TaxTMI 
TaxTMI 
2021 (2) TMI 69
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....om two separate assessment orders dated 25.02.2016 and 15.11.2016 for ay: 2013-14 and 2014-15 respectively, both passed u/s. 143(3) of the Income Tax Act, 1961 (hereinafter called "the Act") by learned Assessing Officer(hereinafter called " the AO") . We have heard both the parties through video conferencing mode through virtual court. 2. The grounds of appeals raised by assessee in its appeal in ITA No. 175/Alld/2018 for ay : 2013-14 and by Revenue in its appeal(s) ITA No. 80 and 177/Alld/2018 for ay 2013-14 and 2014-15 respectively, in memo of appeal filed with Income-Tax Appellate Tribunal, Allahabad (hereinafter called " the tribunal") reads as under : Assessee's Appeal in ITA no. 175/Alld/2018 for AY:2013-14 "1. Because the sum of Rs. 1,91,40,00 being forfeiture of earnest money from the contractors, forfeited and appropriated by the assessee, neither constituted business income of the assessee nor income from other sources and was in the nature of capital receipt and as such was not liable to be taxed. 2. Because the Id. Commissioner of Income-tax (Appeals) has erred in law and on facts in upholding the addition of Rs. 1,91,40,000, being forfeitu....
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.... 9 of the decision in the case of CIT Vs. Indo Gulf Fertilizers & Chemicals Corp. Ltd. (2006) 280 ITR 621 (Alld), has considered the relevant part of that decision and has held that company has not chosen to keep its surplus capital idle, but has decided to invest it fruitfully and the fruits of such investment will clearly be of revenue nature, 3.' On facts and circumstances of the case and law on the issue the order of the Ld. CIT(A) is not legally tenable hence, it is prayed that order dated 21.12.2017 of CIT(A), Allahabad be set aside and that order of Assessing Officer be restored." Revenue's Appeal in ITA No. 177/Alld/2018 for AY:2014-15 "(i) The Ld. CIT (A) Allahabad has erred in deleting the addition of Rs. 7,14,08,725/- being income from other sources by relying upon the decision of Hon'ble ITAT in the respondent case of A.Ys. 2009-10 & 2010-11, and ignoring the decision of Hon'ble jurisdictional High Court in the case of CIT Vs. Indo Gulf Fertilizers & Chemicals Corp. Ltd. (2006) 280 ITR 621 (Alld). (ii) The Ld. CIT(A) has erred in holding that the AO has wrongly relied upon the decision of Hon'ble Supreme Court in the c....
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..... 6. Being aggrieved by assessment order passed by AO, the assessee filed first appeal with ld. CIT(A) who was pleased to allow claim of the assessee for setting off interest income to the tune of Rs. 1,67,02,568/- earned by assessee on bank deposits against preoperative expenses thereby reducing the cost of the project, by following the appellate order dated 16.08.2017 passed by tribunal in assessee's own case for ay's: 2009-10 and 2010-11 in ITA No. 44/Alld/2014 and ITA No. 85/Alld/2016 respectively, by holding as under: "Appellant's submission The AR of the appellant has submitted as under- A. The amount of Rs. 1,67,02,568 received as interest during the construction period is a capital receipt because it pertains to a period when the business of the assessee has not yet commenced and therefore it was liable to be adjusted against pre operative expenses reducing the cost of the project. Hence, the same has rightly been set off against the interest paid on term loans. The above view has already been settled in favour of the assessee by the Hon'ble ITAT, Allahabad in assessee's own case for the AY 2009-10 and 2010-11. A copy of the judgme....
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....essee that the assessee has not yet commenced commercial operations during the impugned assessment years . The said letter dated 30.04.2019(signed on 01.05.2019) of Northern Regional Power Committee, Ministry of Power, Government of India addressed to Central Electricity Authority is placed in file on record. 8. We have heard both the parties through Video Conferencing and perused the material on record. We have observed that the assessee is a Public Sector undertaking which was setup and incorporated on 02.04.2008 as a joint venture company of NTPC Limited and of UP RUVN Ltd. and was engaged in setting up of a power generation plant in the name of Mija Urja Nigam (P) Ltd. . The assessee has undisputedly not commenced commercial operations during the impugned assessment year. We have observed that the assessee has earned income from interest to the tune of Rs. 1,67,02,568/- on deposits with banks. We have observed that the assessee has claimed the same to be set off against interest paid on terms loans availed for setting up of the power generation plant and hence reduction from pre-operative expenses for setting up the project was sought instead of offering the said interest in....
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....Taxman 94 (SC) . The tribunal further observed that these short term MODs created by Bank were reversed automatically by the bank as and when the assessee withdraw the amount from the account and there was no intention on the part of the assessee to earn any interest on such fund. The tribunal had further observed that the funds were kept in liquid so as to use them as and when required, since, the interest income on short term MOD's were inextricably linked to the construction and acquisition activities in the regular course of the assessee's activities. The tribunal further observed that the interest income was not earned by the assessee out of surplus funds so as to treat the said income as income from other sources. The tribunal has also considered decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and also decision of Hon'ble Apex Court in the case of CIT v. Bokaro Steel Ltd. [1999] 102 Taxman 94 (SC), and then the claim of the assessee was allowed for both the years by tribunal, by holding as under: "We have heard both the parties and perused the material available on record. It can be seen that in both the asse....
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....ecision of the Hon'ble Supreme Court in the case of Radhasoami Satsang v. CIT reported in (1992)193 ITR 321(SC). We have observed that Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (Supra) has observed that even during the period when commercial production has not started but the funds were invested in the bank FDR etc. the interest income has to be brought to income-tax under provisions of Section 56 of the 1961 Act under the head 'Income from other sources', and setoff cannot be allowed against interest on term loans secured by tax-payer from Financial Institutions which would be capitalized after the commencement of commercial production. The decision of Hon'ble Supreme Court in the case of Tuticorin (supra) is reproduced hereunder: " 7..........In view of the aforesaid conflict of decisions between the Madras and the Andhra Pradesh High Courts, the Tribunal has referred the following question of law to this Court for decision: "Whether, on the facts and in the circumstances of the case, interest derived by the assessee from the borrowed funds which were invested in short-term deposits with banks would be chargeable ....
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....iness or profession' is only one of the heads under which the company's income is liable to be assessed to tax. If a company has not commenced business, there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed. If the company, even before it commences business, invests the surplus fund in its hand for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head 'Capital gains'. Similarly, if a company purchases a rented house and gets rent, which rent will be assessable to tax under section 22 of the Act as income from house property. Likewise, a company may have income from other sources. It may buy shares and get dividends. Such dividends will be taxable under section 56. The company may also, as in this case, keep the surplus fund in short-term deposits in order to earn interest. Such interest will be chargeable under section 56. 13. The company has chosen not to keep its surplus capital idle, but has decided to invest it fruitfully. The f....
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....ons of the Act. The expenditure would have been deductible as incurred for the purpose of business if the assessee's business had commenced. But that is not the case here. The assessee may be entitled to capitalise the interest payable by it. But what the assessee cannot claim is adjustment of this expenditure against interest assessable under section 56. Section 57 of the Act sets out in its clauses (i) to (iii)the expenditures which are allowable as deduction from income assessable under section 56. It is not the case of the assessee that the interest payable by it on term loans is allowable as deduction under section 57. 16. If that be so, under which other provision of law, can the assessee claim deduction or set-off of his income from other source against interest payable on the borrowed fund? 17. There are specific provisions in the Act for setting off of loss from one source against income from another source under the same head of income (section 70), as well as setting off of loss from one head against income from another (section 71). In the facts of this case, the company cannot claim any relief under any of these two sections, since its business ha....
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....order to earn income out of the surplus funds, it invested the amount for the purpose of earning interest. The interest, thus, earned is clearly of the revenue nature and will have to be taxed accordingly. The accountants may have taken some other view but accountancy practice is not necessarily good law. In B.S.C. Footwear Ltd. 's case (supra), the House of Lords had no hesitation in holding that the accounting practice for calculating its profit followed by the assessee and accepted by the revenue for 30 years could not be treated as sanctioned by law and was : not acceptable for the purpose of computation of taxable income. 22. There is another aspect of this matter. The company, in this case, is at liberty to use the interest income as it likes. It is under no obligation to utilise this interest income to reduce its liability to pay interest to its creditors. It can re-invest the interest income in land or shares, it can purchase securities, it can buy house property, it can also set up another line of business, it may even pay dividends out of this income to its shareholders. There is no overriding title of anybody diverting the income at source to pay the amount ....
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.... 489 . In that case, the assessee, before commercial production had started, had realised a sum of Rs. 3,14,356 as interest on short-term deposit. At the same time, the assessee had paid a sum of Rs. 58,51,505 as interest on funds borrowed by it for the purpose of its business. The assessee after deducting the receipt of interest from the amount of interest paid by it capitalised the balance amount. The High Court was of the view that the background of raising of the fund by borrowing and temporary utilisation of a portion of that fund by keeping the same in call deposits with the banks went to show that the interest was earned for the purpose of reducing the liability of the assessee. The High Court came to the conclusion that it was evident that the assessee did not derive any income by temporary utilisation of the loans and since no income was derived by the assessee, the question of assessing the sum of Rs. 3,14,366 in the hands of the assessee as 'income from other sources' did not arise. 26. It is difficult to follow this reasoning. If a person borrows money for business purpose but utilises that money to earn interest, however, temporarily, the interest so g....
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....een defined in the Act. It was, therefore, necessary to find out the commercial sense of the phrase. Khanna, J. (as his Lordship then was) observed: "As the expression 'actual cost' has not been defined, it should, in our opinion, be construed in the sense which no commercial man would misunderstand. For this purpose it would be necessary to ascertain the connotation of the above expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The accepted accountancy rule for determining cost of fixed 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." (p. 167) 30. This Court also took note of the provisions of the Companies Act, 1956 and in particular section 208(1)( b). It observed: "... clause (b) of sub-section (1) of that section provides that....
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....during the construction of that mile of line. Now, it seems to me that the company are entitled -1 do not say that they are bound to do it - if they think fit to charge in their accounts as the cost of that mile of line not only GBP 10,000, but the GBP 10,000 and the interest on it during the period of construction.'" (p. 176) In other words, it was held that the cost of construction will be the amount actually spent and also the interest payable on the amount borrowed during the period of construction. 31. The judgment in Challapalli Sugars Ltd s case (supra)goes to show that the Court was not in any way departing from legal principles because of any opinion expressed by the Institute of Chartered Accountants. The phrase 'actual cost' was not defined in the Act. Therefore, it had to be understood in the commercial parlance. To find that out the normal rule of accountancy prevalent in commercial and industrial circles was noted. According to the Institute of Chartered Accountants, actual cost will also include interest paid on borrowed money for the purchase of the assets. Khanna, J., however, did not stop there. He pointed out that t....
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....not filed any appeal from this finding which is given against it. In any case, this question is now concluded by a decision of this Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172. Hence, we are not called upon to examine that issue." (Emphasis supplied by us) We have also gone through the decision of Hon'ble Allahabad High Court in the case of M/s Sangam Power Generation Limited(supra) and have observed that Hon'ble jurisdictional High Court has passed a detailed order and decided this issue in favour of Revenue. We have observed that the facts for the earlier years viz. ay's: 2009-10 and 2010-11 were clearly peculiar as it was at the behest of bank the deposits were created, which were automatically reversed by the bank, when the assessee required the funds towards implementation of the project. Thus, on its own peculiar facts, the finding was given by tribunal that there was no surplus funds held by assessee and interest income was inextricably linked with the construction and acquisition activities in the regular course of the assessee activities. In the impugned assessment year 2013-14 which is in consideration before us....
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....T(A) and adjudicated on merits in accordance with law. We clarify that we have not commented on the merits of the issue in appeal. Thus, the appeals of the Revenue for ay: 2013-14 is allowed for statistical purposes. Since, the facts and issue in Revenue's appeal for ay: 2014-15 are similar, we also restore the said appeal to the file of ld. CIT(A) with similar directions. We order accordingly. 9. Now coming to assessee's appeal filed with tribunal for ay:2013-14. We have observed that the assessee has filed this appeal late by 40 days beyond the time stipulated u/s 253(3) of the 1961 Act, and an application supported by an Affidavit executed by Assistant General Manager (Finance), explaining the cause of delay in filing this appeal late with tribunal has been filed with prayers to condone the delay. After considering the material on record and hearing rival parties, we hold that the assessee has shown sufficient cause for delay of 40 days in filing this appeal late with tribunal beyond the time provided u/s 253(3) of the 1961 Act and hence we condone the delay in filing of this appeal by the assessee for ay: 2013-14. The assessee is aggrieved by decision of ld. CIT(A) in uph....
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....y both the rival parties, as were made while arguing the issue concerning interest income on deposits with bank which is adjudicated by us in preceding para's of this order. In this case, we have observed that there is a clear finding by ld. Assessing Officer/ld. CIT(A) that earnest money(EMD) given by contractors was forfeited by assessee on account of non completion of work and other miscellaneous recoveries were made from contractors. It is undisputed that power plant project of the assessee was under implementation during the impugned ay: 2013-14 and commercial production has not yet started during the impugned assessment year. We have observed that the Hon'ble Supreme Court in the case of Bokaro Steel Ltd. (Supra) passed a detailed order in which it has been held that if the receipt are inextricably linked to the project under implementation then the same are be treated as capital receipt which will go on to reduce cost of project, by holding 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 fo....
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....ction 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 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 uti....