TaxTMI 
TaxTMI 
2019 (1) TMI 346
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....ubsidiary company of Adani Power Ltd. (APL) which owns majority of the issued share capital in it. The assessee company is engaged in power sector and has undertaken a project of construction of power plant to generate electricity. The power plant was stated to be in the process of being set up during the year. The assessee company thus has not begun any commercial activities whatsoever during the year. The expenses incurred for the purpose of setting up of project were shown in the balance sheet as 'project development expenditure' and 'capital work in progress'. The expenditure incurred were capitalized and income generated were reduced from the cost of project. The return was thus filed by the assessee declaring the total income of Rs. Nil. The return so filed for AY 2010-11 was subjected to scrutiny assessment. On scrutiny of the 'project development expenditure' and 'capital work in progress', the AO inter alia noticed that the assessee has made adjustment of interest income of Rs. 7,19,89,318/- against financial charges (project development expenditure) of Rs. 98,44,60,069/-. The interest income of Rs. 7,19,89,318/- comprised of interest income of the current year of Rs. 6,77....
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.....44 Crore. The CIT(A) however did not agree with the plea of the assessee towards reduction of interest income derived from fixed deposits amounting to Rs. 47,04,267/- from the project development expenditure aggregating to Rs. 140.31 Crore (including interest costs Rs. 98.44 Crores) on the ground that assessee failed to demonstrate that interest earned is inextricably linked with the setting up of power plant. 7. It will be apt to reproduce the relevant paras dealing with the controversy: "2.3 Interest income on fixed deposits kept from surplus funds pending utilization - Rs. 47,04,267/-: 2.3.1 During the year under consideration the appellant company has also earned interest income on fixed deposits with AXIS Bank and State Bank of India of Rs. 47,04,267. Break up of the interest income earned is as under: Particulars Amount (in Rs.) Interest income on FDs placed with Axis bank 25,11,666 Interest income on FDs placed with State bank of India 21,92,601 Total 47,04,267 The A.O. has characterized the interest income on Fixed Deposits placed with the above banks as revenue receipt and therefore he has not allowed setting off of the interest income again....
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....ke to submit that the intention of the appellant is required to be seen for deducing whether the interest on funds parked into FD is inextricably linked with the business of the appellant. It is pertinent to note that after maturity of the FDs, the proceeds thereof were invested in the business of the appellant. In this regards, the appellant would like to provide the utilization of funds on maturity of certain FDs exemplifying that the funds on maturity of all FDs generating an aggregate interest income of Rs. 47,04,2677- has been ultimately used for the purpose of business. a) Axis bank FD, Maturity Date: 22.08.2009, interest amount: Rs. 4,35,876/-, Doc No. 8100001894 Date Doc No. Purpose Amount (in lacs of Rs.) 22.08.2009 8100001791 Security Deposit for project registration customs 30.00 25.08.2009 8100001819 Axis Bank - Trf to SB/ Ahmedabad 85.00 22.08.2009 8100001789 Emd Refund to Shree Laxmi C & F P ltd on 22.8.2009 5.00 24.08.2009 1500000420 Emd Refund to Agarwal Carriers Corp on 24.8.2009 5.00 24.08.2009 1500000422 Prof Feees of Circulation of Draft 4.43 28.08.2009 1500000439 EMD Refund To BLR Logistics on 28/8/2009 5.00....
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...., not liable to tax - Held, yes [In favour of assessee]" As discussed at length in the preceding paragraphs, the interest income earned of Rs. 47,04,267/- is a capital receipt and addition made for the same under the head "income from other sources" deserves to be obliterated. 3. Interest income on deposit with Adani Welspun Exploration ltd.- Rs. 4,57,53,424/- 3.1 During the year under consideration, the appellant Company received an amount of Rs. 100 Crores from its shareholder APL for the purpose of construction of the Power Plant at Tiroda project. The said funds were received by the appellant Company on 15-10-2009. On the very same day, these funds were advanced by the appellant Company to AWEL for a brief period of 5-6 months. These funds were to be utilized for the purposes of construction of the Power Plant. However, for a temporary period of time, awaiting the payment to be made for construction and setting up of the Power Plant, viz. to the contractors, machinery suppliers, and to the Companies for securing coal linkage/coal supply for smoothening the work of the Power Plant. Therefore, awaiting the utilization for the aforesaid purposes, the appellant Company had ....
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.... development expenditure and capital work-inprogress; during the year appellant had earned interest income of Rs. 6,77,37,328/-; out of the said amount Rs. 47,04,267/- was interest income on the fixed deposit with Maharashtra State Electricity Distribution Co. Ltd.; the said income cannot be linked to setting up of Project; it is taxable u/s 56; appellant had received Rs. 4,57;53,424/- by way of interest from M/s Adani Welspun. Exploration Ltd. on the temporary advance of Rs. 100 crores given to it; said income is also assessable as income from 'Other Sources' and therefore these two sums were being added as income from 'Other Sources'. 4.4 The contentions of the appellant are that the interest income of Rs. 47,04,267/- was earned on the F.Ds. with Axis Bank and SBI; A.O. had incorrectly stated that the interest was earned on the deposit with Maharashtra State Electricity Distribution Co. Ltd; the deposits with the Bank were made out of the share capital of the appellant Co. and borrowed funds awaiting utilization for construction of power plant and therefore, the interest earned was a capital receipt. As regards the interest of Rs. 4,57,53,424/-, it was contende....
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....pra) the Supreme Court held as follows: "if the company, even before it commences business, invests the 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 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 a/so, as in that case, keep the surplus funds in short term deposits in order to earn interest Such interest will be chargeable under sect/on 56 of the Income-tax Act". The Supreme Court, subsequently, in Bokaro Steel Ltd. (supra) held that: "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 assessee, the same cannot be said In the present case where the utilization of various assets of the company and the payments received for such . utilization are directly linked with the activity of setting up of the capital structure ....
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....e Tribunal and the lower authorities fell into error in holding that the interest earned on fixed deposit of amounts borrowed, which is the subject matter of the present appeal, would have to be treated as revenue receipt. The answer is given in favor of the assessee; the appeal is consequently allowed." In view of the above mentioned Delhi High Court decision the interest earned on surplus funds temporarily advanced, but ultimately used for construction of the power project is to be held a capital receipt not liable to tax [but will go to reduce the cost of the project]. The contentions of the Ld. A.R are that the advance given to AWEL on 10-05-2009 was returned back on 30-04-2010 and on 1205-2010 and the funds were utilized in connection with the setting up of power plant. A.O is directed to verify these contentions, If they are found to be correct, addition of the interest shall be deleted." 8. The CIT(A) accordingly accepted the grievance of the assessee affirmatively in part in terms of preceding paras. 9. Aggrieved by the order of the CIT(A), both Revenue and assessee are in appeal before the Tribunal. While the Revenue has challenged the action of the CIT(A) in accepti....
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....nger res integra. 12. We have carefully considered the rival submissions. The essential controversy involved in the instant case is; whether interest income derived from certain deposits placed with group concerns and banks [while the power project construction is under progress and in the process of being set up and has not commenced generating electricity] can be set off against the ongoing power project costs incurred of capital nature and consequently; whether such interest income would go to reduce the project costs prior to its commencement or not. 13. It is the case of the assessee that while the AO committed error in characterizing interest income of Rs. 4,57,53,424/- earned on advances given to AWEL and interest earned Rs. 47,04,267/- on fixed deposits pending utilization as independent receipt of revenue nature liable to be taxed as 'income from other sources' under s.56 of the Act, the CIT(A) was partly right to the extent of holding that the interest income earned amounting to Rs. 4,57,53,424/- bears the character of capital nature and would consequently go to reduce the power project costs being set up. The assessee however has simultaneously faulted the CIT(A) in no....
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....in its hands. In order to earn income out of the surplus funds, it had invested the amount for the purpose of earning interest. The interest thus earned was clearly of revenue nature and would have to be taxed accordingly. The accountants might have taken some other view but accountancy practice was not necessarily good law. This was not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as it liked. The application of the income for payment of interest would not affect its taxability in any way. The company could not claim any relief under section70 or section 71 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 years. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business could not be allowed as deduction, nor could it be adjusted against any other income under any other head. Similarly any income from a non-business source could not be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before....
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....he deposit of money in the present case was directly linked with the purchase of plant and machinery. Hence, any income earned on such deposit was incidental to the acquisition of assets for the setting up of the plant and machinery. The interest was a capital receipt, which would go to reduce the cost of asset. " 21. In the case of Karnataka Power Corporation (supra), their Lordships of Hon'ble Apex Court, following the decision of Bokaro Steel Ltd. (supra), held as under:- 21. In the case of Karnataka Power Corporation (supra), their Lordships of Hon'ble Apex Court , following the decision of Bokaro Steel Ltd. (supra), held as under:- "...also, (i) that the Tribunal was right in law in upholding the order of the Commissioner (Appeals) who deleted the addition of Rs. 1,30,44,518/- being interest receipts and here charges from contractors by holding that the same were in the nature of capital receipts which would go to reduce capital cost." 22. In the case of Bongaigaon Refinery & Petrochemicals Ltd. (supra), the Hon'ble Apex Court, after considering the decision of Bokaro Steel Ltd. (supra), held as under:- " reversing the decision of the High Court in relat....
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.... income to be classified as income under the head "Profits and gains of business or profession" it would have to be an activity which is in some manner or form connected with business. The word "business" is of wide import which would also include all such activities which coalesce into setting up of the business. See Mazagaon Dock Ltd. vs. CIT/CEPT (1958) 34 ITR 368 (SC) and Narain Swadeshi Weaving Mills vs. CEPT (1954) 26 ITR 765 (SC). Once it is held that the assessee's income is an income connected with business, which would be so in the present case, in view of the finding of fact by the CIT(A) that the monies which were inducted into the joint venture company by the joint venture partners were primarily infused to purchase land and to develop infrastructure then it cannot be held that the income derived by parking the funds temporarily with Tokyo Mitsubishi Bank, will result in the character of the funds being changed, in as much as the interest earned from the bank would have a hue different than that of business and be brought to tax under the head 'Income from other sources'. It is well-settled that an income received by the assessee can be taxed under the head....
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....rt, their Lordships of the Delhi High Court arrived at the conclusion "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 the 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 the pre-operative expenses." That, the ratio of the above finding of the Hon'ble Delhi High Court would be squarely applicable to the facts of the assessee's case, because admittedly in the case under appeal before us the share capital as well as loans were raised for the specific purpose of setting up of the power generation plants. The business of the assessee has not been commenced and therefore, as per above decision, the interest received in the period prior to commencement of business was in the nature of capital receipt and hence was required to be set off against the pre-operative e....