MJSJ COAL LIMITED,ANGUL vs. ITO, WARD-2, DHENKANAL

Per Shri Pavan Kumar Gadale, JM: These are the appeals filed by the assessee against the separate orders of CIT(A)-1&3, Bhubaneswar, dated 28.04.2016, 04.11.2016 & 04.12.2017 passed in I.T.Appeal Nos.0120/2014-15, 0472/15-16 and 0254/16-17, for the assessment years 2011-2012, 2013-2014 & 2014- 2015. 2. Since issues the above appeals are common, therefore, they are heard together and disposed off by this consolidated order. For the sake of convenience we shall take up assessee’s appeal i.e. ITA No.429/CTK/2016 for assessment year 2011-2012 and the grounds and facts mentioned therein, wherein the assessee has raised the following grounds of appeal :- GROUND OF APPEAL • We are not agreeing with the computation of tax on interest earn by company made by assessing officer. • During the assessment, the cases we submitted to justify our claim (as mentioned in statement of facts) has not been paid any emphasis for deciding the case by the A.0 and CIT (Appeal- 3),Bhubaneswar. On the other hand the A.0 and CIT (Appeal-3) finally imposed his decision based on the facts of Alkali Tuticorin Chem. And fertilizers ltd. in which it has earned interest on the funds, were borrowed funds only

Whereas in our case the money which was deposited, is the amount contributed by the shareholders towards Equity Share Capital for the purpose strictly capital in nature, for mining project and it is clarified that "Interest on short term deposits of capital receipts [share capital money (equity)] is capital receipt only and not taxable." The main objective of our Company owned by Govt.of India is Coal production which boosts to Indian economy, Social lifestyle of citizen of India & help in every sector / society which basic core raw material is coal. The company is not even commenced its coal production till date.

As per Supreme Court & HC: Above type of capital receipts (similar to our case) is not taxable and this is "inextricably linked" to the setting up of the business. Such income is to be treated as capital receipt is required to be capitalized to be set off against pre- operative expenses.(case laws attached for reference)(CIT Vs. Bokaro Steel Ltd.(1999) 236 ITR 315 Supreme Court, Pr. CIT Vs FACOR POWER LTD ITA 1011/2015, Jdg.07-01-2016, HC Delhi and etc)

• Hence, the amount which is deposited in our banks shall not be seen as borrowed funds as in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd v. CIT (1997) 22 7 ITR 172 (SC) (as this is a revenue nature income and taxable as per SC).In Akali CFL ,the objective of borrowed fund is to earn interest income but not in our case. In that case it is to state that the said company has borrowed funds and utilized as short term deposits to earn interests, and in our case is Capital fund, so this case is not similar to our case, because the nature of Capital fund and borrowed fund is different So taxation is also different

In our present case, This should be decided on the basis of nature of principle (equity, not through borrowings) and "inextricably linked" to the setting up of the business including objective and it is similar to case "Pr. CIT Vs FACOR POWER LTD ITA 1011/2015, Jdg.07-01-2016, HC Delhi", " CIT Vs. Bokaro Steel Ltd.(1999) 236 ITR 315 Supreme Court" and etc.

The following cases are enlisted to justify our claim for Refund as under. –

1- CIT Vs. Bokaro Steel Ltd.(1999) 236 ITR 315 SC 2- Pr. CIT Vs FACOR POWER LTD ITA 1011/2015, Jdg.07-01- 2016, HC Delhi 3- ITO Vs Facor Power Ltd(TTAT Delhi VTTA No.4300/DEL/2012,Date of Decision: 10.06.2015. 4- CIT Vs. Jaypee DSC Ventures ltd. ITA 357/2010 HC Delhi 5- CIT Vs Saraswati kunj Co. op Housing Building Society( 2006 287 ITR 22) HC Delhi 6- CIT Vs Arihant Thread ltd.(2011)-49 DTR(T&H 251) 7- CIT Vs NTPC Sail Power Co. Ltd. ITS 1238/2011 HC Delhi 8- CIT v. Govinda Choudhury and Sons (1993) 203 ITR 881 (SC) 9- CIT v. Madhya Bharat Energy Corporation Ltd. (2011)337ITR 389 (Del) 10- Indian Oil Panipat Power Consortium Ltd. v. ITO (2009) 315 ITR 255 (Del) 1 l-Mazagaon Dock Ltd v. CIT/Excess Profits Tax (1958) 34 ITR 368 (SC), 12- Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax (1954) 26 ITR 765 (SC) 13- S.G. Mercantile Corporation P. Ltd v. CIT (1972) 83 ITR 700 (SC).

• The imposed demand is prejudicial and offers unnecessary hardship on us, since our affairs is still lying on the verge of development only, we do not have commenced yet.

• We have the valid reason for taking that interest earned (Rs 91,56,600.00 and TDS of Rs 12,72,540.00,Tax Demand of Rs 22,33,130.00) is for capitalization in our books and further utilization into acquisition of Capital assets or any other similar purposes, by the way of interest or in any other manner on funds which are otherwise "inextricably linked" to the setting up of the business, such income is to be treated as capital receipt is required to be capitalized to be set off against pre-operative expenses. As in our case the operations is still lying in the developmental phase and therefore our plea shall be accepted and necessary refund shall be processed in the said case (i.e. A.Y.2011-12).

• We are genuine in the eye of law and followed valid procedure for computation of tax for refund as per laws.

• In preview of the case reference mentioned by AO & CIT (Appeal-3) regarding Tuticorin Alkali Chemicals and Fertilizers Ltd v. CIT (1997) 227 ITR 172 (SC). The said company has borrowed funds and utilized to in short term deposits to earn interests with the bank which is difficult to follow the reasoning of earning income on such capital receipts. Whereas in our case the money which was deposited, is the amount contributed by the shareholders towards Equity Share Capital for the purpose strictly capital in nature for mining project which is main objective of the company owned by Govt, of India Hence, the amount which is deposited in our banks shall • Since the project for which MJSJ Coal Ltd. was established was not even commenced till date, the amounts which are deposited in the bank and finally generated interest cannot be named as Surplus funds. And such amount is only Equity Capital, shall be utilized for the mining developments and capital expenditures only in future after obtaining clearance from the Central Govt, and State Govt, as well. • Therefore we believe our plea has been, misconstrued the ratio of judgments of the court cases we submitted earlier ( i.e. A.Y.2011-12) mentioned above. The ratio of the Supreme Court judgment in Bokaro Steel Ltd. (1999) 236 ITR to our mind is that if income earned by the way of interest or in any other manner on funds which are otherwise "inextricably linked" to the setting up of the business, such income is to be treated as capital receipt is required to be capitalized to be set off against pre-operative expenses. As in our case the operations is still lying in the developmental phase and therefore our plea shall be accepted and necessary refund shall be processed in the said case (i.e. A.Y.2011-12).( The latest case is attached for your reference " CIT Vs FACOR POWER LTD ITA 1011/2015, Jdg.07-01-2016, HC Delhi") • Therefore the tax refund claimed Rs 35,05,670.00 (as TDS of Rs 12,72,540.00 and Tax demand paid of Rs 22,33,130.00) on interests earned is of capital nature . This is "inextricably linked" to the setting up of the business (please refer the case of Bokaro Steel Ltd. (1999) 236 ITR and the latest decision of "Pr. CIT Vs FACOR POWER LTD ITA 1011/2015, Jdg.07-01-2016, HC Delhi") and shall be refunded to us , because such income is to be treated as capital receipt is required to be capitalized and to be set off against pre-operative expenses. As in our case the operations is still lying in the developmental phase and therefore our plea shall be accepted and necessary refund shall be processed in the said case (i.e. A.Y.2011-12). Hope above ground of appeal is valid for taking the matter in appeal.”

to carry on the business of coal mining. The partners in the venture are Mahanadi Coal Field having 60% share holding, M/s JSW Ltd. having

11% share holding, M/s JSW Energy Ltd. having 11% share holding, M/s Shyam Mettalics and Energy Ltd. having 9% share holding and M/s Jindal

Stainless Ltd. having 9% share holding. Since the process of land

acquisition for extraction of coal and geological survey was under process, the assessee company was yet to commence its commercial

production in the said financial year, whereas the assessee company has filed return of income electronically on 24.09.2011 declaring total income

at Rs.Nill for the assessment year 2011-2012. Subsequently, the case was selected for scrutiny under CASS and notices u/s.143(2) & 142(1) of the Act were issued to the assessee. In compliance, ld. AR of the assessee appeared before the AO from time to time and produced the books of accounts and other relevant documents. Subsequently AO

completed the assessment assessing total income at Rs.94,32,204/- and passed order u/s.143(3) of the Act, dated 18.03.2014 making addition

u/s.56 of the Act, on account of interest on bank deposits and expenses

of contractual payments, audit fees and hire charges.

before the CIT(A). In the appellate proceedings ld. AR reiterated the submissions made before the AO and the CIT(A) after considering the findings of the AO and submission of the assessee partly allowed the appeal of the assessee.

under the head income from other sources, the assessee has filed an appeal before the Tribunal.

deposited in the bank in the form of fixed deposits is contributed by the shareholders towards Equity Share Capital for the purpose of mining project and also interest on short term deposits, is a capital receipt. Ld.

AR emphasized that since the project of assessee company is yet to commence its operations, therefore, the assessee company has deposited the amounts in the bank for short term deposits and the interest on fixed deposits cannot be considered as income from other sources.

The equity Capital, shall be utilized for the mining developments and incurring of capital expenditures after obtaining clearance from the Central

Government and State Government and other agencies. The ld. AR

mentioned that the mining operations are in the developmental phase and supported the submissions with judicial decisions and prayed for allowing

the appeal of the assessee.

the interest on bank deposits under income from other sources. In the present case we find the AO in the assessment proceedings observed

that the company was formed to set up a mining project and the process

of setting up is got delayed and utilization of share capital in bank

deposits cannot be considered as inextricably link with the process of setting of its plant and machinery. In appellate proceedings, the CIT(A)

confirmed the addition on the ground that the primary objective of holding in absence of commencement of business, where the contentions of ld.

AR is that when the AO in the assessment proceedings has accepted the fact that the assessee company has not started its commencement of business and temporarily kept the funds in bank as fixed deposits out of the share capital amount which was kept for a specific purpose of utilization for establishment/commencement of the business and therefore, interest earned temporarily on fixed deposits is capital receipt

and shall be capitalized in the work in progress and the said interest

amount cannot be taxable under income from other sources. The contention of ld.AR is that the reliance placed by the lower authorities of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals [1997]

227 ITR 172 (SC) is not applicable to the present facts of the case. In the present case the assessee company has not commenced its business

and the interest from bank deposits is duly capitalized under the head

work-in-progress as per guidelines and are directly linked/nexus with the activities of setting up the plant and machinery. Therefore, the receipts

are inextricably linked with the setting up of the capital structure of the assessee company. We find the Hon’ble Supreme Court in the case of CIT Vs. M/s Shree Rama Multi Tech Ltd., 403 ITR 426 (SC), has held as under :-

“8. The Respondent company had come out with initial public issue during the year under consideration and the amount of share application money received was deposited with the banks on which interest of Rs. 1,71,30,202/- was earned which was shown in the return of income originally filed as income from other sources which was also referred to in Col. 13(d) of the Tax Audit report filed under Section 44AB of the IT Act. Even though initially the income from the interest was shown as income from other sources in the return of income, however, the Respondent had raised an additional ground before the Tribunal to allow the set off of such interest against the public issue expenses. The issue was examined by the Tribunal and was set aside for fresh adjudication by the Assessing Officer. During the course of fresh proceedings, an opportunity was given to the Respondent to file the details of interest on share application money. The Respondent stated that the details of interest income on share application money was already furnished at Annexure No. 7 of their letter dated 11.03.2003 at the time of original assessment. The verification of the said Annexure reveals that the Respondent had earned the interest income on FDRs placed with the bank, however, the period for which such FDRs were placed and the specific period of the interest earned was not found to have been mentioned. Under the circumstances, it was not possible to identify as to what portion of interest earned on FDRs was relating to the period prior to the allotment of shares or after the allotment of shares. Keeping in view the specific guidelines of the Tribunal in this regard and in the absence of specific working of interest for pre-allotment and post-allotment, the claim of the Respondent was not allowed and added to the total income under the head income from the other sources as was declared in the original return of income filed by the Respondent.

Nos.186,462&461/CTK/2011, dated 14.02.2013, where the Tribunal has observed that, the head “income from other sources” is a residuary head

of income. In the present case, on perusal of the facts and application of judicial decisions, there share capital were infused in the company for a specific purpose of acquiring land and the development of infrastructure

and 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 in the nature of capital receipt and, hence,

set off against pre-operative expenses. The observations of the Tribunal

at para 5 read as under :-

“5. We have heard the rival parties and perused the material available on record. On our careful consideration of the facts and circumstances of case as brought on record by the authorities below, we are inclined to find the contention of the learned Counsel of the assessee appropriate to the extent that it was never a change of stance on the facts remaining the same beginning from Assessment Year 2006-07. It was a misconstruction of the facts for the purpose of finding applicability of the provisions of law ennunciated by the Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd v. CIT (supra). The law ennunciated in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd v. CIT(supra) cannot alone be considered as favoring Revenue insofar as it also talks about capitalization of the interest and the circumstances, which circumstances have been dealt with by the Hon'ble Delhi High Court in the case of India Oil Panipat Power Consortium Ltd v. ITO (supra) and further more in the case of NTPC Sail Power Company Pvt. Ltd., v. CIT decided on 17.07.2012 in ITA No.1238/2011 (copy placed on record) which has also been relied on by the learned Counsel of the assessee. The learned Counsel of the assessee has submitted the financial statements duly audited under the provisions of the I.T.Act as well as under the Companies Act which have been verified by the Assessing Officer requiring no reference to be made to the Transfer Pricing Officer under the provisions of Section 92CA. In other words, no business income hasbeen generated by the assessee. The expenditure claimed therefore was only for the purpose of setting up the project envisaged and there is no method for balancing interest, if any, passed on to the share holders on account of dividend or business income by the assessee. 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 avail-able 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 "Profits 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. 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 Commissioner of Income-tax (Appeals) that the monies which were inducted into the joint venture by the Koreans 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 Bank, will result in the character of the funds being changed, inasmuch 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. 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-operatiyg expenses. We are inclined to find a meaning to the insertion of the proviso to Section 36(l)(iii) that interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession was being allowed as deduction u/.s.36(l)(iii) of the Act as revenue expenditure was amended w.e.f. 1.4.2004 when the amount of interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business or profession whether to be balanced interest on capital borrowed when the assessee's own funds were being utilised for the purpose of incurring the project cost which took undue delay due to Government and other interference. In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd v. CIT (supra), Hon'ble Apex Court has held - ""if the company, even before it commences business, invests the 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 a rented house and gets rent, such rent will be assessable to tax under section 22 as income from house property. Likewise, a 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 Income-tax Act". Subsequently Hon'ble Apex Court in the case of CIT v. Bokaro Steel Ltd (supra) held - "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 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. " Merits for consideration as brought on record for the AYs in appeal before us are as under : Particulars. As on As on As on 31.3.2006 31.3.2007 31.3.2008

Private Limited, in ITA Nos.403&344/CTK/2017, vide order dated

arising out of the running business, 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 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.

(Senior Private Secretary) आयकर अपील"य अ"धकरण, कटक / ITAT, Cuttack