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2020 (11) TMI 172

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....tal 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 linked to the project and is purely a capital receipt and hence the aforesaid addition is liable to be delet....

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.... 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'ble Tribunal, after relying on the order of Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. 315 ITR 255, held that Inter....

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....ked 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, AO completed the assessment assessing the total income at Rs. 4,31,66,600/- and its passed order u/s 143(3) of the Act, dated 01.09.2016 making the following addition- Sr. No. Particulars Amount (Rs.) 1. Interest on FDR ....

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....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 funds which are otherwise "inextricably linked" to the setting up of the plant, such income is required to be capitalised to be set off against pre-operative expenses." 25. Finally, the Delhi High Court after analyzing the ratio in the case of Tuticorin Alkali Chemicals and Bokaro Steel Ltd simultaneously, held that the Interes....

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.... 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 other sources, whereas the interest income on bank deposits earned by the assessee company to commencement of its business is in the nature of capital receipt 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 inextr....

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....f 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-Atlanta Transformers India Pvt. Ltd. v. ACIT, ITA 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 30. 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 ....

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....ssee 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 issued specifically for the purpose of completion Project in AY 2012-13. 36. Therefore, the circumstances of the present situation are highly dissimilar from that of the preceding assessment year, i.e. AY 12-13 because the major infusion has been in the AY 2013-14 and AY 2014-15 only and not in AY 2012-13. If anything was going wrong in the past that wrong thing need not to be followed in subsequent years 37. Without prejudice to the above, it is also submitted that it also a settled law if anything was going wrong in the past that wrong thing need not to be followed in subse....

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....ed 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 or it was commercially utilized for laying down railway line. iv.) Investing monies in the FDS is neither the business of the assessee company not incidental to its main business. It was held by the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (227 ITR 172) that it is totally immaterial whether the funds were raised by the issue of share or debentures. If the money lying idle is put into FDs, then interest income so earned would be revenue in nature chargeable to tax. v.) The assessee had raised share application monies for the purpose of laying down railway line. But, due to non-utilization of funds, fixed deposits were made out of....

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....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 had been invested in FDRs of the banks as well as deposits with various companies and assessee had earned interest on the same. The same had to be taxed as 'income from other sources' in the light of the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. Vs. CIT (supra). It was clear that unless and until the machinery of project was fully installed and the project became operational and the order was executed, it could not be said that the business had been set up. In view of the fact that the assessee was in the process of setting up an institute for training of people in film line but the building for such training institute was under construction during the ye....

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.... 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, then these would constitute surplus funds for that period which were utilized for making short term deposits/fixed deposits as held by the Chandigarh ITAT in the case of Himalayan Expressway Ltd., Kalka Vs. ITO in ITA No.690/Chd/ 2014 dated 23.07.2015. The facts & circumstances of the present case are similar to that of Matoshri Ramabai Ambedkar Magaswargiya Sahakari Soot Girani Maryadit, Warananagar, Tal. Panhala, Dist. Kolhapur Vs. ITO in ITA No.1804/PN/2012 dated 31.12.2013 for AY 2008-09 wherein the Jurisdictional ITAT i.e. Honourable Pune Tribunal decided against the assessee. In the cited case, the assessee was a Co-operative Society, registered under Societies Act proposed to set-up a spinning mill. In addition to share capital contri....

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....,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 deduction of the amount of Rs. 33,95,068/- u/s. 80P of the Income-tax Act against which an amount of Rs. 27,83,940/- received from Shivaji Sahakari Bank Ltd. was allowed. The Assessing Officer did not allow the claim of Rs. 15,40,341/- attributed to various expenses on the ground that during pre-business commencement period, the expenses ought to be capitalized which was evident that funds given by the Government of Maharashtra as their contribution towards share capital was deposited with various banks primarily as the same was idle fund lying with the assessee pending development of land and construction of factory building and erection of spinning mill. Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT (1997) 227 ITR 172 ....

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.... 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 the assessment years under consideration that the share application money pending for allotment is also appearing and we have decided the similar issue in the case of M/s Haridaspur Paradip Railway Company Limited Vs. DCIT in ITA No.383/CTK/2019, order dated 12.10.2020, in which the issue of share application money were pending for allotment has been remitted back to the file of AO with the following observations :- 4. Ld. AR has reiterated the submissions made before the lower authorities and he has also relied on number cases and filed his written submissions :- * 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 H....

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....nditure 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 construction work. Furthermore, on such advances, the assessee company received interest which was later adjusted by the assessee against the dues of RVNL from their bills. * Further, the small amount of money so raised by the assessee is parked by in various banks in the form of term deposit to earn interest in order to meet day to day cost of the project. * That, the interest income mentioned above is utilized to meet the expenses of the project, and it is inextricably linked with the process of construction of Railway Line. Accordingly, the assessee treated the said income as a capital receipt. * That, the assessee filed its return of income for AY 2014-15 on 27.09.2014, declaring nil income. Copy of Acknowledgement of ROI along with the Computation of Income is at PB Pg. 1-2. * That, the case was selected for scrutiny assessment and notice u/s 143(2) & 142(1) of the Act, were issued to the....

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....ine between Haridaspur to Paradeep in Orissa. * Further, for the purpose of construction, the assessee company entered into a construction agreement with RVNL. Wherein, RVNL shall undertake the construction of the project (Railway Line) on behalf of the assessee company. Moreover, the funds required for construction shall be arranged by the assessee company. Copy of construction agreement is at PB Pg. 13-40 (Relevant PB Pg. 27, Para 11 of the construction Agreement) * It may also be noted that, as per the construction agreement, RVNL shall charge interest at the Average Prime Lending Rate, if any expenditure is incurred out of its own funds. (Relevant PB Pg. 28, Para 11.5 of the construction Agreement). Thus, the whole cost of the project is to be financed by the assessee company * Accordingly, the assessee company issued share capital which is unquestionably utilized for construction of Railway Line. Further, small amount of funds are also parked in various banks in the form of term deposit on which assessee received interest which is also expended to meet day to day cost of the project. * It is pertinent to note that there is no allegation of AO or CIT (A) that the share ....

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...." 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 (supra) 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 pre-operative expenses. * Thus, applying the aforesaid Judgment of Delhi High Court in the facts of the present case, it can be appreciated that here also interest income is earned on funds which are "inextricably linked" to the setting up of the Rail Line. Therefore, such income is required to be capitalized to be set off against pre-operative expenses. It may also be noted that the above Judgement of Delhi High Court has been followed by the Coordinate Bench of ITAT Cuttack in the following cases. The Hon'ble ITAT Cuttack, on similar facts after considering the decision of Apex Court in the case of Tuticorin Alkali Chemical and Fertilizers Ltd. v. CIT, a) DCIT v. M/s Radhikapur (West) Coal and Mining Pvt. Ltd., I.T.A. N....

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....the instant case, it was 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 he set off against pre-operative expenses. d) ACIT, v. M/S. POSCO INDIA PVT LTD. AND VICE-VERSA ITA No.155 & 122/CTK/2017, C.O.No.07 And 08/CTK/2017 the interest on fixed deposits are not taxable under income from other sources and, accordingly, we uphold the findings of the CIT (A) and dismiss the ground of appeal taken by the revenue for both the assessment years. e) M/S. KALINGA COAL MINING PVT. LTD., VERSUS ACIT ITA No. 123 and 279/CTK/2010 The learned Counsel has been able to establish that there was no surplus insofar as it was the share capital received as application money pending allotment which was poured in for the purchase/acguisition of land whic....

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....thus, fall under the head of 'profits and gains of business or profession'. There would, therefore, be no requirement of taking recourse to Section 56 of the IT Act for taxing the interest income under this residuary clause as income from other sources. In our view, to decide the question as to whether a particular source of income is business income, one would have to look to the notions of what is the business activity. The activity from which the income is derived must have a set purpose. The business activity of the appellant-Corporation is really that of an intermediary to lend money or give grants. Thus, the generation of interest income in support of this only business (not even primary) for a period of time when the funds are lying idle, and utilised for the same purpose would ultimately be taxable as business income. * Thus, in the view of above submission and judicial pronouncements, it is submitted that the interest earned on FDR & Flexi deposits should reduce the cost of its assets since these are the receipts of capital nature and could not be taxed as income from other sources^ * Thus, in the light of the above, it is submitted that the addition made by th....

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.... No.4 of Rs. 454.95 crores as on 31.03.2014 and Rs. 274.95 crores on 31.03.2013, respectively. It shows that there is net increase in the above account head of Rs. 180 crores and as per Note No.4.2 of the balance sheet, the company has issued 42,74,50,000 equity shares of Rs. 10/- each at par on 29.05.2014 against the share application money pending allotment as on 31.03.2014 to all the applicants except POSCO Ltd. The details are as under :- 4. Share application money pending allotment (Amount inRs.) Particulars As at 31st March, 2014 As at 31st March, 2013 (a) Rungta Mines Ltd. 300,000,000 300,000,000 (b) Essel Mining and Industries Ltd. . 299,750,000 299,750,000 (c) Paradip Port Trust 510,000,000 275,000,000 (d) MSPL Ltd.. 150,000,000 150,000,000 (e) Jlndal Steels & Power Ltd. 50,000,000 50,000,000 (f) steel Authority of India Ltd. 50,000,000 50,000,000 (g) POSCO Ltd, 275,000,000 275,000,000 (h) IDCO 18,000,000 18,000,000 (i) Rail Vikas Nlgam Ltd, 1,639,750,000 1,331,750,000 (j) Govt Or Odlsha 450,000,000 - (k) Orissa Mining Corporation 747,000,000       4.549,500,000 2,749,500,....

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....2014 and the rest were remained unanswered. Therefore, the ld. AR submitted that let the AO may examine the above questions which are unanswered. 8. Considering the submissions of both the sides and with the consent of both the parties for sending back to the file of AO for the examination of above questions for deciding the issue raised as above afresh, we remit the matter back to the file of AO for fresh adjudication in the light of the above questions and taxability of interest income as per Income Tax Act, 1961. The AO is directed to decide the case after detail examinations and documents produced by the assessee after considering the relevant rules and regulations as per the law. The assessee is also directed to avoid any unnecessary adjournment and cooperate with the AO for early disposal of the case. 13. In the impugned case, on perusal of the orders of the authorities below as well as the submissions made by both the sides before us, we observe that the assessee has deducted the expenses from the interest and surplus has been transferred into the reserve and surplus account. Before the AO the assessee has also offered it as a business income in the form of written submi....