TMI Blog2021 (2) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... As observed in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. [ 1991 (11) TMI 2 - SUPREME COURT] has observed 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 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 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, 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 in equal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st money from the contractors, forfeited and appropriated by the assessee - constituted business income or income from other sources or capital receipt and as such was not liable to be taxed - commercial production has not yet started of the project - HELD THAT:- The finding by ld. Assessing Officer/ld. CIT(A) that earnest money(EMD) given by contractors was forfeited by assessee on account of non completion of work and other miscellaneous recoveries were made from contractors. It is undisputed that power plant project of the assessee was under implementation during the impugned ay: 2013-14 and commercial production has not yet started during the impugned assessment year. 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 case of Bokaro Steel Ltd. [ 1998 (12) TMI 4 - SUPREME COURT] whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axed. 2. Because the Id. Commissioner of Income-tax (Appeals) has erred in law and on facts in upholding the addition of ₹ 1,91,40,000, being forfeiture of earnest money and other miscellaneous recoveries from contractors as income from other sources because the said receipts are inextricably linked with plant set up activities and hence is in the nature of Capital Receipt and are being set off against Expenditure during construction period. This activity was rather a part and parcel of the constructional activities of the assessee. The source is not independent of, but is rather closely connected and interlinked to the process of setting up of the factory. 3. Because the learned CIT(Appeals) has erred in upholding the addition, since the assessee has earned income before commencement of the business of the assessee, it was to be capitalized and the assessee accordingly treated the receipt as capital receipt and adjusted against expenses reducing the cost of the project. 4. Because the learned CIT(Appeals) has committed a grave error of law in not appreciating the case law cited by the assessee, which not only squarely covers the controversy but was also bindin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 in the case of CIT Vs. Indo Gulf Fertilizers Chemicals Corp. Ltd (2006) 280 ITR 621 (Alld), 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. (iii) 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 13.03.2018 of CIT(A), Allahabad be set aside and that order of Assessing Officer be restored . 3. The brief facts of the case are that assessee is a Public Sector Undertaking which was set up and incorporated on 02.04.2008, as a joint venture of NTPC Ltd. and UP RUVN Ltd. and was engaged in setting up of a power generation plant in the name of Meja Urja Nigam (P) Ltd. . 4. First, we shall take up Revenue s appeal for both the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur 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 vs. ITO (ITA No. 625 626 /LKW/2013). And Hon'ble ITAT, Ahmadabad in the case of Adani Power Ltd. vs. ACIT (ITA No.2755/Ahd/2011). 2.2 Decision: The-appellant's argument and the order of the A,O. is considered. This issue is covered in favour of the appellant in appellant's own case for the A.Ys. 2009- 10 2010-11 in lTA No.44/Alld/2014 and ITA No.85/Alld/2016 vide order dated 16.08.2017. Respectfully following the above judgment the addition made on account of interest income is deleted. This ground is allowed. 7. Being aggrieved by appellate order passed by ld. CIT(A), the Revenue has filed an appeal with tribunal for ay: 2013-14 . Similar issue is also involved in ay: 2014-15 and Revenue has also preferred an appeal with tribunal for ay:2014-15 agitating similar issue. We have heard both the parties through video conferencing. Relianc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 off the said interest income on bank deposits against the interest paid on term loans availed for setting up of power plant. The AO relied upon provisions of Section 5 of the 1961 Act and Hon ble Supreme Court decision in the case of Tuticorin Alkali Chemicals and Fertilizers Limited(supra) while rejecting the contentions of the assessee and bringing to tax interest income earned on bank deposits under the head Income from other sources under the provisions of Section 56 of the 1961 Act. The ld. CIT(A) while adjudicating appeal filed by assessee granted relief to the assessee by following decision of tribunal in assessee s own case for earlier years viz. ay: 2009-10 and 2010-11. The ld. CIT(A), thus, followed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 activity was not started in both the Assessment Years under consideration before us. In the present case, the interest was not earned on the surplus funds but were equity contribution by the joint venture of partners for acquisition, construction and setting up of a plant and other infrastructure facilities. The funds kept in the current account of the company were used for on-going construction activity as and when required. The CIT(A) relied upon the case of Bokaro Steel, but the same is not transferred by the bank in short term MODs Accounts in accordance with the account terms and conditions. The said MODs were reversed automatically as and when the assesses withdrew the amounts From account. There was no intention to earn any interest on such funds. The funds were kept in liquid so as to use them as and when required, since, the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 production? 8. The facts of this case are not in dispute. In the usual course, interests received by the company from bank deposits and loans would be taxable as income under the head 'Income from other sources' under section 56 of the Income-tax Act, 1961 ('the Act'). It is argued on behalf of the company that it had not yet commenced its business and in any event the income was derived from funds borrowed for setting up the factory of the company and should be adjusted against the interest payable on the borrowed funds. 9. In our judgment neither of the two factors can affect taxability of the income earned by the company. Under the Act, the total income of the company is chargeable to tax under section 4 of the Act. The total income has to be computed in accordance with the provisions of the Act. Section 14 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. This income has been linked pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something, which is often loosely spoken of as 'capital'. 14. In other words, if the capital of a company is fruitfully utilised instead of keeping it idle, the income, thus, generated will be of the revenue nature and not accretion of capital. Whether the company raised the capital by issue of shares or debentures or by borrowing will not make any difference to this principle. If borrowed capital is used for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-business source cannot be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plants and machineries even before commencement of business of the assessee. 18. It has been argued that the source from which the company has earned interest is borrowed capital. The company has to pay interest to its creditors on the same borrowed capital. Having regard to the identity of the fund on which interest is earned and interest is payable, the company should be allowed to set off its income against interest payable by it on the same fund. We are of the view that no adjustment can be allowed except in accordance with the provisions of the Act. However desirable it may be from the point of view of equity, this adjustment cannot be made unless the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 two other decisions where the view of the Andhra Pradesh High Court was followed. In the case of CIT v. Electrochem Orissa Ltd. [1995] 211 ITR 552, the Orissa High Court preferred the view expressed by the Andhra Pradesh High Court to the view expressed by the Madras High Court in Seshasayee Paper Boards Ltd's case ( supra ) on the ground that the Madras High Court case was based on a finding of fact that there was no direct connection between the interest paid and the interest received. In our view it will not be right to read the judgment in Seshasayee Paper Boards Ltd. 's case ( supra )in that way. The Court's finding in Seshasayee Paper Boards Ltd. 's case ( supra )was that the interest earned by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 its employees with the money received as interest, will the interest amount be treated as not his income? This is not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as he liked. The application of the income for payment of interest could not affect its taxability in any way. 27. The second reason given by the High Court was that the Institute of Chartered Accountants of India was a recognised authority on accounting principles. This fact has been recognised by this Court in the case of Challapalli Sugars Ltd v. CIT [1975] 98 ITR 167. Therefore, its view has to be respected. 28. It is true that this Court has very of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 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 raised to defray expenses of the construction of any work 6r building or the provision of any plant in contingencies mentioned in that section even though such money constitutes share capital. The same principle, in our opinion, should hold good if interest is paid on money not raised by way or share capital but taken on loan for the purpose of defraying the expenses of the construction of any work or building or the provision of any plant. The reason indeed would be stronger in case such interest is paid on money taken on loan for meeting the above expenses. (p. 175) This Court also relied on an English case in support of this conclusion in Hindsv. Buenos Ay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 well-settled that interest income is always of a revenue nature unless it is received by way of damages or compensation. 33. In the premises, we are of the view that the Madras High Court came to a correct decision in the case of Seshasayee Paper Boards Ltd ( supra ) . The contrary views expressed in the cases of Nagarjuna SteebLtd ( supra ) , Electrochem Orissa Ltd (supra) and Maharashtra Electrosmelt Ltd s case ( supra ) are erroneous. 34. We are of the view that the Tribunal has co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat there was a further infusion of capital of ₹ 600 crores in equal proportion by both the promoters namely NTPC Ltd. and UP RUVN Ltd., and the assessee has earned interest income of ₹ 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 interest income was received or short term deposits were created at the behest of the bank which were automatically credited by bank when the assessee required the funds for the project execution, and the ld. CIT(A) has merely followed the appellate order passed by the tribunal for earlier ay s: 2009-10 and 2010-11 . The power of ld. CIT(A) are co-terminus with the power of the Assessing Officer, and the ld. CIT(A) is duty bound to make enquiries to give finding that facts as are prevalent in the current year are similar/para materia to the facts of the earlier year and hence the appellate order passed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on made by ld. Assessing Officer to the tune of ₹ 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 ₹ 1,91,40,000/-, being forfeiture of earnest money and other miscellaneous recoveries from contractors cannot be treated as Income from Other Sources, since the said receipts are inextricably linked with plant set up activities and hence is in the nature of Capital Receipt and are being set off against Expenditure during construction period. This activity was rather a part and parcel of the constructional activities of the assessee. The source is not independent of, but is rather closely connected and interlinked to the process of setting up of the factory. Reliance is placed on the decision of the Hon'ble ITAT in the case of ITO vs. Prayagraj Power Generation Company Ltd (ITA N0.618 619/I.KW/2013) wherein under similar circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 facility not been provided by the assessee, the contractors would have had to make their own arrange- ments and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee has provided these facili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under section 56 of the Act. This Court also emphasised the fact that the company was not bound to utilise the interest so earned to adjust it against the interest paid on borrowed capital. The company was free to use this income in any manner it liked. However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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