TaxTMI 
TaxTMI 
2020 (10) TMI 1091
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessee and five by the revenue and all are cross appeals for AY 2011-12 to 2015-16. He also brought to our notice that the assessee has only one issue against the action of the Ld. CIT(A) i.e. whether the interest earned from the borrowed funds (short term temporary deposits) can be capitalized or not? For the Revenue Shri Amitabha Sen, JCIT, Sr. DR submitted that in all the assessment years under consideration, the revenue has raised two relevant grounds wherein they have challenged the Ld. CIT(A)'s action of accepting the contention of the assessee regarding the interest earned from capital subsidy & equity as capital receipt which according to the revenue is erroneous and should be treated as revenue receipt. The ld. AR drew our attention the fact that all the issues raised by both the parties are covered by the decision of the Tribunal in assessee's own case for AY 2009-10 and 2010-11 and drew our attention to para 7.5 wherein the Tribunal has allowed the additional ground raised by the assessee in respect of interest on deposit out of equity portion wherein the Tribunal held as under: "7.5. We hold that the aforesaid decisions supra would be squarely applicable in f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ome on deposits also which were invested out of unutilized capital subsidy. In view of this finding, we hold that the said interest income in the sum of Rs. 8,09,03,035/- on unutilized capital subsidy would have to be construed only as a capital receipt and the Ld. AO is hereby directed to delete the said addition made for the Asst. Year 2009-10." 4. Thus, it was pointed out by the Ld. AR that the Ld. CIT(A) has followed the Tribunal's order for AYs 2009-10 and 2010-11 to grant the relief to assessee in respect of interest from un-utilized capital subsidy and equity by holding the same as capital receipt, against which the revenue has come in appeal. 5. First of all, we take up the revenue appeal inter-alia for AY 2011-12 in ITA No. 89/Kol/2018 wherein the Ld. CIT(A) allowed the assessee's claim to treat the interest received towards equity and capital subsidy as revenue receipt. In order to appreciate the action of the Ld. CIT(A), we note the following facts in respect of assessee which is a PSU of Govt of India: Equity Equity participation (%) GAIL (India) Limited 70 State Government of Assam 10 Oil India Limited 10 Numaligarh Refinery Limited ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....AY 2016-17), by relying on the ratio of the decision of the Hon'ble Supreme Court in CIT Vs. Bokaro Steels Ltd. 236 ITR 315 (SC), and the decision in CIT Vs. Karnataka Power Corporation 247 ITR 268 (SC), we are of the opinion that the Ld. CIT(A) rightly allowed the claim of assessee, so we do not find any reason to interfere with the order of the ld. CIT(A) and, therefore, we sustain his action and dismiss the revenue appeal for all the assessment years i.e. AYs 2011-12 to 2015-16. 7. Coming to the assessee's appeal. We note that the AO and the Ld. CIT(A) has disallowed the claim of capitalizing interest received by assessee from short term deposit (herein after referred as 'STD') of unutilized borrowed funds by relying on the decision of the Hon'ble Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), Bokaro Steels Ltd.(supra) and Bongaigaon Refinery & Petrochemicals Co. Ltd. (supra). The Ld. CIT(A) has quoted the relevant portion of the order of the Hon'ble Supreme Court in the case of Bongaigaon Refinery & Petrochemicals Co. Ltd (supra) and held as under: "The case of Bongaigaon Refinery & Petrochemicals Co. Ltd. (supra) is squarely in favour of re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d the project was under construction phase and has not yet set up/operational. The assessee has derived interest on deposits of borrowed funds for AY 2011-12 to the tune of Rs. 3,83,20,744/- which he claimed as capital receipt. It was brought to our notice that till AY 2015-16 assessee did not draw up the P&L Account and the interest earned from short term deposit of the borrowing funds was adjusted with the capital work in progress. The Ld. AR drew our attention to page 160 of the paper book for AY 2011-12 from where it is noted that the assessee has not prepared P&L Account for this year even though it was incorporated on 08.01.2007. And since no commercial activity has started and only from February, 2016, the project has been set up and commenced operation only from AY 2016-17, so up to AY 2015-16 no P&L Account was prepared by the assessee. We note that in the case of Chellapali Sugars ltd. Vs. CIT 98 ITR 167 the Hon'ble Supreme Court examined the question whether interest paid before the commencement of production by a company on amount borrowed for the acquisition and installation of plant and machinery would form part of the actual cost of the asset to the assessee within t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gard to the judgments of this court in CIT Vs. Bokaro Steel Ltd. (1999) 236 ITR 315 and CIT Vs. Alcock Ashdown and Co. ltd. (1997) 224 ITR 353, respectively.( Emphasis given by us)" 10. Thus, we note that the Hon'ble Supreme Court has answered the first two questions in favour of the assessee since it was covered by Bokaro Steels 236 ITR 315 and answered the question which is relevant in this case before us; As noted from the question of law framed by the Hon'ble Supreme Court in Karnataka Power Corporation (supra), we note the question was whether interest receipt and hire charges from contractors are in the nature of capital receipts. Thus, we note that the Hon'ble Supreme Court in Karnataka Power Corporation (supra) has held in favour of the assessee by following the ratio laid in CIT Vs. Bokaro Steels Ltd. (supra) wherein the Hon'ble Supreme Court has held as under : "5. We will take the first three heads under which the assessee has received certain amounts. These are the rent charged by the assessee to its contractors for housing workers and staff employed by the contractor for the construction work of the assessee including certain amenities granted to t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ceipts 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 linked with the process of setting up of business. These were directly related to the capital structure of business and were held to be capital in nature. We agree with this view taken by the Delhi High Court. 7. The appellant, however, relied upon the decision of this Court in Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case (supra). That case dealt with the question whether the investment of borrowed funds prior to commencement of business, resulting in earning of interest by the assessee, would amount to the assessee earning any income. This Court held that if a person borrows money for business purposes, but utilises that money to earn interest, however, temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. Merely because he utilised it to repay the interest on the loan taken will not make the interest income as a c....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income.[Emphasis given by us]" 11. We note that in Bokaro Steel ltd. (supra), the Hon'ble Supreme Court has clearly distinguished the ratio laid in Tuticorin Alkali (supra) at para 7 and laid down the ratio that if income is earned whether by way of interest or in any other manner or the funds, which are otherwise inextricably linked with setting up of a plant, such income is required to be capitalized to set off against pre-operative expenses. And we note that in the case of Bongaigaon Refinery (supra) since the Hon'ble High Court has held that the interest from surplus fund was taxable (revenue receipt), therefore, the Hon'ble Supreme Court did not accept the claim of the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... necessary sums of money. We note that the assessee maintains a separate bank account for such capital subsidy and any excess amount not temporarily is parked in short term deposits in bank on which the appellant earns interest income. The said deposit is in accordance with the guidelines of Department of Public Enterprises ('DPE'). The unutilized amounts of equity capital and borrowed funds are similarly parked in short term deposits in banks and on which interest income is received. We note that the assessee received clarifications from the MoCF (dated 11-Aug-2010 and 15-Feb-2012) regarding the treatment of the interest earned from parking of Capital Subsidy. The MoCF clarified that such interest shall be treated as part of Capital subsidy and it will correspondingly reduce the amount of capital subsidy which is sought from the Government (page nos. 24-25 of paper book for AY 2011-12). The assessee has accordingly claimed such interest income as capital receipt i.e. part of capital subsidy itself. Similarly, the interest earned on parking of equity capital and on borrowed funds have been similarly claimed as capital receipts, being linked with the construction and setting up o....