TaxTMI 
TaxTMI 
TaxTMI 
2016 (3) TMI 49
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..... The Ld. CIT(A) erred in law and on facts in not considering the fact that interest earned on fixed deposits is ultimately an income and also failed to mention any provision of the Act under which such income is exempt. 5. The Ld. CIT(A) erred in law and on facts in holding that the interest on surplus amount is not taxable though the surplus amount is nowhere mentioned under the provisions of the Income Tax Act 1961." 2. The brief facts of the case are that the assessee company is a joint venture company formed by NTPC Ltd. and Tamilnadu Electricity Board with the authorized capital of Rs. 2000 crores for setting up power plant of 1500 Mega Watt of electricity at Vallur, in outskirts of Chennai, Tamilnadu incorporated on 23.05.2003. The construction work of said power project was started on 28.03.2007 which was expected to be completed in F.Y. 2011-12 (Phase-I). The assessee company filed return of income on 24.09.2010 declaring loss of Rs. 7,52,957/-. The issued and subscribed capital of the company stood at Rs. 850 crores as at 31.03.2010. The cost of project was to be invested with 30% own funds and 70% by raising debt fund from Rural Electrification Corporation of India,....
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.... reproduced below : 4.1 I have carefully considered the facts of the case, the findings of the AO as well as the submissions of the A/R of the appellant. Both the Grounds of appeal are directed against additions of Rs. 175,74,129/- comprising of the interest income received from the bank(s) amounting to Rs. 1,02,7407- and interest received from contractors advances amounting to Rs. 174,71,389. In the P&L Account the appellant has shown under the head other income, amount of Rs. 1,02,740/- as interest income earned on short term deposits parked with Banks and an amount of Rs. 174,71,389/- as interest earned on interest bearing advance given to contractors, total Rs. 1,75,74,129/- which was adjusted against Expenditure During Construction Account in Schedule - 15 and the net Expenditure During Construction was capitalized under the Capital Work in Progress in Schedule - 4 of the balance sheet. The AO in the assessment order observed that the assessee has not offered above incomes for tax. AO observed that the facts of case are similar to the case of Tuticorin Alkali Chemical & Fertilizers ltd. v. CIT (supra). Therefore, the AO treated the above receipt of Rs. 175.74 lakh as chargea....
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.... bank and cash balances was Rs. 4.74 crores only. Further, the debit balance of Profit and Loss Account as appearing in the Balance Sheet as on 31.03.2010 was Rs. 1.13 crores. From the above it is evident that investment in fixed assets is more than the funds available and fixed asset is partly funded by current liabilities. The liability towards sundry creditors (Rs.86.78 crores) are far more than the funds lying in bank (Rs.4.74 crores). Therefore, it is clear that advances were not given out of surplus funds available with the company. Simply because money is lying in bank meant for construction of the plant, it cannot be treated as the surplus money. The surplus money can arise only after meeting all the obligations relating to the construction of the power plant and if the money is found to be surplus after the completion of construction of the unit. In the instant case the work of construction of the power plant was under progress. Therefore, funds cannot be said to be at surplus. 4.5 Some of such funds which were lying unutilized were temporally parked by the appellant in bank to earn interest. The purpose of bank deposits yielding interest was evidently to maintain liqui....
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....the charges of the contractors for the construction work. Instead, the assessee has provided these facilities. The same is true of the hire charges for plant and machinery which was given by the assessee to the contractors for the assessee's construction work. The receipts in this connection also go to compensate the assessee for the wear and tear of the machinery. The advances which the assessee made to the contractors 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 from any independent source. 7. However, while interest earned by investing borrowed capital in shortterm deposits is an independent so....
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....tion in the books or otherwise, "for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use" would not qualify as deduction. However, in all these cases, when the interest was received by the assessee towards interest paid for fixed deposits when the borrowed funds could not be immediately put to use for the purpose for which they were taken, this Court, and indeed the Supreme Court held that if the receipt is "inextricably linked" to the setting up of the project, it would be capital receipt not liable to tax but ultimately be used to reduce the cost of the project, By the same logic, in this case too. the funds invested by the assessee company and the interest earned were inextricably linked with the setting up of the power plant." 4.8 Therefore, decisions of Hon'ble Supreme Court in the case of Bokaro Steel Ltd. (supra), Hon'ble Delhi High Court in Indian Oil Panipat Power Consortium Ltd. (supra) and NTPC Sail Power Company (P) Ltd. (supra) are squarely applicable in the instant case. Identical issue was raised in appeal for AY 2008- 09 which was decided by me in favour o....