COASTAL GUJARAT POWER LTD, MUMBAI V. ITO 6(2)(1), MUMBAI

ITA 1043/MUM/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8328 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-08-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 07-08-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 06-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K KARDA M
• Keywords: Opportunity of being heard; Source of fund; Proportionate interest; Capital receipt
• Section: 143(3)

Judgement Text

IN THE INCO ME TAX APPELLATE TRIBUNAL C BENCH, MUMBAI BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JUDICIAL MEMBER ./I.T.A. NO. 1043/M/2013 ( AY: 200 9 - 20 10 ) COSTAL GUJARAT POWER LTD, C/O. TATA POWER CO. LTD., 34, SANT TUKARAM ROAD, CARNAC BUNDER, MUMBAI - 09. / VS. ITO - 6(2)(1), R.NO.510, AAYAKAR BHAVAN, M.K. ROAD, NEW MARINE LINES, MUMBAI 400 020. ./ PAN : AADCC 1347 A ( / APPELLANT) .. ( / RESPONDENT ) ./I.T.A. NO. 512/M/2013 ( AY: 200 9 - 20 10 ) ITO - 6(2)(1), R.NO.510, AAYAKAR BHAVAN, M.K. ROAD, NEW MARINE LINES, MUMBAI 400 020. / VS. COSTAL GUJARAT POWER LTD, C/O. TATA POWER CO. LTD., 34, SANT TUKARAM ROAD, CARNAC BUNDER, MUMBAI - 09. ./ PAN : AADCC 1347 A ( / APPELLANT) .. ( / RESPONDENT ) / A SSESSEE BY : SHRI FARROKH V IRANI / RESPONDENT BY : SHRI A.K. KARDAM, DR / DATE OF HEARING :7 .8 .2014 / DATE OF PRONOUNCEMENT :22 .8 .2014 / O R D E R PER D. KARUNAKARA RAO, AM: THERE ARE TWO APPEALS UNDER CONSIDERATION AND THEY ARE CROSS APPEALS INVOLVING ASSESSMENT YEAR 2009 - 2010. BOTH THESE APPEALS ARE FILED AGAINST THE ORDER OF THE CIT (A) - 12, MUMBAI DATED 19.1.2012. SINCE, THE ISSUES RAISED IN BOTH THESE APPEALS ARE CONNECTED, FOR THE SAKE OF CONVENIENCE, THEY ARE CLUBBED, HEARD COMBINEDLY AND DISPOSED OF IN THIS CONSOLIDATED ORDER. APPEAL WISE AND GROUND WISE ADJU DICATION IS GIVEN IN THE FOLLOWING PARAGRAPHS OF THIS ORDER. 2 2. FIRSTLY WE SHALL TAKE UP THE APPEAL ITA NO.1043/M/2013 , WHICH IS FILED BY THE ASSESSEE ON 6.2.2013. IN THIS APPEAL, ASSESSEE RAISED THE FOLLOWING GROUNDS WHICH READ AS UNDER: 1. THE CIT (A) ERRED IN CONFIRMING THE DISALLOWANCE MADE BY THE INCOME TAX OFFICER IN RESPECT OF INTEREST EXPENDITURE OF RS. 25,93,348/ - ON BORROWINGS CLAIMED AS DEDUCTION UNDER SECTION 57(III) OF THE ACT AGAINST THE INTEREST INCOME ON FIXED DEPOSITS WITH BAN KS. 2. WITHOUT PREJUDICE TO THE ABOVE, IF THE INTEREST EXPENDITURE IN QUESTION IS TREATED AS PRE - OPERATIVE EXPENDITURE, THE SAME SHOULD BE ALLOWED TO BE CAPITALIZED TO THE FIXED ASSETS. 3. AT THE OUTSET , SHRI FARROKH V IRANI, LD COUNSEL FOR THE ASSESSEE BROUGHT OUR ATTENTION TO THE ABOVE GROUNDS AND MENTIONED THAT THE ONLY ISSUE RAISED BEFORE THE TRIBUNAL RELATES TO THE ALLOWABILITY OF NETTING OF INTEREST EXPENSES AGAINST THE INTEREST INCOME EARNED BY THE ASSESSEE ON THE FIXED DEPOSIT MADE OUT THE SURPLUS BORROWED UNUTILIZED FUNDS U/S 57(III) OF THE ACT. IT IS MENTIONED IN PARA 4 OF THE IMPUGNED ORDER THAT THE AO DID NOT GIVE MUCH REASONING WHILE HOLDING THAT THE INTEREST EXPENSES OF RS. 25,93,348/ - , WHICH IS CALCULATED BASED ON THE PROPORTIONATE INTEREST COST APPLYING THE @ 7.85% PER ANNUM IS NOT TO BE SET OFF AGAINST THE INTEREST INCOME OF RS. 18,66,393/ - . MATTER TRAVELLED TO THE FIRST APPELLATE PROCEEDINGS. 4. DURING THE PROCEEDINGS BEFORE THE FIRST APPELLATE AUTHORITY, ASSESSEE MADE SUBMISSIONS WHICH IS EXTRACTED IN PARA 4.2 OF THE IMPUGNED. IN THE SAID SUBMISSIONS, IT IS CLAIMED BY THE ASSESSEE THAT THE SAID INTEREST COST WHOLLY AND EXCLUSIVELY INCURRED FOR EARNING OF THE SAID INTEREST INCOME THEREFORE, THE NETTING IS REQUIRED IN VIEW OF THE NEXUS BE TWEEN THE INTEREST INCOME AND INTEREST EXPENDITURE. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE OFFERED THE INTEREST INCOME U/S 57 OF THE ACT. ON PERUSAL OF THE SAID SUBMISSIONS OF THE ASSESSEE, CIT (A) ANALYZED THE FACTS OF THE CASE AND HELD AS FOLLOWS. 4.3.THE DISPUTE IS REGARDING WHETHER ANY INTEREST EXPENSE ARISING TO THE APPELLANT REGARDING SUCH BORROWED FUNDS WOULD BE ALLOWED AS DEDUCTION TO THE APPELLANT OR NOT. THE APPELLANT HAS WORKED OUT THE INTEREST EXPENSE ON THE FUNDS DEPOSITED AS FIXED DEPOSIT WITH THE HDFC BANK HOLDING THAT THE AVERAGE BORROWING COST WOULD AMOUNT TO RS. 7.81%. HOWEVER, IT IS SEEN THAT ONLY A PROPORTIONATE INTEREST COST HAS BEEN WORKED OUT BY THE APPELLANT WITHOUT GIVING ANY SUPPORTING DOCUMENTS TO ESTABLISH AS TO HOW A RATE OF 7.81% HAS BEEN INCORPORATED / CONSIDERED BY IT. IT IS SEEN THAT A GENERAL STATEMENT HAS BEEN MADE AND A AVERAGE PROPORTIONATE BORROWING COST WORKED OUT BY TAKING INTO CONSIDERATION THE OPENING LOAN ACCOUNT, CLOSING LOAN ACCOUNT IN THE YEAR ALONG WITH THE INTEREST COST. THE INTEREST COST, IT IS SEEN, WAS ON THE TOTAL AMOUNT OF BORROWINGS OF THE APPELLANT. HOWEVER, WHAT WAS THE INTEREST CHARGED BY THE BANK ON THE AMOUNTS BORROWED HAS NOT BEEN STATED. IT IS ALSO SEEN THAT THE AO STATEMENT THAT THE FUNDS HAD BEEN TAKEN 3 SPECIALLY FOR BUSINESS PURPOSE AND FOR EARNING INTEREST INCOME FIXED DEPOSITS WAS CORRECT. THEREFORE, THE INTEREST COST IN THE YEAR CONCERNED, IF ANY, WOULD BE TREATED AS THE PRE - OPERATIVE EXPENSE OF THE APPELLANT AND NOT BE AVAILABL E TO THE APPELLANT FOR NETTING OFF REGARDING INTEREST FROM OTHER SOURCES AS EARNED BY USING THE FUNDS AVAILABLE ON A TEMPORARY BASIS FOR MAKING A FIXED DEPOSIT. NO NETTING OFF CAN BE ALLOWED TO THE APPELLANT. THE ACTION OF THE AO SO TAKEN TO DISALLOW THE INTEREST COST IS, THEREFORE, CONFIRMED AND THE GROUND OF APPEAL DISMISSED. 5. FROM PAGE 11 AND 12 OF THE CIT (A)S ORDER, WHICH IS REPRODUCED ABOVE, IT IS CLEAR THAT THE CIT (A) DENIED THE BENEFIT FOR THE ASSESSEES FAILURE TO ESTABLISH CORRECTNESS OF T HE RATE OF INTEREST OF 7.81%, WHICH IS USED BY THE ASSESSEE FOR QUANTIFYING THE PROPORTIONATE INTEREST COST. HE ALSO MENTIONED THAT THE FUNDS, WHICH IS THE SOURCE FOR MAKING FIXED DEPOSIT WHICH YIELDED INTEREST INCOME, WAS TAKEN FOR BUSINESS PURPOSES AND NOT EARNING INTEREST INCOME FROM THE FIXED DEPOSITS. THEREFORE, HE OPINED THAT THE INTEREST COST, IF ANY, SHOULD BE CONSIDERED AS PRE - OPERATIVE EXPENSES AND THUS, THE INTEREST EXPENDITURE SHOULD BE TAXED FULLY WITHOUT GRANTING ANY NETTING AGAINST THE INTE REST EXPENSES. ASSESSEE FILED AN APPEAL BEFORE US AGAINST THE SAID DECISION OF THE CIT (A). 6. DURING THE PROCEEDINGS BEFORE US, LD COUNSEL FOR THE ASSESSEE BROUGHT OUR ATTENTION TO THE PAPER BOOK CONTAINING 6 PAGES AND DEMONSTRATED THAT THE SOURCES OF FU NDS FOR MAKING FIXED DEPOSIT IS MOSTLY THE BORROWED FUNDS AND PARTLY THE EQUITY OF RS. 8 CRS. HE FAIRLY MENTIONED THAT IF AN OPPORTUNITY IS GIVEN, THE ASSESSEE CAN FILE PROPER LETTERS FROM THE FINANCIAL INSTITUTION BEFORE THE AO EVIDENCING THE EXACT AMOUN T OF INTEREST EXPENSES RELATABLE TO THE AMOUNT OF FIXED DEPOSIT WHICH YIELDED INTEREST INCOME. THE PAPER BOOK FILED BEFORE US DOES NOT BEAR THE CERTIFICATE THAT THESE DOCUMENTS WERE AVAILABLE BEFORE THE LOWER AUTHORITIES. 7. ON THE OTHER HAND, LD DR FAI RLY RELIED ON THE ORDERS OF THE AO AND THE CIT (A) AND MENTIONED THAT THE PROVISIONS OF SECTION 57(III) ARE NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE THEREFORE THE ORDER OF THE CIT (A) NEEDS TO BE CONFIRMED. 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS THE RELEVANT MATERIAL PLACED BEFORE US. ON HEARING BOTH THE PARTIES, WE ARE OF THE OPINION THAT THE ISSUE OF SOURCE OF FUNDS WAS DELIBERATED BY THE AO / CIT (A), W HICH IS NOW MADE CLEAR BY THE LD COUNSEL BEFORE US . A LL THE PAPERS ARE FOUND IN THE FORM OF PAPER BOOK. WE FIND THAT THERE IS A DIRECT NEXUS OF FUNDS OF THE BORROWED CAPITAL WITH THE FIXED DEPOSITS IN QUESTION PARTLY. THE 4 INTEREST PAID ON A LOAN TAKEN TO AVOID PREMATURE ENCASHMENT OF THE FIXED DEPOSIT IS DEDUCTIBLE AGAINST THE INTEREST EARNED ON THE FIXED DEPOSIT AS HELD BY THE ITAT, AGRA BENCH IN THE CASE OF RAJ KUMARI AGARWAL VS. DCIT VIDE ITA NO.176/AGRA/2013 (AY 2008 - 2009) , DATED 18.7.2014 . HAVING DE CIDED ON THE ISSUE OF NEXUS OF FUNDS AND THE ALLOWABILITY OF THE INTEREST EXPENSES AGAINST THE INTEREST INCOME, T HE REMAINING ISSUE IS ABOUT THE INTEREST RATE OF 7.81% APPLIED BY THE AO IN DETERMINING THE INTEREST EXPENSES. IN OUR OPINION, THIS REQUIRES R EVISIT OF THE ISSUE TO THE FILE OF THE AO. ASSESSEE MUST DEMONSTRATE BEFORE THE AO THE EXACT ACCOUNT OF INTEREST EXPENSES RELATABLE TO THE INTEREST INCOME IN QUESTION. IF NECESSARY, AO SHALL ADMIT THE LETTERS FROM THE BANK, IF ANY, IN THE INTEREST OF JUS TICE. IT IS THE SUBMISSION OF THE LD COUNSEL THAT THE PURPOSE OF FUNDS DOES NOT DETERMINE THE ALLOWABILITY OF THE CLAIM MADE U/S 57(III) OF THE ACT. THE DECISIONS RELIED UPON BY THE LD COUNSEL IN THIS REGARD SHOULD BE EXAMINED BY THE AO IN THE REMAND PRO CEEDINGS. AO SHALL GRANT A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. ACCORDINGLY, GROUNDS RAISED BY THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. 9. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES . I.T.A. NO.5 12/M/2013 (AY: 2009 - 2010) (BY REVENUE) 10. THIS APPEAL FILED BY THE REVENUE ON 18.1.2013 IS AGAINST THE ORDER OF THE CIT (A) - 12, MUMBAI DATED 25.10.2012 FOR THE ASSESSMENT YEAR 2009 - 2010. 11. IN THIS APPEAL, REVENUE RAISED THE FOLLOWING GROUNDS WHICH READ AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT (A) ERRED IN DELETING THE ADDITION MADE BY THE AO OF RS. 94,75,453/ - BY TREATING THE INTEREST INCOME ON SECURITY DEPOSIT PLACED WITH PASCHIM GUJARAT VIZ. CO. LTD (PGVCL ) FOR AVAILING ELECTRICITY FACILITY FOR THE PURPOSE OF CONSTRUCTION OF POWER PLANT AS INCOME FROM OTHER SOURCES . 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT (A) AS CAPITAL RECEIPT WITHOUT APPRECIATING THE FACT THAT SUPREM E COURT IN ITS LATEST DECISION IN THE CASE OF BANGAIGAON REFINERY & P E TROCHEMICALS LTD VS. CIT HAS UPHELD THE DECISION OF GUWAHATI HIGH COURT BY WHICH DECISION OF TRIBUNAL WAS REVERSED AND INTEREST INCOME FOR PRE - COMMENCEMENT PERIOD WAS HELD TO BE TAXABLE IN THE LIGHT OF ITS EARLIER DECISION OF TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. 5 12. THE ABOVE GROUNDS REVOLVE AROUND THE TREATMENT OF AO IN CONSIDERING THE INTEREST INCOME ON SECURITY DEPOSIT RECEIVED BY THE ASSESSEE UNDER THE HEAD INCOME FROM OTHER SOURCES, WHEREAS THE ASSESSEE CAPITALIZED THE SAME BY HOLDING IT TO BE CAPITAL IN NATU RE BASED ON THE PRINCIPLES LAID DOWN BY THE APEX COURT IN THE CASE OF BOKARO STEEL LTD 236 ITR 315. BRIEFLY STATED RELEVANT FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF GENERATION OF POWER. ASSESSEE FILED THE RETURN OF INCOME DEC LARING THE TOTAL INCOME OF RS. NIL. ASSESSMENT WAS COMPLETED U/S 143(3) OF THE ACT BY DETERMINING THE ASSESSED INCOME AT RS. 1,13,41,850/ - . DURING THE ASSESSMENT PROCEEDINGS, AO NOTICED THAT INTEREST INCOME RECEIVED BY THE ASSESSEE FROM PASCHIM GUJARAT VI J CO. LTD (PGVCL) ON THE SECURITY DEPOSIT OF RS. 14.788 CRS, WHICH IS PLACED WITH THE ASSESSEE, WAS NOT OFFERED BY THE ASSESSEE FOR TAXATION AS IT WAS CAPITALIZED. IN THIS REGARD, AO ASKED THE ASSESSEE TO SUBSTANTIATE ITS ACTION. NOT SATISFIED WITH THE E XPLANATION OF THE ASSESSEE, AO MADE AN ADDITION OF RS. 94,75,453/ - UNDER THE HEAD INCOME FROM OTHER SOURCES BY HOLDING THAT THE ASSESSEE HAD NOT STARTED THE BUSINESS ACTIVITY AS YET AND THEREFORE, ANY INCOME EARNED BEFORE THE COMMENCEMENT OF BUSINESS ACT IVITY HAS TO BE TREATED AS INCOME FROM OTHER SOURCES AND RELIED ON VARIOUS DECISIONS IN SUPPORT OF HIS DECISION. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 13. DURING THE PROCEEDINGS BEFORE THE FIRST APPELLATE AUTHORITY, AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, CIT (A) ALLOWED THE APPEAL. PARA 3.4 TO 3.7 OF THE IMPUGNED ORDER ARE RELEVANT IN THIS REGARD. AGGRIEVED WITH THE DECISION OF THE CIT (A), REVENUE FILED THE PRESENT APPEAL BY RAISING THE ABOVE MENTIONED GROUNDS. 14. DURING THE PROCEEDINGS BEFORE US, LD DR HEAVILY RELIED ON THE ORDER OF THE AO AND REITERATED THE CONTENTION THAT ANY INCOME EARNED BEFORE THE COMMENCEMENT OF BUSINESS ACTIVITY HAS TO BE TREATED AS INCOME FROM OTHER SOURCES. 15. ON THE OTHER HAND, LD COUNSEL FOR THE ASSESSEE RELIED ON THE ORDER OF THE CIT (A) AND REITERATED THE SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES. 16. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS THE RELEVANT M ATERIAL PLACED BEFORE US. ON HEARING BOTH THE PARTIES AND ON PERUSAL OF THE ORDER OF THE CIT (A) IN GENERAL AND PARAS 3.4 TO 3.7 IN PARTICULAR, WE FIND THAT THE CIT (A) HAS DISCUSSED THE ISSUE UNDER CONSIDERATION AT 6 LENGTH BEFORE GRANTING RELIEF TO THE AS SESSEE. FOR THE SAKE OF COMPLETENESS OF THIS ORDER, WE FIND IT RELEVANT TO REPRODUCE PARA 3.7 OF THE CIT (A)S ORDER WHICH READS AS UNDER: 3.7. THEREFORE, RELYING ON THE CASE LAWS MENTIONED ABOVE, THE INTEREST INCOME EARNED BY THE APPELLANT WOULD NEED TO BE TREATED AS CAPITAL RECEIPT AND CAPITALIZED AS DONE BY THE APPELLANT. THE ACTION OF THE AO IN TREATING THE INTEREST INCOME EARNED BY THE APPELLANT ON SECURITY DEPOSIT PLACED WITH PGVCL FOR AVAILING ELECTRICITY FACILITY FOR THE PURPOSE OF CONSTRUCTION O F POWER PLANT AS INCOME FROM OTHER SOURCES THEREFORE, CANNOT BE UPHELD. THIS GROUND OF APPEAL OF THE APPELLANT IS ALLOWED. 17. WHILE GIVING THE ABOVE ADJUDICATION, CIT (A) RELIED ON VARIOUS DECISIONS OF THE HIGHER JUDICIARY AND ONE OF THEM IS THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD VS. CIT [1997] 227 ITR 172 WHICH IS RELEVANT FOR THE PROPOSITION THAT INTEREST EARNED ON SURPLUS FUNDS WOULD NEED TO BE TREATED INCOME FROM OTHER SOURCES AND ACCORDINGLY INTEREST EARNED ON ADVANCES PAID DURING PRE - COMMENCEMENT PERIOD FOUND TO BE LINKED TO SETTING UP OF THE PLANT OF THE ASS ESSEE WOULD NEED TO BE TREATED AS CAPITAL RECEIPT . CONSIDERING THE SETTLED POSITION OF THE ISSUE AT THE LEVEL OF THE APEX COURT, WE ARE OF THE OPINION THAT THE DECISION TAKEN BY THE CIT (A) WHILE ALLOWING THE ASSESSEES APPEAL IS FAIR AND REASONABLE AND IT DOES NOT CALL FOR ANY INTERFERENCE. ACCORDINGLY, GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 18. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN TH E OPEN COURT ON 2 2 N D AUGUST, 2014. S D / - S D / - (AMIT SHUKLA ) (D. KARUNAKARA RAO ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; 2 2 /08/2014 . . ./ OKK , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, 7 ITAT, MUMBAI 6. / GUARD FILE . //TRUE COPY// / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI