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2020 (11) TMI 172
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..... That the Ld. AO has erred both in law and facts by treating capital receipt as revenue 5. That the appellant craves leave to add or to amend the above grounds of appeal before or at the time of hearing of the appeal. 6. For these and among other grounds to be urged at the time of hearing, adequate relief as may be deemed fit be granted in the matter. 3. Grounds taken by the assessee for A.Y.2014-2015 are as under :- 1. That the order of the Ld. AO is illegal, arbitrary contrary to evidence on record and without application of mind and for that matter the said order is liable to be quashed and/or annulled. 2. That on the facts and circumstances of the case, the Ld. AO was not justified in denying that the interest on mobilization advance amounting to Rs. 45,84,391/- received from the contractors during the construction/project period is a capital receipt and is adjustable against pre-operative expenses. 3. That on the facts of circumstances of the case, the Ld. AO has erred in treating interest on FDR and Flexi deposit amounting to Rs. 3,85,82,206/- as revenue receipt and made addition although the said interest is inextricably linke....
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....audit report. The Assessing Officer after considering the written submissions filed by the assessee determined the total income of the assessee at Rs. 1,76,58,540/- for the assessment year 2013-2014 and Rs. 4,31,66,600/- for assessment year 2014-2015. 7. Aggrieved from the assessment order, the assessee appealed before the CIT(A) and the CIT(A) after considering the submission of the assessee and findings of AO, he accepted the contention of the assessee in respect addition of Rs. 68,55,574/- and uphold the addition of Rs. 1,08,02,969/-, accordingly partly allowed the appeal of the assessee for both the assessment years. 8. Against the above order of CIT(A) for both the assessment years under consideration, the assessee is in appeals before the Income Tax Appellate Tribunal. 9. Ld. AR has reiterated the submissions made before the lower authorities and he has also relied on number cases and filed his written submissions for A.Y.2013-2014 as under :- 1. This issue is squarely covered by the decision of the Hon'ble Cuttack Tribunal in the case of DCIT v. M/s Radhikapur (West) Coal and Mining Pvt. Ltd., I.T.A. Nos.396/397CTK/2018, dated 21.10.2019. Wherein the Hon'bl....
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.... of RVNL from their bills. 8. That, the assessee treated interest income as a capital receipt. The interest income is utilised to meet the expenses of the project, and it is inextricably linked with the process of construction of Railway Line. Copy of Audited Balance sheet and P/l account for the FY 2013-14 is at PB Pg.6-24 9. That, the assessee filed its return of income for AY 2014-15 on 25.09.2014, declaring NIL income. Copy of acknowledgement of ROI along with the computation of income is at PB Pg. 1. 10. That, the case was selected for scrutiny assessment and notice u/s 143(2) & 142(1) of the Act, were issued to the assessee. The Ld. AO asked the assessee to explain the treatment of Interest received on Mobilisation Advances and Fixed Deposit. 11. That, in compliance with the same, the assessee produced the books of accounts and other relevant documents. Moreover, it explained that Mobilisation advance and Interest of FD are inextricably linked with the setting up of the Railway Line. Therefore, the same should not be treated as Income from Other Sources. Copy of reply submitted by the assessee is at PB Pg. 60-55 12. Subsequently, A....
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....et wherein all expenditure incurred on the project is shown as WIP PB Pg. 21 21. Since the assessee company is incorporated only for construction of Railway Line therefore it is not free to utilise the funds for any purpose except for Railway Project. Moreover, there is no allegation of AO regarding the utilization of funds for any other purpose and lastly, the interest income from FD was earned in a period before the commencement of business; therefore, the said receipt is a capital receipt. 22. It is pertinent to note that the ld. CIT (A) has misconstrued the ratio of the Judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and held that the income earned by the assessee is not a capital receipt. 23. It may kindly be noted that the Hon'ble Delhi HC has interpreted the aforesaid judgement of Apex Court in the case of Indian Oil Panipat Power Consortium Ltd v. ITO. [2009] 315 ITR 255. 24. Further, the Hon'ble High Court in the said case considered the another Judgement of Supreme Court in Bokaro Steel Ltd. Wherein the Supreme Court held that "if income is earned, whether by way of Interest or in any other manner on ....
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....e in favour of the assessee. a) DCIT v. M/s Radhikapur (West) Coal and Mining Pvt. Ltd., I.T.A. Nos.396/397CTK/2018, dated 21.10.2019 From the above observations of the CIT(A), we find that CIT(A) while dealing with the issue has observed that in the case of Indian Oil Panipat Power Consortium Ltd. v. ITO 315 ITR 255, the Hon'ble High Court held that the interest earned on FDs was capital receipt liable to be set off against pre-operative expenses, and could not be taxed as income from other sources. In their judgment, the Hon'ble Delhi High Court has considered a host of decisions of various courts on the issue including the decisions of the Hon'ble Supreme Court in the cases of Tuticorin Alkali Chemicals & Fertilizers Ltd. and Bokaro Steel Ltd. The case of the assessee appears to be squarely covered by the decision of the Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. b) MJSJ Coal Limited v. ITO, I.T.A. Nos.429/CTK/2016, 68/CTK/2017 And 107/CTK/2018, dated 31.08.2018. Para 12 the Interest earned on funds primarily brought for infusion in the business activity cannot be termed as income from othe....
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.... was no surplus insofar as it was the share capital received as application money pending allotment which was poured in for the purchase/acquisition of land which would entitle the assessee to commence business of excavating coal in accordance with the Rules and Regulations governed by the State undertakings namely, IDCO and OMC. We have perused the correspondences lying with the assessee to clarify the stand taken for the purpose of starting business which required the assessee to park funds in the bank simultaneously incurring pre-operative expenses to the magnitude of Rs.51 Crores and Rs.66 Crores. This clearly indicates that there was no surplus available with the assessee for earning Interest as income from other sources 29. Further reliance has been placed on the following decisions: • Bongaigaon Refinery and Petrochemicals ltd. v. CIT 251 ITR 329 (SC); • NTPC Sail Power co. Pvt. Ltd. v. CIT in ITA No. 1238/2011 (DELHI HC); • PCIT v. M/S. NTPC Tamil Nadu Energy Co. Ltd., ITA 233/2018 & CM APPL.7162/2018, ITA 234/2018 & CM APPL.7163/2018; • Solarfield Energy Pvt. Ltd. v. ITO, ITA No. 5189/Mum/2016; • BTW....
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....and could not be taxed as income. Allegation regarding treatment of Interest income till AY 2012-13. 32. It is submitted that the ld. AO has also raised an allegation that the assessee in the preceding assessment year AY 2012-13 has itself shown the interest income as income for other sources. 33. In this regard, it is submitted that "Principle of Consistency" should be followed only, when the facts & circumstances continue to remain the same. However, in this case, circumstances are not same. 34. It is pertinent to note that the assessee for the first time has infused significant funds through issue of equity shares in the FY 2012-13, i.e. AY 2013-14 only. Further, during the year, the assessee has issued equity shares for construction of Railway Line, and out of this capital, the assessee has deposited small amount in FD to meet day to day expense of the project. Details regarding share capital issued during the year is at PB Pg. 18 35. Thus, the action of the AO to match the treatment of interest income earned in the AY 2012-13 from the treatment done in AY 2013-14 and AY 2014-15 may not merit the consideration as no capital was issue....
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....ppellant company. This amount could not have been used for making advances to the contractor or meeting day to day expenses as alleged by the assessee. In the absence of bank statement, this contention of the assessee can't be verified. On perusal of balance sheet of the assessee as on 31.03.2014, it is seen that the assessee is having surplus funds to the extent of Rs. 129.52 crores which is lying in the form of cash and cash equivalents. Out of total share capital/reserves of Rs. 248.29 crores, the capital work-in-progress as on 31.03.2014 stands at Rs. 112.49 crores. The amount invested as FDRs in banks has neither been given as advances to RVNL nor utilized in meeting day to day expenses as alleged. In this case, the AR of the assessee had relied upon the decisions rendered in the case of Indian Oil Panipat Power Consortium Ltd. vs. ITO (315 ITR 255)(Delhi High Court). However there is no link between the construction business of laying down railway line and the surplus monies parked in FDs. iii.) There is no material on record to suggest that the interest earned from the fixed deposits was inseparably connected with the business activity of the assessee o....
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....ut of surplus fund received from share capital. The assessee reduced such interest income from the cost of project. The Assessing Officer, however, held that since assessee was in the process of setting up of training institute during the year, interest earned by deploying surplus funds was income to be assessed under the head 'Income from other sources'. On appeal, the Commissioner (Appeals) confirmed the Assessing Officer's views relying upon the decision of Tuticorin Alkali Chemicals & Fertilisers Ltd. Vs. CIT [1997] 93 Taxman 502 (SC). However, he agreed with the submission of the assessee that in case any expenditure had been incurred for the purpose of earning interest income, then the Assessing Officer should examine the same and allow the same. On appeal, the Honourable Mumbai ITAT held that except under the head 'profits and gains of business', then such income had to charged to tax under that particular head. In the instant case, the assessee was still constructing the building for the institute which was to be established for training of people. During this phase, the assessee had raised share capital and funds raised from such share capital ....
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.... or were incidental to the work of construction of its plant undertaken by the company. This was to facilitate the work of construction. Had this facility not been provided by the assessee company, then the contractors would have made their own arrangements and it would have been reflected in the charges on the contractor for the construction work. Thus, the Hon'ble Supreme Court gave the finding that the three receipts being intrinsically connected with construction of assesses's plant were capital receipts and not income of company from any independent source. Similar was the finding by the Hon'ble High Court of Delhi in the case of Indian Oil Panipat Consortium Ltd. (supra). The facts in the present case are totally different from that in the case of Bokaro Steel Ltd. (supra) or Indian Oil Panipat Consortium Ltd. (supra). Here no advances have been given to the contractors. In other words, the interest receipts have not been utilized towards creation of capital assets. In these facts & circumstances, it is prayed that the interest income ought to be charged as "income from other sources". viii.) If the funds were not required for certain period, the....
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....unds other stake holders, namely the Government of Maharashtra, who had to contribute Rs. 10,04,00,000/- as its share of share capital, started. This share capital was contributed on 31.03.2007 and kept in an account in IDBI Bank. The Government of Maharashtra vide letter dated 29.03.2007 indicated that the fund should be utilized for setting up of spinning mill. At the end of the relevant accounting period 60 % of civil work was completed and order for procurement of machinery, along with security deposit, was placed with Voltas Ltd. No interest was earned from the supplier of machinery. In the interregnum, the assessee kept this amount in various institutions and earned interest thereon. The institutions from which interest to the tune of Rs. 49,35,409/-was earned are Shivaji Sahakari Bank Ltd., Union Bank of India, Bank of India and IDBI Bank against which expenses to the tune of Rs. 15,40,341/- were claimed. The assessee had received interest to the tune of Rs. 27,83,940/- from Shivaji Sahakari Bank Ltd., another cooperative institution and Rs. 41,83,517/- from other banks. Manufacturing has not started during the relevant previous year. The assessee claimed a....
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....plication money were also lying with the assessee as per the annual financial reports. It was also submitted by the ld. CIT-DR the interest received on fixed deposits/flexi deposits is in the nature of income from other sources. 11. After hearing both the sides and perusing the entire material available on record and the order of the authorities below, we find that during the course of assessment proceedings the assessee explained before the AO with regard to interest on mobilization advance is a capital receipt, therefore, it has been reduced from the capital work-in-progress and in case of interest earned on fixed deposit/flexi deposits is a business income, therefore, it has been treated as a revenue income. The AO did not accept the claim of the assessee and treated the same as income from other sources. In appeal, the CIT(A) accepted the claim of the assessee in regard to interest on mobilization advance but he did not agree with the interest received on fixed deposits/flexi deposits and upheld the action of AO holding that the AO has rightly treated the interest earned on FDR & Flexi Deposit as income from other sources. 12. We observe from the balance sheet for both th....
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....ruction of a New Railway Line between Haridaspur to Paradeep in Orissa. Copy of MOU entered between the joint venture partners is enclosed at PB Pg. 3-12 (Relevant Pg. 5) * That, it has been provided in the MOU that the Joint Venture Partners will provide funds via Equity Participation to the assessee company to complete the cost of the project. PB Pg. 6. * Accordingly, the assessee company issued share capital to construct the Railway Line. * Further, for construction, the assessee company has entered into a construction agreement with RVNL. Wherein, RVNL shall undertake the construction of the project (Railway Line) on behalf of the assessee company and for which the assessee company provided funds. Copy of construction agreement is at PB Pg. 13-40 (Relevant Pg. 27, Para 11 of the construction Agreement) * Moreover, as per construction agreement, if any expenditure incurs out of the funds of RVNL, then RVNL shall charge interest at the Average Prime Lending Rate on the amount so expended. (Relevant Pg. 28, Para 11.5 of the construction Agreement) * That, on a regular basis, the assessee made advances to RVNL to enable it to execute the....
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....s, the assessee preferred an appeal before the CIT (A). The Id. CIT (A) deleted the addition of interest received on Mobilization advance relying on the order passed by the Tribunal (ITA No. 83/CTK/2016), dated 09.10.2017 in the assessee's own case for the AY 2010-11. Copy of ITAT order is placed at PB Pg. 45-49 * However, the CIT (A) confirmed the addition of Interest on FDR and Flexi Deposit relying on the decision of Tuticorin Alkali Chemical and Fertilizers Ltd. (Relevant findings of CIT (A) are at Para 4.2, Pg. 11) * Challenging the order of CIT (A), the assessee in appeal before your Honors. Our Submissions: * It is submitted that in the present case, the assessee being a Joint Venture Company of- - Rail Vikas Nigam Limited; - Government of Orissa - Paradip Port Trust, - Rungta Mines Ltd; - Essel Mining & Industrial Ltd. - Jindal Steel & Power Ltd; is incorporated as a Special Purpose Vehicle (SPV) particularly to construct a New Railway Line between Haridaspur to Paradeep in Orissa. * Further, for the purpose of construction, the assessee company entered into a construction....
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....is required to be capitalized to be set off against pre-operative expenses." * Finally, the Delhi High Court after analyzing the ratio in the case of Tuticorin Alkali Chemicals and Bokaro Steel Ltd simultaneously, held that the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources-Relevant para of Judgment are reproduced hereunder: 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 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 (supra) 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 ....
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....and accordingly be set off against pre-operative expenses. We considering the judicial precedence and the facts and circumstances of the present case, are of the substantive opinion that if the assessee company receives any amount which is inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. Hence such receipts are capital in nature and cannot be taxed as income under income from other sources. The assessee company was formed to set up a mining project and the process of setting up was got delayed and deposits of share capital amount received from the share applicants with the bank in the form of fixed deposits for short term, is to be considered as inextricably linked with the process of setting of its plant and machinery. Accordingly, we hold that the interest earned by the assessee should not be treated as income from other sources and we allow the grounds of appeal of the assessee. Therefore, the appeal of the assessee for assessment year 2011-2012 is allowed. c) POSCO INDIA PVT. LTD VERSUS, DCIT ITA Nos. 186 and 460/CTK/2011, 461/CTK/2011 and held as under: Para 5 In the instant ca....
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.... Nos. 1642 & 1643/Ahd/2018; ♦ ITO, v. CMDC ICPL Coal Ltd, ITA No. 271/RPR/2014; ♦ M/s Saville Hospital & Research Centre PVT. Ltd. v. ITO ITA No. 491/JP/2018 * It may also be noted that recently the Hon'ble Supreme Court in the case of NATIONAL CO-OPERATIVE DEVELOPMENT CORPORATION v. CIT in CIVIL APPEAL NOS. 5105-5107 OF 2009, dated 11.09.2020 held that interest income generated on the idle funds which is applied in the business of the assessee company is to be treated as a business income thus, fall under the head of 'Profits and Gains of Business or Profession and not under Income from Other Sources. Relevant findings of the order are as under: 23. We are in agreement with this view taken by the High Court, as the only business of the appellant-Corporation is to receive funds and then to advance them as loans or grants. The interest income arose on account of the fund so received and it may not have been utilised for a certain period of time, being put in fixed deposits so that the amount does not lie idle. That the income generated was again applied to the disbursement of grants and loans. The income generated from interest....
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.... from the bank accounts of the assessee. Therefore, it need to be verified the utilization of the interest as to whether it has been utilized for the revenue purpose or for the construction of the project. He also submitted that the share application money is kept pending for allotment at the year ending 31.03.2014. He also made analysis of the balance sheet and submitted that the huge amounts have been kept by the assessee in liquid form in the bank by way of investments as FD. Therefore, it is clear that the intention of the assessee is to earn interest on investment in fixed deposit and no advances were made to the contractor. Therefore, ld. CIT-DR requested that the matter should go back to the AO for verification. 6. After hearing both the sides and perusing the entire material available on record and the order of the authorities below, we find that the assessee has shown interest on fixed deposit of Rs. 3,27,79,005/- and further on perusal of the documents filed by the assessee in the paper book containing page Nos.1 to 11 filed on 8th October, 2020 on email that the assessee has filed copy of the fixed deposit and the balance sheet of the assessee company. On perusa....
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....ng allotment as on 31.03.2014 to all the applicants, except POSCO Ltd. (at 4(g) above) due to non-fulfillment of certain conditions by them. 7. From the above it is clear that the assessee company is a public limited company and the share application money was kept pending for allotment for a long time. In this regard, we specifically asked questions to the ld. AR of the assessee on the following certain points which are as under :- i) Date of receipt of share application money & allotment to shareholders. ii) whether the company has followed the relevant rules/provisions of the Companies Act in this regard. iii) if the shares have not been allotted within 60 days from the date of receipts then the discloser policy in the balance sheet, whether it should be treated as current liability or otherwise and treatment in the books of account of the company. iv) use of share application money during pendency for allotment. v) applicability of company deposit rules and its classification in the balance sheet & utilization of interest or interest on such deposit and taxability as per the Income Tax Act, 1961. vi) the fixed depos....