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2015 (7) TMI 949 - ITAT AHMEDABAD

2015 (7) TMI 949 - ITAT AHMEDABAD - TMI - Chargeability of interest income - claimed to be capital receipt by the assessee and set off against the project development expenditure - Held that:- Ratio of the finding of in the case of Indian Oil Panipat Power Consortium Ltd. vs. ITO, (2009 (2) TMI 32 - DELHI HIGH COURT ) would be squarely applicable to the facts of the assessee’s case, because admittedly in the case under appeal before us the share capital as well as loans were raised for the speci .....

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e opinion that the interest income of ₹ 1,35,87,158/- as well as ₹ 7,91,51,306/- was a capital receipt not chargeable to tax during the year under consideration. - Decided in favour of assessee. - ITA No. 2755/Ahd/2011 - Dated:- 27-7-2015 - Shri G.D. Agrawal and Shri Kul Bharat, JJ. For the Petitioner : Shri S.N. Soparkar with Vartik Chokshi & P.M. Mehta For the Respondent : Shri Narendra Singh, Sr. DR ORDER PER G.D. AGRAWAL, VICE PRESIDENT: This appeal by the assessee is directe .....

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cation by him. 2. In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in upholding addition of ₹ 1,35,87,158 to the appellant's returned income made by the learned Assessing Officer on account of interest income which, on account of its peculiar nature of being a capital receipt, had not been offered to be taxed by the appellant. The learned CIT(A) ought to have appreciated, inter alia, that the appellant's case in respect of .....

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pholding the learned Assessing Officer's rejection of the appellant's claim made in writing during the course of the assessment proceedings that of the interest income of ₹ 7,91,51,306 which the appellant had offered for tax (total interest income of ₹ 9,31,33,148 minus interest income not offered for tax ₹ 1,39,81,841), interest income of ₹ 2,03,36,936 was such in nature as to be covered by the ratio of the decision of the Delhi High Court in Indian Oil Panipat P .....

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that the facts of earning interest on temporary surplus in the case of the appellant as well as in the case of the assessee before the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd.'s case (227 ITR 172) are similar although, when it was the appellant's specific case before him that its case was very much covered by the decision of the Delhi High Court which had been arrived at after considering the decision of the Supreme Court in Tuticorin Alkali Chemicals and Fertili .....

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y the decision of the Delhi High Court which had itself been arrived at after consideration of the decision of the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd.'s case (227 ITR 172), it cannot be open to him to summarily dismiss the appellant's case by merely making general observations at para 4.3 of the impugned Appellate Order. 4. In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in dismissing the appellant&# .....

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nus ₹ 1,39,81,841) (and not merely ₹ 2,03,36,936) forming part thereof for which the appellant had made a claim during the course of the assessment proceedings, deserved to be regarded to be of capital nature required to be set off against the capital cost of the appellant's project and, therefore, as not taxable. 5. In law and in the facts and circumstances of the appellant s case, the learned CIT(A) has grossly erred in dismissing ground No.5 of the appellant s appeal before hi .....

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ground or grounds of appeal either before or at the time of hearing of the appeal. 3. With regard to Ground Nos. 1, 5 & 6, no argument was advanced at the time of hearing; accordingly, these grounds are treated as not pressed and rejected as such. 4. Ground Nos. 2, 3 and 4 are interrelated as all these three grounds are relating to chargeability of interest income which is claimed to be capital receipt by the assessee and set off against the project development expenditure. Therefore, all t .....

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ruction period is shown in the balance-sheet as project development expenditure and capital work in progress. As per Schedule VI of the assessee s balance-sheet as on 31st March 2008, the total project development expenditure was ₹ 178.56 crores. After setting off there from ₹ 16.11 crores, the assessee carried forward a sum of ₹ 162.45 crores in its balance-sheet as project development expenditure. The income of ₹ 16.11 crores included interest income of ₹ 11,66,14 .....

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nterest on general purpose investment 6,829,678 Interest from Securities 11,739,986 Interest receivable on N.S.C. 1,317 Total 79,151,306 6. However, the assessee claimed the interest income of ₹ 1,39,81,841/- to be capital receipt not liable to be taxed and the details of which is as under:- Interest Income not offered for Tax Purpose FD Amt Rate of Int. Int. Receivable GUVNL-BID BOND 40,000,000 8.25% 3,012,276 GUVNL-BID BOND 37,500,000 7.75% 3,433,559 HPGCL - BID BOND 72,000,000 8.50% 2,1 .....

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ncome of ₹ 7,91,51,306/- which is offered as interest income in the return of income, a sum of ₹ 2,03,36,936/- from FDs and Govt. Securities to be exempt. The Assessing Officer accepted the assessee s claim only with regard to the interest income of ₹ 3,94,683/- which was the interest earned from the margin money of ₹ 3 crores. Thus, out of the sum of ₹ 1,39,81,841/- claimed as exempt in the return of income, the Assessing Officer accepted the assessee s claim only .....

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CIT(A). Before the CIT(A), the assessee claimed the entire interest income to be capital receipt. Vide Ground No.2, the assessee claimed interest income of ₹ 1,35,87,158/- to be non-taxable and vide Ground No.4 the assessee claimed the entire remaining interest income of ₹ 7,91,51,306/- to be non-taxable. The CIT(A) rejected Ground No.2 of the assessee s appeal which was with regard to assessee s claim for nontaxability of ₹ 1,35,87,158/- with the following finding in his orde .....

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for the purpose of entering into power purchases agreement but revenue is flowing from investment in bonds and not from the implementation of projects or purchases of plant and machinery. LC margin money interest was considered inextricably linked to the project by the assessing officer and accordingly he allowed the same to be reduced from project cost. Apart from this no other interest income is directly coming from implementation of the project or purchases of plant and machinery. Power purch .....

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in the case of Tuticorin Alkalies chemicals and fertilisers Ltd. In view of this, unless the income is inextricably linked to the implementation of the project, the same cannot be reduced from the cost of the project and accordingly the income will be faxed. The decision of honourable Supreme Court in the case of Bokaro steel Ltd and Karnal corporate sugar Mills Ltd do not support the appellant's claim since in both the cases, interest income was directly coming from the implementation of th .....

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n of apex court, appellant is liable for tax on interest. The addition made by the assessing officer is accordingly confirmed. 9. Ground No.4 of the assessee s appeal, which was with regard to nontaxability of sum of ₹ 7,91,51,306/-, was also rejected by the CIT(A) with the following finding:- 5.2 I have considered the facts of the case and appellant s submission. Appellant earned interest on inter-corporate deposits deployed out of surplus fund available. The said interest was duly offere .....

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income on the same. The earning of interest income is not inextricably linked to the construction of project. In the identical facts, honourable Supreme Court held that interest income earned from temporary deployment of surplus fund is taxable in other sources head. In view of the decision of honourable Supreme Court, this ground which is taken for the first time in appeal is not sustainable. Accordingly the same is dismissed. 10. The assessee, aggrieved with the order of the CIT(A), is in app .....

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ssee is whether the interest earned by the assessee from the surplus fund, which was admittedly collected by the assessee for the purpose of implementation of the power project, is a capital receipt liable to be adjusted against the project development expenditure. In the audit report, the assessee has adjusted the interest receipt against the project development expenditure. He referred to paragraph 6 of the schedule to the audit report. He stated that the Assessing Officer as well as CIT(A) ha .....

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micals Ltd. vs. CIT (2001) 251 ITR 0329 12. He further referred to the decision of Hon ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. vs. ITO, (2009) 315 ITR 0255 and pointed out that in this case the Hon ble Delhi High Court has made a comparative analysis of the decision of Hon ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and subsequent decision of Bokaro Steel Ltd. (supra) and then pointed out that what is the position o .....

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CIT(A) denied to apply the decision of Hon ble Delhi High Court on the ground that when the issue is squarely covered by the decision of Hon ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), the decision of Hon ble High Court cannot be considered and applied. He stated that the Hon ble Delhi High Court has interpreted the decision of Hon ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and also the subsequent decision .....

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Ltd. vs. CIT, 25 taxmann.com 401 (Delhi); b. CIT vs. Sasan Power Ltd, 18 taxmann.com 182 (Delhi) 13. He, therefore, submitted that the entire interest income received by the assessee was out of the funds brought in for the purpose of power projects. That part of the funds was invested in the securities and bonds which were required for giving bank guarantee or for giving as margin money. These investments were necessary and integral to the implementation of power projects. Some interest income .....

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he Hon ble Apex Court, which is subsequent to the decision of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), as interpreted by the Hon ble Delhi High Court, the interest eared prior to commencement of the business on the funds brought in for specific purpose is capital receipt which is liable to be set off against pre-operative expenses. He reiterated that the entire receipt of interest has been set off against the project development expenditure and the auditors have not pointed out .....

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nt of business is assessable under the head income from other sources . That, the assessee itself has treated the sum of ₹ 7,91,51,306/- as taxable and offered the same in the return of income. It is only before the CIT(A) the assessee claimed the sum of ₹ 7,91,51,306/- to be capital receipt. He, therefore, submitted that when the issue is squarely covered by the decision of Hon ble Apex Court, the same is binding upon all the lower authorities, including the Assessing Officer, CIT(A .....

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Court in the case of National Thermal Power Co. Ltd. vs. CIT, (1998) 229 ITR 383. He further submitted that the CIT(A) has also not disputed that the assessee is not entitled to raise this question before him but he rejected the assessee s claim on merit. The Revenue is neither in appeal nor in cross-objection against the order of the CIT(A) and therefore, at this stage, the Revenue cannot claim that the assessee could not have raised this issue before the CIT(A). He, therefore, submitted that .....

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income but during the course of assessment proceedings claimed to be capital receipt. Ground No.4 is with regard to taxability of interest income of ₹ 7,91,51,306/- which was offered as income in the return of income but claimed to be capital receipt before the CIT(A). Before we proceed further, we would like to point out here that Ground Nos. 2 & 3 are overlapping. The sum of ₹ 2,03,36,936/- is part of sum of ₹ 7,91,51,306/-. Therefore, if Ground No.4 is considered for dec .....

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jection challenging the consideration of this ground by the CIT(A). Therefore, at this stage, the ld. Departmental Representative cannot dispute that the assessee is not permitted to raise this ground before the ITAT. Moreover, we find that this issue is settled by the Hon ble Apex Court in the case of National Thermal Power Co. Ltd. (supra). In the said case, the assessee had offered the interest income in the return of income and did not dispute the taxability of interest income before the CIT .....

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or the first time before the Tribunal even if the interest was offered as income in the return of income provided relevant facts for adjudication of the said ground are available on record. Admittedly, in this case all the relevant facts are available on record and were considered by the Assessing Officer. Moreover, as we have already pointed out, this ground was raised before the CIT(A) and who has adjudicated on merit. In view of above factual and legal position, we are of the opinion that the .....

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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 & Fertilizers Ltd. (supra), the Hon ble Apex Court held as under:- …that the company had surplus funds in its hands. In order to earn income out of the surplus funds, it had invested the amount for the purpose of e .....

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under section70 or section 71 since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting years. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business could not be allowed as deduction, nor could it be adjusted against any other income under any other head. Similarly any income from a non-business source could not be set off against the liability to pay .....

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or for the construction work of the assessee including certain amenities granted to the staff by the assessee, (ii) hire charges for plant and machinery which was given to the contractors by the assessee for use in the construction work of the assessee, and (iii) interest from advances made to the contractors by the assessee for the purpose of facilitating the work of construction. The activities of the assessee in connection with all these three receipts were directly connected with or incident .....

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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, t .....

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nd machinery. Hence, any income earned on such deposit was incidental to the acquisition of assets for the setting up of the plant and machinery. The interest was a capital receipt, which would go to reduce the cost of asset. 21. In the case of Karnataka Power Corporation (supra), their Lordships of Hon ble Apex Court, following the decision of Bokaro Steel Ltd. (supra), held as under:- …also, (i) that the Tribunal was right in law in upholding the order of the Commissioner (Appeals) who .....

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axable income but were to be adjusted against the project cost for the business of oil refinery and petrochemicals. 23. That the Hon ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. (supra), after considering the decisions in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and Bokaro Steel Ltd. (supra) at length, held at pages 258, 259 and 260 of report, i.e., 315 ITR 255, as under:- 5. In our opinion the Tribunal has misconstrued the ratio of th .....

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ead "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 th .....

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ng on whether it is of a revenue nature or capital receipt. The income of a newly set up business, post the date of its setting up can be taxed if it is of a revenue nature under any of the heads provided under s. 14 in Chapter IV of the Act. For an income to be classified as income under the head "Profits and gains of business or profession" it would have to be an activity which is in some manner or form connected with business. The word "business" is of wide import which wo .....

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urchase land and to develop infrastructure then it cannot be held that the income derived by parking the funds temporarily with Tokyo Mitsubishi Bank, will result in the character of the funds being changed, in as much as the interest earned from the bank would have a hue different than that of business and be brought to tax under the head 'Income from other sources . It is well-settled that an income received by the assessee can be taxed under the head "Income from other sources" .....

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rpose 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 pre-operative expenses. In the case of Tuticorin Alkali Chemicals [1997] 227 ITR 172 it was found by the authorities that the fund .....

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ich was permitted to be set off against pre-operative 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) .....

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