IL & FS TAMIL NADU POWER COMPANY LIMITED,CHENNAI vs. ACIT, CHENNAI

आदेश / O R D E R

1.1 The Appellant was incorporated for setting up a mega power plant at Cuddalore. During the subject AY 2010-11, the Appellant was in the process of setting up the mega power plant at Cuddalore.

1.2 The Appellant had entered into a Rupee Loan Agreement with Consortium of Banks to raise funds for the project. The said Agreement mandated a precondition for funding the project. Per Clause 5.2(a) of the Agreement, Appellant was mandated to infuse equity share capital of 25% of the total equity and as per Clause 5.2(g) of the Agreement, the Appellant was also mandated to acquire minimum land required for commencement of construction activity of the power project as a condition precedent to initial disbursement of loan.

1.3 For this purpose, the Appellant had raised share application money amounting to RS.89 Crores during the subject AY 2010-11 for the purpose of purchase of land for setting up the power project and also to meet the aforesaid precondition mandated in the consortium agreement.

1.4 The Appellant submits that it required huge extent of land (around 1180 acres). However the same was not available with one vendor/landlord. Therefore, the Appellant had to acquire lands from numerous vendors/landlords at different points in time. During the subject AY 2010-11, the Appellant acquired 218.4325 acres of land. Later the Appellant consolidated al lands acquired for setting up the mega power plant.

1.5 Since the process of acquisition of land was taking considerable time, a portion of the said share application money amounting to RS.51.25 Crores was temporarily kept in short term deposits to be utilized for purchase of land as and when necessary. The Appellant submits that a portion of advance was kept in deposits so that liquidity was ensured and money would be easily available for the purchase of land for the power project.

1.6 The share application money received was interest free and it was infused only to meet the mandatory precondition for setting up the project. Therefore, the interest received is inextricably and directly connected with setting up of power project and as such the same should go to reduce cost of the power project.

1.7 The Appellant relies on Chennai ITAT decision in the case of DClT Vs M/s.Chennai Network Infrastructure Pvt Ltd. In ITA.No.1649/Mds/2015 AY 2012-13 dated 9th September 2016 wherein at para 4.4.3 it has been categorically held that "4.4.3 From the above decisions of the Hon'ble jurisdictional High Court, in the case of VGR Foundations and the decision of the Hon'ble Apex Court in the case of ClT Vs. Bokaro Steels Ltd., supra, and the decision of the Tribunal(supra), it is evident that the interest received from ICDs the source of which are from share application money which is interest free has to be set off against the pre-operative expenses of the assessee because they are inextricably linked to the setting up of the business of the assessee. Since the learned Commissioner of Income Tax (Appeals) has only followed the decision of the above mentioned higher judiciaries while arriving at his decision and given relief to the assessee, following the same ratio, we do not find it necessary to interfere with his order on this issue." [emphasis supplied].

1.8 The Appellant also relies on Delhi High Court decision in the case of Indian Oil Panipat Power Consortium Ltd Vs ITO 315 ITR 255 wherein at para 5.2 is it specifically held that "5.2 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 purpose 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 pre-operative expenses." [emphasis supplied].

5. On the other hand, the Ld. DR vehemently argued in support of the orders of the Revenue authorities and prayed that the same may be confirmed.

4.4.2 On the second issue also the learned Commissioner of Income Tax (Appeals) following the decision of the Hon’ble jurisdictional High Court in the case of VGR Foundation cited supra has held that the assessee is entitled to set off the interest income earned on ICDs from the pre-operative expenditure because the share application money received by the assessee company do not fall under the category of borrowed fund and is inextricably linked with the business of the assessee. The gist of the relevant portion of the learned

Commissioner of Income Tax (Appeals) is reproduced herein below for reference:-

“4.2.4 With regard to denial of set off of interest on ICDs from the preoperative expenditure also, the jurisdictional High Court decision in the case of VGR Foundations (supra) relied on by the appellant clearly covers wherein the decision goes in favour of the appellant. The jurisdictional High Court has confirmed the order of the ITAT, Chennai which has given its ruling in assessee's favour by following its own earlier order. The relevant paras of the jurisdictional High Court are produced as under-

"Learned standing counsel appearing for the Revenue submitted that the assessee had set off interest earned, prior to the commencement of the business operation, against the expenses. The assessee is wrong in setting off the interest prior to the commencement of the business operation against the expenses. The interest income earned prior to the commencement of the business has to be assessed under the head "Income from other sources". Hence, the Assessing Officer is right in assessing the interest income under the head "Income from other sources". Heard counsel. The Tribunal allowed the appeals by following its own earlier order and accepted the contention of the assessee. The Tribunal, in its order, held as follows:

“5. Before me learned counsel for the assessee also relied on the decision of the Supreme Court in the case of CITv. Karnataka Power Corporation [2001] 247 ITR 268, wherein it was held that interest receipts / hire charges received during pre-production is on capital account. Learned counsel for the assessee also relied on various decisions in support of his case. At the time of hearing he had also filed a copy of the order of this Tribunal in dated November 11, 2002, wherein on identical issue the Tribunal considering the various Supreme Court decisions observed and held as under:

'4. The Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. [1997] 227 ITR 172 was considering investment of borrowed funds prior to commencement of business and held that the interest earned was taxable. In Bokaro Steel Ltd. [1999] 236 ITR 315, it was a case of a Government company which during the period of construction of the plant had advanced monies to contractors on which it was earning interest, received rent from quarters let out to employees, received hire charges on plant let out to contractors and received royalty on stones removed from the assessee's lands. The Supreme Court considered all these activities to be intricately connected with the construction activity and accordingly held that interest received, rent received, hire charges and royalty, etc., would be reduced from the cost of the assets and it would not be treated as income. Similar view was expressed by the Supreme Court in the case Kamal Co- operative Sugar Mills Ltd. [2000] 243 ITR 2. Identical view was also taken by the Supreme Court in the cases of Bongaigaon Refinary and Petrochemicals Ltd. [2001] 251 ITR 329 and Karnataka Power Corporation [2001] 247 ITR 268.

5. In our opinion, in view of the above clear cut ruling by the Supreme Court it is necessary to give a finding of fact in regard to monies that were kept in deposit from out of the share application monies. In the light of the Supreme Court decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. [1997] 227 ITR 172, 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 borrowed 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, obviously the money has to be kept in deposit with a bank. Keeping 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 the bank. In these circumstances in the light of the Supreme Court decisions in the cases of Bokaro Steel Ltd. [1999] 236 ITR 315, Kamal Co-operative Sugar Mills Ltd. [2000] 243 ITR 2 and Karnataka Power Corporation [2001] 247 ITR 268, the claim of the assessee is reasonable and deserves to be accepted. We accordingly uphold the claim of the assessee and delete the addition of interest made to the income. The legal plea was not insisted upon.'"

From a reading of the above, it is seen that the Tribunal has followed the principles enunciated in the Supreme Court judgments in the case of CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 and in the case of Karnataka Power Corporation [2001] 247 ITR 268, and came to the correct conclusion. The Revenue is unable to give any further materials or evidence and also not able to furnish information as to whether they have filed any appeal against their earlier order or not.

Under the circumstances, we do not find any error or legal infirmity in the order of the Tribunal so as to warrant interference. Hence, no substantial question of law arises for consideration of this court and accordingly the tax cases are dismissed. Consequently, M.P. NO.1 of 2007 in T.C. (A) No. 610 of 2007 is closed. No costs."

4.2.5 In view of the above discussion, it is clear that the appellant is entitled to claim deduction u/s 57(iii) from the interest income earned from the banks on term deposits kept with them during preoperative period. Similarly, the appellant is entitled to set off the interest income earned on ICDs from the preoperative expenditure claimed by the appellant since the interest earned from depositing the share application moneys as ICDs do not fall under the category of borrowed funds .and do not involve payment of interest and are inextricably linked with the business of the appellant. In the result, the disallowance made by the AO is directed to be withdrawn. The ground is allowed.”

4.4.3 From the above decisions of the Hon’ble jurisdictional High Court, in the case of VGR Foundations and the decision of the Hon’ble Apex Court in the case of CIT Vs. Bokaro Steels Ltd., supra, and the decision of the Tribunal(supra), it is evident that the interest received from ICDs the source of which are from share application money which is interest free has to be set off against the pre- operative expenses of the assessee because they are inextricably linked to the setting up of the business of the assessee. Since the learned Commissioner of Income Tax (Appeals) has only followed the decision of the above mentioned higher judiciaries while arriving at his decision and given relief to the assessee, following the same ratio, we do not find it necessary to interfere with his order on this issue.

Order pronounced in the court on the 14th February, 2017.