Delhi High Court
Vng Automotive P. Ltd vs Asstt. Commissioner Of Income on 10 April, 2026
Author: V. Kameswar Rao
Bench: V. Kameswar Rao
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment reserved on: 20.12.2025
Judgment delivered on: 10.04.2026
Judgment uploaded on: As per Digital Signature~
+ ITA 795/2004
+ ITA 796/2004
VNG AUTOMOTIVE P. LTD .....Appellant
versus
ASSTT. COMMISSIONER OF INCOME TAX .....Respondent
Advocates who appeared in this case
For the Appellant : Mr. Satyen Sethi & Mr. Arta Trana Panda,
Advocates.
For the Respondent : Mr Abhishek Maratha, SSC, Mr Apoorv
Aggarwal, Mr Parth Samwal, JSCs, Ms
Nupur Sharma, Mr Gaurav Singh, Mr
Bhanukaran Singh Jodha, Ms Muskan Goel,
Mr Himanshu Goel and Mr Nischay Purohit,
Advocates
CORAM:
HON'BLE MR. JUSTICE V. KAMESWAR RAO
HON'BLE MR. JUSTICE VINOD KUMAR
JUDGMENT
V. KAMESWAR RAO, J.
1. The challenge in these appeals is against the common order of the
Income Tax Appellate Tribunal (“ITAT”) dated 23.06.2004 in ITA.
3792/Del/2002 and ITA. 3793/Del/2002 for the Assessment Years (“AY”)
1993-94 and 1994-95 respectively.
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2. The appellant company was incorporated on 24.03.1992 with the
object of carrying on business of manufacture and export of ecological
brake-shoes for two-wheelers, cars and trucks. For AYs 1993-94 and 1994-
95, returns declaring “nil” income were filed on 29.12.1993 and 29.11.1994,
respectively. In computing the income, interest earned during the respective
previous years was adjusted against project expenses.
3. On 25.05.1992, the appellant entered into an agreement with CDB
Holding Pte. Ltd, Singapore for acquiring technical know-how. In terms of
the agreement, the appellant was to pay USD 2, 50,000/- out of which, USD
50,000/- (Rs.20,27,000/-) was paid during AY 1993-94. The balance USD
2,00,000 /- was to be paid in five equal yearly installments. The appellant in
AY 1993-94 raised a loan of Rs.72,69,500/- from its Directors. The payment
of technical fee and other expenses aggregating to Rs.23,17,618/- and
Rs.20,27,157/- (inclusive of payment for land) were paid out of the said loan
from the directors. The funds not immediately required were deposited in
the bank, on which the appellant earned interest of Rs.1,23,151/- and
Rs.2,37,770/- for the AYs 1993-94 & 1994-95.
4. The Assessing Officer (AO) re-opened the assessment under Section
148 A of the Income Tax Act, 1961, („the Act‟) by referring to the Tuticorin
Alkali Chemicals & Fertilizers Ltd. v. CIT, (1997) 227 ITR 172 (SC), and
treated the amount deposited in the bank as surplus amount, and that the
surplus fund/interest to be taxed as „income from other sources‟. Aggrieved
by the order of the AO, the appellant filed an appeal before the
Commissioner of Income-tax (Appeals)-XIV, New Delhi, [“CIT (A)”],
which was allowed. Aggrieved by the order of the CIT (A), the respondent
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filed the appeal before the ITAT.
5. The ITAT, vide order dated 23.06.2004, set aside the order of CIT(A)
and held that the decisions of CIT v. Bokaro Steel Ltd. 236 ITR 315 (SC)
and CIT v. Karnal Cooperative Sugar Mills Ltd., 243 ITR 2(SC), as relied
upon by CIT(A), were not applicable and as such, interest received was
wrongly adjusted against project expenses. Accordingly, the interest income
was liable to be taxed separately as “income from other sources”.
6. Aggrieved by the common order of the ITAT, the appellant filed these
appeals. On 21.04.2005, this Court framed the following substantial
questions of law:
“(1) Whether on the facts and circumstances of the case, the
Tribunal was right in law in upholding the reassessment, even
though, the department had not raised any ground against the
finding of CIT(A) that jurisdiction to re-assess the income was
assumed on mere change of opinion?
(2) Whether, on the facts and circumstances of the case and in
law, the Tribunal had any material before it, which justified
reversal of finding recorded by CIT(A) that it is not a case
where surplus capital lying idle has been deposited in the bank
for the purpose of earning interest?”
CASE OF THE APPELLANT
7. It is the case of the appellant that in terms of the agreement with CDB
Holding Pvt. Limited, Singapore for acquiring technical know-how for the
manufacturing of Asbestos-free automobile brake-shoes, the appellant was
required to pay USD 2,50,000/- out of which, USD 50,000/- (equivalent to
Rs.20.27 lakhs) were paid during the previous year/AY 1993-94. The
remaining amount was to be paid in five equal instalments. In fact, payment
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of technical fee and other expenses aggregating to Rs.23,17,618/- and
Rs.20,27,157/- (inclusive of land) were paid out of the loan from the
Directors. The funds not immediately required from the loan raised from the
Directors were deposited in the bank, on which the appellant earned an
interest of Rs.1,33,151/-and Rs.2,37,770/- for the AYs 1993-94 & 1994-95.
8. Having entered into technical know-how agreement, the appellant
incurred following expenses towards the project :-
Accounting Year Accounting Year
ending 31.3.93 ending 31.3.94
Purchase of industrial land - 15,36,614/-
Technical know-how fee 20,72,028/- -
(including withholding tax)
Raw material - import 39,590/- -
Tools & dies - 15,543/-
Advances for purchases of
machinery
Ashok Hydraulic 2,51,000/- 2,00,000/-
Hi-Tech Precision Engg. - 75,000/-
Pyramids Precision Engg. - 50,000/-
Pioneer Enggo. Co. - 50,000/-
Fad-de-con Engg. - 1,00,000/-
23,17,618/- 20,27,157/-
9. It is the case of the appellant that the expenditure of Rs.43,44,775/-
(Rs.23,17,618 + Rs.20,27,157) was incurred out of the funds arranged from
the Directors, partly by way of share capital of Rs.25,00,000/- and partly as
interest free loans of Rs.50,59,113/-. In order to facilitate the timely payment
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of committed obligations such as purchase of plant & machinery,
construction of factory building etc., the appellant company deposited the
remaining funds of approx. Rs.32,00,000/- in the bank. It was on this deposit
that appellant, during the previous years relevant to AYs 1993-94 and 1994-
95 earned interest of Rs.1,33,151/- and Rs.2,37,770/- respectively. The
interest was adjusted against the project expenditure and the deficit was
transferred to pre-operative expenses which were carried forward.
10. On 28.03.2001, a notice under Section 148 of the Act, re-opening the
assessment for AY 1994-95 was issued to tax the interest income as „income
from other sources‟. In the notice, the AO by referring to Tuticorin Alkali
Chemicals & Fertilizers Ltd. (supra) treated the amount deposited in the
bank as „surplus funds‟ brought the interest to tax as „income from other
sources‟. The appellant’s stand before the AO was that the ratio of the later
judgment of Supreme Court in Karnal Co-operative Sugar Mills (supra) is
applicable, which was rejected for the reason that there was no compulsion
for the appellant to deposit funds in the bank as was the case of Karnal Co-
operative Sugar Mills (supra). It was also held by the AO that since the
business of the appellant has not commenced, the deposit in the bank was
not directly linked to acquisition of technical know-how and hence the
interest earned was income from other sources.
11. Aggrieved by the order of the AO, the appellant filed an appeal before
the CIT(A). The CIT(A), vide order dated 25.02.2002, held as under :
“It is not a case wherein a surplus share capital money lying
idle has been deposited in the bank for the purpose of earning
interest and the deposit of money by the appellant, was directly
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and machinery, construction or factory premises and payment
of technology fees. Thus any income earned on such deposit is
incidental to the acquisition of assets for setting up for the plant
& machinery and meeting other committed obligations.”
12. It is the case of the appellant that in the appeal against the order of
CIT (A), though the Revenue did not raise any ground on assumption of
jurisdiction, the ITAT went on to hold that the assessment was validly
assumed. On merits, the ITAT proceeded on the premise that the interest
was earned on surplus funds and held as under :-
“We find that the facts of the case of the assessee are more or
less identical to those in the case of Tuticorin Alkali Chemicals
& Fertilizers Ltd. (supra). The facts of the case in Bokaro
Steels Ltd are different. Subsequent judgment in the case of
Bokaro Steels does not purport to over-rule the earlier
judgment of Apex Court in the case of M/s Tuticorin Alkali
Chemicals & Fertilizers”
13. Mr. Satyen Sethi, the learned counsel appearing for the appellant,
submitted that the ITAT cannot go beyond the subject matter of appeal,
which is governed by the grounds raised before it and the Revenue did not
raise any such ground against the order of CIT(A) holding that jurisdiction
under Section 148 of the Act was not validly assumed. He also submitted
that the ITAT was not correct in going into the issue of reopening of
assessment, which had attained finality. In support of this submission, he has
relied on the judgment of this Court in CIT v. Divine Infracon (P) Ltd,
(2015) 64 taxmann.com 472.
14. He submitted that the judgment in the case of Tuticorin Alkali
Chemicals & Fertilizers Ltd. (supra) was rendered in its own facts and has
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no applicability to the case of the appellant, He contended that Tuticorin
Alkali Chemicals & Fertilizers Ltd was incorporated on 03.12.1971 and had
taken term loans from various banks and financial institutions. Since the
funds borrowed were not immediately required, the same were invested in
short term deposits with (i) banks, (ii) Tamil Nadu Electricity Board and (iii)
utilised to disburse interest bearing loans to its employees to purchase
vehicles. In the said case, up-to AY 1980-81, the interest earned was shown
as “income” and was taxed accordingly. Only in AYs 1982-83 and 1983-84,
the interest income was reduced from the pre-production expenses. It was a
case where surplus funds were utilised to generate income. In fact, the stand
before the Supreme Court was that deduction/set-off of interest income be
allowed against interest payable on borrowed funds. It was not the case
therein that interest on deposits was incidental to acquisition of assets and
the same would go to reduce the cost of project.
15. Mr. Sethi submitted that the Supreme Court in CIT v. Bokaro Steel
Ltd., (1999) 236 ITR 315 (SC), applying the ratio of Challapalli Sugar
Mills Ltd. v. CIT, (1975) 98 ITR 167, held that if an assessee receives any
amounts, which are inextricably linked with the process of setting-up its
plant & machinery, such receipts will go to reduce the cost of its assets, for
such receipts are of a capital nature and cannot be taxed as „income‟. In
reaching the aforesaid conclusion, Tuticorin Alkali Chemicals & Fertilizers
Ltd. (supra) was also considered. He also submitted that, Bokaro Steel Ltd
(supra) was rendered in the context of; (a) rent charged from the contractor
for housing workers (b) hire charges for plant & machinery given to
contractor for using in construction and (c) interest from advances to
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contractors to facilitate construction.
16. He submitted that, in Karnal Co-operative Sugar Mills (supra), the
principle laid down in Bokaro Steel Ltd. (supra) was applied to interest on
money deposited to open LC for purchase of machinery and in CIT v.
Karnataka Power Corporation (2001) 247 ITR 268, the same was applied
to interest receipts.
17. He submitted that, from a conjoint reading of Bokaro Steel Ltd
(supra) and Karnal Cooperative Sugar Mills Ltd (supra), it is evident that
interest, which is directly linked with setting-up of a project and would
reduce the cost of the project, will not be covered by Tuticorin Alkali
Chemicals & Fertilizers Ltd. (supra).
18. According to him, the reasoning is that since there was no compulsion
for the appellant to deposit funds in the bank, the ratio of Karnal Co-
operative Sugar Mills (supra) is not attracted is not correct, as the
compulsion of deposit of funds is not the guiding factor. He has also relied
on the judgments of this Court in Indian Oil Panipat Power Consortium
Ltd. v. IΤΟ, (2009) 315 ITR 255 and Pr. CIT v. International Coal
Ventures (P) Ltd, (2025) 472 ITR 307.
19. Mr. Sethi submitted that the preliminary objection of the Revenue is
that the CIT (A) has admitted additional evidence which is in violation of
Rule 46A of the Income Tax Rules, 1962 (“Rules”). For the assessment
order for AY 1999-00, deduction under Section 35D of the Act was allowed.
The assessment orders for the subsequent years do not constitute „additional
evidence‟, since they are part of record of the Revenue and that clarificatory
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material is not additional evidence. He has placed reliance on the judgment
in the case of Sri Shankar Khandasari Sugar Mills v. CIT, (1992) 193 ITR
669 (Kar), to contend that in the said case, the assessee produced sales tax
assessment order for the first time before the CIT(A), which refused to look
into the same on the pretext of additional evidence. The Karnataka High
Court held the action of the CIT(A) to be unjustified. He has also relied on
the judgment in the case of CIT v. Lakshmi Vilas Bank, (2010) 329 ITR
591 (Mad), to support his case.
20. He submitted that, in CIT v. Mahalakshmi Textile Mills Ltd., (1967)
66 ITR 710 (SC), the expenditure on “Casablanca conversion bsystem”
involving replacement was held to be allowable, not as „installation of new
machinery‟ as claimed but as „current repairs‟ to the existing machinery.
The Supreme Court while dealing with powers of the Tribunal, held as
under:
“If for reasons recorded by the departmental authorities in
rejecting a contention raised by the assessee, grant of relief
to him on another ground is justified, it would be open to
the departmental authorities and the Tribunal and indeed
they would be under a duty, to grant that relief.”
21. He submitted that, Section 254 of the Act, which deals with orders
that the ITAT can pass on an appeal before it, is pari-materia to Section
33(4) of the Indian Income-Tax Act, 1922. The provision reads as under:-
“(1) The Appellate Tribunal may, after giving both parties
to the appeal on opportunity of being heard, pass such
order thereon as it thinks fit.”
22. The word “thereon” was considered by Supreme Court in
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Hukumchand Mills Ltd. v. CIT (1967) 63 ITR 232, wherein, it was
observed that, “The word „thereon‟, of course, restricts the jurisdiction of
the Tribunal to the subject-matter of the appeal.”
23. Mr. Sethi contended that in CIT v. Divine Infracon (P) Ltd, (2015)
64 taxmann.com 472, based on search and seizure operation, addition of
Rs.20.25 crore on account of share application money was made under
Section 68 of the Act. In appeal, the CIT (A) held that the addition was not
based on any incriminating material. No appeal against the aforesaid finding
was filed by the Revenue. However, in the appeal filed by the assessee, the
Revenue sought to assail the finding of the CIT(A) on the ground that the
addition was outside the scope of Section 153A of the Act, which though
permitted, was not sustained on merits. In the appeal filed by the Revenue
against the order of ITAT, this Court referring to Hindustan Coca Cola
Beverage (P) Ltd v. Jt. CIT, (2007) 293 ITR 226 (SC), held that:
“7. We find considerable merit in the contention advanced on
behalf of the Assessee. Concededly, the issue whether the
additions made by the AO were beyond the scope of Section
153A had been decided by the CIT (A) in favour of the Assessee
and the decision on the said issue had attained finality as the
revenue had not preferred any appeal with regard to the
CIT(A)’s order.
8. It is also relevant to note that by virtue of Section 253(2) of
the Act, the Principal Commissioner or Commissioner may, if
he objects to an order passed by the CIT (A) under Section 250
of the Act, direct the AO to prefer an appeal to the Tribunal. It
is not disputed that no such directions to file an appeal against
the CIT (A)’s order dated 21st January, 2014 were issued by the
concerned Income Tax Authority.
9. In the circumstances, there could be no dispute that the CIT
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assessment being beyond the scope of Section 153A of the Act
had attained finality, and thus, could not have been disturbed
by the Tribunal.”
He also submitted that, in Mahalakshmi Textile Mills Ltd. (supra),
the Supreme Court has noted that there was no change in the subject matter
of appeal.
24. Mr. Sethi submitted that the genesis of the finding of the CIT(A) as
change of opinion is holistic and is not purely based on the judgment in
Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997) 227 ITR 172
(SC). The CIT(A) referring to the fact that the AO has already allowed
deduction under Section 35D of the Act for AY 1999-00, observed that:
“On the basis of material available on record, it is clear that
there is neither any material information which has come to the
possession of the Ld. Assessing Officer nor any fresh material
already on record provide a nexus between the material /
information and the formation of belief of escapement of
income. The accrual of interest of bank deposit was duly
declared in the profit & loss account quoted supra. The mere
change of opinion to reopen the completed assessment, has not
found favour…… ”
25. According to him, Tuticorin Alkali Chemicals & Fertilizers Ltd.
(supra) was decided on 08.07.1997, Bokaro Steel Ltd. (supra) was rendered
on 18.12.1998 and Karnal Co-operative Sugar Mills (supra) was decided
on 23.04.1999, meaning thereby that all the judgments were available on
28.03.2001, when the assessments for AYs 1993-94 and 1994-95 were
reopened.
26. He submitted that as per the scheme of the Act, in respect of business
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which is newly set up, the „charge of income tax‟ under Section 4 of the Act
is on the total income of the „previous year‟, which term is defined by
Section 3 of the Act, as the financial year immediately preceding the
assessment year. However, in respect of business newly set up, the previous
year begins with the date of setting up of business. In support his submission
he has relied upon the following judgments:-
ï‚· Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151
(Bom)ï‚· Carefour WC & C India (P) Ltd. v. Dy. CIT (2014) 368 ITR 692
(Del)
27. Mr. Sethi submitted that though Revenue expenses are allowed from
the date business is set up, capital expenditure incurred prior to
commencement of business are amortised under Section 35D of the Act and
are allowed 1/10th in ten successive year beginning with the previous year in
which the business is commenced. He also submitted that there is a marked
distinction between „setting-up of business‟ and „commencement of
business‟. In support of his submission, he has relied upon the judgment of
this court in Carefour WC & C India (P) Ltd. (supra). Mr. Sethi has relied
upon the decision of this Court in the case of Pr Commissioner of Income
Tax-1, Delhi v. Brahma Center Development Pvt Limited,
2025:DHC:8487-DB to contend that the funds were received for the real
estate project and while awaiting their deployment, they were invested in a
fixed deposit which generated interest. This fits in with the dicta of the
Supreme Court in Bokaro Steels Ltd. (supra) case and of this Court in
Indian Oil Panipat Power (supra) and other similar judgments.
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28. According to him, applying the ratio of judgments, the conclusion of
the CIT (A) that the appellant company was in „post project setting up stage‟
was correct because the appellant had already paid USD 50,000 to CDB
Holding Pte. Ltd, to acquire technical know-how and had imported
chemicals as raw materials and had made advance payments to the
manufacturer for supply of machinery as also the land for construction of
building. He also submitted that the ITAT in reversing the order of CIT(A)
has merely observed that; “the facts of the case of the assessee are more or
less identical to those in the case of Tuticorin Alkali Chemicals & Fertilizers
Ltd. (supra). The facts of the case in Bokaro Steels Ltd are different…”. The
reasons do not throw any light, in the finding of CIT(A) that the appellant
was in „post project setting up stage‟, was incorrect.
29. He submitted that admittedly, the appellant was to start manufacturing
operations, which takes time. Having adjusted interest on bank deposits
against deduction under Section 35D of the Act, the AO cannot turn around
and assess the very same interest as income from other sources, as it would
amount to double taxation.
30. He submitted that, the ratio of judgments of this Court in Indian Oil
Panipat Power Consortium Ltd. (supra) and Pr. CIT v. International Coal
Ventures (P) Ltd (2025), 472 ITR 307; are applicable to the facts of the
present case because in the present case, the interest on bank deposit was
inextricably linked to setting up of manufacturing unit. It was not on surplus
funds, as was in Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra).
Therefore, the finding of the ITAT is erroneous.
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31. He seeks prayers as made in these appeals.
SUBMISSIONS ON BEHALF OF THE RESPONDENT.
32. Mr. Abhishek Maratha, learned Senior Standing Counsel for the
respondent/Revenue, submitted that the reassessment proceedings in the
present case were not initiated on a change of opinion, as erroneously
alleged by the appellant/assessee. At the time of original assessment, the AO
had not formed any opinion on the specific issue, which subsequently
formed the basis of reassessment, as there was no order passed under
Section 143(3) of the Act, rather only intimation under Section 143(1) of the
Act was issued by the Revenue.
33. He submitted that, besides the agreement with CDB Holding Pte. Ltd,
the appellant had imported certain raw materials (chemicals) and made
advances to manufacturers towards purchase of machinery and land for
construction of building.
34. He submitted that the CIT (A) has erred in law and on facts while
granting relief to the appellant by placing reliance upon additional facts and
evidence which were never before the AO. The assessment order was passed
after granting sufficient opportunities to the appellant. Despite such
opportunities, the appellant failed to furnish the material which subsequently
formed the basis of the relief granted by the CIT (A). He submitted that the
CIT (A), while exercising appellate jurisdiction, has accepted and relied
upon fresh material without adhering to the mandatory procedure prescribed
under Rule 46A of the Rules. No reasons have been recorded to demonstrate
that the case of the appellant fell within any of the exceptions enumerated
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under Rule 46A (1) of the Rules. He also submitted that, Rule 46A of the
Rules prevents taxpayers from intentionally withholding evidence during
assessment and then introducing it at the stage of appeal to get a fresh
review.
35. He submitted that the AO was not afforded any meaningful or
effective opportunity to examine, verify, or rebut such additional evidence,
as required under Rule 46A(3). Thus, the statutory safeguard intended to
protect the interests of the Revenue has been completely bypassed.
36. Mr. Maratha submitted that it is a settled position of law that though
the powers of the CIT (A) are wide, such powers cannot be exercised in
contravention of statutory provisions. Any order passed in violation of Rule
46A is vitiated and liable to be set aside.
37. He submitted that the counsel for the appellant contended that the
ITAT had granted certain reliefs which were allegedly not prayed for by the
Revenue, is misconceived and untenable in law. In this regard, he has relied
upon the judgment of the Supreme Court in Mahalakshmi Textile Mills Ltd.
(supra), to contend that, whether in law or of fact, which relate to the
assessment of the assessee, may be raised before the ITAT, and that the
ITAT is not confined to the grounds set forth in the memorandum of appeal.
He also submitted that the ITAT has rightly applied the settled distinction
between “setting up” and “commencement” of business and has correctly
upheld the finding that the appellant‟s business had not commenced during
the relevant AY.
38. He submitted that, upon examination, the AO has categorically held
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that the appellant/assessee had neither carried out any actual business
activity during the relevant period, nor had it earned any income from its
stated business activities. The ITAT, after independently examining the
factual matrix, concurred with the AO that the assessee was still in the pre-
operative stage. The ITAT has also found that the appellant has not crossed
the threshold of actual business operations and has applied legal principles
to the facts of the case
39. He submitted that the ability of expenditure and tax consequences are
dependent upon actual commencement of business. The expenditure
incurred prior thereto remains pre-operative in nature. He also submitted the
ITAT has merely applied the principal of law in the present case and that,
Section 35D of the Act is a specific and restrictive provision which permits
amortisation of certain preliminary expenses only when the statutory
conditions are strictly fulfilled, and the onus lies on the assessee to
demonstrate such compliance.
40. He seeks dismissal of these appeals.
ANALYSIS
41. Having heard the learned counsel for the parties and perused the
record, we note that in the present appeals, two common substantial
questions of law have been framed on 21.04.2005, which we have already
reproduced in paragraph 6 above. These appeals pertain to AYs 1993-94 and
1994-95. In view of the common questions of law framed, the first and
foremost issue, which needs to be decided is whether in the facts and
circumstances of the case, the ITAT was right in upholding the re-
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assessment even though the department has not raised any ground of
objection against the finding of the CIT (A) that jurisdiction to reassess the
income was assumed on a mere change on opinion.
42. In this regard, we may note that the transaction with regard to the
interest on the bank deposit was duly disclosed by the assessee in the profit
and loss account accompanied with the return of income filed under Section
139(1) of the Act and the assessment thereof was completed under Section
143(1)(a) of the Act. It was only thereafter in the year 2001 that
reassessment proceedings were initiated by issuing a notice under Section
148 of the Act, in view of the decision of the Supreme Court in the case of
Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). The AO primarily
held that the aforesaid judgment of the Supreme Court covers the case in
favour of the Revenue and against the assessee. The jurisdictional issue as to
whether the reassessment could have been carried out was raised by the
assessee before the CIT (A). The conclusion drawn by the CIT (A) is that
the assessment could not have been opened on mere change of opinion that
too of a completed assessment.
43. The CIT (A) was also of the view that any post dated judgment cannot
be applied retrospectively especially when assessments were not pending,
but stood completed on the basis of laws enforced at the time of filing of the
returns as has been held in the case of CIT v. Gujarat Power Corporation
254 ITR 217 Guj.
44. We may state here that the CIT (A) while stating that the ratio of the
judgment of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers
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Ltd. (supra) is not applicable to the facts of this case, relied upon the
judgments in Karnal Cooperative Sugar Mills Ltd. (supra) and Bokaro
Steel Ltd. (supra). In any case, we may state here that the Revenue did not
challenge the findings of the CIT (A) on the jurisdictional aspect. Rather the
ITAT took upon itself the jurisdictonal issue and decided the same by
holding that under the new provisions of Section 147 of the Act (w.e.f.
01.04.1989) if the earlier assessment was not made under Section 143(3), all
the talk about fresh facts coming into existence or omission or failure on the
part of the assessee to disclose fully and truly, all the material facts
necessary for the assessment would be irrelevant. It held that only
requirement is escapement of income chargeable to tax, which has been
fully satisfied in the instant case.
45. We are in agreement with the conclusion of the ITAT that the CIT(A)
erred in holding that the notice under Section 148 of the Act was based on a
change of opinion in as much as the assessment which stood completed was
reopened pursuant to the judgment of the Supreme Court in Tuticorin Alkali
Chemicals & Fertilizers Ltd. (supra). The initiation of assessment under
Section 143(1) of the Act cannot be treated to be an „assessment order‟
where the AO has formed an opinion and passed an order. In view of the
conceptual difference between Section 143(1) and Section 143(3) of the Act,
when no order under the latter provision has been passed, the AO is not
precluded from re-opening the assessment, provided he has reasons to
believe income has escaped assessment. Thus, the ITAT has rightly reached
this conclusion. The position of law in this regard can be found in the
judgment of the Supreme Court in Assistant Commissioner of Incometax v.
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Rajesh Jhaveri Stock Brokers Pvt Limited, 2008 (14) SCC 208.
46. An objection has been raised by Mr.Sethi that since the Revenue has
not challenged the finding of the CIT(A) with regard to the jurisdictional
aspect, the ITAT could not have taken upon itself to decide the same. We
do not see any merit in this objection for the reason that the ITAT possesses
ample power to decide any issue that goes to the root of the subject matter
before it, as it thinks fit. This position has been clarified by the Karnataka
High Court in Fidelity Business Services India P Limited v. ACIT &
Another, 2018 SCC OnLine Kar 756 on which much reliance has been
placed by Mr. Maratha. Relevant part of the judgment reads as under:-
“62. The powers under section 254 of the Act with the
Tribunal to pass such orders “as it thinks fit” cannot be
lesser than the powers conferred upon the lower and first
appellate authority, viz., the Commissioner of Income- tax
(Appeals) who under section 251(1)(a) of the Act has power
to dispose of an appeal against the order of assessment and
he may confirm or reduce or enhance or annul the
assessment. The higher and final appellate authority under
the Act cannot be intended by Parliament to have lesser
power than the first appellate authority as is well settled
that the powers of the appellate authorities are always co-
extensive with that of the assessing authority and therefore
what the assessing authority or the first appellate authority
could do in the matter of assessment, the Tribunal cannot be
said to have any lesser power to do so.
63. Section 254 of the Act, in our opinion, does not have any
narrower scope to put fetters on the powers of the Tribunal
as is sought to be canvassed before us that the Tribunal
could not have exceeded the grounds raised before it by the
appellant-assessee. The appellant may be either the
assessee or Revenue before the Tribunal and the Tribunal
has also powers to allow fresh ground of appeal or allowSignature Not Verified
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the other party to the appeal to file its cross objections and
even suo motu pass appropriate orders “thereon” and
therefore the words “as it thinks fit” in our opinion, confer
wide powers upon the Income-tax Appellate Tribunal to
pass such orders on the subject matter of appeal “as it
thinks fit” whether the issue is raised by either party to the
appeal or not. The Tribunal is not bound to decide the
appeal in a particular or narrower manner or limited to the
grounds raised in the appeal before it. The confines or
boundary limit is only “subject matter” of the appeal.
64. The powers of the Tribunal are not limited or
circumscribed by the grounds raised before it and any order
on the subject matter of appeal can be passed if it is found
to be necessary, expedient and relevant by the learned
Tribunal.”
47. Further, the Supreme Court in Mahalakshmi Textile Mills Ltd.
(supra) in paragraph no.5 has also held as under:-
“5. By the first question the jurisdiction of the Tribunal to
allow a plea inconsistent with the plea raised before the
departmental authorities is canvassed. Under sub-section
(4) of Section 33 of the Indian Income Tax Act, 1922, the
Appellate Tribunal is competent to pass such orders on the
appeal “as it thinks fit”. There is nothing in the Income Tax
Act which restricts the Tribunal to the determination of
questions raised before the departmental authorities. All
questions whether of law or of fact which relate to the
assessment of the assessee may be raised before the
Tribunal. If for reasons recorded by the departmental
authorities in rejecting a contention raised by the assessee,
grant of relief to him on another ground is justified, it would
be open to the departmental authorities and the Tribunal,
and indeed they would be under a duty to grant that relief.
The right of the assessee to relief is not restricted to the plea
raised by him.”
48. Having said that, now the issue is whether in the facts and
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circumstances of the case the Tribunal had any material before it to justify
the reversal of the finding recorded by the CIT (A). As stated above, the
present appeals are relatable to AYs 1993-94 and 1994-95 and the
reassessment is sought to be done vide notice dated 28.03.2001. The
appellant company was incorporated on 24.03.1992 and the agreement with
the Singapore based company was entered on 25.05.1992 for acquiring
technical knowhow. The consideration of USD 50,000 along with TDS of
Rs. 5,25,562/- was paid by the appellant as per terms thereof. The unsecured
loan raised by the appellant company of Rs. 72,69,500/- from its Directors
have been utilized and partially invested into fixed deposits from which
interest of Rs. 1,33,151/- and Rs. 2,37,770/- have accrued during AYs 1993-
94 and 1994-95. We may also state for clarification that after meeting the
requisite payment for technical knowhow and purchase of land and also for
advances for purchase of machinery and raw material, the remaining amount
was deposited in the bank yielding interest as the funds were not
immediately required.
49. In view of the fact that the business of the company had not
commenced during these years, it had adjusted the income against pre-
operative expenses. The AO was of the view that there was no compulsion
on the appellant to deposit the money in the bank and therefore, it cannot be
said that the deposit of money on which interest income was received was
directly linked with the purchase of technical knowhow. On the above basis,
the interest income has not been allowed to be set off against the pre-
operative expenses.
50. At this juncture, it is necessary to reproduce the profit and loss
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accounts for the years ending 31.03.1993 and 31.03.1994, on which much
reliance has been placed by the CIT (A):-
ASSESSMENT YEAR 1993-94
Return filed at NIL income-accompanied with the following:
PROFIT & LOSS ACCOUNT FOR THE YEAR ENDING 31ST MARCH 1993
PARTICULARS AMOUNT PARTICULARS AMOUNT
To raw materials 39,590 By Intt. on Bank 1,33,151
Deposit
To Technical Know-how 20,27,028 By Closing Stock 39,590
fee (Valued at cost)
To Fees & Taxes 1,000
To Travelling & 1,69,800 By Amount trfd. 20,67,878
Conveyance (including to Pre-operative
Rs. 166438 for foreign expenses
travelling)
To Bank Charges 682To Audit Fee 2,500
To Printing & 19
Stationery
22,40,619 22,40,619ASSESSMENT YEAR 1994-95
Return filed at NIL income – accompanied with the following:
PROFIT & LOSS ACCOUNT FOR THE YEAR ENDING 31ST MARCH 1994PARTICULARS AMOUNT PARTICULARS AMOUNT
To Opening Stock 39,590 By Intt. on Bank 2,37,770
Deposit
“Salary 30,565 By Closing Stock 39,590
(valued at cost)
“Postage, Telegram & 4,234 By Amount trfd. 655
Telepohone to Pre-operative
expenses
To Printing & 6,543
Stationery
To Travelling & 1,74,128
Conveyance (including
Rs. 1,66,238/- for
foreign traveling)
To Staff Welfare 2,285
To AGM expenses 3,155
(including Meeting fee)Signature Not Verified
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To fees & Taxes 3,940
To Bank Charges 502
To Audit Fees 10,000
To Misc. Expenses 3,073
Total 2,78,015/- 2,78,015/-
51. The aforesaid would reveal that the appellant had paid for the
purchase of industrial land, technical knowhow, raw material import and
tools. But at the same time, for certain purchases of machinery etc.,
advances were paid to different parties. The case of the appellant/assessee is
that the balance of the amount payable for purchase of machinery has to be
met through the deposits made in the bank on which interest has accrued,
which is sought to be taxed by the Revenue. It is also contended the timely
payment of the committed liability towards the know-how fee of USD
40,000 (out of total of UDS 2,00,000) annually was also to be made out of
the said amounts.
52. If that be so, surely the said funds, on which interest of Rs. 1,33,151/-
and Rs. 2,37,770/- respectively had accrued, could not have been treated as
income from other sources and the benefit under Section 35D would enure
to the benefit of the appellant as the same was inextricably linked with the
setting up of the business. The reasoning given by the CIT (A) for holding
that the Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) is not
applicable to the facts of this case is the following:-
“8. … … …
The assessments have been reopened to tax the interest
income on the strength of the decision of the Hon’ble
Supreme Court. The decision of the Hom’ble Supreme
Court relied upon by the Ld AO is not applicable to the
facts and circumstances of the case. The decision of theSignature Not Verified
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Hon’ble Supreme Court in the case of Bokaro Steel
Limited Dated 18.12.1998 is fully applicable in the
available facts and circumstances of the case. In the
case of Bokaro Steel Limited, the Hon’ble Supreme
Court held “that the assessee company was in process
of steel constructing and erecting its Plant and had not
started any business during the relevant assessment
years It received certain amounts through (i) rent
charged by assessee from its contactors for housing
workers and staff employed by contractor for
construction work of assessee (ii) hire charges for
plant and machinery given to contractors for use in
construction work of assessee, (iii) interest from
advances made to contractors for purpose of
facilitating work of construction, and (iv) royalty for
excavation and use of stones lying on assessee’s land
for construction work-First three receipts had been
adjusted against charges payable to contractors and,
thus, had gone to reduce cost of construction Whether
first three receipts being intrinsically connected with
construction of assessee’s plant, would be capital
receipt and not Income of assessee from any
independent source – Held, yes, Whether similarly
royalty received for stone excavated from assessee’s
land would go to reduce cost of plant and could not be
taxed as Income – Held, yes.”
53. Whereas the ITAT has differed with the CIT (A) by holding as
under:-
“5. We shall now address ourselves as to whether the
fact that at the time of return of income filed the
judgment in the case of Tuticorin Alkali Chemicals and
Fertilisers was not reported would make any
difference. In our opinion the judgment of the Hon’ble
Supreme Court lays down the legal position as it
always existed. Unless the Hon’ble Supreme Court
over-rules an earlier judgment it cannot be said thatSignature Not Verified
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any change in the legal position was brought about by
the particular judgment of the Hon’ble Supreme Court.
We, therefore, do not see any force in the contentions
of the assessee that the judgment in the case of
Tuticorin Alkali Chemicals and Fertilisers Ltd. was not
available when the returns of income were filed by the
assessee. Reliance placed by the assessee in this
respect on the judgment of the Hon’ble Gujarat High
Court in the case of Gujarat Power Corpn. Ltd., 254
ITR 217(Guj.) is misplaced. In that case there was levy
of additional tax u/s 143(1A) on the ground that the
original return of income had not been correctly filed.
There is no such additional tax levied in the case of the
assessee. We, therefore, do not see any assistance to
the case of the assessee from the judgment in the case
of Gujarat power Corpn. Ltd. (supra). As to the
reopening of the asstt. u/s 147 it is important to bear in
mind that the original asst. was completed u/s 143(1).
Under the new provisions of Sec. 147 w.e.f. 1.4.1989 if
the earlier asstt. was not made u/s 143(3) all the talk
about fresh material facts coming in to existence or
omission or failure on the part of the assessee to
disclose fully and truly all the material facts necessary
for the assessment is irrelevant. The only requirement
is escapement of income chargeable to tax which is
fully satisfied in the instant case. We also do not see
much force in the contention of the assessee that
deduction u/s 35-D has not allowed for the asstt. year
1999-2000 on the basis as claimed by the assessee. It is
settled legal position that under the Income Tax Law
each asstt. year is a self contained unit and is not
effected by other asstt. years.”
54. Suffice to state that this Court had also considered a similar issue in
Pr. Commissioner of Income Tax, Delhi v. Brahma Center Development
Pvt. Ltd., 2021 437 ITR 285 Delhi wherein the ratio of the judgments in
Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and also Bokaro
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Steel Ltd. (supra) were examined. The said judgment was referred to by this
Court again in ITA 475/2025 titled Pr. Commissioner of Income Tax, Delhi
v. Brahma Center Development Pvt. Ltd. Relevant part of the judgment
reads as under:
“12. According to us, the AO, having received a
response to his query about the adjustment of interest,
in the concerned AYs, against inventory, concluded
that, there was a nexus between the receipt of funds
from investors located abroad and the real estate
project, which upon being invested generated interest.
Thus, it cannot be said that the conclusion arrived by
the AO, that such adjustment was permissible in law,
was erroneous.
12.1. The reliance placed on behalf of the revenue on
the judgement of Supreme Court in Tuticorin Alkali
Chemicals & Fertilizers Limited v. CIT, (1997) 227
ITR 172 (SC) was not apposite, given the finding of
fact returned by the Tribunal that there was a nexus
between the investment of funds received from
investors located abroad and the real estate project.
The Tribunal, in paragraph 15 of the impugned order,
has distinguished (and, in our view, correctly) the
judgement of the Supreme Court in Tuticorin Alkali
Chemicals Case and applied the later judgement of the
same Court in CIT v. Bokaro Steels Limited, (1999)
236 ITR 315 (SC).
12.2. Furthermore, these judgements were also
considered by a Division Bench of this Court in Indian
Oil Panipat Power Consortium Ltd. vs. Income-tax
Officer, [2009] 181 Taxman 249 (Delhi)/[2009] 315
ITR 255 (Delhi) wherein after appreciating the ratio of
the aforementioned judgements of the Supreme Court,
the following was observed as follows.
“5. In our opinion the Tribunal has misconstrued
the ratio of the judgment of the Supreme Court in
the case of Tuticorin Alkali Chemicals &Signature Not Verified
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Fertilizers Ltd.‘s case (supra) and that of Bokaro
Steel Ltd. (supra). The test which permeates
through the judgment of the Supreme Court in
Tuticorin Alkali Chemicals & Fertilizers Ltd.’s
case (supra) 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.‘s case (supra) 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.
xxx xxx xxx
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 preoperative
expenses. In the case of Tuticorin Alkali
Chemicals & Fertilisers Ltd. (supra) 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.‘s case (supra) where theSignature Not Verified
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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.”
12.3. Indian Oil Panipat Power Case has also been
cited with approval NTPC Sail Power Company (P.)
Ltd. vs. Commissioner of Incometax, [2012] 25
taxmann.com 401 (Delhi); the relevant observations
are extracted hereafter.
“9. This Court, in Indian Oil Panipat Power
Consortium Ltd. v. ITO [2009] 315 ITR 255/181
Taxman 249 (Delhi) held that where interest on
money received as share capital is temporarily
placed in fixed deposit awaiting acquisition of
land, a claim that such interest is a capital receipt
entitled to be set off against pre-operative
expenses, is admissible, as the funds received by
the assessee company by the joint venture
partners are “inextricably linked” with the setting
up of the plant and such interest earned cannot be
treated as income from other sources. The
reasoning in Indian Oil is in line with Bokaro
Steel Ltd. Similarly, the Supreme Court in CIT v.
Karnataka Power Corpn. [2001] 247 ITR
268/[2000] 112 Taxman 629 (SC) and
Bongaigaon v Refinery & Petrochemicals Co. Ltd.
v. CIT [2001] 251 ITR 329/119 Taxman 488 (SC)
held that such receipts are not income.
10. It is no doubt correct that the proviso to
section 36(1)(iii) of the Income Tax Act enacts
that any amount of the interest paid towards (“in
respect of”) capital borrowed for acquisition of an
asset or for extension of existing business
regardless of its capitalization in the books or
otherwise, “for any period beginning from the
date on which the capital was borrowed forSignature Not Verified
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acquisition of the asset till the date on which such
asset was first put to use” would not qualify as
deduction. However, in all these cases, when the
interest was received by the assessee towards
interest paid for fixed deposits when the borrowed
funds could not be immediately put to use for the
purpose for which they were taken, this Court,
and indeed the Supreme Court held that if the
receipt is “inextricably linked” to the setting up of
the project, it would be capital receipt not liable
to tax but ultimately be used to reduce the cost of
the project. By the same logic, in this case too, the
funds invested by the assessee company and the
interest earned were inextricably linked with the
setting up of the power plant. It may be added that
the Tribunal has not found that the deposits made
as margin monies were not limited to the
construction activity connected to the expansion
of the business by way of setting up of a new
power generation plant.”
xxx xxx xxx
13. Having regard to the aforesaid, we are of the
opinion that, since the Tribunal has returned a finding
of fact that there was indeed an enquiry carried out by
the AO as to the nexus between the funds invested in
fixed deposits (on which interest was earned) and the
real estate project undertaken by the assessee, no
interference is called for by the Court.
xxx xxx xxx
14.5. In the instant cases, it was not as if the funds
were surplus and therefore invested in a fixed deposit.
The funds were received for the real estate project and
while awaiting their deployment, they were invested in
a fixed deposit which generated interest. This fits in
with the dicta of the Supreme Court in Bokaro Steels
Case and of this Court in Indian Oil Panipat Power
Case, NTPC Sail Power Case, and Jaypee DSC
Ventures Case.”
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55. A perusal of paragraph 14.5 of the above judgment reveals that in that
case, funds which were received for a real estate project were invested in
fixed deposits while awaiting their deployment. The interest generated
therefrom was held to enure in favour of the assessee and was not be treated
as income from other sources to be taxed. The Court after considering the
judgment in Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) held that
in such a factual circumstances, the judgment in Bokaro Steel Limited
(supra) would be applicable.
56. We find that the funds in the present case were not lying as surplus
but the same were earmarked to facilitate the balance payment for plant and
machinery etc. for which advances were made by the assessee. The funds
are inextricably linked to the setting up of the business of the assessee, and
as such, would be covered by the judgment of the Supreme Court in Bokaro
Steel Ltd (supra), and not Tuticorin Alkali Chemicals & Fertilizers Ltd.
(supra).
57. In view of the above discussion, question of law (1) is answered in
favour of the Revenue and against the appellant. Question of law (2) is
answered in favour of the appellant and against the Revenue. The judgment
of the ITAT is set aside.
58. The appeals are disposed of as allowed.
V. KAMESWAR RAO, J
VINOD KUMAR, J
APRIL 10, 2026
RT
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