TaxTMI 
TaxTMI 
2014 (12) TMI 1378
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....d., to execute the 100 MW Uhi Stage-Ill in Tehsil Jogindernagar, Distt. Mandi. The company was incorporated on 25/3/2003, but the company had not started commercial operation even during the assessment year 2009-10. Therefore, no profit and loss account was prepared by the assessee corporation, and instead a statement showing incidental expenditure during construction (pending allocation) was prepared by the assessee. During the course of assessment proceedings, the A.O. observed that the assessee company was still in the pre-operative stage and had not started any commercial production. He, therefore, held that the interest earned on bank deposits to the tune of Rs. 1,19,32,956/- by the assessee corporation was taxable, as the said interest was earned on surplus funds. Dismissing the claim of the assessee company that the purpose of keeping the funds in savings/short term deposits instead of current account was not to generate any income but to efficiently and effectively use the funds so as to reduce the total outlay on the project, the A.O. relied on the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkaline Chemicals & Fertilizers Ltd. Vs. CIT (1997) 227 IT....
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....e of Karnal Co-operative Sugar Miiis Ltd., (2000) 243 ITR 2 (SC), it was contended that Bharat Heavy Electrical Limited (BHEL) is the main supplier for supply and installation services of Hydro generating equipments and its associated auxiliaries, transformers and E.O.T. Cranes for UHL Stage-Ill, HEP and have entered into agreement with Beas Valley Power Corporation through H.P. State Electricity Board Work awarded to the BHEL on 15/02/2007. As per clause 5.0 of the Terms and Procedures of payments laid in the agreement between the parties, the purchaser i. e. Beas Valley Power Corporation will establish an irrevocable letter of credit (L/C) payable at site in favour of the contractor through the purchaser bank for payment due, on dispatch of equipment. The value of L/C will be as per payment schedule for each quarter and will be valid for one quarter only. It will be the responsibility of the contractor to utilize the L/C for concerned quarter to fullest extent etc. For the financial year 2008-09, BHEL had given a fund requirement of 13.80 Crores through letter of credit (L/C) and 10.72 crore as Direct payment. As per the books of accounts, during the financial year 2008-09, total....
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....r of credit (L/C) payable at site in favour of the contractor (BHEL) through the Purchaser Bank for the payments due, as per Terms and Procedures of payment. As per letter dated 24/10/2008, the BHEL had given a total fund requirement of payment through L/C for the F. Y. 2008-09 at Rs. 1380.00 Lakhs, and SBI, Joginder Nagar vide letter dated 04/11/2008 had issued the UC of Rs. 3.80 crores in favour of M/s BHEL on behalf of the appellant Corporation. It has been certified by the Branch manager, SBI, Joginder Nagar that an FDR bearing No.950158 amounting to Rs. 6.00 cores in the name of M. D. B. V. P. C.L was pledged in lieu of security created against L/C opened in favour of M/s BHEL on behalf of BVPCL and the interest earned/accrued upto 31/3/2009 against the captioned FDR was to the tune of Rs. 36,26,063/-. Thus it is clear that the assesses Corporation had deposited funds in the form of an FDR to the tune of Rs. 6 crores to open a letter of credit for the purchase of the machinery required for setting up its plant in terms of the assessee's agreement with the supplier (BHEL). It was on the money so deposited that interest of Rs. 36,26,063/- was earned. Therefore, it cannot be ....
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....ractors, albeit on payments, the contractors would have added the said cost in their bills separately and the assessee would have been under an obligation to pay the same. By earning the given income, the assessee only succeeded in getting the said income adjusted against the bills raised by the contractors. It was in this context that it was held by the Apex Court that was required to establish an irrevocable letter of credit (L/C) payable at site in favour of the contractor (BHEL) through the Purchaser Bank for the payments due, as per Terms and Procedures of payment. As per letter dated 24/10/2008, the BHEL had given a total fund requirement of payment through L/C for the F. Y. 2008-09 at Rs. 1380.00 Lakhs, and SB I, Joginder Nagar vide letter dated 04/11/2008 had issued the L/C of Rs. 3.80 crores in favour of M/s BHEL on behalf of the appellant Corporation. It has been certified by the Branch manager, SB I, Joginder Nagar that an FDR bearing No. 950158 amounting to Rs. 6.00 cores in the name of M. D. B. V. P. C.L was pledged in lieu of security created against L/C opened in favour of M/s BHEL on behalf of BVPCL and the interest earned/accrued upto 31/3/2009 against the captione....
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....iven on rent to the contractor and royalty income for excavation and use of the stones from the assessee's land for the construction work by the contractors. Thus all the receipts by Bokaro Steel Ltd. were earned during the course of construction activity, and the ultimate effect of the said receipts was to reduce the cost of construction for the assessee. Had the assesses not extended the said facilities to the contractors, albeit on payments, the contractors would have added the said cost in their bills separately and the assessee would have been under an obligation to pay the same. By earning the given income, the assessee only succeeded in getting the said income adjusted against the bills raised by the contractors. It was in this context that it was held by the Apex Court that the given receipts were directly connected with the work of construction of its plant undertaken by the assessee and that the arrangements between the assessee company and the contractors were intrinsically connected with the construction of its steel plant. Therefore, the said receipts had rightly been held as capital receipts and not the income of the assessee from any independent source. On the gi....
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....ixed deposits. It is further noted that the appellant did not even have to incur any extra cost in order to earn this income. The income earned in the form of interest was pure and simple revenue receipt in the hands of the appellant company without any corresponding liability in the form of any incidental expenses. Merely because the appellant, at some time in future, would be utilizing the funds for the setting up of power plant does not mean that the income earned by the appellant on the said funds today falls outside the charge of section 4 of the I. T.Act. It is well settled that income attracts tax as soon as it accrues. It is also well settled that interest income is always of a revenue nature unless it is received by way of damages or compensation. The ultimate objective/destination of the funds today available to the appellant for investment has got nothing to do with the taxability of the income earned thereon at this point of time. 4.4 As regards the appellant's argument that the interest received on short term deposits was set off against the interest payable on PFC Joan, it will be worthwhile to reproduce some of the relevant parts of the judgment in the case of....
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....als and Fertilizers Ltd. while concluding that the interest income earned by the appellant is chargeable u/s 56 of the Act. No interference is, therefore, called for with the action of the Ld. A.O.in respect of the remaining interest income of Rs. 83,06,897/- (Rs. 1,19,32,960/- -Rs. 36,26,063/-). As far as the appellant's claim for payment of interest on the borrowed capital is concerned, the appellant is free to capitalize the same as per the provisions of law and accounting practices in the precommencement period. 11. We have heard ld. Representatives of both the parties and perused the findings of authorities below. The ld. counsel for the assessee reiterated the submissions made before authorities below and submitted that there were no surplus funds available with the assessee so the decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs. CIT (supra) relied upon by Assessing Officer is not applicable to the facts of the case. He has submitted that funds were kept in short term deposit for the purpose of completion of the project and not to earn any interest. He has submitted that even the interest so received was utilized for construction of the proje....
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....nterest to the power finance company which have not been adversely commented upon by the authorities below. Therefore, the reliance of the Assessing Officer on the decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs. CIT (supra) was totally misplaced. The Hon'ble Supreme Court in the case of CIT Vs Bokaro Steel Ltd. held as under : Held, dismissing the appeal, that the first three heads of income were (i) 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, (ii) 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 (ii) 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 were directly connected with or incidental to the work of construction of its plant undertaken by the assessee. The advances which the assessee made to the contractors to facilitate the constructi....