M/S TENUGHAT EMTA COAL MINES LTD.,RANCHI vs. ITO,WARD-3(2), RANCHI

IN THE INCOME TAX APPELLATE TRIBUNAL, RANCHI BENCH, RANCHI

BEFORE S/SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER AND LAXMI PRASAD SAHU, ACCOUNTANT MEMBER

ITA Nos.56,57 & 58/Ran/2015 Assessment Years: 2007-08 to 2009-2010

M/s. Tenughat Emta Coal Mines Vs. ITO, Ward 3(2), Ranchi Ltd., 401, Radium Court, Radium Road, Ranchi PAN/GIR No.AACCT 0777 A (Appellant) .. ( Respondent)

Assessee by : Shri Manish Mallick Adv & L.N.Mallick, CA Revenue by : Shri P.K.Mondal, Addl. CIT(DR)

Date of Hearing : 27/08/2019 Date of Pronouncement : 30/10/2019

O R D E R Per Bench. The above captioned appeals have been filed by the assessee against

the separate orders of the Commissioner of Income Tax(Appeals)- Ranchi

dated 21.1.2015 for the assessment years 2007-08 to 2009-2010.

circumstances of the appeals for the assessment year 2007-08 to 2009-

2010 are identical and similar. Therefore, for the sake of convenience and

clarity, for our adjudication, we are taking up the appeal in ITA

P a g e 1 | 13 No.56/Ran/2015 for assessment year 2007-08 as a lead case to decide the

controversy.

general in nature and hence, requires no separate adjudication.

08, the assessee has raised legal ground, which read as follows:

“2. That the CIT(A) failed to appreciate the contention of the appellant in regard to wrong assumption of jurisdiction u/s.147/148 of the Act by the AO in order to make addition of interest earned on FDRs as appellant’s income for the year under consideration. 2.1 That the CIT(A) failed to appreciate that the AO had no reason to believe that income escaped assessment within the meaning of section 147/148 of the Act and that the reopening was bad in law. 2.2 That the CIT(A) failed to appreciate the fact that the reasons to believe did not exist and the AO had reopened the assessment as a change of opinion which is not permissible in law for reopening of the assessment.” 5. Apropos this ground, ld A.R. of the assessee submitted that the

CIT(A) failed to appreciate that the AO did not assume valid jurisdiction

u/s.147/148 of the Act for initiation of reassessment proceedings and

issuing notice u/s.148 of the Act. Ld A.R. drew our attention towards

Annexure-4 i.e. reasons recorded by the AO for initiating reassessment

proceedings vide dated 14.2.2011 and submitted that there was no new

tangible materials in the hands of the AO at the time of initiating

reassessment proceedings and thus, it is clear case of change of opinion,

which were before the AO at the time of original assessment proceedings.

P a g e 2 | 13 Ld counsel vehemently pointed out that from the reasons, it is ample clear

that the AO had no reason to believe that income has escaped assessment

as there is no reason or description or basis on which the AO formed an

opinion to believe that income has escaped assessment in the assessment

year 2007-08. Placing reliance on the decision of CIT v. Kelvinator of

India Ltd.: 320 ITR 561(SC), ld A.R. contended that as there

was no tangible materials in the hands of the AO for reopening the

assessment, the impugned assessment as well as the first

appellate order deserves to be quashed.

ground of the assessee and submitted that the assessee earned

interest income from the fixed deposits from the bank and did not

disclose the same as income of the assessee. Therefore, the AO

had reason to believe that interest income has escaped

assessment.

we find it appropriate to reproduce the reasons recorded by the

AO dated 14.2.2011 while initiating reassessment proceedings

u/s.147 of the Act and issuing notice u/s.148 of the Act as under:

“ In this case, scrutiny assessment was done for A.Y. 2008- 09 during which it was noted that the assessee is earning interest income from fixed deposit and, therefore, I have reason to believe that income earned interest on fixed

P a g e 3 | 13 deposit has escaped assessment and, therefore, notice u/s.148 is being issued and served on the assessee in this regard.” 8. From the above reasons, it is clearly discernible that the AO

proceeded to initiate reassessment proceedings for assessment

year 2007-08 on the basis of scrutiny assessment proceedings

done by him for the assessment year 2008-09 during which it was

noted that the assessee is earning interest income from fixed

deposits and the same was not shown as income from other

sources. Therefore, in our humble understanding, there was new

material before the AO, which was not before him during original

assessment proceedings for the assessment year 2007-08 and

found in the assessment record for the assessment year 2008-09.

Therefore, in our opinion, it is not a case of change of opinion. So

far as reason to believe is concerned, when the AO had made

addition for the assessment year 2008-09 pertaining to interest

income earned by the assessee from fixed deposits on the basis of

financial statement of the assessee for the assessment year 2008-

09, then on perusal of assessment record for assessment year

2007-08, the AO had reason to believe that similar income of

interest earned by the assessee from the fixed deposits has

escaped assessment for assessment year 2007-08. In view of

above, without expressing any opinion on the merits of the

P a g e 4 | 13 addition, we have no hesitation to hold that the AO assumed valid

jurisdiction to initiate reassessment proceedings u/s.147 of the

Act and thus, he is empowered to issue notice u/s.148 of the Act

to the assessee calling his stand on the return of income.

Accordingly, Ground Nos.2 to 2.2 of the assessee are dismissed.

are as under:

“ 3. That the CIT(A) grossly erred on facts and in law in sustaining the order of the AO in assessing the interest income at Rs.11,21,049/- as income of the appellant under the head “ income from other sources” . 4. That the CIT(A) grossly erred on facts and in law in holding that a sum of Rs.11,21,049/- was assessable as income of the appellant from other sources without appreciating the decision cited by the appellant to the Hon’ble Delhi High Court in the appellant sister concern’s case.” 10. Apropos these grounds, ld counsel for the assessee submitted that

the Assessing Officer as well as the CIT(A) has grossly erred on facts and in

law in sustaining the assessment in assessing the interest income from

fixed deposit as income of the assessee under the head “ income from other

sources”. Ld A.R. submitted that the authorities below have made addition

without appreciating and considering the decision of Hon’ble Delhi High

Court cited by the assessee in the case of sister concern (CIT vs Panel Coal

Mines Ltd in ITA No.639/2008 order dated 17.9.2009). Ld counsel also

submitted that the interest income earned on fixed deposit was adjusted

P a g e 5 | 13 against the pre-operational expenses which were duly disclosed in the profit

and loss account. Ld counsel for the assessee explained that out of interest

income of Rs.11,21,049/- earned by the assessee during the relevant

period, same had been adjusted with the cost of mines and mines

development shown under the head fixed assets, therefore, there was no

reason to believe that any income had escaped assessment. Ld counsel for

the assessee submitted that the case of the assessee is further supported

by the decision of Hon’ble Supreme Court in the case of Bokaro Steels Ltd.,

236 ITR 315 (SC). Ld counsel reiterating the earlier submission, submitted

that in the case of assessee’s sister concern, i.e. Panel Coal Mines

Ltd(supra) on similar facts and circumstances, Hon’ble Delhi High Court

decided the issue in favour of the assessee by holding that the interest

income has rightly been adjusted against the cost of project as the business

was yet co commence. Ld A.R. lastly pointed out that Hon’ble Delhi High

Court has been pleased to distinguish the proposition rendered in the case

of Tuticorin Alkali & Fertilizers Ltd., 227 ITR 172, as relied by the AO for

making addition/disallowance and Hon’ble High Court clearly held that the

said decision is not applicable to the facts of the assessee’s case. Ld

counsel for the assessee summed up his arguments with the submission

that in view of another decision of Hon’ble Delhi High Court in the case of

Indian Oil Panipat Power Consortium Limited vs ITO in ITA No.1156/2007 &

1157/2007 order dated 26.2.2009 including the decision of Hon’ble

P a g e 6 | 13 Supreme Court in the case of Tuticorin Alkali & Fertilizers ltd (supra) held

that the funds infused by the assessee by joint venture partners was

inextricable linked with the setting up of the plant and interest earned by

the assessee cannot be treated as income from other sources.

of the CIT(A) order and submitted that in the case of Tuticorin Alkali

Chemicals (supra), the Hon’ble Supreme Court has held that the interest

earned by the assessee before the commencement of business on short

term deposits with banks, even out of term loans secured from financial

institutions, is an income chargeable under the head “income from other

sources” and would not go to reduce interest payable by the assessee which

would be capitalize after commencement of commercial production. Ld

D.R. submitted that the assessee has failed to establish through facts as to

how said proposition is not applicable to the case of the assessee.

Therefore, the impugned assessment and CIT(A) order may kindly be

upheld on this issue.

undisputedly, the assessee company had kept in fixed deposit of

Rs.2,16,65,144/- and earned interest income from the bank of

Rs.11,21,049/- . It is also not in dispute that the assessee company, out of

interest income of Rs.11,21,049/-, the pre-operational expenses have been

set off amounting to Rs.66,244/- and remaining balance amount of

P a g e 7 | 13 Rs.10,54,805/- has been adjusted with the cost of mines and mines

development expenses shown under the head “fixed assets’. The

assessee company also disclosed details of pre-operational expenses in the

profit and loss account which includes filing fee, Board meeting expenses,

printing and stationery, general expenses, bank charges and audit fees.

The Mines and Mines Development expenses have been shown in the fixed

assets and same has been disclosed in the balance sheet filed before the

authorities below. It was the bone of contention of the assessee that these

expenses have been set off from the interest income from fixed deposits.

Therefore, there is no income assessable under the head “income from

other sources”. Therefore, the AO was not right and justified in taxing the

interest income from fixed deposits as income from other sources. The

main bone of contention of ld D.R. is that the Assessing officer was right in

applying the ratio of the proposition rendered by Hon’ble Supreme Court in

the case of Tuticorin Alkali Chemicals (supra), wherein, it was held that

interest income earned by the assessee from fixed deposit keeping the

surplus fund in the bank has to be assessed under residuary head of income

from other sources. From the respectfully vigilant reading of the judgment

of Hon’ble Delhi High Court in the case of Indian Oil Panipat Power

Consortium Limited (supra), we observe that identical controversy was

posed to Hon’ble High Court, wherein, Their Lordships has considered the

ratio of relevant decision of Hon’ble Supreme Court and High Court

P a g e 8 | 13 including the decisions Hon’ble Supreme Court in the case of Tuticoron

Alkali Chemicals (supra) and Bokaro Steel Ltd (supra). We find it profitable

to reproduce the findings of Hon’ble Delhi High Court in the case of Indian

Oil Panipat Power Consortium Limited (supra) in para 5 to 5.2 which read

as follows:

“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 of the plant. The clue is perhaps available in Section 3 of the Act which states that for newly set up business the previous year shall be the period beginning with the date of setting up of the business. Therefore, as per the provision of Section 4 of the Act which is the charging Section income which arises to an assessee from the date of setting of the business but prior to commencement is chargeable to tax depending on whether it is of a revenue nature or capital receipt. The income of a newly set up business, post the date of its setting up can be taxed if it is of a revenue nature under any of the heads provided under Section 14 in Chapter IV of the Act. For an income to be classified as income under the head "profit and gains of business or profession" it would have to be an activity which is in some manner or form connected with business. The word "business" is of wide import which would also include all such activities which coalesce into setting up of the business. See Mazacraon Dock Ltd vs CIT & Excess Profits Tax; (1958) 34ITR 368 (SC), and Narain Swadeshi Weaving Mills vs Commissioner of Excess Profits Tax; (1954) 26 ITR 765 (SC). Once it is held that the assessee's income is an income connected with business, which would be so in the present case, in view of the finding of fact by the CIT(A) that the monies which were inducted into the joint

P a g e 9 | 13 venture company by the joint venture partners were primarily infused to purchase land and to develop infrastructure - then it cannot be held that the income derived by parking the funds temporarily with Tokyo Mitsubishi Bank, will result in the character of the funds being changed, in as much as, the interest earned from the bank would have a hue different than that of business and be brought to tax under the head 'income from other sources". It is well-settled that an income received by the assessee can be taxed under the head "income from other sources" only if it does not fall under any other head of income as provided in Section 14 of the Act. The head "income from other sources" is a residuary head of income. See S.G. Mercantile Corporation P. Ltd vs CIT, Calcutta; (1972) 83 ITR 700 (SC) and CIT vs Govinda Choudhury & Sons.; (1993) 203 ITR 881 (SC).

5.2 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.”

the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals (supra)

held 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’. In the subsequent judgment

Hon’ble Supreme Court in the case of Bokaro Steel Ltd (supra) held that if

the income is earned by way of interest or in any other manner on funds

P a g e 10 | 13 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. It is not in dispute that the assessee has incurred pre-

operational expenses for setting up its business of mining on various heads

including mines and mines development activities and the expenses have

been shown in the profit and loss account. Therefore, we have no hesitation

to hold that the interest income earned by the assessee on the fixed

deposits from bank, the funds which otherwise inextricably linked to the

setting up of mining business, then such income is required to be

capitalized and to be set off against pre-operational expenses. Therefore,

we hold that the authorities below were not correct in treating the interest

income on fixed deposit as income from other sources by relying on the

decision of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals

(supra) as the same is applicable only in a situation when the assessee has

earned income on FD by keeping surplus funds with the bank. As we have

noted above in the subsequent decision in the case of Bokaro Steel (supra),

the Hon’ble Supreme Court clearly held that the income earned by the

assessee by way of interest or any other manner on the funds which are

otherwise inextricably linked to the setting up of the plant/business, then

such income is required to be capitalized to be set off against pre-operative

expenses. Therefore, keeping in mind the facts and circumstances of the

ratio of decision of Hon’ble Supreme Court in the case of Bokaro Steel Ltd.

P a g e 11 | 13 (supra), we direct the Assessing Officer to delete the addition of

Rs.11,21,049/- as the interest income has been adjusted by the assessee

against pre-operational expenses and mines and mines development

expenses, which has already been shown in the profit and loss account

submitted before the authorities below. Accordingly, Ground Nos.3 & 4 of

appeal are allowed.

Ground No.2 & 3 for A.Y. 2008-09 & 2009-10.

identical to the ground Nos.3 & 4 of appeal for the assessment year 2007-

assessment year 2007-08 would apply mutatis-mutandis to the assessment

years 2008-09 & 2009-10, hence, facts being identical, we direct the

Assessing Officer to delete the addition of Rs.55,31,720/- for the

assessment year 2008-09 and addition of Rs.27,72,667/- for the assessment

year 2009-10 and allow these grounds of appeal of the assessee.

Order pronounced in the open court under Rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1963 on 25 / 10/2019. Sd/- sd/-

(Laxmi Prasad Sahu) (Chandra Mohan Garg) ACOUNTANT MEMEBER JUDICIALMEMBER

Ranchi; Dated 30/10/2019 B.K.Parida, SPS

P a g e 12 | 13 Copy of the Order forwarded to : 1. The Appellants : M/s. Tenughat Emta Coal Mines Ltd., 401, Radium Court, Radium Road, Ranchi

Sr. Pvt. Secretary, ITAT, Cuttack

P a g e 13 | 13