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Income Tax Appellate Tribunal, BANGALORE BENCH ‘A’
PER SHRI JASON P BOAZ, ACCOUNTANT MEMBER :
This appeal by Revenue is directed against the order of the CIT(A)-1, Bangalore dated 10.3.2016 for Assessment Year 2012-13.
2. Briefly stated, the facts relevant for this appeal are as under:- 2.1 The assessee company, is a joint venture between M/s Bharatiya Reserve Bank Note Mudran Pvt. Ltd., engaged in the business of developing, designing, manufacturing and supplying currency paper and bank note paper. The assessee company since the period relevant to asst. year 2010-11 has commenced activities in the process of setting up of a plant for manufacture of paper; which activity is continuing in this year also. For asst. year 2012-13, the assessee filed its return of income on 27/9/2012 declaring NIL income. The case was taken up for scrutiny and the assessment was completed u/s 143(3) of the Income-tax Act, 1961(in short ‘the Act’) vide order dated 30/4/2014, wherein the assessee’s income was determined at Rs.17,01,72,0884/-. This was on account of Assessing Officer (‘AO’) making an addition of Rs.17,01,72,084/- in respect of interest earned by the assessee on fixed deposits made with various banks out of share capital/application money invested by RBI. The assessee had reduced this interest income so received from the pre- operative expenses incurred by the company. The AO was, however, of the opinion that in view of the judgment of the Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd., Vs. CIT (227 ITR 172) (SC), interest income is chargeable to tax under the head ‘income from other sources’ and brought the aforesaid interest to tax in the assessee’s hands accordingly. 2.2 Aggrieved by the order of assessment dated 30/4/2014 for asst. year 2012-13, the assessee preferred an appeal before the CIT(A)-1, Bangalore. The ld CIT(A) vide order dated 10/3/2016 deleted the aforesaid addition of Rs.17,01,72,084/- made by the assessee holding as under at paras 6.2 to 7 thereof:-
6.2 Thus, the facts of the case would go to show that the amounts invested in bank deposits are not the surplus funds of the appellant company, rather it is the share capital meant for meeting the capital expenses and owing to the financial planning and depending on the requirement of funds at given intervals/time schedule, the funds were temporarily deposited in banks. Further, it is fact that, the Appellant Company itself was formed in October 2010 and the iv promoters having made the capital available immediately and there being a time lag for utilising the funds due to an, unavoidable delay of about 9 months in finalization of tender and award of contract. The same were invested in bank deposits from November 2010 onwards. In making such deposits appellant has kept in mind its commitments from time to time and accordingly invested the same in fixed deposits of short term. Thus, in my considered opinion, the interest earned by the appellant is inextricably linked to its capital expenditure and therefore it is proper to reduce such income from the pre-operative expenses rather than treating it as an item of revenue. 6.3 In the case of M/s Bokaro Steel Ltd (1999) 236 ITR 315. The Hon'ble Supreme Court has held as under; 6.4 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". 6.5 The Supreme Court in the case of CIT Vs Karnal Co-operative Sugar Mills Ltd. (2000) 2431TR 2 (SC), has held that where the assessee had deposited money to open a letter of credit for the purchase of the machinery required for setting up its plant, the interest earned from such deposit would be capital receipt since it is inextricably linked with the purchase of machinery. The relevant extract reads 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 (1997) 227 ITR 1721, will not be attracted. The more appropriate decision in the factual situation in the present case is in CIT V Bokaro Steel Ltd. (1999) 236 ITR 3152 (SC). The appeal is dismissed. There will be no order as to costs". 6.6 In the case of CIT Vs Karnataka Power Corporation ( 2001 ) 247 ITR 268 (SC), the Supreme Court following its own decision in the case of Bokaro Steel ( Supra) held that interest receipts and hire charges from contractors are capital receipts which would go to reduce capital cost. 6.7 In the case of Bongaigaon Refinery and petro Chemicals Ltd Vs CIT ( 2001) 251 ITR 329, the Supreme court followed the CIT Vs Bokaro Steel Ltd case, holding that the interest receipts etc. received during the pre-commencement period were not taxable but were in the nature of capital receipts which would go to reduce the project cost. 6.8 In case of CIT Vs VGR Foundation [2004] 292 ITR 132, Hon'ble Madras High Court has reviewed the available decisions on this issue and held that: "In the light of the Supreme Court decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. (Supra), it is only in the event of interest earned from out of deposits made from borrowed funds that it would be in the nature of income. Share application monies do not fall into the category of borowed funds and do not involve payment of interest. In effect share application monies etc., are gathered for being used in setting up of an industry, unit, purchase of assets, and so on. Till such time the money is required for deferment of various items, obliviously the money in current account would not yield any interest income. It can therefore, be seen that it is during the course of construction that the monies are kept in deposits with bank. In these circumstances, in the light of the Supreme Court decisions in the cases of Bokaro Steel Ltd. (Supra), Karnal Co-operative Sugar Mills Ltd. (Supra) and Karnataka Power Corporation (Supra), the claim of the assessee is reasonable and deserves to be accepted". 6.9 In case of NTPC Sail Power Company Pvt. Ltd Vs CIT (2012) 210 Taxman 358. Hon'ble Delhi High Court has held that "It is no doubt correct that the proviso to section 36(1)(iii) of the Income Tax Act enacts that any amount of the interest paid towards ("in respect of') capital borrowed for acquisition of an asset or for extension of existing business regardless of its capitalization in the books or otherwise, "for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use" would not qualify as deduction. However, in all these cases, when the interest was received by the assessee towards interest paid for fixed deposits when the borrowed funds could not be immediately put to use for the purpose for which they were taken, this Court, and indeed the Supreme Court held that if the receipt is "inextricably linked" to the setting up of the project, it would be capital receipt not liable to tax but ultimately be used to reduce the cost of the project. By the same logic, in this case too, the funds invested by the assessee company and the interest earned were inextricably linked with the setting up of the power plant". 6.101n case of Indian Oil Panipat Power Vs Income Tax officer (2012) 315 ITR 255. Hon'ble Delhi High Court held that: "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 pupose 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 pre-operative expenses. In the case of Tuticorin Alkali Chemicals (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 (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 preoperative expenses In view of the discussion above, in our opinion the Tribural misdirected itself in applying the decision of the Supreme Court in ITA 1156&1157/2007 Page 7 of 8 Tuticorin Alkali Chemicals (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 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". 6.111n the case of Shiv Om Paper Mills Pvt Ltd Vs Income Tax Officer (2012) hA No 2448, ITAT Delhi: The assessee has raised its share to meet out its financial requirements. The funds so raised were deposited in the bank account of the assessee company. On this fund the bank has provided the FFD facilities so that the assessee company may receive interest on that account. Assessee's submissions in this regard is that by earning the interest, assessee has mitigated the cost of construction and other related expenditure. It has been claimed that it has resulted in reduction of cost of construction of building, plant and machinery.ln this regard, reliance was placed on the following case laws: 1. C.I.T. vs. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC)
C.I.T. vs. Karnataka Power Corporation (2001) 247 ITR 268 (SC) 3. Bongaigaon Refinery and Petro Chemical Ltd. vs. C.I.T. (2001) 251 ITR 329 (SC) 4. Challapalli Sugars Ltd. vs. C.I.T. (1975) 98 ITR 167 (SC) 5. C.I.T. vs. VGR Foundations (2008) 298 ITR 132 (Mad.) 6. Indian Oil Panipat Power Consortium Limited vs. ITO (2009) 315 ITR 255 (Delhi) On perusal of the above case laws Hon'ble Delhi Tribunal held: "It is amply clear that in matters as that of assessee interest earned in pre- commencement- periodshould be treated as inextricably linked with the setting up of the capital structure. Hence the same should be allowed to be set off against pre- construction expenditure. Upon careful consideration, we find that Id. counsel of the assessee's submission is cogent enough and hence, we set aside the orders of the authorities below and decide the issue in favour of the assessee". 6.12 In case of POSCO India Private Limited Vs DCIT (2013) TIOL 225 ITAT Cuttack:
The assessee in the bulk paper book has correlated earning of interest on the amounts deposited in the Banks to be utilised for the purpose of business of the assessee as per the project envisaged and as per the project approved by the Government of Orissa but taken time due to reason beyond the assessee' s control. The entire interest from bank was shown as reduction from cost of expenditure during construction/project implementation and the net amount was carried over in balance sheet for future capitalisation. The following case laws were relied upon: 1. C.I.T. vs. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) 2. Indian Oil Panipat Power Consortium Limited vs. ITO (2009) 315 ITR 255 (Delhi HC) 3.NTPC Sail Power Company Pvt. Ltd Vs CIT (2012) 210 Taxman 358 (Delhi HC) In consideration of the above case laws Hon'ble Cuttack Tribunal disposed of the appeal - _ in favour of the assessee.
Now, having regard to the facts brought on record that the bank deposits were made for a short period keeping in mind the commitments of the applicant company from time to time and not with an intention to earn the interest and such interest earned having been inextricably linked with its capital expenditure, I am of the considered opinion that the decision of the Hon'ble Supreme Court in the case of M/s Bokaro Steel Ltd (Supra ) is applicable to the assessee case and not that of the Hon'ble Supreme Court decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. V CIT [ 1997 ] 227 ITR 1721. Thus, the interest earned which is earmarked and kept as deposit with banks for capital expenditure has to go to reduce the cost of pre-operative expenses and does not constitute income in the hands of the appellant. Relief is allowed to appellant on this ground. In earlier assessment year 2011-12, my predecessor has held in favour of appellant on similar grounds.”
3.1 Aggrieved by the order of the CIT(A)-1, Bangalore dated 10/3/2016 for asst. year 2012-13, Revenue has filed this appeal before us wherein it has raised the following grounds:- “1. The order of the Learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case.
2. The Learned CIT(A) erred in allowing the claim of the assessee company by holding that the interest earned which waearmarked and kept as deposit with banks for capital expenditure has to go to reduce the cost of pre- operative expenses and does not constitute income in the hands of assessee following the decision of the Hon'ble Supreme Court in the case of M/s Bokaro Steel Ltd without appreciating the fact that the interest earned on the deposit made by the assessee has no direct link with the construction activities/activities of setting up of plant but it is independent source of income earned by the assessee by depositing its surplus funds in term deposits with the banks.
The Ld. CIT(A) ought to have appreciated d that the case law relied upon by the AO in the case Tuticorin Alkali Chemicals and Fertilizers Ltd (1997) (227 ITR 172) is squarely applicable to the instant case wherein the Apex court has held that the interest income earned on surplus funds by the assessee before commencement of the business is to be treated as income from other sources and taxed accordingly. 4. The Ld. CIT(A) erred in not appreciating the fact that the Hon'ble Supreme Court in the case of M/s Bokaro Steel Ltd., held that the question of treating the interest earned on short-term deposits as income from other sources has already been concluded by the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. 5. The Ld. CIT(A) erred in allowing relief to the assessee by relying on an earlier CIT(A) order in the assessee's own case for the A.Y.2011-12 as that order has not been accepted by the Department and Revenue is in further appeal before the Hon'ble ITAT which is pending. 6. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) be reversed and that of the Assessing Officer be restored. 7. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of earning of appeal.”
3.2 The ld DR for Revenue was heard in support of the grounds raised (Supra) and emphatically urged that the ld CIT(A) ought not to have deleted the addition made by the AO on account of interest, as there was no direct nexus between the interest earned on deposits and the construction activities of setting up the plant. It was submitted that the decision of the Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd., (Supra) is squarely applicable to the facts of the case on hand.
3.3 Per contra, the ld AR for the assessee supported the order of the ld CIT(A) on this issue. It was submitted that the issue for consideration in this appeal, as to whether the interest income earned by the assessee on bank deposits, made out of share application money during the period of construction of the plant being set up, is taxable as ‘income from other sources’ or it should go to reduce the capital cost of plant being set up, is covered in favour of the assessee by the decision of a co-ordinate bench of this Tribunal in the assessee’s own case in and CO No.177/Bang/2015 dated 17/3/2017 for asst. year 2011-12. 3.4.1 We have heard the rival contentions and perused and carefully considered the material on record. The issue for consideration before us in this appeal is whether the interest income earned by the assessee from bank deposits made out of share application money received by it form RBI, during the period of construction of the plant being set up, is taxable as ‘income from other sources’ as contended by Revenue or would go to reduce the capital cost of the plant being set up. We find that this issue has been considered and decided in favour of the assessee by a co-ordinate bench of this Tribunal in the assessee’s own case for asst. year 2011- 12. In its order in ITA No.692 & CO.No.177/Bang/2015 dated 17/3/2017, the co-ordinate bench at para 7 of its order had held as under:- “7. We heard rival submissions and perused material on record. The short issue that comes up for consideration in the present appeal is whether interest income earned by the assessee during the construction period on bank deposits made out of share application money received by it, is taxable as ‘income from other sources’ or it should go to reduce capital cost of the plant which is being set up by the assessee-company. Undisputedly, facts are that the said interest income was earned by the assessee-company on bank deposits made out of share capital received by it from the Reserve Bank of India. The share capital was received by the respondent-assessee-company to meet capital expenditure for setting up of assessee’s factory. As the funds were not immediately required, the respondent-assessee made deposits with bank on which assessee earned interest. This interest income was treated as abatement of capital cost of the project/factory by the assessee-company in the books of account, whereas the AO was of the opinion that the same should be treated as revenue receipt and brought to tax placing reliance on the decision of the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). The decision of the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) was distinguished by the Hon’ble Supreme Court in the case of Bokaro Steel Ltd. ((236 ITR 315)(SC) wherein it was held that the ratio of the decision of the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) is not applicable where interest receipt is directly connected with or incidental to working of construction of the assessee’s plant. The decision of the Hon’ble Supreme Court in the case of Bokaro Steel Ltd. (supra) was followed subsequently in the case of CIT vs. Karnal Co- operative Sugar Mills Ltd. (243 ITR 2). An identical issue had come up for consideration before the Hon’ble Jurisdictional High Court in the case of CITA vs. Karnataka State Agricultural Produce Processing and Export Corporation Ltd.(377 ITR 496). In that case the State Government Corporation earned interest on deposits temporarily kept out of grants received from the State Government was taxable or not? The facts are that the State Government Corporation earned interest during the construction period on the fixed deposits temporarily made out of State Government grants. The issue before the Hon’ble High Court was whether such interest income was taxable or should go to reduce the capital cost of the project. The Hon’ble High Court, after considering the decisions of the Hon’ble Supreme Court in the case of Bongaigaon Refinary Petrochemicals Ltd. v. CIT (251 ITR 329)(SC), Bokara Steel Ltd. (supra), and Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and its own decision in the case of CIT v. Karnataka Power Corporation, (247 ITR 268) and CIT vs. Karnataka Urban Infrastructure and Development and Finance Corporation (284 ITR 582) held that such interest income would go to reduce the capital cost of the project, is on the capital account and should not be brought to tax. The relevant portion of the judgment is as under: “9. After hearing the rival contentions and perusing the material on record, we have noticed that the assessee-company is a Government owned company. In order to facilitate infrastructure facilities in various parts of the State of Karnataka, for increasing the export of horticultural produce, a sum of Rs. 10.00 crores was granted to the assessee. Before the utilisation of this grant amount, it was temporarily kept in fixed deposits and the interest was earned on the said amount. The assessee has placed certain additional evidence before the Tribunal to establish that the Government of Karnataka had specifically directed that interest earned on fixed deposits of grants pending utilisation should be treated as additional grant of the scheme and not to be treated as "income of the company". No liberty was provided to the company to make use of that the interest earned on the said amount kept in fixed deposits. Though the assessee-company is engaged in trading in agricultural produce, it has no power to make use of the said grant made by the Government of Karnataka other than for a particular scheme i.e., the said amount cannot be diverted for any other purpose other than for which it was sanctioned as per the Government Order dated 23.1.2007. Thus, the emphasis made by the revenue that the assessee-company being engaged in trading activities cannot be considered as a nodal agency of the State Government and the interest earned on the grants by the assessee-company has to be treated as income is not acceptable in view of the specific directions issued by the State Government regarding the utilization of the amount granted and on the interest accrued thereon.
The Tribunal relied on the Judgment of this Court in the case of Karnataka Urban Infrastructure Development Finance Corpn.'s case (KUIDC) (supra) wherein it is held that: "The material on record shows that the very purpose of constitution of the assessee was to act as a nodal agency for implementation of mega-city scheme worked out by the Planning Commission. Both the Central and the State Governments are expected to provide requisite finances for implementation of the said project. The funds from the Central and State Governments will flow directly to the specialised institutions/nodal agencies as grant and the nodal agency will constitute a revolving fund with the help of Central and State shares out of which finance could be provided to various agencies such as water, sewerage boards, municipal corporations, etc. 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 nodal agency formed/created by the Government of Karnataka 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 nation/States as provided in the guidelines; the whole Of the fund belongs to the State Exchequer and the assessee has to channelise them to the objects of centrally sponsored scheme of infrastructure development for mega-city of Bangalore. Funds of one wing of the Government is distributed to the other wing of the Government for public purpose as per the guidelines issued. The monies so received, till it is utilised, is parked in a bank. The finding recorded by the Tribunal clearly shows that the entire money in question is received for implementation of the scheme which is for a public purpose and the said scheme is implemented as per the guidelines of the Central Government and, therefore, the assessee is only acting as a nodal agency of Central Government for implementation of these projects. It is not the case of the Revenue that the assessee was carrying on any business or activities of its own while implementing the scheme in question. The unutilised money, during which the project could not be fully implemented, is deposited in a bank to earn interest. That interest earned is also again utilised for the implementation of the mega-city scheme which is also permitted under the scheme. Therefore, in computing the total income of the assessee for any previous year the interest accrued on bank deposits cannot be treated as an income of the assessee as the interest is earned out of the money given by the Government of India for the purpose of implementation of mega-city scheme. Therefore, we do not find any error in the conclusion reached by the Tribunal that there was no income earned by way of interest by the assessee and setting aside the order of AO which is affirmed by the first appellate authority. The finding given by the Tribunal is purely a question of fact. We do not find any substantial question of law involved in this appeal and therefore, this appeal is liable to be dismissed at the stage of admission itself."
In Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case (supra), the Apex Court has held that: "There is another aspect of this matter. The company, in this case, is at liberty to use the interest income as it likes. It is under no obligation to utilise this interest income to reduce its liability to pay interest to its creditors. It can re- invest the interest income in land or share, it can purchase securities, it can buy house property, it can also set up another line of business, it may even pay dividends out of this income to its shareholders".
In the case of Karnataka Power Corpn. (supra), the Apex Court following the Judgment of Bokaro Steel Ltd's case (supra) has held that "interest receipts and hire charges from contractors are in the nature of capital receipts".
In the case of Bongaigaon Refinary & Petrochemicals Ltd., v. CIT [2001] 251 ITR 329/119 Taxman 488 the Apex Court considering the decision in Tuticorin Alkali Chemicals Ltd.'s case (supra) and Bokaro Steel Ltd.'s case (supra) has held that in Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case, the question related was with the interest earned by the Company during its formative period by investments while in Bokaro Steel Ltd.'s case (supra), it is so confined and did not apply where the receipts were directly connected with or were incidental to the work of construction of the assessee's plant. Accordingly, applying the law enunciated in Bokaro Steel Limited case allowed the appeal. 14. In the light of the judgments referred to above, we have examined the case on hand.
It is clear that the assessee has received the grant of Rs 10.00 crores from the Government of Karnataka for a particular project i.e., for improvement of infrastructure and to promote export of horticultural produce. Before the said grant was utilized for the specific purpose it was parked in fixed deposits and the interest was earned and by the subsequent additional evidence produced by the assessee before the Tribunal, it is further made clear that the State Government has categorically specified that any interest earned on those grants originally granted has to be considered as an additional grant and not an income of the assessee-Company.
As explained by the Apex Court, in Bongaigaon Refinary & Petrochemicals Ltd.'s case, (supra), in Tuticorin's case, the investment in deposits was made by the Company during its formative period by investments and in Bokaro Steels Ltd.'s case (supra) the inextricable link between the interest earned and the set up of the plant was established. Thus, in the present case we are of the view that this is not an investment made subsequent to the setting up of the project but this is the unutilized income parked in fixed deposits for a temporary period and inextricable link for the interest earned on the grants and the original grant made by the State Government to set up a project is established as in Bokaro Steel case. ” Respectfully following the ratios of the decisions laid down in the above cases, we hold that even in the present case also, interest earned should only go to reduce the capital cost of the project to be set up by the respondent company and it should not be brought to tax, as the interest is earned on capital account. The appeal of the revenue is dismissed.”
3.4.2 Respectfully following the aforesaid decision of the co- ordinate bench in the assessee’s own case for asst. year 2011-12 (Supra), we hold that the said interest earned on deposits should only go to reduce the capital cost of the plant project being set up by the assessee company and is not to be brought to tax in the assessee’s hand, as the interest is earned on capital account. We, therefore, dismiss the grounds raised by Revenue.
In the result, Revenue’s appeal for asst. year 2012-13 is dismissed.