Case Law Details
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:
| Sr. No. | AO’s contention | Assessee’s rebuttal |
| 1 | The decision relied upon by the assessee in the matter of IndianOil 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 | pending before the Apex Court.
The AO has not considered the decision in proper perspective, since the conclusion of the Delhi High Court, which emerges is as per the decision of the Apex Court in Bakaro Steel Ltd., in coming to a conclusion to hold that interest earned on funds primarily brought in for infusion in business could not have been classified as income from other sources but since the interest income earned prior to commencement of business was capital in nature and had to be set off against pre-operative expenses. It may be noted that at Para 3 of the assessment order, the AO has observed that the assessee is in the process of setting up port facilities at Karanja. This finding of the AO means that the business has not commenced and this is obvious from the fact that the nature of business is left blank. |
| 2 | 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 2012 lTANo. 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 JVOS.503JP/504JP/505JP/568J P/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. | The jurisdictional High Court in Goodwill Theatres Pvt Ltd. ITA No.: 2356 of 2013 has categorically held a capital receipt is not chargeable to tax either as income or as book profits, Therefore, the A O’s simplistic observation that appeal has been filed in the High Court will not holdgood water. |
| 3 | 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. “* | The 264 petition filed by the assessee for both the years has still not been disposed off by the CIT and is still pending. |
7. The Bombay High Court, which is the Jurisdictional High Court in the case o/ITO V. Siemens India Ltd, (1985J – 156 JTK 11, which are reproduced as under:
“So far as the legal position is concerned, the ITO would be bound by a decision of the Supreme Court as also by a decision of the High Court of the State within whose jurisdiction he is, irrespective of the pendency of any appeal or special leave application against that judgment. He would equally be bound by a decision of another High Court on the point because not to follow that decision would be to cause grave prejudice to the assessee. Where there is a conflict between different High Courts, he must follow the decision of the High Court within whose jurisdiction he is, but if the conflict is between decisions of other High Courts, he must take the view which is in favour of the assessee and not against him.
Similarly, if the Income-tax Appellate Tribunal has decided a point in favour of the assessee, he cannot ignore that decision and take a contrary view, because that would equally prejudice the assessee.”
(emphasis supplied)
8. In another case of Bombay High Court ~ Jurisdictional High Court reported at 256 ITJR 385; i.e. the case of Bank of Baroda v, S.C.Srivastava the relevant observations on the issue by the Hon. Court as under;
“At this juncture, we cannot resist observing that the Judgement delivered by the Income-tax Tribunal was very much binding on the Assessing Officer. The Assessing Officer was bound to follow the judgements in its true letter and spirit. It wasnecessary for judicial unit and discipline that all the authorities below the Tribunal must accept as binding the judgments of the Tribunal The Assessing Officer being an inferior officer visa-vis the Tribunal, was bound by the Judgment of the Tribunal and the Assessing Officer should not have tried to distinguish the same on untenable grounds. In this behalf, it will not be out of place to mention that “in the hierarchical system of courts” which exists in our country, “it is necessary for each lower tier” including the High Court, “to accept loyally the decisions of the higher tiers”. “It is inevitable in a hierarchical system of courts that there are decisions of the supreme Appellate Tribunal which do not attract the unanimous approval of all members of the Judiciary. But the judicial system only works if someone is allowed to have the last word,- and that last word once spoken is loyally accepted”. The better wisdom of the court below must yield to the higher wisdom of the court above as held by the Supreme Court in the matter of Asst. CCB v. Dunlop India Ltd. (1985) 154 JTR 172″.
9. The aforesaid two decisions of the Bombay High Court, which are jurisdictional would establish the binding force of the judicial hierarchy & the consequence of deviation from such judicial discipline. Hon. Members have elaborately discussed the authority ofITAT by referring to plethora of case laws including those of Supreme Court and concluded that the lower authority is duty bound to follow the decision of the 1TAT, so long as the same is not suspended / reversed by Hon. High Court.
10. In the light of the submissions made above, we request your Honour to grant relief in the matter….”
8. The ld CIT(A) in the appellate proceedings upheld the order of the AO after taking into consideration the arguments and the submissions of the assessee by observing and holding as under:
“6.3 The submissions of the learned counsel have been carefully considered.The learned counsel reiterated the submissions made before the assessingofficer, He had further placed reliance on the decision of the hon’ble apex courtin the case of CIT vs, Bokaro steel Ltd 236 ITR 315 wherein it was held that ifincome 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, suchincome is required to be capitalised to be set off against the operating expenses.
The learned counsel further argued that the AO is bound by the decisions of high courts or ITAT and cannot take the plea that they are contested in a higher court for not following the same.
6.4 The learned counsel has heavily relied upon the decision of the honourable apex court in the case of Bokaro Steel Ltd supra. But the facts of the case of Bokaro Steel Ltd are not relevant to the facts of the present case. The amounts in dispute in the case of Bokaro Steel Ltd were not interest on idle funds. These were receipts/receivables from the contractors deployed by the assessee for the construction of its factory representing the following:
1. For usage of residential quarters of the company by the contract,
2. Interest on mobilisation advance given for executing the contract,
3. Higher charges received for usage of equipment belonging to the company.
4. Amount received from contractors for using the stones lying in the campus of the company.
6.5 These amounts were never physically received by the company but prior to that was adjusted against the charges payable by it to the contractors, Thehon’ble apex court held these accruals to be ‘incidental’ and ‘intrinsically connected’ with the construction of the steel plant, on the reasoning that it in short that the construction work proceeded smoothly without financial hitches. In this background, it was held that this would comprise a capital receipt. Even a quick perusal of the present appeal ineluctably shows that the decision of Bokaro steel case is inapplicable. Interest earned on idle funds temporarily invested in fixed deposits cannot be taken as akin to the charges received for availing of the construction -related facilities provided to the contractors. In fact, as per para 4 of the Bokaro steel decision, interest in the nature of what obtains in the appeal under consideration was unambiguously held to be taxable. In the said paragraph, the following observation was made by the hon’ble Supreme Court:
“During these assessment years, the respondent assessee had invested the amounts borrowed by it for the construction work which were not immediately required, in short-term deposits and earned interest. It has been held in these proceedings that the receipt of interest amounts to income of the assessee from other sources. The assessee has not filed any appeal from this finding which is given against it In any case this question is now concluded by a decision of this court in Tuticorin alkali chemicals and fertilisers Ltd vs. CIT(1997) 227 ITR 172.”
6.6 Thus both the decisions are in harmony and equally disapprove the tax treatment of interest on fixed deposits canvassed by the appellant through which it seeks an undeserved tax benefit. Unlike the facts of the Bokaro steel case, the impugned receipts, in this case, bearing the nature of interest income on fixed deposits/ have not arisen due to interplay between the assessee, the contractors and the construction activity.
6.7 The appellant also placed reliance on the case of Indian oil Panipat power consortium Ltd vs, ITO (2009) 315 ITR 255 wherein the hon’ble Delhi High Court held that the funds could not be immediately utilized by the appellant owing to the legal entanglements with respect to the title of the land which the state government was to acquire for the assessee. In the interregnum the funds were parked as interest-bearing fixed deposits in a bank. No such issue is involved in the instant appeal and hence the reliance of the assessee on this judgement is misplaced.
6.8 On the contrary the judgement in the case of Tuticorin alkali chemicals and fertilizers Ltd (supra) is squarely applicable to the facts of the present case, In the Tuticorin alkali’s case the hon’ble apex court inter alia, observed and held as under;
1. In the usual course, interest received by the company from bankdeposits and loans would be taxable as income under the head income from other sources under section 56.
2. It was argued on behalf of the company that it had not yet commenced its business and in any event if the income was derived from funds borrowed for setting up the factory of the company, it should be adjusted against the interest payable on the borrowed funds. Neither of the two factors can affect taxability of the income earned by the company. The total income of the company is chargeable to tax under section 4. The total income has to be computed in accordance with the provisions of the Act. Section 14 lays down that for the purpose of computation, income of an assesses has to be classified under 6 heads.
3. If a company has not commenced business, there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed. If the company, even before it commences business, invests the surplus funds in its hand for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head ‘capital gains’. Similarly, if a company purchases rented house and gets rent, such rent will be assessable to tax under section 22 as income from house property. Likewise, a company may have income from other sources. It may buy shares and get dividends. Such dividends will be taxable under section 56. The company may also, as in this case, keep the surplus funds in short-term deposits in order to earn interest. Such interests will be chargeable under section 56, In the instant case, the company had chosen not to keep the surplus capital idle, but had decided to invest it fruitfully. The fruits of such investment will clearly be of the revenue nature.
4. If the capital of a company is fruitfully utilised instead of keeping itidle, the income thus generated will be of the revenue nature andnot accretion to capital. Whether the company raised the capital by issue of shares or debentures or by borrowing will not make anydifference to this principle. If borrowed capital is used for thepurpose of earning income that income will have to be taxed in accordance with law. Income is something which flows from the property. Something received in place of the property will be capital receipt. The amount of interest received by the company flows from its investments and is its income and is clearly taxable even though the Interest amount is earned by utilising borrowed capital.
5. The interest earned by the assessee was clearly its income and unless it could be shown that any provision like section 10 exempted it from tax, it will be taxable. The fact that the source of income was borrowed money did not detract anything from the revenue character of the receipt.
6. Further, any argument based on accountancy practice has little merit if such practice cannot be justified by any provision of the statute or is contrary to it.
7. The company was at liberty to use the interest income as it liked. It was under no obligation to utilise this interest income to reduce its liability to pay interest to its creditors. It could re-invest the interest income in land or shares, it could purchase securities, it could by house property, it could also set up another line of business, it might even pay dividends out of this income to its shareholders. There was no overriding title of anybody diverting the income at source to pay the amount to the creditors of the company.
8. It is well-settled that tax is attracted at the point when the income is earned. Taxability of income is not dependent upon its destination or the manner of its utilisation. It has to be seen whether at the point of accrual, the amount is of the revenue nature and if so, the amount will have to be taxed.
9. It is true that the Supreme Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act Whether a particular receipt is of the nature of income and falls within the charge of section 4 is a question of law which has to be decided by the court on the basis of the provisions of the Act and the interpretation of the term ‘income’ given in a large number of decisions of the High Courts, the privy Council and also this court. It is well-settled that income attracts tax as soon as it accrues. The application or destination of the income has nothing to do with its accrual or taxability. It is also well-settled that interest income is always of a revenue nature unless it is received by way of damages or compensation.”
6.9 Further, in the case of Shree Krishna polyester Ltd vs. DCIT (2005) 144 taxman 41, the hon’ble Bombay High Court held that “the interest that the assessee earned from short-term investment of surplus money received in public issue did not spring or emanate from the business activity of the assessee. The interest income in respect of the surplus money not required for business immediately and deposited in banks as idle money, would be assessable as ‘income from other sources’.” The hon’ble Rajasthan High Court in the case of CIT vs, Rajasthan land development Corporation (1995) 211 ITR 597, after considering various decisions on this subject, held that income from interest on deposits of surplus money during the construction period is to be considered as ‘income from other sources’.
6.10 The instant case is clearly covered by the decision of the jurisdictionalHigh Court in the case of Shree Krishna polyester Ltd supra, In the instant casealso the assessee has received the foreign direct investment by way of shareImplication money as per the assessee’s own admission. This amount wasneither ‘incidental’ nor ‘intrinsically connected’ with the business activities of the assessee. In view of the binding judgements in the cases of Tuticorin alkali chemicals and fertilisers Ltd of the apex court and Shree Krishna polyester Ltd of the Bombay High Court supra the Interest income earned by the assessee on the ICDs and deposits made with NBFCs is to be treated as income from other sources and not a capital receipt. Moreover, the assessee itself had offered this as income from other sources in the preceding assessment years i.e. 201112 and 2012-13. The assessee cannot suddenly change its stand on identical facts. The action of the AO in treating this income as income from other sources and holding it liable for tax both under the normal provisions of the Income Tax Act and for the purposes of section 115 JB is confirmed. This ground of appeal is dismissed.”
9. The ld AR vehemently submitted before the bench that this is a stay rejected early hearing matter and therefore required to be heard on priority basis. The ld counsel of the assessee submitted before the bench that the assessee company was incorporated in May, 2010 for a specific purpose of developing and operating of port terminal and facilities at Karanja Creek in the state of Maharashtra with shares capital held SKIL Infrastructure Ltd, India(SKIL India) with its nominees to the extent of 49% and by Karanja Infrastructure Private Ltd(KPIL) and its associates to the tune of 51%. The SKIL group incorporated a holding company SKIL Ports & Logistics Limited (Guernsey) (SKIL Guernsey) to develop, own and operate logistics facilities in India. The said company in October, 2010 made an AIM Initial Public Offer an Alternative Investment Market on Landon Stock Exchange for investment in Karanja Terminal & Logistics (Cyprus) Limited(KTLCL) a Cypriot Intermediate company which was incorporated on 31 August, 2010. On 1st October, 2010 KTLCL agreed to subscribe the shares of the assessee to the tune of 99.97 % and balance of 0.23% are held by SKIL India and KIPL being nominee shareholders. The assessee received share capital raised in the Landon Stock exchange of Rs. 465.12 Cr to meet its cost of port terminal project. The ld AR submitted that share capital was received as foreign inward remittance from 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 after complying with various formalities under the relevant applicable laws. The ld AR submitted before the bench the complete time line mentioning therein the date wise stages and also the reasons for which the project was delayed. The ld AR submitted that the project was delayed for the reasons which were beyond the control of the assessee such as environment clearances, local issues such as the agitation by the local people. The ld AR submitted that the unutilized funds in hand, which could not be utilized for the development of the port terminal because of delayed clearances and other factors, were put into FDRs and ICDs with banks and NBFCs pending the clearances and other formalities. The said interest of Rs. 44,45,12,424/- was of capital nature as the it relates to the period prior to the commencement of the project and therefore not offered to tax. The ld AR argued that the interest income received by the assessee was earned out of the funds received as share capital raised on the London stock exchange by KTLCL specially for the purpose of development of port terminal and other facilities at Karanja Creek. The ld AR stated that receipt of interest was earned on the unutilized funds which are inextricably linked to the development of port terminal at Karanja Creek. In defense of his arguments the ld AR relied on the following decisions:
a) CIT Vs Bokaro Steel Ltd 236 ITR 315(SC)
b) Indian Panipat Powe Consortium Ltd Vs ITO 315 ITR 255
c) CIT Vs Karnal Coop. Sugar Mills Ltd. 243 ITR 2 (SC)
d) PCIT Vs Facor Power Ltd 380 ITR 474 (Delhi)
e) NTPC Sail Power Company (P) Ltd. CIT 210 Taxman 358 (Delhi)
f) CIT Vs Sasan Power Ltd 205 Taxman 56 (Delhi)
g) Adani Power Ltd. Vs ACIT 155 com 239(Delhi)
h) Solarfield Energy Two Pvt Ltd Vs ITO 5076/Mum/2016 AY 2012-13 dt 11.9.2017
10. The ld AR submitted that in all the above decisions it has been held that the interest/income received during the period prior to commencement of project is a capital receipt and has to be deducted from the capital expenditure.
11. The ld AR of the assessee also contended that the income which is not taxable on account of being capital receipt is not to be included in the book profits under MAT. The ld AR of the assessee has relied on various decisions namely:
i) Indo Rama Synthetics (I) Ltd. V/s. CIT, 330 ITR 363(SC)
ii) Shivalik Venture Pvt. Ltd. V/s. Dy. CIT, 43 ITR(Trib) 187(Mum Tr)
iii) DCIT Circle-1 V/s. McNally Bharat Engineering Co. Ltd., ITA No.l00/Kol/2011, Dated 01/03/2017.(ITAT Kol)
iv) of ACIT, Range-2, V/s. M/s. L. H. Sugar Factory Ltd., ITA NQ.417 & 418/LKW/2013(Lucknow)
v) DCIT, c.c-XXVIII V/s. Binani Industries Ltd., 178 TTJ 658(Kol Tri)
vi) ACIT, Circle-2 V/s. Shree Cement Ltd., ITA NO.614, 615 & 635/JP/2010,152 ITR 561(Jaipur Tri)
vii) Shree Cement Ltd. V/s. Addl. Commissioner of Income Tax, 152 ITD 561(Jai Tri)
viii)Veekaylal Investment Co. Pvt.Ltd. 249 ITR 597(Bom)
ix) JSW Steel Ltd. Vs. ACIT, 82 com 210 (Mumbai Tri)
x) Bisleri Sales Ltd v/s. CIT, 377 ITR 144(Bom)
xi) Veekaylal Investment Co. Pvt. Ltd. 249 ITR 597 (Bom) was distinguished.
The ld AR submitted that that in the Asst year 13-14 & 14-15 interest earned was credited to the P&L account but, at the same time, in the notes attached to the audited statement of accounts, it is mentioned that since the interest is the Capital Receipt it is not taxable both under the normal provisions of the Act as well as u/s. 115JB of the Act and therefore prayed that the said interest is not part of the book profit. Likewise the interest received on FDR/ICDs is reduced from the capital work in progress being capital receipt.
12. The ld. DR, on the other hand, submitted that the documents filed by the assessee in the various paper books were not before the AO though the same are certified to be before the AO and CIT(A) by the counsel of the assessee. The ld DR sought adjournments three times on the plea that it has to be confirmed from the AO whether the documents were before the AO or not. During the last hearing the ld DR filed letter dated 5.2.2019 seeking the time of one month but since these are SREH appeals, the adjournment was denied on the ground that the assessee is developing a infrastructure project and the bank account of the assessee are lying attached by the revenue authorities thereby putting the assessee to irreparable loss.
13. The DR while opposing the arguments of the ld AR submitted that the order of ld CIT(A) has rightly upheld the order of AO by distinguishing the various case laws relied by the ld AR. The ld DR submitted that ld CIT(A) has passed a very speaking and reasoned order after distinguishing the various decisions as relied upon by the assessee. The DR argued that the interest received by the assessee on unutilized funds put into FDRs and ICDs is of revenue nature and therefore has rightly been brought to tax. The ld DR in defense of his contentions relied on a series of decisions namely:
a) Tuticorin Alkali Chemicals &Fertilisers Ltd Vs CIT (1997)93 Taxman 502 (SC)
b) Shree Krishnan Polyster Ltd Vs DCIT (2005) 144 Taxman 41 (Bom)
c) CIT Vs Rajasthan Land Development Corporation Ltd (1995)211 ITR 597 (Raj)
d) Thermal Power Tech Corporation India Ltd. Vs DCIT 81 com 168 (Hyd)
e) Emta Steel & Energy Ltd Vs DCIT ITA No. 1018/Kol/2012 dated 6.1.2017
f) ShreMaheshwar Hydel Power Corporation Ltd Vs CIT 96 com 176 (Bom)
g) Thermal Powertech Corporation India Ltd. 164 ITD 449(Hyd. Trib)
14. The ld DR prayed before the bench that in view of the ratio laid down in the above decisions, the order of CIT(A) may be upheld by dismissing the appeal of the assessee. The ld DR also argued that the assessee is not accounting the interest income on consistent basis. In 2011-12 and 201213 the assessee has not only credited the interest to the profit and loss account but also offered the interest received to tax. Whereas in the AY 2013-14 & 2014-15,the interest received was credited to the profit and loss account but while calculating the taxable income under normal as well as special provisions of the Act it was excluded on the ground that interest being a capital receipt. In AY 2015-16, the interest was not credited to the profit and loss account at all and was reduced from the capital work in progress besides reducing the interest for earlier years in the balance sheet as at 31.3.2015. The ld DR. therefore prayed that the order of ld CIT(A) may be upheld.
15. In the rebuttal, the ld AR submitted that assessee has filed petition u/s 264 of the Act before the Principal Commissioner of Income Tax (hereinafter called as PCIT) for the AY 2011-12 & 2012-13 to revise the assessment by excluding the interest income from the taxability under the normal provisions as well as u/s 115JB of the Act upon realising its mistake that the interest is capital receipt. The ld. AR submitted that the said petition was rejected by the PCIT on the ground of delay in filing petition u/s 264 of the Act. Ld. AR submitted that Hon’ble Bombay High Court after considering the plea of the assessee directed the PCIT to hear the petition on merits which is pending before the PCIT as on date. Therefore, the arguments of the ld DR has not force. The ld AR relied on the case of CIT Vs Reliance Wellness Ltd ITA No. 842 and 843 of 2016 dated 10.12.2018 in which the Hon’ble Bombay High Court has held that mere accounting entries in the books of accounts are not sufficient to decide the taxability of the amount received by following the decision of the Apex Court in the case of Kedarnath Jute Mills Ltd 82 ITR 363 and Tapariya Tools Ltd 372 ITR 605. Further, the ld AR submitted that principal of resjudicutta does not apply to the income tax proceedings by relying the decision of Radha Soami Satsang Vs CIT 193 ITR 391.
16. We have heard the rival parties and carefully perused the materials placed before us including the case laws relied upon by both the parties. At the outset we would like to mention that these are the stay rejected appeals and posted for hearing on out of turn basis with first hearing on 18.12.2018 vide order of the tribunal dated 16.11.2018. We further note that the bank accounts of the assessee stood attached by the AO as informed during the hearing thereby affecting the development work of the terminal which is on the final stages of completion. Thereafter the case was adjourned to 3.1.2019. On 3.1.2019, the case again was adjourned at the request of the ld DR to 9.1.2019. On 9.1.2019 the case was substantially heard and adjourned at the request of the ld DR as he requested the bench that confirmation from the AO is still awaited on documents filed by the assessee in the paper books. According to the ld DR, AO report is required whether the documents filed in the paper books were before the him and adjourned to 17.1.2019 giving as last and final opportunity to the ld DR. as the ld DR prayed for 10 days’ time. On 17.1.2019 the said date also, the ld DR again sought adjournment by filing letter dated 5.2.2019 requesting that the report of the AR is still not received and the hearing was adjourned to 6.2.2019. Therefore the case was again adjournment to 8.2.2019 but on the said date again filed letter dated 7.2.2019 received from D.C Circle-6(3) and , the DR requested for the adjournment on the ground that the AO requires one month time for giving report whether the documents filed in paper books were before him or not though expressing his preparedness to argue the case which received sharp reactions from the ld AR on manner in which the adjournments were being sought in the stay rejected matters. The ld AR stated that assessee is executing an infrastructure project of port development which in final stages of completion and is likely to be commissioned in the month of March, 2019 but due to the attachment of bank accounts by the AO, the assessee is exposed to irreparable loss which would be impossible to recoup if the case is adjourned again today. The ld AR prayed before the bench that the case is covered in favour of the assessee by various decisions of the Apex Court, High Court and the Tribunals. The ld AR submitted before the bench that he can prove on the basis of the various replies filed before the authorities below and also on the basis of observations of the AO in the assessment orders of various years that all the documents in the paper books were before the AO. After hearing both the parties on this issue, we are of view that the revenue cannot be given any further adjournment on the ground of seeking confirmation from the AO on paper books particularly when the bank accounts of the assessee are already attached and the revenue has been given sufficient opportunities. The ld AR of the assessee took us through the various assessment order and replies filed before the AO which proved to our satisfaction that the concerns of the DR about the documents not being before the AO is not correct. We have, therefore, decided to hear the appeals of the assessee.
17. Only issue involved in the present case of the assessee is that whether the interest received on FDRs/ICDs with bank/NBFCs made out of unutilized funds which could not be used in the development of the port terminal due to various reasons such as clearances from Govt. Authorities and due to local issues. We note that the delay in the construction of port terminal was purely due to the reasons of non-issue or delayed issuance of clearances and due to local protests by the public. This is also undisputed that these funds were received as share capital solely for the development of port terminal and other facilities at Karanja Creek and were raised on Landon stock exchange by holding company M/S SKIL Guernsey a Cyprus company which was formed for the specific purpose only. The port terminal in question is yet to be commenced as is apparent from various evidences in chronology placed on records as stated below:
| Sr.No | Contents / Brief Description | Page Nos |
| 1 | Letter from MMB bearing ref. no. MMB/Planning-2/KIPL/921, dtd.13thMar.2015 – Permission to carry outCapital Dredging at the Karanja Site | 1-4 |
| 2 | Letter from MMB bearing ref. no. RPO/MORA/GEN/KTLPLKARANJA/ 1070,dtd.28thSept.2015— response to project update confirming LeaseAgreement continues to remain valid and in force. | -5- |
| 3 | Letter from KTPL to MMB bearing ref No.KTPL/14/15-16, dtd.3rdMar.2016- Obstructions at the project site by antisocial elements (Marathi Transcript) | 6-7
|
| 4 | Letter from KTPL to MMB bearing ref No.KTPL/14/15-16. dtd.3rdMar.2016- Obstructions at the project site by antisocial elements (English Translation”) | 8-10
|
| 5 | Letter from Maharashtra Maritime Board bearing ref. no. MMB /Planning- 1/KIPL/Maint. Dredging/249, dtd. 21stJan.2017- granting extension for dredging Work. | -11-
|
| 6 | KTPL letter dated 23rd August 2017 addressed toMaharashtra Maritime Board, providing Project update of Karanja Port | -12-
|
| 7 | KTPL letter dated 4th April 2018 seeking extension of Termof Deed of Lease / Expansion of Port Limit | 13- 17
|
| 8 | Letter from Maharashtra Maritime Board bearing ref no. MMB/Planning-2/Karanja Terminal 75-201 8/2288. dtd.llthMay, 2018 extending the period of lease from 30 years to 50years and providing additional 200 Acres land with 1000 metres of waterfront. (Marathi transcript”) | 18- 19
|
| 9 | Letter from Maharashtra Maritime Board bearing ref no. MMB/Planning-2/Karanja Terminal/5-2018/2288. dtd.llthMay, 2018 extending the period of lease from 30 years to 50years and providing additional 200 Acres land with 1000 metres of waterfront. (English Translation) | 20- 21
|
| 10 | Letter from Maharashtra Maritime Board bearing ref no. MMB/Planning-2/Karanja Terminal/ 6526. dtd. 22ndOctober, 2018 — Permission to carry out trial Operation of JSW Cargo at Karanja Creek Jetty. | 22- 23
|
| 11 | KTPL letter to Maharashtra Maritime Board bearing ref. no. KTPL/MMB 7201 8/09- 027. dtd.27th Sept. 2018 – requestingpermission to carry out trial operation of JSW Cargo atKaranja Port. | 24- 27
|
18. We may add that these documents have no bearing on the issue involved in these appeals. However, these documents are filed just to prove various issues/problems faced by the appellant company in starting the project. It is also apparent from the above that the lease agreement granted by the Maharashtra Maritime Board has been extended from 30 years to 50 years. Maharashtra Maritime Board have further given more 200 acres land and 1000 meters of water front and even permission of the trial operation has been granted vide their letter dated 22/10/2018.
19. We observe that the above letters have no bearing on the issue to be adjudicated by us but only reinforces the stand of the assessee that port terminal is in final stage and permission has been granted for trial run vide letter dated 22/10/2018.After taking into consideration the facts before us we have no doubt in our mind that the income by way interest is received on the unutilized funds which were directly related to the development of port and received by way of Share capital exclusively raised for the purpose of development of port terminal. Thus we have no doubt in our mind that these funds were exclusively and inextricably connected to the development of port facilities at Karanja Creek. The various decisions relied upon by the ld AR and DR as stated hereinabove are perused and analyzed and on the basis of that we hold that the interest received by the assessee during period to the commissioning of the port is of capital receipt and cannot be taxed both under the normal provisions and under section 115 JB of the Act. The decisions relied by the ld AR and DR are analyzed as under:
- In the case of Bokaro Steel Ltd (Supra) the Hon’ble Supreme Court has held as under:
“The activities of the assessee in connection with all these three receipts are directly connected with or are incidental to the work of construction of its plant undertaken by the assessee. Broadly speaking, these pertain to the arrangements made by the assessee with its contractors pertaining to the work of construction. To facilitate the work of the contractor, the assessee permitted the contractor to use the premises of the assessee for housing its staff and workers engaged in the construction activity of the assessee’s plant. This was clearly to facilitate the work of construction. Had this facility not been provided by the assessee, the contractors would have had to make their own arrangements and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee had provided these facilities. The same is true of the hire charges for plant and machinery which was given by the assessee to the contractor for the assessee’s construction work. The receipts in this connection also go to compensate the assessee for the wear and tear on the machinery. The advances which the assessee made to the contractor to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitches as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts are arrangements which are intrinsically connected with the construction of its steel plant. The receipts have been adjusted against the charges payable to the contractors and have gone to reduce the cost of construction. They have, therefore, been rightly held as capital receipts and not income of the assessee from any independent source.
In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production of such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income.
The same reasoning would apply to royalty received by the assessee company for stone etc. excavated from the assessee company’s land. The land had been allowed to be utilized by the contractors for the purpose of excavating stones to be used in the construction work of assessee’s steel plant. The cost of the plant to the extent of such royalty received, is reduced for the assessee. It is therefore, rightly taken as a capital receipt.”
The ratio laid down by the apex court squarely applies to the assessee’s case as it has been held by the court that when the interest on borrowings by newly started company who is in the process of erecting its plant is capitalized and added to the cost of fixed assets created as a result of such expenditure. The apex court held that by the same reasoning if the assessee receives any amounts which were inextricably linked to the setting up of the plant and machinery would go to reduce the cost of assets as the receipts are of capital nature and cannot be taxed.
- In the case of Indian Oil Panipat Power Consrtium Ltd (Supra) it has been held interest on deposits is incidental to the acquisition of assets for setting up plant and machinery and thus distinguished the decision of Tuticorin Alkali Chemicals & Fertilisers Ltd. will not be attracted. In the present case also the interest is earned on FDRs/ICDs made out of unutilized funds meant for port development which could not be used due to various beyond the control of the assessee.
Similarly, we have perused carefully the other decisions relied upon the AR in defense of his arguments and are of the view that the ratio coming out of those decisions squarely applies to the assessee’s case.Now we shall deal with the decisions relied by the ld DR as under:
- In the case Tuticorin Alkali Chemicals Fertilizers Ltd (Supra) the Hon’ble Apex Court has held that where the assessee received the interest on bank deposits made out of loans and borrowings for setting up the factory of the company is taxable as income from other sources. The facts of this case are distinguishable from that of assessee’s case as in the assessee case the funds were raised by way share capital and therefore not applicable and distinguishable.
- In the case of Shree Krishna Polyster Ltd (Supra) the facts are distinguishable as the assessee is carrying on the business and interest on surplus funds in short term deposits with the banks was offered as business income whereas the Hon’ble Bombay Court held that such income is assessable as income from other sources.So the facts are distinguishable.
- Similarly, in the case of CIT Vs Rajasthan development Corporation Ltd(Supra) the facts are distinguishable as the issue was whether the interest received on surplus funds is business income or income from other sources.
- The Hon’ble Bombay High Court in the case of Shree Maheshwar Hydel Power Corporation Ltd., (supra) has held that interest earned is not inextricably linked to the setting up of the plant and Machinery. Further it is also given in the finding that money , raised by way of Optional Fully Convertible Debentures, were not received for setting up of the plant and machinery. This decision is not applicable on the facts of the case as in this case the money was collected under Optional Fully Convertible Debenture. At Para (v) the Bombay High Court in the decision referred to supra while deciding the matter in favour of the Revenue held as follows:
(v) In the decisions of the Delhi High Court in Sasan Power Ltd. (Supra) » and Facor Power Ltd. (Supra) the Tribunal had come to finding of fact that interest which has been earned is in respect of deposits made in the course of/for setting up of plant. Thus, the interest was capitalised. So far as Indian Oil Panipat Power Consortium Ltd. (Supra) is concerned, it was earned prior to commencement of business and could be set off against pre-operative expenses. The fact situation in this case is completely different. In the present facts, both the CIT (A) and the Tribunal have rendered a finding of fact that the interest earned is not inextricably linked to settins up of plant and machinery on the part of the Appellant-Assessee. It also records a finding that money by OFCD was not received for setting up of plant. Therefore, cannot be capitalised. We find that on the facts as found by the Authorities, the decision of the Apex Court in Bokaro Steels Ltd. (Supra) and Karnal Co-operative Sugar Mills Ltd. (Supra) has been correctly applied.
After perusal of the above finding of the Jurisdictional High Court, it will be clear that this decision is in favour of the Assessee wherein the Hon’ble Bombay High Court has confirmed the view of the Delhi High Court in the case of Indian Oil Panipat Consortium Pvt. Ltd. And Facor Power Ltd. And the decision of the Hon’ble Apex Court in the matter of Karnal Co-operative Sugar Mills Ltd.
- In the case of M/s. EMTA Steel & Energy Ltd (supra) , the tribunal held that in case the surplus fund arises out of the loans from various banks and financial institutions and the decision of the Tuticorin Alkali Chemicals & Fertilizers Ltd is applicable and accordingly the interest earned is taxable under the head Income from Other Sources.
- The ld DR has also relied on the decision of the Hyderabad ITAT in the case of Thermal Powertech Corporation India Ltd.(Supra). The facts of the case are different as in that case the interest income was earned out of the borrowed funds. The head note of the decision states: “where assessee company formed to build, own and operate a power plant, deposited unutilised borrowed funds in short term fixed deposits during construction of power plant, interest earned on those deposits was to be taxed as income from other sources – Held yes.
20. So far as the provisions of section 115JB are concerned , in the Asst year 2013-14 & 2014-15 the assessee has credited the interest received in the P&L account however, in the statement of total income the same is reduced being capital receipt. In the notes forming part of the financial accounts for the asst year 2013 -14 and 2014-15 it is mentioned that “Interest Income accrued during the year being in the form of Capital Receipt, as held by the Hon’ble Courts and Tribunals, is not taxable under the normal tax provisions nor under section u/s. 115JB of the Act. We observe from the records that in the AY 2015-16 , the interest received on FDRs/ICDs not been credited to the profit and loss account and was directly reduced from the capital work in progress . In the case of Indo Rama Synthetics (I) Ltd. V/s. CIT, 330 ITR 363(SC) the Hon’ble Apex Court has held that the object of MAT provisions is to bring out the real profit of the companies. The thrust is to find out the real working results of the company. Inclusion of receipt in the computation of MAT would defeat two fundamental principles, it would levy tax on receipt which is not in the nature of income at all and secondly it would not result in arriving at real working results of the company. The real working result can be arrived at only after excluding this receipt which has been credited to P&L a/c and not otherwise. The case of the assessee is supported by the following decisions:
- In the case of Shivalik Venture Pvt. Ltd. V/s. Dy. CIT, 43 ITR(Mum Trib) 187 the issue was, profits and gains arising on transfer of a capital asset by a company to its subsidiary company does not fall under definition of income as given in section 2(24) of The Income Tax Act, 1961. Since it does not enter into computation provisions of Act, it cannot be included in book profit as per scheme of provisions of section 115 JB.
- In the case of DCIT Circle-1 V/s. McNally Bharat Engineering Co. Ltd., ITA No. 100/Kol/2011, Dated 01/03/2017(Kol Tri) the facts were that the retention income was credited to the profit and loss account over which the assessee does not have a title and therefore cannot be regarded as income. The assessee executes turnkey contracts and under the terms of contract a certain percentage is retained and will be given to the assessee only on successful trial run of the final acceptance by the customer .Therefore, the retention money cannot be regarded as income even for the purpose of book profits u/s. 115JB of the Income Tax Act, 1961.
- In the case of ACIT, Range-2, V/s. M/s. L. H. Sugar Factory Ltd., ITA NQ.417 & 418/LKW/2013(Lucknow Tri). In this case sale of carbon credits is credited to the profit and loss account the receipt of transfer of carbon credit is a capital receipt not liable to tax, the same is required to be reduced from book profit because capital receipt cannot be considered as a part of book profit liable to tax.
- In the case of DCIT, c.c-XXVIII V/s. Binani Industries Ltd., 178 TTJ 658(Kol) ITAT the facts were that on receipt of forfeiture of share warrants being capital receipt would not be liable for book profits tax under section 115JB of IT Act. 1961. The genesis of Sec 115J, thereafter section 115JA and now section 115JB was to ensure that the assessee, while making profit from operations, should not enjoy tax free status due to various deductions available under the Income Tax Act. There was never any intention of the legislature to tax what is not income at all.
- In the case of ACIT, Circle-2 V/s. Shree Cement Ltd., ITA NO.614, 615 & 635/JP/2010,152 ITR 561(Jaipur ITAT) the issue is as to whether sales tax subsidy received which was admittedly capital in nature can be subjected to MAT. The ITAT held that there was never any intention behind introduction of section 115JB to tax something which is not taxable at all.
21. In the case of Veekaylal Investment Co. Pvt.Ltd. 249 ITR 597(Bom) the Hon’ble Bombay High Court has held that direct transfer of an item to capital reserve account will not be in accordance with the requirement of the Companies Act and therefore, the AO has the power to recompute the book profit as per the Companies Act. However, the said judgement was rendered prior to the judgment of the Hon’ble Supreme Court in case of Apollo Tyres and therefore, now has no binding effect. In fact, there are subsequent Bombay High Court judgments deviating from the ratio laid down in the said judgment. Thus, the settled position now is that such capital receipts not forming part of the P&L account cannot be brought to tax by including it in the book profit.
22. Accordingly, even for the Asst year 13-14 & 14-15 interest earned is credited to the P&L account but at the same time it was mentioned in the notes to the audited statement of accounts that interest is not taxable under the normal provisions of the Act as well as u/s. 115JB the Act. In the assessment year 2015-15 the interest was not credited to the profit and loss account at all and was reduced from the capital work in progress.
Finally, after considering the facts of the assessee case in the light of various decisions by the Hon’ble Apex court, Hon’ble High Court and coordinate benches, we hold that the 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.
ITA No. 2473/Mum/2018 & 5752/Mum/2018:
23. The issue involved in these appeals is identical to one as decided by us in ITA No. 2472/Mum/2018. Therefore, our decision in ITA No. 2472/Mum/2018 would, mutatis mutandis, apply to these appeals as well. Accordingly, the both these appeals of the assessee are allowed.
24. In result the all the three appeals of the assessee are allowed.
Order pronounced in the open court on the 20th March, 2019
