TaxTMI 
TaxTMI 
TaxTMI 
2014 (6) TMI 1050
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.... delete, add, and amend any ground of appeal with the permission of the Hon'ble Bench. " 3. The only issue raised in both the appeals before us is in relation to the treatment of interest on FDR s during the construction period. 4. Both the appeals relating to the same assessee on identical issue were heard together and are being disposed off by this consolidated The facts and issue raised in both order for the sake of convenience. the appeals are identical, however, reference is made to the facts in ITA No.488/Chd/2012 to adjudicate the issue. 5. The brief facts of the case are that the assessee corporation was a government company set up on 5.12.2006 as a joint venture between Government of Himachal Pradesh and H.P.State Electricity Board. During the year under consideration no commercial production had been undertaken. However, the assessee had set off sum of R s. 1,59,44,653/- on account of interest earned on FDR s under the head 'statement of incidental expenses The assessee was show caused to explain as to why the said interest should not be added as income under the head income from other sources In reply it was submitted by the assessee that the said incom....
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....ores to the assessee in pursuance of the agreement. The Assessing Officer observed that no restrictions and conditions had been imposed on the assessee for utilization of money received from Delh Jal Board as well as the interest that had accrued thereupon. Reliance was placed on the ratio laid down by the Hon'ble Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT [227 ITR 172 (SC)]. The Assessing Officer held that the interest income was assessable in the hands of the assessee as income from other sources. 7. In the appeal relating to assessment year 2008-09 the learned A.R for the assessee stressed that the funds which were inextricably linked to the share capital were to be deployed towards setting up of power projects and the interest thereon must be held to be capital receipt. The CIT (Appeals) noted that there was no activity undertaken during the year towards the setting up of any of the power plants. By virtue of being a joint venture company, the government of Himachal Pradesh contributed an amount of during the year under consideration towards its equity share. Another amount of R s.12,36,82,000/- R s was received by the appellant company from Del....
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....itional equity of the government, and as such the interest income belongs to the State government and not to the appellant. In support of the said argument, the appellant has submitted a copy Q/ the Minutes Q/ the 15th meeting Q/ the Board Q/ Directors of the appellant Corporation held on 20.02.2009 at Shim/a and pointed out that item No. 02 of the supplementary/additional agenda item dealt with the issue of interest earned/accrued on the amounts received from the State Govt. as equity. It was emphasized that it was decided in the said Board meeting that the interest earned is to be converted into equity from H.P. Government. ' 9. The CIT (Appeals) perused the minutes of meeting of the Board of Directors which are reproduced under para 4.4 at pages 6 and 7 of the appellate order and compiled the facts of the case as under: "4.5 From the perusal of the above, the following facts become immediately evident: - (i) The Board of Directors of the appellant Corporation was fully seized of the matter regarding the taxable nature of the interest income earned/accrued on the bank deposits invested from the surplus funds available with the appellant corporation. (ii) Special del....
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.... earn income from the bank deposits by utilizing the funds received from the State Govt. and then pass on he burden Q/ taxation thereon to the State Govt. only on papers and that neither of the two panies would actually make the due payment of the income tax. Thus the said plea of the appellant is only a bald plea which does not help its case in any manner. ' 10. The CIT (Appeals) thereafter dealt with the case laws relied upon by the assessee in paras 4.7 to 4.9 and held that the facts of the present case had to be examined in the light of the decision of the Hon'ble Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT (supra). The CIT (Appeals) further held that the total income of the appellant company is chargeable to tax u/ s 4 of the I. T. Act. Since the appellant company had not commenced any business, there was no question of assessment of its profits and gains of business. But the capital of the company was fruitfully utilized by the appellant instead of keeping it idle. Therefore the income generated in the form of interest is distinctly of a revenue nature. The amount of interest received by the appellant company has flown from its investment ....
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....assessment year 2008-09, two other companies i.e. M/S K innar Kai lash Power Corporation Ltd. and M/S Pabber Valley Power Corporation Ltd., were merged with the assessee and all the assets and liabilities of those companies were taken over at book values by the assessee. The Assessing Officer on perusal of the Balance Sheet as on 31.3.2008 noted that there were no fixed assets with the assessee as on 1.4.2007 and the entire assets except for some office equipments were received on merger from he amalgamating companies. The assessee had not made any investment in assets to set up power plant during the said year. The incidental expenditure incurred during the year were in the nature of administrative expenses, apart from some nominal expenses on survey and investigation and consultancy fee. The process of setting up of power plant had not commenced during the relevant year. The Assessing Officer further noted that the bank deposits were made not only from the share capital but also from the funds of the amalgamating companies, which in turn were transferred to the assessee on merger. The assessee during the assessment year 2008- 09 in addition to the share capital had received addit....
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....inst the incidental expenses. 16. The analysis of the above said facts reflects that the assessee company was in the process of setting up of power projects in the State of Himachal Pradesh for which the funds were allocated by the State Government as share capital and further funds were received from Delhi Jal Board for the construction of Renuka Dam Project on behalf of Central Government. Since both the projects had not commenced, the funds lying with the assessee were parked in short term deposits in the bank and interest earned thereupon. The taxability of such interest in the hands of the assessee is the question raised in the present appeal The taxability of a particular receipt or income is to be determined in accordance with the nature and character of the receipt/ income. There is no merit in the plea of the assessee that since the income earned is to be utilized in a particular manner, the same partakes the character of a capital receipt. The receipt is whether capital or revenue in nature, is to be determined in line with the provisions of Income Tax Act and also keeping in mind the nature and character of the said receipt/ income. Another plea raised by the assessee w....
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....nment or for utilization for the specific projects. It is also mentioned in the said sanction orders as to where the money cannot be utilized in the year of grant, then the same could be re-appropriated for providing equity to hydro power projects. While releasing the funds the sanction orders talks of its utilization for a specific purpose and recognizes that the same may not be utilized for the said purpose during the year of its grant and may be reallocated in the succeeding year. However, the said grant orders are silent about the utilization of those funds by the assessee during the intervening period i.e. from the date of allotment to its utilization. The assessee during both the years under appeal had admittedly not commenced its activities and the money which it had received from the H. P. State Government and from Delhi Jal Board on behalf of Government of Delhi was utilized for making short term deposits in bank on which interest was earned. 18. During the course of hearing, the learned A. R. for the assessee was asked to produce any agreement or any letter to the effect that the interest earned on such deposits is to be reverted back or partake the character of funds al....
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....ecision of the Hon 'ble Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT (supra) had been reversed by the Hon'ble Supreme Court in CIT vs. Bokaro Steel Ltd. [236 ITR 315 (SC). In the facts of the said case the assessee company had advanced money to contactors, who were to erect iron and steel plant for the assessee. On these advances to the contractors, the assessee was paid some interest. The company was also receiving hire charge on the plant and machinery let out to the contractors and housing quarters leased to the employees. The Hon 'ble Supreme Court held that the ratio of Tuticorin Alkali Chemicals and Fertilizers Ltd. supra, was not applicable to such facts. The relevant extract from the judgment of the Hon'ble Supreme Court in the case of Bokaro Steel Ltd., supra, is as under: However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income and not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilization of various assets of the company and he payments received for such utilization are dire....
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....o merit in the plea of the assessee that the interest earned by the assessee is to be infused as share capital and/or to be returned to the Principals who had had advanced the loans to the assessee as the assessee has failed to bring on record any evidence to establish its claim. Merely because the money in future would be utilized for capital expenditure does not make the receipts as capital receipts in the hands of the assessee. 24. The Mumbai Bench of the Tribunal in Whistling Woods International Ltd. Vs. ITO (supra) had considered similar issue and also adjudicated the submissions made therein that the principles laid down by the Hon 'ble Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT (supra) had been diluted by the Hon'ble Supreme Court while deciding the case in CIT Vs. Bokaro Steel Ltd. (supra) and other cases. The relevant paras are as under: "12. We have considered the rival submissions carefully in the light of the material on record as well as decisions cited by the parties. In the case of ws Tuticorin Alkali Chemicals & Fertilisers Ltd. v/s. CIT [supra] the Hon'ble Supreme Court observed as under: 'The assessee was a company ....
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.... the Tribunal was dismissed. We are also concerned in this case with the asst. yr. 1983-84. During the previous year relevant to this assessment year, the assessee had received interest income of Rs.l,08,336. The assessee this assessment year, the assessee had received interest income of Rs. 1,08,336. The assesseefiled its return in which it claimed that the interest income of should go to 13 reduce the pre- production expenses including the interest and finance charges which would ultimately be capitalised. The Income-tax Officer rejected the assessee's claim that the interest income was not exigible to tax. The view of the ITO was upheld by the CIT [A] . The company's further appeal to the Income Tax Appellate Tribunal was dismissed. In view of the conflict of decisions between the Madras and Andhra Pradesh High Courts., the Tribunal referred the question regarding taxability of income, directly to the Supreme Court". On the above facts, it was held as under: The company had surplus funds in its hands. In order to earn income out the surplus funds, it invested the amount for the purpose of earning interest. The interest thus earned is clearly of revenue nature and will....
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.... to earn interest. Such interests will be chargeable under s. 56 of the Act. Thus, it is clear from the above discussion that if whenever an assessee is in the process of setting up of the business, if any, income arises under any of the heads except under the head profits and gains of business, then such income has to charged to tax under that particular head. 13. The Id. counsel of the assessee had vehemently argued that this principle was diluted by Hon'ble Supreme Court while deciding the issue in the case of Bokaro Steel Ltd. [supra], Karnal Co-operative Sugar Mill Ltd. [supra] and CIT vs. Karnataka Power Corporation [supra]. But having read these judgments very carefully, we find that the Id. DR is right that in these later three decisions were rendered because of distinguishable facts. In the case of Bokaro Steel Ltd. [supra], the issue was whether rent received from contractors against houses given for staff of contractors, machine hire charges received from machines given by the assessee company and interest received 15 from contractors on advances made by the assessee company to such contractors, was assessable to tax. The Hon'ble Supreme Court observed that ....
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....rporation [supra], the first question referred before the Hon 'ble Court was as under- "(1) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in upholding the order of the CIT(A) who deleted the addition of Rs. being interest receipts and hire charges from contractors by holding that the same are in the nature of capital receipts which would go to reduce capital cost ? From the question itself it is clear that in this case the issue was regarding interest receipts and hire charges from the contracts and that is why the principle laid down in Bokaro Steel Ltd. [supra] was followed. 16. We further find that Hon'ble Supreme Court has again followed the decision of M/S Tuticorin Alkali Chemicals & Fertilisers Ltd. vis. CIT [supra] in the case of CIT vs. Coromandal Cements Ltd. [234 ITR 412]. In this case the head note reads as under: "Against the judgment of the Andhra Pradesh High Court refusing to call for a reference of the question whether the Tribunal was right in holding that interest earned on short-term bank deposits during the pre-production stage could not be treated as income from other sources and should go towards the ....
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....his decision is clearly distinguishable, particularly in the light of the principles laid down by the Hon'ble Supreme Court. 17. As far as the second limb of the argument is concerned, to which the Id. counsel of the assessee has referred to the decision of the Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Limited vs. ITO [supra], it was observed by the Hon 'ble Delhi Court at placitum as under: "4. It is important to note that the Tribunal without holding that the finding of fact of the Commissioner of Income-tax (Appeals), that the interest earned was 'inextricably linked' with the setting up of the power plant reversed the decision of the Commissioner of Income-tax (Appeals)by making a bald observation that the "deposit of share capital has no or very remote connection with setting up of plant and machinery". The Tribunal further observed that it was an independent income earned in a similar fashion as was the case in Tuticorin Alkali Chemicals [1997] 227 ITR 172 (SC). " From the above, it is clear that there was already a finding by the first appellate authority that interest earned was inextricably linked with the settin....