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TMI Blog2021 (2) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... .02.2016 and 15.11.2016 for ay: 2013-14 and 2014-15 respectively, both passed u/s. 143(3) of the Income Tax Act, 1961 (hereinafter called "the Act") by learned Assessing Officer(hereinafter called " the AO") . We have heard both the parties through video conferencing mode through virtual court. 2. The grounds of appeals raised by assessee in its appeal in ITA No. 175/Alld/2018 for ay : 2013-14 and by Revenue in its appeal(s) ITA No. 80 and 177/Alld/2018 for ay 2013-14 and 2014-15 respectively, in memo of appeal filed with Income-Tax Appellate Tribunal, Allahabad (hereinafter called " the tribunal") reads as under : Assessee's Appeal in ITA no. 175/Alld/2018 for AY:2013-14 "1. Because the sum of Rs. 1,91,40,00 being forfeiture of earnest money from the contractors, forfeited and appropriated by the assessee, neither constituted business income of the assessee nor income from other sources and was in the nature of capital receipt and as such was not liable to be taxed. 2. Because the Id. Commissioner of Income-tax (Appeals) has erred in law and on facts in upholding the addition of Rs. 1,91,40,000, being forfeiture of earnest money and other miscellaneous recoveries from contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has considered the relevant part of that decision and has held that company has not chosen to keep its surplus capital idle, but has decided to invest it fruitfully and the fruits of such investment will clearly be of revenue nature, 3.' On facts and circumstances of the case and law on the issue the order of the Ld. CIT(A) is not legally tenable hence, it is prayed that order dated 21.12.2017 of CIT(A), Allahabad be set aside and that order of Assessing Officer be restored." Revenue's Appeal in ITA No. 177/Alld/2018 for AY:2014-15 "(i) The Ld. CIT (A) Allahabad has erred in deleting the addition of Rs. 7,14,08,725/- being income from other sources by relying upon the decision of Hon'ble ITAT in the respondent case of A.Ys. 2009-10 & 2010-11, and ignoring the decision of Hon'ble jurisdictional High Court in the case of CIT Vs. Indo Gulf Fertilizers & Chemicals Corp. Ltd. (2006) 280 ITR 621 (Alld). (ii) The Ld. CIT(A) has erred in holding that the AO has wrongly relied upon the decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemical and Fertilizers Ltd. Vs CIT (supra) whereas the Hon'ble Allahabad High Court, in Para 9 of the decision i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... setting off interest income to the tune of Rs. 1,67,02,568/- earned by assessee on bank deposits against preoperative expenses thereby reducing the cost of the project, by following the appellate order dated 16.08.2017 passed by tribunal in assessee's own case for ay's: 2009-10 and 2010-11 in ITA No. 44/Alld/2014 and ITA No. 85/Alld/2016 respectively, by holding as under: "Appellant's submission The AR of the appellant has submitted as under- A. The amount of Rs. 1,67,02,568 received as interest during the construction period is a capital receipt because it pertains to a period when the business of the assessee has not yet commenced and therefore it was liable to be adjusted against pre operative expenses reducing the cost of the project. Hence, the same has rightly been set off against the interest paid on term loans. The above view has already been settled in favour of the assessee by the Hon'ble ITAT, Allahabad in assessee's own case for the AY 2009-10 and 2010-11. A copy of the judgment of the Hon'ble ITAT is being enclosed. Reliance is also placed upon the decisions of Hon'ble ITAT, Lucknow bench in the case of M/s Prayagraj Power Generation Company Ltd v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Government of India addressed to Central Electricity Authority is placed in file on record. 8. We have heard both the parties through Video Conferencing and perused the material on record. We have observed that the assessee is a Public Sector undertaking which was setup and incorporated on 02.04.2008 as a joint venture company of NTPC Limited and of UP RUVN Ltd. and was engaged in setting up of a power generation plant in the name of Mija Urja Nigam (P) Ltd. . The assessee has undisputedly not commenced commercial operations during the impugned assessment year. We have observed that the assessee has earned income from interest to the tune of Rs. 1,67,02,568/- on deposits with banks. We have observed that the assessee has claimed the same to be set off against interest paid on terms loans availed for setting up of the power generation plant and hence reduction from pre-operative expenses for setting up the project was sought instead of offering the said interest income from bank deposit to tax under the provisions of 1961 Act. The AO brought the said interest income earned on bank deposit to income- tax u/s 56 of the 1961 Act and rejected the contentions of the assessee to set of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the assessee to earn any interest on such fund. The tribunal had further observed that the funds were kept in liquid so as to use them as and when required, since, the interest income on short term MOD's were inextricably linked to the construction and acquisition activities in the regular course of the assessee's activities. The tribunal further observed that the interest income was not earned by the assessee out of surplus funds so as to treat the said income as income from other sources. The tribunal has also considered decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and also decision of Hon'ble Apex Court in the case of CIT v. Bokaro Steel Ltd. [1999] 102 Taxman 94 (SC), and then the claim of the assessee was allowed for both the years by tribunal, by holding as under: "We have heard both the parties and perused the material available on record. It can be seen that in both the assessment orders the commencement of the business was not started but was only to the extent that the company was setting up a plant activities like land acquisition, statutory, clearance, development of infrastructure but the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erved that even during the period when commercial production has not started but the funds were invested in the bank FDR etc. the interest income has to be brought to income-tax under provisions of Section 56 of the 1961 Act under the head 'Income from other sources', and setoff cannot be allowed against interest on term loans secured by tax-payer from Financial Institutions which would be capitalized after the commencement of commercial production. The decision of Hon'ble Supreme Court in the case of Tuticorin (supra) is reproduced hereunder: " 7..........In view of the aforesaid conflict of decisions between the Madras and the Andhra Pradesh High Courts, the Tribunal has referred the following question of law to this Court for decision: "Whether, on the facts and in the circumstances of the case, interest derived by the assessee from the borrowed funds which were invested in short-term deposits with banks would be chargeable to tax under the head 'Income from other sources' or would go to reduce the interest payable by the assessee on the term loans secured by the assessee from financial institutions, which would be capitalised after the commencement of commercial pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om any other source will not be taxed. If the company, even before it commences business, invests the surplus fund 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 a rented house and gets rent, which rent will be assessable to tax under section 22 of the Act as income from house property. Likewise, a company may have income from other sources. It may buy shares and get dividends. Such dividends will be taxable under section 56. The company may also, as in this case, keep the surplus fund in short-term deposits in order to earn interest. Such interest will be chargeable under section 56. 13. The company has chosen not to keep its surplus capital idle, but has decided to invest it fruitfully. The fruits of such investment will clearly be of revenue nature. This position in law was explained by Sir George Lowndes in the oft-quoted passage in the case of CIT v. Shaw Wallace & Co. [1932] [59 LA. 206]: "Income, their Lordships think, in this Act connotes a periodical monetary return 'coming in' with some sort of regularity o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 57 of the Act sets out in its clauses (i) to (iii)the expenditures which are allowable as deduction from income assessable under section 56. It is not the case of the assessee that the interest payable by it on term loans is allowable as deduction under section 57. 16. If that be so, under which other provision of law, can the assessee claim deduction or set-off of his income from other source against interest payable on the borrowed fund? 17. There are specific provisions in the Act for setting off of loss from one source against income from another source under the same head of income (section 70), as well as setting off of loss from one head against income from another (section 71). In the facts of this case, the company cannot claim any relief under any of these two sections, 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 year. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business cannot be allowed as deduction, nor can it be adjusted against any other income under any other head. Similarly, any income from a non-bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing practice for calculating its profit followed by the assessee and accepted by the revenue for 30 years could not be treated as sanctioned by law and was : not acceptable for the purpose of computation of taxable income. 22. There is another aspect of this matter. The company, in this case, is at liberty to use the interest income as it likes. It is under no obligation to utilise this interest income to reduce its liability to pay interest to its creditors. It can re-invest the interest income in land or shares, it can purchase securities, it can buy house property, it can also set up another line of business, it may even pay dividends out of this income to its shareholders. There is no overriding title of anybody diverting the income at source to pay the amount to 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. If so, the amount will have to be taxed - Pondicherry Railway Co. Ltd. v. CIT AIR 1931 PC 165. 23. Our attention was drawn to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd of raising of the fund by borrowing and temporary utilisation of a portion of that fund by keeping the same in call deposits with the banks went to show that the interest was earned for the purpose of reducing the liability of the assessee. The High Court came to the conclusion that it was evident that the assessee did not derive any income by temporary utilisation of the loans and since no income was derived by the assessee, the question of assessing the sum of Rs. 3,14,366 in the hands of the assessee as 'income from other sources' did not arise. 26. It is difficult to follow this reasoning. If a person borrows money for business purpose but utilises that money to earn interest, however, temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. He may or may not discharge his liability to pay interest with this income. Merely because it was utilised to repay the interest on the loan taken by the assessee, it did not cease to be his income. The interest earned by the assessee could have been used for many other purposes. If the assessee purchased a house or distributed dividend or paid salary of it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stry. The accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure." (p. 167) 30. This Court also took note of the provisions of the Companies Act, 1956 and in particular section 208(1)( b). It observed: "... clause (b) of sub-section (1) of that section provides that in case, interest is paid on share capital issued for the purpose of raising money to defray the expenses of constructing any work or building or the provision of any plant in contingencies mentioned in that section, the sums so paid by way of interest may be charged to capital as part of the cost of construction of the work or building or the provision of the plant. The above provision thus gives statutory recognition to the principle of capitalising the interest in case the interest is paid on money ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The judgment in Challapalli Sugars Ltd s case (supra)goes to show that the Court was not in any way departing from legal principles because of any opinion expressed by the Institute of Chartered Accountants. The phrase 'actual cost' was not defined in the Act. Therefore, it had to be understood in the commercial parlance. To find that out the normal rule of accountancy prevalent in commercial and industrial circles was noted. According to the Institute of Chartered Accountants, actual cost will also include interest paid on borrowed money for the purchase of the assets. Khanna, J., however, did not stop there. He pointed out that the principle of capitalising interest was to be found in section 208 itself and was also consistent with the views of the English Courts. 32. But this is an entirely different case. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the facts for the earlier years viz. ay's: 2009-10 and 2010-11 were clearly peculiar as it was at the behest of bank the deposits were created, which were automatically reversed by the bank, when the assessee required the funds towards implementation of the project. Thus, on its own peculiar facts, the finding was given by tribunal that there was no surplus funds held by assessee and interest income was inextricably linked with the construction and acquisition activities in the regular course of the assessee activities. In the impugned assessment year 2013-14 which is in consideration before us, it is observed that there was a further infusion of capital of Rs. 600 crores in equal proportion by both the promoters namely NTPC Ltd. and UP RUVN Ltd., and the assessee has earned interest income of Rs. 1,67,02,568/- on deposits made with the bank which was sought to be set off by assessee against interest paid to bank on term loans availed for setting up of the project. But here during the impugned assessment year's, there are no such further findings as were there in ays:2009-10 and 2010-11 as to whether the surplus funds were deployed by assessee with deposit with banks on which int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd an application supported by an Affidavit executed by Assistant General Manager (Finance), explaining the cause of delay in filing this appeal late with tribunal has been filed with prayers to condone the delay. After considering the material on record and hearing rival parties, we hold that the assessee has shown sufficient cause for delay of 40 days in filing this appeal late with tribunal beyond the time provided u/s 253(3) of the 1961 Act and hence we condone the delay in filing of this appeal by the assessee for ay: 2013-14. The assessee is aggrieved by decision of ld. CIT(A) in upholding the addition made by ld. Assessing Officer to the tune of Rs. 1,91,40,000/- on account of receipts being forfeiture of earnest money and other miscellaneous recoveries from contractors which were held to be taxable in the hands of assessee under the head 'income from other sources' u/s 56 of the 1961 Act, wherein ld. CIT(A) held as under: "Appellant's submission-. The A.R. of the appellant has submitted as under B. The amount of Rs. 1,91,40,000/-, being forfeiture of earnest money and other miscellaneous recoveries from contractors cannot be treated as Income from Other Sources, sinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Supreme Court in the case of Bokaro Steel Ltd. (Supra) passed a detailed order in which it has been held that if the receipt are inextricably linked to the project under implementation then the same are be treated as capital receipt which will go on to reduce cost of project, by holding as under: "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 for the construction work of the assessee including certain amenities granted to the staff by the assessee. Secondly, 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 thirdly, 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 are directly connected with or are 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s case (supra). That case dealt with the question whether the investment of borrowed funds prior to 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 generated 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 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 rented house and gets rent, such rent will be assessable to tax under section 22 as income from house property. Likewise, the company may have income from other sources. The company may also, as in that case, keep the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee's steel plant. The cost of the plant to the extent of such royalty received is reduced for the assessee. It is, therefore, rightly taken as a capital receipt. (Emphasis supplied by us) In this case, it is undisputed contractors has given earnest money (EMD) to the assessee and since they could not complete the work in time the assessee has forfeited the amount, and also there were miscellaneous recoveries from contractors. The commercial operations of the power plant has not yet commenced during the impugned ay and the project was under implementation. Thus, the receipts are inextricably linked to the project and the ratio of decision of Hon'ble Supreme Court in the case of Bokaro Steel Ltd. (Supra) shall be applicable and hence we are of the view that these are capital receipt and they cannot be brought to tax and shall go on to reduce the cost of the project . Hence, we reverse the appellate order passed by ld. CIT(A) and allow the appeal filed by the assessee on this issue. Thus, A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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