ACIT, NEW DELHI vs. M/S. PORBANDAR SOLAR POWER LTD., NEW DELHI

Date of Hearing : 22-08-2016 Date of Order : 30-08-2016

ORDER PER H.S. SIDHU, J.M.

The Department has filed the Appeal against the impugned order dated 02.9.2015 of Ld. CIT(A)-7, New Delhi pertaining to assessment year 2012-13. The grounds raised in the revenue’s appeal reads as under:-

1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs. 35,43,471/- without appreciating the fact that the Apex Court in the case of CIT vs. Autocast Ltd. (2001)

348 ITR 110 (SC) has held that short term investment of money was income from other sources.

2. The appellant craves to be allowed to add any fresh

grounds of appeal and / or delete or amend any of the grounds of appeal.”

6. On the contrary, Ld. Counsel of the Assessee has relied upon the order of the Ld. CIT(A) and stated that Ld. CIT(A) has passed a well reasoned order which does not need any interference on our part, hence, the same may be upheld and accordingly, the appeal of the Revenue may be dismissed.

7. I have heard both the parties and perused the records, especially the impugned order passed by the Ld. CIT(A). I find that Ld. First Appellate Authority has elaborately discussed the issue in dispute by considering the submissions of the assessee and adjudicated the issue as under vide pages 7 to 11 of the impugned order. The said relevant paras are reproduced as under:-

“3.3. I have carefully considered the submissions of the AR of the appellant and the order passed by the AO.

The AO has brought to tax of interest income of Rs.35,43,471/- earned by the appellant on the fixed deposits of Rs.7,5O,OO,OOO/- deposited as margin money for issue of performance security for fulfillment of obligation under power purchase agreement with Gujarat Urja Vikas Nigam Ltd. It is the case of the AO that the said FDRs had been made out surplus fund available to the appellant and even if the FDRs may be Inextricably with the business of the appellant the interest income arising from it is taxable as per the provisions of the Act. The appellant has contended that 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. As a necessary corollary 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. The AO has relied on the ratio of Tuticorin Alkali Chemicals and Fertilizers Ltd. VS. CIT (1997) 227 ITR 172. The AO has held that short term deposits has been made by the appellant out of surplus funds which were not immediately required and therefore parked in FDRs. It is however noted that in the previous year, the audited financials reflect that the appellant had "Current Liabilities” of Rs.13,23,82,781/- and a corresponding "Cash and Bank Balance" of Rs.36,92,417/-. Further, during the period under consideration, the appellant has raised long term borrowings in form of term loans Porbandar Solar Power Ltd.lA. Y. 2012-13 from banks amounting to Rs.75,93,61,471/- and has outstanding current liabilities of Rs.97,12,39,602/- as on 31.03.2012. It cannot be conclusively said that there was availability of surplus fund for the purpose of investment into FDRs for earning interest. In the case of Tuticorin Alkali Chemicals and. Fertilizers Ltd. vs. CIT (supra), the company invested for the purpose of earning interest.

In the case of the appellant however the amount was invested in FDRs as margin money for issue of bank guarantee to be furnished to Gujarat Urja Vikas Ltd. as performance security. This was prerequisite that the appellant was obliged to provide under the power purchase agreement with Gujarat, Urja Vikas Nigam Ltd. The interest earned on the FDRs was clearly inextricably linked with the process of setting up of plant and machinery by the appellant company.

Furnishing of the performance guarantee and the execution of the project by the appellant company were inextricably linked events. In the case of Commissioner of Income-tax v. Karnal Co-operative Sugar Mills Ltd., [2000] 243 ITR 2 11 (SC) 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 had been earned. In that factual backdrop, the Apex Court ruled as under:

"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 and Fertilizers

Limited v. CIT [1997] 227 ITR 172, will not be attracted. The more appropriate decision in the factual situation in the present case is in CIT v.

Bokaro Steel Ltd. [1999J 236 ITR 315 (SC).”

3.4. The Hon'ble Supreme Court in the case of CIT vs. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) had decided the issue which has been relied upon by the AR. The head note of the judgement is reproduced as under:

"In case money is borrowed by a 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 of the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipt will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income.”

3.5 The Apex Court had ruled as under:

We will take the first three heads under which the assessee has received certain amounts. These are, the 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. The activities of the assessee in connection with all these three receipts are directly connected with or are incident 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 for the contractors, the assessee permitted the contractors to use the premises of the 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 ha e been reflected in the charges of the contractors for the construction work. Instead, the a1sessee has provided these facilities. The same is true of the hire charges for plant and machinery which was given by the assessee to the contractors 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 contractors 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 hitch 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.

In the case of Addl. CIT v. Indian Drugs and Pharmaceuticals Ltd. [1983] 141 ITR 134, the Delhi High Court considered a case where the work of construction of the factory of the assessee was in progress and production had not commenced. Receipts from sale of tender forms and supply of water and electricity to, the contractors engaged in construction as also receipts on account of sale of stones, boulders, grass and trees were held to be receipts not from independent sources but were considered as inextricably linked with the process of setting up of business. These were directly related to the, capital structure of business and were held to be capital in nature. We agree with this view taken by the Delhi High Court.

The appellant, however, relied upon the decision of this court in Tutlcorin Alkali Chemicals and Fertilizers Ltd. v.

CIT [19971 227 ITR 172. That case dealt with the question whether investment of borrowed funds prior to commencement of business, resulting in earning of interest by the assessee would amount to the assessee earning ,my income.

This court held that if a person harrows money far business purposes, but utilises that money to earn interest so generated will be his income. This income can be utilized by the assessee whichever way he likes.

Merely because he utilized 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 the 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 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. 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-Income tax- Act. This court also emphasized the fact that the company was not bound to utilize the interest so earned to adjust it against the interest paid on borrowed capita. 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 utilization of various assets of the company, and the payments received for such utilization are indirectly 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 [1975J 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 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 seen 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.

The same reasoning would apply to royalty received by the assessee-company for stones, etc., excavated from the assessee-company's land. The land had been allowed to be utilized by the contractors for the purpose of excavating stones to be used in the construction work of the 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"…….

3.6 In my view the case of the appellant is covered by the ratio of the judgments referred above. The deposit made by the appellant in FDR as margin money for issue of performance security was not a case of parking idle or surplus funds but a critical precondition to meet its obligation under the power purchase agreement with Gujarat Urja Vikas Nigam Ltd. The earning of interest on the said FDR was therefore only incidental and not the cardinal motive of the transaction.

Interest income of Rs. 35,43,471/- being inextricably linked with the activity of the setting up of the business of the appellant is treated as capital receipt. The treatment of interest income of Rs. 35,43,471/- as income from the other sources as held by the AO is not sustainable and is therefore, deleted.”

7.1 After going through the findings of the Ld.CIT(A), as aforesaid, I find that Ld. CIT(A) has decided the issue in favour of the assessee and deleted the addition in dispute by respectfully follow the order of the Hon’ble Supreme Court of India in the cases of CIT vs. Karnal Cooperative Sugar Mills Ltd. (2000) 243 ITR 2 (SC) and CIT vs. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC).

Keeping in view of the facts and circumstances as explained and respectfully follow the precedents of the Hon’ble Supreme Court as cited in the Ld. CIT(A)’s impugned order, as aforesaid, I do not find any infirmity in the order of the Ld. CIT(A), hence, I uphold the same and dismiss the ground raised by the Revenue.

Order pronounced in the Open Court on 30/08/2016.