IN THE ITAT AHMEDABAD BENCH (special bench)
Sardar Sarovar Narmada Nigam Ltd.
v/s.
Assistant Commissioner of Income-tax, Gandhinagar Circle
IT APPEAL NO. 2654 (AHD.) OF 2004
[ASSESSMENT YEAR 2001-02]
SEPTEMBER 7, 2012
ORDER
Per Bench
The circumstances leading to the above appeal by the Assessee against the order of Commissioner of Income-tax(Appeals) [“CIT(A)”], Gandhinagar, Ahmedabad dated 02.07.2003 being referred for consideration by a Special Bench by the Hon’ble President are as follows.
2. The Assessee is a Company. The Government of Gujarat established the assessee Corporation as a wholly-owned Government Company under the provisions of the Companies Act, 1956 to take the execution of Sardar Sarovar Project – an inter-state multi-purpose project of four States viz. Madhya Pradesh, Maharashtra, Gujarat and Rajasthan with a terminal major dam on the river Narmada in Gujarat. The Government of Gujarat executed a part of the project and on being advised, it decided to form a Nigam and it passed a resolution vide the Government of Gujarat, Narmada Development Department’s Resolution No. NMD/1073(86)/ 33(2)/H dated 21-3-1988, which reads as under:
“PREAMBLE:
With a view to execute the works of the Sardar Sarovar (Narmada) Project, the State Government has decided to set up a Public Limited Company namely the Sardar Sarovar Narmada Nigam Limited. The proposed Sardar Sarovar Narmada Nigam Limited will have its head office at Gandhinagar and its main objects would be to execute the works of the Sardar Sarovar (Narmada) Project.
RESOLUTION:
The Government is, therefore, pleased to set up the Sardar Sarovar Narmada Limited with its registered office at Gandhinagar with an authorized share capital of Rs. 2,000 crores to be divided into 2 crores shares of Rs. 1,000/- each. The entire capital will be scribed by the Government and accordingly the Nigam will be a wholly owned Government Company. The Company should be registered as Public Limited Company under the Companies Act, 1956….”
3. Thereafter, the assessee Corporation was incorporated under the Companies Act, 1956 on 24th March, 1988. The Registrar of Companies (“ROC”), Gujarat issued Certificate of Incorporation. The assessee Corporation, thereafter, was granted Certificate of Commencement of Business by the ROC, Gujarat on 9th May, 1988. On formation of the assessee Corporation, the Government of Gujarat, Narmada Development Department vide Resolution No. MPC/1088/23/K, dated 31-3-1988 transferred en-bloc the entire staff and officers of the Circles and office other heads etc. working under the control of Narmada Development Department to the assessee Corporation. Further, the Government of Gujarat also transferred assets of Sardar Sarovar Narmada Project to assessee Corporation and to effect that transfer, the Government of Gujarat also passed a G.R. No. COR-1488-H dated 27th October, 1988.
4. When the execution of the Project was transferred to the Corporation total works of Rs. 750 crores were under execution. During the year 1988-89 new tenders of the estimated cost of Rs. 352 crores were invited and during the Financial year 1989-90 further tenders of the estimated cost of Rs. 163.92 crores had been invited and so on, till the end of the accounting year 1999-2000.
5. The estimated cost of the Project was Rs. 6406 crores as cleared by the Planning Commission in October, 1988 based on 1986-87 price level. The World Bank had agreed to provide aid of 450 million Dollars for the Project. Further Yen Credit of Rs. 150 crores under OECF will also be available for the Project. This external aid was to be received by the Government of Gujarat through Government of India. About Rs. 1502 crores was expected as share from participating states i.e. Maharashtra, Madhya Pradesh and Rajasthan leaving balance of about Rs. 4204 crores. The expenditure of about Rs. 750 crores has already been incurred on the Project. As per the compressed construction schedule of the Project of 10-12 years the above amount may escalate by 8% annual to Rs. 6000 crores. Considering the likely allocations from the Government of Gujarat and additional funds available due to the liberalized policy of the Government of India on external aid, it was estimated that there would be a net gap of only Rs. 1000 crores. This amount was planned to be raised through Deposits, Debentures, Bond, Kisan Vikas Patras and Non-Resident Indian Investments. It was expected that the servicing of the borrowed money would be possible from the returns which was expected to start generating sometime in 1993-94.
6. During the year 1988-89, the Government of Gujarat made total share capital contribution of Rs. 650.10 crores of which Rs. 533.10 crores is in the form of assets transferred to the Corporation and the balance amount of Rs. 117 crores was received in cash. Against this, the Corporation has allotted equity shares of Rs. 563.50 crores. Further equity shares of Rs. 53.50 crores were allotted in April, 1989. The allotment of the equity shares against the balance amount of Rs. 33.10 crores was to be made on receipt of the report of the Committee appointed to give details regarding the categories of the assets transferred by the Government of Gujarat.
7. No profit and loss account was prepared by the assessee in any of the years (AY 1989-90 to 2000-01) and in Note No. 7 forming part of the accounts in the Annual Report 1988-89 it was mentioned as follows:
“(a) No Profit and Loss Account for the period from 24th March, 1988 to 31st March, 1989 has been prepared as the Projects of the Company are under construction and the Company’s operation of supply of water and power has not commenced by 31st March, 1989.
(b) Most of the items classified under incidental expenditure during construction, according to the Company, are relating to the Project and it is therefore the intention of the Company to capitalize the same as and when commercial operations commence.”
8. The position of the project executed and establishment of infrastructure continued upto the previous year relevant to the A.Y. 2000-2001. In the Directors’ report for the year ended 31st March, 2000 it was observed in the “Highlight of the Project” as “The Sardar Sarovar (Narmada) Project being implemented by your Corporation is a unique multi-purpose project, participated by four states i.e. Gujarat, Madhya Pradesh, Maharashtra and Rajasthan. The project is the largest water resources development project in India and reportedly one of the three largest in the world. The length of the main concrete gravity dam is 1,210 meters and the height is 163 meters from the deepest foundation level. The gross storage capacity of the reservoir is 9,500 million cubic meters (7.70 MAF) and live storage capacity is 5,800 million cubic meters (4.72 MAF). The reservoir will be extending about 2.14 kms. Upstream covering a surface area of 370 sq.km. A 460 Kms. Long concrete lined main canal is being constructed on the right bank from the reservoir upto Rajasthan border having a capacity of 1,133 cumecs at the head and 71 cumecs at the tail i.e. at the Gujarat Rajasthan border. There will be 42 branches off-taking from the main banks”
9. The Directors’ report further mentioned under head ‘Dam and Appurtenant Works’ as “Excavation and concrete works are two major components of the Main Dam works. Upto March, 2000 a total of 63.28 lacs cubic meters excavation and 58.50 lacs cubic meters concrete works has been done, which constitute 98.88 & 85.78% respectively of the total work to be carried out.” Similarly, under the head ‘Hydro Power’ it was mentioned that “9.85% open excavation and 91.55% underground excavation for the River Bed Power House have been completed. Of the two hydropower stations planned in the project the Canal Head Power House of 250 MW is completely ready for commissioning. As soon as the dam height reaches 110M, it would start generating power. Imported turbo Generator sets from Japan are to be installed in River Bed Power House. Two units have already reached the dam site and their installation has started and will be completed in May, 2003. As per planning, remaining sets will be installed from May, 2003 one by one at interval of four months.”
10. Again under head “Narmada Main Canal” it was observed that “The construction of Narmada Main Canal (NMC) upto Mahi river crossing (i.e. reach 0 to 144 kms.) is in completion stage. Total 767.23 LCM earthwork (99.17% of revised qty.) 150.55 lsm lining (99.98% and 20.96 LCM structured concrete (97.66%) are completed upto March, 2000. The Narmada Main Canal works from 144 kms. To 264 kms. Reach (i.e. from Mahi river crossing to Saurashtra Branch Canal off-take) are in progress. Total 633.89 LCM excavation (96.35%, 12.19 LSM lining (95.28%) and 4.73 LCM (92.38%) structural concrete are completed upto March, 2000. The works of six major canal siphons on major rivers i.e. Shedhi, Saidak, Mohar, Watrak, Meshwo and Sarbarmati are in progress and on Khari is completed.” While in the Report under head ‘Distribution System’ it is stated that “Phase-I-“Sardar Sarovar (Narmada) Project Command under Phase-I (i.e. area under NMC ch. 0 to 144 km) covers culturable command area of 4.47 lac Ha. Between the rivers Narmada & Mahi. The survey, investigation, planning, designing and estimating of distribution system upto 40 Ha. Block has been completed. The work of Distributaries and some minors are nearly completed. Out of remaining works distributaries & minors 41 works amounting to Rs. 262 crores have been awarded. For remaining works tenders are being invited.” Phase-II – “The planning of distribution system in the C.C.A. of 3.85 lacs Ha. In Phase-II area is completed. In remaining area of 10 lac Ha. In Phase-II, the same is under progress. The work of above distribution system are yet to be taken up. The distribution of Shedhi Branch Canal (44,128 Ha. C.C.A.) is completed upto Minor level (except lining in minors). The sub-minors & field channels of the SSP will be constructed through Water Users’ Association under farmers’ Participatory Irrigation Management (PIM).”
11. Auditors’ qualified the report and in reply to the Auditors’ remark on accounts, (item 4) the Board of Directors replied that “The Company is not a contractor. Therefore, Accounting Standard-7 is not applicable to the Company. No revenue has been generated during the year from the normal activities of the Company. Therefore, Accounting Standard-9 (Revenue Recognition) is also not applicable to the Company. All other Accounting Standards have been complied with to the extent they are applicable to the Company.” The expenses and income are not carried to Profit & Loss account, but are shown in the Balance Sheet under the Head “Incidental Expenditure Pending Capitalisation”. There are expenses minus income.
12. Pending project completion /construction, the money available with the assessee, out of capital contribution by the Govt. of Gujarat and also the borrowings, which could not be utilized for construction immediately, became surplus and was invested in short-term deposits with the banks and the assessee earned interest thereon in all these years.
13. In the background of the facts as stated above, the Tribunal had to decide the appeals of the Assessee and C.O. of the Revenue in ITA No. 349/Ahd/2001, 2106 to 2108, 2729 to 2735, 3057/Ahd/2003 and 899/Ahd/2004 and C.O.No.56/Ahd/2003 for AY 89-90 to 2000-01. The assessee did not file return of income for the aforesaid assessment years presumably because it had not prepared any Profit & Loss Account as stated in note 7 to the Annual Accounts of the year 1998-99, its project being under construction and operations of supply of water and electricity had not commenced. It adjusted all the expenditure and income to work-in-progress account. Pursuant to the notice Under Section 148, the assessee filed return of income for the years under consideration, claiming all expenditure incurred by it as business expense, even though in the books of account, the expenditure was capitalized and carried and debited to work-in-progress. The assessee corporation/Nigam contended that it was incorporated with the sole purpose of construction of dam, canals and power houses and there is no provision to continue to operate, once construction is complete and, therefore, the Nigam was carrying on the construction business, and therefore, the moment it had put first bricks for construction and started its first activity with regard to construction, it has commenced its business activity. As a consequence it claimed that the all revenue expenditure incurred by it for the purpose of carrying on its business have to be allowed as deduction. If it is so allowed as claimed by the Assessee, then the result of computation under the head “Income from Business” would be a loss. Even if interest income is taxed under the head “Income from other sources”, the loss under the head “Income from Business” will be set off against “Income from other sources” and if so set off, admittedly there would be no total income which will be chargeable to tax. As already stated, the Assessee deposited funds raised by it by issue of bonds etc., which were lying idle in banks and earned interest on such deposits. The Assessee also claimed that the interest it paid to the bond holders should be allowed as a deduction against interest that it earned on deposits u/s.57(iii) of the Act. On the above issues raised by the Assessee, the Tribunal rendered its decision against the Assessee.
14. On the question whether the Assessee can be said to have set up its business, the Tribunal held as follows:
“23.3 Now the question is that when the assessee corporation can be said to have set up or commenced its business. The assessee is not engaged in any business of construction of dams or powerhouse for others. It has to construct the dam for own self so as to regulate and supply of water and electricity. Constructed portion of the project is not its stock in trade but capital asset. Where the construction is part of stock in trade it might be said that it started its business activity the moment it put in the first brick to continue the taken over project. In case of construction of capital asset or infrastructure it could not be said to have or commenced the business. It is normally when it is ready to provide or produce the (SIC). The assessee Corporation being engaged in constructing infrastructure, the dam, in this case, cannot be said to have set up its business or it had commenced business. At best it can be said that it had taken steps to provide the infrastructure. It is only when the infrastructure is ready to exploit, it can be said to be started and/or set up its business or commenced its business. Let us examine the cases relied upon by the parties on these issues.” (emphasis supplied)
15. The Assessee had advanced arguments to the effect that the entries in the books of accounts whereby the Assessee capitalized all expenses to work-in-progress should not be held against the Assessee. On the aforesaid argument, the Tribunal held as follows:
“23.15 No doubt it is true that these two decisions say that the accounting entries would not be decisive, but in this case it is not only the accounting entries but even the provisions of law are contrary to the claim of the assessee. The assessee has not commenced/set up its business and therefore any expenditure before setting up/commencement of business cannot be allowed as deduction. The project of the assessee was under construction in all the previous years and the construction has not been to such an extent as to enable one to say that it was ready to commence its business or that it had set up its business.
23.16 The Certificate of Incorporation as a Company and/or Certificate of Commencement of Business in 1998, do not establish anything except the fact that the assessee can operate as a company or it is authorized or permitted to commence the business. Whether the company has commenced its business or not depends upon the activities it carries on and not on what it can do or authorized to do. It had engaged in activities during these years only in construction of dams, which is the infrastructure with which it has to conduct its business on completion. No doubt, it is true that it had completed a major part of the mega project, but it has not completed the dams to such an extent that it can be exploited for starting supply of water and/or electricity nor it can be said to have set up the business or commenced its business.
23.17 The objects clause contained in the Articles and Memorandum of Association and also an authority of what assessee can do, but here also it does not establish that the assessee corporation was doing or had started its business, in light of the decision of the Supreme Court in the case of Bengal & Assam Investors Ltd. [supra] and Oriental Investment Co. [supra] wherein it was observed that the object clause is a relevant consideration but not conclusive. It is a matter of fact that whether it had actually commenced its business or had set up the same and that is to be determined by the activity it is engaged in. Mere engagement in construction of the dam by itself is not an activity of business or reaching a stage immediately prior to the commencement and setting up of the business to be carried out, when the construction is complete and reach a stage to be exploited.
16. On the question whether interest income is taxable under the head “Income from other sources” and whether the interest paid on funds borrowed by the Assessee which were lying idle with the Assessee and which were invested in deposits with Banks which yielded interest income, can be claimed as expenditure in earning interest income u/s.57(iii) of the Act, the Tribunal held as follows:
“24.2 The assessee, the ld. Counsel submits, is not claiming any adjustment of that expenditure under Section 56 nor set off Under Section 70 nor 71 of the Act, but it claims a deduction under Section 57 of the interest on the borrowed money, which has been utilized for the purpose of earning interest income, and as such, interest would be allowable as deduction in view of the decision of Supreme Court in case of Rajendra Prasad Moody, 115 ITR 569 (SC). The Supreme Court, in the case of Tuticorin Alkali Chemicals, though specifically observed that there was no claim by the assessee for its allowability under Section 57 of the Act, but at the same time it held that such interest could have been deductible while computing the business income but that was not the case of the assessee, and the claim of adjustment was denied under Section 56, 70 and 71 of the Act. In our opinion, therefore, interest which pertains to the borrowings made not for the purposes of making deposits in the bank but made for the purposes of constructing the project which is under completion, even though which have been utilized for making short term deposit for earning interest cannot be allowed as deduction as the same could not be said to have been incurred for making or earning income from interest within the meaning of Section 57 of the Act.” (emphasis supplied)
17. In this appeal which relates to AY 2001-02, similar issues as was decided by the Tribunal in AY 89-90 to 2000-01 came for consideration before the AO. The Assessee took a stand before the AO that the main object for the formation of the company was to construct dams and canals etc., and the business has commenced from the very first year of incorporation of the Assessee. The AO held that the Assessee was not a contractor and therefore the contention that on formation and beginning of construction activities, it cannot be said that the business of the Assessee has commenced.
18. The Assessee claimed before the AO that receipts by way of rent, tender fees, miscellaneous recovery, interest etc., are incidental and inextricably linked with the project and hence have to be set off against the sums that have to be capitalised and cannot be brought to tax as “Income from other sources”. In this regard the Assessee relied on the decision of the Hon’ble Supreme Court in the case of CIT v. Bokaro Steels Ltd. 236 ITR 315 (SC). The Assessee took a plea before the AO vide its letter dated 12.12.2003 that the facts as it prevailed in AY 01-02 are different from the earlier years and submitted as follows:
“We would like to submit that during the year under consideration we have started the activity of supplying water to the people through our canal from the Narmada Dam. We invite your attention to our Director’s report. Which is part of our annual report filed with your goodself and there on records. However, relevant extract from the Director’s report are reproduced for your ready reference:
“Gujarat has faced three consecutive scarcities in last three years. In wake of the acute water crisis that prevailed in many regions of the state during the last summer, an emergency water supply from Narmada river was executed. Sardar Sarovar Project, for this emergency supply, put to use its facilities created so far and started the deliverance of water through its partial completed Narmada Main canal. The water from the SSP reservoir was pumped out through installation of 90 water pumps and maintained continuous flow of on an average more than 1000 cusecs through the Narmada Canal upto ch. 149 km. Thereafter, the Gujarat Water Supply and Sewerage Board (BWSSB) arranges further delivery of water to remote interior areas – specifically Saurashtra. This supply arrangement started on 21st February, 2001 and lasted upto 8th June, 2001. In all 421 villages and 29 towns of five districts of Ahmedabad, Bhavnagar, Rajkot, Amreli and Junagadh received this water during the summer.”
Apart from the above, the Assessee also submitted vide its letters dated 3rd/4th Feb.2004 and 8.3.2004 that the Assessee generated income from supply of water. Later it turned out that the water charges received were not for water released by Narmada Canal but were for the water supplied from Shedhi Branch canal which belonged to the Government of Gujarat and which was transferred to the Assessee on 19.3.1987 for rotational water supply. These water charges were subsequently transferred back to Government of Gujarat. The facts with regard to supply of water on an emergency basis by using the facilities already created by the Assessee viz., partially completed Narmada Main Canal, as stated in the earlier paragraph of this order are not disputed.
19. The AO without referring to the contentions of the Assessee in the earlier paragraph of this order and after referring to the fact that the Assessee had not earned income from supply of Narmada water as the said income belonged to the Government of Gujarat for supply of water through Shedhi branch canal which was transferred to Government of Gujarat, concluded that the Assessee has not commenced its business. The AO thereafter referred to the decision of the Hon’ble Supreme Court in the case of Tuticorin Alkalies, Chemicals & Fertilizers Ltd. 227 ITR 172 (SC) and held that interest income earned by the Assessee has to be brought to tax under the head “income from other sources”. Thereafter the AO held as follows:
“It is seen that the assessee has earned the following interest income during the year:
