HAZARIBAG RANCHI EXPRESSWAY LTD,MUMBAI vs. ITO 14(2)(1), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “H”, BENCH MUMBAI BEFORE SHRI G. MANJUNATHA, ACCOUNTANT MEMBER & SHRI RAM LAL NEGI, JUDICIAL MEMBER ITA No.6696/Mum/2017 (Assessment Year :2012-13) Hazaribagh Ranchi Vs. ITO-14(2)(1) 4th Floor, Expressway Ltd. The IL&FS Financial Center Aaykar Bhawan Plot No.C-22, G Block M.K.Road BKC, Bandra(E) Mumbai-400 020 Mumbai-400 051 PAN/GIR No.AACCH2490J Appellant) .. Respondent)

Revenue by Shri Sachchidanand Dube, DR Assessee by Shri Sandeep Bhalla & Ms. Niti Agarwal, AR’s Date of Hearing 06/01/2020 Date of Pronouncement 22/01/2020 आदेश आदेश / O R D E R आदेश आदेश PER G.MANJUNATHA (A.M):

This appeal filed by the assessee is directed against, the order of the Ld. Commissioner of Income Tax (Appeals)–22, Mumbai, dated 09/08/2017 and it pertains to Assessment Year 2012-13.

2 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd.

Learned Commissioner of Income tax (Appeals) amounting to Rs. 75,96,711/- under the head Income from other sources in may be deleted. 3. On the [acts & circumstances of the case the appellant prays that the sum of Rs. 75,96,711/-may be treated as income earned from business and profession and may be reduced from the total value of the capital work-in-progress and the said amount is not chargeable to tax under the head Income from other sources. 4. On the facts &. circumstances of the case the Learned Commissioner of Income Tax (Appeals) has erred in concluding that the appellant is not entitled to claim the deduction of the sum of Rs. 2,48,92,602/- , being the interest paid against the interest income. 5. On the facts and circumstances the appellant prays that the sum of Rs. 2,48,92,602/- being the interest payment may be allowed as deduction against the interest of Rs.75,96,711/- treated as the income chargeable to tax under the head income from other sources. 6. Without prejudice to ground 1 to 5 the appellant prays that if the sum of Rs.75,96,711/- is taxed under the head income from other sources and if deduction of interest payment is not allowed to be set off against the said income then the sum of Rs. 2,48,92,602/- may be added to the capital work-in-progress as the appellant has reduced the said amount while computing the capital work-in-progress. 7. On the facts and circumstances of the case the appellant prays that the Learned Commissioner Of Income tax (Appeals) has erred in allowing the deduction of Rs. 2,90,600/-u/s. .37(1) as against the claim of the appellant of Rs. 3,78,373/-. The appellant prays that appellant be granted deduction of Rs. 35.87,773/- us. 37(1). 8. Without prejudice to Ground No. 7 if the claim of deduction of Rs. 35,87,773/- is not accepted then me said sum of Res. 35.87,7737- be added to capital work-in-progress 9. On the facts and circumstances of the case the appellant denies the liability for payment of interest u/s 234B and prays that the interest levied by the Learned Assessing Officer may be deleted. 10. The appellant craves the permission to add, alter or amend the grounds of appeal at the time of hearing.

3 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd. total income. The case was selected for scrutiny and during the course of assessment proceedings, the Ld. AO noticed that on perusal of Form 26AS, it is seen that during the year, the assessee has received interest on time deposits of Rs. 75,96,711/- . However, on perusal of the return of income, it is seen that said income was not offered to tax, but reduced the same from its capital work-in- progress. Therefore, he called upon the assessee to file necessary explanation as to why interest income from time deposits shall not be assessed under the head income from other sources as per provisions of section 56(1) of the I.T.Act, 1961. In response, the assesee submitted that it is engaged in the business of construction of roads on BOT basis, for which it has borrowed loans from consortium banks. As per the agreement with consortium banks, the assessee drawn loan funds for the purpose of its project on a periodic basis. However, when the funds are not required for its project, it has kept those funds in consortium banks in fixed deposits for short period and necessary interest earned from said deposits has been credited to RTA account to be used for project of the assesse.

4 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd.

income earned was to be offered to tax under the head income from other sources. The relevant findings of the AO are as under:-

5.6 The submissions made by the assessee has been carefully perused and considered but the same are found untenable. At the outset, it needs not be mentioned that the assesse has placed emphasis on the facts that the interest has been earned on the borrowed funds on which it has paid interest. Since, the interest is paid by the assesse, as per its submission, is entitled for deduction u/s 57(iii) of the Income Tax Act, 1961. The edifice of the submission of the assesse is founded on wrong notion. At this point of time, it needs to be mentioned that by virtue of the law laid down by the Hon’ble Supreme Court in the case of CIT vs. Dr.V.P. Gopinathan 248 ITR 449 (SC) the assessee does not become entitled for deduction u/s 57(iii) in the back drop of facts of the case. In the case before the Hon’ble Supreme Court in the case of CIT vs. Dr. V.P. Gopinathan 248 ITR 449(SC) the assessee doe sot become entitled for deduction u/s 57(iii) in the back drop of facts of the case. In the case before the Hon’ble Supreme Court the respondent raised loan against his FD with the bank on which it was required to pay interest. The interest so paid was reduced by the respondent from his interest earning on the identical pretext that the investment in that the interest has been paid on the loans taken by the assessee. The Hon’ble Apex Court vide ruling under consideration pronounced that since the loans were not taken for earning of interest, assessee does not become entitled for deduction u/s 57(iii). 5.7 Taking into consideration, the ruling of Hon’ble Supreme Court in the case referred to the above natural inference that spring is that the facts of the instant case are almost identical to the case decided by the Hon’ble Apex Court. Inasmuch as, in the instant case, the assessee has borrowed the funds by way of share capital from its subsidiaries and credit facilities from banks and institutions. Therefore, the undersigned has not hesitation whatsoever in concluding that the assessee has no case to seek any deduction against the interest earned by the assesse. 5.8 The assesse company is incorporated for setting up of infrastructure facility being construction of toll road between Hazaribag and Ranchi which is under construction. During the year under consideration assessee’s activities to construct road were under progress and the project was not finalized during the year under consideration. The assessee company is capitalizing all the expenses incurred for development for projects under the head “WIP’. The WIP is reflected in the balance sheet of the company. 5.9 Before dwelling upon the captioned issue it is imperative to go through the WIP reflected in Balance sheet as it will assist in arriving at the judicious conclusion. Taking into consideration the significance of this aspect of the Balance sheet it is observed that the assessee has earned interest income on temporary investment from borrowed funds of

5 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd.

Rs.75,96,711/- which was deducted from the borrowing cost to arrive at the figure of Capital Work-in-progress of Rs.185,60,44,412/-. Even a cursory look at the above imprinted Schedule of the Balance sheet makes it abundantly clear that the closing balance of the work-in- progress has been arrived at after reducing an amount of rs.75,96,711/- which the assesee has claimed as expenses related to earning of interest (to the extent of interest earned i.e Rs.75,96,711/-).

5.10 Taking into consideration this aspect the natural question that crops up is that as to why the impugned amount of Rs.75,96,711/- has not been shown in the P&L Account as receipts following the dictum of various court pronouncements. Instead, the assessee while taking this income under the head “Income from other sources” has conveniently reduced the same amount from the interest income being expenses incurred for earning interest income. This act of the assesee is totally not in consonance with the provisions of sec. 57(iii) of the Income Tax Act, 1961.

5.11 Now the second most important question that arises from the facts of the case is that whether the interest so earned by the assessee is to be taxed under the head income from other sources’ or assessee is entitled for reduction of such interest earning from WIP as done by the assessee. In this context, the assessee in its submission has placed reliance on the decision of the Hon’ble Supreme court in the case of CIT vs. Bokaro Steel Ltd. The facts of the case before the Hon’ble Supreme Court and the facts of the assessee’s case are distinguishable in as much as in that case the project was not in progress and therefore this ruling does not provide any aid or assistance to the assessee. In the other case i.e Indian Oil Panipat Power Consortium Ltd. the income earned by the assessee was totally linked to the assets of the project. Therefore, in both these case the income received by the assessee was inextricably linked, whereas in the instant case the recipes in the form of interest earned by the assessee have got no direct link with the assets meant for the project of the assesse. In all the case laws cited by the assessee the common feature is inextricable link to the asset, whereas the same link is missing in the case of the assesee. The assessee has therefore tried to misinterpret the decisions given by the Hon’ble Delhi Court in the case of Indian Oil Panipat Power consortium ltd. and the decision of the Hon’ble Supreme Court in the case of Bokaro Steel Ltd.

5.12 As a matter of fact, the facts and circumstances of the instant case has got more proximity with the ruling of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT 227 ITR 172 (SC) as discussed herein under: 5.13 Facts of the assessee’s case; As stated earlier the assessee company is engaged in construction of road on BOT basis and the activities of projects in hands are in progress not yet reached finality. This is evident from the fact that assessee showing the expenses towards project as WIP. The funds required for this construction activity have been raised by the assesee by share application money and loan funds,

6 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd. inter-alia on which assessee pays interest. The major pat of interest bearing borrowed funds which have not been put into the use for construction of road activities were advanced by the assessee to its associate concerns and interest was charged on the same. This activity fetch interest income of Rs.75,96,711/- which assessee has not credited to P&L Account, but has credited to WIP account meaning thereby the WIP has been reduced to that extent. 5.14 Facts of the case before the Supreme Court: In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT 227 ITR 172 (SC) the work of project in the hands of the assessee was in progress and as a result the funds at the disposal of the assessee were not used for the purpose they were meant. The surplus funds at the disposal of have assessee were deployed for earning income like interest etc. The interest so earned was not offered for tax and was reduced from the work-in- progress. The Hon’ble Supreme Court rejected assessee’s claim and ruled that the income earned by the assessee requires to be brought to tax under the head ‘Income from Other sources.. 5.15 In the back drop of above comparative facts there is no iota of doubt that in the instant case the ruling of Supreme Court in the case of Tuticorin Alkali chemicals & Fertilizers Ltd. Vs. CIT 27 ITR 172 (SC) squarely gets applied. There are plethora of pronouncements wherein identical decision was pronounced by the court few of which are listed herein under: • Whistling Woods International Ltd. ( 16 Taxmann 242 (Mum) (2011) Where assesee was in process of setting up of business, interest earned by it by deploying surplus fund would be assessed under the head ' • Dy.CIT vs. Allied Construction 106 TTJ 595 (Del. SB) Interest on deposit is different and separate from assesee contract business. There is nexus between the earning on exist or continue without pressure or continuity of other. Interest is independent sources of income and to be taxed as income form other sources. • A.C.Nielson Research Services (P) ltd. Vs. Addl. CIT 120 TTJ(Mum) 918 (MUM) Assessee company engaged in business of customized market re- search also earns income from loans given and FDR since company was not engaged in the business of advancing loan the interest so earned has to be taxed as income from other sources. • Dy.CIT vs. Times Guarantee Ltd. 131 TTJ (Mum) 257. Deployment of surplus fund for earning interest gives rise to interest income to be taxed under the head income from other source. • Traco Cable Co.Ltd. vs. CIT (Ker) 72 ITR 503 Madhya Pradesh State Industries Corpn. Ltd. vs. CIT (MP) 69 ITR 824(MP) CIT vs. Assam Plantation Corp Dev. Corpn Ltd. (Gau) 221 ItR 392 Share capital received deposited in bank – Interest eanred is to be assessed under –“ Other sources” • The identical ruling has been given in the following cases.

7 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd. i. South India Shipping Corporation Ltd. Vs. CIT-240 ITR 24 (Mad.) ii. CIT vs. Kisan Sahakari Chini Mills Ltd. -280 ITR 617 (All.) iii. Shree Krishna Ploysters Ltd. Vs. Dy.CIT -274 ITR 21(Bom.) 5.16 In the back drop of the discussion in foregoing paras, the only and only natural and judicial inference that crops up is that the interest earned by the assesee of Rs. 75,96,711/- is taxable under the head ‘Income from Other Source’ and assessee is not entitled for any deduction u/s 57(iii) of the Income Tax Act. Since the funds were borrowed by the assessee for the purpose of construction of roads on BOT basis and the interest paid on such borrowed funds has to be dealt with as per the provision of section 36. Accordingly, a sum of Rs. 75,96,711/- is brought to tax as assessee’s income under the head Income under the head Income from Other Sources without giving any deduction u/s 57(iii) of the Income Tax Act.

8 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd. ground taken by the assessee regarding increase in value of capital work-in-progress. Similarly, the Ld.CIT(A) has admitted additional ground filed by the assessee claiming deduction for certain expenditure amounting to Rs. 38,78,373/-, on the ground that said expenditure has been incurred wholly and exclusively for the purpose of business, but allowed partial relief to the assessee and out of total expenditure of Rs. 38,78,378/-, he has allowed a sum of Rs. 2,90,600/- being director’s fees and auditor fee, on the ground that above mentioned expenses are required to be incurred to maintain the corporate status of the assessee. Aggrieved by the Ld.CIT(A) order, the assessee is in appeal before us.

9 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd. Act, income is classified under five heads of income based on nature of income and hence, it is highly incorrect to refer, the source of funds to earn said income to change the characters of income. He further submitted that this position has been clearly explained by the Hon’ble Supreme Court, in the case of CIT vs. Tuticorin Alkali Chemicals and Fertilizers Ltd(supra), where it was categorically held that it is irrelevant to see the source of funds, but what is relevant is the nature of income to decide the head of income. The Ld. AO, as well as the Ld.CIT(A) has rightly considered the facts, in light of provision of the Act, and assessed interest income under the head income from other sources and their order should be upheld.

ISSUES No. 1:-

10 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd.

11 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd.

income from business. In the case of Lok Holdings (supra), the assessee therein collected advances from the customers who intended to purchase the flats in the properties as developed by the assessee. Since the construction was going on, the surplus funds available with the assessee out of the advances so received was deposited in Fixed deposits. The Hon’ble jurisdictional Bombay High Court, after considering the decision of Hon’ble Supreme Court rendered in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd (supra), held that the interest income is assessable under the head Income from business.” 5. In the similar circumstances, the Hon’ble ITAT Jaipur Bench in the case of ITA. No. 628/JP/2014 title as Infrastructure Development Company of Rajasthan Ltd. Vs. DCIT dated 11.08.2016 has held that the interest income upon the deposit by the assessee for the utilization of fund for the project, is liable to be treated as business income. The finding is hereby mentioned below for ready reference.: - “2.10 We have heard the rival contentions and pursued the material available on record. We find that both the parties have relied upon the decisions of the Hon'ble Supreme Court and in addition, the assessee has relied upon the decisions of Hon'ble Delhi High Court. Therefore, it would be appropriate to first refer to these decisions and some of the other recent decisions of Hon’ble High Courts and Coordinate Bench decisions. 2.11 In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), the Hon'ble Supreme Court held as under:— “The facts of this case were not in dispute. In the usual course, interest received by the company from bank deposits and loans would be taxable as income under the head Income from other sources' under section 56. It was argued on behalf of the company that it had not yet commenced its business and in any event if the income was derived from funds borrowed for setting up the factory of the company, it should be adjusted against the interest payable on the borrowed funds. Neither of the two factors can affect taxability of the income earned by the company the total income of the company is chargeable to tax under section 4. The Total income has to be computed in accordance with the provisions of the Act. Section 14 lays down that for the purpose of computation, income of an assessee has to be classified under six heads. In the instant case, the company had chosen not to keep its surplus capital idle, but had decided to invest it fruitfully. The fruits of such investment will clearly be of the revenue nature. If the capital of a company is fruitfully utilised instead of keeping it idle, the income thus generated will be of the revenue nature and not accretion of capital Whether the company raised the capital by issue of shares or debentures or by borrowing will not make any difference to this principle. If borrowed capital is used for the purpose of earning income, that income will have to be taxed in accordance with law. Income is something which flows from the property. Something

12 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd.

received in place of the property will be capital receipt. The amount of interest received by the company flows from its investments and is its income and is clearly taxable even though the interest amount is earned by utilising borrowed capital. It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilising the borrowed funds as its income. The company was at liberty to use the interest income as it liked it was under no obligation to utilise this interest income to reduce its liability to pay interest to its creditors. It could re-invest the interest income in land or shares, it could purchase securities, it could buy house property, it could also setup another line of business, it might even pay dividends out of this income to its shareholders. There was no overriding title of anybody diverting the income at source to pay the amount to the creditors of the company. It is well-settled that tax is attracted at the point when the income is earned Taxability of income is not dependent upon its destination or the manner of its utilization. It has to be seen whether at the point of accrual, the amount is of the revenue nature and if so, the amount will have to be taxed. It is true that the Supreme Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act. Whether a particular receipt is of the nature of income and falls within the charge of section 4 is a question of law which has to be decided by the Court on the basis of the provisions of the Act and the interpretation of the term 'income' given in a large number of decisions of the High Courts, the Privy Council and also this Court. It is well-settled that income attracts tax as soon as it accrues. The application or destination of the income has nothing to do with its accrual or taxability. It is also well settled that interest income is always of a revenue nature unless it is received by way of damages or compensation.” 2.12 In the case of Bokaro Steel Ltd. (supra), the Hon'ble Supreme Court, after considering the decision of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), held as under:— “The activities of the assessee in connection with first three receipts were directly connected with or were incidental to the work of construction of its plant undertaken by the assessee. Broadly speaking, these pertained to the arrangements 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

13 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd.

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 arrangements and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee had provided these facilities. The same was true of the hire charges for plant and machinery which was given by the assessee to the contractor for the assessee's construction work. The receipts in this connection also went to compensate the assessee for the wear and tear on the machinery. The advances which the assessee made to the contractor 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 were arrangements which were intrinsically connected with the construction of its steel plant. 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 source. 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 received any amounts which were inextricably linked with the process of setting up its plant and machinery, such receipts would go to reduce the cost of its assets. These were receipts of a capital nature and could not be taxed as income. The same reasoning would apply to royalty received by the assessee company for stones, etc., excavated from the assessee-company's land. The land had been allowed to be utilised by the contractors for the purpose of excavating stones to be used in the construction work of the assessee's steel plant. The cost of the plant to the extent of such royalty received, was reduced for the assessee. It was, therefore, rightly taken as a capital receipt.” 2.13 That the Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. (supra), after considering the decisions in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and Bokaro Steel Ltd. (supra) at length, held as under:— “5. In our opinion the Tribunal has misconstrued the ratio of the judgment of the Supreme Court in the case of Tuticorin

14 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd.

Alkali Chemicals & Fertilizers Ltd.'s case (supra) and that of Bokaro Steel Ltd. (supra). The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case (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.'s case (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 Mazagaon Dock Ltd. v. CIT & EPT [1958] 34 ITR 368 (SC), and Narain Swdeshi Weaving Mills v. CEPT [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 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, 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

15 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd.

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 Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 (SC) and CIT v. 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 preoperative expenses. In the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. (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.'s case (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. 6. There is another perspective from which the present issue can be examined. Under section 208 of the Companies Act, 1956 a company can pay interest on share capital which is issued for a specific purpose to defray expenses for construction of any work and which cannot be made profitable for a long period subject to certain restrictions contained in subsections (2) to (7) of section 208. This section was specifically noted by the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. 6.1 In our view the situation in the instant case is quite similar except here instead of paying interest on funds brought in for specific purpose interest is earned on funds brought in by way of share capital for a specific purpose. Could it be said that in the former situation interest could have been capitalized and in the later situation it cannot be capitalized. To test the principle we could extend the example, that is, would our answer be any different had assessee passed on the interest to the respective shareholders. If not, then in our view the only conclusion possible is that interest earned in the present circumstances ought to be capitalized. 7. In view of the discussion above, in our opinion the Tribunal misdirected itself in applying the decision of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case (supra ) in the facts of the present case. In our opinion on account of the finding of fact returned by the CIT(A) that the funds infused in the

16 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd.

assessee by the joint venture partner were inextricably linked with the setting up of the plant, the interest earned by the assessee could not be treated as income from other sources. In the result we answer the question as framed in favour of the assessee and against the revenue. These appeals are allowed and the impugned judgment is set aside.” 2.14 That the Hon'ble Delhi High Court in the case of Sasan Power Ltd (supra) following the decision in case of Indian Oil Panipat Power Consortium Ltd. (supra), has held as under: “14. It is clear from the facts stated above that Commissioner of Income Tax (Appeals) and tribunal have specifically held that the interest income was on capital account. We have gone through the grounds of appeal and do not find any reason or justification to upset the said finding. The factual findings recorded by the CIT(Appeals) and tribunal are not under challenge. The CIT(Appeals) and the tribunal have held that in view of the factual position quoted above the decision of the Supreme Court in CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 / 102 Taxman 94 was applicable as the Commitment Advance, which had been paid to PFC. This is not a case of surplus funds, which were available and investment were made in fixed deposits to earn interest. The interest paid to the power procurement utilities on commitment advances was capitalized. Interest paid and interest received were inextricably linked and have a commonality about their nature and character. The appellant cannot treat them differently. Commitment Advances and interest paid and received had reference to bidding process and linked to the project/purpose for which the respondent was set up. In view of the factual matrix, interest received on unutilized commitment advances cannot be taxed as revenue income and interest paid on commitment advance treated as a capital expense. This will be contradictory. The entire expenditure for inviting bids etc. and even documentation was paid to PFC. The amounts received from the prospective bidders on account of sale of tender documents was also transferred to PFC. As noticed above, Revenue has not challenged and has accepted the order of the tribunal deleting addition of Rs. 1,35,81,234/- paid by the respondent-assessee to PFC for preparation of tender documents. In view of the factual matrix, the tribunal has rightly followed the ratio in Indian Oil Panipat power Consortium Ltd.'s case (supra).” 2.15 In a recent decision, the Delhi High Court in case of Pr. Commissioner of Income-tax v. Facor Power Ltd. [2016] 66 taxmann.com 178 (Delhi) following the decision in case of Indian Oil Panipat Power Consortium Ltd. (supra), has held as under: 11. From the above extract, it is evident that the test that is required to be employed 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

17 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd.

the same. In the present case, findings of fact have been returned by the Commissioner of Income Tax (Appeals) and have been confirmed by the Income Tax Appellate Tribunal to the effect that the funds were inextricably connected with the setting up of the power plant of the assessee. The learned counsel for the revenue has also not been able to point out any perversity in such finding and, therefore, the factual findings have to be taken as those accepted by the Income Tax Appellate Tribunal which is the final fact finding authority in the income tax regime. That being the case, the decision of the Division Bench in Indian Oil Panipat Power Consortium Ltd. (supra) would squarely apply to the facts of the present case and the Tribunal was right in applying the same. 13. In the present case, there is a finding of fact that the money placed in the fixed deposit was inextricably linked with the setting up of the power plant. Thus, the revenue generated on account of interest on the said fixed deposits would be in the nature of a capital receipt and not a revenue receipt. This case has been decided on the basis of this principle and not on the basis that the source of the funds was through raising of share capital and not through borrowings.” 2.16 The Coordinate Bench in case of Adani Power Ltd. v. Assistant Commissioner of Income-tax, Range-1, Ahmedabad [2015] 61 taxmann.com 355 (Ahmedabad - Trib.) has held as under: “ 2.16 From the above, it is evident that the Hon'ble Delhi High Court has considered and interpreted the decisions of Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) as well as Bokaro Steel Ltd. (supra). The conclusion of the Delhi High Court is in fact the law which emerges as per the decision of Hon'ble Apex Court. Therefore, in our opinion, the CIT(A) was not justified in ignoring the decision of Hon'ble Delhi High Court by simply mentioning that the issue is covered by the decision of Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). After considering these two decisions of the Hon'ble Apex Court and also some other decisions of the Hon'ble Apex Court, their Lordships of the Delhi High Court arrived at the conclusion "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 the 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 the pre-operative expenses." That, the ratio of the above finding of the Hon'ble Delhi High Court would be squarely applicable to the facts of the assessee's case, because admittedly in the case under appeal before us the share capital as well as loans were raised for the

18 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd.

specific purpose of setting up of the power generation plants. The business of the assessee has not been commenced and therefore, as per above decision, the interest received in the period prior to commencement of business was in the nature of capital receipt and hence was required to be set off against the pre-operative expenses. The assessee has already set off the interest income against the preoperative expenses which is titled as "project development expenditure". In view of above, we are of the opinion that the interest income of Rs.1,35,87,158/- as well as Rs.1,64,07,481/- was a capital receipt not chargeable to tax during the year under consideration. Accordingly, Ground Nos. 1 of the assessee's appeal is allowed.” 2.17 Further, we drawn guidance from the decision of Hon’ble Rajasthan High Court in case of Commissioner of Income-tax-I v. Kansara Modler Ltd. [2012] 20 taxmann.com 641 (Raj.) wherein it was held that: "13. In that view of the matter, what we are required to consider is, as to whether the Tribunal was legally justified in not applying the judgment rendered in Tuticorin's case (supra), or that, the Tribunal was justified in applying the judgments given in Bokaro Steel, and Karnal Cooperative Sugar Mill's case. If this question were to come originally before us, perhaps we might have taken a task of undertaking the exercise, as to which of the views is required to be followed, and may be, that we might have come to any conclusion, either ways. In such circumstances, when the learned Tribunal, after examining all the three judgments, in Tuticorin's case (supra), Karnal Cooperative Sugar Mill's case (supra), and Bokaro Steel's case (supra), has examined the question, and found Karnal Cooperative's case (supra) to be the nearest, and latest case, on facts, in our view, it cannot be said, that the Tribunal was wholly wrong in adopting this course. It would have been equally the same situation, if the learned Tribunal would have adopted the other line of reasoning, following the judgment in Tuticorin's case (supra). 14. Therefore, when there are two sets of judgments of Hon'ble Supreme Court, proceeding on different lines of reasoning’s, and both stand on their own logical footing, and in that event, if the learned Tribunal has accepted one line of reasoning, supported by one set of judgments, it cannot be said, that the learned Tribunal was legally not justified in following the decision, as followed by it, simply because it might have been possible, or might be more appropriate to follow the other set of judgment, by following the other line of reasoning.” 2.18 From the above, it is evident that there are two sets of judgments of Hon'ble Supreme Court, proceeding on different lines of reasoning’s. The Hon’ble Delhi High Court in case of Indian Oil Panipat Consortium Ltd (supra) has considered and interpreted the decisions of Hon’ble

19 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd.

Supreme Court in case of Tuticorin Alkali Chemicals & Fertilizers (supra) as well as Bokaro Steel ltd (supra). After analyzing both the decisions of Hon’ble Supreme Court, it held that “the test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case (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.'s case (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.” 2.19 The facts in the instant case are pari materia with the facts of the Indian Oil Panipat (supra) and the ratio decidendi of Hon’ble Delhi High Court in that case will squarely apply to the facts of the assessee. In the instant case, undisputedly, the funds have been borrowed for the specific purpose of execution of the mega road projects and as per the loan agreement executed between the consortium of bankers and the assessee dated 23.11.2005, all the disbursements shall be deposited in the trust and retention account which shall be subject to strict control and verification by the Senior lenders and all disbursements shall be utilised solely for the purposes of implementation of the project and no other purpose. The funds are thus inextricably linked to the setting up of the mega road projects and interest earned on such borrowed funds infused in the business could not be classified as income from other sources. We also note a distinguishing feature in the instant case that the assessee is not at liberty to use the interest so earned as per its will and discretion unlike the case in Tuticorin Alkali Chemicals & Fertilizers (supra) and the interest has to be used solely for the purposes of implementation of the specified projects only. The impugned interest receipt of Rs. 35,39,479/- on such borrowed funds relates to the mega road projects/stretches which were under construction and the completed road projects/stretches up to the date of commencement of commercial operations. Therefore, the interest received prior to commencement of commercial operations of the specified mega road projects will be in the nature of capital receipt and will be required to be set off against the pre- operative expenditure capitalized under the head “Capital work-in-progress” and the same cannot be brought to tax under the head “income from other sources”. Hence, ground no. 1 of the assessee is allowed.

20 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd. 3. In ground No.2, the assessee has challenged the action of the Ld.AO in double taxation of interest income of Rs. 1,64,07,481/- 6. In the above mentioned law, the Hon’ble ITAT has discussed the law relied by the Ld. Representative of the assessee. The facts are not distinguishable at this stage also. In the instant case, the assessee company has been incorporated for setting up of infrastructure facilities being construction of toll road between Hazaribag and Ranchi which is under construction. The assessee earned the interest income upon the borrowed funds of Rs.46,03,457/- which was deducted from the borrowing cost to arrive at the figure of capital work-in-progress of Rs.1,86,25,83,284/-. The promoters of the company had introduced money by way of share capital and also obtained credit facilities from the banks and institutions. The total funds were exclusively meant for use for setting up of the infrastructure facility. The lenders disbursed the funds at specified intervals and the said funds were required to be used for the purpose of setting up of the project. Needless to say that the on account of the time difference, the funds may lies with the bank resultantly earning the interest income in dispute. These funds were deposit in the bank for a short period for the purpose of utilizing the same in the project. Eventually, raising the interest is clearly on account of business exigency. Taking into account, all the facts and circumstances, we are of the view that the finding of the CIT(A) is not justifiable hence the same is hereby ordered to be set aside and we treat the interest income as business income of the assessee.

21 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd. computing the income under the head income from business and profession. Even before the Ld. AO, the assesee has not made any claim for deduction towards said expenditure u/s 37(1) of the I.T.Act, 1961. However, before the Ld.CIT(A), the assessee has filed an additional ground, on the ground that although, said expenditure is an allowable expenditure u/s 37(1) of the I.T.Act, 1961, but the same was erroneously disallowed in the computation of income. The Ld.CIT(A) has admitted additional ground filed by the assessee, but, while adjudicating the issue by considering the nature of expenditure debited into the profit and loss account, he has allowed a sum of Rs.2,90,600/- out of total expenditure of Rs.38,78,373/-. Further, the Ld.CIT(A) has allowed deductions towards director’s fees of Rs.70,000/- and audit fees of Rs.2,20,600/-, on the ground that the above mentioned expenses are required to be incurred to maintain the corporate status of the assessee, even though the business activity was not commenced during the year under consideration. The balance expenditure has been disallowed, on the ground that they are not related to maintaining the corporate status of the assesee.

22 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd.

13 . We have heard both the parties, perused the material available on record and gone through orders of the authorities below. It is an admitted fact that any expenditure incurred for day to day maintenance of corporate status of the assesee needs to be allowed as revenue expenditure, whether or not any business activity, including income from business is generated during the year under consideration. But, in order to consider those expenditure as revenue expenditure deductible u/s 37(1), the assessee shall beyond the doubt prove that the said expenditure are in the nature of general administrative and other expenses, which are required to be incurred to maintain corporate status of the assessee. In this case, the Ld.CIT(A) after considering the nature of expenditure and its relevance for maintaining the corporate status of the assessee has allowed director’s fees of Rs. 70,000 and audit fees of Rs.2,20,600/-, on the ground that the above mentioned expenses are required to be incurred to maintain the corporate status of the assessee. The balance expenditure has been disallowed, on the ground that they are not related to maintaining the corporate status of the assessee. The assessee has furnished details of expenditure, as per financial statements prepared for the year. Ongoing through, the nature of expenditure debited into the profit and loss account under the head other expenses, we find that they are all general expenses, which are not directly related to maintain the corporate status of the assesee. Therefore, we are of the considered view that the Ld.CIT(A) was right in allowing only director’s fees and audit fees out

23 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd. of total expenditure debited under the head other expenditure and disallowed balance amount, on the ground that they are not related maintaining the corporate status of the assessee. Insofar as, alternate ground of the assesee that if, the claim of the deduction is not accepted towards said expenditure, then the said sum may be added to capital work-in-progress. No doubt, the assessee is entitled for deduction towards certain expenditure incurred, either as revenue expenditure or if said expenditure is not in the nature of revenue expenditure, the same needs to be capitalized to work-in- progress. Since, we held that remaining expenditure is not in the nature of revenue expenditure, which could be allowed u/s 37(1), the Ld. AO is directed to add the balance expenditure to capital work-in- progress account. We ordered accordingly.

Order pronounced in the open court on this 22 /01/2020

Sd/- Sd/- (RAM LAL NEGI) (G. MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated : 22/01/2020 Thirumalesh Sr.PS

Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5.

24 ITA No.6696/Mum/2017 Hazaribagh Ranchi Expressway Ltd.

Guard file. 6. स�यािपत �ित //True Copy// BY ORDER,

(Asstt. Registrar) ITAT, Mumbai