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A.C.I.T., Circle 13 (1) , New Delhi Versus NTPC Tamil Nadu Energy Co. Ltd.

2016 (3) TMI 49 - ITAT DELHI

Interest on deposits with Indian Banks and others - disallowance of capitalization of interest - Treated as Income from other sources - Held that:- In view of the factual and legal positions in the instant AY 2010-11 since the work of construction of the power plant was under progress, interest incomes are also inextricably linked with the setting up of the power plant and such incomes have gone on to reduce the expenses for setting up of the plant and as there was no surplus funds available wit .....

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Sahu, Accountant Member This appeal by the Revenue is directed against the order dated 29.08.2013 of ld. CIT(A)-XVI, Delhi for the assessment year 2010-11 on the following grounds : 1. The Ld. CIT(A) erred in law and on facts in deleting the addition of ₹ 1,75,74,129/- including interest on deposits with Indian Banks and others. 2. The Ld. CIT(A) erred in law and on facts in not appreciating the provision laid down in Sub section 1 to section 5 of the Act wherein it has been dearly mentio .....

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Ld. CIT(A) erred in law and on facts in holding that the interest on surplus amount is not taxable though the surplus amount is nowhere mentioned under the provisions of the Income Tax Act 1961. 2. The brief facts of the case are that the assessee company is a joint venture company formed by NTPC Ltd. and Tamilnadu Electricity Board with the authorized capital of ₹ 2000 crores for setting up power plant of 1500 Mega Watt of electricity at Vallur, in outskirts of Chennai, Tamilnadu incorpor .....

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aring. During the year under consideration, the assessee company paid interest on borrowed funds which was capitalized. For setting up of plant, he allotted contract works to the contractors and for doing smooth work, he gave mobilization advance to his contractors which was interest bearing. The assessee earned total interest on mobilization advance for ₹ 1,74,71,389/- and interest income from temporary parking of funds in banks was ₹ 1,02,740/-. The break-up of interest income earn .....

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s made by the AO. Aggrieved by the order of ld. CIT(A), the department is in appeal before us. 3. The ld. DR relied upon the order of the AO and reiterated the contentions raised in the grounds of appeal. It was submitted by the ld. DR that the AO has rightly assessed the income at ₹ 1,75,74,129/-. It was further submitted that the AO has given cogent reasons for disallowing the capitalization of interest. 4. The ld. AR, on the other hand, contended that the action of the AO was not justif .....

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th the parties, perused the materials available on record, case laws cited by ld. Counsel for assessee, assessment order and the order of the ld. CIT(A). We find that the ld. CIT(A) has elaborately discussed the issue and gave his finding vide para No. 4.1 to 4.9 at page No. 8 to 13 of the impugned order. For the sake of convenience, the relevant finding of the ld. CIT(A) is reproduced below : 4.1 I have carefully considered the facts of the case, the findings of the AO as well as the submission .....

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nterest earned on interest bearing advance given to contractors, total ₹ 1,75,74,129/- which was adjusted against Expenditure During Construction Account in Schedule - 15 and the net Expenditure During Construction was capitalized under the Capital Work in Progress in Schedule - 4 of the balance sheet. The AO in the assessment order observed that the assessee has not offered above incomes for tax. AO observed that the facts of case are similar to the case of Tuticorin Alkali Chemical & .....

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Act as held by the AO. The whole emphasis of Apex Court decision in the Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) was that funds were found to be surplus. The company was ready to commence trial production and the surplus funds were deposited in bank to earn interest. 4.3 In the instant case there is no dispute that project was under construction during the previous year relevant to AY 2010-11 and the business had not commenced. The appellant company was incorporated on 23-05-200 .....

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29/11/2012, unit - II w.e.f. 25/08/13 and unit 3 is yet to be commissioned. By end of financial year 31-03-2010 the assessee company had raised share holders fund of ₹ 905.5 crores and had borrowed funds in the form of secured loan of ₹ 1808.27 crores. These funds were essentially utilized during the initial period of construction from A.Y. 2004-05 to A.Y. 2010-11 for conducting survey, investigation & preliminary expenses, for purchasing land, for infrastructure development work .....

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regating to ₹ 293.45 crores, bank and cash balances was ₹ 4.74 crores only. Further, the debit balance of Profit and Loss Account as appearing in the Balance Sheet as on 31.03.2010 was ₹ 1.13 crores. From the above it is evident that investment in fixed assets is more than the funds available and fixed asset is partly funded by current liabilities. The liability towards sundry creditors (Rs.86.78 crores) are far more than the funds lying in bank (Rs.4.74 crores). Therefore, it .....

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ore, funds cannot be said to be at surplus. 4.5 Some of such funds which were lying unutilized were temporally parked by the appellant in bank to earn interest. The purpose of bank deposits yielding interest was evidently to maintain liquidity of funds and to reduce the cost of construction of the power plant. Therefore, interest earned on such unutilized funds temporally parked with banks to maintain liquidity and to reduce cost, is inextricably linked with the setting up of the project. Simila .....

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hemicals and Fertilizers Ltd. (supra) held that interest from advance to contractors, rent charged on contractor, hire charges from contractors are inextricably linked to the setting up of the project and as such capital receipts. In that said decision Hon'ble Apex Court held:- "5. We will take the first three heads under which the assessee has received certain amounts. These are the rent charged by the assessee to its contractors for housing workers and staff employed by the contractor .....

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incidental to the work of construction of its plant undertaken by the assessee. Broadly speaking, these pertain to the arrangements made by the assessee with its contractors pertaining to the work of construction. To facilitate the work of the contractor, the assessee permitted the contractor to use the premises of the assessee for housing its staff and workers engaged in the construction activity of the assessee's plant. This was clearly to facilitate the work of construction. Had this fac .....

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e machinery. The advances which the assessee made 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 hitches as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts are arrangements which are intrinsically connected with the construction of its steel plant. The receipts have .....

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ation of various assets of the company and the payments received for such utilization are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee - company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction." 4.6 Hon'ble Delhi High Court in Indian Oil Panipat Power Consortium Ltd. vs. 1TO (2009) 315 ITR 255 (Del.) held th .....

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e ratio of Hon'ble Supreme Court in Bokaro Steel Ltd. (supra) while arriving at the above decision. Hon'ble High Court also distinguished the facts before them from the facts which were before the apex court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v CIT. The distinction drawn by Delhi High Court, was that that there was a finding of fact recorded in the case before the apex court that whatever money was deposited in the bank was essentially found to be the surplus .....

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rrect 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 acquisition of the asset till the date on which such asset was first put to use" would not qualify as deduction. However, in a .....

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d by the assessee company and the interest earned were inextricably linked with the setting up of the power plant." 4.8 Therefore, decisions of Hon'ble Supreme Court in the case of Bokaro Steel Ltd. (supra), Hon'ble Delhi High Court in Indian Oil Panipat Power Consortium Ltd. (supra) and NTPC Sail Power Company (P) Ltd. (supra) are squarely applicable in the instant case. Identical issue was raised in appeal for AY 2008- 09 which was decided by me in favour of the appellant in A. No .....

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