TaxTMI 
TaxTMI 
2019 (3) TMI 1457
X X X X Extracts X X X X
X X X X Extracts X X X X
....ook profits U/S.115JB of the Income Tax Act. The receipt of Rs. 44.45 Crores being in the nature of a capital receipt (since income was earned prior to commencement of business, it was a capital receipt and was required to be set off against pre-operative expenses), the same is not liable to tax both under the normal provisions of Income Tax as well as for the purposes of computing book profits U/S.115JB of the Income Tax Act, the addition made should be deleted. 2. The appellant reserves its right to add to, alter, amend, modify or delete any of the grounds taken in this appeal. 2. The assessee has challenged the order of ld CIT(A) on the ground that Interest of Rs. 44.45 Cr has wrongly been held to be revenue receipt by ld CIT(A) by ignoring the fact that the interest was received on the FDRs/ICDs during the period prior to the commissioning of the port terminal at Karanja Creek which has to be reduced from the pre-operative capital expenditure as the development of the port is till under progress and not commissioned. 3. The fact in brief are that the assessee company was incorporated under the Companies Act, 1956 to develop, operate multipurpose port terminal at ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o the profit and loss account resulting into book profit during the year would not change the character of the receipt from capital to revenue and cannot be taxed both under normal provisions and under section 115JB of the Act. The assessee submitted before the AO that the section 115 JB provides for a mechanism which is alternative to the normal provisions and comes into play where the tax as per normal provisions of the Act is less than the tax as per the provisions of section 115 JB of the Act. Thus it cannot go beyond the legislative intent and bring to tax the receipt which is not at all taxable owing to its being of capital receipt. The assessee relied on a series of decisions namely Shree Cement Ltd ITA No. 614,615,635/Jaipur/2010 AY 2004-05 to 2006-07 dated 9.9.2011 and also subsequent years, Shivalik Ventures Pvt. Ltd. ITA No. 2008/Mum/2012 AY 2008-09. 5. The AO however rejected the arguments and contentions of the assessee citing various reasons which are reproduced as under: "a) The decision relied upon by the assessee in the matter of Indian Oil Panipat Consortium Ltd, v. ITO - 315 ITR 255, subsequently followed by several ITAT decisions as pointed out by th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sed on normal income. Aggrieved by the assessment order, the assessee is in appeal before your Honour by taking the undermentioned grounds in appeal: 1. On facts and circumstances of the case and in law the Assessing Officer (A. O.) has erred in not holding a sum ofRs. 44.45 crores as a capital receipt In doing so the AO has erred in holding the sum of Rs. 44.45 crores as to be taxable both for the purposes of the normal computation as well as computing book profits u/s115JB of the Income Tax Act, The receipt of Rs, 44.45 Crores being in nature of a capital receipt (since the income was earned in a period prior to commencement of business it was a capital receipt and hence was required to be set off against the pre-operative expenses) :- the same is not liable to tax both under the normal provisionsof the income tax as well as for the purposes of computing book profits u/s 115JB of the income tax act. The addition made should therefore be deleted, 2. The appellant reserves its right to add to, alter, amend or modify, and delete any of the grounds taken in this appeal" 3. The interest on the inter-corporate deposits ('ICDs') on funds specifically m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....p on 24* August, 2010 incorporated a new holding company SKIL Ports &Logistics Limited (Guernsey) ("SKIL Guernsey"), to develop, own and operate port and logistics facilities in India. SKIL Guernsey in October 2010 made an AIM Initial Public Offering, an Alternative Investment Market on London Stock Exchange for investment in Karanja Terminal &Logistics (Cyprus) Limited ("KTLCL"), a Cypriot intermediate company, which got incorporated on 31st August, 2010. On 1st October, 2010 KTLCL agreed to subscribe for shares of the Petitioner for approximately 99.77%. Therefore, the Petitioner as on date was held 99.77% by KTLCL and balance 0.23% held by SKIL India and KIPL, being the Nominee shareholders. Enclosed at Pages 59 to 137 of the compilation is a copy of the relevant extract of theAIM Initial Public document (attention is drawn to Page 79). 4.6 The IPO was mainly announced for the specific and precise purpose of raising capital for meeting the cost of laying multipurpose port terminal facility and logistics facility at Karanja creek (herein after referred to as "the Project"). Thereafter, on 15th October, 2010 the assessee, received a Certificate of Foreign Inward ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ner for commencement of the Project is enclosed at Pages 145 to 152 of the compilation. 4.11 In December, 2014 access was given to the bridge and road to site constructed by CIDCO. However, in January, 2015 pursuant to the local agitation against the Project, this access was again blocked by the villagers. During February, 2015 work again began at the site under police protection but again in March, 2015 work at the site halted owing to local agitation. Finally, in May, 2015 the local agitation was withdrawn and then the Project work resumed in November, 2015 post monsoon. Till June, 2016 the reclamation of 19 hectares' area is completed and 57 piles were installed during this period after which due to monsoon the Project work was suspended up to November, 2016. Presently, the Project work is going on in full force. 5. With the above set of arguments, the assessee supported its case for filing NIL return as under: 5.1 The interest income earned by the assessee on the ICDs maintained with NBFCs and Banks is a capital receipt (not liable to tax) as it is spending on the Project and in this regard, heavy reliance is placed by the assessee on the Apex Cou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r mesne profits can be a part of book profit u/s.115JB held that mesne profits (amount received from a person in wrongful possession of property) is a capital receipt and not chargeable to tax either as income or as "book profits" u/s.115JB. As the department has implicitly accepted Narang Overseas v. ACIT 100 ITD (Mum) (SB), it cannot file an appeal on the issue in the case of other assessees. 6. The AO has objected to the assessee's submission and our rebuttal to the same is as under: Sr. No. AO's contention Assessee's rebuttal 1. The decision relied upon by the assessee in the matter of IndianOil Panipat Consortium Ltd. v, ITO - 315 ITR 255, subsequently followed by several ITAT decisions as pointed out by the assessee in its application, is a subject matter of appeal to the Hon. Supreme Court under SLP No.: 15705 of 2009, which is pending disposal pending before the Apex Court. The AO has not considered the decision in proper perspective, since the conclusion of the Delhi High Court, which emerges is as per the decision of the Apex Court in Bakaro Steel Ltd., in coming to a conclusion to hold that interest earned on funds primarily brought ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....llow that decision would be to cause grave prejudice to the assessee. Where there is a conflict between different High Courts, he must follow the decision of the High Court within whose jurisdiction he is, but if the conflict is between decisions of other High Courts, he must take the view which is in favour of the assessee and not against him. Similarly, if the Income-tax Appellate Tribunal has decided a point in favour of the assessee, he cannot ignore that decision and take a contrary view, because that would equally prejudice the assessee." (emphasis supplied) 8. In another case of Bombay High Court ~ Jurisdictional High Court reported at 256 ITJR 385; i.e. the case of Bank of Baroda v, S.C.Srivastava the relevant observations on the issue by the Hon. Court as under; "At this juncture, we cannot resist observing that the Judgement delivered by the Income-tax Tribunal was very much binding on the Assessing Officer. The Assessing Officer was bound to follow the judgements in its true letter and spirit. It wasnecessary for judicial unit and discipline that all the authorities below the Tribunal must accept as binding the judgments of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed that the AO is bound by the decisions of high courts or ITAT and cannot take the plea that they are contested in a higher court for not following the same. 6.4 The learned counsel has heavily relied upon the decision of the honourable apex court in the case of Bokaro Steel Ltd supra. But the facts of the case of Bokaro Steel Ltd are not relevant to the facts of the present case. The amounts in dispute in the case of Bokaro Steel Ltd were not interest on idle funds. These were receipts/receivables from the contractors deployed by the assessee for the construction of its factory representing the following: 1. For usage of residential quarters of the company by the contract, 2. Interest on mobilisation advance given for executing the contract, 3. Higher charges received for usage of equipment belonging to the company. 4. Amount received from contractors for using the stones lying in the campus of the company. 6.5 These amounts were never physically received by the company but prior to that was adjusted against the charges payable by it to the contractors, Thehon'ble apex court held these accruals to be 'incidental' a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t is misplaced. 6.8 On the contrary the judgement in the case of Tuticorin alkali chemicals and fertilizers Ltd (supra) is squarely applicable to the facts of the present case, In the Tuticorin alkali's case the hon'ble apex court inter alia, observed and held as under; 1. In the usual course, interest received by the company from bankdeposits and loans would be taxable as income under the head income from other sources under section 56. 2. 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 the purpose of computation, income of an assesses has to be classified under 6 heads. 3. If a company has not commenced business, there cannot be any question of assessment of its p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ome to reduce its liability to pay interest to its creditors. It could re-invest the interest income in land or shares, it could purchase securities, it could by house property, it could also set up another line of business, it might even pay dividends out of this income to its shareholders. There was no overriding title of anybody diverting the income at source to pay the amount to the creditors of the company. 8. It is well-settled that tax is attracted at the point when the income is earned. Taxability of income is not dependent upon its destination or the manner of its utilisation. It has to be seen whether at the point of accrual, the amount is of the revenue nature and if so, the amount will have to be taxed. 9. It is true that the Supreme Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt years i.e. 2011- 12 and 2012-13. The assessee cannot suddenly change its stand on identical facts. The action of the AO in treating this income as income from other sources and holding it liable for tax both under the normal provisions of the Income Tax Act and for the purposes of section 115 JB is confirmed. This ground of appeal is dismissed." 9. The ld AR vehemently submitted before the bench that this is a stay rejected early hearing matter and therefore required to be heard on priority basis. The ld counsel of the assessee submitted before the bench that the assessee company was incorporated in May, 2010 for a specific purpose of developing and operating of port terminal and facilities at Karanja Creek in the state of Maharashtra with shares capital held SKIL Infrastructure Ltd, India(SKIL India) with its nominees to the extent of 49% and by Karanja Infrastructure Private Ltd(KPIL) and its associates to the tune of 51%. The SKIL group incorporated a holding company SKIL Ports & Logistics Limited (Guernsey) (SKIL Guernsey) to develop, own and operate logistics facilities in India. The said company in October, 2010 made an AIM Initial Public Offer an Alternative Investment....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Facor Power Ltd 380 ITR 474 (Delhi) e) NTPC Sail Power Company (P) Ltd. CIT 210 Taxman 358 (Delhi) f) CIT Vs Sasan Power Ltd 205 Taxman 56 (Delhi) g) Adani Power Ltd. Vs ACIT 155 taxmann.com 239(Delhi) h) Solarfield Energy Two Pvt Ltd Vs ITO 5076/Mum/2016 AY 2012-13 dt 11.9.2017 10. The ld AR submitted that in all the above decisions it has been held that the interest/income received during the period prior to commencement of project is a capital receipt and has to be deducted from the capital expenditure. 11. The ld AR of the assessee also contended that the income which is not taxable on account of being capital receipt is not to be included in the book profits under MAT. The ld AR of the assessee has relied on various decisions namely: i) Indo Rama Synthetics (I) Ltd. V/s. CIT, 330 ITR 363(SC) ii) Shivalik Venture Pvt. Ltd. V/s. Dy. CIT, 43 ITR(Trib) 187(Mum Tr) iii) DCIT Circle-1 V/s. McNally Bharat Engineering Co. Ltd., ITA No.l00/Kol/2011, Dated 01/03/2017.(ITAT Kol) iv) of ACIT, Range-2, V/s. M/s. L. H. Sugar Factory Ltd., ITA NQ.417 & 418/LKW/2013(Lucknow) v) DCIT, c.c-XXVIII V/s. Binani....
X X X X Extracts X X X X
X X X X Extracts X X X X
....orin Alkali Chemicals &Fertilisers Ltd Vs CIT (1997)93 Taxman 502 (SC) b) Shree Krishnan Polyster Ltd Vs DCIT (2005) 144 Taxman 41 (Bom) c) CIT Vs Rajasthan Land Development Corporation Ltd (1995)211 ITR 597 (Raj) d) Thermal Power Tech Corporation India Ltd. Vs DCIT 81 Taxmann.com 168 (Hyd) e) Emta Steel & Energy Ltd Vs DCIT ITA No. 1018/Kol/2012 dated 6.1.2017 f) ShreMaheshwar Hydel Power Corporation Ltd Vs CIT 96 Taxmann.com 176 (Bom) g) Thermal Powertech Corporation India Ltd. 164 ITD 449(Hyd. Trib) 14. The ld DR prayed before the bench that in view of the ratio laid down in the above decisions, the order of CIT(A) may be upheld by dismissing the appeal of the assessee. The ld DR also argued that the assessee is not accounting the interest income on consistent basis. In 2011-12 and 2012- 13 the assessee has not only credited the interest to the profit and loss account but also offered the interest received to tax. Whereas in the AY 2013-14 & 2014-15,the interest received was credited to the profit and loss account but while calculating the taxable income under normal as well as special provisions of the Act it was excluded....
X X X X Extracts X X X X
X X X X Extracts X X X X
....9 the case was substantially heard and adjourned at the request of the ld DR as he requested the bench that confirmation from the AO is still awaited on documents filed by the assessee in the paper books. According to the ld DR, AO report is required whether the documents filed in the paper books were before the him and adjourned to 17.1.2019 giving as last and final opportunity to the ld DR. as the ld DR prayed for 10 days' time. On 17.1.2019 the said date also, the ld DR again sought adjournment by filing letter dated 5.2.2019 requesting that the report of the AR is still not received and the hearing was adjourned to 6.2.2019. Therefore the case was again adjournment to 8.2.2019 but on the said date again filed letter dated 7.2.2019 received from D.C Circle- 6(3) and , the DR requested for the adjournment on the ground that the AO requires one month time for giving report whether the documents filed in paper books were before him or not though expressing his preparedness to argue the case which received sharp reactions from the ld AR on manner in which the adjournments were being sought in the stay rejected matters. The ld AR stated that assessee is executing an infrastructure pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....MB/Planning-2/KIPL/921, dtd.13^thMar.2015 - Permission to carry outCapital Dredging at the Karanja Site 1-4 2 Letter from MMB bearing ref. no. RPO/MORA/GEN/KTLPL-KARANJA/1070,dtd.28^thSept.2015- response to project update confirming LeaseAgreement continues to remain valid and in force. -5- 3 Letter from KTPL to MMB bearing ref No.KTPL/14/15-16, dtd.3^rdMar.2016- Obstructions at the project site by antisocial elements (Marathi Transcript) 6-7 4 Letter from KTPL to MMB bearing ref No.KTPL/14/15-16. dtd.3^rdMar.2016- Obstructions at the project site by antisocial elements (English Translation") 8-10 5 Letter from Maharashtra Maritime Board bearing ref. no. MMB /Planning- 1/KIPL/Maint. Dredging/249, dtd. 21^stJan.2017- granting extension for dredging work. -11- KTPL letter dated 23^rd August 2017 addressed toMaharashtra Maritime Board, providing Project update ofKaranja Port -12- 7 KTPL letter dated 4^th April 2018 seeking extension of Termof Deed of Lease / Expansion of Port Limit 13-17 8 Le....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ove are perused and analyzed and on the basis of that we hold that the interest received by the assessee during period to the commissioning of the port is of capital receipt and cannot be taxed both under the normal provisions and under section 115 JB of the Act. The decisions relied by the ld AR and DR are analyzed as under: * In the case of Bokaro Steel Ltd (Supra) the Hon'ble Supreme Court has held as under: "The activities of the assessee in connection with all these three receipts are directly connected with or are incidental to the work of construction of its plant undertaken by the assessee. Broadly speaking, these pertain to the arrangements made by the assessee with its contractors pertaining to the work of construction. To facilitate the work of the contractor, the assessee permitted the contractor to use the premises of the assessee for housing its staff and workers engaged in the construction activity of the assessee's plant. This was clearly to facilitate the work of construction. Had this facility not been provided by the assessee, the contractors would have had to make their own arrangements and this would have been reflected in the charges of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d and added to the cost of fixed assets created as a result of such expenditure. The apex court held that by the same reasoning if the assessee receives any amounts which were inextricably linked to the setting up of the plant and machinery would go to reduce the cost of assets as the receipts are of capital nature and cannot be taxed. * In the case of Indian Oil Panipat Power Consrtium Ltd (Supra) it has been held interest on deposits is incidental to the acquisition of assets for setting up plant and machinery and thus distinguished the decision of Tuticorin Alkali Chemicals & Fertilisers Ltd. will not be attracted. In the present case also the interest is earned on FDRs/ICDs made out of unutilized funds meant for port development which could not be used due to various beyond the control of the assessee. Similarly, we have perused carefully the other decisions relied upon the AR in defense of his arguments and are of the view that the ratio coming out of those decisions squarely applies to the assessee's case.Now we shall deal with the decisions relied by the ld DR as under: * In the case Tuticorin Alkali Chemicals Fertilizers Ltd (Supra) the Hon'ble Ap....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pellant-Assessee. It also records a finding that money by OFCD was not received for setting up of plant. Therefore, cannot be capitalised. We find that on the facts as found by the Authorities, the decision of the Apex Court in Bokaro Steels Ltd. (Supra) and Karnal Co-operative Sugar Mills Ltd. (Supra) has been correctly applied. After perusal of the above finding of the Jurisdictional High Court, it will be clear that this decision is in favour of the Assessee wherein the Hon'ble Bombay High Court has confirmed the view of the Delhi High Court in the case of Indian Oil Panipat Consortium Pvt. Ltd. And Facor Power Ltd. And the decision of the Hon'ble Apex Court in the matter of Karnal Co-operative Sugar Mills Ltd. * In the case of M/s. EMTA Steel & Energy Ltd (supra) , the tribunal held that in case the surplus fund arises out of the loans from various banks and financial institutions and the decision of the Tuticorin Alkali Chemicals & Fertilizers Ltd is applicable and accordingly the interest earned is taxable under the head Income from Other Sources. * The ld DR has also relied on the decision of the Hyderabad ITAT in the case of Thermal Powert....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e-1 V/s. McNally Bharat Engineering Co. Ltd., ITA No.l00/Kol/2011, Dated 01/03/2017(Kol Tri) the facts were that the retention income was credited to the profit and loss account over which the assessee does not have a title and therefore cannot be regarded as income. The assessee executes turnkey contracts and under the terms of contract a certain percentage is retained and will be given to the assessee only on successful trial run of the final acceptance by the customer .Therefore, the retention money cannot be regarded as income even for the purpose of book profits u/s. 115JB of the Income Tax Act, 1961. * In the case of ACIT, Range-2, V/s. M/s. L. H. Sugar Factory Ltd., ITA NQ.417 & 418/LKW/2013(Lucknow Tri). In this case sale of carbon credits is credited to the profit and loss account the receipt of transfer of carbon credit is a capital receipt not liable to tax, the same is required to be reduced from book profit because capital receipt cannot be considered as a part of book profit liable to tax. * In the case of DCIT, c.c-XXVIII V/s. Binani Industries Ltd., 178 TTJ 658(Kol) ITAT the facts were that on receipt of forfeiture of share warrants being capital r....