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Income Tax Appellate Tribunal, DELHI BENCH ‘E’ NEW DELHI
Before: SHRI C.M. GARG & SHRI L.P. SAHU
ORDER
Per L.P. Sahu, Accountant Member:
This appeal by the Revenue is directed against the order dated 29.08.2013 of ld. CIT(A)-XVI, Delhi for the assessment year 2010-11 on the following grounds : “
1. The Ld. CIT(A) erred in law and on facts in deleting the addition of Rs.1,75,74,129/- including interest on deposits with Indian Banks and others.
2. The Ld. CIT(A) erred in law and on facts in not appreciating the provision laid down in Sub section 1 to section 5 of the Act wherein it has been dearly mentioned that the total income of any previous year of a person who is resident includes all income from whatever source derived;
3. The Ld. CIT(A) erred in law and on facts in not accepting the Assessing Officer’s plea from other sources u/s. 56 of the Income Tax Act, 1961; 4. The Ld. CIT(A) erred in law and on facts in not considering the fact that interest earned on fixed deposits is ultimately an income and also failed to mention any provision of the Act under which such income is exempt. 5. The Ld. CIT(A) erred in law and on facts in holding that the interest on surplus amount is not taxable though the surplus amount is nowhere mentioned under the provisions of the Income Tax Act 1961.”
The brief facts of the case are that the assessee company is a joint venture company formed by NTPC Ltd. and Tamilnadu Electricity Board with the authorized capital of Rs. 2000 crores for setting up power plant of 1500 Mega Watt of electricity at Vallur, in outskirts of Chennai, Tamilnadu incorporated on 23.05.2003. The construction work of said power project was started on 28.03.2007 which was expected to be completed in F.Y. 2011-12 (Phase-I). The assessee company filed return of income on 24.09.2010 declaring loss of Rs.7,52,957/-. The issued and subscribed capital of the company stood at Rs.850 crores as at 31.03.2010. The cost of project was to be invested with 30% own funds and 70% by raising debt fund from Rural Electrification Corporation of India, which was interest bearing. During the year under consideration, the assessee company paid interest on borrowed funds which was capitalized. For setting up of plant, he allotted contract works to the contractors and for doing smooth work, he gave mobilization advance to his contractors which was interest bearing. The assessee earned total interest on mobilization advance for Rs.1,74,71,389/- and interest income from temporary parking of funds in banks was Rs.1,02,740/-. The break-up of interest income earned from the contractors advance is as under : Party Income Gammon (I) Limited 1,65,60,655 IEC Fabchem 79,714 L & T 7,26,539 Ratna Infra 1,04,778 Total 17,471,389 The above interest was capitalized by the assessee. During the assessment proceedings, the AO disallowed the capitalization of interest and added in the total income under the head ‘income from other sources’. Aggrieved by the order of the AO, the assessee preferred an appeal before the ld. CIT(A). The ld. CIT(A) deleted the additions made by the AO. Aggrieved by the order of ld. CIT(A), the department is in appeal before us.
The ld. DR relied upon the order of the AO and reiterated the contentions raised in the grounds of appeal. It was submitted by the ld. DR that the AO has rightly assessed the income at Rs.1,75,74,129/-. It was further submitted that the AO has given cogent reasons for disallowing the capitalization of interest.
The ld. AR, on the other hand, contended that the action of the AO was not justified. The assessee had advanced money to his contractors for smooth working, which was interest bearing out of debt funds for setting up of plant. He placed reliance on the judgments submitted before the Assessing Officer. He strongly opposed the arguments of the ld. DR and stated that the AO was not justified to assess the interest income in lieu of capitalization of interest earned and he further stated that the ld. CIT(A) has rightly deleted the addition.
We have heard the submissions of both the parties, perused the materials available on record, case laws cited by ld. Counsel for assessee, assessment order and the order of the ld. CIT(A). We find that the ld. CIT(A) has elaborately discussed the issue and gave his finding vide para No. 4.1 to 4.9 at page No. 8 to 13 of the impugned order. For the sake of convenience, the relevant finding of the ld. CIT(A) is reproduced below : 4.1 I have carefully considered the facts of the case, the findings of the AO as well as the submissions of the A/R of the appellant. Both the Grounds of appeal are directed against additions of Rs. 175,74,129/- comprising of the interest income received from the bank(s) amounting to Rs. 1,02,7407- and interest received from contractors advances amounting to Rs. 174,71,389. In the P&L Account the appellant has shown under the head other income, amount of Rs. 1,02,740/- as interest income earned on short term deposits parked with Banks and an amount of Rs. 174,71,389/- as interest earned on interest bearing advance given to contractors, total Rs. 1,75,74,129/- which was adjusted against Expenditure During Construction Account in Schedule - 15 and the net Expenditure During Construction was capitalized under the Capital Work in Progress in Schedule - 4 of the balance sheet. The AO in the assessment order observed that the assessee has not offered above incomes for tax. AO observed that the facts of case are similar to the case of Tuticorin Alkali Chemical & Fertilizers ltd. v. CIT (supra). Therefore, the AO treated the above receipt of Rs. 175.74 lakh as chargeable to tax u/s 56 of the Act as 'Income from other sources' following the decision of Hon'ble apex court in the case of CIT vs. Tuticorin Alkali and Chemicals & Fertilizers Ltd. (1997) 227 ITR 172. 4.2 Therefore, the issue to be decided in this appeal is whether the above receipts are capital receipt as claimed by the appellant or income from other sources u/s 56 of the Act as held by the AO. The whole emphasis of Apex Court decision in the Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) was that funds were found to be surplus. The company was ready to commence trial production and the surplus funds were deposited in bank to earn interest. 4.3 In the instant case there is no dispute that project was under construction during the previous year relevant to AY 2010-11 and the business had not commenced. The appellant company was incorporated on 23-05-2003 as a joint venture company between NTPC Ltd. and Tamil Nadu Electricity Board for the purpose of construction of power plant for generation of electricity. The total project was meant to produce 1500 mw of electricity through 3 units @ 500 mw by each unit. The said power plant was located at Vellur at the outskirt of Chennai, Tamil Nadu. The construction of the power generating unit was started on 28-03-2007. As per letter of CEO, commercial operation is declared in respect of unit - I w.e.f. 29/11/2012, unit - II w.e.f. 25/08/13 and unit 3 is yet to be commissioned. By end of financial year 31-03-2010 the assessee company had raised share holders fund of Rs. 905.5 crores and had borrowed funds in the form of secured loan of Rs. 1808.27 crores. These funds were essentially utilized during the initial period of construction from A.Y. 2004-05 to A.Y. 2010-11 for conducting survey, investigation & preliminary expenses, for purchasing land, for infrastructure development work and for disbursement as advance to the contractors engaged for construction of power plant etc. 4.4 Further, there is no finding given by the AO that advances were made by the appellant out of surplus fund. From the balance sheet it is observed that as against the above funds of Rs. 2713.77 crores (without considering amounts due to sundry creditors), sums aggregating to Rs. 2998.02 crores were used for acquiring / construction of fixed assets. Against the liabilities and provisions aggregating to Rs. 293.45 crores, bank and cash balances was Rs. 4.74 crores only. Further, the debit balance of Profit and Loss Account as appearing in the Balance Sheet as on 31.03.2010 was Rs.1.13 crores. From the above it is evident that investment in fixed assets is more than the funds available and fixed asset is partly funded by current liabilities. The liability towards sundry creditors (Rs.86.78 crores) are far more than the funds lying in bank (Rs.4.74 crores). Therefore, it is clear that advances were not given out of surplus funds available with the company. Simply because money is lying in bank meant for construction of the plant, it cannot be treated as the surplus money. The surplus money can arise only after meeting all the obligations relating to the construction of the power plant and if the money is found to be surplus after the completion of construction of the unit. In the instant case the work of construction of the power plant was under progress. Therefore, funds cannot be said to be at surplus. 4.5 Some of such funds which were lying unutilized were temporally parked by the appellant in bank to earn interest. The purpose of bank deposits yielding interest was evidently to maintain liquidity of funds and to reduce the cost of construction of the power plant. Therefore, interest earned on such unutilized funds temporally parked with banks to maintain liquidity and to reduce cost, is inextricably linked with the setting up of the project. Similarly, the interest incomes earned on advance to contractors engaged for construction of power plant is also inextricably linked with the setting up of the power plant. These incomes have also gone on to reduce the expenses for setting up of the plant as evident from schedule 15 of annual report showing details of expenses during construction. Hon'ble Supreme Court on identical issue in CIT v. Bokaro Steel Ltd. 102 taxman 94 (SC) after considering the decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra) held that interest from advance to contractors, rent charged on contractor, hire charges from contractors are inextricably linked to the setting up of the project and as such capital receipts. In that said decision Hon'ble Apex Court held:- "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 arrangements 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. 7. - 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 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." 4.6 Hon'ble Delhi High Court in Indian Oil Panipat Power Consortium Ltd. vs. 1TO (2009) 315 ITR 255 (Del.) held that where interest on money received as share capital is temporarily placed in fixed deposit awaiting acquisition of land, a claim that such interest is a capital receipt entitled to be set off against pre- operative expenses, is admissible, as the funds received by the assessee company by the joint venture partners are "inextricably linked" with the setting up of the plant and such interest earned cannot be treated as income from other sources. The Hon'ble Delhi High Court applied the ratio of Hon'ble Supreme Court in Bokaro Steel Ltd. (supra) while arriving at the above decision. Hon'ble High Court also distinguished the facts before them from the facts which were before the apex court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v CIT. The distinction drawn by Delhi High Court, was that that there was a finding of fact recorded in the case before the apex court that whatever money was deposited in the bank was essentially found to be the surplus funds in the hands of that company and the very purpose of making fixed deposits was to earn interest on such surplus money. Apex court under those peculiar circumstances, had held in Tuticorin Alkali Chemicals that interest income arising on surplus funds, was chargeable to tax as income from other sources. 4.7 In identical issue in the case of NTPC Sail Power Company (P) Ltd. vs. CIT in Hon'ble Delhi High Court in its decision on 17/07/2012 held that:- "It is no doubt correct that the proviso to section 36 (1) (iii) of the Income Tax Act enacts that any amount of the interest paid towards ("in respect of) capital borrowed for acquisition of an asset or for extension of existing business regardless of its capitalization in the books or otherwise, "for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use" would not qualify as deduction. However, in all these cases, when the interest was received by the assessee towards interest paid for fixed deposits when the borrowed funds could not be immediately put to use for the purpose for which they were taken, this Court, and indeed the Supreme Court held that if the receipt is "inextricably linked" to the setting up of the project, it would be capital receipt not liable to tax but ultimately be used to reduce the cost of the project, By the same logic, in this case too. the funds invested by the assessee company and the interest earned were inextricably linked with the setting up of the power plant." 4.8 Therefore, decisions of Hon'ble Supreme Court in the case of Bokaro Steel Ltd. (supra), Hon'ble Delhi High Court in Indian Oil Panipat Power Consortium Ltd. (supra) and NTPC Sail Power Company (P) Ltd. (supra) are squarely applicable in the instant case. Identical issue was raised in appeal for AY 2008- 09 which was decided by me in favour of the appellant in A. No. 102/2010-12 vide decision dt. 17/12/2012 following the above decisions of Supreme Court and Delhi High Court as under: "8.1.5 Since the work of construction of the power plant has just started and funds were essentially utilized for conducting survey, investigation & preliminary expenses, for land purchase, for infrastructure development work and for disbursement as advance to the contractors engaged for construction of power plant etc., therefore, funds cannot be said to be at surplus. Moreover, the liability towards sundry creditors (Rs.23.52 crores) are far more than the funds lying in bank (Rs.3.34 crores). Interest income is also inextricably linked with the setting up of the power plant because interest income have gone on to reduce the incidental expenses for setting up of the plant as evident from schedule 12 of balance sheet showing details of incidental expenses during construction. In view of the above, as the interest on STDR are "inextricably linked" to the setting up of the project and the fact that no surplus funds are also available with the appellant company, therefore, such income is required to be capitalized to be set off against the pre operative expenses. As such the A.O. is not justified in adding the sum of Rs.36,06,774/- as income for other source u/s 56.'' 4.9 In view of the above factual and legal positions in the instant AY 2010-11 since the work of construction of the power plant was under progress, interest incomes are also inextricably linked with the setting up of the power plant and such incomes have gone on to reduce the expenses for setting up of the plant and as there was no surplus funds available with the appellant company, therefore, such income is required to be capitalized to be set off against the pre operative expenses. As such the A.O. is not justified in adding the sum of Rs. 1,75,74,129/- as income from other source u/s 56. The appeal is allowed in ground nos. I & 2 of appeal.”
In the background of the aforesaid discussion and the precedents, we are of the view that the ld. CIT(A) has passed a well reasoned order which does not need any interference on our part. Hence, we uphold the same. Accordingly, the appeal of the Revenue is dismissed.