ITA 795-796/2004 Page 1 of 30

* 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.

ITA 795-796/2004 Page 2 of 30

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

ITA 795-796/2004 Page 3 of 30

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

ITA 795-796/2004 Page 4 of 30

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

ending 31.3.93

Accounting Year

ending 31.3.94

Purchase of industrial land - 15,36,614/-

Technical know-how fee

(including withholding tax)

20,72,028/- -

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

ITA 795-796/2004 Page 5 of 30

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

linked to the committed obligations for the purchase of plant

ITA 795-796/2004 Page 6 of 30

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

ITA 795-796/2004 Page 7 of 30

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

ITA 795-796/2004 Page 9 of 30

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

ITA 795-796/2004 Page 10 of 30

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

(A)'s order in so far as it relates to the issue regarding the

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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

ITA 795-796/2004 Page 12 of 30

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:-

 Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151

(Bom)

 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 1/10

th

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.

ITA 795-796/2004 Page 13 of 30

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

ITA 795-796/2004 Page 15 of 30

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

ITA 795-796/2004 Page 16 of 30

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-

ITA 795-796/2004 Page 17 of 30

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

ITA 795-796/2004 Page 18 of 30

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.

ITA 795-796/2004 Page 19 of 30

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 allow

ITA 795-796/2004 Page 20 of 30

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

ITA 795-796/2004 Page 21 of 30

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

ITA 795-796/2004 Page 22 of 30

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 31

ST

MARCH 1993

PARTICULARS AMOUNT PARTICULARS AMOUNT

To raw materials 39,590 By Intt. on Bank

Deposit

1,33,151

To Technical Know-how

fee

20,27,028 By Closing Stock

(Valued at cost)

39,590

To Fees & Taxes 1,000

To Travelling &

Conveyance (including

Rs. 166438 for foreign

travelling)

1,69,800 By Amount trfd.

to Pre-operative

expenses

20,67,878

To Bank Charges 682

To Audit Fee 2,500

To Printing &

Stationery

19

22,40,619 22,40,619

ASSESSMENT YEAR 1994-95

Return filed at NIL income – accompanied with the following:

PROFIT & LOSS ACCOUNT FOR THE YEAR ENDING 31

ST

MARCH 1994

PARTICULARS AMOUNT PARTICULARS AMOUNT

To Opening Stock 39,590 By Intt. on Bank

Deposit

2,37,770

“Salary 30,565 By Closing Stock

(valued at cost)

39,590

“Postage, Telegram &

Telepohone

4,234 By Amount trfd.

to Pre-operative

expenses

655

To Printing &

Stationery

6,543

To Travelling &

Conveyance (including

Rs. 1,66,238/- for

foreign traveling)

1,74,128

To Staff Welfare 2,285

To AGM expenses

(including Meeting fee)

3,155

ITA 795-796/2004 Page 23 of 30

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 the

ITA 795-796/2004 Page 24 of 30

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 that

ITA 795-796/2004 Page 25 of 30

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

ITA 795-796/2004 Page 26 of 30

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 &

ITA 795-796/2004 Page 27 of 30

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 the

ITA 795-796/2004 Page 28 of 30

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 for

ITA 795-796/2004 Page 29 of 30

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.”

ITA 795-796/2004 Page 30 of 30

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