TaxTMI 
TaxTMI 
2018 (10) TMI 1111
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....ake mining of coal from TARA Coal Block Mine in Sarguja district of Chhattisgarh. The entire share capital of the assessee company is jointly held in ratio of 51:49 by its promoters i.e. CMDCL and ICPL respectively. The return of income for the impugned assessment year was filed on 29.02.2012 declaring Nil income. During the course of assessment proceedings, the Assessing Officer observed that the assessee company earned income from interest on short term deposits on the funds temporarily parked in the Bank which are out of the funds received by way of share capital. On being questioned by the Assessing Officer, it was submitted that the share capital funds were temporarily parked to productively exploit the funds thereby effectively reduce the cost of project. It was explained that during the year under consideration, the assessee company was in the process of obtaining mining lease and mining rights for Tara Coal Block Project for which various administrative and statutory approvals/ clearances were under progress and the assessee had not started any business or commercial activities during this period. Since the assessee earned interest income from the short term investment made....
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.... specific project/purpose. This again requires ascertainment of the fact whether or not there was any specific project/purpose. 9. In the factual background of the instant case, it is pertinent to advert to the legal position emerging from the provisions of the Act and judicial pronouncements: Section 4 brings to charge tax on total income. Prima facie, in order to come within the scope of the charging provision, the receipt in question should bear the character of income. In the absence of any specific provision, like those pertaining to capital gains, a capital receipt shall be outside the scope of section 4. 10. While determining the nature of a receipt as being a trading receipt taxable as income from business or profession or otherwise, one should be guided by the terms of the agreement genuinely entered into between the parties. The Revenue authorities cannot ignore the genuine agreements. In the absence of any suggestion or allegation of collusion, fraud or camouflage, the Revenue cannot resort to any attempt to rewrite the agreement with a view to imposing the levy of tax especially when the transactions between the parties are at arms length. This has bee....
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.... Memorandum of Understanding itself, foundation was laid for the formation of the appellant company as well as IFFCO Chhattisgarh Power Limited (ICPL), in fact, it is also seen that vide this Memorandum of Understanding itself a decision was taken to form a company to be reckoned as "Power Company" to be named as IFFCO Chhattisgarh Power Limited (being a Joint Venture Company with 26% equity share holding of Chhattisgarh State Electricity Board and 74% equity share holding of Indian Farmers Fertilizers Cooperative Limited). It is seen that the power project was expected to commission in the F.Y. 2009-10. ii. It is also seen that vide the said Memorandum of Understanding itself, foundation was laid for formation of the appellant company and it was agreed between Government of Chhattisgarh, Chhattisgarh State Electricity Board and Indian Farmers Fertilizers Cooperative Limited that a company to be reckoned as "Coal Company" will be incorporated with 51% equity share holding of Chhattisgarh Mineral Development Corporation Limited and 49% equity share holding of the Power company namely IFFCO Chhattisgarh Power Limited. iii. Vide this Memorandum of Understanding itsel....
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....edings also, it is an undisputed fact that a Memorandum of Understanding (MOU) was executed on 4/6/2005 with an objective of setting up Power Project and as its extension, Coal Project through Tara Coal Block. 16. Cumulatively considering the underlying facts and history since 2003, in my considered view, the terms of Memorandum of Association cannot be viewed in isolation, particularly, when the case of the appellant, directly or indirectly, involves involvement of Ministry of Coal, Government of India and Government of Chhattisgarh regulating use of coal and stipulations have been laid down for supply of coal to the Power Project to IFFCO Chhattisgarh Power Limited and therefore, I am convinced that the appellant company was formed to undertake a specific project i.e. Tara Coal Block Project whereby the appellant company was to obtain mining lease and mining rights in its favour and thereafter supply coal from Tara Coal Block to the Power Project of IFFCO Chhattisgarh Power Limited in Surguja District. 17. It is also seen that the appellant company was constituted with initial equity contribution of Rs. 37.00 crores, out of which, Rs. 16.15 crores had already be....
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.... of the Company shall be interpreted, acted upon and governed by the provisions of this Agreement. 1.3.2 In so far as contractual relationship inter se between the Parties is concerned, : a) this Agreement shall prevail and have an overriding effect, notwithstanding anything contained in any other document or agreement(s) including the Memorandum of Association and the Articles of Association of the Company; b) the understanding reflected in this Agreement shall prevail in case of any ambiguity or inconsistency between this Agreement and any other document(s) or agreements or the Memorandum of Association and the Articles of Association of the Company; and, c) to the extent possible and permissible, any such ambiguity / inconsistency (referred to in b) above will be removed (and the Parties will so endeavour), by causing necessary modifications to be carried out to the Memorandum of Association or the Articles of Association or other relevant document/s) or agreements), as the case may be, to ensure that the same are in conformity with the provisions of this Agreement, to the extent permitted by the Act." 20. In my considered opinion, su....
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....ppellant was free to use the funds as per its will and that Memorandum of Association permits the appellant to pursue some other business/purpose, the A.O merely relied upon the generality of Memorandum of Association and disregarded the chronology of facts of the case as emerging from the various documentary evidences brought on record by the appellant. 22. Now, adverting to the submission of the appellant that there is a direct nexus even between the interest income and interest cost on compensation against land acquisition, considering the fact that the Gazette Notification u/s 4 of the Land Acquisition Act was published in the F.Y. 2009-10 itself, particularly, the provisions of Section 23 of Land Acquisition Act providing for payment of interest on compensation since the date of publication of the notification u/s 4, I am convinced that there is a direct nexus between the interest income on term deposits and interest cost on compensation. I do find considerable force in the submissions of the appellant that if the award u/s 23 of the Land Acquisition Act had been passed earlier as was envisaged in the MOU dated 04.06.2005, the appellant would have had to make payment ....
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....ters. [Para 7] The Tribunal placed undue emphasis on the source of the funds instead of focussing its attention to the utilisation of the fund - whether they were invested in activities which are inextricably linked with the construction of the project. In [act, the assessee in the present case had invested the funds under the scheme operated by the banks for an assured return. That had nothing to do with the project and there was no inextricably link between the investment and the project. The interest income could not, therefore, be permitted to be adjusted against the capital work-in-progress on pre-operative expenses. Both the Assessing Officer and the Commissioner (Appeals) were right in bringing the interest to tax under the head 'Income from other sources'. [Para 7]" 24. However, even the said decision is also not supporting the contention of the A.O in view of divergent facts inasmuch as, in the said case, the Hon'ble High Court took note of the fact that the investment of the funds has nothing to do and was not inextricably linked with the construction of the project, on the contrary, in the case of the appellant, funds are inextricably linked....
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....xplained that it is a common practice among the business undertaking to park the surplus funds temporarily available to them while setting up new business or while undertaking a diversification / substantial expansion in a manner so as to derive certain income therefrom, thereby effectively reducing the cost of construction and interest incurred before the commencement of business. In the present case, during the year under consideration, the assessee company was in the process of setting up of 1320 MW power plant in the same district of Chhattisgarh State of India for which land acquisition activities as per relevant state laws were under progress and the assessee has not started any business or commercial activity during this period. Since the assessee earned interest income from the investment made in the banks and other institutions from parking of funds which were awaiting its disbursement for land acquisition and other activities in view of above, respectfully following the judgment of Hon'ble Apex Court in the case of Bokaro Steel Limited (supra) and recent judgment of Hon'ble High Court of Delhi in the case of NTPC Sail Power Co. Ltd. (supra) and Indian Oil Painpat ....
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....d circumstances of the case, as also decisions cited above, the addition of Rs. 1,22,54,520/- on account of "Income From Other Sources" made by the A.O cannot be sustained. Hence, the addition is deleted." 6. Aggrieved with such order of the ld. CIT(A), the Revenue is in appeal before the Tribunal. 7. The ld. DR strongly supported the order of the Assessing Officer. Referring to the decision of the Delhi Bench of the Tribunal in the case of M/s IFFCO Chhattisgarh Power Ltd. (supra), the ld. DR submitted that in that case which has been relied on by the ld. CIT(A) the assessee company was in the process of setting up of 1320 MW power plant in the same district of Chhattisgarh State of India for which land acquisition activities as per relevant state laws were under progress and the assessee has not started any business or commercial activity during this period. However, in the instant case of the assessee, the project has not started in this year or even in the subsequent assessment year. Therefore, the entire addition should be charged as revenue receipt and the action of the assessee in reducing such income from the preoperative expenses is not justified. The interest income....
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.... various decisions cited before us. We find the Assessing Officer relying, on the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkalies Chemicals Fertilizers Ltd. (supra) and various other decisions taxed the interest income of Rs. 1,22,54,520/- earned by the assessee from fixed deposits kept in various banks during the year under consideration as revenue receipt liable to tax during the current year. We find, in appeal, the ld. CIT(A), following the decision of the Hon'ble Supreme Court in the case of Bokaro Steel Ltd. (supra) and the decision of the Delhi Bench of the Tribunal in the case of IFFCO Chhattisgarh Power Ltd. (supra) and various other decisions held the income as capital in nature and has to be reduced from its pre-operative expenses as the commercial operations have not commenced. He accordingly deleted the addition. We find no infirmity in the order of the ld. CIT(A) on this issue. From the various details furnished by the assessee, we find that an MOU dated 04.06.2005 was entered into between Government of Chhattisgarh, CMDC and IFFCO Chhattisgarh Power Ltd. for implementing a power project on joint venture, copies of which are placed at p....
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....ision of the Hon'ble Supreme Court in the case of Tuticorin Alkalies Chemicals Fertilizers Ltd. (supra) and Bokaro Steel Ltd. (supra) and various other decisions. We find the Hon'ble Supreme Court in the case of CIT vs. Karnal Co-operative Sugal Mills Ltd. reported in 243 ITR 2 following the decision in the case of Bokaro Steel Ltd. (supra) has observed as under :- "In the present case, the assessee had deposited money to open a letter of credit for the purchase of the machinery required for setting up its plant in terms of the assessee's agreement with the supplier. It was on the money so deposited that some interest has been earned. This is, therefore, not a case where any surplus share capital money which is lying idle has been deposited in the bank for the purpose of earning interest. The deposit of money in the present case is directly linked with the purchase of plant and machinery. Hence, any income earned on such deposit is inci dental to the acquisition of assets for the setting up of the plant and machinery. In this view of the matter the ratio laid down by this court in Tuticorin Alkali Chemicals and Fertilizers Limited v. CIT [1997] 227 ITR 172, will no....
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....ter 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, such rent will be assessable to tax under section 22 as income from house property. Likewise, a 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 Income tax 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 asses see, the same cannot be said in the present case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricab....
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....s case (supra) to our mind is that if income is earned, whether by way of interest or in any other manner on funds which are otherwise 'inextricably linked' to the setting up of the plant, such income is required to be capitalized to be set off against preoperative expenses." 11. In another recent judgment of Hon'ble High Court of Delhi in the case of NTPC Sail power Company Pvt. Ltd. vs C.I.T.(supra), the controversy is now settled with the following observations:- "9. This Court, in Indian Oil Panipat Power Consortium Ltd Vs. ITO (2009) 315 ITR 255 (Del.) held that where interest on money received as share capital is temporarily placed in fixed deposit awaiting acquisition of land, a claim that such interest is a capital receipt entitled to be set off against pre-operative expenses, is admissible, as the funds received by the assessee company by the joint venture partners are "inextricably linked" with the setting up of the plant and such interest earned cannot be treated as income from other sources. The reasoning in Indian Oil is in line with Bokaro Steel Ltd. Similarly, the Supreme Court in CIT vs. Karnataka Power Corporation, 247 l.T.R. 268 (SC) and Bongaiga....
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.... diversification/substantial expansion in a manner so as to derive certain income therefrom, thereby effectively reducing the cost of construction and interest incurred before the commencement of business. In the present case, during the year under consideration, the assessee company was in the process of setting up of 1320 MW power plant in the same district of Chhatisgarh State of India for which land acquisition activities as per relevant state laws were under progress and the assessee has not started any business or commercial activity during this period. Since the assessee earned interest income from the investment made in the banks and other institutions from parking of funds which were awaiting its disbursement for land acquisition and other activities, in view of above, respectfully following the judgment of Hon'ble Apex Corut in the case of Bokaro Steel Ltd. (supra) and recent judgment of Hon'ble High Corut of Delhi in the case of NTPC Sail Power Co. Ltd. (supra) and Indian Oil Panipat Power Consortium Limited (supra), we hold that the income earned by the assessee from interest is not taxable in the hands of assessee as income from other sources and the same was inextrica....