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TMI Blog2019 (3) TMI 1457X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 44.45 Crores being in the nature of a capital receipt (since income was earned prior to commencement of business, it was a capital receipt and was required to be set off against pre-operative expenses), the same is not liable to tax both under the normal provisions of Income Tax as well as for the purposes of computing book profits U/S.115JB of the Income Tax Act, the addition made should be deleted. 2. The appellant reserves its right to add to, alter, amend, modify or delete any of the grounds taken in this appeal. 2. The assessee has challenged the order of ld CIT(A) on the ground that Interest of Rs. 44.45 Cr has wrongly been held to be revenue receipt by ld CIT(A) by ignoring the fact that the interest was received on the FDRs/ICDs during the period prior to the commissioning of the port terminal at Karanja Creek which has to be reduced from the pre-operative capital expenditure as the development of the port is till under progress and not commissioned. 3. The fact in brief are that the assessee company was incorporated under the Companies Act, 1956 to develop, operate multipurpose port terminal at Karanja Creek, Chanje Village, Taluka Urban, Distt. Raigad, Maharashtra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would not change the character of the receipt from capital to revenue and cannot be taxed both under normal provisions and under section 115JB of the Act. The assessee submitted before the AO that the section 115 JB provides for a mechanism which is alternative to the normal provisions and comes into play where the tax as per normal provisions of the Act is less than the tax as per the provisions of section 115 JB of the Act. Thus it cannot go beyond the legislative intent and bring to tax the receipt which is not at all taxable owing to its being of capital receipt. The assessee relied on a series of decisions namely Shree Cement Ltd ITA No. 614,615,635/Jaipur/2010 AY 2004-05 to 2006-07 dated 9.9.2011 and also subsequent years, Shivalik Ventures Pvt. Ltd. ITA No. 2008/Mum/2012 AY 2008-09. 5. The AO however rejected the arguments and contentions of the assessee citing various reasons which are reproduced as under: "a) The decision relied upon by the assessee in the matter of Indian Oil Panipat Consortium Ltd, v. ITO - 315 ITR 255, subsequently followed by several ITAT decisions as pointed out by the assessee in its application, is a subject matter of appeal to the Hon. Supreme C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e undermentioned grounds in appeal: 1. On facts and circumstances of the case and in law the Assessing Officer (A. O.) has erred in not holding a sum ofRs. 44.45 crores as a capital receipt In doing so the AO has erred in holding the sum of Rs. 44.45 crores as to be taxable both for the purposes of the normal computation as well as computing book profits u/s115JB of the Income Tax Act, The receipt of Rs, 44.45 Crores being in nature of a capital receipt (since the income was earned in a period prior to commencement of business it was a capital receipt and hence was required to be set off against the pre-operative expenses) :- the same is not liable to tax both under the normal provisionsof the income tax as well as for the purposes of computing book profits u/s 115JB of the income tax act. The addition made should therefore be deleted, 2. The appellant reserves its right to add to, alter, amend or modify, and delete any of the grounds taken in this appeal" 3. The interest on the inter-corporate deposits ('ICDs') on funds specifically meant for development of a multi-purpose port terminal at Karanja Creek accrued only on temporary deployment by the assessee prior to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SKIL Guernsey in October 2010 made an AIM Initial Public Offering, an Alternative Investment Market on London Stock Exchange for investment in Karanja Terminal &Logistics (Cyprus) Limited ("KTLCL"), a Cypriot intermediate company, which got incorporated on 31st August, 2010. On 1st October, 2010 KTLCL agreed to subscribe for shares of the Petitioner for approximately 99.77%. Therefore, the Petitioner as on date was held 99.77% by KTLCL and balance 0.23% held by SKIL India and KIPL, being the Nominee shareholders. Enclosed at Pages 59 to 137 of the compilation is a copy of the relevant extract of theAIM Initial Public document (attention is drawn to Page 79). 4.6 The IPO was mainly announced for the specific and precise purpose of raising capital for meeting the cost of laying multipurpose port terminal facility and logistics facility at Karanja creek (herein after referred to as "the Project"). Thereafter, on 15th October, 2010 the assessee, received a Certificate of Foreign Inward Remittance amounting to Rs, 4,65,11,85,000/- from KTLCL for subscription of 1,72,06,226 shares having face value of Rs. 10/- at an approximate premium of Rs. 260.32/share. On 18th October, 2010 the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itation against the Project, this access was again blocked by the villagers. During February, 2015 work again began at the site under police protection but again in March, 2015 work at the site halted owing to local agitation. Finally, in May, 2015 the local agitation was withdrawn and then the Project work resumed in November, 2015 post monsoon. Till June, 2016 the reclamation of 19 hectares' area is completed and 57 piles were installed during this period after which due to monsoon the Project work was suspended up to November, 2016. Presently, the Project work is going on in full force. 5. With the above set of arguments, the assessee supported its case for filing NIL return as under: 5.1 The interest income earned by the assessee on the ICDs maintained with NBFCs and Banks is a capital receipt (not liable to tax) as it is spending on the Project and in this regard, heavy reliance is placed by the assessee on the Apex Court decision rendered in the case matter of Bakaro Steel Ltd. - 263 ITR 315, Delhi High Court decision rendered in the case of Indian Oil Panipat Power Consortium -315 ITR 255 and Facor Power Ltd. -380 ITR 474. The assessee has also further pointed out th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icitly accepted Narang Overseas v. ACIT 100 ITD (Mum) (SB), it cannot file an appeal on the issue in the case of other assessees. 6. The AO has objected to the assessee's submission and our rebuttal to the same is as under: Sr. No. AO's contention Assessee's rebuttal 1. The decision relied upon by the assessee in the matter of IndianOil Panipat Consortium Ltd. v, ITO - 315 ITR 255, subsequently followed by several ITAT decisions as pointed out by the assessee in its application, is a subject matter of appeal to the Hon. Supreme Court under SLP No.: 15705 of 2009, which is pending disposal pending before the Apex Court. The AO has not considered the decision in proper perspective, since the conclusion of the Delhi High Court, which emerges is as per the decision of the Apex Court in Bakaro Steel Ltd., in coming to a conclusion to hold that interest earned on funds primarily brought in for infusion in busines could not have been classified as income from other sources but since the interest income earned prior to commencement of business was capital in nature and had to be set off against pre-operative expenses. It may be noted that at Para 3 of the assessment order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee and not against him. Similarly, if the Income-tax Appellate Tribunal has decided a point in favour of the assessee, he cannot ignore that decision and take a contrary view, because that would equally prejudice the assessee." (emphasis supplied) 8. In another case of Bombay High Court ~ Jurisdictional High Court reported at 256 ITJR 385; i.e. the case of Bank of Baroda v, S.C.Srivastava the relevant observations on the issue by the Hon. Court as under; "At this juncture, we cannot resist observing that the Judgement delivered by the Income-tax Tribunal was very much binding on the Assessing Officer. The Assessing Officer was bound to follow the judgements in its true letter and spirit. It wasnecessary for judicial unit and discipline that all the authorities below the Tribunal must accept as binding the judgments of the Tribunal The Assessing Officer being an inferior officer visa-vis the Tribunal, was bound by the Judgment of the Tribunal and the Assessing Officer should not have tried to distinguish the same on untenable grounds. In this behalf, it will not be out of place to mention that "in the hierarchical system of courts" which exists in our country, "it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase. The amounts in dispute in the case of Bokaro Steel Ltd were not interest on idle funds. These were receipts/receivables from the contractors deployed by the assessee for the construction of its factory representing the following: 1. For usage of residential quarters of the company by the contract, 2. Interest on mobilisation advance given for executing the contract, 3. Higher charges received for usage of equipment belonging to the company. 4. Amount received from contractors for using the stones lying in the campus of the company. 6.5 These amounts were never physically received by the company but prior to that was adjusted against the charges payable by it to the contractors, Thehon'ble apex court held these accruals to be 'incidental' and 'intrinsically connected' with the construction of the steel plant, on the reasoning that it in short that the construction work proceeded smoothly without financial hitches. In this background, it was held that this would comprise a capital receipt. Even a quick perusal of the present appeal ineluctably shows that the decision of Bokaro steel case is inapplicable. Interest earned on idle funds temporarily inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 56. 2. It was argued on behalf of the company that it had not yet commenced its business and in any event if the income was derived from funds borrowed for setting up the factory of the company, it should be adjusted against the interest payable on the borrowed 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 assesses has to be classified under 6 heads. 3. If a company has not commenced business, there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed. If the company, even before it commences business, invests the surplus funds in its hand 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 rented house and gets rent, such r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity 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. 9. 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. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act Whether a particular receipt is of the nature of income and falls within the charge of section 4 is a question of law which has to be decided by the court 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 noth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted before the bench that the assessee company was incorporated in May, 2010 for a specific purpose of developing and operating of port terminal and facilities at Karanja Creek in the state of Maharashtra with shares capital held SKIL Infrastructure Ltd, India(SKIL India) with its nominees to the extent of 49% and by Karanja Infrastructure Private Ltd(KPIL) and its associates to the tune of 51%. The SKIL group incorporated a holding company SKIL Ports & Logistics Limited (Guernsey) (SKIL Guernsey) to develop, own and operate logistics facilities in India. The said company in October, 2010 made an AIM Initial Public Offer an Alternative Investment Market on Landon Stock Exchange for investment in Karanja Terminal & Logistics (Cyprus) Limited (KTLCL) a Cypriot Intermediate company which was incorporated on 31 August, 2010. On 1st October, 2010 KTLCL agreed to subscribe the shares of the assessee to the tune of 99.97 % and balance of 0.23% are held by SKIL India and KIPL being nominee shareholders. The assessee received share capital raised in the Landon Stock exchange of Rs. 465.12 Cr to meet its cost of port terminal project. The ld AR submitted that share capital was received as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income which is not taxable on account of being capital receipt is not to be included in the book profits under MAT. The ld AR of the assessee has relied on various decisions namely: i) Indo Rama Synthetics (I) Ltd. V/s. CIT, 330 ITR 363(SC) ii) Shivalik Venture Pvt. Ltd. V/s. Dy. CIT, 43 ITR(Trib) 187(Mum Tr) iii) DCIT Circle-1 V/s. McNally Bharat Engineering Co. Ltd., ITA No.l00/Kol/2011, Dated 01/03/2017.(ITAT Kol) iv) of ACIT, Range-2, V/s. M/s. L. H. Sugar Factory Ltd., ITA NQ.417 & 418/LKW/2013(Lucknow) v) DCIT, c.c-XXVIII V/s. Binani Industries Ltd., 178 TTJ 658(Kol Tri) vi) ACIT, Circle-2 V/s. Shree Cement Ltd., ITA NO.614, 615 & 635/JP/2010,152 ITR 561(Jaipur Tri) vii) Shree Cement Ltd. V/s. Addl. Commissioner of Income Tax, 152 ITD 561(Jai Tri) viii)Veekaylal Investment Co. Pvt.Ltd. 249 ITR 597(Bom) ix) JSW Steel Ltd. Vs. ACIT, 82 Taxmann.com 210 (Mumbai Tri) x) Bisleri Sales Ltd v/s. CIT, 377 ITR 144(Bom) xi) Veekaylal Investment Co. Pvt. Ltd. 249 ITR 597 (Bom) was distinguished. The ld AR submitted that that in the Asst year 13-14 & 14-15 interest earned was credited to the P&L account but, at the same time, in the notes attached to the audited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld DR also argued that the assessee is not accounting the interest income on consistent basis. In 2011-12 and 2012- 13 the assessee has not only credited the interest to the profit and loss account but also offered the interest received to tax. Whereas in the AY 2013-14 & 2014-15,the interest received was credited to the profit and loss account but while calculating the taxable income under normal as well as special provisions of the Act it was excluded on the ground that interest being a capital receipt. In AY 2015-16, the interest was not credited to the profit and loss account at all and was reduced from the capital work in progress besides reducing the interest for earlier years in the balance sheet as at 31.3.2015. The ld DR. therefore prayed that the order of ld CIT(A) may be upheld. 15. In the rebuttal, the ld AR submitted that assessee has filed petition u/s 264 of the Act before the Principal Commissioner of Income Tax (hereinafter called as PCIT) for the AY 2011-12 & 2012-13 to revise the assessment by excluding the interest income from the taxability under the normal provisions as well as u/s 115JB of the Act upon realising its mistake that the interest is capital recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived from D.C Circle- 6(3) and , the DR requested for the adjournment on the ground that the AO requires one month time for giving report whether the documents filed in paper books were before him or not though expressing his preparedness to argue the case which received sharp reactions from the ld AR on manner in which the adjournments were being sought in the stay rejected matters. The ld AR stated that assessee is executing an infrastructure project of port development which in final stages of completion and is likely to be commissioned in the month of March, 2019 but due to the attachment of bank accounts by the AO, the assessee is exposed to irreparable loss which would be impossible to recoup if the case is adjourned again today. The ld AR prayed before the bench that the case is covered in favour of the assessee by various decisions of the Apex Court, High Court and the Tribunals. The ld AR submitted before the bench that he can prove on the basis of the various replies filed before the authorities below and also on the basis of observations of the AO in the assessment orders of various years that all the documents in the paper books were before the AO. After hearing both t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... KTPL letter dated 23rd August 2017 addressed toMaharashtra Maritime Board, providing Project update ofKaranja Port -12- 7 KTPL letter dated 4th April 2018 seeking extension of Termof Deed of Lease / Expansion of Port Limit 13-17 8 Letter from Maharashtra Maritime Board bearing ref no. MMB/Planning-2/Karanja Terminal 75-201 8/2288. dtd.llthMay, 2018 extending the period of lease from 30 years to 50years and providing additional 200 Acres land with 1000metres of waterfront. (Marathi transcript") 18-19 9 Letter from Maharashtra Maritime Board bearing ref no. MMB/Planning-2/Karanja Terminal/5-2018/2288. dtd.llthMay, 2018 extending the period of lease from 30 years to 50years and providing additional 200 Acres land with 1000metres of waterfront. (English Translation) 20-21 10 Letter from Maharashtra Maritime Board bearing ref no. MMB/Planning-2/Karanja Terminal/ 6526. dtd. 22ndOctober, 2018 - Permission to carry out trial Operation ofJSW Cargo at Karanja Creek Jetty. 22-23 11 KTPL letter to Maharashtra Maritime Board bearing ref. no. KTPL/MMB 7201 8/09027. dtd.27th Sept. 2018 - requestingpermission to carry out trial operation of JSW Cargo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity 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 had provided these facilities. The same is true of the hire charges for plant and machinery which was given by the assessee to the contractor for the assessee's construction work. The receipts in this connection also go to compensate the assessee for the wear and tear on the machinery. The advances which the assessee made to the contractor 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 been adjusted against the charges payable to the contractors and have gone to reduce the cost of construction. They have, therefore, been rightly held as capital receipts and not income of the assessee f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions relied by the ld DR as under: * In the case Tuticorin Alkali Chemicals Fertilizers Ltd (Supra) the Hon'ble Apex Court has held that where the assessee received the interest on bank deposits made out of loans and borrowings for setting up the factory of the company is taxable as income from other sources. The facts of this case are distinguishable from that of assessee's case as in the assessee case the funds were raised by way share capital and therefore not applicable and distinguishable. * In the case of Shree Krishna Polyster Ltd (Supra) the facts are distinguishable as the assessee is carrying on the business and interest on surplus funds in short term deposits with the banks was offered as business income whereas the Hon'ble Bombay Court held that such income is assessable as income from other sources.So the facts are distinguishable. * Similarly, in the case of CIT Vs Rajasthan development Corporation Ltd(Supra) the facts are distinguishable as the issue was whether the interest received on surplus funds is business income or income from other sources. * The Hon'ble Bombay High Court in the case of Shree Maheshwar Hydel Power Corporation Ltd., (supra) has h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Hyderabad ITAT in the case of Thermal Powertech Corporation India Ltd.(Supra). The facts of the case are different as in that case the interest income was earned out of the borrowed funds. The head note of the decision states: "where assessee company formed to build, own and operate a power plant, deposited unutilised borrowed funds in short term fixed deposits during construction of power plant, interest earned on those deposits was to be taxed as income from other sources - Held yes. 20. So far as the provisions of section 115JB are concerned , in the Asst year 2013-14 & 2014-15 the assessee has credited the interest received in the P&L account however, in the statement of total income the same is reduced being capital receipt. In the notes forming part of the financial accounts for the asst year 2013 -14 and 2014-15 it is mentioned that "Interest Income accrued during the year being in the form of Capital Receipt, as held by the Hon'ble Courts and Tribunals, is not taxable under the normal tax provisions nor under section u/s. 115JB of the Act. We observe from the records that in the AY 2015-16 , the interest received on FDRs/ICDs not been credited to the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... warrants being capital receipt would not be liable for book profits tax under section 115JB of IT Act. 1961. The genesis of Sec 115J, thereafter section 115JA and now section 115JB was to ensure that the assessee, while making profit from operations, should not enjoy tax free status due to various deductions available under the Income Tax Act. There was never any intention of the legislature to tax what is not income at all. * In the case of ACIT, Circle-2 V/s. Shree Cement Ltd., ITA NO.614, 615 & 635/JP/2010,152 ITR 561(Jaipur ITAT) the issue is as to whether sales tax subsidy received which was admittedly capital in nature can be subjected to MAT. The ITAT held that there was never any intention behind introduction of section 115JB to tax something which is not taxable at all. 21. In the case of Veekaylal Investment Co. Pvt.Ltd. 249 ITR 597(Bom) the Hon'ble Bombay High Court has held that direct transfer of an item to capital reserve account will not be in accordance with the requirement of the Companies Act and therefore, the AO has the power to recompute the book profit as per the Companies Act. However, the said judgement was rendered prior to the judgment of the Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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