M/s Kalinga Coal Mining Pvt. Ltd, Bhubaneswar V. ACIT, Bhubaneswar

ITA 123/CTK/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4447 (ITAT-CUTTACK)
• Duration Of Justice: 1 year(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-04-2011
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 11-04-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 08-04-2010
• Court: TRIBUNAL
• Department Lawyers: J KHANRA
• Keywords: Capital receipt

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK ( ) BEFORE . . , , HONBLE SHRI K.K.GUPTA, ACCOUNTANT MEMBER. /AND . . . , S HRI K.S.S.PRASAD RAO , JUDICIAL MEMBER / I.T.A.NO. 123 AND 279/CTK/2010 / ASSESSMENT YEAR S 2006 - 07 AND 2007 - 08 M/S.KALINGA COAL MINING PVT. LTD., 307, 4 TH FLOOR, NIRMALA PLAZA B, FOREST PARK, BHUBANESWAR. - - - VERSUS - AS ST.COMMISSIONER OF INCOME - TAX, CIRCLE 1(1), BHUBANESWAR. ( /APPELLANT ) ( / RESPONDENT ) / FOR THE APPELLANT : / SHRI SALIL KAPOOR, AR / FOR THE RESPONDENT: / SHRI J.KHANRA, DR / ORDER . . , , SHRI K.K.GUPTA, ACCOUNTANT MEMBER. THESE TWO APPEALS BY THE ASSESSEE FOR THE AYS 2006 - 07 AND 2007 - 08 RELATE TO A COMMON ISSUE BEING THE INTEREST EARNED ON FUNDS LYING IN THE BANK BEING THE AMOUNT OF SHARE APPLICATION MONEY RECEI VED , PENDING ALLOTMENT OF SHARES AND ON THE BASIS OF A JOINT VENTURE TO BE PAID FOR ACQUISITION OF LAND FROM THE GOVERNMENT, INTEREST RECEIVED THERE UPON WAS CAPITALIZED BY REDUCING THE PRE - OPERATIVE EXPENSES FOR THE IMPUGNED AYS . THIS HAS BEEN DENIED BY THE LEARNED CIT(A ) AND HELD TO BE TAXED AS INCOME FROM OTHER SOURCES AS ASSESSED BY THE ASSESSING OFFICER. INCIDENTALLY FOR THE ASSESSMENT YEAR 20 06 - 07, THE ASSESSING OFFICER HAD ONLY DISALLOWED FEES PAID TO REGISTRAR OF COMPANIES AND EXPENSES INCURRED FO R GEOLOGICAL SURVEY REPORT FROM THE PRE - OPERATIVE EXPENSES WHICH WAS DELETED BY THE LEARNED CIT(A) BUT THE INCOME WAS ENHANCED FOR THE TAXATION OF INTEREST PERTAINING TO THAT PERIOD AS INCOME FROM OTHER SOURCES . THE APPELLANT HAS RAISED THIS ISSUE AS AN ADDITIONAL GROUND FOR THE I.T.A.NO. 123 AND 279/CTK/2010 2 ASSESSMENT YEAR 2006 - 07 BEING VALIDITY OF ENHANCEMENT WAS NOT IN ACCORDANCE WITH LAW CONTAINED IN THE PROVISIONS OF SECTION 251. 2. THE LEARNED COUNSEL FOR THE ASSESSEE INITIATING HIS ARGUMENTS SUBMITTED THAT THE ASSESSING OFFICER AND THE LEARNED CIT(A) ON THE BASIS OF THE DECISION OF HONBLE APEX COURT IN THE CASE OF TITUCORIN ALKALI CHEMICALS & FERTILISERS LTD., V. CIT (227 ITR 172) AND ON THE BASIS OF ANOTHER DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT V. BOKARO STEEL L TD., (263 ITR 315),OPINED THAT THE RATIO OF THESE JUDGMENTS DO NOT APPLY TO THE FACTS OF THE ASSESSEES CASE. THEREFORE, THE ASSESSEE HAS NOT BEEN ABLE TO ESTABLISH THAT THE FUNDS ARE INEXTRICABLY LINKED WITH THE BUSINESS OF THE ASSESSEE THE INTEREST EARNE D ON THE FUNDS PARK ED IN THE BANK O UGHT BE CHARGED TO TAX AS INCOME FROM OTHER SOURCES AND NOT CAPITALIZED AS RETURNED BY THE ASSESSEE BY REDUCING THE PRE - OPERATIVE EXPENSES AMOUNTING TO 66.64 CRORES FOR THE ASSESSMENT YEAR 2006 - 07 AND 51.90 CRORES FOR THE ASSESSMENT YEAR 2007 - 08. 3 . IN SUPPORT OF HIS CONTENTION, THE LEARNED COUNSEL HAS FILED A PAPER BOOK WHEREIN INTER ALIA THE ASSESSEE HAS FURNISHED THE CASH FLOW AND FUNDS FLOW IN THE FORM OF SHARE APPLICATION MONEY RECEIVED DURING THE RELEVANT AYS AN D PENDING ALLOTMENT OF SHARES TO BE ALLOTTED FOR A JOINT VENTURE WHEN ORISSA INFRASTRUCTURE DEVELOPMENT CORPORATION ( IN SHORT IDCO) BECOMES A PARTNER TO RELEASE THE LAND SO ACQUIRED UNDER THE AEGIS OF ORISSA MINING CORPORATION LTD., (IN SHORT OMC). HE POI NTED OUT THAT CERTAIN FUNDS WERE REQUIRED FOR COMPENSATING THE VILLAGERS WHOSE LAND WAS BEING ACQUIRED AND THEREFORE, THE VARIOUS CHARGES ON ACCOUNT OF COST OF LAND, TREES AND RE - SETTLEMENT EXPENSES WERE CALLED FOR TO BE PAID BY THE ASSESSEE BY AN AD HOC A DDITION OF 10% W AS OVER AND ABOVE OTHERWISE AGREED UPON WITH OMC LTD., BY THE ASSESSEE. THE 10% ADMINISTRATIVE CHARGES AS INTIMATED BY IDCO WERE, THEREFORE, CONSIDERED I.T.A.NO. 123 AND 279/CTK/2010 3 FOR PAYMENT ONLY WHEN ASSURANCE OF REFUND OF THE SAME WITH INTEREST WAS GRANTED AS AGREE D UPON. HE POINTED OUT THAT THE FACTS OF THE ASSESSEES CASE ARE SIMILAR AND IDENTICAL TO THE ONE CONSIDERED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF INDIAN OIL PANIPAT POWER CONSORTIUM LIMITED V. INCOME - TAX OFFICER [2009] 315 ITR 255 (DEL) AND HE AL SO ARGUED THAT THE JUDGMENTS OF THE HONBLE APEX COURT IN THE CASES OF TITUCORIN ALKALI CHEMICALS & FERTILISERS LTD., V. CIT (227 ITR 172) AND CIT V. BOKARO STEEL LTD., (263 ITR 315) WERE ALSO DEALT WITH AND DISTINGUISHED AS APPLICABLE TO THE FACTS OF THE ASSESSEES CASE INSOFAR AS HONBLE DELHI HIGH COURT HELD THAT FUNDS INFUSED IN THE COMPANY BY THE JOINT VENTURE PARTNER WAS INEXTRICABLY LINKED WITH THE SETTING UP THE PLANT, THE INTEREST EARNED BY THE ASSESSEE CANNOT BE TREATED AS INCOME FROM OTHER SOURCE S. HONBLE HIGH COURT DISTINGUISHED THE FACTS IN THE LINE THAT ARE SQUARELY APPLICABLE AND IDENTICAL TO THE CASE OF THE ASSESSEE BEFORE THE TRIBUNAL BY CONSIDERING THE CASE OF TITUCORIN ALKALI CHEMICALS & FERTILISERS LTD., AND BOKARO STEEL LTD (SUPRA) ON O BSERVATION THAT THE TEST WHICH PERMEATES THROUGH THESE JUDGMENT S OF THE SUPREME COURT INDICATED THAT ONLY WHEN THE FUNDS ARE ' SURPLUS' AND BY VIRTUE OF TH E CIRCUMSTANCE PREVAILING AT THAT TIME THE INTEREST EARNED ON THE FUNDS PARK ED IN THE BANK MAY BE CO NSIDERED FOR TAXATION AS ' INCOME FROM OTHER SOURCES'. HERE THE HONBLE DELHI HIGH COURT CLEARLY HELD THAT SHARE CAPITAL WAS INVITED FOR THE PURPOSE OF ACQUISITION OF LAND AND THE DEVELOPMENT OF INFRASTRUCTURE WHICH C OAL BLOCK CANNOT BE EXECUTED BEING THE MAIN OBJECT OF THE COMPANY THEREFORE COULD NOT BE CLASSIFIED AS FOR EARNING OF INTEREST AS INCOME FROM OTHER SOURCES. THE INCOME WAS EARNED FOR A PRIOR PERIOD WAS INCIDENTALLY FOR THE COMMENCEMENT OF THE ASSESSEES BUSINESS WAS IN THE NATURE OF CAPITAL RECEIPT AND WAS THEREFORE, RIGHTLY SET OFF AGAINST THE PRE - OPERATIVE EXPENSES BEING MAJOR EXPENSES OF MAGNITUDE AS MENTIONED ABOVE FOR THE IMPUGNED I.T.A.NO. 123 AND 279/CTK/2010 4 AYS. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE COMPANY WAS INCORPORATED ON 30.1.200 4 WITH THE MAIN OBJECT TO UNDERTAKE PROSPECTIVE WORK OF DEVELOPMENT OF COAL BLOCKS INCLUDING DRILLING, FEASIBILITY STUDIES AND ASSESSMENT OF MINE BLOCKS, MINING SURVEY AND PR EPARATION OF COAL MINE PLANS WHICH ARE CAPITALIZED IN ORDER TO PURSU E THE MAIN OBJ ECT OF THE COMPANY WHICH IS RAISING OF COAL AND STOCK OR DISPATCH COAL, TO MINE COAL EITHER IN OPEN CASE PROCESS OR UNDERGROUND AND UNDERTAKING BUSINESS AND ACTIVITIES PURSUANT TO THE JOINT VENTURE AGREEMENT ENTERED BETWEEN THE SAINIK MINING AND ALLIED SER VICES LTD., AND ORISSA MINING CORPORATION LTD. THE LEARNED COUNSEL FURNISHED A CHART CONTAINING THE DETAILS OF FUNDS AND UTILIZATION THEREOF ALONG WITH CORRESPONDENCES FOR THE ACQUISITION OF LAND AND OTHER RIGHTS. HE SUBMITTED THAT THERE WAS NO OCCASION FO R THE ASSESSING AUTHORITIES TO COMPUTE INTEREST EARNED AS INCOME FROM OTHER SOURCES TO BE TAXED EVEN ON THE BASIS OF MAGNITUDE OF PREOPERATIVE EXPENSES WHICH ONLY INDICATE THAT THE NATURAL RESOURCES ARE THE WEALTH OF THE NATION AGAINST WHICH EXPENSES HAVE TO BE INCURRED AND VALUED FOR COSTS CORRECTLY WITHOUT DISTINGUISHING TAXABLE INCOME. 4. INCIDENTALLY FOR THE ASSESSMENT YEAR 2006 - 07,THE LEARNED CIT(A) DELETED THE CAPITALIZATION OF FEES PAID TO THE REGISTRAR OF COMPANIES AND THE GEOLOGICAL SURVEY REPORT AS OTHERWISE DISALLOWED BY THE ASSESSING OFFICER BUT SOUGHT TO ENHANCE THE INCOME BY ISOLATING THE PORTION OF THE INTEREST EARNED AND REDUCING THE PREOPERATIVE EXPENSES INCURRED BY THE ASSESSEE , WITHOUT PROPER PROCEDURE OF ISSUING A NOTICE TO THE ASSESSEE UNDER THE PROVISIONS OF SECTION 251 OF THE I.T.ACT. HE PRAYED THAT THIS ENHANCEMENT FOR THE ASSESSMENT YEAR 2006 - 07 BE CONSIDERED AS INVALID AND DELIBERATED UPON IN ACCORDANCE WITH THE PROVISIONS OF THE I.T.ACT. 5. THE LEARNED DR WHOLLY SUPPORTED THE ORDE R OF THE LEARNED CIT(A) FOR HIS I.T.A.NO. 123 AND 279/CTK/2010 5 PART SUBMISSIONS. THE LEARNED CIT(A) HAD DISTINGUISHED THE FACTS OF THE ASSESSEES CASE ALSO BY CONSIDERING THAT THE CITED DECISION OF THE HONBLE DELHI HIGH COURT DOES NOT APPLY TO THE FACTS OF THE ASSESSEES CASE WHICH MAY KINDLY BE TAKEN NOTE OF. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. ON OUR CAREFUL CONSIDERATION OF THE FACTS, WE ARE INCLINED TO AGREE WITH THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE. PETTY INTEREST H AS BEEN EARNED FOR BOTH THE AYS WHICH HAS BEEN CAPITALIZED BY THE ASSESSEE BY REDUCING THE PREOPERATIVE EXPENSES OF SUCH MAGNITUDE AS MENTIONED ABOVE CANNOT BE ISOLATED FOR THE PURPOSE OF TAXATION AS INCOME FROM OTHER SOURCES UNLESS OF COURSE THE RATIO OF THE DECISION OF HONBLE APEX COURT AS CITED BY THE LEARNED CIT(A) AND ALSO DISTINGUISHED BY HONBLE DELHI HIGH COURT ARE TO BE APPLIED. THE LEARNED COUNSEL HAS BEEN ABLE TO ESTABLISH THAT THERE WAS NO SURPLUS INSOFAR AS IT WAS THE SHARE CAPITAL RECEIVED AS APPLICATION MONEY PENDING ALLOTMENT WHICH WAS POURED IN FOR THE PURCHASE/ACQUISITION OF LAND WHICH WOULD ENTITLE THE ASSESSEE TO COMMENCE BUSINESS OF EXCAVATING COAL IN ACCORDANCE WITH THE RULES AND REGULATIONS GOVERNED BY THE STATE UNDERTAKINGS NAMELY , I DCO AND OMC. WE HAVE PERUSED THE CORRESPONDENCES LYING WITH THE ASSESSEE TO CLARIFY THE STAND TAKEN FOR THE PURPOSE OF STARTING BUSINESS WHICH REQUIRED THE ASSESSEE TO PARK FUNDS IN THE BANK SIMULTANEOUSLY INCURRING PREOPERATIVE EXPENSES TO THE MAGNITUDE O F 51 CRORES AND 66 CRORES. THIS CLEARLY INDICATES THAT THERE WAS NO SURPLUS AVAILABLE WITH THE ASSESSEE FOR EARNING INTEREST AS INCOME FROM OTHER SOURCES. WE ARE OF THE CONSIDERED VIEW THAT THE FACTS ARE CLEAR AND DISTINGUISHABLE INSOFAR AS HAVING APPLIE D THE PROVISIONS OF THE COMPANIES ACT SECTION 208, THE MONIES WHICH ARE INDUCTED INTO THE JOINT VENTURE COMPANY BY THE JOINT VENTURE PARTNERS WERE PRIMARILY INFUSED TO PURCHASE LAND AND TO I.T.A.NO. 123 AND 279/CTK/2010 6 DEVELOP INFRASTRUCTURE THEN IT CANNOT BE HELD THAT THE INCOME DERIV ED BY PARKING THE FUNDS TEMPORARILY IN BANK WILL RESULT IN FUNDS GENERATED AS THE INTEREST EARNED WAS NOT FROM THE BUSINESS WHICH BUSINESS WAS YET TO BEGIN. INCOME FROM OTHER SOURCE CAN BE TAXED ONLY WHEN A PARTICULAR RECEIPT HAS NOT BEEN IDENTIFIED TO BE TAXED UNDER OTHER HEADS. IT IS CLEAR UPON PERUSAL OF THE FACTS AS SUBMITTED IN THE PAPER BOOK BY THE LEARNED COUNSEL THAT THE FUNDS IN FORM OF SHARES WAS INFUSED FOR THE PURPOSE OF ACQUIRING LAND AND FOR DEVELOPMENT OF INFRASTRUCTURE. IN THE CASE OF TITUCO RIN ALKALI CHEMICALS & FERTILISERS LTD., (SUPRA) THE FUNDS CAN BE IDENTIFIED AS SURPLUS INSOFAR AS IN THE CASE OF BOKARO STEEL LTD IT WAS INCIDENTAL TO THE BUSINESS OF THE ASSESSEE AND THE INTEREST WAS EARNED ON THE ADVANCE PAID TO THE CONTRACTORS DURING T HE PRE - COMMENCEMENT PERIOD WAS FOUND TO BE INEXTRICABLY LINKED TO THE SETTING UP OF THE PLANT OF THE ASSESSEE. IT IS NOT THE QUESTION OF INTEREST HAVING PAID ON THE SHARE CAPITAL WHICH UNDER THE PROVISIONS OF THE COMPANY ACT SECTION 208 COULD ONLY BE PAID FOR A SPECIFIC PURPOSE TO DEFRAY EXPENSES FOR CONSTRUCTION OF ANY WORK AND WHICH COULD NOT BE MADE PROFITABLE FOR A LONG PERIOD SUBJECT TO CERTAIN RESTRICTION CONTAINED IN SUB - SECTIONS (2) TO (7) OF SECTION 208. IN BOTH THE SITUATIONS, THEREFORE, THE CAPI TALIZATION OF THE INTEREST WAS A MUST WHICH HAS BEEN CONSIDERED BY INVOKING THE RATIO OF THE DECISION OF HONBLE APEX COURT IN THE CASES OF TITUCORIN ALKALI CHEMICALS & FERTILISERS LTD., AND BOKARO STEEL LTD (SUPRA). 7. IN VIEW OF OUR FINDING OF FACTS AND ON THE BASIS OF SUBMISSIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE, WE ARE INCLINED TO HOLD THAT THE AMOUNT OF INTEREST FOR THE ASSESSMENT YEAR 2006 - 07 BEING 3,28,734 AND 7,81,383 FOR THE ASSESSMENT YEAR 2007 - 08 CANNOT BE TAXED AS INCOME FROM OTHER SOURCES. THE TREATMENT AS RETURNED BY THE ASSESSEE BY CAPITALIZING AND REDUCING THE PREOPERATIVE EXPENSES IS APPROPRIATE AND ALLOWED. I.T.A.NO. 123 AND 279/CTK/2010 7 8. BE THAT AS IT MA Y, THE LEARNED COUNSEL AGREED TO THE PROPOSITION THAT IF CONSIDERED THE ISSUE ON MERITS, THE ADDITIONAL GROUND RAISED IN THE ASSESSMENT YEAR 2006 - 07 WITH RESPECT TO VALIDITY OF ENHANCEMENT WOULD REMAIN OF ACADEMIC INTEREST ONLY IS NOT DELIBERATED UPON. 9. IN THE RESULT, THE APPEALS FILED BY THE ASSESSEE ARE ALLOWED. THIS ORDER IS PRONOUNCED IN OPEN COURT ON DT. 21 ST APRIL, 2011 S D/ - S D/ - ( . . . ) , ( K.S.S.PRASAD RAO), JUDICIAL MEMBER ( . . ) , , (K.K.GUPTA), ACCOUNTANT MEMBER. ( ) DATE: 21 ST APRIL, 2011 - COPY OF THE ORDER FORWARDED TO: 1 . / THE APPELLANT : M/S.KALINGA COAL MINING PVT. LTD., 307, 4 TH FLOOR, NIRMALA PLAZA B, FOREST PARK, BHUBANESWAR. 2 / THE RESPONDENT: ASST.COMMISSIONER OF INCOME - TAX, CIRCLE 1(1), BHUBANESWAR. 3 . / THE CIT, 4 . ( )/ THE CIT( A), 5 . / DR, CUTTACK BENCH 6 . GUARD FILE . / TRUE COPY, / BY ORDER, [ ] SENIOR PRIVATE SECRETARY ( ), ( H.K.PADHEE ), SENIOR.PRIVATE SECRETARY.