Elgen (India) Private Limited (formerly known as Elgen (India) Ltd.,), Hyderabad V. Income Tax Officer, Ward-17(2), Hyderabad.

ITA 1608/Hyd/2017

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 6024 (ITAT-HYDERABAD)
• Duration Of Justice: 8 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 29-05-2018
• Assessment Year: 2014-2015
• Appeal Filed On: 15-09-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANJALA SAHU
• Assessee Lawyers: V SIVA KUMAR
• Keywords: Capital receipt; Capital expenditure
• Section: 133A

Judgement Text

ITA NO 1608 OF 2017 ELGEN INDIA P LTD HYDERABAD. PAGE 1 OF 5 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S.RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO.1608/HYD/2017 (ASSESSMENT YEAR: 2004-05) ELGEN (INDIA) PRIVATE LTD (FORMERLY KNOWN AS ELGEN (INDIA) LTD, HYDERABAD PAN: AAACE8520C VS INCOME TAX OFFICER WARD 17(2) HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI V. SIVA KUMAR FOR REVENUE : SMT. ANJALA SAH U, DR O R D E R PER SMT. P. MADHAVI DEVI, J.M. THIS IS ASSESSEES APPEAL FOR THE A.Y 2014-15 AGAIN ST THE ORDER OF THE CIT (A)-5, HYDERABAD, DATED 24.08. 2017. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL : 1. THE ORDER OF THE LEARNED CIT (A) IS AGAINST LAW , WEIGHT OF EVIDENCE AND PROBABILITIES OF THE CASE. 2. THE LEARNED CIT (A) ERRED IN CONFIRMING THE ORDE R OF THE AO AND HOLDING THAT THE INTEREST AMOUNT OF RS.2,94, 09,230 IS ASSESSABLE AS INCOME FROM OTHER SOURCES. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY WAS INCORPORATED FOR THE PURPOSE OF ESTABLISHING A POWER GENERATION PLANT, WHICH IS YET TO START COMMERCIAL OPERATIONS PENDING GOVERNMENT CLEARANCES. A SURVEY U/S 133A OF THE ACT WAS DATE OF HEARING: 29.05 . 201 8 DATE OF PRONOUNCEMENT: 31.05.2018 ITA NO 1608 OF 2017 ELGEN INDIA P LTD HYDERABAD. PAGE 2 OF 5 CONDUCTED ON 30.01.2015, DURING THE COURSE OF WHICH , IT WAS FOUND THAT THE COMPANY RECEIVED SHARE CAPITAL OF RS .50.00 CRORES INCLUDING THE SHARE PREMIUM WHICH WAS INVESTED IN F IXED DEPOSITS. PENDING GOVERNMENT CLEARANCES, THE INTERE ST INCOME EARNED FROM SUCH DEPOSITS WAS SET OFF AGAINST THE C APITAL EXPENDITURE INCURRED BY THE COMPANY DURING THE PREO PERATIVE PERIOD, RESULTING IN A LOSS FOR THE A.Y 2014-15. SU BSEQUENT TO THE SURVEY, THE ASSESSMENT FOR THE A.Y 2013-14 WAS REOP ENED BY THE AO ON THE GROUND THAT THE INCOME BY WAY OF INTEREST EARNED ON THE FDS SOURCED FROM THE SHARE CAPITAL INCOME FROM OTHER SOURCES WHICH CANNOT BE SET OFF AGAINST THE PRE-OPERATIVE E XPENDITURE AND THUS HAD ESCAPED ASSESSMENT. CONSEQUENTLY, THE RETU RN FILED FOR THE A.Y 2014-15 WAS ALSO SELECTED FOR SCRUTINY AND THE AO DISALLOWED THE SET OFF OF THE INTEREST INCOME AGAIN ST THE PRE- OPERATIVE EXPENDITURE AND BROUGHT IT TO TAX. AGGRIE VED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT (A), WH O CONFIRMED THE ORDER OF THE AO AND THE ASSESSEE IS IN SECOND A PPEAL BEFORE US. 3. AT THE TIME OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE VERY SAME ISSUE WHICH H AD ARISEN IN A.YS 2012-13 AND 2013-14 IN THE ASSESSEES OWN CASE HAD COME UP FOR CONSIDERATION BEFORE THE B BENCH OF THE TR IBUNAL IN ITA NOS. 1286 & 1287/HYD/2016 AND VIDE ORDERS DATED 29. 11.2017, THE TRIBUNAL HAS HELD THAT THE INTEREST INCOME CAN BE SET OFF AGAINST THE PRE COMMENCEMENT EXPENSES DURING THE YE AR. A COPY OF THE DECISION HAS BEEN FILED BEFORE US. ITA NO 1608 OF 2017 ELGEN INDIA P LTD HYDERABAD. PAGE 3 OF 5 4. THE LEARNED DR, HOWEVER, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 5. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE M ATERIAL ON RECORD, WE FIND THAT THE COORDINATE BENCH OF THE TRIBUNAL IN THE ASSESSEES OWN CASE (SUPRA) HAS CONSIDERED THE ISSUE AT LENGTH AND AT PARAS 9 TO 9.6 OF ITS ORDER, HAS HELD AS UNDER: 9. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL FACTS ON RECORD. THE ASSESSEE HAS BROUGHT SHARE CAPITAL FOR THE SOLE PURPOSE OF ESTABLISHING POWER GENERATION UNIT, MAINLY, A GAS B ASED PROJECT OF 700MW. THIS SHARE CAPITAL ALONG WITH SHARE PREMIUM, WAS CONTRIBUTED BY THE FRIENDS AND RELATIVES, WHO ARE NRI'S, OF THE DIRECTOR. THE ASSESSEE HAS COMMENCED THE INITIAL ACTIVITIES FOR S ECURING THE VARIOUS PERMISSIONS/APPROVALS FOR THE PROJECT FROM THE STAT E/CENTRAL GOVERNMENT AGENCIES, LAND ACQUISITION AND PROJECT FEASIBILITY ETC. DUE TO CHANGE IN THE GOVERNMENT POLICIES AND UNFORESEEN DEVELOPMENT, IT MAKES THE PROJECT DIFFICULT TO IMPLEMENT. IN THE GIVEN CASE, IT WAS DISCOVERED THAT SHORTFALL IN ALLOCABLE SUPPLY OF NATURAL GAS IN KRI SHNA BASIN WOULD NOT MEET THE DEMAND OF POWER UNITS IN THE STATE OF AP/T ELANGANA. ACCORDINGLY, POWER MINISTRY HAS ISSUED AN ADVISORY TO POWER DEVELOPING UNITS NOT TO PLAN PROJECTS UNTIL 2015-16 VIDE CIRCULAR DATED 14/03/2012. THE ABOVE DEVELOPMENT BROUGHT THE PROJE CT IMPLEMENTATION PROCESS TO HALT. THE ASSESSEE STILL EXPECTS TO GET FAVOURABLE SANCTION FROM THE POWER MINISTRY FOR GAS LINKAGES CONSIDERING THE FACT THAT THERE IS STILL HUGE DEMAN D FOR POWER. IN ORDER TO ACHIEVE THE ABOVE OBJECT OF ESTABLISHING GAS BAS ED POWER PLANT, ASSESSEE HAS RETAINED THE SHARE CAPITAL AND ALSO TH IS CAPITAL COULD NOT BE RETURNED TO THE SHAREHOLDERS AS THE SAME WAS ALR EADY ALLOTTED. SUCH SHARE CAPITAL WAS DEPOSITED IN THE BANKS AND EARNED INTEREST INCOME. CAN THE INTEREST BE CHARGEABLE TO TAX UNDER THE HEA D 'INCOME FROM OTHER SOURCES'. WE HAVE ANALYSED THE ABOVE QUERY IN THE LIGHT OF VARIOUS JUDICIAL PRONOUNCEMENTS OF HON'BLE SUPREME COURT, H IGH COURTS AND COORDINATE BENCHES. THE MAJOR DECISIONS OF HON'BLE SUPREME COURT IN THIS SUBJECT ARE AS UNDER: 1. TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD., VS CIT, [1997] 227 ITR 172 (SC): IF FUNDS HAVE BEEN BORROWED FOR SETTI NG UP OF A PLANT AND THE FUNDS ARE 'SURPLUS', THEN BY VIRTUE OF THAT CIR CUMSTANCES THEY ARE INVESTED IN FIXED DEPOSITS, THE INCOME EARNED IN TH E FORM OF INTEREST WILL BE TAXABLE UNDER HEAD 'INCOME FROM OTHER SOURCES'. 2. CIT VS. BOKARO STEEL LTD. [1999] 236 ITR 315 (SC ): IF INCOME IS EARNED, WHETHER BY WAY OF INTEREST OR IN ANY OTHER MANNER ON FUNDS, WHICH ARE OTHERWISE 'INEXTRICABLY LINKED' TO THE SE TTING UP OF THE PLANT, SUCH INCOME IS REQUIRED TO BE CAPITALIZED TO BE SET OFF AGAINST PREOPERATIVE EXPENSES. ITA NO 1608 OF 2017 ELGEN INDIA P LTD HYDERABAD. PAGE 4 OF 5 9.1 FROM THE ABOVE RATIOS, IT IS CLEAR THAT IF THE SURPLUS FUNDS ARE INVESTED IN FIXED DEPOSITS, THE INTEREST INCOME EARNED IS CHARG EABLE TO TAX. WHEREAS IN THE BOKARO STEEL CASE, FUNDS WHICH ARE OTHERWISE INEXTR ICABLY LINKED TO THE SETTING UP OF THE PLANT, SUCH INCOME REQUIRED TO BE CAPITAL IZED. LATER IN THE CASE OF BONGAIGOAN REFINERY, [2001] 251 ITR 329 (SC), THE H ON'BLE SUPREME COURT HAS REITERATED THE FINDINGS OF BOKARO STEEL, FOR TH E OTHER INCOME AND, WITH REGARD TO INTEREST INCOME, IT REITERATED THE RATIO OF TUTICORIN ALKALI CASE. HON'BLE SUPREME COURT HAS LAID DOWN THE PRINCIPLE T HAT THE SURPLUS FUNDS INVESTED AND INCOME GENERATED ARE TAXABLE UNDER THE HEAD 'INCOME FROM OTHER SOURCES' AND AT THE SAME TIME, IF IT IS INEXTRICABL Y LINKED TO PROJECT, IT CAN ONLY BE CAPITALIZED. SUBSEQUENTLY, THE HON'BLE DELHI HIG H COURT IN THE CASE OF INDIAN OIL PANIPAT POWER CONSORTIUM LTD. VS. ITO, 1 81 TAXMAN 249 (DEL.) HAS HELD AS UNDER: 'THE FUNDS IN THE FORM OF SHARE CAPITAL WERE INFUSE D FOR A SPECIFIC PURPOSE OF ACQUIRING LAND AND THE DEVELOPMENT OF IN FRASTRUCTURE. THEREFORE, THE INTEREST EARNED ON FUNDS PRIMARILY B ROUGHT FOR INFUSION IN THE BUSINESS COULD NOT HAVE BEEN CLASSIFIED AS 'INC OME FROM OTHER SOURCES'. SINCE THE INCOME WAS EARNED IN A PERIOD P RIOR TO COMMENCEMENT OF BUSINESS, IT WAS IN THE NATURE OF C APITAL RECEIPT AND HENCE, WAS REQUIRED TO BE SET OFF AGAINST PREOPERAT IVE EXPENSES.' IN THE CASE OF PR. CIT VS. FACOR POWER LTD.,[2016] 66 TAXMANN.COM 178 (DELHI), 'THERE IS A FINDING OF FACT THAT THE M ONEY PLACED IN THE FIXED DEPOSITS WAS INEXTRICABLY LINKED WITH THE SET TING UP OF THE POWER PLANT. THUS, THE REVENUE GENERATED ON ACCOUNT OF IN TEREST ON FIXED DEPOSIT WOULD BE IN THE NATURE OF A CAPITAL RECEIPT AND NOT REVENUE. THIS CASE HAS BEEN DECIDED ON THE BASIS OF THIS PRINCIPL E AND NOT ON THE BASIS THAT THE SOURCE OF THE FUNDS WAS THROUGH RAISING OF SHARE CAPITAL AND NOT THROUGH BORROWINGS.' 9.2 IN THE ABOVE TWO DECISIONS, IT IS CLEAR THAT IN CASE THE SHARE CAPITAL IS BROUGHT FOR SPECIFIC PURPOSE FOR THE IMPLEMENTAT ION OF THE PARTICULAR PROJECT, AND INTEREST IS EARNED BY TEMPORARILY DEPO SITING IN THE BANK, SUCH INCOME CAN BE TREATED AS CAPITAL RECEIPT. IN T HE GIVEN CASE, ASSESSEE HAS BROUGHT THE SHARE CAPITAL ONLY FOR THE IMPLEMENTATION/COMMENCEMENT OF THE POWER PROJECT. S INCE, IT COULD NOT PROCEED WITH THE IMPLEMENTATION, UNDER CONSTRAINT, IT KEPT THE UNUTILIZED FUNDS IN THE BANK; IN THAT PROCESS IT HA S EARNED INTEREST; BY FOLLOWING THE RATIOS OF HON'BLE SUPREME COURT, THE FUNDS KEPT IN BANK UNDER CONSTRAINT AND THE FUNDS ARE INEXTRICABLY LIN KED TO THE PROJECT, SUCH INCOME CAN BE TREATED AS CAPITAL RECEIPT. AT T HE SAME TIME, THE FINDINGS OF DELHI HIGH COURT IN THE SIMILAR CIRCUMS TANCES AS IN THE CASE UNDER CONSIDERATION ARE FULLY APPLICABLE TO THE CAS E IN HAND. THEREFORE, IN OUR CONSIDERED VIEW, THE ASSESSEE IS ELIGIBLE TO TREAT THE INTEREST AS CAPITAL RECEIPT. WHETHER THE ASSESSEE CAN UTILIZE T HIS RECEIPT TO SET OFF THE OTHER PRE-IMPLEMENTATION EXPENSES, IN OUR VIEW, WE HAVE ALREADY TREATED THE INTEREST RECEIPTS AS CAPITAL IN NATURE AND THE PRE- COMMENCEMENT EXPENSES ARE ALSO CAPITAL EXPENDITURE, THE ASSESSEE CAN SET OFF SUCH EXPENSES. ITA NO 1608 OF 2017 ELGEN INDIA P LTD HYDERABAD. PAGE 5 OF 5 9.5 LD. DR HAS SUBMITTED JURISDICTIONAL HIGH COURT DECISION IN THE CASE OF DERCO COOLING COILS LTD., [1992] 198 ITR 375 (AP) W HEREIN THE COURT HAS LAID DOWN THE FOLLOWING RATIO: 'THE RECEIPT IN QUESTION AROSE OUT OF SHARE CAPITAL MONEY DEPOSITED WITH THE BANK WHICH MIGHT OR MIGHT NOT BE UTILIZED OR MEANT TO BE UTILIZED FOR THE PURPOSE OF SETTING UP OF THE PLANT. THIS AGAIN EMPH ASIZED THAT THE INTEREST RECEIVED MIGHT NOT STAND ON THE SAME FOOTING AS THE INTEREST INCURRED DURING PRE- PRODUCTION PERIOD, SO THAT ONE COULD BE SET OFF AGA INST THE OTHER.' IN THE ABOVE CASE, THE ISSUE WAS, CAN THE ASSESSEE SET OFF THE INTEREST INCOME EARNED BY DEPOSITING THE SHARE CAPITAL MONEY AGAINS T THE INTEREST EXPENSES INCURRED DURING PRE-PRODUCTION PERIOD. THIS RATIO C ANNOT BE APPLIED TO THE CASE OF THE ASSESSEE UNDER CONSIDERATION. 9.6 CONSIDERING THE ABOVE DISCUSSION, IN OUR CONSID ERED VIEW, THE INTEREST INCOME EARNED BY ASSESSEE BY DEPOSITING THE SHARE C APITAL IN FIXED DEPOSITS UNDER CONSTRAINT ARE ELIGIBLE TO TREAT THE INCOME A S CAPITAL IN NATURE AND ALLOWED TO SET OFF AGAINST THE PRE- COMMENCEMENT EX PENSES DURING THE YEAR. ACCORDINGLY, GROUNDS RAISED BY THE ASSESSEE ARE ALL OWED. 6. SINCE THE FACTS AND CIRCUMSTANCES BEFORE US ARE THE SAME, WE ALLOW THE ASSESSEES APPEAL AND DIRECT THE AO TO ALLOW THE SET OFF OF INTEREST INCOME AGAINST THE PRE-OPER ATIVE EXPENSES. 7. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST MAY, 2018. SD/- SD/- (S.RIFAUR RAHMAN) ACCOUNTANT MEMBER (P. MADHAVI DEVI) JUDICIAL MEMBER HYDERABAD, DATED 31 ST MAY 2018. VINODAN/SPS COPY TO: 1 M/S. ELGEN (INDIA) PRIVATE LTD PLOT NO.213, ROAD NO.1, FILM NAGAR, JUBILEE HILLS, HYDERABAD 500096 2 ITO WARD 17(2) SIGNATURE TOWERS, KONDAPU R, HYDERABAD 3 CIT (A)-5 HYDERABAD 4 PR. CIT 5 HYDERABAD 5 THE DR, ITAT HYDERABAD 6 GUARD FILE BY ORDER