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2016 (9) TMI 957 - ITAT JAIPUR

2016 (9) TMI 957 - ITAT JAIPUR - TMI - Interest earned on shortterm receipts (STR) prior to commercial operations of the roads - treated as income from other sources rather than reducing it from the capital cost of construction of the roads - Held that:- In the instant case, undisputedly, the funds have been borrowed for the specific purpose of execution of the mega road projects and as per the loan agreement executed between the consortium of bankers and the assessee dated 23.11.2005, all the d .....

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ishing feature in the instant case that the assessee is not at liberty to use the interest so earned as per its will and discretion unlike the case in Tuticorin Alkali Chemicals & Fertilizers (1997 (7) TMI 4 - SUPREME Court) and the interest has to be used solely for the purposes of implementation of the specified projects only. The impunged interest receipt of ₹ 35,39,479/- on such borrowed funds relates to the mega road projects/stretches which were under construction and the completed r .....

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f interest income - Held that:- From the perusal of the CIT(A)ís order it is noted that the interest income of ₹ 1,64,07,481/- was reduced from the interest expenditure debited in the P&L account in other words the interest expenditure has been shown net of interest income of ₹ 1,64,07,481/-. This shows that the interest income has already been credited in the profit and loss account. However, the way it has been reflected in the profit and loss account is by way of reduction from th .....

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P. Pareek (CA) For The Revenue : Shri R.S. Dagur (Addl.CIT) ORDER PER SHRI VIKRAM SINGH YADAV, A.M. The appeal filed by the assessee is arising from the order dated 23.07.2014 passed by the learned CIT(A)-II, Jaipur for A.Y. 2009-10. The assessee has raised the following effective grounds of appeal:- 1. That the order passed by ld. Assessing Officer and Ld. CIT(A)-II, Jaipur has also erred in considering ₹ 35,39,474/- as income from other sources rather than reducing it from the capital co .....

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ons of Income Tax Act, 1961. 2. The facts relevant for the issue under consideration are that the appellant company was formed as a joint venture company between Government of Rajasthan and IL&FS Ltd. and is engaged in development establishment, strengthening, upgradation, repair, rehabilitation, improvement, operation, maintenance and implementation of road and other infrastructure projects and facilities. During the financial year 2008-09, the company had completed Four (4) mega roads proj .....

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o Jhalawar (LJ-2) 15-Apr-2008 2.1 The first ground is with regard to considering interest earned on shortterm receipts (STR) prior to commercial operations of the roads, as income from other sources rather than reducing it from the capital cost of construction of the roads. To implement and execute the project, loans were sanctioned and disbursed by a consortium of banks. Once the assessee commenced commercial operations of the roads, the interest expense on relatable borrowings were claimed as .....

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which were under construction during the year and in case of completed road stretches upto the date of commercial operations, the Assessing Officer has not agreed to the treatment given for the interest earned on STR and Ld. CIT (Appeals) has also concurred with the same and interest receipt on STR of ₹ 35,39,474/- were brought to tax as income under the head Income from Other Sources . 2.2 The Ld. AO at para 2.3 Page 4 of his Order has observed that - The reply of the assessee has been co .....

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be treated as income from Other Sources. The assessee has not furnished the basis of interest apportioned towards Capital or the P&L account. No details or basis of interest apportioned towards various projects has also been provided as the assessee was carrying various other projects also which were underway. The assessee has shown to have earned interest of ₹ 1,99,46,955/- from FDRs in Banks out of which ₹ 35,39,474/- is adjusted in WIP and ₹ 1,64,07,481/- towards borrow .....

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llant and the case laws cited by the assessing Officer and the appellant. The appellant has relied upon the case of CIT vs. Bokaro Steels Ltd. 236 ITR 316 (SC) to emphasize the point that the interest income earned on Short term Fixed Deposit receipts was inextricably linked with the setting up of the project - in this case construction of the Road. It has been stated by the appellant that the Assessing Officer has wrongly applied the case law of Tuticorin Alkali Chemicals & Fertilizers Ltd. .....

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e on the interest income earned. I have perused the common loan agreement submitted by the appellant wherein it has been stated that the borrower will deposit all disbursements and all cash inflows into a Trust and Retention account including toll liquidated damages revenues etc. which shall be subject to verification by the Senior Lenders. It has also been stated that all disbursement shall be used solely for the implementation of the project and for no other purpose. I have also perused the ne .....

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by overriding title even with respect to toll receipts. In any case, the appellant has also not pointed out any clause which creates a diversion by overriding title on the interest income earned. Therefore, it is held that there is no diversion by overriding title on the interest income earned prior to the period when the roads were put to commercial use. Therefore the ratio in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. is applicable to the facts of this case. (4.4.2) As regards .....

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this finding which is given against it. In any case, this question is now concluded by a decision of this Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs. CIT (1997) 227 ITR 172. Hence we are not called upon to examine that issue. (4.4.3) Therefore, the case of Bokaro Steel Ltd. reiterates that ratio in the case of Tuticorin Alkali chemicals and Fertilizers ltd. In fact, the issue of interest income prior to the commencement of operation was not before the Hon ble Sup0reme court in .....

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tricably linked with the activity of setting up of the steel plant and therefore, were capital receipts which could not be taxed separately as income. The issues adjudicated upon in this case are totally different from the present case. (4.4.4) In view of the above discussion, it is held that interest on fixed deposit receipts amounting to ₹ 1,99,46,955/- is to be taxed under the head income from other sources, in view of the judgement of the Supreme Court in the case of Tuticorin Alkali C .....

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taxed as income from other sources as it is inextricably linked with the setting up of the project. The Hon'ble Supreme Court has also considered the earlier decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (93 Taxman 502) and have concluded that the income earned during the setting up of the project cannot be taxed as income from other sources. As the interest income is inextricably linked to the activity of setting up of the project the same can be reduced from the t .....

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its liability to pay interest to its creditors. It could re-invest the interest income in land or shares, it could purchase securities, it could buy house property, it could also setup another line of business, it might even pay dividends out of this income to its shareholders. There was no overriding title of anybody diverting the income at source to pay the amount to the creditors of the company". However, in our case, it was under lien and control of the bank as a designated Trust and Re .....

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urrent account or it could be converted into any other account like short term deposit, etc. To our mind, the interest earned on keeping that money with the same bank and merely changing the nature of deposit cannot be constituted as utilization of funds other than the object for which it was sanctioned and disbursed and for all practical purposes more particularly as decided by number of judicial pronouncement that real income should be taxed and actual expenditure should be allowed stating all .....

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es how, when and where this money can be utilized. The situation would have been different, if this money would have been invested in some security or was given as loan to someone else or was used for some other purposes but merely keeping the fund in separate type of account with the same rider of No Lien and utilization for the specified propose with the same bank which is lender, to our understanding, to arrive at the cost to the party should be netted, which has been done by the company. The .....

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igh Court in the case of Indian Oil Panipat Power Consortium Ltd vs Income Tax Officer dated 26 February, 2009 (ITA No. 1156/2007 & 1157/2007) and in case of CIT vs. Sasan Power Ltd. dated 6th January, 2012 (ITA 10/2012). The ld AR submitted that there is similarity of facts in our case and judgment of Hon ble Delhi High Court in the case of Indian Oil Panipat Power ... vs Income Tax Officer on 26 February, 2009 (ITA No. 1156/2007 & 1157/2007) and in case of CIT vs. Sasan Power Ltd. on 6 .....

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ontentions and pursued the material available on record. We find that both the parties have relied upon the decisions of the Hon'ble Supreme Court and in addition, the assessee has relied upon the decisions of Hon'ble Delhi High Court. Therefore, it would be appropriate to first refer to these decisions and some of the other recent decisions of Hon ble High Courts and Coordinate Bench decisions. 2.11 In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), the Hon'bl .....

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owed funds. Neither of the two factors can affect taxability of the income earned by the company the total income of the company is chargeable to tax under section 4. The Total income has to be computed in accordance with the provisions of the Act. Section 14 lays down that for the purpose of computation, income of an assessee has to be classified under six heads. In the instant case, the company had chosen not to keep its surplus capital idle, but had decided to invest it fruitfully. The fruits .....

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which flows from the property. Something received in place of the property will be capital receipt. The amount of interest received by the company flows from its investments and is its income and is clearly taxable even though the interest amount is earned by utilising borrowed capital. It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilising the borrowed funds as its income. The co .....

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the creditors of the company. It is well-settled that tax is attracted at the point when the income is earned Taxability of income is not dependent upon its destination or the manner of its utilisation. It has to be seen whether at the point of accrual, the amount is of the revenue nature and if so, the amount will have to be taxed. It is true that the Supreme Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. .....

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on the basis of the provisions of the Act and the interpretation of the term 'income' given in a large number of decisions of the High Courts, the Privy Council and also this Court. It is well-settled that income attracts tax as soon as it accrues. The application or destination of the income has nothing to do with its accrual or taxability. It is also wellsettled that interest income is always of a revenue nature unless it is received by way of damages or compensation. 2.12 In the case .....

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cilitate 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 facility not been provided by the assessee, the contractors would have had to make their own arrangements and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee .....

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out 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 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 independ .....

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t of its assets. These were receipts of a capital nature and could not be taxed as income. The same reasoning would apply to royalty received by the assesseecompany for stones, etc., excavated from the assessee-company's land. The land had been allowed to be utilised by the contractors for the purpose of excavating stones to be used in the construction work of the assessee's steel plant. The cost of the plant to the extent of such royalty received, was reduced for the assessee. It was, t .....

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hat 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 Supr .....

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o the setting up of the plant. The clue is perhaps available in section 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 business. Therefore, as per the provision of section 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. Th .....

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etting up of the business. See Mazagaon Dock Ltd. v. CIT & EPT [1958] 34 ITR 368 (SC), and Narain Swdeshi Weaving Mills v. CEPT [1954] 26 ITR 765 (SC). Once it is held that the assessee's income is an income connected with business, which would be so in the present case, in view of the finding of fact by the CIT(A) that the monies which were inducted into the joint venture company by the joint venture partners were primarily infused to purchase land and to develop infrastructure - then i .....

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of income as provided in section 14 of the Act. The head "income from other sources" is a residuary head of income. See S.G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 (SC) and CIT v. Govinda Choudhury & Sons [1993] 203 ITR 881 (SC). 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 ear .....

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re, 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 assessee had earned interest on advance paid to contractors during precommencement 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. 6. Th .....

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In our view the situation in the instant case is quite similar except here instead of paying interest on funds brought in for specific purpose interest is earned on funds brought in by way of share capital for a specific purpose. Could it be said that in the former situation interest could have been capitalized and in the later situation it cannot be capitalized. To test the principle we could extend the example, that is, would our answer be any different had assessee passed on the interest to .....

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ssessee by the joint venture partner were inextricably linked with the setting up of the plant, the interest earned by the assessee could not be treated as income from other sources. In the result we answer the question as framed in favour of the assessee and against the revenue. These appeals are allowed and the impugned judgment is set aside. 2.14 That the Hon'ble Delhi High Court in the case of Sasan Power Ltd (supra) following the decision in case of Indian Oil Panipat Power Consortium L .....

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he decision of the Supreme Court in CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 / 102 Taxman 94 was applicable as the Commitment Advance, which had been paid to PFC. This is not a case of surplus funds, which were available and investment were made in fixed deposits to earn interest. The interest paid to the power procurement utilities on commitment advances was capitalized. Interest paid and interest received were inextricably linked and have a commonality about their nature and character. The .....

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amounts received from the prospective bidders on account of sale of tender documents was also transferred to PFC. As noticed above, Revenue has not challenged and has accepted the order of the tribunal deleting addition of ₹ 1,35,81,234/-paid by the respondent-assessee to PFC for preparation of tender documents. In view of the factual matrix, the tribunal has rightly followed the ratio in Indian Oil Panipat power Consortium Ltd.'s case (supra). 2.15 In a recent decision, the Delhi Hig .....

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e been returned by the Commissioner of Income Tax (Appeals) and have been confirmed by the Income Tax Appellate Tribunal to the effect that the funds were inextricably connected with the setting up of the power plant of the assessee. The learned counsel for the revenue has also not been able to point out any perversity in such finding and, therefore, the factual findings have to be taken as those accepted by the Income Tax Appellate Tribunal which is the final fact finding authority in the incom .....

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ceipt and not a revenue receipt. This case has been decided on the basis of this principle and not on the basis that the source of the funds was through raising of share capital and not through borrowings. 2.16 The Coordinate Bench in case of Adani Power Ltd. v. Assistant Commissioner of Income-tax, Range-1, Ahmedabad [2015] 61 taxmann.com 355 (Ahmedabad - Trib.) has held as under: 2.16 From the above, it is evident that the Hon'ble Delhi High Court has considered and interpreted the decisio .....

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ls & Fertilizers Ltd. (supra). After considering these two decisions of the Hon'ble Apex Court and also some other decisions of the Hon'ble Apex Court, their Lordships of the Delhi High Court arrived at the conclusion "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 the specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily b .....

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pital as well as loans were raised for the specific purpose of setting up of the power generation plants. The business of the assessee has not been commenced and therefore, as per above decision, the interest received in the period prior to commencement of business was in the nature of capital receipt and hence was required to be set off against the pre-operative expenses. The assessee has already set off the interest income against the preoperative expenses which is titled as "project deve .....

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t: "13. In that view of the matter, what we are required to consider is, as to whether the Tribunal was legally justified in not applying the judgment rendered in Tuticorin's case (supra), or that, the Tribunal was justified in applying the judgments given in Bokaro Steel, and Karnal Cooperative Sugar Mill's case. If this question were to come originally before us, perhaps we might have taken a task of undertaking the exercise, as to which of the views is required to be followed, an .....

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ave been equally the same situation, if the learned Tribunal would have adopted the other line of reasoning, following the judgment in Tuticorin's case (supra). 14. Therefore, when there are two sets of judgments of Hon'ble Supreme Court, proceeding on different lines of reasoning s, and both stand on their own logical footing, and in that event, if the learned Tribunal has accepted one line of reasoning, supported by one set of judgments, it cannot be said, that the learned Tribunal was .....

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n ble Supreme Court in case of Tuticorin Alkali Chemicals & Fertilizers (supra) as well as Bokaro Steel ltd (supra). After analyzing both the decisions of Hon ble Supreme Court, it held that 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 fix .....

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acts in the instant case are pari materia with the facts of the Indian Oil Panipat (supra) and the ratio decidendi of Hon ble Delhi High Court in that case will squarely apply to the facts of the assessee. In the instant case, undisputedly, the funds have been borrowed for the specific purpose of execution of the mega road projects and as per the loan agreement executed between the consortium of bankers and the assessee dated 23.11.2005, all the disbursements shall be deposited in the trust and .....

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not at liberty to use the interest so earned as per its will and discretion unlike the case in Tuticorin Alkali Chemicals & Fertilizers (supra) and the interest has to be used solely for the purposes of implementation of the specified projects only. The impunged interest receipt of ₹ 35,39,479/- on such borrowed funds relates to the mega road projects/stretches which were under construction and the completed road projects/stretches upto the date of commencement of commercial operations .....

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