source of income was borrowed money does not detract anything from Revenue character of receipt. question of adjustment of interest payable by company against interest earned by it will depend upon provisions of Act. expenditure would have been deductible as incurred for purpose of business if assessee s business had commenced. But that is not case here. assessee may be entitled to capitalise interest payable by it. But what assessee cannot claim is adjustment of this expenditure against interest assessable under section 56. Section 57 of Act sets out in its clauses (i) to (iii) expenditures which are allowable as deduction from income assessable under section 56. It is not case of assessee that interest payable by it on term loans are allowable as deduction under section 57 . (6 of 8) [ ITA-54/2003] In case in hand, it is not in dispute that assessee had income of interest through FDRs and while setting off that Assessing Officer as well as ITAT did not examine aspect as to under which provision assessee claimed deduction or set off of his income from other sources against interest payable on borrowed fund. reason given is that amount pertaining to FDR was not surplus amount but part of amount that was kept to obtain letter of credit for purchase of machinery. While accepting fact that FDR was for obtaining letter of credit to purchase machinery but so far as interest earned thereon is concerned, that is nothing but income through other sources, as such, Commissioner of Income Tax rightly treated same as income taxable. So far as second question is concerned as to whether Commissioner of Income Tax was justified in invoking powers under Section 263 of Act of 1961 by holding that enquiry conducted by Assessing Officer before assessment order was neither proper nor adequate, we would like to state that order passed by Assessing Officer nowhere reflects about any enquiry said to be made. It simply refers explanation given by assessee and nothing beyond that. In view of whatever stated above, we are inclined to accept this appeal. Accordingly, appeal is allowed. order passed by Income Tax Appellate Tribunal dated 28.3.2003 is set aside. (7 of 8) [ ITA-54/2003] order passed by Commissioner of Income Tax invoking powers under Section 263 of Act of 1961 stands restored. D.B. Income Tax Appeal No.46/2006 This appeal is directed against order of Tribunal dtd. 1.4.2005 relating to assessment year 1996-97. It is sequel to order passed by Tribunal in ITA No.212/JU/01 on 28.3.2003. original assessment for assessment year 1996-97 was made at nil income by assessing officer accepting contention of assessee. However, in pursuance of order passed by CIT in exercise of its power under Section 263, fresh assessment for year 1996-97 came into existence which is subject matter of this appeal and relates to including interest earned on fixed deposit receipt as income of assessee and not capital receipt resulting in reduction of cost of installation of assessee s business. Since order passed by CIT under Section 263 itself was set aside by Tribunal vide its above referred order dtd.28.3.2003, order of assessment giving effect to order passed under Section 263, appeal of assessee has been allowed as foundational order has ceased to exist. Coordinate Bench of this Court admitted this appeal without framing any substantial question of law. Having (8 of 8) [ ITA-54/2003] considered all facts of case, we are of opinion that this appeal involves substantial question of law in terms that Whether Income Tax Appellate Tribunal was justified in setting aside order of assessment which was made as consequence to revisional order under Section 263 of Income Tax Act on count that order passed by revisional authority was already set aside ? It is position admitted that order passed by revisional authority under Section 263 of Act of 1961 was set aside by Income Tax Appellate Tribunal and, therefore, consequential order of assessment was certainly not sustainable, as such, Income Tax Appellate Tribunal under order impugned did not commit any wrong in setting aside same, however, position has now been altered in view of fact that revisional order has already been restored, therefore, order or assessment too deserves to be restored. Accordingly, this appeal is allowed. order passed by Income Tax Appellate Tribunal dated 01.4.2005 is set aside. order passed by Assessing Officer stands restored, hence, ITAT is required to adjudicate same on merits. appeal ITA No.156/JU/2003 (A.Y. 1996-97), accordingly stands restored and is remanded to ITAT for adjudication on merits. (VINIT KUMAR MATHUR)J. (GOVIND MATHUR)J. Sanjay Commissioner of Income-tax v. Bhawal Synthetics (India)