M/s. Karanja Terminal & Logistics Pvt. Ltd. Vs DCIT (ITAT Mumbai)
Interest income received by the assessee from the FDRs/ICDs made out of funds are inextricably linked to the development of port terminal and other infrastructure at Karanja Creek which is yet to be completed and commissioned. We would like to add that the these funds could not be used for the development work of the port due to late issuance of permissions/clearances by the Govt authorities and also due to some local issues. Therefore, in our considered view the interest income is a capital receipt and is not taxable at all both under the normal provisions of the Act as well as u/s 115JB of the Act. The appeal of the assessee is allowed.
FULL TEXT OF THE ITAT JUDGEMENT
The above titled appeals have been preferred by the assessee against the orders dated 20.02.2018, 20.02.2018 & 28.08.2018 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment years 2013 – 14, 2014-15 & 2015-16 respectively.
The grounds raised by the assessee are as under: –
AY 2013-14:
“1. On the facts and circumstances of the case and in law, the Commissioner of Income Tax – (Appeals) has erred in upholding that a sum of Rs.44.45 Crores is not a capital receipt. In doing so, the CIT(A) has erred in upholding that the sum of Rs.44.45 Crores is taxable, both for the purposes of normal computation as well as computing book profits U/S.115JB of the Income Tax Act. The receipt of Rs.44.45 Crores being in the nature of a capital receipt (since income was earned prior to commencement of business, it was a capital receipt and was required to be set off against pre-operative expenses), the same is not liable to tax both under the normal provisions of Income Tax as well as for the purposes of computing book profits U/S.115JB of the Income Tax Act, the addition made should be deleted.
2. The appellant reserves its right to add to, alter, amend, modify or delete any of the grounds taken in this appeal.
2. The assessee has challenged the order of ld CIT(A) on the ground that Interest of Rs. 44.45 Cr has wrongly been held to be revenue receipt by ld CIT(A) by ignoring the fact that the interest was received on the FDRs/ICDs during the period prior to the commissioning of the port terminal at Karanja Creek which has to be reduced from the pre-operative capital expenditure as the development of the port is till under progress and not commissioned.
3. The fact in brief are that the assessee company was incorporated under the Companies Act, 1956 to develop, operate multipurpose port terminal at Karanja Creek, Chanje Village, Taluka Urban, Distt. Raigad, Maharashtra, India on 14th May, 2010. For the purpose of the port terminal project, the assessee raised share capital to the tune of Rs. 449.86 Cr in the month of October, 2010 as foreign inward remittance from M/S Karanja Terminal and Logistics (Cyprus) Ltd. a Cypriot Intermediate company which was incorporated on 31st August, 2010. The IPO was raised for the specific purpose of developing multipurpose port terminal facility and logistics facility at Karanja Creek. However, the port terminal could not be developed as envisaged and planned as it was delayed for various reasons beyond the control of the assessee and therefore the unutilized funds as received from the IPO were put in fixed deposits and ICDs with banks and non-Banking finance companies till the resumption of development work of the port terminal and other facilities at Karanga Creek.During the year, the assessee received interest of Rs. 44.45,12,424/- which was credited to profit and loss account resulting into book profit of Rs. 44,34,01,132/-. The assessee, however, treated the said interest as capital in nature and did not file any return of income for the instant year.
4. Thereafter, the case of the assessee was re-opened u/s 147 of the Act by issuing notice u/s 148 dated 19.8.2015 which was served upon the assessee on 26.8.2015. In compliance to the said notice, the assessee filed return of income on 23.9.2015 declaring income at Nil. The statutory notices were issued and duly served upon the assessee. The assessee, during the course of re-assessment proceedings, submitted before the AO that the interest received on FDR/ICDs with banks and NBFC being a capital receipt and is not liable to income tax both under the normal provisions of the act as well as under special provisions u/s 115JB of the Act for the reasons that the interest was received prior to the commencement of the port terminals which was delayed for the want of various permissions and clearances from the Govt. authorities. The assessee relied on the decision of Delhi High Court in the case of Indian Oil Panipat Power Consortium 315 ITR 255 (Delhi). The assessee also submitted before the AO that the said decision was followed in a numbers of decisions in various benches of the tribunals all over India. The assessee submitted that even if the interest was credited to the profit and loss account resulting into book profit during the year would not change the character of the receipt from capital to revenue and cannot be taxed both under normal provisions and under section 115JB of the Act. The assessee submitted before the AO that the section 115 JB provides for a mechanism which is alternative to the normal provisions and comes into play where the tax as per normal provisions of the Act is less than the tax as per the provisions of section 115 JB of the Act. Thus it cannot go beyond the legislative intent and bring to tax the receipt which is not at all taxable owing to its being of capital receipt. The assessee relied on a series of decisions namely Shree Cement Ltd ITA No. 614,615,635/Jaipur/2010 AY 2004-05 to 2006-07 dated 9.9.2011 and also subsequent years, Shivalik Ventures Pvt. Ltd. ITA No. 2008/Mum/2012 AY 2008-09.
5. The AO however rejected the arguments and contentions of the assessee citing various reasons which are reproduced as under:
“a) The decision relied upon by the assessee in the matter of Indian Oil Panipat Consortium Ltd, v. ITO – 315 ITR 255, subsequently followed by several ITAT decisions as pointed out by the assessee in its application, is a subject matter of appeal to the Hon. Supreme Court under SLP No.: 15705 of 2009, which is pending disposal,
b) The decision of the Jaipur Tribunal rendered in the matter of Shree Cement Ltd. – ITA Nos.614, 615 & 635/Jaipur/2010 for AYs 2004 – 05, 2005 – 06 & 2006 -07 (order passed on 09.09.2011) is a subject matter of appeal to the Hon. Rajasthan High Court, (appeal filed on 25.01.2012, lodging No.: 1074 of 20.12 [ITA No.27, 28 & 29]), which is pending disposal and decision. Similarly, in respect of the ITA appeals for AY 2007-08, 2008-09 & 2009-10 in ITA Nos.503JP/504JP/505JP/568JP/569JP&570JP all of 2012 reported in 152 ITD 561 (Order dtd.27.01.2014), an appeal has been filed to the Hon. Rajasthan High Court on 21.08.2104, under registration No.: 6380/2014 being ITA Nos.: 85 of 2014, 86 of 2014 & 87 of 2014.
c) On identical facts for A.Y. 2011 /12 and 12/13 the assessee on its own has offered these interest incomes to tax, as income from other sources.”
6. Finally, the assessment was framed by the AO under section 143(3) r.w.s. 147 of the Act vide order dated 28.10.2016 by assessing the interest income as income from other sources and thus taxed the interest under the normal provisions of the Act as under tax under section 115JB was lesser than the normal provisions of the Act.
7. Aggrieved assessee filed an appeal before the ld. CIT(A) challenging the order of the AO. Before the ld. CIT(A), the assessee made detailed arguments and submissions which are reproduced below:
“1. The appellant is a company incorporated on 24th May, 2010, which is engaged in the business of developing &operating multi-purpose terminal, logistics facility and ship repair facility in India. Its main object is to develop a multi-purpose port terminal at Karanja Creek, Chanje Village, Taluka Uran, District Raigad, Maharashtra, India. For the year under consideration, the assessee filed a NIL return of income. The computation of income is enclosed at Pages 1 to 27 of the compilation. The audit report in Form 29B is enclosed at Pages 28 to 36of the compilation. The audited Balance Sheet is enclosed at Pages 37 to 58of the compilation.
2. The assessed income by the Assessing Officer (AO) was Rs.44.45 Crores. Since the tax on normal computation was higher than the tax on book profits, the assessee was assessed on normal income. Aggrieved by the assessment order, the assessee is in appeal before your Honour by taking the undermentioned grounds in appeal:
1. On facts and circumstances of the case and in law the Assessing Officer (A. O.) has erred in not holding a sum of Rs. 44.45 crores as a capital receipt In doing so the AO has erred in holding the sum of Rs. 44.45 crores as to be taxable both for the purposes of the normal computation as well as computing book profits u/s115JB of the Income Tax Act, The receipt of Rs, 44.45 Crores being in nature of a capital receipt (since the income was earned in a period prior to commencement of business it was a capital receipt and hence was required to be set off against the pre-operative expenses) :- the same is not liable to tax both under the normal provisions of the income tax as well as for the purposes of computing book profits u/s 115JB of the income tax act. The addition made should therefore be deleted,
2. The appellant reserves its right to add to, alter, amend or modify, and delete any of the grounds taken in this appeal”
3. The interest on the inter-corporate deposits (‘ICDs’) on funds specifically meant for development of a multi-purpose port terminal at Karanja Creek accrued only on temporary deployment by the assessee prior to the commencement of its business. Thus the interest accrued was a capital receipt not liable to income tax both under the normal provisions as well as MAT provisions under section 215JB of the Act. Petitioner in this regard, refers to and relies on the ratio of the Supreme Court in case of CIT v. BokaroSteel Ltd. 236 ITR 315 holding that if income is earned, whether by way of interest or in any other manner on funds which are otherwise ‘inextricably linked’ to the setting up of the plant, such income is required to be capitalized to be set off against pre-operative expenses,
4. The facts relating to the assessee’s case are as under:
4.1 The assessee is a Company incorporated under the Companies Act, 1956 on 14th May, 2010 and is engaged in the business of developing and operating multipurpose terminal, logistics facility and ship repair facility in India, Its main object is to develop a multi-purpose port terminal at Karanja Creek, Chanje Village, Taluka Uran, District Raigad, Maharashtra, India.
4.2 The assessee on its incorporation was held 49% by SKIL Infrastructure Limited, India (“SKIL India”), including and jointly with certain nominees and 51% by Karanja Infrastructure Private Limited (“KIPL”) and its affiliates a group outside the SKIL Group. Petitioners main object was to develop a multi-purpose port terminal at Karanja Creek, Chanje Village, Taluka Uran, District Raigad, Maharashlra, India, for which the timeline is mentioned herein further,
4.3 On 31st August, 2009 a Lease Deed was executed between KIPL and the Maharashtra Maritime Board (“MMB”) for development of Multipurpose Terminal Facility at Karanja creek, a high growth industrial zone, in close proximity to JNPT, India’s largest container handling port in Maharashtra. The said Lease Deed was executed for a period of 30 years for development of multipurpose port terminal facility on BOOT (Built, Own, Operate &Transfer) basis.
4.4. On 29th June, 2010, the assessee made an application to the of Environment and Forest (“MoEF”) for Environment and CRZ clearance. On 28th September, 2010, a Deed of confirmation executed between the Petitioner, KIPL and the MMB,
4.5. Meanwhile the SK1L Group on 24* August, 2010 incorporated a new holding company SKIL Ports &Logistics Limited (Guernsey) (“SKIL Guernsey”), to develop, own and operate port and logistics facilities in India. SKIL Guernsey in October 2010 made an AIM Initial Public Offering, an Alternative Investment Market on London Stock Exchange for investment in Karanja Terminal &Logistics (Cyprus) Limited (“KTLCL”), a Cypriot intermediate company, which got incorporated on 31st August, 2010. On 1st October, 2010 KTLCL agreed to subscribe for shares of the Petitioner for approximately 99.77%. Therefore, the Petitioner as on date was held 99.77% by KTLCL and balance 0.23% held by SKIL India and KIPL, being the Nominee shareholders. Enclosed at Pages 59 to 137 of the compilation is a copy of the relevant extract of theAIM Initial Public document (attention is drawn to Page 79).
4.6 The IPO was mainly announced for the specific and precise purpose of raising capital for meeting the cost of laying multipurpose port terminal facility and logistics facility at Karanja creek (herein after referred to as “the Project”). Thereafter, on 15th October, 2010 the assessee, received a Certificate of Foreign Inward Remittance amounting to Rs, 4,65,11,85,000/- from KTLCL for subscription of 1,72,06,226 shares having face value of Rs. 10/- at an approximate premium of Rs. 260.32/share. On 18th October, 2010 the KYC details were filed by KTLCL with its Bank and on 19th October, 2010 an intimation of above share capital subscription was made to Reserve Bank of India, whose reply was received on 20th October, 2010 in respect of the foreign remittance towards investment under PDI Scheme. Enclosed at Pages 138 to 144recopies of the chronologically arranged letters dated 15th October, 2010, 18* October, 2010, 19th October, 2010 and 20th October, 2010 pertaining to foreign remittance.
4.7. Since the Project was getting delayed for reasons beyond control of the Petitioner, it was decided to temporarily deploy these unutilized funds specifically obtained for the Project in fixed deposits and ICDs with Non-Banking Financial Companies (‘NBFCs’) and Banks until the commencement of the business operations of the Project,
4.8 During the relevant assessment year, there was no business activity which was carried on by the assessee as also mentioned at Page 1, Paragraph 3 of the assessment order passed under section ,143(3) of the Act, dated 28.10.2016, Further, the interest on ICDs “only accrued, never received was recorded.
4.9 On 16th June, 2011 the ‘Terms of Reference’ were issued by the Ministry of Environment and Forest (“MoEF”). The Maharashtra Coastal Zone Management Authority (“MCZMA”) clearance was received on 15th May, 2012. On 3rd August, 2012, the ‘Consent to Establish’ was received from Maharashtra Pollution Control Board (“MPCB”). Subsequently, on 30th October, 2012 in the Public Hearing conducted under the Chairmanship of Collector of Raigad District, the Project received unanimous support from locals.
4.10 On 21st December, 2012, the Project was listed for Final Environment and CRZ clearance in the agenda of 119th Meeting of the Export Appraisal Committee of Ministry of Environment and Forest (“MoEF”), Government of India. On 21st August, 2013, the Final Environment & CRZ clearance received. This clearance is vital for commencement of onsite works. Non-receipt of this permission would lead to cancellation of the Project. The copy of the Final Environment and CRZ clearance received by the Petitioner for commencement of the Project is enclosed at Pages 145 to 152 of the compilation.
4.11 In December, 2014 access was given to the bridge and road to site constructed by CIDCO. However, in January, 2015 pursuant to the local agitation against the Project, this access was again blocked by the villagers. During February, 2015 work again began at the site under police protection but again in March, 2015 work at the site halted owing to local agitation. Finally, in May, 2015 the local agitation was withdrawn and then the Project work resumed in November, 2015 post monsoon. Till June, 2016 the reclamation of 19 hectares’ area is completed and 57 piles were installed during this period after which due to monsoon the Project work was suspended up to November, 2016. Presently, the Project work is going on in full force.
5. With the above set of arguments, the assessee supported its case for filing NIL return as under:
5.1 The interest income earned by the assessee on the ICDs maintained with NBFCs and Banks is a capital receipt (not liable to tax) as it is spending on the Project and in this regard, heavy reliance is placed by the assessee on the Apex Court decision rendered in the case matter of Bakaro Steel Ltd. – 263 ITR 315, Delhi High Court decision rendered in the case of Indian Oil Panipat Power Consortium -315 ITR 255 and Facor Power Ltd. -380 ITR 474. The assessee has also further pointed out that this decision of the Delhi High Court has been followed by the Delhi ITAT in the matter of CLC Textile Pvt. Ltd. ~ 44 CCH 258, NTPC Tamil Nadu Energy Co. Ltd. – 44 CCH 263 and Facor Power Ltd, 2015 TIOL, 1183 (Delhi). The Ahmedabad WAT in Adani Power Ltd. -155 ITD 239, where, while holding interest income received, which related to a period prior to the commencement of business is capital in nature, the Ahmedabad ITAT has followed the decision of the Delhi High Court in 315ITR 255.
5.2 Since the receipt being capital in nature not liable to tax under the normal provisions of the Act, the same cannot be notionally taxed u/s.115JB of the Income Tax Act, even though the same is routed through the P&L Account. The above argument mooted is on the grounds that section 115JB of the Income Tax Act has only provided a mechanism, which is alternative to the normal provisions and it cannot go beyond legislative intention and levy tax on a receipt, which is outside the purview of Income Tax Act In this context, the assessee has heavily relied on the Jaipur Tribunal decision rendered in the case ofShree Cement Ltd. – ITA Nos.614, 615&635/Jaipur/2010 for AYs 2004 – 05, 2005 – 06 & 2006 – 07, decided on 09.09.2011, for AY 2007 – 08, 2008 – 09 & 2009 – 10 in ITA Nos. 503JP/5O4JP/505JP/$68JP/569JP &57OJP all of 2012 reported in 152 ITD 561 (Order dtd.27.01.2014). Thereafter, the assessee has relied on Bombay Tribunal decision rendered in the case of Shivalik Ventures Pvt. Ltd. -ITA No.: 2008/Mum/2012 for AY 2OO9 – 10, where identical views have been accepted by the Mumbai ITAT. We further seek to place reliance on the decision of the Lucknow Tribunal in the matter of L. H. Sugar Factory Ltd. – 417 & 418/LKW/2013 for AY 2008-09 &2009-10 order dtd.09.02.2016, wherein, at Para 50, the ITAT held that capital receipts need to be excluded from the P&L Account, while computing book profits u/s.115JB of the Income Tax Act Further in order dtd.06.06.2016, the Jurisdiction^ High Court in the matter of Goodwill Theatres Pvt. Ltd., ITA No.: 2356 of 2013, while dismissing the revenue’s question of law as to whether mesne profits can be a part of book profit u/s.115JB held that mesne profits (amount received from a person in wrongful possession of property) is a capital receipt and not chargeable to tax either as income or as “book profits” u/s.115JB. As the department has implicitly accepted Narang Overseas v. ACIT 100 ITD (Mum) (SB), it cannot file an appeal on the issue in the case of other assessees.
6. The AO has objected to the assessee’s submission and our rebuttal to the same is as under:
