Kerala Infrastructure Investment Fund Board, Trivandrum V. DCIT, Trivandrum

CO 10/COCH/2013

• Counselvise Citation: [2013] 122 COUNSELVISE.COM (IT) 8913 (ITAT-COCHIN)
• Duration Of Justice: 1 month(s) 14 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 05-09-2013
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 28-08-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 22-07-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: K K JOHN
• Assessee Lawyers: R SRIDHAR
• Keywords: Business income; Business expenditure

Judgement Text

ITA NO 279 & 283 & CO 10 & 11/ COCH/ 13 1 IN THE INCOME TAX APELALTER TIBUNAL COCHIN BENCH , COCHIN BEFORE S/SH RI N.R.S. GANESAN, JM & B. R. BASKARAN, AM ITA NO S . 279 & 283 /COCH/ 2013 (ASST YEAR S 2008 - 09 ) & CROSS OBJECTION NO S . 10 & 11/COCH/2013 THE DY COMMR OF INCOME TAX CIRCLE 1(2), TRIVANDUM VS M/S KERALA INFRASTRUCTURE INVESTMENT FUND BOARD ROOM NO. 420, MAIN BLOCK GOVT. SECRETARY, TRIVANDUM ( APPELLANT /RESPONDENT ) (RESPONDENT /CROSS OBJECTOR ) PAN NO. AAAJK0192K ASSESSEE BY SHRI R SRIDHAR , CA REVENUE BY SHRI K K JOHN, SR DR DATE OF HEARING 28 TH AUG 2013 DATE OF PRONOUNCEMENT 5 TH , SEPT 2013 ORD ER PER B.R. BASKARAN, AM: BOTH THE APPEALS FILED BY THE REVENUE AND THE CROSS OBJECTIONS FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER S PASSED BY THE LD CIT(A) , TRIVANDRUM AND T HEY RELATE TO THE AYS 2008 - 09 AND 2009 - 10 . SINCE THE ISSUES URGED IN THESE APPEALS ARE ARISING OUT OF COMMON SET OF FACTS, ALL THESE APPEALS WERE HEARD TOGETHER AND HENCE THEY ARE DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2 THE SOLIT ARY ISSUE URGED IN THE APPEAL S FILED BY THE REVENUE IS WHETHER THE LD CIT(A) WAS JUSTIFIED IN HOLDING THAT THE INTEREST INCOME EARNED BY THE ASSESSEE OUT OF TREASURY DEPOSITS AND BANK DEPOSITS ARE ASSESSABLE UNDER THE HEAD INCOME FROM BUSINESS . ITA NO 279 & 283 & CO 10 & 11/ COCH/ 13 2 3 IN THE CROSS OBJECTION THE ASSESSEE, THE ASSESSEE HAS TAKEN A PLEA THAT THE AO WAS NOT JUSTIFIED IN GRANTING DEDUCTION OF EXPENSES INCURRED (INCLUDING INTEREST EXPENDITURE) IN EARNING THE INTEREST INCOME, EVEN IF FOR A MOMENT IF IT IS ASSUMED THAT THE STAN D OF THE AO WAS UPHELD. 4 THE LD DR HAS SUBMITTED THAT THE ASSESSEE COMPANY WAS FORMED UNDER THE KERALA INFRASTRUCTURE INVESTMENT FUND ACT, 1991 IN ORDER TO PROVIDE FUNDS FOR INVESTMENTS IN INFRASTRUCTURE PROJECTS IN THE STATE OF KERALA. THE ASSESSEE ISS UED BONDS TO THE PUBLIC AND RAISED FUNDS TO FINANCE ITS OPERATIONS. PENDING FINANCING OF PROJECTS, THE ASSESSEE PARKED THE FUNDS SO RAISED IN TREASURY SAVING BANK AND ALSO IN NATIONALIZED BANKS. I N THE RETURN OF INCOME, THE ASSESSEE DECLARED THE INTEREST INCOME , RECEIVED FROM THE DEPOSITS CITED ABOVE , UNDER THE HEAD INCOME FROM BUSINESS. THE AO NOTICED THAT THE DEPOSITS SO MADE WERE OUT OF SURPLUS FUNDS AVAILABLE WITH THE ASSESSEE AND HENCE THE SAME IS ASSESSABLE UNDER THE HEAD I NCOME FROM OTHER SOURCE S . FURTHER, THE AO NOTICED THAT THE ASSESSEE HAS NOT COMMENCED ITS OPERATIONS AND ACCORDINGLY HELD THAT THE INTEREST EARNED DURING PRE - COMMENCEMENT PERIOD IS ASSESSABLE UNDER THE HEAD INCOME FROM OTHE R SOURCES ONLY. THE LD DR SUBMITTED THAT THE ASSESSING OFFIC ER HAS PLACED RELIANCE ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD VS CIT (227 ITR 172) IN THIS REGARD. ACCORDINGLY, THE LD D.R SUBMITTED THAT THE AO WAS JUSTIFIED IN ASSESSING THE INTERE ST INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. HOWEVER, THE LD CIT(A) ALLOWED THE APPEAL OF THE ASSESSEE BY HOLDING THAT THE INTEREST INCOME IS ASSESSABLE UNDER THE HEAD INCOME FROM BUSINESS . 5 THE LD AR SUBMITTED THAT THE IMPUGNED ISSUE HAS SIN CE BEEN SETTLED BY THE HONBLE HIGH COURT OF KERALA AND THE LD CIT(A) HAS ONLY FOLLOWED THE BINDING DECISION OF THE JURISDICTIONAL HIGH COURT. HE SUBMITTED THAT THE HONBLE JURISDICTIONAL HIGH COURT HAS HELD THAT ITA NO 279 & 283 & CO 10 & 11/ COCH/ 13 3 THE RAISING OF FUNDS BY THE COMPANY ITSEL F IS COMMENCEMENT OF BUSINESS AND FURTHER THE INTEREST EARNED ON DEPOSITS IS ASSESSABLE AS INCOME FROM BUSINESS. HE ALSO FURNISHED THE COPIES OF THE ORDER PASSED BY THE TRIBUNAL AND THE HIGH COURT. WITH REGARD TO THE CROSS OBJECTION, THE LD A.R SUBMITTED THAT THE ASSESSEE HAS FILED THE CROSS OBJECTIONS AS A SAFER COURSE, SINCE THE AO DID NOT ALLOW DEDUCTION OF INTEREST EXPENDITURE AND OTHER EXPENSES, WHICH WERE INCURRED IN EARNING THE INTEREST INCOME, I.E., HE HAS ASSESSED GROSS AMOUNT OF INTEREST UNDER T HE HEAD INCOME FROM OTHER SOURCES WITHOUT ALLOWING DEDUCTION OF EXPENSES INCURRED IN EARNING THE SAID INCOME. HE SUBMITTED THAT THE AO SHOULD BE DIRECTED TO ALLOW DEDUCTION OF EXPENSES (INCLUDING INTEREST EXPENDITURE ON THE BONDS) INCURRED IN EARNING TH E INTEREST INCOME, IF THE AOS STAND IS UPHELD. 6 WE HAVE HEARD THE RIVAL CONTENTIONS AND CAREFULLY PERUSED THE RECORD. FROM THE ORDER PASSED BY THE LD CIT(A) , WE NOTICE THAT AN IDENTICAL ISSUE CAME UP IN ASSESSEES OWN CASE IN THE EARLIER YEARS BEFORE TH E TRIBUNAL AS WELL AS THE JURISDICTIONAL HIGH COURT OF KERALA. WE NOTICE THAT THE TRIBUNAL HAD TAKEN THE VIEW THAT THE INTEREST INCOME IS ASSESSABLE UNDER THE HEAD INCOME FROM BUSINESS AND THE SAID VIEW HAS BEEN UPHELD BY THE HONBLE HIGH COURT OF KE RALA, VIDE ORDER DATED 11.12.2009 IN ITA NOS. 17 79, 1783, 1789 ,1791 AND 1796 OF 2009 RELATING TO AYS 2000 - 01 TO 2004 - 05. THE LD CIT(A) HAS EXTRACTED THE RELEVANT OBSERVATIONS MADE BY THE HONBLE JURISDICTIONAL HIGH COURT AND WE ALSO EXTRACT HIS OBSERVATION S BELOW, FOR THE SAKE OF CONVENIENCE: 8. APROPOS GROUND A, DURING THE COURSE OF APPELLATE PROCEEDINGS THE APPELLANT SUBMITTED THAT THE ISSUES HAS BEEN DECIDED IN ITS FAVOUR BY CIT(A), ITAT AS WELL AS THE HONBLE KERALA HIGH COURT IN EARLIER ASSESSMENT YE AR. THE APPELLANT ALSO FILED A COPY OF CONSOLIDATED ORDER OF HONBLE HIGH COURT OF KERALA DATED 11.12.2009 IN ITA NOS. 1779, 1 783 , 1 789, 179 1 AND 1796 OF 2009 IN ITS OWN CASE FOR AYS 2001 - 01 TO 2004 - 05. IT IS SEEN FROM THIS ORDER THAT THE ISSUE HAS BEEN D ECIDED BY THE HONBLE HIGH COURT OF KERALA IN FAVOUR OF THE APPELLANT HOLDING THAT THE FIRST APPELLATE AUTHORITY AS WELL AS TRIBUNAL HAVE RIGHTLY HELD THAT THE APPELLANT IS ENTITLED TO ALL THE DEDUCTIONS AVAILABLE IN ITA NO 279 & 283 & CO 10 & 11/ COCH/ 13 4 THE COMPUTATION OF BUSINESS INCOME. THE ORDERS OF TRIBUNAL CONFIRMING THE ORDER OF THE FIRST APPELLATE AUTHORITY WAS UPHELD DISMISSING THE APPEAL OF THE DEPARTMENT. THE SAID DECISION OF HONBLE HIGH COURT IS AS UNDER: 3. THE ONLY QUESTION TO BE CONSIDERED IS WHETHER THE ASSESSEE CAN BE SAID TO HAVE COMMENCED BUSINESS BEFORE ACTUAL ADVANCING OF ANY FUND FOR ANY INFRASTRUCTURE PROJECT. STANDING COUNSEL RELYING ON THE DECISION OF THE SUPREME COURT IN TUTICORIN ALKALI CHEMICALS & FERTILISERS' CASE, ABOVE REFERRED, CONTENDED THAT THE CASE HEREIN IS SIMILAR TO THE FACTS OF THE CASE DECIDED BY THE SUPREME COURT BECAUSE AS IN THAT CASE, INCOME EARNED BY THE ASSESSEE IS INTEREST INCOME ON DEPOSITS MADE PRIOR TO THE COMMENCEMENT OF BUSINESS, THAT IS ADVANCING OF AMOUNTS FOR INFRASTRUCTURE PROJECTS. WE ARE UNABLE TO ACCEPT THE CONTENTION OF STANDING COUNSEL THAT FACTS IN TUTICORIN ALKALI CHEMICALS AND FERTILISERS' CASE APPLY TO THIS CASE, BECAUSE THAT WAS A CASE WHERE THE COMPANY WAS ENGAGED IN MANUFACTURE OF HEAVY CHEMICALS AND BEFORE STARTING BUSINESS, IT APPLIED SURPLUS FUND IN SHORT - TERM DEPOSITS AND EARNED INTEREST, WHICH IS OBVIOUSLY NOT OUT OF ANY BUSINESS CARRIED ON BY IT. ADMITTEDLY THAT COMPANY WAS NOT ENGAGED IN FINANCING AND ON THE OTHER HAND IT WAS AN INDUSTRIAL COMPANY ENGAGED IN MANUFACTURE. THEREFORE INTEREST EARNED BY IT CAN NEVER BE INCOME FROM BUSINESS, MORE SO WHEN SUCH INTEREST IS EARNED FROM DEPOSITS MADE EVEN PRIOR TO COMMENCEMENT OF PRODUCTION BY THE COMPANY. HOWEVER, FACTS OF THIS CASE ARE ENTIRELY DIFFERENT BECAUSE THE ACTIVITY OF T HE RESPONDENT IS FINANCING FOR INFRASTRUCTURE PROJECTS. IN FACT IT RAISED FUND TOWARDS WORKING CAPITAL THROUGH PUBLIC BORROWINGS BY ISSUE OF BONDS. ADMITTEDLY INTEREST EARNED BY THE RESPONDENT IS ON DEPOSITS OF BORROWED FUNDS RETAINED IN TREASURY ACCOUNTS AND IN OTHER BANK ACCOUNTS. THE QUESTION AS TO WHETHER THE ASSESSEE HAS COMMENCED BUSINESS OR WAS CARRYING ON BUSINESS WILL DEPEND UPON THE FACTS OF EACH CASE. INFRASTRUCTURE PROJECTS THEMSELVES ARE VERY FEW AND RESPONDENT CAN FUND THE PROJECT ONLY WHEN IT CONFORMS TO ASSESSEE'S NORMS FOR ELIGIBILITY. THE FUND REQUIRED FOR INFRASTRUCTURE PROJECTS IS SUBSTANTIAL AND THEREFORE FUND HAS TO BE FIRST RAISED BEFORE IDENTIFYING THE PROJECT TO BE FUNDED. THEREFORE, IN OUR VIEW, RAISING OF FUND FOR PROJECT FINANCING ITSELF IS COMMENCEMENT OF BUSINESS BECAUSE FUND RAISED IS NOTHING BUT WORKING CAPITAL TO BE APPLIED F OR BUSINESS PURPOSES. RESPONDENT CANNOT BE EXPECTED TO IMMEDIATELY ADVANCE FUND BECAUSE ONLY AFTER PROJECTS ARE IDENTIFIED AND THEIR ELIGIBILITY IS PROVE D, IN ACCORDANCE WITH THE NORMS OF THE RESPONDENT, THEY CAN FUND A PROJECT. HOWEVER, RESPONDENT CANNOT BE EXPECTED TO KEEP THE INTEREST BEARING BORROWINGS IDLE WITHOUT ANY RETURNS, WHICH WILL LEAD TO HEAVY LOSS. THEREFORE NECESSARILY RESPONDENT HAD TO D EPLOY AVAILABLE FUND IN SHORT TERM DEPOSITS TO EARN INTEREST WHICH IS TO BE UTILISED FOR PAYING INTEREST TO THE BOND HOLDERS AND TO MEET THE ADMINISTRATIVE COST. MAY BE MONTHS, OR YEARS, MAY TAKE FOR FUNDING PROJECTS. THEREFORE IT CANNOT BE SAID THAT BUSIN ESS CAN BE SAID TO COMMENCE ONLY AFTER FIRST PROJECT IS FINANCED. IN OUR VIEW, THE BUSINESS COMMENCED WHEN THE RESPONDENT RAISED FUND FROM PUBLIC THROUGH BONDS ISSUED AND WHEN THEY WERE READY WITH THE FUND TO DEPLOY FOR INFRASTRUCTURE PROJECTS WHICH IS THE BUSINESS OF THE RESPONDENT. THEREFORE IN OUR VIEW DEPOSIT OF FUNDS IN BANKS AND TREASURY IS NOTHING BUT AN ACTIVITY DONE IN THE COURSE OF BUSINESS AND CONSEQUENTLY INTEREST EARNED IS INCOME FROM ITA NO 279 & 283 & CO 10 & 11/ COCH/ 13 5 BUSINESS. SINCE THE ASSESSEE IS A FINANCING COMPANY, THE INTEREST EARNED BY IT ON THE FUNDS RAISED THROUGH PUBLIC BORROWINGS CANNOT BE COMPARED TO THE INTEREST EARNED ON BUSINESS LIKE MANUFACTURING INDUSTRIES AND THEREFORE THE DECISION OF THE SUPREME COURT RELIED ON BY THE DEPARTMENT IS NOT APPLICABLE TO THE FAC TS OF THIS CASE. THEREFORE THE FIRST APPELLATE AUTHORITY AS WELL AS THE TRIBUNAL HAVE RIGHTLY HELD THAT THE ASSESSEE IS ENTITLED TO ALL THE DEDUCTIONS AVAILABLE IN THE COMPUTATION OF BUSINESS INCOME. WE THEREFORE UPHOLD THE ORDERS OF THE TRIBUNAL CONFIRM ING THE ORDER OF THE FIRST APPELLATE AUTHORITY. CONSEQUENTLY DEPARTMENTAL APPEALS ARE DISMISSED. RESPECTFULLY FOLLOWING THE AFORESAID ORDER OF THE HIGH COURT IN THE CASE OF THE APPELLANT, IT IS HELD THAT THE APPELLANT HAD COMMENCED THE BUSINESS AND T HEREFORE, IT ELIGIBLE FOR AL BUSINESS EXPENSES INCURRED AND CLAIMED BY IT. THIS GROUND OF APPEAL IS THEREFORE, ALLOWED. THE AO IS DIRECTED TO COMPUTE THE TOTAL INCOME ACCORDINGLY. 7 WE NOTICE THAT THE HONBLE JURISDICTIONAL HIGH COURT HAS HELD THAT: A) THE ACTIVITY OF RAISING FUNDS FOR FINANCING THE INFRASTRUCTURE PROJECTS ITSELF IS COMMENCEMENT OF BUSINESS ACTIVITY. B) T HE ACTIVITY OF DEPOSITING FUNDS IN BANKS AND TREASURY IS NOTHING BUT AN ACTIVITY DONE IN THE COURSE OF BUSINESS AND CONSEQUENTLY INTEREST EA RNED IS INCOME FROM BUSINESS. C) THE DECISION RENDERED BY THE HONBLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD (SUPRA) IS NOT APPLICABLE TO THE FACTS OF THE INSTANT CASE. THUS, IT IS SEEN THAT THE VIEWS ENTERTAINED BY TH E REVENUE ON THE INSTANT ISSUE HAS ALREADY BEEN REJECTED BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE ASSESSES OWN CASE. SINCE THE LD CIT(A) HAS FOLLOWED THE BINDING DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT, WE DO NOT FIND ANY REASON TO INTERF ERE WITH HIS ORDER. 8 IN THE CROSS OBJECTION, THE ASSESSEE HAS STATED THAT IT HAD TAKEN AN ALTERNATIVE PLEA BEFORE THE CIT(A) THAT EVEN ASSUMING THAT INTEREST INCOME IS ASSESSABLE UNDER THE HEAD INCOME FROM OTHER SOURCES, THE EXPENDITURE INCURRED ON EAR NING THE SAME SHOULD HAVE BEEN ALLOWED. WE NOTICE THAT THE JURISDICTIONAL HIGH COURT HAS HELD THAT THE INTEREST INCOME IS ASSESSABLE UNDER THE HEAD INCOME FROM BUSINESS. THE LD D.R ALSO POINTED OUT THAT THE LD CIT(A) HAS DIRECTED THE AO TO ALLOW DEDUCT ION OF ALL BUSINESS EXPENSES INCURRED AND CLAIMED BY ITA NO 279 & 283 & CO 10 & 11/ COCH/ 13 6 THE ASSESSEE. HENCE, THE QUESTION OF ASSESSING THE INTEREST INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES DOES NOT ARISE AT THIS STAGE. HENCE, WE DO NOT FIND IT NECESSARY TO GIVE ANY DIRECTION AS SOU GHT BY THE ASSESSEE IN THE CROSS OBJECTION . 9 IN THE RESULT, BOTH THE APPEALS FILED BY THE REVENUE AND THE CROSS OBJECTION S F ILED BY THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 5 TH , DAY OF SEPTEMBER, 2013. SD/ - SD/ - (N.R.S. GAN ESAN) ( B.R. BASKARAN ) JUDICIAL MEMBER ACCOUNTANT MEMBER COCHIN: DATED 5 TH , SEPT 2013 RAJ* COPY TO: 1. APPELLANT , THE DY COMMR OF INCOME TAX, CIRCLE 1(20, TRIVANDRUM 2. RESPONDENT M/S KERALA INFRASTRUCTURE INVES T ME NT FUND BOARD, ROOM NO.420, MAIN BLOCK, GO VT SECRETARY, TRIVANDRUM 3. CIT(A) 4. CIT , TRIVANDRUM 5. DR 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT, COCHIN