TMI Blog2018 (10) TMI 1111X X X X Extracts X X X X X X X X Extracts X X X X ..... PER R. K. PANDA, AM : This appeal filed by the Revenue is directed against the order dated 02.07.2014 of the ld. CIT(A), Raipur (CG) relating to assessment year 2011-12. 2. The only effective ground raised by the Revenue reads as under :- Whether in law and on facts circumstances of the case, the learned CIT(A) has erred in deleting the addition of ₹ 1,22,54,520/- made by the AO on account of interest earned in surplus funds parked with banks, treating it as income from other sources being a revenue receipt? 3. Facts of the case, in brief, are that the assessee company is a joint venture company between Chhattisgarh Mineral Development Corporation Limited (CMDCL) and IFFCO Chhattisgarh Power Limited (ICPL). The object of this joint venture is to undertake mining of coal from TARA Coal Block Mine in Sarguja district of Chhattisgarh. The entire share capital of the assessee company is jointly held in ratio of 51:49 by its promoters i.e. CMDCL and ICPL respectively. The return of income for the impugned assessment year was filed on 29.02.2012 declaring Nil income. During the course of assessment proceedings, the Assessing Officer observed that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been reduced from the pre-construction expenses. On the contrary, according to the A.O, the interest income is a revenue receipt and taxable under the head Income From Other Sources as the share capital fund of the appellant was not and is not meant for any specific purpose/project. 8. The issue to be decided in the present case lies in a narrow compass, whether the interest earned by the appellant from terms deposits with banks is a Capital Receipt not chargeable to tax or a revenue receipt taxable under the head income from other sources ? For determining the nature of receipt as aforesaid, firstly, the issue that needs to be decided is whether or not the share capital funds parked in term deposits yielding interest income were inextricably linked with the setting up of any specific project/purpose. This again requires ascertainment of the fact whether or not there was any specific project/purpose. 9. In the factual background of the instant case, it is pertinent to advert to the legal position emerging from the provisions of the Act and judicial pronouncements: Section 4 brings to charge tax on total income. Prima facie, in order to come within the scope of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the mining in Tara Coal Block will be done by Joint Venture Company wherein Chhattisgarh Mineral Development Corporation Limited (for short CMDC) shall be holding more than 50% of voting equity in the joint venture, it is also seen that there is an explicit stipulation in the said letter whereby CMDCL has to supply coal produced from the Tara Coal Block mainly to Chhattisgarh State Electricity Board for the proposed Power Plant. 12. I have also carefully perused the Memorandum of Understanding entered in to between the Government of Chhattisgarh, Chhattisgarh State Electricity Board (CSEB) and Indian Farmers Fertilizers Cooperative Limited OFFCO) dated 04.06.2005. From the perusal of said Memorandum of Understanding, following facts are noted:- i. Vide this Memorandum of Understanding itself, foundation was laid for the formation of the appellant company as well as IFFCO Chhattisgarh Power Limited (ICPL), in fact, it is also seen that vide this Memorandum of Understanding itself a decision was taken to form a company to be reckoned as Power Company to be named as IFFCO Chhattisgarh Power Limited (being a Joint Venture Company with 26% equity share holding of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is also seen that Chhattisgarh Mineral Development Corporation Limited had spent about ₹ 6.62 crores in the financial year 2006-07 itself for land acquisition. 15. I have also carefully perused the Gazette Notification dated 26.06.2009 and various correspondence between Ministry of Environment and Forest and Government of Chhattisgarh, similarly between Government of Chhattisgarh and the Prime Minister etc. I have also perused the return of income and financial statements of the appellant for the preceding assessment years assessment orders passed under section 143(3) of the Act for the Assessment Year 2009-10. On a thoughtful consideration of the entire material on record before me which were very well before the AO during the course of assessment proceedings also, it is an undisputed fact that a Memorandum of Understanding (MOU) was executed on 4/6/2005 with an objective of setting up Power Project and as its extension, Coal Project through Tara Coal Block. 16. Cumulatively considering the underlying facts and history since 2003, in my considered view, the terms of Memorandum of Association cannot be viewed in isolation, particularly, when the case of the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articularly, in the light of the restrictions imposed by the JVA dated 31.1.2008 prior to formation of the appellant company wherein they have categorically confirmed in unambiguous terms as reproduced here-in-below:- 3.17 Conduct of Business till Execution of Mining Lease. Parties agree that on and from the date hereof and till the execution of Mining Lease in favour of the Company: 3.17.1 The Company shall not undertake any activity other than those required for timely implementation of the project or as may hereafter be agreed in writing by and between CMDC and ICPL; 1.3 Overriding Effect of the Agreement 1.3.1 The Parties agree that their rights and obligations in relation to the Company including the operation, control and management of the Company shall be interpreted, acted upon and governed by the provisions of this Agreement. 1.3.2 In so far as contractual relationship inter se between the Parties is concerned, : a) this Agreement shall prevail and have an overriding effect, notwithstanding anything contained in any other document or agreement(s) including the Memorandum of Association and the Articles of Association of the Company; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of doubt that the share capital was meant for multiple purposes and not for specific purpose / project. It is not the case of the A.O that the appellant ever even occasionally used funds for purposes other than Tara Coal Block Project. It is not the case of the A.O that there is apparent and material difference in the Memorandum of Association of the appellant company and other companies viz, NTPC Sail Power Company (P) Limited, Indian Oil Panipat Power Consortium Limited and IFFCO Chhattisgarh Power Limited, as far as generality of the contents of object clause in Memorandum of Association is concerned. I find that while arriving at the conclusion that there were no strings attached to the share capital of the appellant company and that the appellant was free to use the funds as per its will and that Memorandum of Association permits the appellant to pursue some other business/purpose, the A.O merely relied upon the generality of Memorandum of Association and disregarded the chronology of facts of the case as emerging from the various documentary evidences brought on record by the appellant. 22. Now, adverting to the submission of the appellant that there is a direct nexus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... March 5, 2014 dealing with identical issue in which it was held that: The investment of the funds has nothing to do and was not inextricably linked with the construction of the project. It was an investment under the 'portfolio management scheme' operated by banks under which an assured return was guaranteed by the banks. It was a conscious act of investment of funds by the assessee and if such investment results in income, the same must be brought to tax under the residual head, even if the company has not commenced its business. The Tribunal erred in placing reliance upon the fact that the present case is not one where borrowed funds were used for parking them to earn interest and that the funds were those of the promoters. [Para 7] The Tribunal placed undue emphasis on the source of the funds instead of focussing its attention to the utilisation of the fund - whether they were invested in activities which are inextricably linked with the construction of the project. In [act, the assessee in the present case had invested the funds under the scheme operated by the banks for an assured return. That had nothing to do with the project and there was no inextric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SC) 276: (1999) 236 ITR 315 (SC) ( iv) IFFCO Chhattisgarh Power Limited vs. Income Tax Officer in ITA No.6367/Del/2012 26. I am convinced that the case of the appellant is squarely covered by the decision of the Hon'ble ITAT Delhi Bench in the case of IFFCO Chhattisgarh Power Limited vs. Income Tax Officer in ITA No.6367/Del/2012 wherein it was held as under.- In view of above, we had no hesitation to hold that in the present case, the assessee earned income from interest on term and other deposits. This interest income of ₹ 1,22,96,974/- has been earned on the funds lying in the bank which are out of funds received by way of share application money. Before the authorities below, the assessee explained that it is a common practice among the business undertaking to park the surplus funds temporarily available to them while setting up new business or while undertaking a diversification / substantial expansion in a manner so as to derive certain income therefrom, thereby effectively reducing the cost of construction and interest incurred before the commencement of business. In the present case, during the year under consideration, the assessee company w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxability of interest and other income and after being satisfied that the interest and other income constitutes capital receipts not chargeable to tax, the then A.O had accepted the NIL income returned by the appellant, as the facts prevailing in A.Y. 2009-10 and during the year under consideration are identical, I find no reason for the A.O to take a contrary view during the year under consideration. Hence, the addition made by the A.O deserves to be deleted even on this ground. 28. I am convinced that the interest income earned by the appellant is a capital receipt and rightly reduced by the appellant from its pre-construction expenses as the commercial operations have not commenced. Looking to the facts and circumstances of the case, as also decisions cited above, the addition of ₹ 1,22,54,520/- on account of Income From Other Sources made by the A.O cannot be sustained. Hence, the addition is deleted. 6. Aggrieved with such order of the ld. CIT(A), the Revenue is in appeal before the Tribunal. 7. The ld. DR strongly supported the order of the Assessing Officer. Referring to the decision of the Delhi Bench of the Tribunal in the case of M/s IFFCO Chhatti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the facts of the present case. Therefore, the order of the ld. CIT(A) should be upheld and the grounds raised by the Revenue should be dismissed. 9. The ld. DR, in his rejoinder, submitted that in the instant case the project did not come up therefore, the interest income from surplus funds has to be charged to tax. He submitted that in the case of IFFCO Chhattisgarh Power Ltd. (supra) the project has come up, however, in the instant case the project has never come up. Therefore, the decision of the Delhi Bench of the Tribunal is not applicable to the facts of the present case. 10. We have considered the rival arguments made by both the sides and perused the material available on record. We have also considered the various decisions cited before us. We find the Assessing Officer relying, on the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkalies Chemicals Fertilizers Ltd. (supra) and various other decisions taxed the interest income of ₹ 1,22,54,520/- earned by the assessee from fixed deposits kept in various banks during the year under consideration as revenue receipt liable to tax during the current year. We find, in appeal, the ld. CIT(A), f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letter dated 03.01.2014. We, therefore, are of the view that the interest earned on deposits kept by the assessee out of surplus funds is inextricably linked with the process of setting-up its assets and it will go to reduce the cost of assets. 11. We find the Hon ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. vs. ITO reported in 315 ITR 255 has held that interest which accrued on funds deployed with the bank could not be taxed as income from other sources but constituted capital receipt liable to be set off against preoperative expenses as the said funds were especially earmarked for purchase of land and development of infrastructure. The Hon'ble High Court while holding so considered the decision of the Hon ble Supreme Court in the case of Tuticorin Alkalies Chemicals Fertilizers Ltd. (supra) and Bokaro Steel Ltd. (supra) and various other decisions. We find the Hon'ble Supreme Court in the case of CIT vs. Karnal Co-operative Sugal Mills Ltd. reported in 243 ITR 2 following the decision in the case of Bokaro Steel Ltd. (supra) has observed as under :- In the present case, the assessee had deposited money to open a letter of credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commencement of business, resulting in earning of interest by the assessee would amount to the assessee earning any income. This court held that if a person borrows money for business purposes, but utilises that money to earn interest, however temporarily, the interest so gene rated will be his income. This income can be utilised by the assessee whichever way he likes. Merely because he utilised it to repay the interest on the loan taken, will not make the interest income as a capital receipt. The Department relied upon the observations made in that judgment (at page 179) to the effect that if the company, even before it commences business, invests the surplus funds in its hands for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head 'Capital gains'. Similarly, if a company purchases a rented house and gets rent, such rent will be assessable to tax under section 22 as income from house property. Likewise, a company may have income from other sources. . . . The company may also, as in that case, keep the surplus funds in short term deposits in order to earn interest. Such interest will be chargeable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herein para 5 reads as under:- In our opinion the Tribunal has misconstrued the ratio of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. vs C.I.T. (supra) and that of Bokaro Steel Ltd. (supra). The test which permeates through the judgment of Supreme Court in Tuticorin Alkali Chemicals Fertilizers Ltd. vs C.I.T. (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 form other sources . On the other hand the ratio of the Supreme Court judgment in Bokaro Steel Ltd. s case (supra) 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 preoperative expenses. 11. In another recent judgment of Hon ble High Court of Delhi in the case of NTPC Sail power Company Pvt. Ltd. vs C.I.T.(supra), the controversy is now settled with the following observat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rowed, which is the subject matter of the present appeal, would have to be treated as revenue receipt. The answer is given in favour of the assessee; the appeal is consequently allowed. 12. In view of above, we have no hesitation to hold that in the present case, the assessee earned income from interest on term and other deposits. This interest income of ₹ 1,22,96,974/- has been earned on the funds lying in the bank which are out of funds received by way of share application money. Before the authorities below, the assessee explained that it is a common practice among the business undertaking to park the surplus funds temporarily available to them while setting up new business or while undertaking a diversification/substantial expansion in a manner so as to derive certain income therefrom, thereby effectively reducing the cost of construction and interest incurred before the commencement of business. In the present case, during the year under consideration, the assessee company was in the process of setting up of 1320 MW power plant in the same district of Chhatisgarh State of India for which land acquisition activities as per relevant state laws were under progress an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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