Case Law Details
Brief of the Case
Delhi High Court held In the case of Principal CIT vs. Facor Power Ltd. that no substantial question of law arises for our consideration. This is so because, the Tribunal has correctly placed reliance on the decision of this Court in Indian Oil Panipat Power Consortium Limited [2009 315 ITR 255 (DEL). The facts in that case were quite similar. In this case, the Division Bench considered the decisions of the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. (1997) 227 ITR 172 (SC) and CIT v. Bokaro Steel Limited: (1999) 236 ITR 315 and held that the funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre-operative expenses.
Facts of the Case
The assessee company was incorporated on 24.08.2005 to carry on in India or elsewhere the business to generate, receive, produce, improve, buy, sell etc. electric power by establishing thermal power plants, atomic power plants etc.. In the year under consideration, no business activity was carried out by the assessee as the project was under implementation. On scrutiny, the assessment proceedings under Section 143(3) were initiated. The Assessing Officer had noted that the assessee had received an amount of Rs.70,75,843/- from State Bank of Mysore as interest on fixed deposits but that the said amount was not declared in the return of income as ‘income from other sources’. It was also noted by the Assessing Officer that the assessee had reduced the said interest amount from the capital work in progress.
The assessee submitted that it had earned interest on FDRs which were placed with the bank as margin money for procurement of various capital goods for setting up of the power project. The Assessing Officer did not accept the explanation offered by the assessee and made an addition of Rs.70,75,843/- as income from other sources.
Held by CIT (A)
CIT (A) allowed the appeal of the assessee and deleted the addition made by AO. It was held that funds raised by the appellant company were inextricably linked with acquisition of the capital assets. The interest received from such funds which were put in FDRs for temporary period was in the nature of capital receipts and such receipts was required to be set off against the preoperative expenses. In this regard reliance is placed on the decision of Hon’ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. vs ITO [2009 315 ITR 0255 (DEL).
Held by ITAT
ITAT upheld the order of CIT (A). It was held that the interest income earned by the assessee in the pre-commencement period could not be stated to be ‘income from other sources’. The Tribunal confirmed the finding of fact returned by the Commissioner of Income Tax (Appeals) that the amount raised as additional share capital from the shareholders and put in fixed deposits was inextricably linked with the acquisition of plant and machinery by the assessee. The Commissioner of Income Tax (Appeals) had also held on facts that the additional share capital raised was for the purposes of acquiring capital assets which were temporarily put in fixed deposits. Advances had been made towards purchase of plant and machinery and orders had been placed and, awaiting delivery, the funds were temporarily put in fixed deposits.
Held by High Court
High Court held that no substantial question of law arises for our consideration. This is so because, in our view, the Tribunal has correctly placed reliance on the decision of this Court in Indian Oil Panipat Power Consortium Limited [20091315 ITR 0255 (DEL). The facts in that case were quite similar. In that case also monies had been received as share capital by the assessee which were temporarily put in fixed deposits awaiting acquisition of land which had run into legal entanglements on account of title. In this case, the Division Bench considered the decisions of the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. (1997) 227 ITR 172 (SC) and CIT v. Bokaro Steel Limited: (1999) 236 ITR 315 and held that the funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre-operative expenses.
From the above, it is evident that the test that is required to be employed is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the same. In the present case, findings of fact have been returned by the Commissioner of Income Tax (Appeals) and have been confirmed by the Income Tax Appellate Tribunal to the effect that the funds were inextricably connected with the setting up of the power plant of the assessee.
Also the principle being that if the capital of a company is fruitfully utilised instead of keeping it idle, the income thus generated, will be of a revenue nature and not accretion of capital. In the present case, there is a finding of fact that the money placed in the fixed deposit was inextricably linked with the setting up of the power plant. Thus, the revenue generated on account of interest on the said fixed deposits would be in the nature of a capital receipt and not a revenue receipt. This case has been decided on the basis of this principle and not on the basis that the source of the funds was through raising of share capital and not through borrowings.
For the foregoing reasons, we do not find that there is any substantial question of law which arises for our consideration and the very issues which are sought to be raised in the present case had been squarely covered by the decision of this Court in Indian Oil Panipat Power Consortium Limited [2009 315 ITR 255 (DEL).
Accordingly appeals of the revenue dismissed.
