IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN FRIDAY, THE 11TH DECEMBER 2009 / 20TH AGRAHAYANA 1931 ITA.No. 1779 of 2009() ---------------------- ITA.751/2007 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/APPELLANT --------------------------------------- THE COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): RESPONDENT ------------------------- M/S. KERALA INFRASTRUCTURE INVESTMENT FUND BOARD, GOVT. SECRETARIAT, THIRUVANANTHAPURAM. THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 11/12/2009, ALONG WITH ITA NO. 1783, 1789,1791 & 1796 OF 2009 THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C. R. C .N. RAMACHANDRAN NAIR & V.K. MOHANAN, JJ. -------------------------------------------- I. T. A. Nos. 1779,1783,1789,1791 & 1796 OF 2009 -------------------------------------------- Dated this the11th day of December, 2009 JUDGMENT Ramachandran Nair, J. These are appeals filed by the revenue against common orders of the Tribunal holding that interest income earned by the respondent- assessee from Treasury and Bank deposits is assessable as business income and not as income from other source, as held by the assessing officer. We have heard standing counsel appearing for the appellants and have gone through the orders of the Tribunal and that of the lower authorities. 2. Respondent is constituted by an Act of the State Legislature, namely, the Kerala Infrastructure Investment Fund Act, 1999. The Act was enacted to provide for constitution of a Fund for investments in infrastructure projects in the State and for matters connected therewith and incidental thereto. Under Section 3 of the Act the State 2 Government framed a scheme called the Kerala Infrastructure Investment Fund Scheme, 1999 for the establishment of a Fund under the Act by notification in the official gazette. Under Section 4 of the Act, the Government was to constitute a Board called Kerala Infrastructure Investment Fund Board for the administration of the Fund and for carrying on activities of financing from the Fund. The respondent-Board was accordingly constituted by the State Government under the scheme framed by it on 11.11.1999. After setting up of the Board, it raised massive fund from the public by issue of bonds. Since bonds were interest bearing, pending financing infrastructure projects, borrowed funds were deposited in Treasury Savings Bank account and in Nationalised Banks in accordance with mandatory provisions of the Act and Scheme. Respondent could not start financing for infrastructure projects upto 2005. However, since expenditure by way of interest payments to public borrowings through bonds and other administrative expenditure far exceeded the interest earned on deposits, in the returns filed for the assessment years in question, assessee returned massive loss, for example, the loss returned 3 for the assessment years 2004-05 was Rs. 5,76,72,520. While taking up the assessments, the assessing officer noticed that the assessee filed returns declaring it's activity as business and showing interest income under the head "business income" and after claiming all the eligible deductions in the computation of business income under the provisions of the Act, the assessee returned a massive loss. The assessing officer held that unless the assessee started advancing fund for infrastructure projects, which was the purpose for which the assessee was formed, the assessee cannot be said to have commenced business and so much so, he assessed the interest income as income from other source under Section 56 of the I.T. Act. The assessing officer supported the assessments based on the decision of the Supreme Court in TUTICORIN ALKALI CHEMICALS AND FERTILISERS LTD. V. CIT, 227 ITR 17. However in appeal the CIT (Appeals) found that the under the provisions of the Act and Scheme, the setting up of the fund itself can be said to be commencement of business and so much so, the assessee is entitled to have interest income assessed as business income. On second appeal by the department, the Tribunal confirmed 4 the orders of the CIT (Appeals) against which these appeals are filed. 3. The only question to be considered is whether the assessee can be said to have commenced business before actual advancing of any fund for any infrastructure project. Standing counsel relying on the decision of the Supreme Court in Tuticorin Alkali Chemicals & Fertilisers' case, above referred, contended that the case herein is similar to the facts of the case decided by the Supreme Court because as in that case, income earned by the assessee is interest income on deposits made prior to the commencement of business, that is advancing of amounts for infrastructure projects. We are unable to accept the contention of standing counsel that facts in Tuticorin Alkali Chemicals and Fertilisers' case apply to this case, because that was a case where the company was engaged in manufacture of heavy chemicals and before starting business, it applied surplus fund in short- term deposits and earned interest, which is obviously not out of any business carried on by it. Admittedly that company was not engaged in financing and on the other hand it was an industrial company engaged in manufacture. Therefore interest earned by it can never be income 5 from business, more so when such interest is earned from deposits made even prior to commencement of production by the company. However, facts of this case are entirely different because the activity of the respondent is financing for infrastructure projects. In fact it raised fund towards working capital through public borrowings by issue of bonds. Admittedly interest earned by the respondent is on deposits of borrowed funds retained in Treasury accounts and in other Bank accounts. The question as to whether the assessee has commenced business or was carrying on business will depend upon the facts of each case. Infrastructure projects themselves are very few and respondent can fund the project only when it conforms to assessee's norms for eligibility. The fund required for infrastructure projects is substantial and therefore fund has to be first raised before identifying the project to be funded. Therefore, in our view, raising of fund for project financing itself is commencement of business because fund raised is nothing but working capital to be applied for business purposes. Respondent cannot be expected to immediately advance fund because only after projects are identified and their eligibility is proved, in accordance with 6 the norms of the respondent, they can fund a project. However, respondent cannot be expected to keep the interest bearing borrowings idle without any returns, which will lead to heavy loss. Therefore necessarily respondent had to deploy available fund in short term deposits to earn interest which is to be utilised for paying interest to the bond holders and to meet the administrative cost. May be months, or years, may take for funding projects. Therefore it cannot be said that business can be said to commence only after first project is financed. In our view, the business commenced when the respondent raised fund from public through bonds issued and when they were ready with the fund to deploy for infrastructure projects which is the business of the respondent. Therefore in our view deposit of funds in Banks and Treasury is nothing but an activity done in the course of business and consequently interest earned is income from business. Since the assessee is a financing company, the interest earned by it on the funds raised through public borrowings cannot be compared to the interest earned on business like manufacturing industries and therefore the decision of the Supreme Court relied on by the department is not 7 applicable to the facts of this case. Therefore the first appellate authority as well as the Tribunal have rightly held that the assessee is entitled to all the deductions available in the computation of business income. We therefore uphold the orders of the Tribunal confirming the order of the first appellate authority. Consequently departmental appeals are dismissed. (C.N.RAMACHANDRAN NAIR) Judge. (V.K. MOHANAN) Judge. kk 8