AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2016 (9) TMI 957
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....g Officer and Ld. CIT(A)-II, Jaipur has also erred in not allowing deprecation on road and amortising the cost on the basis of concession period, which is against the provisions of Income Tax Act, 1961. 2. The facts relevant for the issue under consideration are that the appellant company was formed as a joint venture company between Government of Rajasthan and IL&FS Ltd. and is engaged in development establishment, strengthening, upgradation, repair, rehabilitation, improvement, operation, maintenance and implementation of road and other infrastructure projects and facilities. During the financial year 2008-09, the company had completed Four (4) mega roads project out of Seven (7) and the remaining Three (3) projects which were under progress at the begin ning of the year were also completed during the year. The details of which are as under: Project Name Status as on 31.03.2009 (i) Phalodi to Pachpadra (PR-1) 15-Jun-07 (ii) Pachpadra to Ramji Ki Gol (PR-2) 28-Dec-2007 (iii) Hanumangarh to Ratangarh (HK-1) 28-Feb-08 (iv) Ratangarh to Kishangarh (HK-2) 28-Feb-08 (v) Alwar to Sikandra (AS) 31-Aug-2008 (vi) Lalsot ....
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....s shown to have earned interest of Rs. 1,99,46,955/- from FDRs in Banks out of which Rs. 35,39,474/- is adjusted in WIP and Rs. 1,64,07,481/- towards borrowing cost capitalized. Further, in view of decision in the case of Tuticorin Alkali, total interest income earned from surplus fund should be declared separately as income from Other Sources instead of capitalizing it. Therefore FDRs. 1,99,46,955/- is added to the income of the assessee from Other sources." 2.3 On appeal, the Ld. CIT(Appeals) in para 4.4.1 to 4.4.4 at page 5 to 7 of his order observed that: (4.4.1) I have perused the facts of the case, the assessment order, submissions of the appellant and the case laws cited by the assessing Officer and the appellant. The appellant has relied upon the case of CIT vs. Bokaro Steels Ltd. 236 ITR 316 (SC) to emphasize the point that the interest income earned on Short term Fixed Deposit receipts was inextricably linked with the setting up of the project - in this case construction of the Road. It has been stated by the appellant that the Assessing Officer has wrongly applied the case law of Tuticorin Alkali Chemicals & Fertilizers Ltd. because in that case the ....
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....me of the assessee from other sources, the assessee has not filed any appeal for this finding which is given against it. In any case, this question is now concluded by a decision of this Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs. CIT (1997) 227 ITR 172. Hence we are not called upon to examine that issue." (4.4.3) Therefore, the case of Bokaro Steel Ltd. reiterates that ratio in the case of Tuticorin Alkali chemicals and Fertilizers ltd. In fact, the issue of interest income prior to the commencement of operation was not before the Hon'ble Sup0reme court in this case. The issue which has been adjudicated upon in this case is - whether(i) certain receipts upon the utilization of its assets viz. rent received from the contractor for the resident of workers employed by the contractor (ii) interest on advances given on hire to the contractor for the purposes of construction of the factory, could be separately taxed as income (whereas the assessee had reduced it receipts from the cost of construction. The Supreme Court held that these receipts were inextricably linked with the activity of setting up of the steel plant and therefore, were capital receipts which ....
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....unt, which is very clearly proved from Article 7 Para No. 7.1.2 of Common Loan Agreement signed between the Assessee and Consortium of banker dated 23.11.2005, which describes the process of disbursement and use of funds disbursed. 2.6 The ld AR further submitted that for the better control on the disbursed loan for this type of projects and operational convenience, the loan is disbursed on the basis of drawdown schedule and is kept in escrow account of the bank that account can be current account or it could be converted into any other account like short term deposit, etc. To our mind, the interest earned on keeping that money with the same bank and merely changing the nature of deposit cannot be constituted as utilization of funds other than the object for which it was sanctioned and disbursed and for all practical purposes more particularly as decided by number of judicial pronouncement that real income should be taxed and actual expenditure should be allowed stating all the interest earned out of disbursed amount is well within four walls of calculating the cost, which is to be capitalized. 2.7 The ld AR further submitted that as stated in Para 7.1.2 of the Loan Agreement....
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....ed upon the decisions of the Hon'ble Supreme Court and in addition, the assessee has relied upon the decisions of Hon'ble Delhi High Court. Therefore, it would be appropriate to first refer to these decisions and some of the other recent decisions of Hon'ble High Courts and Coordinate Bench decisions. 2.11 In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), the Hon'ble Supreme Court held as under:- "The facts of this case were not in dispute. In the usual course, interest received by the company from bank deposits and loans would be taxable as income under the head Income from other sources' under section 56. 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....
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....r 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 nothing to do with its accrual or taxability. It is also wellsettled that interest income is always of a revenue nature unless it is received by way of damages or compensation." 2.12 In the case of Bokaro Steel Ltd. (supra), the Hon'ble Supreme Court, after considering the decision of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), held as under:- "The activities of the assessee in connection with first three receipts were directly connected with or were incidental to the work of construction of it....
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....essee-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 the assessee's steel plant. The cost of the plant to the extent of such royalty received, was reduced for the assessee. It was, therefore, rightly taken as a capital receipt." 2.13 That the Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. (supra), after considering the decisions in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and Bokaro Steel Ltd. (supra) at length, held as under:- "5. In our opinion the Tribunal has misconstrued the ratio of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case (supra) and that of Bokaro Steel Ltd. (supra). The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case (supra ) is that if funds have been borrowed for setting up of a plant and if the funds are 'surplus' and then by virtue of that circumstance they are invested in fixed deposits the income earned in the form of interest will be ta....
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....rces'. It is well-settled that an income received by the assessee can be taxed under the head "income from other sources" only if it does not fall under any other head of income as provided in section 14 of the Act. The head "income from other sources" is a residuary head of income. See S.G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 (SC) and CIT v. Govinda Choudhury & Sons [1993] 203 ITR 881 (SC). 5.2 It is clear upon a perusal of the facts as found by the authorities below that the funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre-operative expenses. In the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. (supra) it was found by the authorities that the funds available with the assessee in that case were 'surplus' and, therefore, the Supreme Court held that the i....
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.... Power Ltd (supra) following the decision in case of Indian Oil Panipat Power Consortium Ltd. (supra), has held as under: "14. It is clear from the facts stated above that Commissioner of Income Tax (Appeals) and tribunal have specifically held that the interest income was on capital account. We have gone through the grounds of appeal and do not find any reason or justification to upset the said finding. The factual findings recorded by the CIT(Appeals) and tribunal are not under challenge. The CIT(Appeals) and the tribunal have held that in view of the factual position quoted above the decision of the Supreme Court in CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 / 102 Taxman 94 was applicable as the Commitment Advance, which had been paid to PFC. This is not a case of surplus funds, which were available and investment were made in fixed deposits to earn interest. The interest paid to the power procurement utilities on commitment advances was capitalized. Interest paid and interest received were inextricably linked and have a commonality about their nature and character. The appellant cannot treat them differently. Commitment Advances and interest paid and received had refe....
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....re of a capital receipt and not a revenue receipt. This case has been decided on the basis of this principle and not on the basis that the source of the funds was through raising of share capital and not through borrowings." 2.16 The Coordinate Bench in case of Adani Power Ltd. v. Assistant Commissioner of Income-tax, Range-1, Ahmedabad [2015] 61 taxmann.com 355 (Ahmedabad - Trib.) has held as under: "2.16 From the above, it is evident that the Hon'ble Delhi High Court has considered and interpreted the decisions of Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) as well as Bokaro Steel Ltd. (supra). The conclusion of the Delhi High Court is in fact the law which emerges as per the decision of Hon'ble Apex Court. Therefore, in our opinion, the CIT(A) was not justified in ignoring the decision of Hon'ble Delhi High Court by simply mentioning that the issue is covered by the decision of Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). After considering these two decisions of the Hon'ble Apex Court and also some other decisions of the Hon'ble Apex Court, their Lordsh....
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....e learned Tribunal, after examining all the three judgments, in Tuticorin's case (supra), Karnal Cooperative Sugar Mill's case (supra), and Bokaro Steel's case (supra), has examined the question, and found Karnal Cooperative's case (supra) to be the nearest, and latest case, on facts, in our view, it cannot be said, that the Tribunal was wholly wrong in adopting this course. It would have been equally the same situation, if the learned Tribunal would have adopted the other line of reasoning, following the judgment in Tuticorin's case (supra). 14. Therefore, when there are two sets of judgments of Hon'ble Supreme Court, proceeding on different lines of reasoning's, and both stand on their own logical footing, and in that event, if the learned Tribunal has accepted one line of reasoning, supported by one set of judgments, it cannot be said, that the learned Tribunal was legally not justified in following the decision, as followed by it, simply because it might have been possible, or might be more appropriate to follow the other set of judgment, by following the other line of reasoning." 2.18 From the above, it is evident that there are two sets of ....
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.... the purposes of implementation of the specified projects only. The impunged interest receipt of Rs. 35,39,479/- on such borrowed funds relates to the mega road projects/stretches which were under construction and the completed road projects/stretches upto the date of commencement of commercial operations. Therefore, the interest received prior to commencement of commercial operations of the specified mega road projects will be in the nature of capital receipt and will be required to be set off against the pre-operative expenditure capitalized under the head "Capital work in progress" and the same cannot be brought to tax under the head "income from other sources". Hence, ground no. 1 of the assessee is allowed. 3. In ground No.2, the assessee has challenged the action of the Ld.AO in double taxation of interest income of Rs. 1,64,07,481/-. 3.1 The ld AR submitted that the ld. CIT(A) upheld the order of the ld. AO regarding the taxation of interest capitalized as well as deducted from the interest expenditure debited into P&L account as income from Other Sources to the extent of Rs. 1,99,46,955/- in spite of giving clear cut finding in the para 4.1 of his order , which has....