DCIT CENT.CIR-1(4), MUMBAI vs. M/S.INTERNATIONAL MINERAL TRADING CO. PRIVATE LIMITED, MUMBAI

M/s International Mineral DCIT Cen Cir -1(4) Trading Co. Pvt. Ltd. Room No. 902, Pratistha बिधम/ 51/53, A Wing, Mittal Bhavan, 9th floor, Old Vs. Court, J. B. Marg, Nariman CGO Building, Annexe, Pint, Mumbai-400 021. Mumbai-400 020 स्थायीलेखासं./जीआइआरसं./PAN No. AABCI8504K (अपीलाथी/Appellant) (प्रत्यथी / Respondent) : अपीलाथीकीओरसे/ Appellant : Shri Kumar Padmapani Bora, DR by प्रत्यथीकीओरसे/Respondentby : Shri Gaurav Kabra, AR सुनवाईकीतारीख/ : 09.09.2019 Date of Hearing घोषणाकीतारीख / : 27.09.2019 Date of Pronouncement आदेश / O R D E R

Per S. Rifaur Rahman, Accountant Member:

Regarding interest income earned from Bindal Sponge Limited Your assessee company is in the process of setting up a beneficiation plant at Badbil, Orissa.

In this regard, it had entered into agreement M/s Bindal Sponge Limited to acquire sponge plant alongwith movable and immovable assets as situated there on, in village Sunakhdni, EkahgHariq, Talcher, DistAngul, Orissa. The said plant was M/s International Mineral Trading Co. Pvt. Ltd. being taken over by the Assessee Company since it would complement its proposed setup and would have been an integral part of the same. Alternatively, if it were not for the taking over of the said plant from M/s. Bindal Sponge Limited, then the Assessee Company would have to independently set up a similar facility at its existing site. However, since it was getting an opportunity to take over an existing and running facility matching its requirements, it proceeded with the said deal. Your assessee company had entered into Memorandum of undertaking dated 15.Aug.20lO with Bindal Sponge Limited for taking over the said plant for a Total Consideration ofRs.155 Crores. Subsequent to that, your above mentioned assessee had paid Rs.25 Crore as security, deposit. It would be pertinent to note-here-that it was a mandatory requirement .as per the terms of the Memorandum of Undertaking to pay Rs 25 Crore as Security deposit. (Copy of the Memorandum of Undertaking is being enclosed herewith for your ready reference and records). However the transaction could not be completed due to some unavoidable reason. The plant that was proposed to be taken over, on subsequent inspection and enquiry turned out to be not up to the mark and was found to be of inferior quality which fact was not disclosed at the time of the signing of the MOU and it also turned out that certain material facts were withheld from the Assessee Company at the time of the initial talks and some misrepresentation was also made.

As per Memorandum of Association, your above mentioned assessee was entitled to take refund along with interest @15%. However, the said party refused to pay the same leading to filing of legal suits; Subsequently, the matter has been duly settled with the said party. Copy' of' Consent Term as mutually agreed M/s International Mineral Trading Co. Pvt. Ltd. by your above mentioned assessee and Bindal Sponge Limited before Bombay High Court is being enclosed herewith for your ready reference and records Accordingly, your above mentioned assessee has mentioned assessee has received Rs. 3 Crore (compensatory interest on the cancellation of the said MOU/ deal for acquiring the plant). Copy of ledger account of Bindal Sponge Limited as appearing in the books of assessee company is being enclosed herewith for your ready reference and records. Hence your assessee had no intention to earn interest income. It has earned the same merely because the transaction was not completed and the deal had to be cancelled, otherwise, had your assessee purchased plant from Bindal Sponge Limited, no interest would have been earned in respect of the same. the said interest/compensation have been earned on capital Advance made by the Assesse Company. Thus the said income earned has been earned In the course of the setting up of the plant by the Assessee Company. It has a clear and direct nexus to the setting up of the said plant which fact cannot be denied. Thus the interest income would be eligible to be set off against the Expenses incurred under CWIP for the setting up of the said Plant.

Further it would be appreciated that your above mentioned assessee had interest income during the pre-construction period on account of advance which was business necessity and not merely surplus fund invested temporarily.

Further, it would be pertinent to note that your above mentioned assessee did not commence business. The Factory of your above mentioned assessee was still under construction Hence all the M/s International Mineral Trading Co. Pvt. Ltd. expenses are capitalized under the head Capital Work in Progress. Further all interest income earned by your above mentioned assessee has been earned during the construction of plant There was no idle fund available which was invested. There was no intention of your above mentioned assessee to earn interest income.

There are various Judicial Pronouncements in respect of interest income to be deducted from Capital Work in progress and not be consider and not be consider the same under the head income from other sources. We are reproducing the same hereunder and place strong reliance on the same.

ITO vs. M/s Star Realty Pvt. Ltd. (ITO No. 4431/Del/2012-ITAT Delhi) held that The assessee has no intention to make deposit of surplus fund lying idle with intention to earn the interest, the interest income earned from fixed deposit which was kept in the bank and marked as lien for furnishing the Bank Guarantees. Thus it had an inextricable nexus with securing the contract NTPC Sail Power Company Pvt Ltd v/s Commissioner of Income Tax (ITA-1238/2011) Delhi High Court Held that "when the interest was received by the assessee towards interest paid for fixed deposit when the borrowed fund could not be immediately out to use for the purpose for which they were taken, it was held that if the receipt if inextricably linked to the setting up of the product, it would be capital receipt not liable to tax but ultimately be used to reduce the cost of project"

M/s International Mineral Trading Co. Pvt. Ltd. Further we strongly relied on the Judgement of supreme court in the case of Commissioner of Income Tax vs. Bakaro Steel Ltd (1999) 102 Taxman94(SC) it was held that "in case money is borrowed by a newly started company which is in process of constructing and erecting its plant, interest incurred before the commencement of production on such borrowed money can be capitalized, and added to the cost of the asset created as a result of such expenditure. By the same reasoning if the assessee received any amount which was inextricably linked with the process of the setting up its plant and machinery, such receipts would go reduce the cost of its assets. These were receipts of a capital nature and could not be taxed as income"

It would be appreciated by your goodself that all the interest income earned by your above mentioned assessee from Bindal Sponge Limited is inextricably linked to the setting up of the project. Hence your above mentioned assessee has reduced the said interest income earned from cost of project or capital work in progress as per the judgement of Apex Court and Delhi High Court (Supra).

Further it would be pertinent to note that your above mentioned assessee has capitalized the net interest expenses in Capital Work on Progress i.e interest income has been reduced from interest expenses while arriving at the figure of Capital Work in Progress. Working of interest capitalized in capital work in progress is as under:

M/s International Mineral Trading Co. Pvt. Ltd. Particular Amount Bank charges 2,71,276 Penal Interest 33,648 Interest on Cash Credit 6,093 Interest on term loan (BoB) 10,59.65,048 LC Amendment Charges 67,905 Processing Fees 5,61,800 Buyers Credit Charges 37,18,322 Buyers Credit- Upfront Fees 0 Buyers Credit- Interest 1, 19,47,531 Loss on Foreign Exchange (Net) 1,65,751 Total 12,27,37,374 Interest received 3,00,00,000 Interest on security deposit- NESCO 58,673 interest on Fixed Deposit 12,83,523 Total interest capitalized 913,95,178 Hence it would be pertinent to note that interest income earned by your above mentioned assesses is inextricable linked with the process of setting up of its project. Consequently, the same is reduced from the cost of project.

M/s International Mineral Trading Co. Pvt. Ltd. Hence, in view of the above facts and circumstances, we request your goodself to kindly consider the interest income as capital receipt and not as a revenue receipt.

Without prejudice to what has been stated above, the assessee company prays to submit that in case they said income is still going to be treated as revenue income taxable in the year in question, the corresponding interest paid on loan by the assessee company should also belated as paid so as to earn the said income and be allowed to be set off against the said income being brought to tax for the year in question."

After considering the assessee’s submission, AO rejected 3. the claim of the assessee and treated the income from other sources by making the following observations: -

of shares on commercial terms, which is given the color of proposed purchases of assets (which never materialized) by way of executing the MOU, filing suit for "recovery of interest, and men arriving at out of court settlement for interest payment of Rs. 3 crores. The purpose could be that while at one hand, the interest paid would be claimed as revenue expenditure in hands of Bindal Sponge Limited, at the other hand the same would not be liable to tax in hands of assessee. Hence, the assessee's submissions cannot be accepted in this regard, and the case law relied upon by him are also not relevant.

Further, the CWIP which has been reduced by this amount is entirely different than for the project the advance is claimed to be given. The Project / P & M for which advance of Rs.25 Cr was claimed to be given were never purchased. The deal was called off. There was no WIP related -to this project, therefore, there is no scope of capitalizing the interest and reducing the WIP. The WIP which has been reduced is entirely separate and the amount of Rs.25 Cr claimed to be given as Security Deposit was neither the Security Deposit / Advance against the said WIP nor utilized against the said WIP.

As per the MOU the assessee was to receive interest @ 15% if the payment is not made on or before the due date. However, the assessee filed petition before the High Court of Bombay and to end dispute Consent Terms were filed before the Hon'ble High Court of Bombay. The relevant paras of the Consent Terms are as under:-

2. The disputes between the Petitioner and the Respondent and the present petition shall disposed off in terms of these consent terms and all disputes between the Petitioner and the Respondent shall thereafter stand settled in terms of the present consent terms on the final payment being received by the Petitioner from the Respondent as per the schedule of payment stated here in below. Until such time, the ad-interim order dated 13lH September, 2010 passed by His Lordship the Hon'ble Mr. Justices. J. Vazifdar shall continue to operate and both the parties will adhere and will comply to the order dated 13.093010.

M/s International Mineral Trading Co. Pvt. Ltd. The above relevant paras of Consent paras are self-explanatory. The assessee company was to receive interest @ 15% w.e.f. 01.07.2010 till proposed date of final payment, but it agreed and settled to receive Rs. 3 Gr as interest only as against claim of interest if Rs.7:61 cr. In view of these Consent Terms there is no iota of doubt that -the amount of Rs.3 Cr received by the assessee from Bindal Sponge Ltd. is a resultant interest income of revenue nature liable to be taxed as income under the head "Income from Other Sources".

"At the outset, we would like to submit that the Ld. AO failed to appreciate the legal position in this matter. He failed to appreciate the ruling of the Hon'ble Apex Court in the case of Bokaro Steel (1999) 102 Taxman 94(SC) wherein the Apex Court has held that:

However, while interest earned by investing borrowed capital in short term deposits is an independent source of income not connected with construction activities or business activities of the assessee, the same cannot be said in the present case where the utilization of the various assets of the company and the payments received for such utilization are directly linked with the activity of setting up of steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital M/s International Mineral Trading Co. Pvt. Ltd. structure of the assessee company. They must therefore be viewed as capital receipts going to reduce the cost of the construction.

Thus, what follows is that once it is proved that the receipt is "inextricably linked" to the setting up of the project, it would be a capital receipt not liable to tax but ultimately be used to reduce the cost of the project This ratio has been upheld by the Order of Delhi HC in the case of NTPC SAIL Power Company Pvt. Ltd. (Copy enclosed herewith) In this case, the fact that the interest income was inextricably linked to the setting up of the project has not be doubted by the AO. He has merely placed reliance on the Apex Court ruling of Tutikorin Alkali (Supra) without appreciating other relevant rulings in this matter.

Further, the Ld. AO has alleged in his order that the transaction between assessee and Bindal Sponge was merely in the nature of advance given against pledge of shares and hence wasn't inextricably linked to the setting up of project. This is a completely baseless accusation of the AO without any legs to stand on whatsoever. All documentary evidences such As Memorandum of Understanding, Correspondence between advocates, Consent Letter of Bombay HC, Ledger copies, etc. clearly indicate that the transaction was that of acquisition of plant. Further, if the AOs hypothetical theory was to be accepted, then the assessee would have given loan to Bindal Sponge at a very low interest rate of less than 6% per annum only with an intention to avoid taxes. Needless to say that the same is completely absurd. Thus, this allegation of the AO is totally baseless and deserves to be dismissed.

M/s International Mineral Trading Co. Pvt. Ltd. Without prejudice to the above, we would also like to submit that even if the AO was of the opinion that interest income was not "inextricably linked" to the project, the fact was that the interest income earned by the assessee from Bindal Sponge Limited was clearly compensatory in nature. Webster's dictionary defines compensatory interest as "interest paid to compensate for the loss of the use of funds by an injured party in a lawsuit". As per Clause 6 of the MOU entered into between the assessee and Bindal Sponge it was clearly specified that if Bindal failed to rectify any defect in the title and such other pending obligation within a period of 15 days from the date of receipt of the notice from IMPTCL at their own cost and expense, then the MOU shall stand terminated and Bindal would be liable to refund all the payments made by IMPTCL along with interest at the rate of 15% per annum. Before taking over the plant, the plant was found to be of inferior quality which fact was not disclosed at the time of signing the MOU and it also turned out that certain material facts were withheld from the Assessee Company at the time of the initial talks and some misrepresentations was also made. Therefore, in accordance with the agreement, the principle amount was returned to the assessee along with a compensation of interest (Reduced from 7.6 Crore to 3 Crore as per out of court settlement).

With regards to the other interest income earned by the assessee, it was submitted that income of Rs. 58,673/- from NESCO security deposit was earned on security deposit for electrical supply for project while interest on FDRs amounting to Rs. 12,83,523/- was earned from Bank of Baroda wherein if the fixed deposits is not maintained then the bank would not M/s International Mineral Trading Co. Pvt. Ltd. allow the assessee to avail buyer credit for the purpose of factory project.

Thus, it was submitted that both these incomes were also inextricably linked to the commencement of project. However, the Ld. AO arbitrarily dismissed this submission of the appellant by stating that these receipts were revenue in nature and hence need to be taxed.

In view of the above position of law and facts of the case, it is humbly submitted that the addition made by the AO deserves to be deleted."

5. After considering the submissions filed by the assessee, Ld. CIT(A) partly allowed the appeal of the assessee with following observations:-

5.4 It is to be noted that the appellant company had entered into Memorandum of Undertaking (MOU) dated 15 Aug, 2010 with M/s Bindal Sponage Limited for taking over a plant for total consideration of Rs. 155 crores. The appellant had paid an amount of Rs. 25 crores as security deposit, in pursuance to Para 1.2.1 of the said MOU. In fact, the AO has failed to appreciate that the Paral.1.2.1 to Para 1.2.5 of the MOU gives the complete details and the manner in which the total consideration of Rs. 155 Crores is to be paid by the Appellant to M/s Bindal Sponge Limited. It is pertinent to note that as per the terms and conditions of the MOU, it was mandatory on the part of the Appellant to pay Rs. 25 crores, as security deposit. It is M/s International Mineral Trading Co. Pvt. Ltd. further noted that the para 1.3 of the MOU clearly states that in case of unforeseen circumstances and the appellant is not able to pay the balance amount of Rs. 105 Crore within the time specified therein , a rate of interest of 15% per annum is payable by the appellant to M/s Bindal Sponge Limited.

5.5 The facts on record reveal that the impugned transaction of purchase of assets transaction could not go through due to some unavoidable reasons. As per the terms of the MOU, the appellant was entitled for refund of all the payments along with interest @ 15%. In this regard, Reference may be made to Para 6.2 o7 the said MOIL However, the said party refused to pay the same, which led to the filing of legal suits, against Bindal Sponge limited. Subsequently, the said matter was duly "settled with the said party and accordingly, the appellant had received Rs. 3 Crores'.

5.6 Thus, what could be observed from the above facts is that the appellant had no intentions to earn interest income. It has earned the same merely because the transaction was not completed and the deal had to be cancelled. ln fact, if the deal would have matured with Bindal Sponge Limited, no interest would have been earned by the appellant. Thus the said interest had been earned on capital advance made by the appellant company in the form of security deposit and that the said income has been earned in the course of setting up of the plant by the appellant company. In these circumstances, the earning of interest has a clear and direct nexus to the setting up of the said plant, as per the terms and conditions outlined in the MOU.

M/s International Mineral Trading Co. Pvt. Ltd. 5.7 It is not the facts of the present case that the appellant has parked the surplus funds for earning of interest, as is the case of Tuticorin Alkali Chemicals & Fertilizers Limited Vs. CIT, (1997) 141 CTR 0387 : (1997) 227 ITR 0172 : (1997) 93 TAXMAN 0502. In the case of Tuticorin Alkali referred supra, the Hon'ble Supreme Court has held that the interest earned by the assessee before commencement of business on short-term deposits with banks out of term loans secured from financial institutions is income chargeable under the head "income from other sources". In the present case at hand, there is no short term deposit of surplus funds in the bank, but incidental interest income has been earned by the appellant on the security deposit, which has been given as per the terms and conditions mentioned in the MOU for the acquisition of the plant. Thus, the facts of the case are totally different form the facts of Tuticorin Alkali, referred supra.

5.8 Further, the allegation of the AO that the transaction between appellant and M/s Bindal Sponge Limited was merely in the nature of advance given against pledge of shares and wasn't inextricably linked to the setting up of project, is not borne out of material on record. The appellant has submitted documentary evidences such as Memorandum of Understanding, Correspondence between advocates, Consent Letter of Bombay HC, Ledger copies, etc. which clearly indicated that the transaction was for the acquisition of the plant. The A.O. has factually and legally erred in drawing conclusions by reading only one clause of the MOU i.e. relating to the payment of security deposit of Rs. 25 Crore. In the absence of any contrary material on record, the entire MOU placed on record needs to be read in entirety and comprehensive and coherent conclusions M/s International Mineral Trading Co. Pvt. Ltd. needs to be drawn from the said MOU. Thus, the myopic approach of reading of the MOU by the AO, has resulted in distortion of the material facts on record.

5.9 Further, reliance is also placed on the judgment of Hon'ble Apex Court in the case of CIT Vs Bokaro Steel (1991) 151 CTR 0276 : (1999) 236 ITR 0315 : (1999) 102 TAXMAN 0094, wherein the Apex Court has clearly held that the receipts from letting out quarters to employees of contractors, who are engaged in construction of assessee's plant, hire charges for letting out plant and machinery to contractors, interest on amounts advanced to them and royalty received from them for allowing excavation of stones, etc. are all intrinsically connected with the construction activity and are capital receipts. The Hon'ble Apex Court on this issue has concluded as under:-

"The activities of the assessee in connection with all three receipts viz. rent charged by the assessee to its contractors for housing workers and staff employed by the contractor for the construction work of the assessee including certain amenities granted to the staff by the assessee; secondly, hire charges for plant and machinery which was given to the contractors by the assessee for use in the construction work of the assessee and thirdly, interest from advances made to the contractors by the assessee for the purpose of facilitating the work of construction are directly connected with or are incidental to the work of construction of its plant undertaken by the assessee. Broadly speaking, these pertain 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 use the premises of the M/s International Mineral Trading Co. Pvt. Ltd. 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 has provided these facilities. The same is 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 go 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 are arrangements which are intrinsically connected with the construction of its steel plant. The receipts have been adjusted against the charges payable to the contractors and have gone to reduce the cost of construction. They have, therefore, been rightly held as capital receipts and not income of the assessee from any independent source. The same reasoning would apply to royalty received by the assessee- company for stone, 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 assessee's steel plant. The cost of the plant to the extent of such royalty received, is reduced for the assessee. It is, therefore, rightly taken as a capital receipt.— M/s International Mineral Trading Co. Pvt. Ltd.

Bokaro Steel Ltd. vs. CIT (1988) 67 CTR (Pat) 281 : (1988) 170 ITR 545 (Pat) : TC 38R.1012 and CIT vs. Bokaro Steel Ltd. (1988) 67 CTR (Pat) 138 : (1988) 170 ITR 522 (Pat) : TC 38R.1011 affirmed; Challapalli Sugars Ltd. vs. CIT 1974 CTR (SC) 309 : (1975) ' 98 ITR 167 (SC) : TC 17R.834 applied; Addl. CIT vs. Indian Drugs & Pharmaceutical Ltd. (1983) 141 ITR 134 (Del) : TC 13R.668 approved; Tuticorin Alkali Chemicals & Fertilisers Ltd. vs. CIT (1997) 141 CTR (SC) 387: (1997) 227ITR 172 (SC) distinguished."

5.10 Since, in the present case at hand, the receipts are inextricably linked with the setting up of the plant, they must therefore be viewed as capital receipts, which will go to reduce the cost of the construction of the plant. In view of the above facts and judicial pronouncement, the interest income of Rs. 3 Crores is eligible to be set off against the expenses incurred under CWIP for the setting up of the said plant.