M/S. HARIDASPUR PARADIP RAILWAY COMPANY LTD.,BHUBANESWAR vs. DCIT, CORPORATE CIRCLE- 1(1), BHUBANESWAR

Per L.P.Sahu, AM: This is an appeal filed by the assessee against the order dated 24.09.2019, passed by the CIT(A)-1, Bhubaneswar for the assessment year 2014-2015, on the following grounds of appeal :-

2

company filed its return of income on 27.09.2014 declaring total

income of Rs.Nil and deemed total income u/s.115JB of Rs.1,77,57,799/-. The company was incorporated in order to execute

the project of construction of new railway line between Haridaspur and Paradip in Odisha on Built On Operate & Transfer Mode (BOOT). The case was selected for scrutiny and statutory notices were issued to the assessee.

period is income from other sources or capital receipt. The AO has treated it as an income from other sources, whereas the assessee has claimed it as a capital receipt and has not offered for taxation. The AO

after considering the submissions of the assessee and relying on the judgment of the Hon’ble Supreme Court in the case of Tuticorin alkali

Chemicals & Fertilisers Ltd. and other judgments as cited in the assessment order, has treated it as an income from other sources. In appeal, the CIT(A) has also confirmed the action of AO.

authorities and he has also relied on number cases and filed his written

submissions :-

• This issue is squarely covered by the decision of the Hon'ble Cuttack Tribunal in the case of DCIT v. M/s Radhikapur (West) Coal and Mining

3 Pvt. Ltd., I.T.A. Nos.396/397CTK/2018, dated 21.10.2019. Wherein the Hon'ble Tribunal, after relying on the order of Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. 315 ITR 255, held that interest earned on funds primarily brought for infusion in the business activity could not be termed as income from other sources.

• Further, the Hon'ble Karnataka High Court on a similar issue in the case of PCIT v. M/s Banknote Paper Mill India Pvt. Ltd. in ITA 690/2017 held that this issue is ex facie covered by the decision of the juri ictional High Courts or even the Hon'ble Supreme Court of India. Thus, no substantial question of law arises in the present case and the Appeal filed by the Revenue is without merit and liable to be dismissed.

• The Hon'ble Karnataka HC in the above case has relied on the order of the Tribunal. Wherein, the Tribunal held that the interest income earned by the Assessee Company on bank deposits made out of share capital received by it from the Reserve Bank of India could not be taxed as "Income from Other Sources" as the said interest income was earned prior to commencement of operations of the company during the construction period.

Brief facts of the case • The assessee is a Joint Venture Company of- - Rail Vikas Nigam Limited; - Government of Orissa - Paradip Port Trust, - Rungta Mines Ltd; - Essel Mining & Industrial Ltd. - Jindal Steel & Power Ltd; • The assessee was incorporated as a Special Purpose Vehicle (SPV) by the Joint Venture Partners to complete the project, i.e. construction of a New Railway Line between Haridaspur to Paradeep in Orissa. Copy of MOU entered between the joint venture partners is enclosed at PB Pg. 3- 12 (Relevant Pg. 5) • That, it has been provided in the MOU that the Joint Venture Partners will provide funds via Equity Participation to the assessee company to complete the cost of the project. PB Pg. 6. • Accordingly, the assessee company issued share capital to construct the Railway Line. • Further, for construction, the assessee company has entered into a construction agreement with RVNL. Wherein, RVNL shall undertake the construction of the project (Railway Line) on behalf of the assessee company and for which the assessee company provided funds. Copy of construction agreement is at PB Pg. 13-40 (Relevant Pg. 27, Para 11 of the construction Agreement) • Moreover, as per construction agreement, if any expenditure incurs out of the funds of RVNL, then RVNL shall charge interest at the Average Prime Lending Rate on the amount so expended. (Relevant Pg. 28, Para 11.5 of the construction Agreement) • That, on a regular basis, the assessee made advances to RVNL to enable it to execute the construction work. Furthermore, on such 4 advances, the assessee company received interest which was later adjusted by the assessee against the dues of RVNL from their bills. • Further, the small amount of money so raised by the assessee is parked by in various banks in the form of term deposit to earn interest in order to meet day to day cost of the project. • That, the interest income mentioned above is utilized to meet the expenses of the project, and it is inextricably linked with the process of construction of Railway Line. Accordingly, the assessee treated the said income as a capital receipt. • That, the assessee filed its return of income for AY 2014-15 on 27.09.2014, declaring nil income. Copy of Acknowledgement of ROI along with the Computation of Income is at PB Pg. 1-2. • That, the case was selected for scrutiny assessment and notice u/s 143(2) & 142(1) of the Act, were issued to the assessee. The Ld. AO asked the assessee to explain why the interest on mobilization advances and Fixed Deposit should not be treated as income from other sources instead of a capital receipt. • That, in compliance with the same, the assessee produced the books of accounts and other relevant documents. Moreover, assessee explained that Mobilization advance and Interest of FD are inextricably linked with the setting up of the Railway Line. Therefore, the same should not be treated as Income from Other Sources, and accordingly, it must be viewed as capital receipt going to reduce the cost of construction. Copy of reply submitted by the assessee is at PB Pg. 41-44 • Subsequently, AO completed the assessment assessing the total income at Rs. 3,89,83,258/- and its passed order u/s 143(3) of the Act, dated 28.12.2016 making the following addition-

Sr. No. Particulars Amount (Rs.)

• Challenging the order of CIT (A), the assessee in appeal before your Honors.

5 Our Submissions: • It is submitted that in the present case, the assessee being a Joint Venture Company of- - Rail Vikas Nigam Limited; - Government of Orissa - Paradip Port Trust, - Rungta Mines Ltd; - Essel Mining & Industrial Ltd. - Jindal Steel & Power Ltd; is incorporated as a Special Purpose Vehicle (SPV) particularly to construct a New Railway Line between Haridaspur to Paradeep in Orissa. • Further, for the purpose of construction, the assessee company entered into a construction agreement with RVNL. Wherein, RVNL shall undertake the construction of the project (Railway Line) on behalf of the assessee company. Moreover, the funds required for construction shall be arranged by the assessee company. Copy of construction agreement is at PB Pg. 13-40 (Relevant PB Pg. 27, Para 11 of the construction Agreement) • It may also be noted that, as per the construction agreement, RVNL shall charge interest at the Average Prime Lending Rate, if any expenditure is incurred out of its own funds. (Relevant PB Pg. 28, Para 11.5 of the construction Agreement). Thus, the whole cost of the project is to be financed by the assessee company • Accordingly, the assessee company issued share capital which is unquestionably utilized for construction of Railway Line. Further, small amount of funds are also parked in various banks in the form of term deposit on which assessee received interest which is also expended to meet day to day cost of the project. • It is pertinent to note that there is no allegation of AO or CIT (A) that the share capital of the assessee company was being used for any other purpose other than the construction of Railway Line. • It is submitted that since the assessee company is incorporated only for construction of Railway Line, therefore it is not free to utilize the funds for any purpose except for Railway Project. Moreover, there is no allegation of AO regarding the utilization of funds for any other purpose, and lastly, the interest income from FD was earned in a period before the commencement of business; therefore, the said receipt is a capital receipt. • The Id. CIT (A) has misconstrued the ratio of the Judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and held that the income earned by the assessee is not a capital receipt. • It may kindly be noted that the Hon'ble Delhi HC has interpreted the aforesaid judgement of Apex Court in the case of Indian Oil Panipat Power Consortium Ltd v. ITO. [2009] 315 ITR 255. • Further, the Hon'ble High Court in the said case considered another Judgement of Supreme Court in Bokaro Steel Ltd. Wherein the Supreme Court held 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."

6 • Finally, the Delhi High Court after analyzing the ratio in the case of Tuticorin Alkali Chemicals and Bokaro Steel Ltd simultaneously, held that the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources- Relevant para of Judgment are reproduced hereunder: It is clear upon a perusal of the facts as found by the authorities below that the funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. 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. • Thus, applying the aforesaid Judgment of Delhi High Court in the facts of the present case, it can be appreciated that here also interest income is earned on funds which are "inextricably linked" to the setting up of the Rail Line. Therefore, such income is required to be capitalized to be set off against pre-operative expenses. It may also be noted that the above Judgement of Delhi High Court has been followed by the Coordinate Bench of ITAT Cuttack in the following cases. The Hon'ble ITAT Cuttack, on similar facts after considering the decision of Apex Court in the case of Tuticorin Alkali Chemical and Fertilizers Ltd. v. CIT, a) DCIT v. M/s Radhikapur (West) Coal and Mining Pvt. Ltd., I.T.A. Nos.396/397CTK/2018, dated 21.10.2019

From the above observations of the CIT(A), we find that CIT(A) while dealing with the issue has observed that in the case of Indian Oil Panipat Power Consortium Ltd. v. ITO 315 ITR 255, the Hon'ble High Court held that the interest earned on FDs was capital receipt liable to be set off against pre-operative expenses, and could not be taxed as income from other sources. In their Judgment, the Hon'ble Delhi High Court has considered a host of decisions of various courts on the issue including the decisions of the Hon'ble Supreme Court in the cases of Tuticorin Alkali Chemicals & Fertilizers Ltd. and Bokaro Steel Ltd. The case of the assessee appears to be squarely covered by the decision of the Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. b) MJSJ Coal Limited v. ITO, I.T.A. NOS.429/CTK/2016, 68/CTK/2017 And 107/CTK/2018, dated 31.08.2018. 7 Para 12 the interest earned on funds primarily brought for infusion in the business activity cannot be termed as income from other sources, whereas the interest income on bank deposits earned by the assessee company to commencement of its business is in the nature of capital receipt and accordingly be set off against pre-operative expenses. We considering the judicial precedence and the facts and circumstances of the present case, are of the substantive opinion that if the assessee company receives any amount which is inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. Hence such receipts are capital in nature and cannot be taxed as income under income from other sources. The assessee company was formed to set up a mining project and the process of setting up was got delayed and deposits of share capital amount received from the share applicants with the bank in the form of fixed deposits for short term, is to be considered as inextricably linked with the process of setting of its plant and machinery. Accordingly, we hold that the interest earned by the assessee should not be treated as income from other sources and we allow the grounds of appeal of the assessee. Therefore, the appeal of the assessee for assessment year 2011-2012 is allowed. c) POSCO INDIA PVT. LTD VERSUS, DCIT ITA Nos. 186 and 460/CTK/2011, 461/CTK/2011 and held as under:

Para 5 In the instant case, it was clear upon a perusal of the facts as found by the authorities below that the funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. 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 he set off against pre- operative expenses.

d) ACIT, v. M/S. POSCO INDIA PVT LTD. AND VICE-VERSA ITA No.155 & 122/CTK/2017, C.O.No.07 And 08/CTK/2017

the interest on fixed deposits are not taxable under income from other sources and, accordingly, we uphold the findings of the CIT (A) and dismiss the ground of appeal taken by the revenue for both the assessment years.

e) M/S. KALINGA COAL MINING PVT. LTD., VERSUS ACIT ITA No. 123 and 279/CTK/2010

The learned Counsel has been able to establish that there was no surplus insofar as it was the share capital received as application money pending allotment which was poured in for the purchase/acguisition of land which would entitle the assessee to commence business of excavating coal in accordance with the Rules and Regulations governed by the State undertakings namely, IDCO and OMC. We have perused the correspondences lying with the assessee to clarify the stand taken for 8 the purpose of starting business which reguired the assessee to park funds in the bank simultaneously incurring pre-operative expenses to the magnitude of Rs.51 Crores and ?66 Crores. This clearly indicates that there was no surplus available with the assessee for earning interest as income from other sources. • Further reliance has been placed on the following decisions wherein the decision of Indian Oil Panipat Power Consortium Ltd v. ITO has been followed : ♦ Bongaigaon Refinery and Petrochemicals ltd. v. CIT 251ITR 329 (SC); ♦ NTPC Sail Power co. Pvt. Ltd. v. CIT in ITA No. 1238/2011 (DELHI HC); ♦ PCIT v. M/S. NTPC Tamil Nadu Energy Co. Ltd., ITA 233/2018 & CM APPL.7162/2018, ITA 234/2018 & CM APPL.7163/2018; ♦ Solarfield Energy Pvt. Ltd. v. ITO, ITA No. 5189/Mum/2016; ♦ BTW-Atlanta Transformers India Pvt. Ltd. v. ACIT, ITA Nos. 1642 & 1643/Ahd/2018; ♦ ITO, v. CMDC ICPL Coal Ltd, ITA No. 271/RPR/2014; ♦ M/s Saville Hospital & Research Centre PVT. Ltd. v. ITO ITA No. 491/JP/2018

• It may also be noted that recently the Hon'ble Supreme Court in the case of NATIONAL CO-OPERATIVE DEVELOPMENT CORPORATION v. CIT in CIVIL APPEAL NOS. 5105-5107 OF 2009, dated 11.09.2020 held that interest income generated on the idle funds which is applied in the business of the assessee company is to be treated as a business income thus, fall under the head of 'Profits and Gains of Business or Profession and not under Income from Other Sources. Relevant findings of the order are as under:

9 • Thus, in the view of above submission and judicial pronouncements, it is submitted that the interest earned on FDR & Flexi deposits should reduce the cost of its assets since these are the receipts of capital nature and could not be taxed as income from other sources^ • Thus, in the light of the above, it is submitted that the addition made by the Ld. AO and sustained by the CIT (A) holding that interest earned on FDR & Flexi deposits is of revenue nature, is bad in law and therefore may kindly be deleted.”

Apart from the above, he has also filed copy of fixed deposit receipts

containing pages No.1 to 8 and copy of balance sheet containing page

No.9 to 11, which all are placed on record. He has also filed paper book

containing pages 54 and submitted that the case is covered in assessee’s own case for the assessment year 2010-2011, order dated

2009-2010, therefore, the assessee has rightly claimed it as a capital

receipt.

are justified to hold that interest on fixed deposit is an income from other sources and case laws relied on by the authorities below are squarely applicable in the present case. He further submitted that the MOU was signed for construction of railway lines on 16.08.2009 and still the works are under construction and he further submitted that the assessee has received interest and how it has been utilized and it can be verified from the bank accounts of the assessee. Therefore, it need to be verified the utilization of the interest as to whether it has been utilized for the revenue purpose or for the construction of the project. He also submitted that the share application money is kept

10 pending for allotment at the year ending 31.03.2014. He also made

analysis of the balance sheet and submitted that the huge amounts

have been kept by the assessee in liquid form in the bank by way of investments as FD. Therefore, it is clear that the intention of the assessee is to earn interest on investment in fixed deposit and no advances were made to the contractor. Therefore, ld. CIT-DR requested

that the matter should go back to the AO for verification.

available on record and the order of the authorities below, we find that the assessee has shown interest on fixed deposit of Rs.3,27,79,005/-

and further on perusal of the documents filed by the assessee in the paper book containing page Nos.1 to 11 filed on 8th October, 2020 on email that the assessee has filed copy of the fixed deposit and the balance sheet of the assessee company. On perusal of the balance sheet

it was noticed that the assessee has shown share application money

pending for allotment in Note No.4 of Rs.454.95 crores as on 31.03.2014 and Rs.274.95 crores on 31.03.2013, respectively. It shows

that there is net increase in the above account head of Rs.180 crores

and as per Note No.4.2 of the balance sheet, the company has issued

42,74,50,000 equity shares of Rs.10/- each at par on 29.05.2014

against the share application money pending allotment as on 11 31.03.2014 to all the applicants except POSCO Ltd. The details are as under :-

Share application money pending allotment

Number of Share proposed to be issued 454,950,000 2,749,950.000 Amount of Premium/Discount on issue Nil Nil Period before which shares are to be issued Refer Note 4.1 Refer Note 4.1 Whether the company has sufficient authorized capital Yes Yes Interest accrued on amount due for refund Nil Nil Period for which pending beyond the period for Refer Note 4.1 Refer Note 4.1 allotment

limited company and the share application money was kept pending

for allotment for a long time. In this regard, we specifically asked

questions to the ld. AR of the assessee on the following certain points

which are as under :-

i) Date of receipt of share application money & allotment to shareholders.

12 ii) whether the company has followed the relevant rules/provisions of the Companies Act in this regard.

iii) if the shares have not been allotted within 60 days from the date of receipts then the discloser policy in the balance sheet, whether it should be treated as current liability or otherwise and treatment in the books of account of the company.

iv) use of share application money during pendency for allotment.

v) applicability of company deposit rules and its classification in the balance sheet & utilization of interest or interest on such deposit and taxability as per the Income Tax Act, 1961. vi) the fixed deposit is a short term fixed deposit or long term fixed deposit and/or auto renewal system in the bank and after maturity the utilization of the interest.

Ld. AR of the assessee could reply only the date of allotment of shares

as per balance sheet note No.4.2, which is 29.05.2014 and the rest

were remained unanswered. Therefore, the ld. AR submitted that let

the AO may examine the above questions which are unanswered.

adjudication in the light of the above questions and taxability of interest income as per Income Tax Act, 1961. The AO is directed to decide the case after detail examinations and documents produced by the assessee after considering the relevant rules and regulations as per

13 the law. The assessee is also directed to avoid any unnecessary

adjournment and cooperate with the AO for early disposal of the case.

आदेशािुसार/ BY ORDER,

(Senior Private Secretary) आयकर अपीऱीय अधिकरण, कटक/ITAT, Cuttack