ITO, WD-2(3), KOLKATA, KOLKATA vs. M/S KOLKATA METRO RAIL CORPORATION LTD., KOLKATA

M/s Kolkata Metro Rail Corpn. Ltd. 49/Kol/2016 Assessment Years: 2010-11&2011-12 “1. On the facts and circumstances of the case and in law, Ld. CIT(A) has erred in not considering the interest income as taxable u/s.56 of the Income Tax Act, 1961, as held by Supreme Court of India’s decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. [227 ITR 172(SC)] 2.The CIT(A) has erred in applying the ratio of Supreme Court of India's decision in the cases of Bokaro Steel Ltd. and Karnal Co-operative Sugar Mills Ltd. In those cases deposits are directly linked with purchases of assets intrinsically connected with construction of plant but in this case facts are different. The assessee company had surplus fund out of share capital/share application which were deposited in banks for earning interest income, therefore same is taxable u/s. 56 of the I.T. Act.

The appellant craves leave to add, alter, amend or modify the grounds of appeal during the course of hearing proceedings of this case.” 5.The brief facts qua the issue are that the assessee filed its return of income for the Assessment Year 2010-11 on 29.09.2010, declaring income at Rs. ‘NIL’. The said return was processed u/s 143(1) of the IT Act, 1961. Thereafter, theassessee`s case was selected for scrutiny under section 143(2) of the Act. The assessee Company was engaged in the construction work for metro Rail, Kolkata under East west Metro project in the capacity of joint venture with Govt. of India and Govt. of West Bengal as well. After going through the Balance Sheet, the assessing officer observed that the assessee Company had received interest from banks amounting to Rs.54,86,324/-. The assessee company stated in the notes to accounts that the said interest was capitalized as the principal amount on which the said interest accrued, were obtained from the central Government and State Government of West Bengal for execution of the construction work for Metro Railway. Hence, interest accrued out of investment made in the Banks from the said borrowed Loan, were treated as capital receipts and accordingly accounted for in the accounts of the company. During the assessment proceedings, the assessing officer asked the assessee company, as to why interest income on short-term deposits with Page | 2 M/s Kolkata Metro Rail Corpn. Ltd. 49/Kol/2016 Assessment Years: 2010-11&2011-12 banks should not be taken as revenue receipts and taxed accordingly. In response to the question asked by theAssessing officer, the assessee company had replied that since the principal amount of borrowed loan obtained from Govt. authorities were capitalized hence the interest accrued on investment with Bank deposits out of the said fund were also taken as capital receipts and accordingly accounted for in the accounts. However, the assessing officer rejected the contention of the assessee company and held that the interest so received from Bank deposits should be taken as ‘income from other sources’. Therefore, the AO treated the interest so received from Bank deposits under the head ‘income from other sources’. 6.Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the ld. CIT(A), who has allowed the appeal of the assessee company. The ld CIT(A) observed that it was found to be an admitted fact that the impugned Interest Income was earned on Short-term deposits with Scheduled Banks, and the investments were derived from Central and the Govt. of West Bengal, i.e State Governments funds for infrastructure project i.e. development of East-West Metro Corridor Project undertaken by the assessee company. The ld CIT(A) noted that the assessee company had treated the impugned amount as capital receipts in its audited accounts, as amount received during pre-operative period. The A.O in the assessment under section 143(3) of the Act had treated the interest income as revenue receipts and brought the interest income amounting to Rs.54,86,324/- on short-term bank deposits to tax under the head, “income from other sources”. It was clear from documents on record that as per book results of the assessee company, the interest income was accrued during the pre-operative period. During the appellate proceedings, the assessee company relied on the judgment of Delhi High Court in the case Indian Oil Panipat Power Consortium Ltd. v. ITO (2009) 315 ITR 255 (Del), whereinit was held that Page | 3 M/s Kolkata Metro Rail Corpn. Ltd. 49/Kol/2016 Assessment Years: 2010-11&2011-12 since the incomes were earned in a period from prior to commencement of the business, in view of the matter, the monies which were inducted into joint venture company by the joint venture partners, primarily to purchase land and develop infrastructure, the Court observed that it cannot be held to be not connected with the business, merely because the relevant funds were temporarily parked with the Bank. The Hon`ble court held that the income by way of interest earned on such funds cannot be said to be income from other sources. Since the income were earned in a period prior to the commencement of business, it was in the nature of a capital receipt, and was required to be set off against pre-operative expenses following the principles laid down by the Hon’ble Supreme Court in CIT V. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) and Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167(SC). The Hon'ble Apex Court in the case of Commissioner of Income vs. Bokaro Steel Ltd. 236 ITR 315 (SC), had considered the decision in the case of Challapalli Sugars Ltd vs. CIT (1975) 98 ITR 167 and examined the question of treatment of interest received before commencement of production by a company. It was observed, that the accepted accountancy rule for determining the 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 capitalized 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 of its plant and machinery; such receipts will go to reduce the cost of its assets. These are receipts of capital nature and cannot be taxed as income. During the appellate proceedings, the assessee company cited the judgment in the case of CIT v. Karnataka Urban Infrastructure Development and Finance Corporation (2006) 284 ITR 582 (Kar), wherein it was held that interest on short term deposits with banks made out of funds received from Page | 4 M/s Kolkata Metro Rail Corpn. Ltd. 49/Kol/2016 Assessment Years: 2010-11&2011-12 Central and State Governments for development of infrastructure projects and the implementation of the megacity scheme, was not taxable as income. Based on the above submissions of the assessee company, the ld CIT(A) observed that the impugned interest income earned on short-term bank deposits during pre-commencement period did not partake the nature of revenue receipts. Therefore, the ld CIT(A) held that the interest income amounting to Rs.54,86,324/- on short-term bank deposits, which are linked with the setting up of infrastructure project were to be in the nature of capital receipts and held to be capital receipts in the hands of the assessee company and accordingly he directed the Assessing Officer to delete the addition. 7.Not being satisfied with the order of the ld.CIT(A), the Revenue is in appeal before us.The Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. On the other hand, the ld Counsel for the assessee has reiterated the submissions made before ld CIT(A) and defended the stand taken by the ld CIT(A).