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Income Tax Appellate Tribunal, “H” BENCH, MUMBAI
Before: SHRI AMIT SHUKLA, JM & SHRI RAJESH KUMAR, AM
O R D E R PER RAJESH KUMAR, A. M: This is an appeal filed by the assessee and is directed against the order of the ld.CIT(A), Mumbai, dated25.2.2015 for the assessment year 2010-11. 2. The first ground raised
by the assessee is against upholding the order of assessing officer as regards interest income from securities deposited with Paschim Gujarat Vij Co.Ltd (hereinafter referred to as PGVCL) for availing electricity for the purposes of construction of power plant as revenue in nature chargeable to tax under the head income from other sources.
3. Brief facts of the case are the assessee is a special purpose vehicle engaged in the construction of 400 MW power plant at Mundra, Kutch, Gujarat and it has received interest of Rs.88,72,800/- from PGVCL which was duly disclosed in the profit and loss account under the head income from other sources. However, at the time of filing the return of income, the said amount was excluded from the head “income from other sources” on the ground that the income was incidental to construction of plant and has to be credited in the capital work in progress in view of decision of the Hon‟ble Supreme Court in the case of Commissioner of Income-tax v. Bokaro Steel Ltd ., [1999] 236 ITR 315 (SC). The AO vide order sheet entry dated 27.02.2013 asked the assessee as to why the income received from PGVCL was not offered for taxation and also to explain the interest expenses claimed and the nexus between the borrowed funds and the interest earned thereon and whether such expenditure was laid out or expended wholly and exclusively for the purpose of making or earning such income. The assessee vide letter dated 25.10.2012 submitted that the said interest was received from PGVCL on security deposit of Rs.14.78 crores which was deposited with the said company for the purpose of availing the electricity to be used in the construction of plant and was rightly credited under the head work-in-progress following the ratio laid in Hon‟ble Supreme Court in the case of Bokaro Steel Ltd (supra). The assessee also relied on some other decisions namely Karnal Co-op Sugar Mills Ltd V/s CIT (2001) 118 Taxman 489(SC), Indian Oil Panipal Power Consortium Ltd V/s ITO (2009) 315 ITR 255 (Del HC) and NTPC Sail Power Company(P) Ltd V/s CIT (2012) 25 taxman 401 as incorporated in para 5 of the assessment order. The AO rejected the contentions raised by the assessee during the assessment proceedings and treated the said interest of Rs.88,72,800/- from PGVCL as the income under the head “Income from other sources” and taxed accordingly by framing the assessment u/s 143(3) by relying on the following decisions: i) South India Shipping Corp. Ltd V/s CIT -240 ITR 24(Mad); ii) CIT V/s Delhi Brass and Metal Works Ltd 313 ITR 352; iii) CIT V/s Dr.V.P.Gopinathan iv) Tuticorin Alkali Chemicals and Fertilizers Ltd V/s CIT 227 ITR 172 (SC); v) Bongaigaon Refinery and Petrochemicals Ltd V/s CIT 251 ITR 329 (SC)
The FAA also dismissed the appeal of the assessee after considering the submissions and contentions as raised during the appellate proceedings by observing and holding as under: “4.3, I have carefully considered the facts stated by the A.O. in the impugned order as well as the oral and written submissions of the learned AR of the appellant, including case-laws and orders of the appellate authorities. It is , undisputed that the business had not commenced during the year and that the appellant had started the construction activities for ultra-mega power project. It is undisputed that the appellant had borrowed funds, for the purpose of erection, construction and setting up of the said power plant. It is also undisputed that the appellant had received interest amounting to RS.88,72,800/- from Paschim Gujarat Vig. Company Ltd (PGVCL) on security deposit placed with it. According to the Rs.14.7 crore and the income was incidental to construction of the power plant and, therefore, credited to Capital work-in-Progress for tax purposes. According to the appellant, as per the decision of the Hon'ble Supreme Court in the case of CIT vs. Bokaro Steel Limited, the interest income is a capital receipt and claimed it to be not taxable as an income. By pith and substance. in spite of huge interest income of Rs.88,72,800/-, according to the appellant. the same, being capital receipt, is not taxable. Since heavy reliance is placed on decision of the Hon'ble Apex Court in the case of Bokaro Steel Limited {and a/se Tuticorin Alkali Chemicals and Fertilizers} (refer para 2.7 of Ld. A.R. 's submission) it is necessary to examine the relevant facts of that case. It is settled by judicial pronouncements of the Hon'ble Apex Court that neither it is desirable nor permissible to pick out a word or sentence from the judgment of the, Hon'ble Apex Court, divorced from the context of question under consideration and treat to be the complete law declared by the Hon‟ble Apex Court. Therefore, it is necessary to analyze the facts of that case. In that case, that the assessee had entered into supplementary agreements with contractors under which the assessee had made certain advances to the contractors on interest to enable them to execute large scale construction work smoothly for assessee company. These arrangements primarily meant for payment in advance of amounts of the contractors' bills for which the assessee company had charged interest and this interest income was later on adjusted against the' dues of the contractors. At the Cost of repetition. it is worth to reiterate that the said interest receipts were adjusted against the charges payable to the contractors and had gone to reduce the cost of construction and. therefore, in light of such peculiar facts of that case, the Hon'ble Apex Court held the same as capital receipts and not income of the assessee from any independent source. Such peculiar facts as existed in that case did not match with the facts of the instant case. Here, the instant appellant had placed security deposit to avail of electricity from the Electricity Company and for which the appellant had received interest income. Neither, the electricity company was involved in construction of power plant as a contractor nor the amount given by the electricity company as interest was adjusted against any payments to be made to the electricity company. At the cost of repetition, for better appreciation of the facts relied upon by the appellant, paras 5 to 7 of the decision of the Hon'ble Apex Court in the case of Bokaro Steel Limited are reproduced herein under: “5. 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 incidental 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 of the contractor, the assessee permitted the contractor 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 arrange- ments and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee 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 of 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 hitches 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.
6. ……………..
7. 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] 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. (emphasis supplied) 4.3.1 The underlined findings of the Hon'ble Apex Court in the aforesaid case clearly spell out the distinguishing facts of that case as compared to the present case. In no way, facts of the present case can be equated with those the case relied upon by the appellant. To be precise, in the case of Bokaro Steel Limited, the advances were given to contractors to enable him to complete the Construction work and the interest earned on the said advances was adjusted against the payments to be made to the said contractors. In that case, the assessee was not entitled to utilize interest income in any manner at its own will. Herein, in the instant case, it is not so. Firstly, the interest on security deposit itself is a separate and independent source of income and the appellant is free to utilize the some as per its free will. Moreover, the assessee shall earn interest every year till. security deposir is withdrawn or refunded, even though business is commenced in any subsequent year. An advance to the contractor engaged in construction of plant, is quire different from security deposit placed with the company with the electricity company with regard to nature of instrument, scope, extent and its utilization. Neither it is adjusted against any payment(s) made to the Electricity Company nor is there any compulsion to utilize the same only for the purpose of construction or erection of power plant or project cost. On the contrary, the facts of the instant case are more resembling with the facts involved in the case of Pandian Chemicals Limited (262 ITR 278 SC), wherein the Hon‟ble Apex Court held as under :
Section 80HH of the Income-tax Act, 1961 - Deductions - Profits and gains from hotels or industrial undertakings, etc., in backward areas - Assessment year 1984-85 - Whether words 'derived from' in section 80HH must be understood as something which has direct or immediate nexus with an industrial undertaking - Held, yes - Whether derivation of interest or profits on deposit with Electricity Board could not be said to be flowing directly from industrial undertaking and, therefore, deduction for same could not be allowed - Held, yes FACTS The question to be decided in the instant case was as to whether interest on deposits with Electricity Board should be treated as income derived by the industrial undertaking for the purpose of section 80HH ?
HELD It is clear that the words 'derived from' in section 80HH must be understood as something which has direct or immediate nexus with an industrial undertaking.
Although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking.The derivation of profits on the deposit made with Electricity Board cannot be said to flow directly from the industrial undertaking itself. [Para 6] 4.3.2 The Hon‟ble Madras High Court in above mentioned case of Pandian Chemicals Limited (which is confirmed by Hon‟ble Supreme Court discussed as above ) had held as under (233 ITR 497 MAD) “A study of various case laws clearly indicates that a restricted meaning is given when the Legislature uses the expression, "derived from" in section 80HH. Though the assessee had necessarily to make the deposit with the Electricity Board for running the industry and the power supply would not be made without the deposit in favour of the Electricity Board, the income derived from the deposit with the Electricity Board could not be said to have been derived from the industrial undertaking. The intermediate source of interest was the deposit itself, and the effective source of the genealogy of the source of the interest income was the deposit and not business, as the industrial undertaking was removed by one step from the source of income for the interest.” (emphasis supplied) 4.3.3 In my humble view, the facts of the instant case are the same and identical to those of Pandian Chemicals Limited as decided by the Hon‟ble Madras High Court and subsequently approved by the Hon'ble Apex Court. Both the Hon'ble Courts have held that interest income is taxable i.e. revenue in nature. Therefore I find n0 reason to treat the interest income received by the appellant during the year from the electricity company on the security deposits made with the said company as capital receipt not liable to tax. 4.3.4 Apart from these two judicial pronouncements, there are other several judgements which have been discussed while adjudicating upon the 1st ground of appeal
, clearly state, that such interest income cannot be reduced from the overall project cost and liable to be assessed independently and separately. At the cost of repetition some of those judgement are reproduced hereunder :
1. CIT v. Autokast Ltd.*(2001) 116 taxman 244 (SC)
4 of the Income-tax Act, 1961 - Income - Assessable as - Assessment year 1985-86 - Assessee borrowed certain amount from IDBI and deposited same in banks till it was used either in purchase of plant and machinery or in installing them or in running establishment - Assessee's case was that interest earned on such deposits did not constitute assessee's income but was going to reduce overall cost of project - Assessing Officer treated such interest as income of assessee from other sources - Whether interest income was assessable to tax in assessee's hands - Held, yes”
Tuticorin Alkali Chemicals & Fertilizers Ltd. V/s CIT (1997) 93 Taxman 502 (SC) “Section 56 of the Income-tax Act, 1961 - Income from other sources - Chargeable as - Assessment year 1980-81 - Whether interest earned on short-term investment of funds borrowed for setting-up of factory during construction of factory before commencement of business has to be assessed as income from other sources and it cannot be said that interest income is not taxable on ground that it would go to reduce interest on borrowed amount which would be capitalised - Held, yes” It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilising the borrowed funds as its income The interest earned by the assessee was clearly its income and unless it could be shown that any provision like section 10 had exempted it from tax, it will be taxable. The fact that the source of income was borrowed money did not detract any thing from the revenue character of the receipt. The question of adjustment of interest payable by the company against the interest earned by it will depend upon the provisions of the Act. The expenditure would have been deductible as incurred for the purpose of business if the assessee's business had commenced. But that was not the case in the instant case. The assessee may be entitled to capitalise the interest payable by it. But what the assessee could not claim was adjustment of this expenditure against interest assessable under section 56. Section 57 sets out in its clauses (i) to (iii) the expenditures which are allowable as deduction from income assessable under section 56. It is not the case of the assessee that the interest payable by it on term loans is allowable as deduction under section 57. There are specific provisions in the Act for setting off of loss from one source against income from another source under the same head of income (section 70), as well as setting off of loss from one head against income from another (section 71). In the facts of this case, the company could not claim any relief since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting year. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business could not be allowed as deduction, nor could it be adjusted against any other income under any other head. Similarly, any income from a non-business source could not be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plants and machineries even before commencement of business of the assessee. Further, no adjustment could be allowed except in accordance with the provisions of the Act. However desirable it may be, from the point of view of equity, this adjustment cannot be made unless the law specifically permits such adjustment. Further, any argument based on accountancy practice has little merit if such practice cannot be justified by any provision of the statute or is contrary to it.
The company was at liberty to use the interest income as it liked it was under no obligation to utilise this interest income to reduce its liability to pay interest to its creditors. It could re-invest the interest income in land or shares, it could purchase securities, it could buy house property, it could also setup another line of business, it might even pay dividends out of this income to its shareholders. There was no overriding title of anybody diverting the income at source to pay the amount to the creditors of the company. It is well-settled that tax is attracted at the point when the income is earned Taxability of income is not dependent upon its destination or the manner of its utilization. It has to be seen whether at the point of accrual, the amount is of the revenue nature and if so, the amount will have to be taxed.
CIT V/s Coromandal Cements Ltd.* [1998] 234 ITR 412 (SC) The Hon‟ble Apex Court reversed the decision of the Hon‟ble High Court of Andhra Pradesh (234 ITR 413) holding the interest received on short term bank deposits during preproduction stage could not be treated as “Income from other sources” and should go towards project cost”
4. CIT V/s Manglam Cement Ltd. [1995] 81 TAXMAN 397 (RAJ.)
Section 56 of the Income-tax Act, 1961 - Income from other sources - Chargeable as - Assessment year 1979-80 - Assessee was in process of setting up business of manufacturing cement - It borrowed money to purchase capital equipments and for setting up its business - It deposited share application money received by it and part of borrowed money with a bank as short-term deposit and earned interest - Deducting interest earned on deposit from interest paid on borrowings assessee treated balance interest paid as part of capital, cost of building, plant and machinery - Assessing Officer held that interest 56 and same could not be deducted from interest paid – as part of capital , cost of building plant and machinery-AO held that interest received was taxable under section 56 and same could not be deducted from interest paid- Commissioner affirmed this order. - Tribunal held that interest received was not taxable under section 56 and was to be reduced from interest payment while capitalising various expenditures to capital account - Whether interest received by assessee was taxable under section 56 - Held, yes - Whether interest received could be deducted from interest paid while borrowing was for purpose of construction and had no relation with earning of interest - Held, no - Whether, though interest received on short-term deposit goes to reduce burden of interest payable, there being no provision under Act under which income received on short-term deposits is liable for deduction or adjustment against interest payable on borrowing, no deduction under section 57 could be allowed - Held, yes
CIT V/s Kisan Sahkari Chini Mills Ltd [2006] 280 ITR 617 (ALL.) “Section 56, read with section 4, of the Income-tax Act, 1961 - Income from other sources - Chargeable as - Assessment year 1984-85 – Assessee, a co-operative society, commenced erection of building and installation of machinery for sugar mills and obtained a loan from Industrial Finance Corporation of India (IFCI) under an agreement which provided that amount was to be kept in a special bank account with a scheduled bank duly approved by IFCI – Assessee in compliance with terms of loan agreement kept money in loan account in said special bank account on account of which it earned interest from bank - Whether interest so earned by assessee on loan amount during stage of construction and installation of machinery was not a capital receipt and accordingly liable to tax – Held, yes
6. CIT V/s Indo Gulf Fertilizer & Chemical Corpn. Ltd. [2005] 149 TAXMAN 603 (ALL.)
“Section 56 of the Income-tax Act, 1961 - Income from other sources - Chargeable as - Assessment year 1988-89 - Assessee-company received loan from financial institutions for setting up its fertilizer plant with stipulation that any interest earned on such amount not utilized temporarily would go to reduce liability of loan - Due to certain unexpected delay, amount of loan received remained lying with bank and interest was received by assessee on those deposits - Besides there were some miscellaneous receipts - Whether such interest Held, yes
7. CIT V/s Manipur Spinning Mills Corpn. Ltd. [1997] 90 Taxman 457 (Gauhati)
Section 56 of the Income-tax Act, 1961 - Income from other sources - Chargeable as - Assessment years 1982-83 to 1985-86 - Assessee, a Government undertaking, claimed that amount of interest income received by it should be set off against interest payments and balance alone capitalised - Whether interest incurred before commencement of production on borrowed money had to be capitalised and added to cost of assets created as a result of such expenditure, and, therefore, interest income had to be taxed as income from other sources - Held, yes
8. CIT V/s Mimraj Manmal Ruia [1972] 84 ITR 673 (BOM.)
Section 57 of the Income-tax Act, 1961 [Corresponding to section 12(2) of the Indian Income-tax Act, 1922] – Income from other sources – Deductions – Assessment year 1959-60 – Assessee, a speculator in cotton and shares, also derived income from salary, properties and dividends – Whether assessee was not entitled to deduction under section 12(2) of 1922 Act in respect of overdraft interest paid to bank from his dividend income as assessee could not establish that borrowing by way of overdraft from bank was for purpose of acquiring shares and earning dividend income – Held, yes – Whether where existence of a connection between amount borrowed and shares purchased by assessee would not be sufficient to attract application of section 12(2) of 1922 Act – Held, yes
CIT V/s United Wire Ropes Ltd [1980] 121 ITR 762 (BOM.)
Section 57 of the Income-tax Act, 1961 – Income from other sources – Deductions – Assessment year 1963-64 – Assessee- company received interest on amounts kept as short-term deposits with banks and said interest was shown as „income from other sources‟ – Those amounts were raised as share capital and assessee wanted to make payment for import of plant and machinery but due to restrictions by Government on remittance abroad, payments for import of plant machinery could not be made and, hence, amounts were kept in short-term deposits – Assessee also paid interest in Whether transactions of earning interest and paying interest by assessee were so integrated so as to be called one single composite transaction – Held, no – Whether, therefore, interest paid was not entitled to set off against interest earned by assessee – Held, yes
10. Commissioner of Income-tax v. Delhi Brass & Metal Works Ltd.[2009] 178 Taxman 215 (Delhi)
Assessing Officer held that income received from bank had to be treated as income under head 'Income from other sources' as it was not income which had direct nexus with exports made by assessee and, hence, could not be held as income derived from export of goods or merchandise as contemplated in section 80HHC - On appeal, Commissioner (Appeals) sustained view of Assessing Officer - On issue of 'netting of interest', Commissioner (Appeals) held that same could not be allowed - Tribunal, however, allowed assessee's claim in said respect - Whether in view of decision in CIT v. Sri Ram Honda Power Equip [2007] 289 ITR 475, assessee could not be allowed to adjust interest paid to bank on overdraft facility against interest received by it on fixed deposits kept with bank as this was not expenditure laid out 'wholly and exclusively' for purpose of earning interest on fixed deposits - Held, yes
Saraf Textile Industries v/s CIT (1996) 85 Taxman 146 (Del)
Section 56, read with section 35D of the Income-tax Act, 1961 - Income from other sources - Chargeable as - Assessment year 1983- 84 - Assessee-company earned interest on bank deposits during period of construction of its factory building and before commencement of commercial production - It also incurred pre- operative expenses which included expenditure on project report covered under section 35D - Whether Tribunal was right in holding that interest was taxable as 'income from other sources' and could not be reduced from capital expenditure - Held, yes - Whether Tribunal was also right in not adjusting project report expenses against interest received on ground that expenditure claimed was specifically allowable under section 35D - Held, yes
12. Positive Packaging Industries Ltd. v. ITO [2010] 125 ITD 212 (MUM.) “Section 56 of the Income-tax Act, 1961 - Income from other sources - Chargeable as - Assessment year 1996-97 - Assessee-company was It applied for a loan from IDBI - In course of assessment, Assessing Officer noticed that assessee had earned interest on fixed deposits - Assessee‟s case was that interest accrued on deposits which had been kept with IDBI as a pre-requirement for obtaining a loan - Assessing Officer rejected assessee‟s claim and brought interest income to tax under head „Income from other sources‟ - Commissioner (Appeals) upheld assessment order - On instant appeal, it was seen that as per terms of agreement entered into between assessee and IDBI, assessee was required to bring promoters contribution and unsecured loan in its business and these would remain in business till institutional loans were fully repaid - However, assessee was not at all required to deposit entire amount with IDBI in fixed deposits - Whether, on facts, revenue authorities rightly rejected assessee's claim and, therefore, impugned order passed by them was to be upheld - Held, yes” 4.3.5 – The issue3 in dispute has another dimension too, As mentioned by the A.O the appellant had claim d credit for TDS on the said interest income. In other words, the appellant is claiming refund of TDS and when the- A.O. asked for taxation of the said income, it claimed that the said income is not taxable being capital receipt. This stand is self contradictory. Section 198 & Rule 37BA(3A) of the Act clearly treat such incomes 'as the income liable to be taxed. For ease of reference, the provisions of Sections 198 are reproduced hereunder : “198. All sums deducted in accordance with the foregoing provisions of this Chapter] shall for the purpose of computing the income of an assessee, be deemed to be income received: (emphasis supplied) [Provided that the sum being the tax paid, under sub-section (1A) of section 192 for the purpose of' computing the income of an assessee, shall not be deemed to be income received]" Apart from clear-cut provisions of Section 198 of the Act as reproduced hereinabove, as per Rule 37BA(3A) of the Income Tax Rules, 1962 read with Section 199 of the Act, credit for TDS shall be given for the Assessment Year for which such income is assessable in the hands of assessee. Thus, combined reading of both the provisions discussed hereinabove clearly stipulate that the interest income is assessable in the hands of the appellant in the year under appeal. 4.3.6 Moreover, as mentioned by the AO, the said interest income formed part of other income in the Profit & Loss Account of the appellant. If it is so, the appellant itself ought to treat it as "Income from other sources", more so when the appellant had claimed credit for TDS.
In view of the above cited binding Judicial pronouncements of the Hon'ble Apex Court/Hon‟ble High Courts vis-à-vis the relevant facts of the case discussed hereto fore and also having regard to the plain and clear provisions of section 56 r.w.s 57(iii) of the Act and also provisions of section 198 and Rule 37BA(3A). I have no alternative, save and except confirming he action of the AO and hence no interference is called for and in result, the same stands confirmed. Thus, ground no.2 of appeal stands dismissed.”
5. The ld. AR vehemently submitted before us that the ld. CIT(A) has erred in law and on facts by dismissing the appeal of the assessee by not appreciating the facts in correct perspective . The ld. AR argued that the assessee has deposited Rs.14.78 crores with PGVCL for the purpose of availing the electricity for the construction of power plant and therefore it was purely security deposits for the purposes of capital works and by no stretch of imagination could be treated as revenue in nature. The ld. AR argued that the assessee is a special purpose vehicle and was doing construction of 4000 MW power plant at Mundra, Kutch, Gujarat and in order to take the electricity from Paschim Gujarat Vij Co.Ltd deposited a security deposit of Rs.14.78 crores as per the condition for supply of electricity and therefore the interest received on the said security deposit was in the nature of capital receipt and should not be brought to tax under the head income from other sources while re-iterating his arguments and submissions as made before the FAA including the decisions referred before the FAA. Lastly the ld AR prayed that the in view of the ratio laid down in Bakaro Steel Ltd. (supra) , the appeal of the assessee should be allowed.
On the other hand, the ld. DR heavily relied upon the orders of authorities below and submitted that the interest received by the assessee on the said security deposit with PGVCL was revenue in nature and was rightly brought to tax by the AO under the head income from other sources. The ld. DR further submitted that the decisions as relied upon by the ld.AR were distinguishable on facts as in the case of Bokaro Steel Ltd (supra), the advances were given to the contractors to enable them to complete the construction of work Plant and interest earned on the said advances were adjusted against the payment to be made to the contractors and the interest income on the said advances were not available at the discretion of the assessee. Whereas in the present case, the interest on security deposits can be utilized by the assessee on it own freewill and the assessee would continue to receive the income on the said security deposit till the time it is refunded to the assessee even though the assessee commenced is business in the subsequent year. In the case of CIT V/s Karnal Co-operative Sugar Mills Ltd (2000) 243 ITR 2(SC), the amount were deposited to open letter of credit for the purchase of machinery which was required for setting up the plant whereas in the present case, the money deposited as security deposits and therefore the facts of this case are distinguishable on facts and not applicable to the present case.
We have heard the rival contentions and perused the material placed before us including the orders of authorities below as well as the citations relied upon by the assessee. It is an undisputed fact that assessee has given interest bearing security to PGVCL in order to avail electricity for the purpose of construction of plant at Mundra in Kutch, Gujarat. During the year the assessee received interest on the said security deposits and credited the same to the profit and loss account but while filing the return of income the same was withdrawn and reduced from the income and was credited to capital-work- in- progress whereas on the other hand the AO treated the same income from other sources and accordingly brought to tax. In the first appellate proceeding, the ld.CIT(A) upheld the finding of the AO on this issue. The assessee is engaged in the business of special purpose vehicle and during the assessee was engaged in the construction of electricity plant at Mundra, Gujarat and he security deposit was given purely to avail the electricity for the purpose of construction of plant which by no stretch of imagination would be treated as revenue in nature as the sole purpose behind the advancing security was to avail electricity for the construction purpose and therefore inextricably linked with the construction of the plant. We also find that the similar issue arose in the assessment year 2009-10 and the FAA decided the issue in favour of the assessee and the appeal filed by the revenue before the ITAT was also dismissed by the Tribunal. Thus, it is clear from para 12 of the said order Rs.14.78 crores placed as security deposit with PGVCL, which was decided in favour of the assessee by the Bench in (AY:2009-2010) and others by dismissing the appeal of the revenue.
In the case of Bokaro Steel Ltd (supra), the Hon‟ble Supreme Court has held that the interest from advances paid to contractor by the assessee for the purpose of facilitating the work of construction is incidental to the work of construction of plant undertaken by the assessee and receipt accruing from the said advances was held to be capital receipt and not income of the assessee from other independent sources.
9. In the case of Karnal Co-operative Sugar Mills Ltd (supra) the Hon‟ble Supreme Court held that money deposited to open letter of credit for purchase of machinery which was required for setting up of its plant and interest accruing therefrom is of capital nature as the deposits was incidental to the acquisition of assets for setting up of the plant and machinery and as results the interest was of capital nature which would go to reduce the cost of assets. In the present case before us, the deposit has been given by the assessee in order to avail electricity so that the construction of the project is facilitated. In our opinion, the assessee has advanced money which is connected to construction of plant and therefore, we are not in agreement with the conclusion drawn by the ld.CIT(A). Therefore, respectfully following the ratio laid down by the Hon‟ble Supreme Court in various case law cited above we set aside the order of the ld. CIT(A) and direct the AO to treat the interest as capital receipt by deleting the disallowance. This ground is allowed.
The second issue raised by the assessee pertains to the confirmation by FAA the disallowance of interest expenditure on the borrowings claimed as deduction against the interest income of Rs.18,26,501/- from the fixed deposits.
11. At the outset, the ld. AR submitted that the issue raised by the assessee in this ground stands covered in favour of the assessee by the decision of the Co-ordinate Bench of the Tribunal in assessee‟s own case in (AY:2009-2010) order dated 22.8.2014. The ld. AR prayed before the Bench that by following the decision of the Tribunal in assessee‟s own case for the earlier year, the issue raised in the present appeal also be decided in that line.
On the other hand, the ld. DR heavily relied upon the decisions of the lower authorities. 13. We find that the issue raised in the present case and the case law in ITA No.1043/Mum/2013(supra) as relied upon by the assessee is identical. For the sake of brevity, we reproduce the relevant portion of the order as under : “8. We have heard both the parties and perused the orders of the Revenue Authorities as well as the relevant material placed before us. On hearing both the parties, we are of the opinion that the issue of source of funds was deliberated by the AO / CIT (A), which is now made clear by the Ld Counsel before us. All the papers are found in the form of paper book. We find that there is a direct nexus of Fixed Deposits in question partly. The interest paid on a loan taken to avoid premature encashment of the Fixed Deposit is deductible against the interest earned on the Fixed Deposit as held by the ITAT, Agra Bench in the case of Raj Kumari Agarwal vs. DCIT vide ITA No.176/Agra/2013 (AY 2008-2009), dated 18.7.2014. Having decided on the issue of nexus of funds and the allowability of the interest expenses against the interest income, the remaining issue is about the interest rate of 7.81% applied by the AO in determining the interest expenses. In our opinion, this requires revisit of the issue to the file of the AO. Assessee must demonstrate before the AO the exact account of interest expenses relatable to the interest income in question. If necessary, AO shall admit the letters from the bank, if any, in the interest of justice. It is the submission of the Ld Counsel that the purpose of funds does not determine the allowability of the claim made u/s 57(iii) of the Act. The decisions relied upon by the Ld Counsel in this regard should be examined by the AO in the remand proceedings. AO shall grant a reasonable opportunity of being heard to the assessee. Accordingly, grounds raised by the assessee are allowed for statistical purposes” We further find that in the set aside proceeding , the AO allowed the claim of the assessee and now issue stands settled in favour of the assessee. The facts of the present case are materially same as in the case referred to above and therefore following the same, we set aside the order of the ld. CIT(A) and direct the AO to allow expenses. This ground of assessee is also allowed. In the result, the appeal of the assessee is allowed. 14.