Nagarjuna Oil Corporation Ltd., CHENNAI V. DCIT, CHENNAI

ITA 2141/CHNY/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 7993 (ITAT-CHENNAI)
• Duration Of Justice: 3 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-02-2016
• Appeal Filed By: Assessee
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 12-11-2015
• Court: TRIBUNAL
• Department Lawyers: S S SANKARALINGAMCITD R
• Assessee Lawyers: M KARUNAKARAN
• Keywords: Business income; Capital receipt

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI ... , , , BEFORE SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI CHANDRA POOJARI , ACCOUNTANT MEMBER ./ I.T.A.NOS.2141 & 2142 /MDS./2015 ( ! / ASSESSMENT YEARS :2011-12 & 2012-13) M/S.NAGARJUNA OIL CORPORATION LTD . MD CHAMBERS, NEW NO.53, OLD NO.31,DR.RADHAKRISHNAN SALAI, MYLAPORE, CHENNAI 600 004. VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 4, CHENNAI-34. PAN AAACN 9369 E ( / APPELLANT ) ( / RESPONDENT ) '# $ % / APPELLANT BY : MR.M.KARUNAKARAN,ADVOCATE &''# $ % / RESPONDENT BY : MR.S.S.SANKARALINGAM,CIT,D.R ( ) $ *+ / DATE OF HEARING : 28.01.2016 ,-! $ *+ /DATE OF PRONOUNCEMENT : 17.02.2016 / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THESE TWO APPEALS FILED BY THE ASSESSEE ARE DIREC TED AGAINST THE DIFFERENT ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(A)-8, ITA NOS.2141 & 2142/MDS/2015 2 CHENNAI DATED 28.09.2015 PERTAINING TO THE ASSESSM ENT YEARS 2011- 12 & 2012-13. SINCE THE FACTS AND GROUNDS IN THES E APPEALS ARE SIMILAR NATURE, THESE TWO APPEALS ARE CLUBBED TOGET HER, HEARD TOGETHER AND DISPOSED OFF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. THE COMMON GROUND IN BOTH THE APPEALS IS WITH R EGARD TO CONFIRM THE DISALLOWANCE OF INTEREST EARNED ON DEPO SITS MADE OUT OF BORROWINGS AND MARGIN AMOUNT ON LETTER OF CREDIT DU RING THE PROJECT STAGE. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE COMPANY IS SETTING UP A PROJECT VIZ., PETROLEUM REFINERY AT C UDDALORE, TAMILNADU WHICH IS UNDER CONSTRUCTION AND ALL THE EXPENDITURE INCURRED DURING THE CONSTRUCTION PERIOD IS BEING CA PITALIZED AS EXPENDITURE PENDING ALLOCATION. FOR THE PROJECT COS T, THE ASSESSEE COMPANY BORROWED FUNDS FROM VARIOUS BANKS AND FINAN CIAL INSTITUTIONS FOR PART FUNDING OF THE PROJECT. FOR THIS PURPOSE, THE ASSESSEE COMPANY IS REQUIRED TO DEPOSIT MARGIN MONEY FOR OPE NING OF THE LEER ITA NOS.2141 & 2142/MDS/2015 3 OF CREDIT AND SUCH MARGIN MONEY SO DEPOSITED IS TRE ATED AS SHORT TERM FIXED DEPOSITS. HENCE, THE ASSESSEE COMPANY EA RNED INTEREST INCOME FROM SUCH SHORT TERM FIXED DEPOSITS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSE SSEE EARNED AN INTEREST OF ` 25.92 CRORES AS A RESULT OF INVESTMENT MADE IN FI XED DEPOSITS IN BANKS AND CLAIMED EXEMPTION ON INTEREST INCOME TO THE TUNE OF ` 21,79,69,805/- OUT OF THE TOTAL INTEREST EARNED OF ` 23,86,27,337/- THE AO WHILE COMPLETING THE ASSESSME NT U/S.143(3) OF THE ACT ON 30.03.2014, HAD BROUGHT TO TAX THE IN TEREST CAPITALIZED AS INCOME FROM OTHER SOURCES ON THE GROUND THAT THE ASSESSEE DOES NOT ENGAGE IN THE BUSINESS OF FINANCING OR OF MONEY -LENDING AND ALSO THE INTEREST THAT WAS REALIZED ON SURPLUS FUNDS UTI LIZED FOR EARNING INTEREST CANNOT BE REGARDED AS BUSINESS INCOME. ON APPEAL, THE CIT(A) CONCURRED WITH THE VIEW OF THE AO AND CONFIR MED THE DISALLOWANCE. AGAINST THIS, THE ASSESSEE IS IN APP EAL FOR BOTH THE ASSESSMENT YEARS BEFORE US. 3. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE MAIN CONTENTION OF THE LD.A.R IS THAT T HE FIXED DEPOSIT WAS ITA NOS.2141 & 2142/MDS/2015 4 MADE OUT OF THE LOAN FUNDS, WHICH ARE NOT IMMEDIATE LY REQUIRED. ACCORDING TO THE LD.A.R, THE FUNDS INVESTED IN FIXE D DEPOSITS WAS INEXTRICABLY AND EXCLUSIVELY LINKED TO THE PROJECT ACTIVITY AND THE INTEREST EARNED ON FUNDS PRIMARILY BROUGHT FOR BUSI NESS PURPOSE IS TO BE CAPITAL RECEIPT AND IT IS REQUIRED TO BE SET OFF AGAINST PRE- COMMENCEMENT EXPENSES. THE TEST, THEREFORE, IS WHE THER THE ACTIVITY WHICH IS TAKEN UP FOR SETTING UP OF THE BUSINESS AN D THE FUNDS WHICH ARE GARNERED ARE INEXTRICABLY CONNECTED TO THE SETT ING UP OF THE PLANT. THE CLUE IS PERHAPS AVAILABLE IN SECTION 3 OF THE A CT WHICH STATES THAT FOR NEWLY SET UP BUSINESS THE PREVIOUS YEAR SHALL B E THE PERIOD BEGINNING WITH THE DATE OF SETTING UP OF THE BUSINE SS. THEREFORE, AS PER THE PROVISIONS OF THE SECTION-4 OF THE ACT WHIC H IS THE CHARGING SECTION INCOME WHICH ARISES TO AN ASSSSEE FROM TH E DATE OF SETTING OF THE BUSINESS BUT PRIOR TO COMMENCEMENT IS CHARGE ABLE TO TAX DEPENDING ON WHETHER IT IS OF A REVENUE NATURE OR C APITAL RECEIPT. THE INCOME OF A NEWLY SET UP BUSINESS, POST THE DATE OF ITS SETTING UP CAN BE TAXED IF IT IS OF A REVENUE NATURE UNDER ANY OF THE HEADS PROVIDED UNDER SECTION 14 IN CHAPTER IV OF THE ACT. FOR AN I NCOME TO BE CLASSIFIED AS INCOME UNDER THE HEAD PROFITS AND GA INS OF BUSINESS OR ITA NOS.2141 & 2142/MDS/2015 5 PROFESSION IT WOULD HAVE TO BE AN ACTIVITY WHICH I S IN SOME MAIMER OR FORM CONNECTED WITH BUSINESS. THE WORD BUSINESS I S OF WIDE IMPORT WHICH WOULD ALSO INCLUDE ALL SUCH ACTIVITIES WHICH COALESCE INTO SETTING UP OF THE BUSINESS. CF MAZAGAON DOCK LTD. V . CIT/EXCESS PROFITS TAX [19581 34 ITR 368 (SC) AND NARAIN SWADE SHI WEAVING MILLS V. COMMISSIONER OF EXCESS PROFITS TAX [1954] 26 ITR 765 (SC). ONCE IT IS HELD THAT THE ASSESSEES INCOME IS AN IN COME CONNECTED WITH BUSINESS, THAT THE MONIES WHICH WERE INDUCTED INTO THE COMPANY WERE PRIMARILY INFUSED TO PURCHASE LAND AND TO DEVE LOP INFRASTRUCTURE THEN IT CANNOT BE HELD THAT THE INCOME DERIVED BY P ARKING THE FUNDS TEMPORARILY WILL RESULT IN THE CHARACTER OF THE FUN DS BEING CHANGED, INASMUCH AS, THE INTEREST EARNED FROM THE BANK WOUL D HAVE A HUGE DIFFERENT THAN THAT OF BUSINESS AND BE BROUGHT TO T AX UNDER THE HEAD INCOME FROM OTHER SOURCES . IT IS WELL SETTLED THA T AN INCOME RECEIVED BY THE ASSESSEE CAN BE TAXED UNDER THE HEAD INCOME FROM OTHER SOURCES ONLY IF IT DOES NOT FALL UNDER ANY OTHER H EAD OF INCOME AS PROVIDED IN SECTION 14 OF THE ACT. THE HEAD INCOM E FROM OTHER SOURCES IS A RESIDUARY HEAD OF INCOME. SEE S. G. M ERCANTILE ITA NOS.2141 & 2142/MDS/2015 6 CORPORATION P. LTD. V. CIT [1972] 83 ITR 700 (SC) A ND CIT V. GOVINDA CHOUDHURY AND SONS [1993] 203 ITR 881 (SC). 4. THUS THE DELHI HIGH COURT IN THE CASE OF INDIA N OIL PANIPET POWER CONSORTIUM LTD. (315 ITR 255) HELD THAT THE F UNDS IN THE FORM OF LOANS WERE INFUSED FOR A SPECIFIC PURPOSE OF ACQ UIRING LAND AND THE DEVELOPMENT OF INFRASTRUCTURE. THEREFORE, THE INTER EST EARNED ON FUNDS PRIMARILY BROUGHT FOR INFUSION IN THE BUSINESS COUL D NOT HAVE BEEN CLASSIFIED AS INCOME FROM OTHER SOURCES. SINCE THE INCOME WAS EARNED IN A PERIOD PRIOR TO COMMENCEMENT OF BUSINES S IT WAS IN THE NATURE OF CAPITAL RECEIPT AND HENCE WAS REQUIRED TO BE SET OFF AGAINST PRE- OPERATIVE EXPENSES. THE DELHI HIGH COURT FOUND THAT IN THE CASE OF TUTICORIN ALKALI CHEMICALS [1997] 227 ITR 172 WA S FOUND BY THE AUTHORITIES THAT THE FUNDS AVAILABLE WITH THE ASSES SEE IN THAT CASE WERE SURPLUS AND, THEREFORE, THE SUPREME COURT HE LD THAT THE INTEREST EARNED ON SURPLUS FUNDS WOULD HAVE TO BE T REATED AS INCOME FROM OTHER SOURCES . ON THE OTHER HAND IN BOKARO S TEEL LTD. [1999] 236 ITR 315 (SC) WHERE THE ASSESSEE HAD EARNED INTE REST ON ADVANCE PAID TO CONTRACTORS DURING PRE-COMMENCEMENT PERIOD WAS FOUND TO BE INEXTRICABLY LINKED TO THE SETTING UP OF THE PLANT OF THE ITA NOS.2141 & 2142/MDS/2015 7 ASSESSEE AND HENCE WAS HELD TO BE A CAPITAL RECEIPT WHICH WAS PERMITTED TO BE SET OFF AGAINST PRE-OPERATIVE EXPEN SES. 5. THE COURT WAS OF THE VIEW THAT SITUATION IN TH E CASE BEFORE THEM IS QUITE SIMILAR TO THE CIRCUMSTANCES CONSIDERED BY THE SUPREME COURT IN THE CASE OF CHALLAPALLI SUGARS LTD. V. CIT [1975] 98 ITR 167, EXCEPT HERE INSTEAD OF PAYING INTEREST ON FUNDS BRO UGHT IN FOR SPECIFIC PURPOSE INTEREST IS EARNED ON FUNDS BROUGHT IN BY W AY OF LOANS SHARE CAPITAL FOR A SPECIFIC PURPOSE. COULD IT BE SAID TH AT IN THE FORMER SITUATION INTEREST COULD HAVE BEEN CAPITALIZED AND IN THE LATTER SITUATION IT CANNOT BE CAPITALIZED. TO TEST THE PRI NCIPLE WE COULD EXTEND THE EXAMPLE, THAT IS, WOULD OUR ANSWER BE AN Y DIFFERENT HAD ASSESSEE PASSED ON THE INTEREST TO THE RESPECTIVE S HAREHOLDERS. IF NOT, THEN, IN THE COURTS VIEW, THE ONLY CONCLUSION POSSIBLE IS THAT INTEREST EARNED IN THE PRESENT CIRCUMSTANCES OUGHT TO BE CAPITALIZED. 6. HOWEVER, WE COME ACROSS THE DECISION OF JURISDI CTIONAL HIGH COURT IN THE CASE OF CIT VS.SESHASAYEE PAPER AND BO ARDS LTD. ITA NOS.2141 & 2142/MDS/2015 8 REPORTED IN [1985] 156 ITR 542(MAD.) WHEREIN IT IS HELD THAT AS THE ASSESSEE HAD NOT ESTABLISHED ITS FACTORY DURING THE ASSESSMENT YEAR IN QUESTION, THERE WAS NO QUESTION OF COMPUTING ITS BUSINESS INCOME DURING THE YEAR AND HENCE THERE WAS NO QUESTION OF APPLICATION OF SECTIONS 70 AND 71 OF THE INCOME-TAX ACT, 1961, DUR ING THE ASSESSMENT YEAR IN QUESTION AND ONLY IN THE COMPUTA TION OF BUSINESS INCOME, EXPENDITURE OR SET-OFF OF THE LOSS FROM THE INCOME FROM BUSINESS WOULD ARISE. THE TRIBUNAL WAS NOT, THEREFO RE, JUSTIFIED IN HOLDING THAT THE INTEREST RECEIPTS COULD NOT BE ASS ESSED AND THE DIFFERENCE BETWEEN THE INTEREST PAID AND THE INTERE ST RECEIVED SHOULD BE CAPITALISED. THE INTEREST EARNED BY THE ASSESSEE ON INVESTMENT OF SHARE CAPITAL IN CALL DEPOSITS COULD BE ASSESSED SE PARATELY UNDER THE HEAD 'OTHER SOURCES'. 7. IN VIEW OF THE MADRAS HIGH COURT DECISION AND THE JUDGEMENT OF THE SUPREME COURT IN THE CASE OF TUTICORIN ALKAL I CHEMICALS (227 ITR 172) , IN OUR OPINION THE HONBLE DELHI HIGH CO URT IN THE CASE OF INDIAN OIL PANIPET POWER CONSORTIUM LTD. REPORTED I N 315 ITR 255 ITA NOS.2141 & 2142/MDS/2015 9 CANNOT BE APPLICABLE TO THE FACTS OF THE CASE. BEIN G SO, WE ARE OF THE OPINION THAT INTEREST FROM FIXED DEPOSIT IS TO BE A SSESSED AS INCOME FROM OTHER SOURCES ONLY AND CANNOT BE SET OFF AGAIN ST THE PRE- COMMENCEMENT EXPENSES. 8. IN THE RESULT, BOTH THE APPEALS FILED BY THE ASS ESSEE FOR THE ASSESSMENT YEARS 2011-12 & 2012-13 ARE DISMISSED. ORDER PRONOUNCED ON WEDNESDAY, THE 17 TH OF FEBRUARY,2016 AT CHENNAI. SD/- SD/- ( ' . . '# . $ ) ( N.R.S.GANESAN ) ( ) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 17 TH FEBRUARY,2016. K S SUNDARAM. $ &*./ 0 /!* /COPY TO: 1. '# /APPELLANT 2. &''# /RESPONDENT 3. ( 1* () /CIT(A) 4. ( 1* /CIT 5. /4 &*5 /DR 6. 6 7) /GF