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Income Tax Appellate Tribunal, “ SMC” BENCH, AHMEDABAD
Before: MS. SUCHITRA KAMBLE & SHRI MAKARAND V. MAHADEOKAR
आयकर अपीलीय अिधकरण, अहमदाबाद "ायपीठ SMC, अहमदाबाद । IN THE INCOME TAX APPELLATE TRIBUNAL “ SMC” BENCH, AHMEDABAD सु"ी सुिच"ा का"ले, "ाियक सद" एवं "ी मकरंद वसंत महादेवकर, लेखा सद" के सम"। ] ] BEFORE MS. SUCHITRA KAMBLE, JUDICIAL MEMBER AND SHRI MAKARAND V. MAHADEOKAR, ACCOUNTANT MEMBER आयकर अपील सं / Year : 2016-17 Kalthia Infra-Con Pvt.Ltd. The ITO बनाम/ 193 “Kalthia House” Ward-2(1)(2) v/s. Satya Grah Chavni Ahmedabad Opp. Iscon Mall, S.G.Highway Ahmedabad – 380 015 (Gujarat) "थायी लेखा सं./PAN: AAECK 3940 N अपीलाथ%/ (Appellant) &' यथ%/ (Respondent) Assessee by : Shri M.J. Shah, AR & Shri Rushin Patel, AR Revenue by : Shri V.K. Mangla, Sr.DR सुनवाई की तारीख/Date of Hearing : 16/10/2024 घोषणा की तारीख /Date of Pronouncement: 23/10/2024 आदेश/O R D E R PER MAKARAND V. MAHADEOKAR, AM:
This appeal by the assessee arises from the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “CIT(A)”], dated 30.11.2023, upholding the order of the Assessing Officer [hereinafter referred to as “AO”], dated 20.12.2018, passed under Section 143(3) of the Income Tax Act, 1961 [hereinafter referred to as “the Act”] for Assessment Year (AY) 2016-17. La;tjoa Omfracpm {vt/:td/ Asst. Year : 2016-17 2 Facts of the case:
The assessee is a Special Purpose Vehicle (SPV) incorporated for undertaking infrastructure development projects under the Build-Operate- Transfer (BOT) model. For AY 2016-17, the assessee filed a return of income claiming a deduction of Rs.20,93,513/- under Section 80-IA(4) of the Act. The assessee-company declared profits derived from its eligible infrastructure project and claimed a 100% deduction under Section 80-IA(4) of the Act. The AO, during scrutiny proceedings, noted that the assessee earned interest income of Rs.27,83,063/- from FDRs maintained with Punjab National Bank (PNB). These FDRs were created as part of the loan sanction condition by PNB for the project. The FDRs were held as a part of the Debt Service Reserve Account (DSRA), which the bank required to secure the loan granted for the infrastructure development project.
2.1. The AO disallowed the deduction of Rs.20,93,513/- under Section 80- IA(4) of the Act, concluding that the interest income from FDRs could not be treated as "profits derived from" the infrastructure development business. The AO classified the interest income as "income from other sources" under Section 56 of the Act, holding that it was not directly related to the assessee's core business activities of developing and maintaining infrastructure. The AO relied on the judgement of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. [1997] 227 ITR 172 (SC), which held that interest earned on deposits placed temporarily cannot be treated as business income but should be classified as income from other sources. Based on this precedent, the AO concluded that the interest income lacked the La;tjoa Omfracpm {vt/:td/ Asst. Year : 2016-17 requisite nexus with the eligible business to qualify for the deduction under Section 80-IA(4) of the Act.
The assessee preferred an appeal before the CIT(A) against the order of the AO. The CIT(A) upheld the disallowance made by the AO, agreeing that the interest income could not be considered as "profits derived from" the business of infrastructure development. The CIT(A) placed reliance on the same judicial precedent, Tuticorin Alkali Chemicals, to confirm that interest on FDRs, being passive income, did not have the necessary nexus with the infrastructure business. The CIT(A) noted that the interest earned on FDRs was not incidental to the infrastructure project but was generated by investing funds in deposits, thus distinguishing it from the operational profits eligible for deduction under Section 80-IA(4) of the Act.
Aggrieved by the order of the CIT(A), the assessee is in appeal before us with following grounds of appeal: “The Learned C.I.T.(Appeals) has erred in law and on facts of the case, in upholding the disallowance u/s.801A of Rs.20,93,513/-.
The appellant craves leave to add, amend or alter the grounds of appeal at the time of hearing, if need arise.”
During the course of hearing before us, the AR submitted that the Fixed Deposits (FDRs) were not created out of surplus or idle funds but were a business necessity as per the conditions of the loan sanction from Punjab National Bank (PNB). The loan was granted for the purpose of financing the infrastructure project under the Build-Operate-Transfer (BOT) model, and one of the conditions of the loan was to maintain a Debt Service Reserve La;tjoa Omfracpm {vt/:td/ Asst. Year : 2016-17 Account (DSRA) in the form of FDRs. The AR presented a certificate from PNB confirming that the FDRs were specifically created to comply with the loan terms, which were essential for the ongoing operation of the infrastructure project. The AR argued that since the FDRs were mandated by the bank as a security for the loan, the interest income earned from such FDRs had a direct and immediate nexus with the infrastructure development business. The creation of the FDRs was an integral part of the business, as without these deposits, the loan for the infrastructure project would not have been sanctioned. Therefore, the interest income should be regarded as part of the "profits derived from" the business of infrastructure development and eligible for deduction under Section 80-IA(4) of the Act. The AR pointed out that the assessee was a Special Purpose Vehicle (SPV) specifically incorporated for the infrastructure development project under the BOT arrangement. Since the company’s entire business activity revolved around this infrastructure project, the FDRs maintained with the bank were exclusively for the purpose of securing the loan for the project. Therefore, the interest income derived from these FDRs should be treated as part of the core business profits, qualifying for the deduction under Section 80-IA(4) of the Act.
The Departmental Representative (DR) contended that the purpose of the loan taken by the assessee was not restricted to financing the infrastructure project. It included repayment of unsecured loans, and it was not clear if the entire loan amount was exclusively used for the infrastructure project. Therefore, the interest income earned on the FDRs should not be considered as part of the eligible business income. La;tjoa Omfracpm {vt/:td/ Asst. Year : 2016-17
The AR firmly rebutted the DR’s contention by emphasizing that the assessee is a Special Purpose Vehicle (SPV) specifically incorporated to execute a single infrastructure project under the Build-Operate-Transfer (BOT) model. As an SPV, the sole and exclusive business of the company is to develop, operate, and maintain the infrastructure project. The AR pointed out that, given the nature of an SPV, all financial activities, including the creation of FDRs, are inherently and inextricably linked to this single project. The AR addressed the DR's contention regarding the purpose of the loan and whether it was used exclusively for the infrastructure project. The AR pointed out that the company's audited financial statements clearly confirm that the loan in question was the only loan appearing in the balance sheet and was solely used for the purpose of developing, operating, and maintaining the infrastructure project. The AR further stated that no unsecured loans or other liabilities are shown in the financial statements, which further solidifies the fact that the entire loan was linked to the specific infrastructure project. The AR also highlighted that the financial statements do not reflect any other project or business activity undertaken by the company.
7.1. Upon examining the facts and the submissions made by the assessee’s AR, it is evident that the assessee is a Special Purpose Vehicle (SPV), exclusively formed to develop, operate, and maintain an infrastructure project under the Build-Operate-Transfer (BOT) model. As an SPV, the assessee does not engage in any other business or project apart from this infrastructure development activity. The Fixed Deposits (FDRs) were not created out of surplus or idle funds, but were a business necessity, specifically mandated by Punjab National Bank (PNB) as part of the loan agreement for financing the infrastructure project. The loan sanction letter clearly required La;tjoa Omfracpm {vt/:td/ Asst. Year : 2016-17 the maintenance of a Debt Service Reserve Account (DSRA) through FDRs to ensure timely repayment of the loan. The FDRs were therefore a vital part of the project’s financial structure, and their creation was integral to the successful execution of the infrastructure business.
7.2. The AO and CIT(A) relied on the ruling of Tuticorin Alkali Chemicals & Fertilizers Ltd. [1997] 227 ITR 172 (SC), which held that interest earned on deposits from surplus funds should be treated as "income from other sources" and not business income. However, the facts of the present case are clearly distinguishable. In the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. (supra), the funds invested in FDRs were surplus and temporarily invested. Here, the FDRs were not surplus investments but a necessary requirement for securing the loan for the infrastructure project. Furthermore, the audited financial statements submitted by the AR confirm that the company has no other business activities or unsecured loans apart from the loan in question. The entire loan amount was utilized for the infrastructure project, and the FDRs were linked exclusively to the project’s financial obligations. The DR’s contention that the loan was used for purposes other than the infrastructure project is not supported by the facts of the case.
7.3. The key issue is whether the interest income from FDRs can be considered as income "derived from" the eligible infrastructure business under Section 80-IA(4) of the Act. The term "derived from" has been interpreted in various judicial pronouncements to require a direct and immediate nexus between the income and the business. In the present case, the FDRs were created as a direct consequence of the loan condition imposed by PNB, which was essential for financing the infrastructure project. The La;tjoa Omfracpm {vt/:td/ Asst. Year : 2016-17 FDRs were not independent investments but were integral to the business’s financing structure. The interest income arising from these FDRs was incidental to the core business activity of infrastructure development and thus should be considered as "profits derived from" the business for the purposes of Section 80-IA(4) of the Act.
7.4. The Hon’ble Gujarat High Court, in CIT v. Shah Alloys Ltd. [2017] 396 ITR 711 (Guj), held that interest income earned on FDRs maintained as margin money for securing business loans qualifies as business income when the FDRs are closely linked to the business’s financial structure. This principle is squarely applicable to the present case, as the FDRs were created to fulfil the bank’s conditions for the loan used to finance the infrastructure project. The Co-ordinate Bench, in case of Aqualfil Polymers Co. Pvt. Ltd. v. DCIT (ITA No. 448/Ahd/2018 & allowed the deduction under Section 80-IA(4) of the Act for interest income on FDRs, relying on the ruling in Shah Alloys Ltd. The facts and reasoning in Aqualfil Polymers are analogous to the present case and provide a solid basis for allowing the deduction. We note that the reliance on Tuticorin Alkali Chemicals & Fertilisers (supra) by the Assessing Officer (AO) and the CIT(A) is misplaced. In Tuticorin Alkali Chemicals & Fertilisers, the interest income arose from surplus funds that were parked in FDRs, unrelated to the core business activity. Here, the FDRs were created as part of the business financing for the infrastructure project, and the interest income is a direct outcome of the financial requirements of the business. Therefore, the principle laid down in Tuticorin Alkali Chemicals & Fertilisers does not apply to the facts of this case. La;tjoa Omfracpm {vt/:td/ Asst. Year : 2016-17 8 7.5. The assessee's audited financial statements, as presented by the AR, clearly confirm that the loan obtained from PNB was exclusively used for the infrastructure project. No unsecured loans or other financial obligations appear on the balance sheet. Thus, the FDRs were solely for the project, further supporting the claim that the interest income earned from the FDRs is part of the business income eligible for deduction.
7.6. In light of the facts, the SPV nature of the assessee, and the judicial precedents discussed, the interest income earned from the FDRs, which were created as part of the financing arrangement for the infrastructure project, qualifies as business income derived from the eligible business under Section 80-IA(4) of the Act. The AO’s disallowance as upheld by the CIT(A) was incorrect. The disallowance is hereby set aside, and the assessee’s claim for deduction under Section 80-IA(4) of the Act is allowed.