TEH DCIT, GANDHINAGAR CIRCLE, GANDHINAGAR vs. METRO LINK EXPRESS FOR GANDHINAGAR AND AHMEDABAD MEGA CO. LTD, GANDHINAGAR

आदेश/ORDER

PER : T.R. SENTHIL KUMAR, JUDICIAL MEMBER:

2.1. The assessee’s main reliance on the decision in the case of Kolkata Metro Rail Corporation Ltd. is not applicable to the case of the assessee as the decision rendered is not from the jurisdictional Tribunal. It was necessary on the part of the assessee to revise the audited financial statements before filing the revised return of income, as the assessee has failed to do so and the same is treated as revenue expenditure and assessable as “income from other sources” and determined the assessed income as Rs. 36,80,03,235/-. The A.O. also initiated penalty proceedings u/s. 271(1)(c) for furnishing inaccurate particulars of income.

C.O. No. 38-Ahd-2014 A.Y. 2016-17 Page No 4 DCIT vs. Metro Link Express for Gandhinagar and Ahmedabad Mega Company Limited 3.1. The ld. CIT(A) following the judgment rendered in the case of Kolkata Metro Rail Corporation Ltd. and deleted the addition made by the Assessing Officer as follows: 4.6 After carefully perusing the aforesaid decision of the Hon'ble Kolkata Bench of ITAT, the facts as emerged in that case and the facts of the appellant's case have been compared. Both the companies had been set up for laying down the rail infrastructure within the cities of Kolkata & Ahmedabad respectively and both the companies are government companies receiving the capital grants from Central and the State Governments of Gujarat and West Bengal as the case may be. Therefore, it is necessary to examine the accounting treatment given in the Profit & Loss Account and the balance-sheet in the case of the appellant to find out any difference of the facts as examined by the Hon'ble ITAT of Kolkata Bench. On examination of the annual accounts for the financial year ending'on 31.03.2016, the following facts are noticed:- 1) The appellant company was incorporated on 04.02.2010 with the shareholding pattern of 17% shares to be subscribed by the Central Government and 83% shares to be subscribed by the Government of Gujarat and the appellant company has been acting as Special Purpose Vehicle (SPV) set-up for the purpose of laying down the railway network between and within twin cities of Gandhinagar and Ahmedabad. 2) During the year under consideration i.e. for the financial year ending on 31.03.2016, the appellant has shown the other incomes as under(Source: profit & loss account- note no. 14 to the accounts);- (Figures in lakhs) Interest income............................ Rs.3679.76 Misc. income............................... Rs. 0.27 Profit on sale of assets.................. Rs. 0.05 Rs.3680.08 After debiting various expenses, the net profit before tax has been worked out to Rs.3677.71 lakhs and the surplus of profit after tax of Rs.2404.12 lakhs has been carried over to the balance-sheet. While doing so, the appellant has capitalized the expenses to the extent of Rs.2913.68/- lakhs with the following narration:- "Less: Expenses capitalized and transferred to Incidental expenses : Pending Capitalization" Thus, the profit before tax was on account of capitalizing of the expenses (not claimed as revenue expenses).

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3) As per the accounting policies, the interest income was treated as revenue receipts and the expenses were capitalized and carried over to the statement showing the incidental expenses pending capitalization. 4) Now, through revised statement of income, the appellant has claimed the interest income of Rs.3679.76 lakhs and has treated the capital receipts without giving any accounting treatment for the financial year ending on 31.03.2016/ 5) Similar practice has been found to be followed in the financial year ending on 31.03.2017 also. On referring to the annual accounts, it has been noticed that the amount of Rs.5176.87 lakhs has been carried over from the Profit & Loss Account to the incidental expenses pending capitalization and the same were not considered to be the revenue expenditure while working out the profit before tax at Rs.3333.40 lakhs. It has also been noticed that the interest of Rs.137.52 lakhs has been reduced from incidental expenses pending capitalization along with other receipts so as to arrive at the net expenses of Rs.4279.00 lakhs. 6) In the annual accounts for the financial year ending on 31.03.2018, the appellant has reduced the interest income of Rs.2581.48 lakhs from the statement of incidental expenses pending capitalization for the project (other than Phase-1) out of expenses capitalized for Rs.6889.94 lakhs. As per statement in Table 5.A.2, the appellant has reduced the interest income of Rs.2,581.48 lakhs which has been carried over to the next financial year 2018-19. 4.7 If the facts of the appellant's case are considered in the light of above financial analysis, the interest income earned on the surplus/unutilized funds with the bank is required to be treated as capital receipts as no project has commenced and no revenue was generated from the project during the year under consideration. Therefore, there cannot be revenue receipts from the projects which are either not completed or commenced. However, the interest on fixed deposits made with various banks are required to be taxed under the head "Income from other sources" as observed by the Hon'ble Kolkata Bench of ITAT after allowing the expenses incurred in relation to earning of such interest. Further, as observed in the relied upon case, here also the very purpose of constitution of the appellant company was to act as a Special Purpose Vehicle (SPV) created by the Govt. of India and Govt. of Gujarat as a Joint Venture with equal equity participation for implementation of rapid transport infrastructure in and around Ahmedabad-Gandhinagar. Both the centra! and the state governments are supposed to provide requisite finances for implementation of the said project. The funds from the central and state governments flow directly to the appellant company as equity and subordinate debt/loans. The objective is to create and maintain a fund for the development of infrastructural assets on a C.O. No. 38-Ahd-2014 A.Y. 2016-17 Page No 6 DCIT vs. Metro Link Express for Gandhinagar and Ahmedabad Mega Company Limited continuing basis and therefore, the appellant is a SPV formed by the governments of India and that of Gujarat as per the guidelines. There has been no profit motive as the entire fund entrusted and the interest accrued there from on deposits in bank though in the name of the appellant has to be applied only for the purpose of welfare of the state as provided in the guidelines. Further, if the interest receipts are capitalized even though they were credited in the Profit & Loss Account as per the accounting standards, the appellant can treat the same as capital receipts which are further required to be adjusted against the project cost and the same has also been found to be done in the subsequent years as mentioned above. 4.8 In view of the above facts and following the observations and findings given in the case of Kolkata Metro Rail Corporation Ltd. (Supra), the addition of Rs.36,80,03,235/- made in the assessment order passed u/s 143(3) of the Act dated 19.12.2018 is deleted. Accordingly, the sole ground of the appeal is allowed.

5. The ground in relation to initiation of penalty proceedings u/s 271(1)(c) of the Act is dismissed as the same is premature in nature and no appeal lies against the initiation of the proceedings u/s 274 of the Act.

ij) On the facts and circumstances of the case, the Ld.Commissioner of Income- Tax(appeals) ought to have upheld the order of the Assessing Officer. iii) It is, therefore prayed that the order of the Ld.Commissioner of Income-tax (Appeals) may be set aside and that of the Assessing Officer be restored.

4.1. The Grounds of Appeal raised by the C.O. of the Assessee which reads as under: I.1 The learned A.O. has erred in law and on facts in not accepting the view taken by the learned CIT(A). The learned A.O. has failed to appreciate that in view C.O. No. 38-Ahd-2014 A.Y. 2016-17 Page No 7. DCIT vs. Metro Link Express for Gandhinagar and Ahmedabad Mega Company Limited of decision of Hon!ble Kolkata ITAT in the case of ITO Wd 2(3), Kolkata vs. Kolkata Metro Rail Corporation Limited in / Kol / 2015 and 49 / Kol / 2016, Interest income on Short term deposits which are linked with the setting up of infrastructure project are to be considered in the nature of capital receipts as the project of the appellant is in pre-operative / construction stage. The learned A.O. has also failed to consider that no revenue was generated from the project during the year under consideration. Accordingly, return has been rightly revised by treating the interest income as capital receipt. The learned A.O. has failed to consider that the interest income is credited in the Profit & Loss Account and adjusted against the project cost in books of accounts as per the accounting standards. The learned CIT(A) has, after considering the facts, documents submitted during the course of appellate proceedings and relying on various case laws, has rightly allowed claim of interest income of Rs. 36,80,03,325/- as capital receipt and thereby deleting the addition. In view of the above, the appellant humbly submits that the contention of the learned A.O. is bad in law and hence the same should be deleted.

II. The respondent reserves its right to add, amend, alter, substitute or modify all or any of the grounds stated hereinabove as the facts and circumstances of the case may justify.

5.1. Per contra Ld. Senior Counsel Shri S.N. Soparkar appearing for the assessee placed on record a Paper Book of case laws, which are as follows:

C.O. No. 38-Ahd-2014 A.Y. 2016-17 Page No 8 DCIT vs. Metro Link Express for Gandhinagar and Ahmedabad Mega Company Limited (1) ITO vs. Kolkata Metro Rail Corporation Ltd. [2019] 102 taxmann.com 419 (Kolkata-Trib.) (2) DCIT vs. M/s. Rohtak Panipat Tollway Pvt. Ltd. in (Ahmedbad – Trib.) (3) CIT vs. Bangalore Metro Rail Corporation Ltd. reported in [2022] 135 taxmann.com 268 (Karnataka).

5.2. The ld. Senior Counsel further submitted that the assessee company was incorporated on 04.02.2010 with the shareholding pattern of 17% shares to be subscribed by the Central Government and 83% shares to be subscribed by the Government of Gujarat and the assessee company has been acting as Special Purpose Vehicle (SPV) set up for the purpose of laying down the railway network between and within twin cities of Gandhinagar and Ahmedabad in the state of Gujarat. In the original Return of income, the net profit before tax has been worked out to Rs. 3677.71 lakhs and the surplus of profit after tax of Rs. 2404.12 lakhs has been carried over to the balance-sheet. While doing so, the expenses to the extent of Rs. 2913.68 lakhs with the following narration:- “Less Expenses capitalized and transferred to Incidental expenses: Pending Capitalization”

5.3. Thus, the profit before tax was on account of capitalizing of the expenses (not claimed as revenue expenses). Thereafter by revised statement of income, the assessee has claimed the interest income of Rs. 3679.75 lakhs and has treated the same as capital receipts without giving any accounting treating for the financial year ending C.O. No. 38-Ahd-2014 A.Y. 2016-17 Page No 9 DCIT vs. Metro Link Express for Gandhinagar and Ahmedabad Mega Company Limited on 31.03.2016. Similar practice has been followed by the assessee for the next financial year ending on 31.03.2017. Thus interest income earned on the surplus/unutilized funds with the bank is required to be treated as capital receipts, as no project has commenced and no revenue was generated from the project during the Assessment year 2016-17. Therefore, there cannot be revenue receipts from the projects, which are neither completed nor commenced its functioning of Ahmedabad Metro Rail Transportation. Further the very purpose of constitution of the assessee company was to act as a Special Purpose Vehicle (SPV) created by the Government of India and Government of Gujarat as a joint venture for implementation of Rapid Transport Infrastructure in and around Ahmedabad-Gandhinagar in the state of Gujarat. The funds from the Central and State Governments flow directly to the assessee company as equity and subordinate debt/loans. There has been no profit, motive as the entire fund entrusted and the interest accrued there from on deposits in bank though in the name of the assessee has to be applied only for the purpose of welfare of the State as provided in the guidelines. Even though they were credited in the Profit and Loss account as per the accounting standards, the assessee can treat the same as capital receipts which are further required to be adjusted against the project cost and the same has also been found to be done in the subsequent years. Therefore the claim made by the assessee is allowable in favour of the assessee and case laws relied by the ld. D.R. namely Tuticorin alkali Chemicals clearly distinguished in the decision of Kolkata Metro Rail Corporation Ltd. case as if the funds C.O. No. 38-Ahd-2014 A.Y. 2016-17 Page No 10 DCIT vs. Metro Link Express for Gandhinagar and Ahmedabad Mega Company Limited have been borrowed for setting up of a plant and if the funds are ‘surplus’ and then by virtue of that circumstances they are invested in fixed deposits the income earned in the form of interest will be taxable under the head ‘Income from other sources”.

5.4. The Hon’ble supreme Court of India in the case of Bokaro Steel Ltd. 236 ITR 315 held 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. The test, therefore is whether the activity which is taken up for setting up of the business and the funds which are generated are inextricably connected to the setting up of the plant. Applying the above ratio of the judgments the Ld. Senior Counsel submitted that the interest income is to be treated as capital in nature and not liable to be taxed.

6.1. Further the Co-ordinate Bench decision in the case of Kolkata Metro Rail Corporation Ltd. (cited supra) is directly covered in favour of the assessee on this issue, wherein it was held as follows: 7. We have given a careful consideration to the rival submissions. We note that the Assessee,(Kolkata Metro Rail Corporation Ltd) is a Government company in the form of joint venture of Government of India and Government of West Bengal with equal equity participation for the execution of East -West Metro Corridor Project at Kolkata by creating a rapid transit system surrounding the City of Kolkata and the District of North 24 Parganas. The required fund has been provided from time to time by Govt. of India and Government of West Bengal in the form of equity and Subordinate Debt/Loans. The total funds received by the Assessee from the respective Governments was put in the bank accounts and utilized as and when required. Interest on fund parked with banks in the form of Short Term deposits resulted in some additional funds in the form of interest which could be utilized exclusively for the purpose of construction of the project. The interest income earned on such Short Term deposits during construction period was fully utilized for the construction of the project and resulted in reduction of project costs. We note that the Assessee does not have any other source of income, as such, treatment of interest income is accounted for as Capital Receipt and adjusted with pre-operative expenditure during the construction period, that, the net off expenditure is carried over to balance Sheet under the head Capital-Work-in Progress.

We are of the view that the Ld CIT (A) has rightly dealt with the issue and reversed the findings of the AO who had treated the interest earned at Rs. 54,86,324/- as "income from other sources".We note that the ratio of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals [1997] C.O. No. 38-Ahd-2014 A.Y. 2016-17 Page No 12 DCIT vs. Metro Link Express for Gandhinagar and Ahmedabad Mega Company Limited

227 ITR 172 and that of Bokaro Steel Ltd. [1999] 236 ITR 315. The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502. is that if funds have been borrowed for setting up of a plant and if the funds are 'surplus' and then by virtue of that circumstance they are invested in fixed deposits the income earned in the form of interest will be taxable under the head "Income from other sources'. On the other hand the ratio of the Supreme Court judgment in Bokaro Steel Ltd. (supra), 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. The test, therefore, 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 due 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 of the Act, 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. We take support of these propositions from the judgments of Hon'ble Supreme Court in the case of Mazagaon Dock Ltd. v. Commissioner of Income tax and Excess Profit tax [1958] 34 ITR 368 and Narain Swadeshi Wev. Mills vs, 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 Bank, will result in the character of the funds being changed, in as much as the interest earned from the bank would have a huge difference than that of business and be brought to tax under the head 'Income from other sources'. It is well-settled that an income C.O. No. 38-Ahd-2014 A.Y. 2016-17 Page No 13 DCIT vs. Metro Link Express for Gandhinagar and Ahmedabad Mega Company Limited 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. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre-operative expenses. In the case of Tuticorin Alkali Chemicals & Fertilizers 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.

The very purpose of constitution of the Assessee was to act as a Special Purpose Vehicle (SPY) created by the Govt of India and Govt. of West Bengal in the form of Joint Venture with equal equity participation for implementation of rapid transport infrastructure in Kolkata. Both the Central and the State Governments are to provide requisite finances for implementation of the said project. The funds from the Central and State Governments flow directly to the Assessee company as equity and Subordinate Debt/Loans. The objective is to create and maintain a fund for the development of infrastructural assets on a continuing basis and, therefore, the Assessee is a SPV formed by the Government of India and Government of West Bengal as per the guidelines; there is no profit motive as the entire fund entrusted and the interest accrued therefrom on deposits in bank though in the name of the Assessee has to be applied only for the purpose of welfare of the State as provided in the guidelines.

Therefore, considering the factual position discussed above, we are of the view that the Assessee has rightly set off the interest income against the pre-operative expenses in its books of accounts and therefore we confirm the order passed by the Id CIT (A).

6.2. The Hon’ble High Court of Karnataka in the case of Bangalore Metro Rail Corporation Ltd. (cited supra) held as follows:

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Section 4 of the Income-tax Act, 1961 - Income - Chargeable as (Interest) - Assessment years 2007-08 and 2008-09 - Assessee company was a wholly owned undertaking of Government of Karnataka, established with approval of Government of India, for implementation of a rail-based Mass Rapid Transit System - Assessee had received funds during year for project from Government - Unutilized funds of project, before commencement of functional operation of project were invested by assessee in fixed deposits and mutual funds as per directions of Government - Assessing Officer brought income earned by company through deposits to tax which was confirmed by Commissioner (Appeals) - Tribunal however reversed order of Commissioner (Appeals) - On revenue's appeal, it was found that income generated out of earlier release of funds by Government to assessee before commencement of project would have to be converted into State's equity towards project and therefore could not be counted as income of assessee - Thus, there was no profit motive as entire fund entrusted and interest accrued therefrom had to be utilized only for purpose of scheme - Whether thus, funds had to be capitalized and could not be considered as revenue receipts - Held, yes [Paras 16 to 18] [In favour of assessee] 6.3. The Co-ordinate Bench of this Tribunal in the case of Rohtak Panipat Tollway Pvt. Ltd. considered Kolkata Metro Rail Corporation Ltd. decision and Bangalore Metro Rail Corporation Ltd. judgment held as follows: 5.4 In view of the above discussion, in our view, the assessee company which was formed primarily for the purpose of four laning of the Rohtak Panipat highway and the funds available with the assessee were to be utilised primarily for the above purposes for which the assessee company was set up. Consequentially, the interest / gains earned on fixed deposits/sale of mutual funds was also be to be utilised for the aforesaid purpose. Therefore, in our view, interest/gains earned by the assessee company during the pre-commencement was inextricably linked with the setting up of the capital structure of the assessee company and there was a direct nexus of the funds and income from interest and mutual funds out of the temporary investments and accordingly, the Id. CIT(A) has not erred in law in holding that receipts in question could not be taxed as "income from other sources" and "short term capital gains".

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