2024 (2) TMI 783 - AT - Income Tax

Interest income on margin money for guarantees eligible for adjustment against capital work-in-progress when linked to plant setup

ITAT Mumbai dismissed revenue's appeal and partially allowed assessee's appeal. The tribunal held that interest income on margin money kept with banks for ... Interest on deposits inextricably linked to construction reduces capital work in progress - characterisation of compensation as capital receipt eligible for adjustment against CWIP - disallowance under 37(1) for alleged overvaluation of capital goods - consequential disallowance of interest on borrowed funds where principal disallowance deleted - no addition in unabated assessments without incriminating material found during search (Abhisar Buildwell principle)Interest on deposits inextricably linked to construction reduces capital work in progress - income from other sources - Treatment of interest of Rs. 1,00,77,381/- earned on margin money kept as lien for guarantees/LCs - taxable as 'income from other sources' or deductible against CWIP - HELD THAT: - The Tribunal applied the ratio of the Supreme Court in CIT v. Bokaro Steel Ltd. and Karnal Co op. Sugar Mills Ltd. and found the interest was earned on margin money kept with banks under lien for guarantees and letters of credit linked to the setting up of the plant. Such receipts are inextricably connected with construction and therefore reduce the cost of the asset and may be adjusted against capital work in progress. The Assessing Officer's view to tax the amount under 'income from other sources' was therefore overturned. Separately, the assessee's contention that no incriminating material was found was considered in light of the Supreme Court's decision in Abhisar Buildwell; the Tribunal held that, as no incriminating material was referenced by the AO, additions could not have been made in unabated assessments and allowed the assessee's additional ground accordingly.Interest treated as reduction of CWIP; deletion of addition upheld and, on legality, addition could not be sustained in absence of incriminating material.Disallowance under 37(1) for alleged overvaluation of capital goods - use of DRI show cause as basis for additions - Disallowance of Rs. 1,29,32,54,291/- on account of alleged overvaluation of imported capital goods and reduction of CWIP - HELD THAT: - The Tribunal examined the AO's reliance on DRI show cause and seized material and the assessee's fixed lumpsum EPC contract with EPIL. It noted that the adjudicating authority under customs had cancelled the DRI show cause and that the assessee had contracted on a fixed lumpsum basis, insulating it from suppliers' invoicing. Given cancellation of the foundational DRI proceedings and that the assessee paid EPIL under a fixed contract, the Tribunal held the AO's disallowance unsustainable and upheld the deletion by the CIT(A).Addition disallowed; reduction of CWIP on account of alleged overvaluation deleted.Consequential disallowance of interest on borrowed funds where principal disallowance deleted - Disallowance of interest charged on funds allegedly utilised for overvalued imported capital goods and consequential deletions - HELD THAT: - The AO had computed interest on the portion alleged to be overvalued and disallowed it. Having deleted the principal disallowance in respect of overvaluation of imported capital goods, the Tribunal found no infirmity in the CIT(A)'s deletion of the corresponding interest disallowance and directed its deletion as consequential relief.Interest disallowance deleted consequentially.Disallowance under 37(1) for excess expenditure under onshore supply contract - lump sum EPC contract and allocation among subcontracts - Disallowance of Rs. 70,77,37,045/- alleged as excess expenses under the onshore supply component despite an overall lumpsum EPC contract - HELD THAT: - The Tribunal found the AO did not treat the excess payment as non genuine and that the assessee had incurred the expenditure for business purposes. The assessee had a fixed lumpsum EPC contract and overall expenditure remained below the lumpsum contract amount. The Tribunal held that mere excess over the sub contract allocation does not permit the revenue to disallow amounts genuinely incurred; the Assessing Officer cannot substitute its commercial judgment. Accordingly, the Tribunal set aside the CIT(A)'s sustainment of the disallowance and directed deletion.Addition in respect of excess onshore supply expenses deleted.Consequential disallowance of interest on funds borrowed for onshore excess payment - Disallowance of interest computed on funds borrowed for alleged excess onshore supply payment - HELD THAT: - As the principal addition in respect of excess onshore supply payment was deleted, the Tribunal directed deletion of the consequential interest disallowance as well.Interest disallowance deleted consequentially.Characterisation of compensation as capital receipt eligible for adjustment against CWIP - treatment of compensation arising from failure to supply raw material for commissioning - Nature of Rs. 240 crores received from Essar Oil Ltd. - revenue or capital - HELD THAT: - The Tribunal analysed the facts that the compensation was for failure to supply methane gas required for pre commissioning/commissioning (a capital activity) and that commissioning was delayed, increasing project cost. The CIT(A)'s characterisation of the receipt as capital and its reduction from CWIP was upheld: the compensation related to the capital nature of the project and was appropriately adjusted against CWIP (with consequent adjustment of depreciation to avoid double benefit).Compensation held to be capital receipt and deleted from income, to be adjusted against CWIP.Final Conclusion: The Tribunal, following settled precedents and the factual record, dismissed the Revenue appeals and allowed the assessee's appeals/cross objections for AY 2013 14 to 2019 2020 as follows: interest on margin money was held to reduce CWIP (and additions could not be sustained in unabated assessments absent incriminating material), the alleged overvaluation of imported capital goods and corresponding interest were deleted (DRI show cause having been cancelled and assessee being under a fixed lumpsum contract), excess onshore supply expenditure and its interest were deleted, and the compensation from Essar Oil Ltd. was held to be capital in nature and adjusted against CWIP. Issues Involved:1. Taxation of interest earned on 'margin money' with banks.2. Disallowance of over-valued part of cost of imported capital goods.3. Disallowance of interest on capital borrowed for overvalued part of imported capital goods.4. Treatment of compensation received from M/s Essar Oil Ltd.5. Disallowance of depreciation claimed on overvalued part of work-in-progress post capitalization.6. Validity of additions without incriminating material found during the search.Summary:1. Taxation of Interest Earned on 'Margin Money':The Assessing Officer (AO) treated the interest income of Rs. 1,00,77,381/- earned on margin money kept with banks as taxable under 'income from other sources'. The Ld. CIT(A) allowed the assessee's appeal by citing the Supreme Court's decision in CIT v. Bokaro Steel Ltd., stating that interest earned on deposits linked to the setting up of the plant should reduce the cost of assets. The Tribunal upheld this view, noting the interest was inextricably linked to the project setup and thus deductible against capital work-in-progress. Additionally, the Tribunal accepted the assessee's legal ground that no addition could be made in non-abated assessments without incriminating material found during the search.2. Disallowance of Over-Valued Part of Cost of Imported Capital Goods:The AO disallowed Rs. 1,29,32,54,291/- for overvaluation of imported capital goods based on a Directorate of Revenue Intelligence (DRI) show cause notice. The Ld. CIT(A) deleted the disallowance, noting the assessee had a fixed price contract with EPIL, insulating it from price fluctuations. The Tribunal upheld this decision, emphasizing the assessee's contractual obligations and the cancellation of the DRI's show cause notice.3. Disallowance of Interest on Capital Borrowed for Overvalued Part of Imported Capital Goods:The AO disallowed interest of Rs. 87,89,98,214/- calculated at 12% on funds borrowed for the overvalued imported capital goods. The Ld. CIT(A) deleted the disallowance, and the Tribunal upheld this, given the deletion of the corresponding overvaluation addition.4. Treatment of Compensation Received from M/s Essar Oil Ltd.:The AO treated the Rs. 240 crores compensation from Essar Oil Ltd. as business income. The Ld. CIT(A) held it as a capital receipt, reducing the capital work-in-progress. The Tribunal upheld this, noting the compensation was for delayed commissioning due to non-supply of gas, thus linked to capital costs.5. Disallowance of Depreciation Claimed on Overvalued Part of Work-in-Progress Post Capitalization:The Tribunal noted that this issue was consequential to the overvaluation addition, which was deleted. Thus, the disallowance of depreciation was also dismissed.6. Validity of Additions Without Incriminating Material Found During the Search:The Tribunal reiterated that no additions in non-abated assessments could be made without incriminating material found during the search, aligning with the Supreme Court's decision in PCIT vs Abhisar Buildwell P. Ltd.Conclusion:The appeals of the Revenue for assessment years 2013-14 to 2019-2020 were dismissed, while the appeals and cross-objections of the assessee were allowed.