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Income Tax Appellate Tribunal, MUMBAI BENCHES “E”, MUMBAI
Before: SHRI M. BALAGANESH (AM) & SHRI RAM LAL NEGI (JM)
O R D E R
PER RAM LAL NEGI, JM
The revenue has filed the present appeal against the order dated 20.10.2016 passed by the Commissioner of Income Tax (Appeals)-12 (for short ‘the CIT(A), Mumbai, for the assessment year 2012-13, whereby the Ld. CIT(A) has partly allowed the appeal filed by the assessee against the assessment order passed u/s 143 (3) of the Income Tax Act, 1961 (for short the ‘Act’).
Brief facts of the case are that the assessee company engaged in the business of transmission of electricity, filed its return of income for the assessment year under consideration declaring total income of Rs. 5,19,84,828/-. The return was processed u/s 143(2) of the Act. In response to notice u/s 143(2) and 142(1), the authorized representative (AR) filed various details and explanations. Since it was noticed that the assessee had reduced the interest earned on margin money amounting to Rs. 1,26,11,000/- from the capital work in progress, the AO asked the AR of the assessee to show cause as Assessment Year: 2012-13 to why the interest earned from margin money should not be treated as income from other sources. After hearing the Ld AR, AO made addition of the said amount to the income of the assessee treating the same as income from other sources. Similarly, since the assessee had increased the capital work in progress by Rs. 1,68,67,000/- being income tax, the AO reduced the capital work in progress to the extent of the said amount holding that since income tax is not an allowable deduction, the assessee cannot claim the same by increasing capital work in progress and claim depreciation in future. The assessee challenged the assessment order before the Ld. CIT(A). The Ld. CIT(A) allowed the appeal of the assessee and decided both the issues in favour of the assessee. The revenue is in appeal against the said findings of the Ld. CIT(A). 2. The revenue has challenged the impugned order passed by the Ld. CIT
(A) on the following effective ground:- 1. “On the facts and the circumstances of the case and in law, the ld. CIT (A) has erred in giving finding that interest of Rs. 1,26,11,000/- on margin money kept for obtaining bank guarantee/letters for credit for “power” business is to be assessed under the head “business income” and upholding the action of the assessee in reducing the above amount from the work in progress (WIP) account, ignoring the detailed reasoning given by the assessing officer in para 5 of the assessment order that it is taxable under the head “income from Other Source”. 2. “On the facts and in the circumstances of the case and in law, the ld. CIT (A) erred in deleting reduction of income tax paid of Rs. 1,68,67,000/- from the capital work in progress ignoring the fact that income tax is not an allowable item and the same will be part of opening WIP in the next year and claimed against income of the year.”
This case was fixed for hearing on 26.11.2019. However, on the said date when the case was called out for hearing, none appeared on behalf of the assessee. We notice that the Ld. AR was present on 19.09.2019 when the case was adjourned 22.10.2019 and on 22.10.2019 when the case was adjourned to 26.11.2019. Since, the assessee did not appear despite knowledge of date of hearing, we decided to dispose of the present appeal on the basis of material Assessment Year: 2012-13 available on record after hearing the departmental representative (DR). Hence, we allowed the Ld. DR to argue the case on behalf of the department.
Vide the first ground of appeal, the revenue has assailed the findings of the Ld. CIT(A) that the interest income earned from deposit of margin money in the Bank for obtaining bank guarantee/letters for credit is required to be treated as business income instead of income from other source. The Ld. DR relying on the assessment order submitted before us that since the assessee had wrongly reduced the interest earned on margin money amounting to Rs. 1,26,11,000/- from the capital work in progress, the Ld. CIT(A) ought to have confirmed the action of the AO in treating the said amount as income from other sources. The Ld. CIT(A) has decided this issue in favour of the assessee holding as under:
5.5 I have considered the submission of the appellant and the observations of the A.O. The fact that the appellant company is in process of setting up of the power plant is undoubted and has been agreed to by the A.O in the assessment order along with the fact that the appellant company had not commenced its business operations during the year under consideration. Thus, all the expenses incurred in connection with the setting up of the power plant has been capitalized and the income earned out of funds mobilized for construction of the power plant for the purpose of availing the credit facilities as per the terms of the power purchase agreement from the banks are on account of compulsion in order to avail such facility. Therefore, the interest income earned on the FDR/margin money placed with bank is inextricably linked to the setting up of the power plant. The interest income has been derived from fixed deposit placed with bank for availing of LC and issue of bank guarantee for the setting up of power project. In view of these facts the interest income has been treated as part of the process of setting up of the plant and the established legal position which emerges from a chain of decisions cited by the appellant company including the Hon'ble Supreme Court decision in the case of CIT vs Bokaro Steel Ltd,, GET vs Karnal Cooperative Sugar Mills Ltd, and the decision of the Hon'ble Ahmedabad Tribunal in the case of Assessment Year: 2012-13 Adani Power Limited vs ACIT(2015) 1TA No. 2755/Ahd/2011 [the facts of which are same as that of the appellant company); is that such income earned which is inextricably linked to the setting up of the business has to be capitalized and reduced from the balance of 'Capital Work in Progress". Such interest income cannot be treated as Income from Other Sources chargeable to U/s 56 of the I.T Act. Therefore, the addition of Rs 12,61,100/- is deleted.
Having carefully gone through the findings of the Ld. CIT(A), in the light of the facts of the present case, we notice that the issue involved in the present case is squarely covered in favour of the assessee by the judgment of the Hon’ble Supreme Court, in the case of CIT vs. Bokaro Steel Ltd. 236 ITR 315 SC, apart from the other cases relied upon by the Ld. CIT(A). Since the findings of the Ld. CIT(A) is in accordance with the ratio laid down by the Hon’ble Supreme Court in the said case, we do not find any reason to interfere with the findings of the Ld. CIT(A). Hence, we uphold the decision of the Ld. CIT(A) and dismiss this ground of appeal
of the revenue.
6. Vide Ground No 2 of the revenue’s has challenged the action of the Ld. CIT(A) in deleting reduction of income tax paid amounting to Rs. 1,68,67,000/- from the capital work in progress. The Ld DR submitted before us that since income tax is not an allowable item assessee cannot the same by increasing capital work in progress and claiming depreciation in coming assessment years. The Ld. CIT(A) has decided this issue in favour of the assessee holding as under: “10. Ground of Appeal No. 3 pertains to reduction of income tax paid of Rs 1,68,67,000/- from capital work in progress from accounting books. This issue has been dealt with by the Assessing Officer at para-9 of the assessment order. The Assessing Officer has mentioned that the assesses company has increased the capital work in progress by Rs. 1,68,67,000/- being income tax. Since income tax is not an allowable item assessee cannot claim this by increasing capital work in progress and claiming depreciation in future assessment years. Assessment Year: 2012-13 (b) Appellant vide its written submissions dated 15th September, 2016 the submitted as under:- "As mentioned supra, since, the appellant company had not commenced any commercial activities, all the expenditure during the construction of capital asset is reflected as "capital work in process". During the year under consideration the appellant company incurred Income tax expenses to the tune of Rs.1,68,67,000/- relating to payment of Income tax on Income from sale of Mutual fund and Interest income. The same was shown as expenditure under "Capital work in progress" as the same were incurred during the construction period. The treatment was as per relevant accounting standard for accounting of expenses at the time project phase. Income tax paid on the Income from sale of Mutual fund and Interest income are inextricably linked to the business activity of the appellant. And thus, would be added to the cost of asset i.e. Capital work in process* However, income tax paid is an expense of personal nature and not allowable as deduction for Income Tax purpose. Thus, for the purpose of computing Tax profits, the appellant requires to maintain separate books for the purpose of accounting and that for tax purpose.
The appellant company at the time of capitalization of Capital Work In Progress for the purpose of tax book, reduced the amount of Income tax in computation of block of assets. The appellant is sensibly aware of the provisions of the Income Tax Act, 1961 and the intent of legislature for the purpose of non allowance of Payment of Income Tax, Thus the appellant company has not taken any effect of Income tax in computation of block of assets for depreciation claim. Once the capital asset is ready for operation the depreciation on the said asset would be claimed by the assessee on the Cost of the asset excluding the amount of Tax. The differential would be appearing in the books of the appellant in the form of Deferred tax Assets / Liabilities as per the application of AS -22. The appellant fails to understand the ratio decidendi behind the disallowance of Rs l ,68,67, 000/- made by the A.O. During the course of the assessment proceedings, the A.O. never provided the appellant an opportunity of being heard and made disallowance on his own whims and assumptions. The same has no effect on the taxable profits since, as the Tax Books the cost of asset excludes Assessment Year: 2012-13 the Tax expenses and depreciation would be claimed on the net figure." I have considered the observation of the assessing officer and the submission of the appellant company. The appellant being a company is required to prepare its accounts as per the mandatory Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI). As per the AS-22 "Accounting for Taxed on Income", the appellant company has debited the taxes paid "by it on sale of mutual fund to the capital work in progress and not claimed as an expenditure in the current year. I find merit in the submission of the appellant company that since the treatment is given as per the accounting standard as stated above. The same is accepted and A.O. is directed that the addition made of Rs. 1,68, 67,000 /- be deleted. Ground of Appeal No. 3 of the appellant is allowed.”
7. We notice that Ld. CIT(A) has decided this issue in the light of the submissions made by AR that the assessee incurred expenses amounting to Rs. 1,68,67,000/- towards payment of income tax on income from sale of Mutual fund and interest income. Since the said expenditure was incurred during construction period, it was shown as expenditure under capital work in progress as per the relevant accounting standard. The contention of the assessee was that since the expenditure in question is inextricably linked to the business of the assessee, the same was added to the cost of assets. However, payment of income tax is an expense of personal nature and not allowable deduction, separate books for computing the tax was maintained and at the time of capitalization of capital work in progress, reduced the amount of income tax in computation of block of assets. Therefore, the assessee has not taken any benefit of income tax in computation of block of assets for depreciation. We further notice that the Ld. CIT(A) has accepted the submissions of the assessee without referring the facts and figures in the books of account of the assessee. Hence, in our considered view, the books of account of the assessee require proper verification by the AO in order to ascertain that the assessee has maintained separate books for computing tax at the time of capitalization of capital work in progress and reduced the Assessment Year: 2012-13 amount of income tax in computation of block assets. Accordingly, we set aside this issue to the file of AO for verification of the aforesaid contention of the assessee with the direction to allow the claim of the assessee if the contention of the assessee is found genuine and to reject the claim in case contention is not genuine. In the result, appeal filed by the revenue for assessment year 2012-13 is partly allowed for statistical purposes.