2015 (4) TMI 1181 - HC - Income Tax

Sale of tender documents - income from other sources or capital receipt - Nature of receipt - Held that - A reading of the order of the CIT (Appeals) as also the Tribunal would reveal that the CIT (Appeals) has relied on the decision in Bokaro Steel case (1998 (12) TMI 4 - SUPREME Court) to come to the conclusion that in the case on hand the receipt by way of sale of tender documents even at the pre-commencement stage is inextricably linked to the process of setting up of business and is therefore capital in nature. Similar was the view of in the case of Indian Drugs & Pharmaceuticals (1981 (9) TMI 13 - DELHI High Court ) which view has been endorsed by the Supreme Court. A reading of the order of the Tribunal would reveal that there can be no iota of doubt that the Tribunal failed to appreciate the finding of the Delhi High Court in similar set of facts which was ultimately endorsed by the Supreme Court that the receipts which are inextricably linked to the process of setting up of business could not be construed in any other manner other than in the nature of capital receipt. The Tribunal fell in error in merely stating that the decision in Bokaro Steel case (supra) is distinguishable from Tuticorin Alkali Chemicals & Fertilizers case (supra) without even understanding the scope of the decision in Bokaro Steel case (supra). The admitted fact in this case is that the amount received by the appellant/assessee in sale of tender documents at the pre-commencement stage is in relation to the establishment of the unit and therefore it could be clearly stated that it is intrinsically connected with the purpose of setting up of the unit. This Court is in agreement with the view expressed by the Supreme Court in Bokaro Steel case (supra) which has affirmed the view of the Delhi High Court in Indian Drugs & Pharmaceuticals case (supra) and is of the considered view that the said decision is squarely applicable to the facts of the present case. Accordingly substantial question of law is answered in favour of the appellant/assessee and against the respondent/Revenue.

Summary

Issues:
1. Whether the amount received for tender documents is correctly assessed as income from other sources or capital receipt.
2. Interpretation of Supreme Court judgments in Tuticorin Alkali Chemicals & Fertilizers Ltd. case and Bokaro Steel Ltd. case.

Analysis:
1. The appellant received a sum for tender documents during the pre-commencement period. The Department treated it as revenue receipt, while the appellant argued it was capital expenditure. The CIT (Appeals) favored the appellant, citing the Bokara Steel case. However, the Tribunal, relying on the Tuticorin Alkali Chemicals case, ruled in favor of the Department. The Tribunal held that the pre-commencement receipt should be treated as income from other sources. The High Court agreed with the CIT (Appeals) and the Bokara Steel case, stating that the receipt was capital in nature, intrinsically linked to setting up the business unit, and not revenue. The Court found the Tribunal erred in not appreciating the Delhi High Court's finding, endorsed by the Supreme Court, that such receipts are capital in nature.

2. The Supreme Court in Tuticorin Alkali Chemicals case held that interest earned from surplus funds was revenue in nature. In contrast, the Bokara Steel case involved receipts directly connected to the construction of a steel plant, deemed capital receipts. The High Court noted that the Tribunal failed to grasp the significance of the Bokara Steel case and the Delhi High Court's decision endorsed by the Supreme Court. The Court found the Tribunal's distinction between the two Supreme Court cases erroneous. The High Court ruled in favor of the appellant, setting aside the Tribunal's order and emphasizing that the receipt for tender documents was capital in nature, connected to setting up the business unit.

3. The High Court allowed the appeal, overturning the Tribunal's decision. The Court found in favor of the appellant, emphasizing that the receipt for tender documents was a capital receipt linked to establishing the business unit. The Court did not address the second question of law, deeming it academic. No costs were awarded in the circumstances.