No Tax on Interest on mandatory reserves created under Major Ports Trust Act 

PCIT Vs Paradeep Port Trust (Orissa High Court)

As regards the deletion of addition of Rs.57 crores under the head of ‘interest accrued on investment on Capital Asset, Replacement Reserve Fund and Development, Repayment of Loan and Contingencies Reserve Fund’, it is pointed out that the Assessee has two statutory reserve funds viz., (i) Replacement, Rehabilitation, Modernization of Capital Assets Reserve and (ii) Reserve for Development, Repayment of Loans and Contingencies. These reserve funds had to be established in terms of Section 90 (1) of the Major Ports Trust Act and the directions of the Ministry of Shipping and Transport. The Central Government is stated to have fixed an annual ceiling of the reserve at 3% of the capital employed in respect of each of the funds. Therefore, there is a mandatory requirement that interest should follow the funds so created and it is therefore directly taken to the balance sheet and not shown in the Profit and Loss (P & L) Account. Once there is a diversion at source as a result of there being a statutory obligation on the Assessee to set aside a certain sum, the Assessee was justified in not showing the interest income in its P & L Account and taking it directly to the balance sheet. The view taken by the CIT (A) has been affirmed by the ITAT and is consistent with the decision of the Supreme Court of India in CIT v. Sitaldas Tirathdas (1961) 41 ITR 367 (SC) and several decisions of the High Courts including DCM Ltd. v. CIT (2004) 192 CTR (Del.) 408 and Somaiya Orgeno-Chemicals Ltd., v. CIT (1995) 216 ITR 291 (Bom.). Consequently, the Court declines to frame a question on this issue.

FULL TEXT OF THE JUDGMENT/ORDER OF ORISSA HIGH COURT

1. This is the Revenue’s appeal against an order dated 2017 of the Income Tax Appellate Tribunal, Cuttack Bench, Cuttack (ITAT) dismissing the Revenue’s appeal i.e. ITA No.356/CTK of 2013 for the Assessment Year (AY) 2009-10.

2. The first two questions sought to be urged by the Revenue are whether the ITAT was justified in deleting addition of Rs.25 Crores under the “provision for Pension Fund” and deleting the addition of Rs.20,86,903/- under the head “Employer’s Contribution to Provident Fund”, the approval for which was not granted at the time when the contributions were made?

3. The facts are that the CIT recognized the PPT Employees Pension Fund Trust by an order dated 25^th March, 2010 with retrospective effect from the date of its creation i.e. 3^rd February, 2009. The contribution to the Pension Fund was made on 7^th May, 2008 but at no time an objection was raised by the Revenue that it does not constitute business expenditure. The CIT (A) accepted the plea of the Assessee that the delay on the part of the CIT granting recognition should not prejudice the case the Assessee. This view has been upheld by the ITAT. As long as the contributions made have been towards the fund, the mere fact that the approval was granted at a subsequent stage, should not deprive the Assessee of the benefit thereunder. Consequently, the Court declines to frame any question as regards the deletion of these two additions.

4. As regards the deletion of addition of Rs.57 crores under the head of “interest accrued on investment on Capital Asset, Replacement Reserve Fund and Development, Repayment of Loan and Contingencies Reserve Fund”, it is pointed out that the Assessee has two statutory reserve funds viz., (i) Replacement, Rehabilitation, Modernization of Capital Assets Reserve and (ii) Reserve for Development, Repayment of Loans and Contingencies. These reserve funds had to be established in terms of Section 90 (1) of the Major Ports Trust Act and the directions of the Ministry of Shipping and Transport. The Central Government is stated to have fixed an annual ceiling of the reserve at 3% of the capital employed in respect of each of the funds. Therefore, there is a mandatory requirement that interest should follow the funds so created and it is therefore directly taken to the balance sheet and not shown in the Profit and Loss (P & L) Account. Once there is a diversion at source as a result of there being a statutory obligation on the Assessee to set aside a certain sum, the Assessee was justified in not showing the interest income in its P & L Account and taking it directly to the balance sheet. The view taken by the CIT (A) has been affirmed by the ITAT and is consistent with the decision of the Supreme Court of India in CIT v. Sitaldas Tirathdas (1961) 41 ITR 367 (SC) and several decisions of the High Courts including DCM Ltd. v. CIT (2004) 192 CTR (Del.) 408 and Somaiya Orgeno-Chemicals Ltd., v. CIT (1995) 216 ITR 291 (Bom.). Consequently, the Court declines to frame a question on this issue as well.

5. The last question urged concerns claiming depreciation on railways and rolling stock, which has already been answered in favour of the Assessee and against the Department by an order passed today by this Court in ITA Nos.64 and 65 of 2012.

6. For the aforementioned reasons, the appeal is dismissed.