TaxTMI 
TaxTMI 
2021 (3) TMI 476
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....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. 54/Alld/2020 for ay : 2015-16 and ITA No. 55 /Alld/2020 for ay 2016-17 respectively, in memo of appeal(s) filed with Income-Tax Appellate Tribunal, Allahabad (hereinafter called " the tribunal"), reads as under : ITA no. 54/Alld/2020 for AY:2015-16 "1. The Id. CIT(A) has erred in upholding the addition of Rs. 6,80,71,611 received as interest from banks during the construction period which is in the nature of 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. The same was rightly set off against the interest paid on term loans by the assessee. 2. The ld.. CIT(A) has erred in making the addition of Rs. 1,49,85,443 received as interest on advances given to contractors for construction work because the said receipts are inextricably linked with plant set up activities and hence is in the nature of Capital Receipt and are being set off aga....
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....ssee has not yet commenced and therefore it was liable to be adjusted against pre operative expenses reducing the cost of the project. The same was rightly set off against the interest paid on term loans by the assessee. 2. The ld. CIT(A) has erred in making the addition of Rs. 6,39,33,174 received as interest on advances given to contractors for construction work because the said receipts are inextricably linked with plant set up activities and hence is in the nature of Capital Receipt and are being set off against Expenditure during construction period, This activity was rather a part and parcel of the constructional activities of the assessee. The source is not independent of, but is rather closely connected and interlinked to the process of setting up of the factory, 3. The Id. Commissioner of Income-tax (Appeals) has erred in law and on facts in upholding the addition of Rs. 7,85,000 and Rs. 82,98,814, being forfeiture of earnest money and other miscellaneous recoveries from contractors, as income from other sources because the said receipts are inextricably linked with plant set up activities and hence is in the nature of Capital Receipt and . are being set ....
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....for seeking legal opinions from legal experts, which has led to delay in filing of these two appeals with the tribunal and prayers are made to condone the delay in filing of these two appeals. The Revenue on the other hand objected to the condonation of delay. After considering the entire matter on record and after hearing both the parties, we hereby condone the delay of 48 days in filing these two appeals by assessee late beyond the time stipulated u/s 253(3) of the 1961 Act. Whence technicalities are pitted against substantial justice, the Courts will lean towards substantial justice as against technicalities unless malafide on the part of tax-payer is at writ large, which in the instant case we find no malafide on the part of the assessee in filing these appeals late with tribunal by 48 days beyond the time provided u/s 253(3) of the 1961 Act. The assessee has shown sufficient cause in filing of these appeals late by 48 days. The assessee being Public Sector undertaking, with a corporate entity having head office at New Delhi, some delay in processing and seeking legal advice on complicated issues can be reasonably foreseeable and this explanation cannot be discarded at threshol....
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....rest income of Rs. 1,49,85,443/- earned from IVRCL & MG Contractors for advance paid for execution of certain work( enhancement of income by ld. CIT(A) ) and the last issue is with respect to forfeiture by assessee of earnest money advanced by contractors to assessee, on account of non completion of work . The assessee has deducted all the three aforesaid receipts from the expenditure during construction period, and has filed return of income showing 'Nil' Income . The ld. CIT(A) has decided all the aforesaid three issue(s) against the assessee including enhancement of income with respect to interest income from advances to Contractors, and hence the assessee being aggrieved has come in appeal before the Tribunal. At the time of hearing before the Bench, both the ld. counsel as well as ld. CIT. DR brought to the notice of the Bench, that the tribunal has recently passed an appellate order(s) dated 29.01.2021 in ITA No. 175/Alld/2018 for ay: 2013-14 in an appeal filed by assessee, and appellate order in ITA No. 80 & 177/Alld/2018 for ay's: 2013-14 & 2014-15 respectively with respect to appeals filed by Revenue for ay: 2013-14 and 2014-15 respectively, and it is claimed that the issu....
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....as sought instead of offering the said interest income from bank deposit to tax under the provisions of 1961 Act. The AO brought the said interest income earned on bank deposit to income- tax u/s 56 of the 1961 Act and rejected the contentions of the assessee to set off the said interest income on bank deposits against the interest paid on term loans availed for setting up of power plant. The AO relied upon provisions of Section 5 of the 1961 Act and Hon'ble Supreme Court decision in the case of Tuticorin Alkali Chemicals and Fertilizers Limited(supra) while rejecting the contentions of the assessee and bringing to tax interest income earned on bank deposits under the head 'Income from other sources' under the provisions of Section 56 of the 1961 Act. The ld. CIT(A) while adjudicating appeal filed by assessee granted relief to the assessee by following decision of tribunal in assessee's own case for earlier years viz. ay: 2009-10 and 2010-11. The ld. CIT(A), thus, followed 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. We have gone through the appellate order p....
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....d. It can be seen that in both the assessment orders the commencement of the business was not started but was only to the extent that the company was setting up a plant activities like land acquisition, statutory, clearance, development of infrastructure but the business activity was not started in both the Assessment Years under consideration before us. In the present case, the interest was not earned on the surplus funds but were equity contribution by the joint venture of partners for acquisition, construction and setting up of a plant and other infrastructure facilities. The funds kept in the current account of the company were used for on-going construction activity as and when required. The CIT(A) relied upon the case of Bokaro Steel, but the same is not transferred by the bank in short term MODs Accounts in accordance with the account terms and conditions. The said MODs were reversed automatically as and when the assesses withdrew the amounts From account. There was no intention to earn any interest on such funds. The funds were kept in liquid so as to use them as and when required, since, the interest on short term MODs were inextricably link to the construction and acquisi....
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....osits with banks would be chargeable to tax under the head 'Income from other sources' or would go to reduce the interest payable by the assessee on the term loans secured by the assessee from financial institutions, which would be capitalised after the commencement of commercial production?" 8. The facts of this case are not in dispute. In the usual course, interests received by the company from bank deposits and loans would be taxable as income under the head 'Income from other sources' under section 56 of the Income-tax Act, 1961 ('the Act'). It is argued on behalf of the company that it had not yet commenced its business and in any event the income was derived from funds borrowed for setting up the factory of the company and should be adjusted against the interest payable on the borrowed funds. 9. In our judgment neither of the two factors can affect taxability of the income earned by the company. Under the Act, the total income of the company is chargeable to tax under section 4 of the Act. The total income has to be computed in accordance with the provisions of the Act. Section 14 of the Act lays down that for the purpose of computati....
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....ecided to invest it fruitfully. The fruits of such investment will clearly be of revenue nature. This position in law was explained by Sir George Lowndes in the oft-quoted passage in the case of CIT v. Shaw Wallace & Co. [1932] [59 LA. 206]: "Income, their Lordships think, in this Act connotes a periodical monetary return 'coming in' with some sort of regularity or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. This income has been linked pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something, which is often loosely spoken of as 'capital'." 14. In other words, if the capital of a company is fruitfully utilised instead of keeping it idle, the income, thus, generated will be of the revenue nature and not accretion of capital. Whether the company raised the capital by issue of shares or debentures or by borrowing will not make any difference to this principle. If borrowed capital is used for the....
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.... under any of these two sections, since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting year. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business cannot be allowed as deduction, nor can it be adjusted against any other income under any other head. Similarly, any income from a non-business source cannot be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plants and machineries even before commencement of business of the assessee. 18. It has been argued that the source from which the company has earned interest is borrowed capital. The company has to pay interest to its creditors on the same borrowed capital. Having regard to the identity of the fund on which interest is earned and interest is payable, the company should be allowed to set off its income against interest payable by it on the same fund. We are of the view that no adjustment can be allowed except in accordance with the provisions of the Act. However desirable it may be from the point of view of equity, this adjustmen....
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....riding title of anybody diverting the income at source to pay the amount to the creditors of the company. 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. If so, the amount will have to be taxed - Pondicherry Railway Co. Ltd. v. CIT AIR 1931 PC 165. 23. Our attention was drawn to two other decisions where the view of the Andhra Pradesh High Court was followed. In the case of CIT v. Electrochem Orissa Ltd. [1995] 211 ITR 552, the Orissa High Court preferred the view expressed by the Andhra Pradesh High Court to the view expressed by the Madras High Court in Seshasayee Paper & Boards Ltd's case (supra) on the ground that the Madras High Court case was based on a finding of fact that there was no direct connection between the interest paid and the interest received. In our view it will not be right to read the judgment in Seshasayee Paper & Boards Ltd. 's case (supra)in that way. The Court's finding in Seshasayee Paper & Boards Ltd. 's case (supra)was....
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.... 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. He may or may not discharge his liability to pay interest with this income. Merely because it was utilised to repay the interest on the loan taken by the assessee, it did not cease to be his income. The interest earned by the assessee could have been used for many other purposes. If the assessee purchased a house or distributed dividend or paid salary of its employees with the money received as interest, will the interest amount be treated as not his income? This is not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as he liked. The application of the income for payment of interest could not affect its taxability in any way. 27. The second reason given by the High Court was that the Institute of Chartered Accountants of India was a recognised authority on accounting principles. This fact has been recognised by this Court in the case of Challapalli Sugars Ltd v. CIT [1975] 98 ITR 167. Therefore, its view has to be re....
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....bserved: "... clause (b) of sub-section (1) of that section provides that in case, interest is paid on share capital issued for the purpose of raising money to defray the expenses of constructing any work or building or the provision of any plant in contingencies mentioned in that section, the sums so paid by way of interest may be charged to capital as part of the cost of construction of the work or building or the provision of the plant. The above provision thus gives statutory recognition to the principle of capitalising the interest in case the interest is paid on money raised to defray expenses of the construction of any work 6r building or the provision of any plant in contingencies mentioned in that section even though such money constitutes share capital. The same principle, in our opinion, should hold good if interest is paid on money not raised by way or share capital but taken on loan for the purpose of defraying the expenses of the construction of any work or building or the provision of any plant. The reason indeed would be stronger in case such interest is paid on money taken on loan for meeting the above expenses." (p. 175) This Court also relied on....
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....he assets. Khanna, J., however, did not stop there. He pointed out that the principle of capitalising interest was to be found in section 208 itself and was also consistent with the views of the English Courts. 32. But this is an entirely different case. Whether a particular receipt is of the nature of income and falls within the charge of section 4 is a question of law which has to be decided by the Court on the basis of the provisions of the Act and the interpretation of the term 'income' given in a large number of decisions of the High Courts, the Privy Council and also this Court. It is well-settled that income attracts tax as soon as it accrues. The application or destination of the income has nothing to do with its accrual or taxability. It is also well-settled that interest income is always of a revenue nature unless it is received by way of damages or compensation. 33. In the premises, we are of the view that the Madras High Court came to a correct decision in the case of Seshasayee Paper & Boards Ltd ( supra). The contrary views expressed in the cases of Nagarjuna SteebLtd ( supra), Electrochem Orissa Ltd (supra) and Maharashtra Electrosm....
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....see activities. In the impugned assessment year 2013-14 which is in consideration before us, it is observed that there was a further infusion of capital of Rs. 600 crores in equal proportion by both the promoters namely NTPC Ltd. and UP RUVN Ltd., and the assessee has earned interest income of Rs. 1,67,02,568/- on deposits made with the bank which was sought to be set off by assessee against interest paid to bank on term loans availed for setting up of the project. But here during the impugned assessment year's, there are no such further findings as were there in ays:2009-10 and 2010-11 as to whether the surplus funds were deployed by assessee with deposit with banks on which interest income was received or short term deposits were created at the behest of the bank which were automatically credited by bank when the assessee required the funds for the project execution, and the ld. CIT(A) has merely followed the appellate order passed by the tribunal for earlier ay's: 2009-10 and 2010-11 . The power of ld. CIT(A) are co-terminus with the power of the Assessing Officer, and the ld. CIT(A) is duty bound to make enquiries to give finding that facts as are prevalent in the current year ....
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....ssessee who has itself given standing instructions to the bank, shall also be looked into by ld. CIT(A) while adjudicating appeal denovo. Needless to say that ld. CIT(A) shall give proper and adequate opportunity of being heard to the assessee in denovo appellate proceedings. The appeal filed by assessee on this issue is allowed for statistical purposes. We order accordingly. 9. With respect to second issue concerning interest earned by assessee from IVRCL and M.G. Contractors for advances paid for execution of certain work, we are also restoring the matter back to the file of ld. CIT(A) with a similar direction as above to look into the terms and conditions of the contract and the deposit made by the assessee with the contractors to see that whether the said deposits were made by assessee to contractors as part of the terms and condition of the contract for construction of the assessee project and if that be so then in that case it is to be held that the interest earned by assessee from said advances to contractors for carrying on said deposits is inextricably linked with the construction activity of the assessee for setting up of the project and hence it will go on to reduce t....
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....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 for the construction work of the assessee including certain amenities granted to the staff by the assessee. Secondly, hire charges for plant and machinery which was given to the contractors by the assessee for use in the construction work of the assessee, and thirdly, interest from advances made to the contractors by the assessee for the purpose of facilitating the work of construction. 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 perta....
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....ertilizers 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 capital receipt. The department relied upon the observations made in that judgment (at page 179) to the effect that if the company, even before it commences business, invests surplus funds in its hands 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 rented house and gets rent, such rent will be assessable to tax under section 22 as income from house property. Likewise, the company may have income from other sources. The company may also, as i....
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....he assessee- company for stones, etc., excavated from the assessee-company's land. The land had been allowed to be utilised by the contractors for the purpose of excavating stones to be used in the construction work of assessee's steel plant. The cost of the plant to the extent of such royalty received is reduced for the assessee. It is, therefore, rightly taken as a capital receipt. (Emphasis supplied by us) In this case, it is undisputed contractors has given earnest money (EMD) to the assessee and since they could not complete the work in time the assessee has forfeited the amount, and also there were miscellaneous recoveries from contractors. The commercial operations of the power plant has not yet commenced during the impugned ay and the project was under implementation. Thus, the receipts are inextricably linked to the project and the ratio of decision of Hon'ble Supreme Court in the case of Bokaro Steel Ltd. (Supra) shall be applicable and hence we are of the view that these are capital receipt and they cannot be brought to tax and shall go on to reduce the cost of the project . Hence, we reverse the appellate order passed by ld. CIT(A) and allow th....