Case Law Details

Case Name : I.T.O Vs. M/s Kolkata Metro Rail Corpn. Ltd. (ITAT Kolkata)
Appeal Number : ITA No. 1362/Kol/2015 & 49/Kol/2016
Date of Judgement/Order : 22/12/2017
Related Assessment Year : 2010- 11 & 2011- 12
Courts : All ITAT (5311) ITAT Kolkata (418)

I.T.O Vs. M/s Kolkata Metro Rail Corpn. Ltd. (ITAT Kolkata)

It is well-settled that an income received by the assessee can be taxed under the head “Income from other sources” only if it does not fall under any other head of income as provided in section 14 of the Act. The head “Income from other sources” is a residuary head of income. 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. In the case of Tuticorin Alkali Chemicals [1997] 227 ITR 172 it was found by the authorities that the funds available with the assessee in that case were ‘surplus’ and, therefore, the Supreme Court held that the interest earned on surplus funds would have to be treated as ‘income from other sources’. On the other hand in Bokaro Steel Ltd. [1999] 236 ITR 315 (SC) where the assessee had earned interest on advance paid to contractors during pre- commencement period was found to be ‘inextricably linked’ to the setting up of the plant of the assessee and hence was held to be a capital receipt which was permitted to be set off against pre- operative expenses.

The very purpose of constitution of the Assessee was to act as a Special Purpose Vehicle (SPV) created by the Govt of India and Govt. of West Bengal in the form of Joint Venture with equal equity participation for implementation of rapid transport infrastructure in Kolkata. Both the Central and the State Governments are to provide requisite finances for implementation of the said project. The funds from the Central and State Governments flow directly to the Assessee company as equity and Subordinate Debt/ Loans. The objective is to create and maintain a fund for the development of infrastructural assets on a continuing basis and, therefore, the Assessee is a SPV formed by the Government of India and Government of West Bengal as per the guidelines; there is no profit motive as the entire fund entrusted and the interest accrued therefrom on deposits in bank though in the name of the Assessee has to be applied only for the purpose of welfare of the State as provided in the guidelines.

Therefore, considering the factual position discussed above, we are of the view that the Assessee has rightly set off the interest income against the pre­operative expenses in its books of accounts and therefore we confirm the order passed by the ld CIT(A).

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

These captioned two appeals filed by the Revenue,pertaining to Assessment Year 2010- 11 are directed against the order passed by the ld Commissioner of Income Tax (Appeals)-1, Kolkata, which in turn arise out of assessment orders passed by the Assessing Officer u/s 143(3)of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).

2. Since these two appeals relate to the same assessee, different assessment years, identical issues are involved, therefore, these have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity.The Revenue’s appeal in ITA No. 1362/Kol/2015, A.Y 2010-11, is taken as the lead case.

4. The grounds of appeal raised by the Revenue (in lead case in ITA No. 1362/Kol/2015, A.Y 2010-11) are as under:

“1. On the facts and circumstances of the case and in law, Ld. CIT(A) has erred in not considering the interest income as taxable u/s.56 of the Income Tax Act, 1961, as held by Supreme Court of India’s decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. [227 ITR 172(SC)]

2. The CIT(A) has erred in applying the ratio of Supreme Court of India’s decision in the cases of Bokaro Steel Ltd. and Karnal Co-operative Sugar Mills Ltd. In those cases deposits are directly linked with purchases of assets intrinsically connected with construction of plant but in this case facts are different. The assessee company had surplus fund out of share capital/share application which were deposited in banks for earning interest income, therefore same is taxable u/s. 56 of the I.T. Act.

3. The appellant craves leave to add, alter, amend or modify the grounds of appeal during the course of hearing proceedings of this case.”

5. The brief facts qua the issue are that the assessee filed its return of income for the Assessment Year 2010-11 on 29.09.2010, declaring income at Rs. ‘NIL’. The said return was processed u/s 143(1) of the IT Act, 1961. Thereafter, theassessee`s case was selected for scrutiny under section 143(2) of the Act. The assessee Company was engaged in the construction work for metro Rail, Kolkata under East west Metro project in the capacity of joint venture with Govt. of India and Govt. of West Bengal as well.

After going through the Balance Sheet, the assessing officer observed that the assessee Company had received interest from banks amounting to Rs. 54,86,324/-. The assessee company stated in the notes to accounts that the said interest was capitalized as the principal amount on which the said interest accrued, were obtained from the central Government and State Government of West Bengal for execution of the construction work for Metro Railway. Hence, interest accrued out of investment made in the Banks from the said borrowed Loan, were treated as capital receipts and accordingly accounted for in the accounts of the company.

During the assessment proceedings, the assessing officer asked the assessee company, as to why interest income on short-term deposits with banks should not be taken as revenue receipts and taxed accordingly. In response to the question asked by the Assessing officer, the assessee company had replied that since the principal amount of borrowed loan obtained from Govt. authorities were capitalized hence the interest accrued on investment with Bank deposits out of the said fund were also taken as capital receipts and accordingly accounted for in the accounts.

However, the assessing officer rejected the contention of the assessee company and held that the interest so received from Bank deposits should be taken as ‘income from other sources’. Therefore, the AO treated the interest so received from Bank deposits under the head ‘income from other sources’.

6. Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the ld. CIT(A), who has allowed the appeal of the assessee company. The ld CIT(A) observed that it was found to be an admitted fact that the impugned Interest Income was earned on Short-term deposits with Scheduled Banks, and the investments were derived from Central and the Govt. of West Bengal, i.e State Governments funds for infrastructure project i.e. development of East-West Metro Corridor Project undertaken by the assessee company.

The ld CIT(A) noted that the assessee company had treated the impugned amount as capital receipts in its audited accounts, as amount received during pre-operative period. The A.O in the assessment under section 143(3) of the Act had treated the interest income as revenue receipts and brought the interest income amounting to Rs. 54,86,324/- on short-term bank deposits to tax under the head, “income from other sources”. It was clear from documents on record that as per book results of the assessee company, the interest income was accrued during the pre- operative period.

During the appellate proceedings, the assessee company relied on the judgment of Delhi High Court in the case Indian Oil Panipat Power Consortium Ltd. v. ITO (2009) 315 ITR 255 (Del), wherein it was held that since the incomes were earned in a period from prior to commencement of the business, in view of the matter, the monies which were inducted into joint venture company by the joint venture partners, primarily to purchase land and develop infrastructure, the Court observed that it cannot be held to be not connected with the business, merely because the relevant funds were temporarily parked with the Bank. The Hon`ble court held that the income by way of interest earned on such funds cannot be said to be income from other sources. Since the income were earned in a period prior to the commencement of business, it was in the nature of a capital receipt, and was required to be set off against pre- operative expenses following the principles laid down by the Honorable Supreme Court in CIT V. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) and Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167(SC).

The Honorable Apex Court in the case of Commissioner of Income vs. Bokaro Steel Ltd. 236 ITR 315 (SC), had considered the decision in the case of Challapalli Sugars Ltd vs. CIT (1975) 98 ITR 167 and examined the question of treatment of interest received before commencement of production by a company. It was observed, that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. 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 on such borrowed money can be capitalized and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up of its plant and machinery; such receipts will go to reduce the cost of its assets. These are receipts of capital nature and cannot be taxed as income.

During the appellate proceedings, the assessee company cited the judgment in the case of CIT v. Karnataka Urban Infrastructure Development and Finance Corporation (2006) 284 ITR 582 (Kar), wherein it was held that interest on short term deposits with banks made out of funds received from Central and State Governments for development of infrastructure projects and the implementation of the mega city scheme, was not taxable as income.

Based on the above submissions of the assessee company, the ld CIT(A) observed that the impugned interest income earned on short-term bank deposits during pre- commencement period did not partake the nature of revenue receipts. Therefore, the ld CIT(A) held that the interest income amounting to Rs. 54,86,324/- on short-term bank deposits, which are linked with the setting up of infrastructure project were to be in the nature of capital receipts and held to be capital receipts in the hands of the assessee company and accordingly he directed the Assessing Officer to delete the addition.

7. Not being satisfied with the order of the ld.CIT(A), the Revenue is in appeal before us. The Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. On the other hand, the ld Counsel for the assessee has reiterated the submissions made before ld CIT(A) and defended the stand taken by the ld CIT(A).

8. We have given a careful consideration to the rival submissions. We note that the Assessee,(Kolkata Metro Rail Corporation Ltd) is a Government company in the form of joint venture of Government of India and Government of West Bengal with equal equity participation for the execution of East -West Metro Corridor Project at Kolkata by creating a rapid transit system surrounding the City of Kolkata and the District of North 24 Parganas. The required fund has been provided from time to time by Govt. of India and Government of West Bengal in the form of equity and Subordinate Debt/ Loans. The total funds received by the Assessee from the respective Governments was put in the bank accounts and utilized as and when required. Interest on fund parked with banks in the form of Short Term deposits resulted in some additional funds in the form of interest which could be utilized exclusively for the purpose of construction of the project. The interest income earned on such Short Term deposits during construction period was fully utilized for the construction of the project and resulted in reduction of project costs.

We note that the Assessee does not have any other source of income, as such, treatment of interest income is accounted for as Capital Receipt and adjusted with pre- operative expenditure during the construction period, so that, the net off expenditure is carried over to balance Sheet under the head Capital-Work-in Progress.

We are of the view that the Ld CIT(A) has rightly dealt with the issue and reversed the findings of the AO who had treated the interest earned at Rs. 54,86,324/- as “income from other sources”. We note that the ratio of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals [1997] 227 ITR 172 and that of Bokaro Steel Ltd. [1999] 236 ITR 315. The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals [1997] 227 ITR 172, is that if funds have been borrowed for setting up of a plant and if the funds are ‘surplus’ and then by virtue of that circumstance they are invested in fixed deposits the income earned in the form of interest will be taxable under the head “Income from other sources’. On the other hand the ratio of the Supreme Court judgment in Boknro Steel Ltd. [1999] 236 ITR 315, is 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.The test, therefore, 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 plant. The clue is perhaps available in section 3 of the Act which states that for newly set up business the previous year shall be the period beginning with the date of setting up of the business. Therefore, as per the provision of section 4 of the Act which is the charging section, income which arises to an assessee from the date of setting of the business but prior to commencement is chargeable to tax depending on whether it is of a revenue nature or capital receipt. The income of a newly set up business, post the date of its setting up can be taxed if it is of a revenue nature under any of the heads provided under section 14 of the Act, in Chapter IV of the Act. For an income to be classified as income under the head “Profits and gains of business or profession” it would have to be an activity which is in some manner or form connected with business. The word “business” is of wide import which would also include all such activities which coalesce into setting up of the business. We take support of these propositions from the judgments of Honorable Supreme Court in the case of Dock Ltd. vs. CIT/CEPT (1958) 34 ITR 368 (SC) and Narain Swadeshi Weaving Mills vs. CEPT (1954) 26 ITR 765 (SC). Once it is held that the assessee’s income is an income connected with business, which would be so in the present case, in view of the finding of fact by the CIT(A) that the monies which were inducted into the joint venture company by the joint venture partners were primarily infused to purchase land and to develop infrastructure then it cannot be held that the income derived by parking the funds temporarily with Bank, will result in the character of the funds being changed, in as much as the interest earned from the bank would have a huge difference than that of business and be brought to tax under the head ‘Income from other sources’. It is well-settled that an income received by the assessee can be taxed under the head “Income from other sources” only if it does not fall under any other head of income as provided in section 14 of the Act. The head “Income from other sources” is a residuary head of income. 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. In the case of Tuticorin Alkali Chemicals [1997] 227 ITR 172 it was found by the authorities that the funds available with the assessee in that case were ‘surplus’ and, therefore, the Supreme Court held that the interest earned on surplus funds would have to be treated as ‘income from other sources’. On the other hand in Bokaro Steel Ltd. [1999] 236 ITR 315 (SC) where the assessee had earned interest on advance paid to contractors during pre- commencement period was found to be ‘inextricably linked’ to the setting up of the plant of the assessee and hence was held to be a capital receipt which was permitted to be set off against pre- operative expenses.

The very purpose of constitution of the Assessee was to act as a Special Purpose Vehicle (SPV) created by the Govt of India and Govt. of West Bengal in the form of Joint Venture with equal equity participation for implementation of rapid transport infrastructure in Kolkata. Both the Central and the State Governments are to provide requisite finances for implementation of the said project. The funds from the Central and State Governments flow directly to the Assessee company as equity and Subordinate Debt/ Loans. The objective is to create and maintain a fund for the development of infrastructural assets on a continuing basis and, therefore, the Assessee is a SPV formed by the Government of India and Government of West Bengal as per the guidelines; there is no profit motive as the entire fund entrusted and the interest accrued therefrom on deposits in bank though in the name of the Assessee has to be applied only for the purpose of welfare of the State as provided in the guidelines.

Therefore, considering the factual position discussed above, we are of the view that the Assessee has rightly set off the interest income against the preoperative expenses in its books of accounts and therefore we confirm the order passed by the ld CIT(A).

In the result, both the appeals filed by Revenue (ITA No. 1362/kol/2015 & ITA No. 49/kol/2016), are dismissed.

Order pronounced in the open court on this 22/12/2017.

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