TaxTMI 
TaxTMI 
2024 (12) TMI 1218
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....ner of Income Tax (Appeals) [hereafter CIT(A)], whereby the Assessee's appeal against the assessment order dated 25.03.2015 in respect of the assessment year (AY) 2012-13, was rejected. 3. The controversy involved in the present appeal relates to the addition of Rs. 31,18,900/- made by the Assessing Officer (hereafter the AO) to the declared income of the Assessee. The Assessee had filed its Income Tax Return for the relevant AY 2012-13 declaring its income as NIL. During the course of the assessment proceedings, the AO noticed that the Assessee had earned an amount of Rs. 11,45,92,550/- in respect of the funds received from its promoters. The Assessee had also paid interest to its promoters amounting to Rs. 11,14,73,651/-. According to the AO, the difference between the interest earned and interest paid was chargeable to tax as 'income from other sources'. Accordingly, the AO passed the assessment order determining the Assessee's total income at Rs. 31,18,900/-. 4. Aggrieved by the same, the Assessee filed an appeal before the CIT(A) claiming that it was entitled to set off the interest earned against the amounts capitalized as 'Capital Work-in-Progress' (CWIP in short). The....
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....teel Authority of India Limited (SAIL), Coal India Limited (CIL), Rashtriya Ispat Nigam Limited (RINL), National Mining Development Corporation Limited (NMDC), and National Thermal Power Corporation Limited (NTPC). The Assessee was incorporated with the purpose of ensuring adequate and dependable coal supply for its promoter companies. It was proposed that the Assessee would acquire resources including a coal mine overseas to secure supply of coal to its promoters. During the financial year relating to AY 2012-13, the Assessee was actively pursuing a proposal to acquire and develop a coal mine overseas. The notes to the final accounts of the Assessee indicate that the Assessee had received equity contribution of Rs. 2.00 Crores from SAIL, Rs. 1.00 Crore from RINL, and Rs. 1.00 Crore from NMDC. In addition, the accounts reflected an advance of Rs. 156 Crores from RINL. The accounts also indicated that the Assessee had received a sum of Rs. 1,81,28,800/-, Rs. 23,92,296/-, and Rs. 24,58,199/- as reimbursement of expenses from SAIL, RINL, and CIL respectively. 8. Apparently, the funds received were kept in a short term fixed deposit yielding interest. The Assessee claimed that it ha....
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....ad accordingly, called for the funds from the shareholder / promoters. Whilst, RINL had paid a sum of Rs. 157 Crores, the other promoters had not done so. In the meanwhile, the proposal for acquisition of coal mine overseas did not fructify and was aborted. Therefore, the other promoters/shareholders of the Assessee withheld further contributions. The amounts received from RINL were kept in a fixed deposit with a bank instead of returning the same to RINL as the Assessee was hopeful that another proposal may fructify. Subsequently - since the proposal for acquisition of the coalmine which was being pursued was abandoned - the Assessee refunded the amount of Rs. 156 Crores received from RINL. Since the Assessee had earned interest on the said amount received from RINL, it also decided to pay interest to RINL. 14. It is material to note that RINL confirmed that the amount received by it was accounted for as income in its hand and tax was paid on the same. REASONS AND CONCLUSIONS 15. It is the Assessee's case that income by way of interest is not chargeable to tax under the head 'income from other sources' as it was inextricably linked to acquisition of coal mine - a capital ....
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....required to be accounted for as the value of that asset. Such expenditure is incurred for bringing the undertaking into existence. Thus, it would not be apposite to treat such pre operative expenses as revenue expenses since it cannot be matched with the revenue receipts. More importantly, the amount incurred for construction or acquisition of the asset would necessarily have to be accounted as the cost of that capital asset. However, this principle applies only in cases where substantial time is required to construct the asset or bring the asset to use. The financial costs for such assets are thus considered as a part of the intrinsic value of the said asset. 22. It is material to note that there is a distinction between the price of an asset and its cost. On the same principle the amounts received which are directly linked to the acquisition or construction of the asset, are required to be reduced from the capital cost of the said asset. In one sense, such receipts mitigate the cost of the capital asset. And, it is essential to reflect the correct cost of the asset. 23. It is relevant to refer to the Accounting Standard 16 [AS-2016: The said standard was notified under the ....
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....e for capitalisation during a period, any income earned on the temporary investment of those borrowings is deducted from the borrowing costs incurred." 25. It is also relevant to refer to the following extract of the India Accounting Standard (Ind AS) 23, which has been notified by Ministry of Corporate Affairs. "12. To the extent that an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalisation as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. 13. The financing arrangements for a qualifying asset may result in an entity obtaining borrowed funds and incurring associated borrowing costs before some or all of the funds are used for expenditures on the qualifying asset. In such circumstances, the funds are often temporarily invested pending their expenditure on the qualifying asset. In determining the amount of borrowing costs eligible for capitalisation during a period, any investment income earned on such funds is deducted from the borrowing costs incurre....
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....en by the Andhra Pradesh High Court. After hearing the learned Counsel for the parties, we are of the opinion that the submission made by Mr Palkhivala is well-founded." 30. In the aforesaid context, the Supreme Court held as under: - "14. In finding the answer to the question mentioned above, we have to bear in mind that it arises in the context of profits or gains of business and the permissible deductions on account of depreciation and development rebate relating to the machinery and plant of the assessee. 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 word "cost", as observed on p. 424 of Simon's Taxes D Third Edition, is not synonymous with "price". Other items of expenditure, such for instance as freight or warehouse charges or insurance, must in certain cases be added to the price. The matter has been dealt with in Accountancy by Pickles, 1955 Ed. on p. 944 under the head "Pa....
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....y plant, which cannot be made profitable for a lengthy period, the company may- (a) pay interest on so much of that share capital as is for the time being paid up, for the period and subject to the conditions and restrictions mentioned in sub-sections (2) to (7); and (b) charge the sum so paid by way of interest, to capital as part of the cost of construction of the work or building or the provision of the plant." Exercise of power under sub-section (1) is, however, subject to certain restrictions which have been enumerated in the remaining sub-sections of the section, one of which requires that no such payment shall be made without the previous sanction of the Central Government. In Statement on Auditing Practices, issued by the Institute of Chartered Accountants of India (1974) it is observed in para 2.5 as under: "2.5 Fixed assets should be valued at cost and depreciation should be written off on a proper and consistent basis. Cost includes all expenditure necessary to bring the assets into existence and to put them in working condition. By way of illustration the following may be mentioned: (i) Legal charges and stamp duties in the c....
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.... (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 sum 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 or 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 of 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." [emphasis added] 31. The later decisions rendered by the courts are required to be unde....
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....sion in Tuticorin Alkali Chemicals and Fertilizers Limited, Madras v. CIT, Madras rested on the conclusion that interest was earned on surplus funds. There is no cavil that interest on surplus funds - funds which are not inextricably linked to the cost of asset - would be required to be accounted for as a revenue receipt. 35. In a later decision, in CIT, Bihar II, Patna v. Bokaro Steels Limited the Supreme Court considered a case where during the course of construction of a plant, the assessee (Bokaro Steel Limited) had accounted for certain receipts on various counts by reducing the capital cost of the steel plant, which was being constructed. It is material to note that in the said case, the assessee had received certain amounts including the rent charges for housing workers and staff at the site including amenities granted to such staff. Hire charges for plant and machinery that was given to contractor by the assessee for use in the construction work, and interest from the advances made to contractor for the purpose of facilitating the construction work. These receipts were sought to be taxed under separate heads. However, the Supreme Court explained that said receipts were '....
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.... receipts in this connection also go to compensate the assessee for the wear and tear on the machinery. The advances which the assessee made to the contractor to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitches as to help the contractors. The arrangements which were made between the assessee-Company and the contractors pertaining to these three receipts are arrangements which are intrinsically connected with the construction of its steel plant. The receipts have been adjusted against the charges payable to the contractors and have gone to reduce the cost of construction. They have, therefore, been rightly held as capital receipts and not income of the assessee from any independent source. 6. In the case of CIT v. Indian Drugs and Pharmaceuticals Ltd. ([1983] 141 ITR 134), the Delhi High Court considered a case where the work of construction of the factory of the assessee was in progress and production had not commenced. Receipts from sale of tender forms and supply of water and electricity to the contractors engaged in construction as also receipts on....
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.... to this court. And, in the aforesaid context, this court held as under: - "5. .......In our opinion the Tribunal has misconstrued the ratio of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals (supra) and that of Bokaro Steel Ltd. (supra). The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals (supra) is that if funds have been borrowed for setting up of a plant and if the funds are "surplus" and then by virtue of that circumstance they are invested in fixed deposits the income earned in the form of interest will be taxable under the head "income from other sources". On the other hand the ratio of the Supreme Court judgment in Bokaro Steel Ltd. (supra) to our mind is 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 capitalized to be set off against pre- operative expenses. 5.1 The test, therefore, to our mind is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up o....
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....ic purpose of acquiring land and the development infrastructure. of 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 be set off against pre-operative expenses. In the case of Tuticorin Alkali Chemicals (supra) it was found by the authorities that the funds available with the assessee in that case were "surplus" 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." 39. The aforesaid view has also been reiterated by this court in several decisions including Principal Commissioner of Income Tax-7 v. M/s Triumph Realty Pvt Limit....