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Income Tax Appellate Tribunal, PUNE BENCH “SMC”, PUNE
Before: SHRI D. KARUNAKARA RAO, AM
आदेश / ORDER
PER D. KARUNAKARA RAO, AM
This appeal filed by assessee is directed against the order of Commissioner of Income Tax (Appeals)-1, Aurangabad dated 29.07.2016 for assessment year 2012-13.
2 ITA No.2455/PUN/2016 A.Y.2012-13
The assessee raised grounds of appeal which revolves around addition
of Rs.62,10,752/- on account of interest income. The Assessing Officer
treated the same as revenue receipts. Thereafter, assessee is in appeal
against the said addition before Revenue Authorities.
Before us, assessee filed a letter dated 19.03.2018 with request to
admit additional grounds informing that the assessee has now blessed with
benefit of registration u/s.12A/12AA of the Income Tax Act, 1961
(hereinafter referred to as ‘the Act’). Therefore, computation of income is
required to be done u/s. 11 & 12 of the Act. The assessee has raised various
grounds without prejudice to one another. The said grounds along with
additional grounds are extracted as under:
“Grounds of appeal:
On facts and in law, The learned CIT(A) erred in confirming the action of the learned A.O. in treating the interest income of Rs.62,10,752/- as a revenue receipt taxable as income from other sources in the hands of the appellant company. 2. The learned CIT(A) failed to appreciate that the said interest income of fixed deposits received by the appellant was a capital receipt not chargeable to tax and accordingly, the entire addition made of Rs. 62,10,752/- should have been deleted. 3. The learned CIT(A) erred in not appreciating that the fixed deposits were kept by the appellant company out of the capital contribution received from the Central Govt. and other stake holders and the interest received thereon was to be reduced from the subsequent capital contribution/grants and therefore, the interest earned of Rs.62,10,752/- could not be taxed as an income of the appellant company. 4. Without prejudice to the above grounds, the appellant company submits that the above interest income of Rs.62,10,752/- should have been reduced from the cost of the assets acquired and in no circumstance, the said interest income could be taxed as a revenue receipt of the appellant company.
The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal.
Additional grounds of appeal
The additional grounds are without prejudice to original grounds, 1. As appellant Company is now granted Registration U/s. 12AA and in terms of Provisions of Sec. 12A(2) Registration and Income Computation
3 ITA No.2455/PUN/2016 A.Y.2012-13
provisions being applicable for earlier pending proceedings Appellant, therefore, prays for computation of Income under Sec. 11, 12 of The Income Tax Act, 1961.
As per the understanding and terms of the Government Grants, the unspent grants be invested in fixed deposit. The interest thereon will be part of the grant. Said Interest will not receipt income of the company because of overriding title of the Government same will be part of Capital Receipt & corpus for specified purpose. Appellant prays the said interest should not be considered part of Income of the Company.
Without prejudice to Addl. Ground No. 1 & 2 and if it IS held that provisions of Sec. 11 & 12 are not applicable, even by the virtue of Principals of overriding title said interest correctly arrived at will not be income of the appellant company.
Without prejudice to ground above assessing officer and CIT(A) have erred in restricting the amount of Interest to Rs. 78 Lakhs to the extent adjusted in next grant installment. Appellant prays for exclusion of the amount of Interest as per certificate of the Bank obtained dated 31.03.2012.
Assessing officer has erred and CIT(A) has erred m confirming interest charged u/s.234 B, 234C etc.
Appellant denies liability of Interest u/s. 234A, B, C.
Appellant prays for just and equitable relief.
Appellant prays to add, alter amend, clarify, modify, take additional grounds and /or with the grounds during appellate proceedings.”
Briefly stated relevant facts include that the assessee is a private
company registered u/s.25 of the Companies Act, 1956. The assessee-
company is formed with the objects to research, promote and manufacture
auto products and generate employment in the Aurangabad region. The
assessee company was set up with the grant in aid from the Central
Government to the extent of 85% and the remaining 15% was to be
contributed by the assessee company. To get grant from Central Government
to the extent of 85%, the remaining 15% had to be brought in as advance by
the stake holders. The assessee took four years to generate require
contribution of 15%. During the year, as per the procedure assessee opened
escrow account with the Bank of Maharashtra. The Central Government
released grant in aid with certain conditions attached to it. The said grant of
Central Government was credited to escrow account. During the year under
4 ITA No.2455/PUN/2016 A.Y.2012-13
consideration, assessee made short term fixed deposit and earned interest
income. As per Assessee, the interest receipts accrued on the said income
shall be adjusted against subsequent release of grants in aid by the Central
Government. The total interest accrued on the said FDR worked out to
Rs.1,06,18,614/- after adjustment of sum of Rs.44,07,862/- against
installment of the Government grant and balance interest income earned by
assessee works out at Rs.62,10,752/-(Rs.1,06,18,614/- - Rs.44,07,862/-).
During assessment proceedings, the Assessing Officer proposed to tax
on balance income of Rs.62,10,752/- invoking the ratio laid down by the
Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and
Fertilizers Ltd. Vs. CIT, 227 ITR 172. In reply, the assessee submitted that
grant in aid is the source of FDR and this grant in aid was kept in escrow
account under monitoring of the Central Government. The amount lying to
the credit of the escrow account which includes the interest income can be
utilized only for capital expenditure and therefore, interest income accrued
constitutes capital receipts. The assessee relied on the ratio laid down by
the Hon'ble Supreme of India in the case of CIT Vs. Bokaro Steel Ltd., 236
ITR 315. On considering the same, the Assessing Officer noticed, interest
income did not accrue in the escrow account maintained by the assessee.
Rather, assessee made FDRs through separate transactions and its FDRs
earned interest income. Therefore, this being transaction held during pre
commencement period of the business and the interest accrued on the FDR
is taxable under head “income from other sources”. It is argument of the
Assessing Officer that on interest accrued on FDRs, there is no control of
Central Government and the control is only upon escrow account. The
relevant extract from the assessment order in this regard are extracted as
follows:
5 ITA No.2455/PUN/2016 A.Y.2012-13
“In the light of above, it is apparent clear that in the case of assessee, interest accrued on FDRs made out of fund withdrawn from escrow account, has no link to acquire assets of company. The FDRs are made only to derive interest income out of fund lying in escrow account. Hence, interest income from FDRs is taxable under the head Income from Other Sources. Generally, escrow account is open to establish control over the payments. Lenders require escrow to assure that the payment will be made. On escrow account borrower don’t have access to or control of the money. Interest gained on the money in an escrow account is often a benefit for the lender. However, in the instant case, interest is not accrued in escrow account, but it is accrued from FDRs made out of fund withdrawn from escrow account. Therefore, on interest accrued on FDRs, there is no control of central Government. Further, it is already discussed above that interest accrued from FDRs is chargeable to tax under the head Income from Other sources. However, considering the terms and conditions for the sanction of grant, interest derived on grant which has either adjusted in next release, can be excluded from the income of assessee-company. xxxxxxxxxxxx It is worth to mentioned here that assessee himself has accepted that total grant received as well as capital contribution of shareholders are deposited in escrow account. As per Balance Sheet as on 31.03.2012, total capital contribution towards subscribed equity share and share premium is at Rs.35,10,000/- and Rs.2,70,90,000/-, respectively. Therefore, FDR is made out of government grant as well as capital contribution of share holders, and hence interest comprises of interest on grant as well as interest on capital contribution of share holders. Further, out of interest accrued on FDR upto 31.03.2012, till date a sum of Rs.62,10,752/- is not adjusted against the installment of grant. Assessee company has also failed to give the details of pending installment of grant, if any, against which remaining interest is like to be set off. Therefore, assessee’s balance interest income at Rs.62,10,752/- is treated as its income from other sources and the same is added to the total income of assessee company. Initiate penalty proceedings u/s. 271(1)(C) of the Income Tax Act, 1961 for furnishing of inaccurate particulars of income.”
Aggrieved with the above, assessee filed appeal before CIT(A),
Aurangabad. The CIT(A) examined the whole issue and discussed the
objections of the company, grant in aid given by the Central Government and
series of decisions including Tuticorin Alkali Chemicals and Fertilizers Ltd.
Vs. CIT (supra.) and CIT Vs. Bokaro Steel Ltd (supra.) and held that the
company was formed under the scheme of Industrial Infrastructure Up-
gradation Scheme (IIUS) financed by the Central Government. He also
discussed the manner of earning interest on FDRs. The CIT(A) extracted a
series of decisions and decided the issue against assessee. Relevant para is
extracted as under:
6 ITA No.2455/PUN/2016 A.Y.2012-13
“Accordingly, it was held that the interest income of Rs.6,09,35,544/- earned during the year by the assessee, from the Fixed Deposits made out of borrowed funds was rightly taxed by the AO under the head “ Income from other Sources”. The ITAT in their decision for the earlier year had found that the interest payable on borrowed funds had no connection with the receipt of interest. Respectfully, following the above decisions and facts and circumstances of the present case, I hold that the interest of Rs.62,10,752/- has to be taxed under the head “ income from other sources” and cannot be capitalized as done by the appellant company. The addition made by the AO is sustained and these grounds of appeal are dismissed.”
Aggrieved with the above decision of CIT(A), assessee filed present
appeal before the Tribunal with the grounds extracted above relating to
correctness in confirming addition of Rs.62,10,752/-.
The Ld. Counsel for the assessee submitted that the assessee company
is non-profit organization established with substantial government grant of
establishing Auto cluster to promote competitive capabilities of Auto sector
related small, medium & large enterprises in Marathwada region of
Maharashtra State. Brining our attention to page 3 to 5 of the paper book,
the Ld. Counsel submitted that the same constitutes the order of CIT(A)
(Exemptions), Pune passed u/s.12AA(1)(b) (i) of the Act dated 07.02.2017
and submitted the company is now enjoying the benefit of registration
u/s.12AA(1)(b)(i) of the Act and therefore, assessee raised additional grounds
stating that the computation of income of the assessee should be done u/s.
11 and 12 of the Act. According to his calculation at page 7 onwards of the
paper book, assessee is entitled to the admission of additional grounds as
well as additional evidence and submitted for remitting the issue back to the
file of Assessing officer for fresh adjudication on the issue of computation of
income of assessee in view of the change in facts relating to registration of
the assessee-company u/s. 12AA of the Act. The issue of admitting
additional grounds, the Ld. Counsel submitted that CIT(A) passed impugned
order on 29.07.2016 whereas registration order u/s.12AA(1)(b)(i) of the Act
7 ITA No.2455/PUN/2016 A.Y.2012-13
was passed on 7th February, 2017 subsequent in time. Therefore, this
document has effect on the income computed for the assessment year 2012-
13 and also due to the provision to proviso of section 12A(2) of the Act. He
also relied on the various decisions in this regard i.e. applicability of benefit
u/s. 12A of the Act in assessment year under appeal. The Ld. Counsel
prayed for admission of additional evidence in the interest of the
administration of justice.
On the other hand, the Ld. DR for the Revenue vehemently opposed on
the admission of additional grounds as well as additional evidence furnished
by assessee before us for the first time. On merit of the issue relating to
taxability on interest income, the Ld. DR relied on the decision in the case of
Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs. CIT (supra.).
We have heard both the parties. The solitary issue raised in the appeal
is for admission of additional grounds as well as additional evidence. On
perusal of the document at page 3 to 5 and others of the paper book, we find
that registration u/s. 12AA (1)(b)(i) of the Act was granted to the assessee
company in the month of February, 2017 whereas, order of CIT(A) was
passed on 29.07.2016. Considering the effect of the said registration order as
well as considering the facts that the provision to proviso of sub section (2) of
section 12A of the Act , we find the same constitutes an important paper
relating to assessment year i.e. A.Y. 2012-13 which is under consideration.
Considering the connectivity of issue to the additional evidences, we are of
the opinion that admission of additional grounds as well as additional
evidence is justified considering the set principles of natural justice. We,
accordingly, admit the said additional grounds as well as additional
evidences. Thereafter, we find relevant to remit the issue back to the file of
Assessing Officer for fresh adjudication after granting reasonable opportunity
8 ITA No.2455/PUN/2016 A.Y.2012-13
of being heard to the assessee. The Assessing Officer shall pass a speaking order after considering additional evidence. Assessing Officer shall consider all the judgments cited by the assessee before us on the issue of nature of the interest receipts. Considering the facts of additional evidence and provision to proviso of sub section (2) of Section 12A of the Act, we are of the opinion that all the grounds, additional grounds as well as additional evidence should be restored to the file of Assessing Officer for adjudicating the issue afresh. Accordingly, grounds raised by assessee are allowed for statistical purposes.
In the result, appeal of the assessee is partly allowed for statistical purposes.
Order pronounced on 06th day of June, 2018.
Sd/- (डी.क�णाकरा राव/D. Karunakara Rao) लेखा सद�य / ACCOUNTANT MEMBER पुणे / Pune; �दनांक / Dated : 06th June, 2018. SB आदेश क� ��त�ल�प अ�े�षत / Copy of the Order forwarded to : अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT(Appeals)-1, Aurangabad. 4. The Pr. CIT-1, Aurangabad. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, “एक-सद�य” ब�च, 5. पुणे / DR, ITAT, “SMC” Bench, Pune. गाड� फ़ाइल / Guard File. 6.
// True Copy // आदेशानुसार / BY ORDER,
�नजी स�चव /Private Secretary आयकर अपील�य अ�धकरण, पुणे / ITAT, Pune.