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Income Tax Appellate Tribunal, MUMBAI “E” BENCH, MUMBAI
Before: SHRI PRADIP KUMAR KEDIA & SHRI SANDEEP GOSAIN
The captioned three appeals relating to two different assessees of the same group have been filed against the orders of the Commissioner of Income Tax (Appeals)-12, Mumbai, (‘CIT(A)’ in short), all dated 20.11.2017 arising in the assessment orders dated 27.12.2016, 11.03.2016 & 27.12.2016 respectively passed by the Assessing Officer (AO) under s. 143(3) of the Income Tax Act, 1961 (the Act) concerning AYs. 2013-14 & 2014-15 and involve identical question for adjudication. Consequently, all the three matters were heard together and disposed of by common order.
We shall first take up Revenue’s appeal in Essar Power Gujarat Ltd. concerning AY 2013-14 for the purposes of adjudication.
The substantive grounds of appeal raised by Revenue read as under:
“1) “On the facts and circumstances of the case and in law, the Ld CIT(A) has erred in giving finding that interest of Rs.1,05,14,115/- 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 6 of the assessment order that it is taxable under the head ‘Income from Other Source’.” 2. “On the facts and circumstances of the case and in law, the Ld CIT(A) has erred in allowing the corresponding interest expenditure against the interest receipts as ‘Income from Other Sources’.”
As per Ground No.1 of the Revenue’s appeal, the AO has impugned the action of the CIT(A) in treating interest income on margin money deposits of Rs.1,05,14,115/- to be of capital nature to 399/Mum/18 [ACIT vs. M/s. Essar Power Gujarat Ltd. & Anr.] - 3 - linked with the process of setting up its power project and consequently, such receipt would go to reduce the cost of the project. It is the case of the Revenue that the interest income arising from deposits made with the Bank during the pre-commencement period is taxable under the head ‘income from other sources’ and has wrongly been capitalized and reduced from the cost of the project.
Briefly stated, the assessee company is engaged in the business of power generation. During the relevant assessment year under consideration, the company owns and operates coal based power plant of 1200 MW in Phase-I and is in the process of implementation of 1320 MW in Phase-II near Salaya, Gujarat. For the AY 2013-14 in question, the assessee has filed its return of income declaring total loss of Rs.841.06 Crore under the normal provisions of the Act. The return of the assessee was subjected to scrutiny assessment. The AO inter alia observed that assessee has derived interest income of Rs.1,05,14,115/- on margin money deposits with bank which were capitalized and reduced from capital work-in-progress in its financial statement and was not offered for taxation for the year under consideration. It was observed by the AO that expenditures incurred during the commencement stage relatable to under construction plant have been capitalized and the expenditures were reflected under the head ‘capital work-in-progress’ and pre-operative expenditures in the books of accounts. It was submitted on behalf of the assessee before the AO that during the ongoing project installation phase, the assessee was required to keep margin deposits with bank for obtaining letter of credit, bank guarantee, LC for coal mining equipment, security deposits for water connection etc. In view of this requirement, the assessee was required to make deposits with the bank. It was pointed out that the said deposits were placed on account of mandatory requirements of the bankers to place such deposit for the purpose of obtaining a letter of credit, BG etc. It was further submitted that to 399/Mum/18 [ACIT vs. M/s. Essar Power Gujarat Ltd. & Anr.] - 4 - amount so deposited would partake the characteristics of project related deposits made for the purpose of installation of power project. During the tenure of said margin deposit, the assessee has earned interest income which is incidental to and interlinked with the project of the assessee and consequently goes to reduce the cost of the project. Since, all the expenditures towards construction of plant have been clubbed under CWIP and pre-operative expenses, the interest received on fixed deposits have been rightly reduced from the cost of the project in progress. The AO however found the action of the assessee for reducing the interest income from cost of the project instead of offering the same as taxable income to be untenable. The AO relied upon the decision of the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [19971 227 ITR 172 (SC) and some other decisions to hold that interest income is assessable as ‘income from other sources’.
Aggrieved, the assessee preferred appeal before the CIT(A). The CIT(A) relied upon the decision of the Hon’ble Supreme Court in the case of CIT vs. Bokaro Steel Ltd. [1999] 236 ITR. 315 (SC) which was again followed by Hon’ble Supreme Court in CIT vs. Karnal Co- operative Sugar Mills Ltd. (2000) 243 ITR 7 and adjudicated the issue in favour of the assessee. The relevant operative para of the order of the CIT(A) is reproduced hereunder:
“13. I have carefully considered the facts of the case, the assessment order and the written submissions of the appellant. I have also perused the judicial decisions relied on by the AO and the appellant. It is an undisputed fact that the impugned interest of Rs.1,05,14,115/-, which was the subject matter of addition in the assessment order, represents interest receipts from margin money deposits placed, by the appellant with the banks for the purpose of obtaining BG and LC facilities, which in turn were necessary for the purpose of procurement of plant, equipment and other materials required in the course of construction and setting up of the power plants by the appellant prior to commencement of the operations of the said units of the power plants. Hence, there is no factual dispute and the only issue for determination is whether such interest receipts can be considered to be capital receipts that go towards reducing the capital cost or whether they are required to be assessed as to 399/Mum/18 [ACIT vs. M/s. Essar Power Gujarat Ltd. & Anr.] - 5 - Income from Other sources.
In the assessment order, the AO held that the interest receipts of such nature are required to be assessed as Income from Other Sources by relying on the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. (Supra) and decisions of various High Courts which followed the ratio of the said decision of the Hon'ble Supreme Court. On the other hand, the appellant placed reliance on the decisions of the Hon'ble Supreme Court in the cases of Bokaro Steel Ltd. (Supra), Karnal Co-operative Sugar Mill Ltd. (Supra), Kamataka Power Corporation (Supra) and the decision of the Hon'ble Delhi High Court in the case of Indian Drugs & Pharmaceuticals Ltd. (Supra).
In the case of Tuticorin Alkali Chemicals & Fertilisers Ltd, the Hon'ble Hon’ble Supreme Court was dealing with a case wherein the assessee, during construction and establishment of its factory before commencement of manufacturing activities, invested funds borrowed for the purpose of setting up the factories in short-term deposits with banks and earned interest thereon. In its return, it disclosed the interest earned as income from other sources and after setting off same against business loss, claimed carry forward of remaining loss. Later on, it filed a revised return claiming that interest and finance charges along with other production expenses will have to be capitalised and therefore, the interest income should go to reduce the pre-production expenses which would ultimately be capitalised and as such, the interest income was not exigible to tax. However, the claim of the assessee in the revised return was not accepted by the AO and the interest income was charged to tax as Income from Other Sources. While deciding this issue, the Hon'ble Supreme Court held as under:
"The basic proposition that has to be borne in mind in this case is that it is possible for a company to have six different sources of income, each one of which will be chargeable to income-tax. 'Profits and gains of business or profession' is only one of the heads under which the company's income is liable to be assessed to tax. If a company has not commenced business, there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed If the company, even before it commences business, invests the surplus fund in its hand for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head 'Capital gains'. Similarly, if a company purchases a rented house and gets rent, such rent will be assessable to tax under section 22 as income from house property. Likewise, a company may have income from other sources. It may buy shares and get dividends. Such dividends will be taxable under section 56. The company may also, as in this case, keep the surplus fund in short-term deposits in order to earn interest. Such interests will be chargeable under section 56.
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". to 399/Mum/18 [ACIT vs. M/s. Essar Power Gujarat Ltd. & Anr.] - 6 - 16. Thus, it is seen that the Hon'ble Supreme Court held that the interest earned on short term deposits made with a bank out of the surplus / idle funds held by an assessee company during the period prior to commencement of its business/operations is chargeable to tax under the head Income from Other Sources. Hence, the ratio laid down by the Hon'ble Supreme Court in this case will be applicable in cases where an assessee invests its surplus/idle funds in short term deposits to earn interest income and such income would be chargeable to tax as Income from Other Sources though the business has not commenced.
It would now be pertinent to consider the decisions of the Hon'ble Supreme Court relied on by the appellant. In the case of Bokaro Steel Ltd., which was rendered subsequent to the decision in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd, the Hon'ble Supreme Court considered its earlier decision in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. and held as under with regard to the taxability of the receipts arising from utilisation of various assets of the assessee for the purpose of the project construction activity prior to the commencement of business:
The appellant, however, relied upon the decision of this Court in Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case (supra). That case dealt with the question whether the investment of borrowed funds prior to commencement of business, resulting in earning of interest by the assessee, would amount to the assessee earning any income. This Court held that if a person borrows money for business purposes, but utilises that money to earn interest, however, temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. Merely because he utilised it to repay the interest on the loan taken will not make the interest income as a capital receipt The department relied upon the observations made in that judgment (at page 179) to the effect that if the company, even before it commences business, invests surplus funds in its hands for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head 'Capital gains'. Similarly, if a company purchases rented house and gets rent, such rent will be assessable to tax under section 22 as income from house property. Likewise, the company may have income from other sources. The company may also, as in that case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under section 56 of the Act. This Court also emphasised the fact that the company was not bound to utilise the interest so earned to adjust it against the interest paid on borrowed capital. The company was free to use this income in any manner it liked. However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee-company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction. In the case of Challapalli Sugars Ltd. v. CIT [1975] to 399/Mum/18 [ACIT vs. M/s. Essar Power Gujarat Ltd. & Anr.] - 7 - 98 ITR 167, this Court examined the question whether interest paid before the commencement of production by a company on amounts borrowed for the acquisition and installation of plant and machinery would form a part of the actual cost of the asset to the assessee within the meaning of that expression in section 10(5) of the Indian Income-tax Act, 1922 and whether the assessee will be entitled to depreciation allowances and development rebate with reference to such interest also. The Court held that the accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. 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 receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income.
It is seen from the above extracted decision of the Hon'ble Supreme Court in the case of Bokaro Steel Ltd, that the Hon'ble Court made a distinction between income earned from the deployment of idle/surplus funds during the construction period and the income earned from utilisation of various assets of the assessee for the purpose of the activity of setting up the plant. While the income earned from short term deposits made out of idle/surplus funds was held to be Income from Other Sources by referring to the earlier decision rendered in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd, the incomes earned from utilisation of various assets for the purpose of the activity of setting up the plant were held to be capital receipts which go to reduce the cost of construction, as they are inextricably linked with the setting up of the capital structure of the assessee.
Similar principle was followed by the Hon'ble Supreme Court subsequently in the case of Karnal Co-operative Sugar Mills Ltd., wherein the Hon'ble Court specifically dealt with interest receipts arising from deposits made with a bank for opening a LC for the purchase of machinery required for setting up the plant. The Hon'ble Supreme Court held as under:
In the present case, the assessee had deposited money to open a letter of credit for the purchase of the machinery required for setting up its plant in terms of the assessee's agreement with the supplier. It was on the money so deposited that some interest has been earned. This is, therefore, not a case where any surplus share capital money which is lying idle has been deposited in the bank for the purpose of earning interest. The deposit of money in the present case is directly linked with the purchase of plant and machinery. Hence, any income earned on such deposit is incidental to the acquisition of assets for the setting up of the plant and machinery. In this view of the matter the ratio laid down by this Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [19971 227 ITR 172, will not be attracted. The more appropriate decision in the factual situation in the present case is in CIT v. to 399/Mum/18 [ACIT vs. M/s. Essar Power Gujarat Ltd. & Anr.] - 8 - Bokaro Steel Ltd. [1999] 236 ITR. 315 (SO, The appeal is dismissed. There will be no order as to costs.
As can be seen from the above, the Hon'ble Supreme Court held that the ratio laid down in its earlier decision in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. will attracted while deciding the issue of taxability of interest receipts derived from the deposits placed with a bank for obtaining Letter of Credit for the purchase of machinery required for setting up its plant. The Hon'ble Court held that the deposit of money in such cases is directly linked with the purchase of plant and machinery and hence, any income earned on such deposits is incidental to the acquisition of assets for the setting up of the plant. It was further held that the decision rendered in the case of Bokaro Steel Ltd. is therefore more appropriate in such cases.
On the basis of the above discussion regarding the decisions of the Hon'ble Supreme Court in Tuticorin Alkali Chemicals & Fertilisers Ltd., Bokaro Steel Ltd. and Karnal Co-operative Sugar Mills Ltd., the principle that emerges is that while the interest receipts arising from deposits made with a bank for utilising the surplus/idle funds of the assessee during the project construction period requires to be charged to tax under the head Income from Other Sources, the interest receipts arising from margin money deposits made with a bank for the purpose of availing bank guarantee/letter of credit facilities for the purpose of procurement of equipment/machinery/other materials for setting up of the plant requires to be treated as capital receipts which will go towards reduction of the capital cost since the said receipts are inextricably linked to the process of setting up its plant.
In the present case, the interest receipts of Rs.1,05,14,115/- were derived by the appellant from the margin money deposits placed with the banks for availing the bank guarantee/letter of credit facilities for the purpose of procurement of equipment/ machinery and other materials for setting up of the units of the power plants in Phase-I and Phase-II. Hence, such interest receipts partake the character of capital receipts which go to reduce the capital cost as per the ratio laid down by the Hon'ble Supreme Court in the cases of Bokaro Steel Ltd. and Karnal Co-operative Sugar Mills Ltd.
Hence, by relying on the said binding decisions of the Hon'ble Supreme Court which are squarely applicable to facts of the present case, it is held that the decision of the AO to treat the said interest receipts from margin money deposits as income chargeable under the head Income from Other Sources is not in accordance with the law. The AO is therefore directed to delete the addition of Rs.1,05,14,115/- made in this regard. These grounds of appeal are therefore allowed.”
The CIT(A) eventually held that interest received from margin money deposits inextricably linked with the installation of project cannot be seen as independent source of income but would form part of the cost of the project under progress. The CIT(A) accordingly to 399/Mum/18 [ACIT vs. M/s. Essar Power Gujarat Ltd. & Anr.] - 9 - reversed the action of the AO and deleted the addition of Rs.1,05,14,115/- made in this regard by the AO.
7. Aggrieved, the Revenue is in appeal before the Tribunal.
7.1 The learned DR for the Revenue relied upon the order of the AO.
7.2 The learned AR for the assessee, on the other hand, supported the action of the CIT(A) and submitted that the AO proceeded on mis- appreciation of facts and mis-conception of law. The learned AR for the assessee pointed out that the law is well settled on this score by the decision of Bokaro Steel Ltd. (supra) and Karnal Co-operative Sugar Mills Ltd. (supra) which have been followed in plethora of judicial precedents wherein decision rendered by the Hon’ble Supreme Court in Tuticorin Alkali Chemicals & Fertilisers Ltd. (supra) relied upon by the Revenue has been distinguished in unequivocal terms. On facts, the learned AR referred to the bank guarantee letter issued by its banker State Bank of India to demonstrate that the assessee was compelled to keep fixed deposits with the bank for obtaining the bank guarantee in favour of the Gujarat Urja Vikash Nigam Ltd. The company was required to cover this bank guarantee limit under over all security arrangement of sanction of the project loan for Salaya-II project in process. It was thus submitted that fixed deposit kept with bank was with the object of obtaining bank guarantee and such fixed deposits were placed for the purposes of margin money for acquisition of fixed assets and for completion of the power project. The fixed deposits were not placed to park the idle funds of the assessee company. In such scenario, the interest income earned from deposits cannot be seen independent of the project in progress and therefore, interest income would go to reduce the ultimate cost of power project. The learned AR also referred to the decision of co-ordinate bench of Tribunal in ITO vs. M/s. Adani Power Rajasthan Limited Nos. 397 to 399/Mum/18 [ACIT vs. M/s. Essar Power Gujarat Ltd. & Anr.] - 10 - 1430/Ahd/2015 order dated 18/01/2019 and Solarfield Energy Two Pvt. Ltd. vs. ITO ITA No. 5076/Mum/2016 order dated 11/09/2017. The learned AR pointed out that the co-ordinate bench in the aforesaid cases has adjudicated the issue in favour of the assessee in the similar facts and upheld the action of the assessee after taking note of host of judicial precedents.
We have carefully considered the rival submissions. The essential controversy involved in the instant case is whether interest income derived from certain deposits placed with the banks (while the power project construction is under progress and in the process of being set up and has not commenced generating electricity) can be set off against the ongoing power project costs incurred of capital nature and consequently, whether such interest income would go to reduce project costs prior to its commencement or not. It is the case of the assessee that the AO clearly mis-appreciated the facts and wrongly characterized interest income derived from fixed deposits utilized towards margin money for obtaining bank guarantee in relation to capital project in process and wrongly held such income to be liable to tax as ‘income from other sources’ under s.56 of the Act. It is further case of the assessee that the CIT(A) has correctly appreciated the facts and applied the law in perspective while holding such interest income to be capital in nature and would consequently go to reduce the power project costs being set up. It is primarily the case of the assessee that the interest income derived from margin money deposits is inextricably linked to the project being set up. Hence, the interest income is required to be regarded as income of capital nature for the purposes of project. We concur with the view taken by the CIT(A) that interest income so earned on deposits placed with Bank to obtain the bank guarantee have been rightly reduced from the project development expenditure incurred for set up of power plant. We note that identical issue came up for consideration of the co-ordinate bench to 399/Mum/18 [ACIT vs. M/s. Essar Power Gujarat Ltd. & Anr.] - 11 - in the case of M/s. Adani Power Rajasthan Ltd. (supra) in a similarly placed situation. We find that the CIT(A) has rightly applied the law laid down by the Hon’ble Supreme Court in Bokaro Steel Ltd. (supra) and Karnal Co-operative Sugar Mills Ltd. (supra). The case in hand is clearly distinguishable from the facts placed before the Hon’ble Supreme Court in Tuticorin Alkali Chemicals & Fertilisers Ltd. (supra). It is not the case where idle and surplus funds have been parked with the banks as fixed deposits pending its utilization in project under progress. It is a case where the fixed deposits giving rise to the interest income has been placed as margin money with the State Bank of India for obtaining bank guarantee for the purposes of the project in progress and consequently, the fixed deposits are integrally connected with the setting up the power plant. The interest income therefore is not independent of the costs incurred for power project. Hence, we find ourselves in complete agreement with the action of the CIT(A) in upholding the action of the assessee to reduce interest income arising from deposits placed with banks out of the costs of project in progress and in reversing the action of the AO in treating the same as revenue de hors the development of the project. The grievance of the Revenue is bereft of any merit.
In the result, Ground No.1 of the Revenue’s appeal is dismissed.
Ground No.2 of the Revenue’s appeal is consequential. The CIT(A) has rightly allowed the deduction of interest expenditure incurred for development of project (forming part of costs of project) against the interest receipts derived from margin money deposits. We do not see any error in the conclusion of the CIT(A) on this score.
Ground No.2 of Revenue’s appeal is dismissed.
In the result, Revenue’s appeal in case of Essar Power Gujarat Ltd. in is dismissed. to 399/Mum/18 [ACIT vs. M/s. Essar Power Gujarat Ltd. & Anr.] - 12 - & 399/Mum/208-AY 2013-14 & 2014-15 (Essar Power Transmission Co. Ltd.)
Identical grounds have been taken by the Revenue in the captioned appeals as taken in . The facts are stated to be identical and thus, in parity, our observations in shall apply mutatis mutandis. Consequently, both the Revenue’s appeals in Essar Power Transmission Co. Ltd. in ITA Nos. 398 & 399/Mum/2018 concerning AY 2013-14 and 2014-15 respectively are dismissed.
14. In the combined result, all three Revenue’s appeals are dismissed.
This Order pronounced in Open Court on 06/06/2019
Sd/- Sd/- (SANDEEP GOSAIN) (PRADIP KUMAR KEDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai: Dated 06/06/2019 True Copy S. K. SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाइल / Guard file.