TaxTMI 
TaxTMI 
2019 (1) TMI 1132
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.... the Act being interest received from SBI without appreciating the fact that the same has earned before commencement of the business." 4. Briefly stated, the assessee company is subsidiary 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 2011-12 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. 3,68,56,918/- ag....
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....ssee towards reduction of interest income derived from deposits with IDBI Bank amounting to Rs. 2,23,06,911/- from the project development expenditure aggregating to Rs. 145.55 Crores (including interest costs Rs. 84.26 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: "9.1 As discussed above, the appellant-company has earned interest income from the following two sources:- Sr. No. Particulars Amount (in Rs.) 1. IDBI Bank Ltd. 2,23,06,911 2. State Bank of India 1,45,50,007 Total 3,68,56,918 "9.2 INTEREST INCOME FROM IDBI BANK LTD. - Rs. 2,23,06,911/-: The appellant-company had placed a fixed deposit of Rs. 36 crores with the bank for the purpose of availing credit facilities of Rs. 360 crores. Copy of the Term Sheet between IDBI Bank Ltd. and the appellant-company is attached herewith as per Anmexure-1. On perusal of the above Term Sheet, it may be seen that the appellantcompany had obtained bank guarantee which was utilized for the purpose o....
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....to place 10% of the bank guarantee availed by it. Relevant portion of the Term Sheet dated 20th August, 2010 is reproduced below for ready reference: A Facility Bank Guarantee B Amount Rs.150cr. C Security Same as Term Loan facility D Margin 10% E Tenor As per the Bank's norm. F Type For the project related works G Charges As prescribed by the Bank from time to time Copy of the above agreement between State Bank of India and the appellant-company was already submitted to the Assessing Officer vide letter dated 17.2.2014. The Assessing Officer nowhere in the body of the assessment order denied the fact that the above banking facility availed in lieu of margin money were not inextricably linked to the setting up of the power plant. In fact, the only contention of the Assessing Officer is that the interest income earned during the pre-commencement stage not being exempt u/s.10 would be taxable. In doing so, the Assessing Officer has grossly erred, on the facts as well as in law. In support of the contention of the appellant-company that the income which is inextricably linked to the setting up of the ....
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....ractors 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. 6. In the case of Addl. CIT v. Indian Drugs & Pharmaceutical^ Ltd. [1983] 141 ITR 134, the Delhi High Court considered a case where the work of construction of the factory of the assessee was in progress and production had not commenced. Receipts from the sale of tender forms and supply of water and electricity to the contractors engaged in construction as also receipts on account of sale of stones, boulders, grass and trees were held to be receipts not from independent sources but were considered as inextricably l....
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.... of the assessee-company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction. In the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, this Court examined the question whether interest paid before the commencement of production by a company on amounts borrowed for the acquisition and installation of plant and machinery would form apart of the actual cost of the asset to the assessee within the meaning of that expression in section 10(5) of the Indian Income-tax Act, 1922 and whether the assessee will be entitled to depreciation allowances and development rebate with reference to such interest also. The Court held that the accepted accountancy rule for determining cost affixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee rece....
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....cidental 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 & Fertilizers Ltd. v. CIT [1997] 227ITR 172, will not be attracted. The more appropriate decision in the factual situation in the present case is in CIT(A) v. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC). The appeal is dismissed. There will be no order as to costs. " In this case the assessee had earned interest on deposits placed to avail a credit facility for purchase of machinery for setting up a plant. The Hon 'ble Apex Court held that the deposit of money was directly linked with the purchase of plant and machinery and therefore the income earned on such deposit was incidental to the acquisition of the asset. As narrated above, the appellant-company has placed the above margin money with the bank in order to avail credit facilities for giving performance bank guarantee to the State Electricity Utility Company and to avail other credit facilities for developing and construction of power plant. Therefore, the appellant has proved beyond any doubt the inextricable nexus between deposit/margin mone....
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....ntee. It had an inextricable nexus with securing the contract. Therefore, we are disposed to think that the factual matrix is covered by the decisions rendered in Bokaro Steel Ltd. (supra), Karnal Cooperative Sugar Mills Ltd. (supra) and Koshika-Telecom Ltd. (supra) and, accordingly, we hold that the view expressed by the Tribunal cannot be found fault with. 22. Resultantly, we do not find any substantial question of law being involved in the present appeal and, accordingly, the same stands dismissed without any order as to costs. " From the above, it is seen that performance bank guarantee has been given by Jay pee DSC Ventures Ltd., for faithful performance obligation to NHAI. In order to give such performance bank guarantee the assessee had placed a fixed deposit as margin money. The bank guarantee was furnished on a condition precedent to enter a contract and therefore the Hon'ble Delhi High Court held that the interest earned on the fixed deposit used for furnishing bank guarantee as having inextricable nexus in securing the contract and hence interest was held as capital receipt not liable to tax as income from other source. The facts of the case in rega....
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....e instant case, the funds invested by the assessee company and the interest earned were inextricably linked with the setting up of the power plant. It may further be added that the Tribunal has not found that the deposits made as margin monies were not limited to the activity of construction connected with the expansion of the business by way of setting up of a totally new power generation plant [Para 10] * The Tribunal and the lower authorities committed 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. [Para 11] On perusal of the above case law, your good self may appreciate that the only requirement to justify whether the receipt is a capital receipt or otherwise is to test whether the receipt is inextricably linked with setting up of power plant or not. The appellant company has brought on record all relevant facts to prove the direct nexus between the Fixed deposit (on which interest income is earned) with setting up of power plant. Therefore on application of the above case law interest income may be characterized as a capital receipt....
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.... from other sources consists of three components. My finding issue-wise are as under: (i) Bid-Bonds for the purpose of PPA [Power purchase agreement] (Rs.1,46,60,271): It is seen that identical issue came up for consideration in Appellant's I case in the immediately preceding Assessment Year 2008-09. Vide the Appellate Order dated 07-09-2011 in Appeal No. CIT(A)-VI/Addl.CIT./R-1/199/10-11 my predecessor has held as under: "3.3 I have considered the facts of the case; Assessment Order and Appellant's submission. It is not in dispute that Appellant's business is being set up and accordingly Appellant did not offer any business income. Appellant raised funds for setting up project, however, 'during the construction period of the project, surplus funds were invested on which interest and other income were received. In the Return of Income field Appellant offered interest income of Rs. 7,9151,306 and claimed that interest income of Rs. 1,3981,841 was earned from deposits which were given as lien against opening of LC, bid bonds and bank guarantees. This income was not offered for tax \on the ground that the same is inextricably linked with capi....
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....ase of Tuticorin Alkalies Chemicals and Fertilizers Ltd., had considered even interest on deposit 'with electricity board as taxable income, there is no basis for not offering the same as taxable in other sources head. None of the decision referred by the Appellant has overruled the landmark decision of Supreme Court in the case of Tuticorin Alkalies, Chemicals and Fertilizers Ltd. In view of this, unless the income is inextricably linked to the implementation of the project, the same cannot be reduced from the cost of the project and accordingly the income will be taxed. The decision ofHon'ble Supreme Court in the case of Bokaro Steel Ltd., and Karnal Co-operative Sugar Mills Ltd., do not support the Appellant's claim since in both the cases, interest income was directly coming from the implementation of the project. In the Appellant's case, the same is from investment in bond required as security for PPA and not for setting up the project. PPA is not for implementation of the project but the same is for sale of electricity after commencement of business. Therefore, Appellant does not get benefit from these decisions. The other decisions relied upon by the Appellan....
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.... nothing to do with the purchase of plant and machinery and, therefore, the interest was assessable as income from other sources and accordingly both the sums totaling to Rs. 8,61,706 were being assessed under the head income from other sources. 3.3 The contentions of the Learned AR are that the Appellant had offered interest income of Rs. 4,15,371 as income from other sources, since this interest was earned on the surplus funds invested in FDs; balance interest income of Rs, 41,97,298 was adjusted against financial charges and net interest expenditure was capitalized as project development expenditure; such balance interest earned on FD/security deposit was inextricably linked with the implementation of the power project; Assessing Officer taxed the interest income earned on FD with Axis Bank and security deposit with MSEDC as income from other sources; the margin money kept with Axis Bank was against the letter of credit as confirmed by the certificate issued by the bank; this deposit was directly linked to the acquisition of Plant & Machinery; Assessing Officer accepted part of the deposit pertaining to the same loan as linked with the business and did not accept part o....
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....the supplier. The Assessee had earned interest on the amount deposited and the Supreme Court held that since it was not an investment of money that was lying idle with the Assessee, the interest had to be adjusted against the cost of the machinery. 7. Insofar as the present case is concerned, the Assessee commenced its business in the subsequent Assessment Year and there is no dispute about the fact that the amount deposited by the Assessee was not idle money on which it was earning interest. 8. Under the circumstances, the interest earned to the tune of Rs. 5,25,385,87 is required to be credited against preoperative expenses incurred by the Assessee." In the instant case, appellant kept fixed deposit as margin money with SBI for obtaining Bank guarantee to avail term loan facility for the project related works. The margin money kept is 10 % of the Bank guarantee of Rs. 150 crores obtained from SBI. Keeping these facts and the above mentioned decisions I am of the view that the interest earned is required to be credited against pre operative expenses incurred by the appellant. Therefore assessing the interest income as income from other sources u/s ....
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....appellant further submits the following facts to establish the direct nexus between borrowed funds and fixed deposit placed for providing bank guarantees: 3.3.1 For fixed deposit placed for providing margin money for PPA: (i) On 11.01.2010, the appellant company received an unsecured loan amounting to Rs. 41 crores from Adani Power Ltd an such loan was used for making investments in FD required for providing margin money for PPA with Rajastham Rajya Vidyut Prasaran Nigam Ltd. (ii) The interest has been charged on such loan during the current assessment year. (iii) A bank statement showing transfer of funds (Rs.41 crore) from Axis Bank to IDBI bank has been attached herewith . It is submitted that aforesaid FD was kept from IDBI Bank account. 3.3.2 Fixed deposit with SBI used for providing bank during construction of power project: (i) The deposit made in SBI was also out of borrowed funds. (ii) Vide letter dated 11.02.2014, annexure-6 submitted during the course of assessment proceedings, it is clearly seen that the appellant has received money from Adani Power Ltd. Amounting to Rs. 10 crore-which was credited to IDBI Bank Ltd. And out of the sam....
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....sits out of unutilized funds in the form of equity share capital and Rs. 1,317 being other interest. Out of the balance amount, interest income of Rs. 48,68,282 was earned on the surplus own funds kept as deposits. In respect of these three amounts netting of interest is not permissible as there is no nexus between the interest income earned and the interest expenditure incurred. The Learned AR fairly conceded that no interest expenditure was incurred in connection with earning of these three sums of interest income. Assessing the said sums totaling to Rs. 66,32,613 as income from other sources is upheld. As regards the balance interest income of Rs. 1,92,87,348 offered to tax in the Return of Income, the contention of the Learned AR is that term loan taken was kept as short term deposit with the banks (pending finalization of purchase of Plant & Machinery) and the interest income was earned on the said deposit. It is contended that the nexus between the interest income earned and the interest expenditure incurred is clearly demonstrated. In support thereof he relied on the Ahmedabad Tribunal decision in the case of JCIT V/s Steelco Gujarat Limited (99 ITD 408), wherein it was held....
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....ney parked with SBI pending its utilization in set up the power plant cannot be claimed for adjustment and reduction from the project costs in the light of the decisions of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT (1997) 227 ITR 172 (SC). 11. The learned Senior Counsel for the assessee, on the other hand, professed that the issue stands squarely covered in favour of the assessee by the decision of the Hon'ble supreme Court in the case of CIT vs. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) and Karnataka Power Corporation 247 ITR 268 (SC). To buttress its claim on merits that accrued interest on earmarked funds would go to reduce the cost of the project and does not represent revenue nature and chargeable nature, the learned AR submitted that on the similar analogy, assessee has simultaneously capitalised interest and finance costs of Rs. 136.80 Crores and added the same to the capital costs incurred for development of power project of highly capital intensive nature involving long gestation period. The learned AR submitted that there is no reason to treat interest costs and interest income on different footings in the similarly ....
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.... of project, same principle requires to be acknowledged for treatment of interest income. Pending completion of power project, the interest income thus is also on the same pedestal (capital nature) similar to interest outgo. It is thus the case of the assessee that while the interest outgo has been added to the capital costs on power project in progress; interest income so earned on deposits placed with banks have been rightly reduced from the 'project development expenditure' incurred for set up of power plant in the same measure. We find that the identical issue came up for consideration of the co-ordinate bench in a group case in a similarly placed situation. 14. It will be apt to reproduce the relevant operative para of the decision in Adani Power Ltd. (supra) relied upon by the Assesee: "16. Next question relates to quantification of interest income available with the assessee for set off against pre-operative expenditure in power project implementation. We find that the ld.CIT(A) has not independently examined any issue in this order, rather followed order of his predecessor in the assessment year 2008-09. The ITAT did not approve the order of the ld.CIT(A) in the....
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....ng workers and staff employed by the contractor for the construction work of the assessee including certain amenities granted to the staff by the assessee, (ii) hire ITA No. 2755/Ahd/2011 Adani Power Ltd vs. ACIT AYs 2008-09charges for plant and machinery which was given to the contractors by the assessee for use in the construction work of the assessee, and (iii) interest from advances made to the contractors by the assessee for the purpose of facilitating the work of construction. The activities of the assessee in connection with all these three receipts were directly connected with or incidental to the work of construction of its plant undertaken by the assessee. 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 hitch as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts were arrangements which were intrinsically connected with the construction of its steel plant. The receipts had been adjusted against the charges paya....
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.... 255, 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 [1997] 227 ITR 172 and that of Bokaro Steel Ltd. [1999] 236 ITR 315. The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals [1997] 227 ITR 172 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 taxable under the head "Income from other sources'. On the other hand the ratio of the Supreme Court judgment in Bokaro Steel Ltd. [1999] 236 ITR 315 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 pre- operative expenses. 5.1 The test, therefore, to our mind is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of ....
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....e 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 [1997] 227 ITR 172 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 interest earned on surplus funds would have to be treated as 'income from other sources'. On the other hand in Bokaro Steel Ltd. [1999] 236 ITR 315 (SC) where the assessee had earned interest on advance paid to contractors during pre-commencement period was found to be 'inextricably linked' to the setting up of the plant of the assessee and hence was held to be a capital receipt which was permitted to be set off against preoperative expenses. (underlined ours to supply emphasis) 24. From the above, it is evident tha....
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.....CIT(A) has simply followed the order of the ld.CIT(A) in the assessment year 2008-09. Therefore, respectfully following the order of the ITAT in the assessment year 2008-09, we reject the ground of appeal taken by the Revenue and allow the grounds of appeal taken by the assessee." 15. Apart from the decision of co-ordinate bench adjudicating the issue in favour of the assessee, we also take notice of the process of reasoning applied by CIT(A) and approve his action affirmatively in so far as interest generated on deposits placed with SBI. The CIT(A) has rightly held that interest income to be of capital nature linked with the process of setting up of its power plant and such receipts would go to reduce the cost of the project which also includes huge interest costs as capitalized. For coming to such conclusion, the CIT(A) has taken cognizance of the decision of the Hon'ble Supreme Court in the case of Bokaro Steel Ltd. (supra), Karnataka corporation Sugar Mills Ltd. & Bongaigaon Refinery & Petro Chemicals Ltd. vs. CIT [2001] 251 ITR 329 which in turn distinguish the decision of the Hon'ble Supreme court in Tuticorin Alkali Chemicals Fertilizers Ltd. (supra). The CIT(A) has obse....
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.... in our view is eligible for set off against the corresponding interest costs and consequently, such income should be reduced out of interest costs which also form part of the capital expenditure. 18. This apart, we also observe that the CIT(A) itself has observed that fixed deposits with IDBI Bank were placed with an object to obtain when guarantee for the purpose of issuance of the Contract Performance Guarantee in respect of Request for Proposal (REP) floated by Rajasthan Rajya Vidyut Prasaran Nigam Ltd. for supply upto 1200 MW power by assessee, with specific validity period. The CIT(A) while admitting that power purchase agreement may require some security in the form of bank guarantee but inexplicably held that such act does not mean that investment is inextricably linked to the implementation of project. In our view, the conclusion drawn by the CIT(A) adversed to the assessee is outright bizarre; and totally unpalatable judicially. The CIT(A) has ignored the vital consideration that the fixed deposits have not been placed to park idle and surplus fund but borrowed money has been utilized by way of fixed deposit for obtaining the bank guarantee for the purpose of the proje....