Case Law Details
International Coal Ventures Private Limited Vs ITO (ITAT Delhi)
The appeal before the Income Tax Appellate Tribunal, Delhi, arose from the order of the Commissioner of Income-tax (Appeals), who had directed that the entire interest earned by the assessee be taxed under the head “Income from other sources.” The assessee, a public sector undertaking incorporated as a special purpose vehicle by five government entities, was formed to acquire coal mines and assets outside India. During the relevant assessment year 2012–13, the assessee received ₹157 crore as call money from one promoter and ₹3 crore from others. Out of this, ₹156 crore was placed in fixed deposits while the company was engaged in preparatory activities such as feasibility studies and project reports, incurring expenditure of over ₹4.48 crore.
The fixed deposits generated interest income of ₹11.45 crore. Simultaneously, the assessee paid ₹11.14 crore as interest to the contributing promoter upon demand. After adjusting expenses and interest, the net expenditure was capitalized as “capital work-in-progress” (CWIP), and the assessee filed its return declaring nil income. During assessment, the Assessing Officer allowed netting of interest income and expenditure, taxing only the net amount of ₹31.18 lakh. However, the Commissioner (Appeals) reversed this approach and directed that the entire interest earned be taxed as income from other sources without allowing set-off.
Before the Tribunal, the assessee contended that the funds placed in fixed deposits were directly linked to its business objective of acquiring coal mines and that the interest earned was incidental to this purpose. It argued that such income should not be treated as independent income but should be adjusted against project costs and reflected in CWIP. Reliance was placed on the Supreme Court’s decision in Bokaro Steel Ltd., which held that receipts directly connected with business activities during project development should be treated as capital receipts.
The Tribunal examined the undisputed facts and noted that the funds were received specifically to increase share capital and were temporarily parked in fixed deposits pending utilization for business purposes. It observed that the interest earned arose during the course of project development and was intrinsically linked to the business activity. Applying the principle laid down by the Supreme Court, the Tribunal held that such interest income could not be treated as income from an independent source.
The Tribunal concluded that the assessee was entitled to net the interest paid against the interest earned and adjust the balance against the capital work-in-progress. It held that the interest received in this context was not taxable under the head “Income from other sources.” Consequently, the direction of the Commissioner (Appeals) was set aside, and the Assessing Officer was directed to delete the addition made on account of interest income. The appeal of the assessee was allowed.
FULL TEXT OF THE ORDER OF ITAT DELHI
Challenging the order of the learned Commissioner of Income-tax (Appeals)-18, New Delhi (for short hereinafter called as “the learned CIT (A)’) in Appeal No.235 of 2016-17 dated 17.05.2017, assessee preferred this appeal.
2. Briefly stated facts are that the assessee is a public sector undertaking incorporated on 20.05.2009 as special purpose vehicle by five public sector undertakings viz. Steel Authority of India Ltd. (SAIL), Coal India Ltd. ( CIL), Rashtriya Ispat Nigam Ltd. (RINL), NDMC Ltd. (NDMC) and National Thermal Power Corporation Ltd. (NTPC) with the specific object of acquiring coal mines and assets outside India. Assessee received a sum of Rs.157 crores from RINL, its share of call money on 29.6.2011 and Rs.3 crores from other promoters. Since the assessee started the study for acquiring coal mines, upto 31.3.2011, it incurred a total expenditure of Rs.4,48,78,068/- on day to day expenses for preparation of a project report, feasibility studies and other expenses and received an interest of Rs.12,67,065/- from banks. In respect of Rs.157 crores received form RINL, Rs.1 crore was transferred to the share application money and the balance was kept in FD account, which earned an income of Rs.11,45,19,580/-. Since RINL demanded interest, the assessee had to pay a sum of Rs.11,14,73,651/- and after netting of expenses and interest earned, the company transferred the net expenditure of Rs.8,60,96,334/- under the head of “capital work-in-progress” bringing the total balance to Rs.12,97,07,336/- as capital work-in-progress as on 31.3.2012. In the circumstances, assessee filed their return of income for the Asstt. Year 2012-13 showing the income as nil.
3. During the scrutiny, learned AO noticed that the interest earned by the assessee was Rs.11,45,92,550/- whereas the interest paid by the assessee was Rs.11,14,73,651/-, as such after netting the same, he brought a sum of Rs.31,18,559/- to tax. In the appeal assessee pleaded that they are entitled to set off the interest earned against the expenses during construction/CWIP and the same cannot be brought to tax treating it as revenue. However, learned CIT(A) rejected this contention of the assesse and held that the interest income has to be assessed under the head “Income from other sources” and while reversing the order of the learned AO allowing the set off of Rs.11,14,73,651/-interest paid against Rs.11,45,92,550/- interest earned, learned CIT(A) directed the AO to assess the entire interest earned to tax under the head “Income from other sources”. Challenging the same, the assessee filed this appeal.
4. It is the argument of the learned AR that the assessee is a public sector undertaking, the interest as well as the tax will go to the corpus of the Government. It is submitted that the amount, which is held by the assessee in FD for acquiring the coal mines earned interest and holding of the money in FD is inextricable linked to the business purpose, as such, any interest accrued thereon cannot be either netted of for bringing the balance to tax under the head “Income from other sources” or the entire interest earned to be brought to tax under that head. According to the learned AR in view of the ratio of the Hon’ble Apex Court in the case of CIT vs Bokaro Steels Ltd. (1999) 236 ITR 315, the net interest shall be allowed to reduce the work-in-progress. Learned DR vehemently relied on the orders of the authorities below.
5. Perused the material on record in the light of the submissions on either side. In so far as the facts are concerned, absolutely there is no dispute. The assessee received Rs.157 crores from RINL and kept Rs.156 crores in FD account in the process of acquiring coal mines for the conduct of their business. The FD accrues some interest out of which the assessee had to pay back interest to RINL on their demand. Now the question is whether the assessee is entitled to net all the interest received against the interest paid and whether the assessee is entitled to reduce the work-in-progress to the extent of the net interest by treating it as business income.
6. In the case of Bokaro Steels Ltd. (supra), the Hon’ble Apex court held that when the activities of the assessee in connection with a receipt is directly connected with or incidental to the business, such receipts be allowed to be adjusted against the work-in-progress and are capital receipts and not income of the assessee from an independent source. Here, in this matter, the very purpose of assessee receiving Rs.157 crores from RINL was to increase the paid up share capital in furtherance of their business and such an amount accrued interest during the period of their study for acquiring coal mines, during which period on day to day basis the assessee incurred an expenditure of Rs.4,48,78,068/-.
7. Though assessee has placed reliance on catena of decisions, while respectfully following the decision of the Hon’ble Apex Court in the case of Bokaro Steels Ltd. (supra), we hold that the assessee is entitled to net of the interest paid against the interest received and the balance to reduce the work-in-progress. Consequently, we hold that the interest received in this matter is not taxable under the head “Income from other sources”. Accordingly, the grounds of appeal are allowed and the learned AO is directed to delete the addition made on account of the interest earned.
8. In the result, appeal is allowed.
Order pronounced in the Open Court on 6th April, 2018.
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