Receipts inextricably linked to project under implementation are capital receipt

Meja Urja Nigam Pvt. Ltd. Vs ITO (ITAT Allahabad)

In this case, we have observed that there is a clear finding by ld. Assessing Officer/ld. CIT(A) that earnest money(EMD) given by contractors was forfeited by assessee on account of non completion of work and other miscellaneous recoveries were made from contractors. It is undisputed that power plant project of the assessee was under implementation during the impugned ay: 2013-14 and commercial production has not yet started during the impugned assessment year. We have observed that the Hon’ble Supreme Court in the case of Bokaro Steel Ltd. (Supra) passed a detailed order in which it has been held that if the receipt are inextricably linked to the project under implementation then the same are be treated as capital receipt which will go on to reduce cost of project.

In this case, it is undisputed contractors has given earnest money (EMD) to the assessee and since they could not complete the work in time the assessee has forfeited the amount, and also there were miscellaneous recoveries from contractors. The commercial operations of the power plant has not yet commenced during the impugned ay and the project was under implementation. Thus, the receipts are inextricably linked to the project and the ratio of decision of Hon’ble Supreme Court in the case of Bokaro Steel Ltd. (Supra) shall be applicable and hence we are of the view that these are capital receipt and they cannot be brought to tax and shall go on to reduce the cost of the project . Hence , we reverse the appellate order passed by ld. CIT(A) and allow the appeal filed by the assessee on this issue. Thus, Assessee appeal for ay: 2013-14 is allowed. We order accordingly.

FULL TEXT OF THE ORDER OF ITAT ALLAHABAD

These three appeals, two filed by Revenue and one filed by assessee, being ITA Nos. 80 & 177/Alld/2018 for assessment year’s(ay’s) : 2013-14 and 2014-15 respectively filed by Revenue , and ITA No. 175/Alld/2018 for ay: 2013-14 filed by assessee are directed against two separate appellate orders , firstly appellate order dated 21.12.2017 in appeal no. 01/ITO/R-II(2)/Alld/16-17 passed by learned Commissioner of Income-tax (Appeals), Allahabad , U.P. (hereinafter called “ the CIT(A)”) for ay: 2013-14 and secondly appellate order dated 13.03.2018 passed by learned CIT(A) in appeal number CIT(A),Allahabad/10258/2016-17 for ay: 2014­15. The appellate proceedings has arisen before ld. CIT(A) from two separate assessment orders dated 25.02.2016 and 15.11.2016 for ay: 2013-14 and 2014-15 respectively, both passed u/s. 143(3) of the Income Tax Act, 1961 (hereinafter called “the Act”) by learned Assessing Officer(hereinafter called “ the AO”) . We have heard both the parties through video conferencing mode through virtual court.

2. The grounds of appeals raised by assessee in its appeal in ITA No.175/Alld/2018 for ay : 2013-14 and by Revenue in its appeal(s) ITA No. 80 and 177/Alld/2018 for ay 2013-14 and 2014-15 respectively, in memo of appeal filed with Income-Tax Appellate Tribunal, Allahabad (hereinafter called “ the tribunal”) reads as under :

Assessee’s Appeal in ITA no. 175/Alld/2018 for AY:2013-14

“1. Because the sum of Rs. 1,91,40,00 being forfeiture of earnest money from the contractors, forfeited and appropriated by the assessee, neither constituted business income of the assessee nor income from other sources and was in the nature of capital receipt and as such was not liable to be taxed.

2. Because the Id. Commissioner of Income-tax (Appeals) has erred in law and on facts in upholding the addition of Rs. 1,91,40,000, being forfeiture of earnest money and other miscellaneous recoveries from contractors as income from other sources because the said receipts are inextricably linked with plant set up activities and hence is in the nature of Capital Receipt and are being set off against Expenditure during construction period. This activity was rather a part and parcel of the constructional activities of the assessee. The source is not independent of, but is rather closely connected and interlinked to the process of setting up of the factory.

3. Because the learned CIT(Appeals) has erred in upholding the addition, since the assessee has earned income before commencement of the business of the assessee, it was to be capitalized and the assessee accordingly treated the receipt as capital receipt and adjusted against expenses reducing the cost of the project.

4. Because the learned CIT(Appeals) has committed a grave error of law in not appreciating the case law cited by the assessee, which not only squarely covers the controversy but was also binding upon him.

5. Because the order passed by the CIT(A) is in teeth of the law laid down by the jurisdictional ITAT in assessee’s own case for the A.Y. 2012-13 as well as in the case of ITO vs Prayagraj Power Generation Company Ltd (ITA N0.618&619/LKW/2013).

6. Because the learned CIT(Appeals) has neither distinguished the abovementioned case laws nor has cited any valid reasons for upholding the addition made by the A.O. rather the CIT(A) has simply held that the forfeiture of earnest money and other recoveries are income in the hands of the assessee in ignorance of the various judicial pronouncements on the issue.”

Revenue Appeal in ITA No. 80/Alld/2018 for AY:2013-14

“1. The Ld. CIT (A) Allahabad has erred in deleting the addition of Rs.1,67,02,568/- being income from other sources by relying upon the decision of Hon’ble ITAT in the respondent case of A.Ys. 2009-10 & 2010­11, and ignoring the decision of Hon’ble jurisdictional High Court in the case of CIT Vs. Indo Gulf Fertilizers & Chemicals Corp. Ltd. (2006) 280 1TR621 (Alld).

2. The Ld. CIT(A) has erred in holding that the AO has wrongly relied upon the decision of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemical and Fertilizers Ltd. Vs CIT (supra) whereas the Hon’ble Allahabad High Court, in Para 9 of the decision in the case of CIT Vs. Indo Gulf Fertilizers & Chemicals Corp. Ltd. (2006) 280 ITR 621 (Alld), has considered the relevant part of that decision and has held that company has not chosen to keep its surplus capital idle, but has decided to invest it fruitfully and the fruits of such investment will clearly be of revenue nature,

3.’ On facts and circumstances of the case and law on the issue the order of the Ld. CIT(A) is not legally tenable hence, it is prayed that order dated 21.12.2017 of CIT(A), Allahabad be set aside and that order of Assessing Officer be restored.”

Revenue’s Appeal in ITA No. 177/Alld/2018 for AY:2014-15

“(i) The Ld. CIT (A) Allahabad has erred in deleting the addition of Rs. 7,14,08,725/- being income from other sources by relying upon the decision of Hon’ble ITAT in the respondent case of A.Ys. 2009-10 & 2010-11, and ignoring the decision of Hon’ble jurisdictional High Court in the case of CIT Vs. Indo Gulf Fertilizers & Chemicals Corp. Ltd. (2006) 280 ITR 621 (Alld).

(ii) The Ld. CIT(A) has erred in holding that the AO has wrongly relied upon the decision of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemical and Fertilizers Ltd. Vs CIT (supra) whereas the Hon’ble Allahabad High Court, in Para 9 of the decision in the case of CIT Vs. Indo Gulf Fertilizers & Chemicals Corp. Ltd (2006) 280 ITR 621 (Alld), has considered the relevant part of that decision and has held that company has not chosen to keep its surplus capital idle, but has decided to invest it fruitfully and the fruits of such investment will clearly be of revenue nature.

(iii) On facts and circumstances of the case and law on the issue the order of the Ld. CIT(A) is not legally tenable hence, it is prayed that order dated 13.03.2018 of CIT(A), Allahabad be set aside and that order of Assessing Officer be restored”.

3.The brief facts of the case are that assessee is a Public Sector Undertaking which was set up and incorporated on 02.04.2008 , as a joint venture of NTPC Ltd. and UP RUVN Ltd. and was engaged in setting up of a power generation plant in the name of Meja Urja Nigam (P) Ltd. .

4. First , we shall take up Revenue’s appeal for both the assessment years before us, as common issue are involved in Revenue’s appeal for both the ay’s viz. ay: 2013-14 and 2014-15 respectively .

5. The main issue in Revenue’s appeals for ay: 2013-14 is with respect to chargeability to income-tax of interest income to the tune of Rs.1,67,02,568/- which was earned by assessee from deposits placed with the Banks. The asesseee had claimed that it was setting up power project during the year under consideration and commercial production has not started till the end of ay, and hence the said interest income earned by assessee is to be set off against the interest paid by the assessee on term loan availed by it for setting up of power generation plant, which will go on to reduce cost of project. The AO, however, disallowed the said setting off of the interest income of Rs. 1,67,02,568 earned by assessee on bank deposits against interest paid on term loans and brought to tax said interest income to the tune of Rs. 1,67,02,568/- on bank deposits in the hands of the assessee, by referring to provisions of Section 5 of the Income-tax Act, 1961 and the decision of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Limited v. CIT , reported in (1997) 227 ITR 172(SC), vide assessment order dated 25.02.2016 passed by the AO , u/s 143(3) of the 1961 Act.

6. Being aggrieved by assessment order passed by AO, the assessee filed first appeal with ld. CIT(A) who was pleased to allow claim of the assessee for setting off interest income to the tune of Rs. 1,67,02,568/- earned by assessee on bank deposits against preoperative expenses thereby reducing the cost of the project, by following the appellate order dated 16.08.2017 passed by tribunal in assessee’s own case for ay’s: 2009-10 and 2010-11 in ITA No. 44/Alld/2014 and ITA No. 85/Alld/2016 respectively , by holding as under:

“Appellant’s submission

The AR of the appellant has submitted as under-

A. The amount of Rs.1,67,02,568 received as interest during the construction period is a capital receipt because it pertains to a period when the business of the assessee has not yet commenced and therefore it was liable to be adjusted against pre operative expenses reducing the cost of the project. Hence, the same has rightly been set off against the interest paid on term loans. The above view has already been settled in favour of the assessee by the Hon’ble ITAT, Allahabad in assessee’s own case for the AY 2009-10 and 2010-11. A copy of the judgment of the Hon’ble ITAT is being enclosed. Reliance is also placed upon the decisions of Hon’ble ITAT, Lucknow bench in the case of M/s Prayagraj Power Generation Company Ltd vs. ITO (ITA No. 625 & 626 /LKW/2013). And Hon’ble ITAT, Ahmadabad in the case of Adani Power Ltd. vs. ACIT (ITA No.2755/Ahd/2011).”

2.2 Decision:

The-appellant’s argument and the order of the A,O. is considered. This issue is covered in favour of the appellant in appellant’s own case for the A.Ys. 2009­10 & 2010-11 in lTA No.44/Alld/2014 and ITA No.85/Alld/2016 vide order dated 16.08.2017. Respectfully following the above judgment the addition made on account of interest income is deleted. This ground is allowed.”

7. Being aggrieved by appellate order passed by ld. CIT(A), the Revenue has filed an appeal with tribunal for ay: 2013-14 . Similar issue is also involved in ay: 2014-15 and Revenue has also preferred an appeal with tribunal for ay:2014-15 agitating similar issue. We have heard both the parties through video conferencing. Reliance has been placed by ld. CIT-DR on the decision of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (Supra) and also decision(s) of Hon’ble Allahabad High Court, dated 31.08.2017 in the case of Sangam Power Generation Company Ltd. v. PCIT in ITA No. 87 & 88 of 2016 and in the case of Prayagraj Power Generation Company Ltd. in ITA No. 80-81 of 2016. The prayers were made by ld. CIT-DR to uphold the assessment order passed by AO on this issue. The Ld. Counsel for the assessee on the other hand relied upon decision of tribunal in assessee’s own case for the earlier years viz. ay: 2009-10 and 2010-11 , and prayers were made to upheld the appellate order passed by ld. CIT(A) on this issue granting relief to the assessee. The Ld. Counsel for the assessee on the instructions of the Bench on earlier occasion has filed a letter dated 30.04.2019(signed on 01.05.2019) of Northern Regional Power Committee, Ministry of Power, Government of India addressed to Central Electricity Authority , whereby it has taken on record assessee letter no. MUNPL/COD/Unit-1 dated 24.04.2019 declaring that Unit-1(660MW) of Meja Thermal Power Station Stage-1(2X6660MW) is declared on commercial operation w.e.f. 00.00Hrs. of 30.04.2019 and claim has been made by ld. Counsel for the assessee that the assessee has not yet commenced commercial operations during the impugned assessment years . The said letter dated 30.04.2019(signed on 01.05.2019) of Northern Regional Power Committee, Ministry of Power, Government of India addressed to Central Electricity Authority is placed in file on record.

8. We have heard both the parties through Video Conferencing and perused the material on record. We have observed that the assessee is a Public Sector undertaking which was setup and incorporated on 02.04.2008 as a joint venture company of NTPC Limited and of UP RUVN Ltd. and was engaged in setting up of a power generation plant in the name of Mija Urja Nigam (P) Ltd. . The assessee has undisputedly not commenced commercial operations during the impugned assessment year. We have observed that the assessee has earned income from interest to the tune of Rs. 1,67,02,568/- on deposits with banks. We have observed that the assessee has claimed the same to be set off against interest paid on terms loans availed for setting up of the power generation plant and hence reduction from pre-operative expenses for setting up the project was sought instead of offering the said interest income from bank deposit to tax under the provisions of 1961 Act. The AO brought the said interest income earned on bank deposit to income- tax u/s 56 of the 1961 Act and rejected the contentions of the assessee to set off the said interest income on bank deposits against the interest paid on term loans availed for setting up of power plant. The AO relied upon provisions of Section 5 of the 1961 Act and Hon’ble Supreme Court decision in the case of Tuticorin Alkali Chemicals and Fertilizers Limited(supra) while rejecting the contentions of the assessee and bringing to tax interest income earned on bank deposits under the head ‘Income from other sources’ under the provisions of Section 56 of the 1961 Act. The ld. CIT(A) while adjudicating appeal filed by assessee granted relief to the assessee by following decision of tribunal in assessee’s own case for earlier years viz. ay: 200910 and 2010-11. The ld. CIT(A), thus, followed appellate order dated 16.08.2017 passed by tribunal in assessee’s own case for ay’s: 2009-10 and 2010­11, in ITA No. 44/Alld/2014 and ITA No. 85/Alld./2016 respectively. We have gone through the appellate order passed by tribunal in assessee’s own case for ay’s: 2009-10 and 2010-11 and we have observed that in those assessment year’s, the tribunal had observed peculiar facts prevailing in those years and has observed that the assessee was setting up a power plant activities like land acquisition, statutory clearances, development of infrastructure , but the business activities of the assessee has not yet been started in both those years viz. ay’s: 2009-10 and 2010­11. It was further observed by tribunal that interest was not earned by assessee on surplus funds but were equity contribution by the joint venture of partners for acquisition , construction and setting up of a plant and other infrastructure facilities. It was observed by tribunal that for ay’s: 2009-10 and 2010-11 , funds were kept by assessee in current account and was used for ongoing construction activity as and when required. The tribunal observed peculiar facts that the assessee kept the funds in current account and it was the Bank who was transferring funds in short term MODs(deposits) account in accordance with terms and conditions of the account , which were not the facts in the case before Hon’ble Supreme Court in the case of CIT v. Bokaro Steel Ltd. [1999] 102 Taxman 94 (SC) . The tribunal further observed that these short term MODs created by Bank were reversed automatically by the bank as and when the assessee withdraw the amount from the account and there was no intention on the part of the assessee to earn any interest on such fund. The tribunal had further observed that the funds were kept in liquid so as to use them as and when required , since , the interest income on short term MOD’s were inextricably linked to the construction and acquisition activities in the regular course of the assessee’s activities. The tribunal further observed that the interest income was not earned by the assessee out of surplus funds so as to treat the said income as income from other sources. The tribunal has also considered decision of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and also decision of Hon’ble Apex Court in the case of CIT v. Bokaro Steel Ltd. [1999] 102 Taxman 94 (SC) , and then the claim of the assessee was allowed for both the years by tribunal, by holding as under:

“We have heard both the parties and perused the material available on record. It can be seen that in both the assessment orders the commencement of the business was not started but was only to the extent that the company was setting up a plant activities like land acquisition, statutory, clearance, development of infrastructure but the business activity was not started in both the Assessment Years under consideration before us. In the present case, the interest was not earned on the surplus funds but were equity contribution by the joint venture of partners for acquisition, construction and setting up of a plant and other infrastructure facilities. The funds kept in the current account of the company were used for on-going construction activity as and when required. The CIT(A) relied upon the case of Bokaro Steel, but the same is not transferred by the bank in short term MODs Accounts in accordance with the account terms and conditions. The said MODs were reversed automatically as and when the assesses withdrew the amounts From account. There was no intention to earn any interest on such funds. The funds were kept in liquid so as to use them as and when required, since, the interest on short term MODs were inextricably link to the construction and acquisition activities in the regular courses of the assessee’s activities. The interest was not earned out of the surplus funds so to treat the said income as income from other source is not justified. This claim of the assessee sustains because the equity contribution by the Joint Venture partners cannot be termed as surplus funds because it was having a short term MODs as per the requirement of day to day construction activities of the assessee. Therefore, the Assessing Officer as well as the CIT(A) over looked these aspects and simply without taking cognizance of the correct fact of the present case relied upon the judgments of Apex Court in Tuticarin Alkali Chemicals and Fertilizers Ltd. and Bokaro Steel wherein the facts were different. The facts are similar in both the Assessment years therefore, the appeals are allowed in both the years.”

Thus , as could be seen above, these appeals for ay’s: 2009-10 and 2010-11 were decided by tribunal on peculiar facts prevailing in those years We have observed that every assessment year is a separate assessment year and principles of res-judicata are not strictly applicable, but we are also fully aware that consistency has to be followed. The reference is made to the decision of the Hon’ble Supreme Court in the case of Radhasoami Satsang v. CIT reported in (1992)193 ITR 321(SC). We have observed that Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (Supra) has observed that even during the period when commercial production has not started but the funds were invested in the bank FDR etc. the interest income has to be brought to income-tax under provisions of Section 56 of the 1961 Act under the head ‘Income from other sources’ , and setoff cannot be allowed against interest on term loans secured by tax-payer from Financial Institutions which would be capitalized after the commencement of commercial production. The decision of Hon’ble Supreme Court in the case of Tuticorin (supra) is reproduced hereunder:

“ 7…………. In view of the aforesaid conflict of decisions between the Madras and the Andhra Pradesh High Courts, the Tribunal has referred the following question of law to this Court for decision:

“Whether, on the facts and in the circumstances of the case, interest derived by the assessee from the borrowed funds which were invested in short-term deposits with banks would be chargeable to tax under the head ‘Income from other sources’ or would go to reduce the interest payable by the assessee on the term loans secured by the assessee from financial institutions, which would be capitalised after the commencement of commercial production?”

8. The facts of this case are not in dispute. In the usual course, interests received by the company from bank deposits and loans would be taxable as income under the head ‘Income from other sources’ under section 56 of the Income-tax Act, 1961 (‘the Act’). It is argued on behalf of the company that it had not yet commenced its business and inany event the income was derived from funds borrowed for setting up the factory of the company and should be adjusted against the interest payable on the borrowed funds.

9. In our judgment neither of the two factors can affect taxability of the income earned by the company. Under the Act, the total income of the company is chargeable to tax under section 4 of the Act. The total income has to be computed in accordance with the provisions of the Act. Section 14 of the Act lays down that for the purpose of computation, income of an assessee has to be classified under six heads:

(A) Salaries.

(B) Interest on securities.

(C) Income from house property.

(d) Profits and gains of business or profession.

(e) Capital gains.

(f) Income from other sources.

10. By an amendment made in 1988, ‘interest on securities’ has been made chargeable to tax as business income when such interest forms part of business profits and in all other cases under section 56(2)(id) as income from other sources. The amendment made in 1988 has no relevance for the purpose of this case. We shall take this Act as it stood at the material time in the assessment year 1983-84.

11. The computation of income under each of the above six heads will have to be made independently and separately. There are specific rules of deduction and allowances under each head. No deduction or adjustment on account of any expenditure can be made except as provided by the Act.

12. The basic proposition that has to be borne in mind in this case is that it is possible for a company to have six different sources of income, each one of which will be chargeable to income-tax. ‘Profits and gains of business or profession’ is only one of the heads under which the company’s income is liable to be assessed to tax. 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 fund 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 a rented house and gets rent, which rent will be assessable to tax under section 22 of the Act 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 fund in short-term deposits in order to earn interest. Such interest will be chargeable under section 56.

13. The company has chosen not to keep its surplus capital idle, but has decided to invest it fruitfully. The fruits of such investment will clearly be of revenue nature. This position in law was explained by Sir George Lowndes in the oft-quoted passage in the case of CIT Shaw Wallace & Co. [1932] [59 LA. 206]:

“Income, their Lordships think, in this Act connotes a periodical monetary return ‘coming in’ with some sort of regularity or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. This income has been linked pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something, which is often loosely spoken of as ‘capital’.”

14. In other words, if the capital of a company is fruitfully utilised instead of keeping it idle, the income, thus, generated will be of the revenue nature and not accretion of capital. Whether the company raised the capital by issue of shares or debentures or by borrowing will not make any difference to this principle. If borrowed capital is used for the purpose of earning income, that income will have to be taxed in accor-dance 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.

15. It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilizing the borrowed funds as its income. It was rightly pointed out in the case of Kedar Narain Singh CIT [1938] 6 ITR 157 (All.) that ‘anything which can properly be described as income is taxable under the Act unless expressly exempted’. The interest earned by the assessee is clearly its income and unless it can be shown that any provision like section 10 has exempted it from tax, it will be taxable. The fact that the source of income was borrowed money does not detract anything from the revenue character of the receipt. The question of adjustment of interest payable by the company against the interest earned by it will depend upon the provisions of the Act. The expenditure would have been deductible as incurred for the purpose of business if the assessee’s business had commenced. But that is not the case here. The assessee may be entitled to capitalise the interest payable by it. But what the assessee cannot claim is adjustment of this expenditure against interest assessable under section 56. Section 57 of the Act sets out in its clauses (i) to (iii)the expenditures which are allowable as deduction from income assessable under section 56. It is not the case of the assessee that the interest payable by it on term loans is allowable as deduction under section 57.

16. If that be so, under which other provision of law, can the assessee claim deduction or set-off of his income from other source against interest payable on the borrowed fund?

17. There are specific provisions in the Act for setting off of loss from one source against income from another source under the same head of income (section 70), as well as setting off of loss from one head against income from another (section 71). In the facts of this case, the company cannot claim any relief under any of these two sections, since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting year. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business cannot be allowed as deduction, nor can it be adjusted against any other income under any other head. Similarly, any income from a non-business source cannot be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plants and machineries even before commencement of business of the assessee.

18. It has been argued that the source from which the company has earned interest is borrowed capital. The company has to pay interest to its creditors on the same borrowed capital. Having regard to the identity of the fund on which interest is earned and interest is payable, the company should be allowed to set off its income against interest payable by it on the same fund. We are of the view that no adjustment can be allowed except in accordance with the provisions of the Act. However desirable it may be from the point of view of equity, this adjustment cannot be made unless the law specifically permits such adjustment.

19. Next it has been argued that according to well-established accountancy practice, the interest earned by the company even before commencement of business from investing borrowed capital will have to be set off against interest payable by the company on that borrowed capital. The 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.

20. In the case of S.C. Footwear Ltd. v. Ridgway (Inspector of Taxes) [1972] 83 ITR 269 (HL), Russell, L.J., while rejecting an argument based on well- settled accountancy practice, pointed out that the Income-tax Law does not march step by step in the divergent footprints of the accountancy profession.

21. The view of Russell, L.J. was upheld by the House of Lords on appeal. It was observed by Lord Reid:

“Whatever merits there may be in the company’s accountancy methods for the purposes of its internal affairs I am not persuaded that Cross, J. and the Court of Appeal were wrong in finding them unacceptable for tax purposes.” (p. 283)

In the case before us, the company had surplus funds in its hands. In order to earn income out of the surplus funds, it invested the amount for the purpose of earning interest. The interest, thus, earned is clearly of the revenue nature and will have to be taxed accordingly. The accountants may have taken some other view but accountancy practice is not necessarily good law. In B.S.C. Footwear Ltd. ‘s case (supra) , the House of Lords had no hesitation in holding that the accounting practice for calculating its profit followed by the assessee and accepted by the revenue for 30 years could not be treated as sanctioned by law and was : not acceptable for the purpose of computation of taxable income.

22. There is another aspect of this matter. The company, in this case, is at liberty to use the interest income as it likes. It is under no obligation to utilise this interest income to reduce its liability to pay interest to its creditors. It can re-invest the interest income in land or shares, it can purchase securities, it can buy house property, it can also set up another line of business, it may even pay dividends out of this income to its shareholders. There is no overriding title of anybody diverting the income at source to pay the amount to the creditors of the company. 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. If so, the amount will have to be taxed – Pondicherry Railway Co. Ltd. CIT AIR 1931 PC 165.

23. Our attention was drawn to two other decisions where the view of the Andhra Pradesh High Court was followed. In the case of CIT Electrochem Orissa Ltd. [1995] 211 ITR 552, the Orissa High Court preferred the view expressed by the Andhra Pradesh High Court to the view expressed by the Madras High Court in Seshasayee Paper & Boards Ltd’s case (supra) on the ground that the Madras High Court case was based on a finding of fact that there was no direct connection between the interest paid and the interest received. In our view it will not be right to read the judgment in Seshasayee Paper & Boards Ltd. ‘s case (supra)in that way. The Court’s finding in Seshasayee Paper & Boards Ltd. ‘s case (supra)was that the interest earned by the assessee from the bank deposits had to be assessed under the head Income from other sources’. Consequently, the interest paid on the borrowings for the purpose of purchase of plants and machineries could not be allowed or adjusted against this income under section 57(iii) nor were such adjustments permissible under section 70 or 71 of the Act because the business of the assessee had not commenced. The Madras High Court categorically held:

“… In this case, admittedly, the borrowing has not been made exclusively and solely for the purpose of earning interest in which case alone it should be taken as an income which should be deducted from the interest receipts.” (p. 549)

24. An assessee-company may have raised its capital by issue of shares or debentures or by borrowing. But when that capital or a portion of it was utilised for whatever reason, even for a short period, to earn interest that interest must be treated as the revenue receipt and will have to be taxed accordingly. Any set off or deduction of any expenditure can only be made in accordance with the provisions of the Act.

25. The other case is a decision of the Bombay High Court in CIT Maharashtra Electrosmelt Ltd [1995] 214 ITR 489 . In that case, the assessee, before commercial production had started, had realised a sum of Rs. 3,14,356 as interest on short-term deposit. At the same time, the assessee had paid a sum of Rs. 58,51,505 as interest on funds borrowed by it for the purpose of its business. The assessee after deducting the receipt of interest from the amount of interest paid by it capitalised the balance amount. The High Court was of the view that the background of raising of the fund by borrowing and temporary utilisation of a portion of that fund by keeping the same in call deposits with the banks went to show that the interest was earned for the purpose of reducing the liability of the assessee. The High Court came to the conclusion that it was evident that the assessee did not derive any income by temporary utilisation of the loans and since no income was derived by the assessee, the question of assessing the sum of Rs. 3,14,366 in the hands of the assessee as ‘income from other sources’ did not arise.

26. It is difficult to follow this reasoning. If a person borrows money for business purpose but utilises that money to earn interest, however, temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. He may or may not discharge his liability to pay interest with this income. Merely because it was utilised to repay the interest on the loan taken by the assessee, it did not cease to be his income. The interest earned by the assessee could have been used for many other purposes. If the assessee purchased a house or distributed dividend or paid salary of its employees with the money received as interest, will the interest amount be treated as not his income? This is not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as he liked. The application of the income for payment of interest could not affect its taxability in any way.

27. The second reason given by the High Court was that the Institute of Chartered Accountants of India was a recognised authority on accounting principles. This fact has been recognised by this Court in the case of Challapalli Sugars Ltd CIT [1975] 98 ITR 167. Therefore, its view has to be respected.

28. It is true that this 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. As was pointed out by Lord Russell in the case of S.C. Footwear Ltd. ( supra), the Income-tax Law does not march step by step in the footprints of the accountancy profession.

29. The question in Challapalli Sugars Ltd’s case (supra)was about computation of depreciation and development rebate under the Indian Income-tax Act, 1922. In order to calculate depreciation and development rebate it was necessary to find out ‘the actual cost’ of the plant and machinery purchased by the company. This Court held that ‘cost’ is a word of wider connotation than ‘price’. There was a difference between the price of a machinery and its cost. This Court thereafter pointed out that the expression ‘actual cost’ had not been defined in the Act. It was, therefore, necessary to find out the commercial sense of the phrase. Khanna, J. (as his Lordship then was) observed:

“As the expression ‘actual cost’ has not been defined, it should, in our opinion, be construed in the sense which no commercial man would misunderstand. For this purpose it would be necessary to ascertain the connotation of the above expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The accepted accountancy rule for determining 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 capitalised and added to the cost of the fixed assets created as a result of such expenditure.” (p. 167)

30. This Court also took note of the provisions of the Companies Act, 1956 and in particular section 208(1)( b). It observed:

“… clause (b) of sub-section (1) of that section provides that in case, interest is paid on share capital issued for the purpose of raising money to defray the expenses of constructing any work or building or the provision of any plant in contingencies mentioned in that section, the sums so paid by way of interest may be charged to capital as part of the cost of construction of the work or building or the provision of the plant. The above provision thus gives statutory recognition to the principle of capitalising the interest in case the interest is paid on money raised to defray expenses of the construction of any work 6r building or the provision of any plant in contingencies mentioned in that section even though such money constitutes share capital. The same principle, in our opinion, should hold good if interest is paid on money not raised by way or share capital but taken on loan for the purpose of defraying the expenses of the construction of any work or building or the provision of any plant. The reason indeed would be stronger in case such interest is paid on money taken on loan for meeting the above expenses.” (p. 175)

This Court also relied on an English case in support of this conclusion in Hindsv. Buenos Ayres Grand National Tramways Co. Ltd [1906] 2 Ch. 654. In Hinds’ case (supra) dealing with the question of capitalisation of interest paid on loans taken to install electric traction for tram lines, it was held by Warrington, J.:

“‘Now, what is it that the company are really proposing to do? They are creating a capital asset by means of which they will hereafter earn, or they hope to earn, profits for the company. They are not simply employing contractors to find the money and do the work. They are finding the money themselves, and they find the money by borrowing it. What does each mile of line cost them under these circumstances – what is that they expend in constructing each mile of line, taking the amount of the borrowed money expended on that line to be £ 10,000, that being the company’s estimate? The money is borrowed for that particular purpose – the £ 10,000. They have to pay interest on that £ 10,000 during the period that construction is taking place. In my opinion that asset which they are so constructing costs them not only the £ 10,000 but the £ 10,000 plus the amount of interest during the period of construction; and that is what they are out of pocket during the construction of that mile of line. Now, it seems to me that the company are entitled -1 do not say that they are bound to do it – if they think fit to charge in their accounts as the cost of that mile of line not only £ 10,000, but the £ 10,000 and the interest on it during the period of construction.'” (p. 176)

In other words, it was held that the cost of construction will be the amount actually spent and also the interest payable on the amount borrowed during the period of construction.

31. The judgment in Challapalli Sugars Ltd s case (supra)goes to show that the Court was not in any way departing from legal principles because of any opinion expressed by the Institute of Chartered Accountants. The phrase ‘actual cost’ was not defined in the Act. Therefore, it had to be understood in the commercial parlance. To find that out the normal rule of accountancy prevalent in commercial and industrial circles was noted. According to the Institute of Chartered Accountants, actual cost will also include interest paid on borrowed money for the purchase of the assets. Khanna, J., however, did not stop there. He pointed out that the principle of capitalising interest was to be found in section 208 itself and was also consistent with the views of the English Courts.

32. But this is an entirely different case. 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.

33.  In the premises, we are of the view that the Madras High Court came to a correct decision in the case of Seshasayee Paper & Boards Ltd ( supra). The contrary views expressed in the cases of Nagarjuna SteebLtd ( supra), Electrochem Orissa Ltd (supra) and Maharashtra Electrosmelt Ltd s case (supra) are erroneous.

34. We are of the view that the Tribunal has come to a correct decision. The question referred by the Tribunal is in two parts. The first part of the question is answered in the affirmative and in favour of the revenue. The second part of the question is answered in the negative and in favour of the revenue.”

This ratio of law as laid down by Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizer Limited(supra)was discussed by Hon’ble Supreme Court in subsequent judgment in the case of Bokaro Steel Ltd. (Supra) which was held to be a binding precedent , and it was observed by Hon’ble Supreme Court that the assessee did not challenge holding of interest income from short term deposit being chargeable to income-tax under the head ‘Income from Other Sources’ under the provisions of Section 56 of the 1961 Act, by observing as under at para 4 :

“4. 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 & Fertilizers Ltd. v. CIT [1997] 227 ITR 172. Hence, we are not called upon to examine that issue.”

(Emphasis supplied by us)

We have also gone through the decision of Hon’ble Allahabad High Court in the case of M/s Sangam Power Generation Limited(supra) and have observed that Hon’ble jurisdictional High Court has passed a detailed order and decided this issue in favour of Revenue. We have observed that the facts for the earlier years viz. ay’s: 2009-10 and 2010-11 were clearly peculiar as it was at the behest of bank the deposits were created , which were automatically reversed by the bank , when the assessee required the funds towards implementation of the project. Thus, on its own peculiar facts, the finding was given by tribunal that there was no surplus funds held by assessee and interest income was inextricably linked with the construction and acquisition activities in the regular course of the assessee activities. In the impugned assessment year 2013-14 which is in consideration before us , it is observed that there was a further infusion of capital of Rs.600 crores in equal proportion by both the promoters namely NTPC Ltd. and UP RUVN Ltd. , and the assessee has earned interest income of Rs.1,67,02,568/- on deposits made with the bank which was sought to be set off by assessee against interest paid to bank on term loans availed for setting up of the project. But here during the impugned assessment year’s , there are no such further findings as were there in ays:2009-10 and 2010-11 as to whether the surplus funds were deployed by assessee with deposit with banks on which interest income was received or short term deposits were created at the behest of the bank which were automatically credited by bank when the assessee required the funds for the project execution, and the ld. CIT(A) has merely followed the appellate order passed by the tribunal for earlier ay’s: 2009-10 and 2010-11 . The power of ld. CIT(A) are co-terminus with the power of the Assessing Officer , and the ld. CIT(A) is duty bound to make enquiries to give finding that facts as are prevalent in the current year are similar/para materia to the facts of the earlier year and hence the appellate order passed by tribunal for earlier year is to be followed. Since there is no clear finding given by the ld. CIT(A) in the fitness of thing it will be appropriate that this issue is restore to the file of ld. CIT(A) for deciding the above issue afresh after considering the facts for impugned assessment year vis-à-vis facts prevalent in ay: 2009-10 and 2010-11 , and also after considering the decision of the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (Supra) and decision(s) of Hon’ble Allahabad High Court in the case of Sangam Power Generation Company Limited (supra) and Pryagraj Power Generation Company Ltd. (Supra) . Thus based on material on record, in the interest of justice and fairness to both the rival parties, we restore the matter back to the file of the ld. CIT(A) for fresh consideration and denovo determination of the issues on merits in accordance with law. The ld. CIT(A) is directed to provide proper and adequate opportunity of being heard to the assessee in accordance with principles of natural justice in accordance with law and evidences/explanations filed by assessee in support of its contentions shall be admitted by ld. CIT(A) and adjudicated on merits in accordance with law. We clarify that we have not commented on the merits of the issue in appeal. Thus, the appeals of the Revenue for ay: 2013-14 is allowed for statistical purposes. Since , the facts and issue in Revenue’s appeal for ay: 2014-15 are similar, we also restore the said appeal to the file of ld. CIT(A) with similar directions. We order accordingly.

9. Now coming to assessee’s appeal filed with tribunal for ay:2013-14. We have observed that the assessee has filed this appeal late by 40 days beyond the time stipulated u/s 253(3) of the 1961 Act , and an application supported by an Affidavit executed by Assistant General Manager (Finance) , explaining the cause of delay in filing this appeal late with tribunal has been filed with prayers to condone the delay. After considering the material on record and hearing rival parties, we hold that the assessee has shown sufficient cause for delay of 40 days in filing this appeal late with tribunal beyond the time provided u/s 253(3) of the 1961 Act and hence we condone the delay in filing of this appeal by the assessee for ay: 2013-14. The assessee is aggrieved by decision of ld. CIT(A) in upholding the addition made by ld. Assessing Officer to the tune of Rs. 1,91,40,000/- on account of receipts being forfeiture of earnest money and other miscellaneous recoveries from contractors which were held to be taxable in the hands of assessee under the head ‘income from other sources’ u/s 56 of the 1961 Act, wherein ld. CIT(A) held as under:

“Appellant’s submission-.

The A.R. of the appellant has submitted as under

 B. The amount of Rs.1,91,40,000/-, being forfeiture of earnest money and other miscellaneous recoveries from contractors cannot be treated as Income from Other Sources, since the said receipts are inextricably linked with plant set up activities and hence is in the nature of Capital Receipt and are being set off against Expenditure during construction period. This activity was rather a part and parcel of the constructional activities of the assessee. The source is not independent of, but is rather closely connected and interlinked to the process of setting up of the factory.

Reliance is placed on the decision of the Hon’ble ITAT in the case of ITO vs. Prayagraj Power Generation Company Ltd (ITA N0.618&619/I.KW/2013) wherein under similar circumstances it has been held as under:

“Since the assessee has earned income before commencement of the business of the assessee, ii was to be capitalized and the assessee accordingly treated the receipt as capital receipt and adjusted against expenses reducing the cost of the project. The Id. CIT(A) examined this issue in the light of various judicial pronouncements and thereafter treated the receipt as capital receipt.” A copy of the said decision is being enclosed herewith.”

3.2 Decision-.

The A.O’s order and submission of the appellant are considered. Appellant has forfeited the amounts received from contractors. This is income in the hands of the appellant. The appellant could not produce any argument as to how this forfeiture is capital in nature. The contractors of the appellant were supposed to perform certain functions which they did not and appellant forfeited the earnest money. There is no dispute that this is income in the hands of the appellant. Addition made is confirmed. This ground is dismissed.”

10. We have heard both the parties and perused the material on record. Similar contention were made by both the rival parties , as were made while arguing the issue concerning interest income on deposits with bank which is adjudicated by us in preceding para’s of this order. In this case, we have observed that there is a clear finding by ld. Assessing Officer/ld. CIT(A) that earnest money(EMD) given by contractors was forfeited by assessee on account of non completion of work and other miscellaneous recoveries were made from contractors. It is undisputed that power plant project of the assessee was under implementation during the impugned ay: 2013-14 and commercial production has not yet started during the impugned assessment year. We have observed that the Hon’ble Supreme Court in the case of Bokaro Steel Ltd. (Supra) passed a detailed order in which it has been held that if the receipt are inextricably linked to the project under implementation then the same are be treated as capital receipt which will go on to reduce cost of project, by holding as under:

“5. We will take the first three heads under which the assessee has received certain amounts. These are the rent charged by the assessee to its contractors for housing workers and staff employed by the contractor for the construction work of the assessee including certain amenities granted to the staff by the assessee. Secondly, hire charges for plant and machinery which was given to the contractors by the assessee for use in the construction work of the assessee, and thirdly, interest from advances made to the contractors by the assessee for the purpose of facilitating the work of construction. 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 arrange- ments and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee has provided these facilities. The same is true of the hire charges for plant and machinery which was given by the assessee to the contractors for the assessee’s construction work. The receipts in this connection also go to compensate the assessee for the wear and tear of the machinery. The advances which the assessee made to the contractors 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.

6. In the case of Addl. CIT v. Indian Drugs & Pharmaceuticals Ltd. [1983] 141 ITR 134, the Delhi High Court considered a case where the work of construction of the factory of the assessee was in progress and production had not commenced. Receipts from the sale of tender forms and supply of water and electricity to the contractors engaged in construction as also receipts on account of sale of stones, boulders, grass and trees were held to be receipts not from independent sources but were considered as inextricably linked with the process of setting up of business. These were directly related to the capital structure of business and were held to be capital in nature. We agree with this view taken by the Delhi High Court.

7. The appellant, however, relied upon the decision of this Court in Tuticorin Alkali Chemicals & Fertilizers Ltd.’s case (supra). That case dealt with the question whether the investment of borrowed funds prior to commencement of business, resulting in earning of interest by the assessee, would amount to the assessee earning any income. This Court held that if a person borrows money for business purposes, but utilises that money to earn interest, however, temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. Merely because he utilised it to repay the interest on the loan taken will not make the interest income as a capital receipt. The department relied upon the observations made in that judgment (at page 179) to the effect that if the company, even before it commences business, invests surplus funds in its hands 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, the company may have income from other sources. The company may also, as in that case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under section 56 of the Act. This Court also emphasised the fact that the company was not bound to utilise the interest so earned to adjust it against the interest paid on borrowed capital. The company was free to use this income in any manner it liked. However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee-company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction. In the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, this Court examined the question whether interest paid before the commencement of production by a company on amounts borrowed for the acquisition and installation of plant and machinery would form a part of the actual cost of the asset to the assessee within the meaning of that expression in section 10(5) of the Indian Income-tax Act, 1922 and whether the assessee will be entitled to depreciation allowances and development rebate with reference to such interest also. The Court held that the accepted accountancy rule for determining 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 capitalised 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 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.

8. The same reasoning would apply to royalty received by the assessee- company for stones, etc., excavated from the assessee-company’s land. The land had been allowed to be utilised 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.

(Emphasis supplied by us)

In this case, it is undisputed contractors has given earnest money (EMD) to the assessee and since they could not complete the work in time the assessee has forfeited the amount, and also there were miscellaneous recoveries from contractors. The commercial operations of the power plant has not yet commenced during the impugned ay and the project was under implementation. Thus, the receipts are inextricably linked to the project and the ratio of decision of Hon’ble Supreme Court in the case of Bokaro Steel Ltd. (Supra) shall be applicable and hence we are of the view that these are capital receipt and they cannot be brought to tax and shall go on to reduce the cost of the project . Hence , we reverse the appellate order passed by ld. CIT(A) and allow the appeal filed by the assessee on this issue. Thus, Assessee appeal for ay: 2013-14 is allowed. We order accordingly.

11. In the result, the Revenue appeals for ay: 2013-14 and 2014-15 are allowed for statistical purposes , while assessee’s appeal for ay: 2013-14 is allowed.

Order pronounced in the open Court on 29/01/2021 through video conferencing