Diwakar Solar Projects Ltd., (formerly Known as M/s. Diwakar Solar Projects Pvt.Ltd.), Hyd, Hyderabad V. ITO, Ward-17(1), Hyd, Hyderabad

ITA 1219/HYD/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2667 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 4 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-01-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2013-2014
• Appeal Filed On: 19-09-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: J SIRI KUMAR
• Assessee Lawyers: P MURALI MOHAN RAO
• Keywords: Business income; Opportunity of being heard; Capital receipt; Capital expenditure
• Section: 143(3); 142(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A', HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NOS. 1218 & 1219/HYD/2016 ASSESSMENT YEAR: 2012-13 AND 2013-14 M/S DIWAKAR SOLAR PROJECTS LTD., HYDERABAD. VS. INCOME-TAX OFFICER, WARD 17(1), HYDERABAD. APPELLANT RESPONDENT ASSESSEE BY: SHRI P. MURALI MOHAN RAO REVENUE BY: SHRI J. SIRI KUMAR DATE OF HEARING: 16/11/2017 DATE OF PRONOUNCEMENT: 24/01/2018 O R D E R PER S. RIFAUR RAHMAN, AM: BOTH THESE APPEALS ARE FILED BY THE ASSESSEE AGAIN ST A COMMON ORDER OF CIT (A) - 5, HYDERABAD, DATED 29/07 /2016 FOR AYS 2012-13 AND 2013-14. SINCE IDENTICAL ISSUE IS I NVOLVED IN BOTH THESE APPEALS, THE SAME WERE CLUBBED AND HEARD TOGETHER AND THEREFORE A COMMON ORDER IS PASSED FOR THE SAKE OF CONVENIENCE. 2. THE FACTS AS EMANATED FROM AY 2012-13 ARE, THE ASSESSEE COMPANY IS UNDER CONSTRUCTION PHASE TO BUI LD A SOLAR PLANT POWER PROJECT AND FILED ITS RETURN OF INCOME DECLARING INCOME OF RS. NIL, WHICH WAS E-FILED ON 2 1/12/2013. THE SAID RETURN WAS PROCESSED U/S 143(1) OF THE ACT ON 31/03/2014. SUBSEQUENTLY, THE CASE WAS TAKEN UP FOR SCRUTINY UNDER CASS AND STATUTORY NOTICES U/S 142(1) AND 143 (2) OF THE ACT WERE ISSUED AND SERVED ON THE ASSESSEE. I.T.A. NOS. 1218 & 1219/HYD/2016 DIWAKAR SOLAR PROJECTS LTD. 2 2.1 ON VERIFICATION OF THE INFORMATION SUBMITTED, T HE AO OBSERVED THAT THE ASSESSEE COMPANY HAS EARNED INTER EST INCOME TO THE TUNE OF RS.9,85,62,240/- ON FIXED DEP OSITS. FURTHER, HE OBSERVED THAT THE INTEREST EARNED IS MA DE OUT OF LOANS TAKEN FOR BUSINESS PURPOSE, AND INSTEAD OF O FFERING THE SAID INTEREST AS INCOME FROM OTHER SOURCES, THE ASS ESSEE COMPANY SET OFF THESE INTEREST RECEIPTS AGAINST THE PREOPERATIVE EXPENSES INCURRED. ACCORDING TO THE AO , SINCE THE INTEREST OF RS. 9,85,62,240/- HAS BEEN EARNED O N FIXED DEPOSIT WHICH IS NOT THE REGULAR BUSINESS OF THE AS SESSEE COMPANY AND ALSO THAT THE PREOPERATIVE EXPENSES DO NOT DIRECTLY RELATE TO OR HAVE BEEN INCURRED TO EARN SU CH INTEREST, THE SAME CANNOT BE SET OFF AGAINST ONE ANOTHER. THE AO RELYING ON THE JUDGMENT OF THE HON'BLE APEX COURT I N THE CASE OF TUTOCORIN ALKELIC CHEMICALS & FERTILIZERS LTD. C IT (1997) 227 ITR 172, BROUGHT THE AMOUNT OF RS. 9,85,62,240 /- BEING INTEREST ON DEPOSIT, TO TAX AS INCOME OF THE COMPA NY FOR THE YEAR UNDER CONSIDERATION AS 'INCOME FROM OTHER SOUR CES'. 3. AGGRIEVED BY THE ORDER OF AO, THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE CIT(A). 4. BEFORE THE CIT(A), THE ASSESSEE FILED WRITTEN SUBMISSIONS AND THEREIN, INTER-ALIA, STATED AS UND ER: WE WOULD LIKE TO SUBMIT THAT INTEREST AMOUNT ON MOBILIZATION OF ADVANCES EARNED BY THE ASSESSEE DUR ING THE PRE COMMENCEMENT PERIOD OF BUSINESS IS IN THE NATURE OF CAPITAL RECEIPT WHICH IS LIABLE TO BE SET OFF AGAINST PRE-OPERATIVE EXPENSES. THE AO SHOULD HAVE FOLLOWED THE TEST WHETHER THE ACTIVITY WHICH IS TAK EN UP FOR SETTING UP OF THE BUSINESS AND THE FUNDS WHICH ARE GENERATED OR INEXTRICABLY CONNECTED TO THE SETTING OF THE PLANT. THEREFORE, AS PER THE PROVISIONS OF SECTION 4 OF THE IT ACT, 1961 WHICH IS THE CHARGING SECTION STAT ES THAT INCOME WHICH ARISES TO THE ASSESSEE FROM THE D ATE OF SETTING UP OF THE BUSINESS BUT PRIOR TO THE COMMENCEMENT IS CHARGEABLE TO TAX DEPENDING ON WHETHER IT IS OF CAPITAL OR REVENUE IN NATURE. SINC E, THE I.T.A. NOS. 1218 & 1219/HYD/2016 DIWAKAR SOLAR PROJECTS LTD. 3 PROJECT OF THE ASSESSEE FOR SETTING UP OF BUSINESS IS STILL UNDER PROGRESS AND THERE IS NO PROFIT OR LOSS DURIN G THE YEAR UNDER CONSIDERATION, THE AMOUNT OF INTEREST EA RNED BY THE ASSESSEE ON MOBILIZATION OF ADVANCES IS SET OFF AGAINST THE CAPITAL EXPENDITURE INCURRED FOR SETTIN G UP OF THE BUSINESS. THE PROFIT & LOSS EL C FOR THE RELEVA NT YEAR IS ENCLOSED FOR YOUR KIND REFERENCE. THEREFORE, THE INCOME EARNED BY THE ASSESSEE COMPANY IS OF CAPITAL IN NATURE. THE ASSESSEE RELIED ON THE FOLLOWING DECISIONS: 1. CIT VS. BOKARO STEEL LTD., [1999] 236 ITR 315 (S C) 2. CIT VS. KARNATAKA POWER CORPORATION [2001] 247 I TR 268 (SC) 3. NTPC TAMIL NADU ENERGY CO. LTD., ITA NO. 6016/DEL./2013. 4. THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, ELABORATELY DISCUSSED THE ISSUE AT LENGTH WITH VARIOUS CASE LAW AND CONFIRMED THE ACTION OF THE AO BY OBSERVING AS UNDER: THE CONSISTENT LINE OF REASONING WHICH EMERGES FROM THE CASE LAW ADVERTED TO EARLIER IS THAT THE MERE F ACT THAT AN ASSESSEE CARRIES ON BUSINESS WOULD NOT RESULT IN AN INFERENCE THAT THE INCOME WHICH IS EARNED BY WAY OF INTEREST WOULD FALL FOR CLASSIFICATION AS BUSINESS INCOME. WHERE THE ASSESSEE ENGAGES IN AN INDEPENDENT LINE ACTIVITY, INTEREST EARNED ON DEPOSITS CANNOT BE REG ARDED AS FALLING UNDER THE HEAD OF PROFITS AND GAINS OF BUSINESS OR PROFESSION. SUCH INCOME WOULD FALL FOR CLASSIFICATION AS INCOME FROM OTHER SOURCES. IT IS PERTINENT TO NOTE HEAR THAT THE ISSUE WITH RE GARD TO ASSESSING THE INTEREST INCOME EARNED DURING THE PER IOD PRIOR TO COMMENCEMENT OF A BUSINESS HAS BEEN A VERY LITIGIOUS ISSUE WHICH HAS SEEN MANY TURNS AND TRIBULATIONS OVER THE PERIOD OF TIME. IN FACT, THE HON'BLE SUPREME COURT OF INDIA IN VIEW OF THE DICHOTOMOUS V IEWS TAKEN BY THE APEX COURT IN THE CASES OF TUTICORIN A LKALI (SUPRA) AND BOKARO STEEL (SUPRA) REFERRED THE MATTE R TO A LARGER BENCH I.E., BONGAIGAON REFINERY AND PETROCHEMICALS (SUPRA). THE LARGER BENCH OF THE HON 'BLE SUPREME COURT CAME TO THE CONCLUSION THAT INCOME DERIVED FROM HOUSE PROPERTY, GUEST HOUSE, CHARGES F OR EQUIPMENT AND RECOVERIES FROM THE CONTRACTORS ON ACCOUNT OF WATER AND ELECTRICITY SUPPLY DURING THE FORMATION PERIOD OF THE BUSINESS IS NOT CHARGEABLE TO TAX BUT HAD TO BE ADJUSTED AGAINST THE PROJECT COST BUT I.T.A. NOS. 1218 & 1219/HYD/2016 DIWAKAR SOLAR PROJECTS LTD. 4 INTEREST INCOME WAS HOWEVER CONSIDERED AS TAXABLE. THUS, A LARGER BENCH OF THE APEX COURT AFTER CONSIDERING THE ENTIRE CASE LAW WITH REGARD TO RECE IPTS OF A BUSINESS PRIOR TO ITS COMMENCEMENT CONCLUDED THAT INTEREST INCOME CANNOT BE ADJUSTED AGAINST PROJECT COST. FOLLOWING THE CONCLUSIONS IN AY 2012-13, THE CIT(A) DISMISSED THE APPEAL IN AY 2013-14 ALSO. 5. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE I S IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF A PPEAL, WHICH ARE COMMON IN BOTH THE APPEALS UNDER CONSIDER ATION EXCEPT THE QUANTUM OF ADDITION: 1. THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-5, HYD, HAS ERRED IN BOTH IN LAW AND ON FACTS IN PASSI NG THE APPELLATE ORDER UPHOLDING THE ASSESSMENT ORDER PASS ED BY THE AO U/S 143(3) ON DT. 29.07.2016 2. THE LD. CIT(A) ERRED IN UPHOLDING THE ADDITION O F RS 9,85,62,240/- MADE BY THE A.O. UNDER THE HEAD 'INCO ME FROM OTHER SOURCES' TOWARDS RECEIPT OF INTEREST ON MOBILISATION ADVANCE 3. THE LD. CIT(A), OUGHT TO HAVE APPRECIATED THE FA CT THAT INTEREST RECEIVED DURING PRE-COMMENCEMENT PERI OD OF BUSINESS INEXTRICABLY LINKED WITH THE SETTING UP OF CAPITAL STRUCTURE AND IT IS NOT A REVENUE RECEIPT 4. THE LD. CIT(A), OUGHT TO HAVE CONSIDERED THE DOCUMENTS FURNISHED BY THE APPELLANT TO SHOW THAT INTEREST WAS EARNED DURING THE PRIOR PERIOD OF THE BUSINESS. 5. THE LD. CIT (A), OUGHT TO HAVE CONSIDERED THE SUBMISSION OF THE APPELLANT THAT INTEREST RECEIVED WAS IS IN THE NATURE OF CAPITAL RECEIPT. 6. THE LD. CIT(A), OUGHT TO HAVE APPRECIATED THE FA CT THAT RECEIPT OF INTEREST WAS ' PRIOR PERIOD INCOME' WHICH WAS RECEIVED BEFORE COMMENCEMENT OF BUSINESS AND WHICH IS IN NATURE OF CAPITAL RECEIPT, SET OFF OF S UCH RECEIPT AGAINST PREOPERATIVE EXPENSES CAN BE DONE 7. THE LD. CIT(A) , OUGHT TO HAVE APPRECIATED THE F ACT THAT THE ACTIVITY OF PAYMENT OF MOBILISATION ADVANC E BY I.T.A. NOS. 1218 & 1219/HYD/2016 DIWAKAR SOLAR PROJECTS LTD. 5 THE APPELLANT WAS TAKEN UP BY THE APPELLANT FOR SET TING UP OF BUSINESS AND THE FUNDS WHICH WERE GENERATED ( I.E. INTEREST) ARE INEXTRICABLY CONNECTED TO THE SETTING UP OF THE PLANT AND ARE CAPITAL IN NATURE AND THEREFORE N OT TAXABLE AS HELD BY THE HON. SUPREME COURT OF INDIA IN THE CASE OF CIT VS. BOKARO STEEL LTD (1999) 236 ITR 315(SC) AND IN THE CASE OF CIT VS. KARNATAKA POWER CORPORATION (2001) 247 ITR 268 (SC) AND ALSO BY NUMBER OF COURTS AND TRIBUNALS. 8. THE LD. CIT(A) OUGHT TO HAVE APPRECIATED THE FAC T THAT CAPITAL RECEIPT ARE NOT TAXABLE AS PER THE PRO VISION OF SECTION 4 OF INCOME TAX ACT,1961. 9. THE APPELLANT MAY ADD, ALTER, OR MODIFY OR SUBST ITUTE ANY OTHER POINTS TO THE GROUNDS OF APPEAL AT ANY TI ME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL. 6. BEFORE US, THE LD. AR OF THE ASSESSEE FILED A PE TITION REQUESTING FOR ADMISSION OF EVIDENCE BY WAY OF PAPE R BOOK CONTAINING EXECUTIVE SUMMARY OF THE COMPANY, PROJEC T STATUS REPORT ON SOLAR THERMAL POWER AGREEMENTS AND OTHER DOCUMENTS, SERIALLY NUMBERED AS PAGE NO. 1 TO 275. HE SUBMITTED THAT THE ASSESSEE WAS PREVENTED FROM FILI NG THE ABOVE DOCUMENTS BEFORE THE LOWER AUTHORITIES AS THE SAME WERE NOT READILY AVAILABLE. ACCORDINGLY, WE ADMIT T HE SAME. 6.1 LD. AR SUBMITTED THAT THE ASSESSEE HAS MADE THE MOBILISATION ADVANCE TO THE CONTRACTORS. SINCE THE PROJECT WAS UNDER SETTING UP STAGE, AS PER THE AGREEMENT, THE C ONTRACTOR HAS TO PAY INTEREST ON THE MOBILISATION ADVANCES UN TIL THE PROJECT IS COMPLETED. THIS EARNING OF INTEREST IS I NEXTRICABLY CONNECTED TO THE SETTING UP OF THE PLANT. FOR THIS PROPOSITION, HE RELIED ON THE DECISION IN THE CASE OF ADANI POWE R LTD., ITA NO. 2755/AHD/2011 AND IN THE CASE OF HYDERABAD HI-T ECH TEXTILE PARK PVT. LTD., ITA NO. 587/HYD/2016. 7. LD. DR RELIED ON THE ORDERS OF REVENUE AUTHORITI ES AND FURTHER SUBMITTED THAT ASSESSEE HAS NOT SUBMITTED A NY I.T.A. NOS. 1218 & 1219/HYD/2016 DIWAKAR SOLAR PROJECTS LTD. 6 RELEVANT DOCUMENT LIKE CONTRACT AGREEMENT ETC. BEF ORE ANY LOWER AUTHORITIES. 8. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IT IS NOTICED FROM THE INFORMAT ION SUBMITTED BY THE ASSESSEE THAT THESE ADVANCES WERE MADE TO TH E CONTRACTOR TO SET UP THE PLANT AND EARNED INTEREST INCOME OUT OF SUCH ADVANCES. ASSESSEE HAS FILED ADDITIONAL INF ORMATION BEFORE US. WE FIND THAT THE AO HAS TREATED THE INTE REST INCOME AS EARNED FROM FIXED DEPOSITS BUT ASSESSEE CLAIMS T HAT IT IS OUT OF MOBILISATION ADVANCES. THESE FACTS WERE NOT VERIFIED BY ANY AUTHORITY. THEREFORE, WE REMIT THE ISSUE BACK TO THE FILE OF AO TO VERIFY THE NATURE OF ADVANCE. IN CASE, IT IS FOUND THAT THE NATURE OF ADVANCE IS FOR MOBILISATION ADVANCE FOR S ETTING UP OF PLANT, THEN, THIS INTEREST SHOULD BE TREATED AS CAP ITAL BY FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. BOKARO STEEL LTD., [1999] 236 ITR 3 15 WHEREIN IT WAS HELD THAT RECEIPTS FROM LETTING OUT QUARTERS TO EMPLOYEES OF CONTRACTORS WHO ARE ENGAGED IN CONSTRUCTION OF ASSE SSEES PLANT, HIRE CHARGES FOR LETTING OUT PLANT AND MACHINERY TO CONT RACTORS, INTEREST ON AMOUNTS ADVANCED TO THEM AND ROYALTY RECEIVED FROM THEM FOR ALLOWING EXCAVATION OF STONES, ETC. ARE ALL INTRINSICALLY CO NNECTED WITH THE CONSTRUCTION ACTIVITY AND ARE CAPITAL RECEIPTS. ACCORDINGLY, THIS ISSUE IS REMITTED TO THE AO FOR VERIFICATION OF ADVANCE AND ASSESSEE MAY BE GIVEN PROPER OPPORTUNITY OF BEING HEARD. THUS, THE GROUNDS RAISED BY THE ASSESSEE IN BOTH THE APPEALS UNDER CONSIDERATIO N ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. I.T.A. NOS. 1218 & 1219/HYD/2016 DIWAKAR SOLAR PROJECTS LTD. 7 9. IN THE RESULT, BOTH THE APPEALS ARE ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 24 TH JANUARY, 2018. SD/- (P. MADHAVI DEVI) JUDICIAL MEMBER SD/- (S. RIFAUR RAHMAN) ACCOUNTANT MEMBER HYDERABAD, DATED 24 TH JANUARY, 2018 KV COPY FORWARDED TO: 1. DIWAKAR SOLAR PROJECTS LTD., C/O P. MURALI & CO. , CAS, 6-3- 655/2/3, 1 ST FLOOR, SOMAJIGUDA, HYDERABAD 82 2. ITO, WARD 17(1), , HYDERABAD 3. CIT(A) - 5, HYDERABAD 4 PR. CIT 5, HYDERABAD 5 THE DR, ITAT, HYDERABAD 6 GUARD FILE