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Income Tax Appellate Tribunal, DELHI BENCH: ‘B’ NEW DELHI
Before: SHRI PRASHANT MAHARISHI & SHRI K.NARASIMHA CHARY
Aggrieved by the order dated 16/3/2018 in appeal No. 10179/16- 17 passed by the learned Commissioner of Income Tax (Appeals)-2, New Delhi (“Ld. CIT(A)”), in the case of M/s Chennai Ennore Port road company limited (“the assessee”) for the assessment year 2013-14, assessee preferred this appeal challenging the addition of Rs. 46, 63, 222/- made by the learned Assessing Officer on account of interest on mobilisation advance and confirmed by the Ld. CIT(A). Grievance of the assessee is that the authorities below failed to notice the fact that such interest charged by the assessee on the mobilisation advance reduced the operating cost as per the provisions of the Income Tax Act, 1961 (for short “the Act”).
Brief facts of the case, as are necessary for the disposal of this appeal, are that the assessee is a company said to have been engaged in the business to develop, establish, construct, operate and maintain a project relating to the construction, operation and maintenance of Chennai and Ennore connectivity project under the “Build Operate Transfer” (BOT) basis. For the assessment year 2013-14 the assessee filed the return of income on 24/12/2013 declaring an income of Rs. 1, 31, 29, 690/-. During the course of assessment, learned Assessing Officer found from the P&L Account and computation that there was discrepancy with regard to the earned interest income, inasmuch as total interest earned was Rs. 1, 45, 20, 085/-, the disclosed interest was only Rs. 98, 56, 862/-. Assessee explained that an amount of Rs. 46, 63, 222/-was received on account of interest on mobilisation advances and that as the project for which the said amount was given was in preoperative stage and, therefore, it was not taxable as per law. Assessee also places reliance on the decision dated 20/1/2016 of the Tribunal in the case of M/s Rail Vikas Nigam Ltd vs. DCIT in ITA No. 6165/del/2012.
Learned Assessing Officer, however, held that the facts of the case in Rail Vikas Nigam (supra) are entirely different from the facts of the case on hand; and that the interest earned by the assessee is in the nature of miscellaneous receipt which has to be treated like income from other sources. Learned Assessing Officer, accordingly, added such sum of Rs. 46, 63, 222/-to the income of the assessee.
Aggrieved by such an action of the learned Assessing Officer, assessee preferred an appeal before the Ld. CIT(A). Ld. CIT(A) also agreed with the learned Assessing Officer and opined that the assessee had no responsibility of arranging any funds by way of advance to the contractors and the interest in this case was the consideration which cannot be part and parcel of the works to be done by the contractor. On this score, Ld. CIT(A), by way of impugned order, supported the findings of the learned Assessing Officer in treating the interest earned on mobilisation advances as the income from other sources and dismissed the appeal.
Aggrieved by the impugned order, assessee preferred this appeal, stating that the Ld. CIT(A) has erred on the law and facts in not appreciating the decision of the Hon’ble Supreme Court in the case of CIT vs Bokaro Steel Ltd. (1999) 102 taxmann 94 (SC),decision of ITAT, Cuttack in the case of Angul Sukinda Railway Limited vs ITO in IT A No. 197/CTK/2016, POSCO India Limited vs DCITin 462 and 461/CTK/2011 and Sardar Sarovar Narmada Nigam Limited vs ACIT (2012) while approaching the issue. He submitted that the mobilization advance given to the contractor were for the purpose of contract work of Chennai and Ennore connectivity project under the “Build Operate Transfer” (BOT) basis, and intrinsically connected with the capital expenditure of the assessee prior to commencement of its business and is rightly treated by the assessee as capital receipt which goes on to reduce the cost of capital work in progress.
Ld. DR placed reliance on the orders of the authorities below and submitted that providing funds to the contractors is beyond the scope of the agreement and therefore, whatever the earnings by way of interest accrued to the assessee cannot be said to have any relationship or nexus to the core business of the assessee, and therefore, such interest are taxable under law under the head income from other sources.
We have gone through the record in the light of the submissions made on either side. Insofar as the facts are concerned there is no dispute. While making the addition, learned Assessing Officer recorded a finding that in this case the complete project of the assessee was in preparative stage and it was a factual material on record that the interest earned was of the nature of miscellaneous receipt which was to be treated like income from other sources agitated by the assessee for other declared interest income and so far as the expense of the project the assessee is rightfully capitalising the project cost as it is still in preparative stage. On this ground learned Assessing Officer held that the interest earned on mobilisation advance was chargeable to tax.
While confirming the said findings of the learned Assessing Officer, Ld. CIT(A), having gone through the copy of agreement signed between the assessee and M/s SPL Infrastructure Pvt. Ltd. and Costal Projects Pvt. Ltd., specifically to Clause 60.6 of the agreement which contains details about advance payment, observed that,-
7.3 ………. In this clause it is clearly mentioned that the principal i.e. the assessee will make interest bearing advance to the contractor for the costs of mobilization in respect of the works. From this clause it is clear that the responsibility of arranging thefunds wasthat of the contractor.
Had the responsibility of arranging the fundsbyway of advance been that of the principal i.e. the assessee, it could not charge interest on such advances. Therefore, the fact to be noted in this case is that the funds have been arranged by the assessee to facilitate the contractor for smooth functioning of the works. But such advance of the funds was not without consideration. Hence, such consideration could not be part and partial of the works to be done by the contractor. In this way the interest earned by the appellant company was income from other sources, taxable in the year of receipt or credit to its account. Interest income was credited/paid in the account of the appellant company during the year under consideration. It was not adjusted by the contractor from amounts payable by the assessee. The postponement of reduction of cost in subsequent financial year/years cannot be held to be justified in view of the facts of the case. The Hon’ble Tribunals did not look into these aspects of the case, therefore, their decisions are distinguishable on facts. Hence, I confirm the addition and dismiss the ground of appeal.
In the case of CIT vs Bokaro Steel Ltd. (supra)Hon’ble Apex ourt held that the receipt of rent, hiring charges and interest from contractors were directly connected with or incidental to the work of construction of its plant undertaken by the assessee. The advance which the assessee made to contractors to facilitate the construction activity of putting together a large project was as much to ensure that the work of contractors proceeded without any financial hitch as to help the contractors. The receipts had been adjusted against the charges payable to the contractors and had gone to reduce the cost of construction. They had, therefore, been rightly held as capital receipts and not income of the assessee from any independent sources. Hon’ble Supreme Court in this case distinguished the case where the assessee was free to use the interest income in any manner it like and the case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of business operations of the assessee.Hon’ble Apex Court observed that no activity was carried out to do any earning but all actions undertaken in the execution of the project therefore, any income earned on that process would go to reduce the cost of the project. Hon’ble Court made a reference to the decision reported in Godhra electricity company limited vs. CIT (1997) 225 ITR 746 while reaching the said conclusions.In the case of Angul Sukinda Railway Limited vs ITO (supra), a coordinate Bench of this Tribunal, on similar facts, held that where the mobilization advance given to the contractor were for the purpose of the core business of the assessee and intrinsically connected with the capital expenditure of the assessee prior to commencement of its business, the assessee was justified in treating itas capital receipt which goes on to reduce the cost of capital work in progress. Further, in the case of POSCO India Limited vs DCIT (supra) a coordinate Bench of this Tribunal held that where, prior to the commencement of business, any the funds in the form of share capital were infused for a specific purpose of furtherance of the business of the assessee, any interest earned on such funds would be in the nature of capital receipt and therefore, was required to be set off against pre- operative expenses. In the case of Sardar Sarovar Narmada Nigam Limited vs ACIT (2012), a coordinate Bench of the Tribunal held that till such time the business is set up, all expenses even if in the nature of revenue expenses will have to be capitalized; and if anyadvance given to the contractor for furtherance of the work of the assessee, such receipts receipts in the nature of interest are inextricably linked with the setting up of the capital structure of the assessee company.
In the light of the settled position of law on this aspect, we are of the considered opinion that the mobilisation advances to the contractors had an intrinsic nexus with the business of the assessee and do not form a different activity from the core business of the assessee and therefore, whatever the interest receipts that would go to reduce the cost of the project would be in the nature of capital receipts and are not chargeable to tax in the hands of the assessee. With this view of the matter, we find it difficult to sustain the orders of the authorities below and accordingly, answer the issue stating that the addition of interest earned by the assessee on the mobilisation advances and which was applied to reduce the cost of the project cannot be sustained. Learned Assessing Officer is accordingly directed to delete the same.
Appeal of the assessee is accordingly allowed. Order pronounced in the open court on this the 11th day of March, 2021 on the conclusion of hearing over virtual mode.