M/S. BRAHMAPUTRA CRACKER & POLYMER LTD. ,DIBRUGARH vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 2, DIBRUGARH

ITA Nos. 89 to 92/Gau/2018 ITA Nos. 94 to 97/Gau/2018 ITA No. 101/Gau/2019 & ITA No.200/Gau/2019 Brahmaputra Cracker & Polymer Ltd.

IN THE INCOME TAX APPELLATE TRIBUNAL GUWAHATI BENCH, “VIRTUAL HEARING” AT KOLKATA (सम�) �ी ऐ. ट�. वक�, �यायीक सद�य एवं डॉ. अजु�न लाल सैनी, लेखा सद�य) [Before Shri A. T. Varkey, JM & Dr. A. L. Saini, AM]

I.T.A. Nos. 89 to 92/Gau/2018 Assessment Years:2011-12 to 2014-15

Dy. C.I.T, Cir-2, Dibrugarh Vs. Brahmaputra Cracker & Polymer Limited, (PAN: AADCB2356E) Appellant Respondent & I.T.A. Nos. 94 to 97/Gau/2018 Assessment Years:2011-12 to 2014-15

Brahmaputra Cracker & Polymer Vs. Dy. C.I.T, Cir-2, Dibrugarh Limited, (PAN: AADCB2356E) Appellant Respondent & I.T.A. No. 101/Gau/2019 Assessment Year:2015-16

Asst. C.I.T, Cir-2, Dibrugarh Vs. Brahmaputra Cracker & Polymer Limited, (PAN: AADCB2356E) Appellant Respondent & I.T.A. No. 200/Gau/2019 Assessment Year:2015-16 Brahmaputra Cracker & Polymer Vs. Asstt. C.I.T, Cir-2, Dibrugarh Limited, (PAN: AADCB2356E) Appellant Respondent

Date of Hearing 10.09.2020 Date of Pronouncement 22.10.2020

ITA Nos. 89 to 92/Gau/2018 ITA Nos. 94 to 97/Gau/2018 ITA No. 101/Gau/2019 & ITA No.200/Gau/2019 Brahmaputra Cracker & Polymer Ltd.

For the Revenue Shri Amitava Sen, JCIT, Sr. DR For the Assessee Shri Ravi Sharma, Advocate & Shri Rishabh Malhotra, AR

ORDER Per Shri A.T.Varkey, JM All these cross appeals filed by the revenue and the assessee are against the action of the Ld. CIT(A), Dibrugarh dated 12.03.2018 (for AY 2011-12 to 2014-15) and dated 18.01.2019 (for AY 2015-16). All these appeals have been heard together and grounds are common, so we dispose of all these appeals by this consolidated order for the sake of brevity and convenience.

ITA Nos. 89 to 92/Gau/2018 ITA Nos. 94 to 97/Gau/2018 ITA No. 101/Gau/2019 & ITA No.200/Gau/2019 Brahmaputra Cracker & Polymer Ltd.

“7.5. We hold that the aforesaid decisions supra would be squarely applicable in favour of the assessee for adjudication of additional ground raised before us with regard to non-taxability of interest on deposits out of equity portion in the sum of Rs. 1,18,85,987/- for the Asst. year 2009-10. It does not matter that the assessee had voluntarily offered the same to tax in its return of income. It is already well settled that there is no estoppel against the statute. Reliance in this regard is placed on the decision of the Hon'ble Calcutta High Court in the case of Maynak Poddar (HUF) vs WTO reported in (2003) 262 ITR 633 (Cal). It is also well settled that the revenue cannot take advantage of ignorance of the provisions of the Act on the part of the assessee and on the contrary, the revenue is expected to educate the assessee and not to deprive the legitimate deductions which is otherwise entitled for the assessee. Hence respectfully following these principles and the judicial precedents relied upon we hold that the interest income on deposits earned in the sum of Rs. 1,18,85,987/- for the Asst Year 2009-10 (raised by way of additional ground) out of equity funds, shall have to be treated only as capital receipt as the same is inextricably linked with the business of the assessee and linked with the capital structure of the assessee company. Hence the Id AO is directed to delete the said addition. Accordingly the Additional Ground raised by the assessee for the Asst. Year 2009-10 is allowed.” 3. Thereafter, he drew our attention to para 7.6 wherein the Tribunal has allowed the assessee’s claim in respect of the interest income on short term deposit out of unutilized capital subsidy holding it as capital receipt. “7.6. With regard to the interest income on short term deposits out of unutilized capital subsidy, we find that the assessee does not have any control over the said interest income and as per the communications from the MoCF ) the said interest income would be reduced from the further release of capital subsidy by the MoCF, Government of India, which infact has also been done from the correspondence dated 23.4.2013 reproduced supra. Hence it could be safely concluded that the said interest income on deposits would only get added to the capital subsidy and accordingly to be treated only as capital receipt. The ratio laid down in the aforesaid decisions would also apply with equal force for this interest income on deposits also which were invested out of unutilized capital subsidy. In view of this finding, we hold that the said interest income in the sum of Rs.8,09,03,035/- on unutilized capital subsidy would have to be construed only as a capital receipt and the Ld. AO is hereby directed to delete the said addition made for the Asst. Year 2009-10.” 4. Thus, it was pointed out by the Ld. AR that the Ld. CIT(A) has followed the Tribunal’s order for AYs 2009-10 and 2010-11 to grant the relief to assessee in respect of interest from un-utilized capital subsidy and equity by holding the same as capital receipt, against which the revenue has come in appeal. 5. First of all, we take up the revenue appeal inter-alia for AY 2011-12 in ITA No. 89/Kol/2018 wherein the Ld. CIT(A) allowed the assessee’s claim to treat the interest

ITA Nos. 89 to 92/Gau/2018 ITA Nos. 94 to 97/Gau/2018 ITA No. 101/Gau/2019 & ITA No.200/Gau/2019 Brahmaputra Cracker & Polymer Ltd.

received towards equity and capital subsidy as revenue receipt. In order to appreciate the action of the Ld. CIT(A), we note the following facts in respect of assessee which is a PSU of Govt of India: Equity Equity participation (%) GAIL (India) Limited 70 State Government of Assam 10 Oil India Limited 10 Numaligarh Refinery Limited 10

source Amount (in Crs.) Capital subsidy 4690 Debt 2691 Equity 1269 Total 8920

Assessment year Interest on deposits of Interest on deposits of Interest on deposits of Equity fund (INR) Capital Subsidy (INR) borrowed funds (INR) 2011-12 2,05,56,952 4,44,08,838 3,83,20,744 2012-13 3,70,32,106 7,84,98,238 53,87,231 2013-14 81,89,914 17,82,62,093 1,83,76,376 2014-15 - 12,12,72,134 16,79,15,802 2015-16 5,09,18,852 1,90,39,000

Assessment Date of Amount of Amount of Amount of Income Year filing of Returned income Assessed income after expected after ROI (INR) income u/s. giving effect appeal effect 143(3) (INR) to order of Ld. from ITAT CIT(Appeals) 3,74,12,820 2011-12 26.09.2011 8,18,21,656 3,83,20,744 Nil (interest income from deposit of loans and equity) 2012-13 26.09.2012 36,72,800 12,09,17,580 53,87,131 Nil (interest income from deposit of loans and equity) 2013-14 27.09.2013 Nil 20,48,28,383 1,83,76,52,004 Nil

ITA Nos. 89 to 92/Gau/2018 ITA Nos. 94 to 97/Gau/2018 ITA No. 101/Gau/2019 & ITA No.200/Gau/2019 Brahmaputra Cracker & Polymer Ltd.

2014-15 24.09.2014 Nil 28,91,87,935 16,79,15,802 Nil 2015-16 22.09.2015 Nil 6,99,57,852 1,90,39,000 Nil

ITA Nos. 89 to 92/Gau/2018 ITA Nos. 94 to 97/Gau/2018 ITA No. 101/Gau/2019 & ITA No.200/Gau/2019 Brahmaputra Cracker & Polymer Ltd.

CIT(A) has quoted the relevant portion of the order of the Hon’ble Supreme Court in the case of Bongaigaon Refinery & Petrochemicals Co. Ltd (supra) and held as under: “The case of Bongaigaon Refinery & Petrochemicals Co. Ltd. (supra) is squarely in favour of revenue. Question before the Hon’ble Court and relevant parts of the judgment of Hon’ble Court is reproduced below: “Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the items of income derived by the assessee during the formation period for the main business, were not taxable income but were to be adjusted against the project cost for the oil refinery and petrochemicals, the main business of which the company was set up?” 4. The High Court has already held that the interest income derived by the assessee during its formative period was taxable income. What remains for consideration is the income which the assessee derived from house property, its guest house, charges for equipment and recoveries from the contractors on account of water and electricity supply. These items are covered by the decision in Bokaro Steel ltd.’s case (1999) 236 ITR 315 (SC). To the extent that it relates to these items, i.e., items excluding interest, the question must be answered in the affirmative and in faovur of the assessee. The order under challenge will stand modified to that extent. 5. Appeal allowed accordingly.” Thus the decisions in this case is also an endorsement of the fact that interest derived by assessee during its formative period is taxable income. In view of these decisions of Apex Court referred to above, interest received by assessee from Short Term Deposits of unutilized borrowed fund is exigible to tax. Considering the foregoing discussion, interest received out of parking of unutilized capital subsidy and Equity Funds are treated as not taxable. This is in view of binding decision of Hon’ble jurisdictional Tribunal in assessee’s own case. However, the interest received from deposits of borrowed fund is held to be taxable.”

ITA Nos. 89 to 92/Gau/2018 ITA Nos. 94 to 97/Gau/2018 ITA No. 101/Gau/2019 & ITA No.200/Gau/2019 Brahmaputra Cracker & Polymer Ltd.

up/operational. The assessee has derived interest on deposits of borrowed funds for AY 2011-12 to the tune of Rs.3,83,20,744/- which he claimed as capital receipt. It was brought to our notice that till AY 2015-16 assessee did not draw up the P&L Account and the interest earned from short term deposit of the borrowing funds was adjusted with the capital work in progress. The Ld. AR drew our attention to page 160 of the paper book for AY 2011-12 from where it is noted that the assessee has not prepared P&L Account for this year even though it was incorporated on 08.01.2007. And since no commercial activity has started and only from February, 2016, the project has been set up and commenced operation only from AY 2016-17, so up to AY 2015-16 no P&L Account was prepared by the assessee. We note that in the case of Chellapali Sugars ltd. Vs. CIT 98 ITR 167 the Hon’ble Supreme Court examined the question whether interest paid before the commencement of production by a company on amount borrowed for the acquisition and installation of plant and machinery would form part of the actual cost of the asset to the assessee within the meaning of expression of section 10(5) of the Income Tax Act, 1922 and whether the assessee will be entitled to depreciation allowance and development rebate with reference to such interest also. The Hon’ble Supreme Court held that the accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. The Hon’ble Supreme Court in Bokaro Steels Ltd. (supra) has also reiterated this ratio and also held that “in case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production of such borrowed money can be capitalized and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee receipts any amount which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of capital nature and could not be taxed as income. The aforesaid proposition of law of the Hon’ble Supreme Court has been upheld by the Hon’ble Supreme Court [three judges bench] decision reported in 247 ITR

ITA Nos. 89 to 92/Gau/2018 ITA Nos. 94 to 97/Gau/2018 ITA No. 101/Gau/2019 & ITA No.200/Gau/2019 Brahmaputra Cracker & Polymer Ltd.

268 in the case of CIT Vs. Karnataka Power Corporation wherein the question of law relevant to this issue were 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 Commissioner (Appeals) who deleted the addition of Rs.1,30,44,518/- 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? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in upholding the order of the Commissioner (Appeals) holding that the work-in-progress is to be treated as opening capital for the purposes of determining the relief admissible under section 80J and the assessee is entitled to relief admissible under section 80J in respect of the said work-in-progress?(Emphasis given by us)” 9. We note that the Hon’ble Supreme Court has answered the above two questions as under: “It is not in dispute that the first two questions must be answered in the affirmative and in favour of the assessee having regard to the judgments of this court in CIT Vs. Bokaro Steel Ltd. (1999) 236 ITR 315 and CIT Vs. Alcock Ashdown and Co. ltd. (1997) 224 ITR 353, respectively.( Emphasis given by us)”

ITA Nos. 89 to 92/Gau/2018 ITA Nos. 94 to 97/Gau/2018 ITA No. 101/Gau/2019 & ITA No.200/Gau/2019 Brahmaputra Cracker & Polymer Ltd.

made by the assessee with its contractors pertaining to the work of construction. To facilitate the work of the contractor, the assessee permitted the contractor to use the premises of the assessee for housing its staff and workers engaged in the construction activity of the assessee's plant. This was clearly to facilitate the work of construction. Had this facility not been provided by the assessee, the contractors would have had to make their own arrange- ments and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee has provided these facilities. The same is true of the hire charges for plant and machinery which was given by the assessee to the contractors for the assessee's construction work. The receipts in this connection also go to compensate the assessee for the wear and tear of the machinery. The advances which the assessee made to the contractors 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 Addl. CIT v. Indian Drugs & 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 the sale of tender forms and supply of water and electricity to the contractors engaged in construction as also receipts on account of sale of stones, boulders, grass and trees were held to be receipts not from independent sources but were considered as inextricably linked with the process of setting up of business. These were directly related to the capital structure of business and were held to be capital in nature. We agree with this view taken by the Delhi High Court. 7. The appellant, however, relied upon the decision of this Court in Tuticorin Alkali Chemicals & Fertilizers 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 in that case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under section 56 of the Act. This Court also emphasised the fact that the company was not bound to utilise the interest so earned to adjust it against the interest paid on borrowed capital. The company was free to use this income in any manner it liked. However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilisation of various assets of the company and the payments received

ITA Nos. 89 to 92/Gau/2018 ITA Nos. 94 to 97/Gau/2018 ITA No. 101/Gau/2019 & ITA No.200/Gau/2019 Brahmaputra Cracker & Polymer Ltd.

for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee-company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction. In the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, this Court examined the question whether interest paid before the commencement of production by a company on amounts borrowed for the acquisition and installation of plant and machinery would form a part of the actual cost of the asset to the assessee within the meaning of that expression in section 10(5) of the Indian Income-tax Act, 1922 and whether the assessee will be entitled to depreciation allowances and development rebate with reference to such interest also. The Court held that the accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income.[Emphasis given by us]”

ITA Nos. 89 to 92/Gau/2018 ITA Nos. 94 to 97/Gau/2018 ITA No. 101/Gau/2019 & ITA No.200/Gau/2019 Brahmaputra Cracker & Polymer Ltd.

was under no obligation to utilize the interest income to reduce its liability to pay interest to its creditors. The Hon’ble Supreme Court noted in that case (Tuticorin) that assessee could have reinvested the interest income as it pleases and there was no restriction on it how to utilize or spent viz, it can invest in land or shares, or it can purchase securities, or it can buy house property, or it can also set up another line of business, or it may even pay dividends out of this income to its shareholders. On these peculiar facts, the Hon’ble Supreme Court in the case of Tuticorin supra held that interest earned from the short term deposit of borrowed funds was of revenue nature. However, it was brought to our notice that in the present case the assessee company is a Public Sector Enterprise under the Ministry of Chemicals & Fertilizers, [Govt. of India] and it was promoted to undertake Assam Cracker Project which was approved by the Cabinet Committee on Economic Affairs for setting up Integrated Petrochemical Complex in the state of Assam where it was estimated the cost of project to Rs.8920 cr. We note that the project was under construction and has not been set up and was not operational in all these assessment years from AY 2011-12 to 2015-16. We note that the assessee has received capital subsidy from Ministry of Chemicals & Fertilizers (MoCF), Government of India [GOI]for setting up a project. We note that the GOI has specifically set out the purpose for which the subsidy is to be utilized and the appellant/assessee is under obligation to utilize the said capital subsidy for the purpose so specified. It has also raised capital by issuing equity and borrowing necessary sums of money. We note that the assessee maintains a separate bank account for such capital subsidy and any excess amount not temporarily is parked in short term deposits in bank on which the appellant earns interest income. The said deposit is in accordance with the guidelines of Department of Public Enterprises (‘DPE’). The unutilized amounts of equity capital and borrowed funds are similarly parked in short term deposits in banks and on which interest income is received. We note that the assessee received clarifications from the MoCF (dated 11-Aug-2010 and 15-Feb-2012) regarding the treatment of the interest earned from parking of Capital Subsidy. The MoCF clarified that such interest shall be treated as part of Capital

ITA Nos. 89 to 92/Gau/2018 ITA Nos. 94 to 97/Gau/2018 ITA No. 101/Gau/2019 & ITA No.200/Gau/2019 Brahmaputra Cracker & Polymer Ltd.

subsidy and it will correspondingly reduce the amount of capital subsidy which is sought from the Government (page nos. 24-25 of paper book for AY 2011-12). The assessee has accordingly claimed such interest income as capital receipt i.e. part of capital subsidy itself. Similarly, the interest earned on parking of equity capital and on borrowed funds have been similarly claimed as capital receipts, being linked with the construction and setting up of the plant and factories of the assessee. 12. We also note that the utilization of the funds available with the assessee is strictly governed by the objects set up by the Articles of Association of company. A perusal of the object clause indicates that there is no scope for the assessee to utilize any funds available for any purpose other than that stated in the Articles of Association (page 180 to 183 of paper book) (AY 2011-12). Thus, we note that the interest earned on the deposits had to be mandatorily invested in the project/business of the assessee and in the facts as discussed we note that interest from borrowed funds temporarily deposited in banks [STD] is inextricably linked to the setting up of the plant. Hence, the interest from the borrowed funds has been rightly capitalized and set off against the pre-operative expenses and, therefore, we rely on the decision of the Hon’ble Supreme Court in Bokaro Steels Ltd. and Karnataka Power Corporation (supra), hold that the interest earned from the borrowed funds/STD which is inextricably linked to the setting up of the plant need to be treated as a capital receipt. Thus, we allow the assessee’s appeal for all the assessment years from AY 2011-12 to 2015-16.

Sd/- Sd/- (Dr. A. L. Saini) (Aby. T. Varkey) Accountant Member Judicial Member Dated :22/Oct/2020 **PP(Sr.P.S.)

ITA Nos. 89 to 92/Gau/2018 ITA Nos. 94 to 97/Gau/2018 ITA No. 101/Gau/2019 & ITA No.200/Gau/2019 Brahmaputra Cracker & Polymer Ltd.

Copy of the order forwarded to: 1. Assessee - Brahmaputra Cracker & Polymer Limited, Administration Building, BCPL Project site, Lepetkata, Dibrugarh-786006 2 Revenue – DCIT/ACIT, Circle-2, Pushkara House, N. H 37, Natungaon, P.O. Mohanghat, Dibrugarh-786008 3. CIT(A), Dibrugarh

/True Copy, By order,

Senior Pvt. Secy.