TMI Blog2019 (1) TMI 346X X X X Extracts X X X X X X X X Extracts X X X X ..... with the action of the CIT(A) in upholding the action of AO to reduce interest income arising from short term advances placed with sister concern out of project development expenditure and in reversing the action of the AO in treating the same as revenue income de hors the projects development in progress. The grievance of the Revenue thus is bereft of any merits. Appeal of the Revenue is dismissed. Cross objection filed by the assessee to impugne the action of the CIT(A) in sustaining the interest income on funds kept as fixed deposits pending utilization to be revenue income and consequently not liable to be set off against project development costs CIT(A) in our view, has failed to take notice of the plea that interest expenditure and interest income arise from the same source i.e. borrowed funds. The income and expenditure are thus inextricably linked. We thus are of the view that when the facts are seen in perspective, the action of the CIT(A) appears to suffer from this cardinal error. In the absence of any other activity other than the construction of power plant, the interest expenditure on borrowed funds and incidental income by way of interest mobilized are required to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alia noticed that the assessee has made adjustment of interest income of ₹ 7,19,89,318/- against financial charges (project development expenditure) of ₹ 98,44,60,069/-. The interest income of ₹ 7,19,89,318/- comprised of interest income of the current year of ₹ 6,77,37,328/- and ₹ 42,51,990/- relating to preceding year. It was noticed in the course of the assessment that certain deposits were parked by the assessee company with Maharashtra State Electricity Distribution Co. Ltd. towards margin money against bank guarantees for work contract for project purpose and interest was earned thereon. Similarly, the assessee also placed temporary deposits with Adani Welspun Exploration Ltd. (AWEL) and some fixed deposits were retained in the bank to meet various contingencies. It was the case of the assessee that such fixed deposits are inextricably linked with highly capital intensive power project as such mega projects require use of state of art technology, substantial imports, planning and execution of installation and commission over a substantial long period of time. It was claimed that the assessee has also inter alia incurred very heavy interest costs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Particulars Amount (in Rs.) Interest income on FDs placed with Axis bank 25,11,666 Interest income on FDs placed with State bank of India 21,92,601 Total 47,04,267 The A.O. has characterized the interest income on Fixed Deposits placed with the above banks as revenue receipt and therefore he has not allowed setting off of the interest income against Project Development expenses. In this respect the appellant company would like to submit that the above deposits were made from the funds received as share capital and/or temporary parking of borrowed funds awaiting utilization for the intended purpose of construction of power plant. The A.O. had incorrectly stated that the impugned interest income has been received by the appellant from Maharashtra State Electricity Distribution Co. Ltd. (MSEDC). The Ld. A.O has mainly rejected the contention of the appellant on the ground that the deposits made with the banks on which interest income has been earned are not inextricably linked with setting up of power plant. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /-, Doc No. 8100001894 Date Doc No. Purpose Amount (in lacs of Rs.) 22.08.2009 8100001791 Security Deposit for project registration customs 30.00 25.08.2009 8100001819 Axis Bank - Trf to SB/ Ahmedabad 85.00 22.08.2009 8100001789 Emd Refund to Shree Laxmi C F P ltd on 22.8.2009 5.00 24.08.2009 1500000420 Emd Refund to Agarwal Carriers Corp on 24.8.2009 5.00 24.08.2009 1500000422 Prof Feees of Circulation of Draft 4.43 28.08.2009 1500000439 EMD Refund To BLR Logistics on 28/8/2009 5.00 28.08.2009 1500000440 EMD Refund To Daman/ Shipping on 28/8/2009 5.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into FDs are ultimately utilized for the purpose of business and therefore any interest income earned from such temporary parking of funds is said to be inextricably linked with the business of the appellant and shall go to reduce the expenses capitalized under the head project Develpoment expenditure . The appellant seeks reliance on the decision of NTPC Sail Power Company (P.) Ltd vs CIT (2012) 25 Taxmann.com 401 (Delhi High Court) From the HEAD NOTE Section 4 of the Income-tax Act, 1961 - Income -Chargeable as - Assessee-company was in business of running power plan - Under its expansion plan it raised term loan for setting up new plant - Assessee worked out amount of interest payable or paid relating to borrowing utilized for expansion purposes - It also worked out earning of interest on temporary deposits of surplus fund and interest on margins/advances made for purposes of expansion Whether funds invested by assesseecompany and interest earned were inextricably linked with setting up of new power plant and, therefore, interest earned was to be treated as capital receipt, not liable to tax - Held, yes [In favour of assessee] As discussed at length in the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racts for construction of the Power Plant. PIL is a Company which has been appointed by the appellant Company for construction of power plant, at Tiroda. Inspite of the above facts, the A.O. has not appreciated the factual position that the funds have, in effect, been utilized for the purpose of construction of the Power Plant and it was not a case where the share capital of ₹ 700 Crores received by the appellant Company was a surplus fund available with it, not to be utilized for the purposes of construction of the Power Plant. Considering the above factual position, the interest income of ₹ 45753424 from the deposits with AWEL be considered as capital receipt and not as a revenue receipt and accordingly, your goodselves may direct the A.O. 4.3 In the assessment order, A.O. observed that the appellant company is a subsidiary of Adani Power Ltd; it is engaged in the business of power generation; the Power Plant Project in Maharashtra was in the implementation stage; no income was offered by the appellant; no P L account was drawn as no activity had started; the expenditure incurred was shown in the in the balance sheet as project development expenditure and capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been able to demonstrate that the deposits were subsequently utilized for construction of the power plant. The interest income earned cannot be said to be inextricably linked with the setting up of the power plant. Therefore, A.O. correctly assessed the income as income from other sources. A.O.'s action is upheld. (ii) Interest of ₹ 4,57,53,424/-: This interest income was earned on the advance given to Adani Welspun Exploration Ltd. While making the addition A.O. relied on the Supreme Court decisions in the case of CIT. Vs. Bokaro Steel Ltd.[ 236 ITR 315] Tuticorin Alkali Chemicals Fertilizers Ltd. [227 ITR 174]. At para 6.4 and 6.9 of the assessment order, A.O. observed that the interest earned on the surplus funds of the appellant was not linked to the setting up of power plant and therefore, it was assessable as income from other sources. The Ld. A.R. contended that Delhi High Court, after referring to two Supreme Court decisions relied on by the A.O. distinguished the decisions. In the case-law relied on by the Ld. A.R. namely NTPC Sail Power Company Pvt. Ltd. Vs. CIT 25 Taxmann.corn 401 [Delhi] [2012], it was held as under: 8. In Tut/conn Alka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 acquisition of the asset fill 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, if 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. If 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. 11. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uarely covered in favour of the assessee by the decision of the Hon ble supreme Court in the case of CIT vs. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) and Karnataka Power Corporation 247 ITR 268 (SC). To buttress its claim on merits that accrued interest on earmarked funds would go to reduce the cost of the project and does not represent revenue nature and chargeable nature, the learned AR submitted that on the similar analogy, assessee has simultaneously capitalised interest costs of ₹ 98.44 Crore and added the same to the capital costs incurred for development of power project of highly capital intensive nature involving long gestation period. The learned AR submitted that there is no reason to treat interest costs and interest income on different footings in the similarly placed circumstances. The learned AR thereafter adverted our attention to the decision of the co-ordinate bench rendered in the case of holding company in the identical facts in DCIT vs. Adani Power Ltd. ITA No. 1663/Ahd/2014. The learned AR pointed out that the co ordinate bench in the aforesaid case has adjudicated the issue in favour of the asessee and upheld the action of the CIT(A) after taking note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eproduce the relevant operative para of the decision in Adani Power Ltd. (supra) relied upon by the Assesee: 16. Next question relates to quantification of interest income available with the assessee for set off against pre-operative expenditure in power project implementation. We find that the ld.CIT(A) has not independently examined any issue in this order, rather followed order of his predecessor in the assessment year 2008-09. The ITAT did not approve the order of the ld.CIT(A) in the assessment year 2008-09 and respectfully following the order of the ITAT in the assessment year 2008-09, we are of the view that interest income of ₹ 8,17,60,319/- is available with the assessee for set off against pre-operative expenditure which is titled as project development expenditure . Discussion made by the Tribunal in the assessment year 2008-09 on this issue reads as under: 18. We find that both the parties have relied upon the decisions of the Hon'ble Apex Court and in addition, the assessee has relied upon the decision of Hon'ble Delhi High Court. Therefore, it would be appropriate to first refer to those decisions. In the case of Tuticorin Alkali Chemicals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the contractors to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitch as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts were arrangements which were intrinsically connected with the construction of its steel plant. The receipts had been adjusted against the charges payable to the contractors and had gone to reduce the cost of construction. They had, therefore, been rightly held as capital receipts and not income of the assessee from any independent source. 20. In the case of Karnal Co-operative Sugar Mills Ltd. (supra), their Lordships of Hon'ble Apex Court, after applying the decision of Bokaro Steel Ltd. (supra), held as under:- Held, that, in the present case, the assessee had deposited money to open a letter of credit for the purchase of the machinery required for setting up its plant in terms of the assessee's agreement with the supplier. It was on the money so deposited that some interest had been earned. This was, therefore, not a case w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest 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. [1999] 236 ITR 315 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. 5.1 The test, therefore, to our mind is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the plant. The clue is perhaps available in s. 3 of the Act which states that for newly set up business the previous year shall be the period beginning with the date of setting up of the ITA No. 2755/Ahd/2011 Adani Power Ltd vs. ACIT AYs 2008- 09 business. Therefore, as per the provision of s. 4 of the Act which is the charging section income which arises to an assessee from the date of setting of the business but prior to commencement is chargeable to tax depending on whether it is of a revenue nature or capital receipt. The income of a newly set up business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. [1999] 236 ITR 315 (SC) where the 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 preoperative expenses. (underlined ours to supply emphasis) 24. From the above, it is evident that the Hon'ble Delhi High Court has considered and interpreted the decisions of Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra) as well as Bokaro Steel Ltd. (supra). The conclusion of the Delhi High Court is in fact the law which emerges as per the decision of Hon'ble Apex Court. Therefore, in our opinion, the CIT(A) was not justified in ignoring the decision of Hon'ble Delhi High Court by simply mentioning that the issue is covered by the decision of Hon'ble Apex Court in the case of Tuticorin Alkali Chemi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncern. The CIT(A) has rightly held that interest income to be of capital nature linked with the process of setting up of its power plant and such receipts would go to reduce the cost of the project which also includes huge interest costs as capitalized. For coming to such conclusion, the CIT(A) has taken cognizance of the decision of the Hon ble Supreme Court in the case of Bokaro Steel Ltd. (supra), Karnataka corporation Sugar Mills Ltd. Bongaigaon Refinery Petro Chemicals Ltd. vs. CIT [2001] 251 ITR 329 which in turn distinguish the decision of the Hon ble Supreme court in Tuticorin Alkali Chemicals Fertilizers Ltd. (supra). Thus, we find ourselves in complete agreement with the action of the CIT(A) in upholding the action of AO to reduce interest income arising from short term advances placed with sister concern out of project development expenditure and in reversing the action of the AO in treating the same as revenue income de hors the projects development in progress. The grievance of the Revenue thus is bereft of any merits. 16. The appeal of the Revenue is dismissed. 17. We now advert to the cross objection filed by the assessee to impugne the action of the CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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