DCIT Corporate Circle 1(2), CHENNAI V. Chennai Metro Rail Limited, CHENNAI

ITA 2180/CHNY/2018

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 3898 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 11 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-06-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2013-2014
• Appeal Filed On: 19-07-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Diversion of income; Source of fund; Capital receipt; Set aside; Liquidation
• Section: 56; 28; 251; 13

Judgement Text

आयकर अपीलीय अिधकरण, ’सी’ Ɋायपीठ, चेɄई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘C’ BENCH, CHENNAI ŵी वी दुगाŊ राव Ɋाियक सद˟ एवं ŵी जी. मंजुनाथा, लेखा सद˟ के समƗ Before Shri V. Durga Rao, Judicial Member & Shri G. Manjunatha, Accountant Member आयकर अपील सं./I.T.A. Nos.2180 & 2181/Chny/2018 िनधाŊरण वषŊ/Assessment Years: 2013-14 & 2014-15 The Deputy Commissioner of Income Tax, Corporate Circle 1(2), Chennai 600 034. Vs. M/s. Chennai Metro Rail Limited, Administrative Building, Chennai Metro Rail Depot, P.H. Road, Opp. To Daniel Thomas School, Koyambedu, Chennai 600 107. [PAN: AADCC2233K] (अपीलाथŎ/Appellant) (ŮȑथŎ/Respondent) अपीलाथŎ की ओर से / Appellant by : Shri M. Rajan, CIT ŮȑथŎ की ओर से/Respondent by : Shri G. Baskar, Advocate सुनवाई की तारीख/ Date of hearing : 10.05.2022 घोषणा की तारीख /Date of Pronouncement : 24.06.2022 आदेश /O R D E R PER V. DURGA RAO, JUDICIAL MEMBER: Both the appeals filed by the Revenue are directed against the common order of the ld. Commissioner of Income Tax (Appeals) 4, Chennai dated 14.05.2018 relevant to the assessment years 2013-14 and 2014-15. Since common ground involved, both the appeals were heard and being disposed of by this common order for the sake of convenience. The only common ground raised in both the appeals relates to deletion of addition made towards interest income. I.T.A. Nos.2180 & 2181/Chny/18 2 2. Brief facts leading to the ground raised by the Revenue are that during the year the assessee company has earned interest income out of the deposits made in the bank. The assessee company has not commenced its business and the assessee filed the original return of income and did not offer the interest income for taxation under the head "Income from other sources". Therefore, the assessee was directed to explain why the interest income should not be brought to tax under the head Income from other sources. In response to the above show-cause, the assessee company filed its detailed reply and the same was reproduced in the assessment order. After considering the submissions of the assessee, the Assessing Officer has observed as under: The assessee is a company incorporated on 03-12-2007 under the Companies Act, and is a joint venture between the Government of India and Government of Tamil Nadu. The assessee's source of fund is share capital which is equally contributed by GOI and. GOTN, Interest free subordinate debt (subordinated debts are repayable after other debts have been paid in case of liquidation) and Loan from Japan International Corporation Agency (JICA). The assessee company is still in the pre- commencement stage during the financial year relevant to Assessment Year 2011-12. Further, the assessee in its submission has stated that, "During the Construction period and based on the budget provisions, both the joint venture partners are providing funds to CMRL. CMRL makes use of the funds for the project. The funds, which are pending to be utilized for the project, are temporarily parked in Short Term Flexi Deposits with the Banks". I.T.A. Nos.2180 & 2181/Chny/18 3 The assessee has earned interest income out of the funds "temporarily parked" in the Short Term Flexi Deposits. The assessee’s claim is that, the funds are for the purpose of setting up of the plant and it is 'inextricably linked' with the business of the assessee. Hence, the interest income is a capital receipt entitled to be set off against the pre-operative expenses and cannot be treated as income from other sources. In this regard the assessee also relied on the Delhi High Court decision and the decision of the Cuttack Bench of the Tribunal. The factors such as whether, the interest income is out of 'surplus' fund or the out of the fund temporarily parked until the utilization in the business, do not determine the taxability of the income. The income has to be charged to tax as per the provisions of the Income-tax Act. The total income of the company is chargeable to tax under Section 4. The Total income has to be computed in accordance with the provisions of the Act. Section 14 lays down that for the purpose of computation, income of an assessee has to be classified under six heads. 'Profits and gains of business or profession' is only one of the heads under which the company's income is liable to be assessed to tax. If a company has not commenced business, there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed. In the instant case, the company had chosen to park its fund temporarily in "Short Term Flexi Deposit" until the utilization of the same for the setting up of the plant. Therefore, the company has chosen to utilize the fund fruitfully and earn income out of the fund instead of keeping the same idle. The fruits of such investment will clearly be of the revenue nature. If the capital of a company is fruitfully utilized instead of keeping it idle, the income thus generated will be of the revenue nature and not accretion of capital. Therefore, the question of the income being "inextricably linked" with the business of the assessee does not arise. It is pertinent to substantiate here, that the interest income which is the subject matter of discussion is revenue in nature and not capital. Income is something which flows from the property. Something received in place of the property will be capital receipt. The amount of interest received by the company flows from its investments and its income is clearly revenue in nature and not capital. Section 28 deals with the income from business or profession. The business of the assessee in this case is construction and running of Metro I.T.A. Nos.2180 & 2181/Chny/18 4 Rail. Therefore, the income earned out of such activity is the business income of the assessee. Since, the business is yet to commence, there is no question of assessing a business income. In case of business transactions during the period prior to the commencement of the business, the income tax act envisages only the pre-operative expenditure which has to be dwelt with in accordance with Section 35D. However, there is no provision in the Income tax Act to deal with Pre-operative Income. Thus the intent of the legislature is clear, wherein the legislature has envisaged that, before the commencement of business operations there cannot be any business income, and there can be only business expenditure. Thus, the income (Capital or Revenue) derived before the commencement of the business operations cannot be a business income and hence, the question of the income being "inextricably linked" with the business of the assessee does not arise. Thus if the income is out of capital asset then the same is to be taxed under the head "capital gain" otherwise Section 56 comes into rescue. As per Section 56 (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. therefore in the present case the income is chargeable to tax under the head Income from Other sources. The assessee has further countered that, the decision of the Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd Vs CIT 227 ITR 172 (SC) deals with only interest earned out of "surplus" funds, which is not the case of the assessee where the funds are parked temporarily. The submissions of the assessee are not acceptable. Even in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. the funds that were borrowed for the purpose of the setting up of the plant was invested in deposits until it is utilized for the business. Therefore, it is not a case of "excess", but it is only a fund which is "surplus temporarily" until it is utilized in the business. Hence, the judgment of the Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. is directly related in the assessee's case. Further, the assessee company contented that, the interest income is deemed agency income diverted at source and CMRL being an agent of the government is only implementing the project. The funds of the government are distributed to CMRL for public purpose; therefore the interest income cannot be brought to tax. The submissions of the assessee are not acceptable. The income is earned by the assessee, Income tax is I.T.A. Nos.2180 & 2181/Chny/18 5 levied at the point of 'accrual or arise' and the application of money do not in any affect the taxability of an income. In this regard reliance is placed on the Bombay High court decision in the case of CIT v. Maharashtra Electro smelt Ltd [1995] 214 ITR 489, wherein the court has recorded a finding that, "The interest earned by the assessee could have been used for many other purposes. If the assessee purchased a house or distributed dividend or paid salary of its employees with the money received as interest, will the interest amount be treated as not his income? This is not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as he liked. The application of the income for payment of interest could not affect its taxability in any way". 2.1 In view of the above discussions, the Assessing Officer has concluded that the assessee is liable to tax for the interest income earned during the pre-commencement period as “Income from Other Sources” and accordingly, the interest income of ₹.131,82,34,509/- was brought to tax in the assessment year 2013-14. Similarly, the interest income of ₹.124,16,25,482/- for the assessment year 2014-15 was also brought to tax. 3. The assessee carried the matters in appeal before the ld. CIT(A). After considering the submissions of the assessee, distinguishing the decision of the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. 227 ITR 172 and by relying upon the subsequent decisions of the Hon’ble Supreme Court in the cases of Bokaro Steel Ltd. 236 ITR 315, Karnal Co-operative Sugar Mills Ltd. 243 ITR 2 and Karnataka Power Corporation 247 ITR 268, the ld. I.T.A. Nos.2180 & 2181/Chny/18 6 CIT(A) has observed that the claim of the assessee is reasonable and deserves to be accepted and accordingly held that the interest income is not taxable. 4. Aggrieved, the Revenue is in appeal before the Tribunal for both the assessment years under appeal. 5. We have heard both the sides, perused the materials available on record and gone through the orders of authorities below including the case law referred and various case law filed in the form of paper book. The point at issue for adjudication is whether the interest income earned out of temporary investment in short term flexi deposits is taxable or not. The assessee is a company incorporated on 03-12- 2007 under the Companies Act, and is a joint venture between the Government of India and Government of Tamil Nadu. The assessee's source of fund is share capital which is equally contributed by GOI and. GOTN, Interest free subordinate debt (subordinated debts are repayable after other debts have been paid in case of liquidation) and Loan from Japan International Corporation Agency (JICA). The assessee company is still in the pre-commencement stage during the financial year relevant to the assessment years 2013-14 and 2014-15. I.T.A. Nos.2180 & 2181/Chny/18 7 The assessee has earned interest income out of the funds "temporarily parked" in the Short Term Flexi Deposits. The assessee claimed that the funds are for the purpose of setting up of the plant and it is 'inextricably linked' with the business of the assessee. Hence, the interest income is a capital receipt entitled to be set off against the pre- operative expenses and cannot be treated as income from other sources. By referring to various case law, the Assessing Officer has concluded that the assessee is liable to tax for the interest income earned during the pre-commencement period as “income from other sources”. 6. On appeal, the ld. CIT(A) has observed on the reliance placed by the Assessing Officer in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT (supra) that, the Hon’ble Supreme Court has considered the investment of borrowed funds prior to commencement of business and held that the interest earned was taxable. Further, the ld. CIT(A) has observed that in the case of CIT v. Bokaro Steel Ltd. 236 ITR 315, it was a case of a Government company which during the period of construction of the plant had advance monies to contractor on which it was earning interest, received rent form quarters let out to I.T.A. Nos.2180 & 2181/Chny/18 8 employees, received hire charges on plant let out of contractor and received royalty on stones removed from the assessee's lands. The Supreme Court considered all these activities to be intricately connected with the construction activity and accordingly held that interest received, rent received, hire charges and royalty, etc. would be reduced form the cost of the asset and it would not be treated as income. Similar view was expressed by the Supreme Court in the case Karnal Co-operative Sugar Mills Ltd. (2000) 243 ITR 2. An identical view was also taken by the Supreme Court in the cases of Bongaigaon Refinery and Petrochemicals Ltd. (2001) 251 ITR 329 and Karnataka Power Corporation (2001) 247 ITR 268. Accordingly, the ld. CIT(A) has noted that in the light of the Supreme Court decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. (1997) 27 ITR 172, it was only in the event of interest earned from out of deposits made from borrowed funds that it would be in the nature of income. Thus, the ld. CIT(A) has opined that the share application monies do not fall into the category of borrowed funds and do not involve payments of interest. In effect share application monies, etc., are gathered for being used in setting up on an industry unit, purchase of assets, as on. Till such time the money is required for deferment of various items, obviously the money has to be I.T.A. Nos.2180 & 2181/Chny/18 9 kept in deposit with a bank. Keeping the money in current account would not yield any interest income. It can, therefore, be seen that it is during the course of constructions that the monies are kept in deposits with the bank. Therefore, in view of the judgements of Hon’ble Supreme Court in the cases of CIT v. Bokaro Steel Ltd (supra), Karnal Co-operative Sugar Mills Ltd. (supra) and Karnataka Power Corporation (2001) 247 ITR 268, the ld. CIT(A) has opined that the claim of the assessee is reasonable and deserves to be accepted. 6.1 Accordingly, the ld. CIT(A) has concluded that the assessee CMRL is acting as an agent of the Government of India and Government of Tamil Nadu in carrying out the Chennai Metro Rail Projects and, therefore, its interest income is not taxable in the light of the decisions of the Hon’ble Bombay High Court in the case of City and Industrial Development Corporation of Maharashtra Ltd. v. ACIT [2012] 343 ITR 102 and in the light of the Hon’ble Karnataka High Court in the case of CIT v. Karnataka Urban Infrastructure Development and Finance Corporation (2009) 315 ITR 301 as well as similar decisions of Delhi and Patna High Court referred in the appellate order. 6.2 Before us, besides strongly supporting the order of the ld. CIT(A), I.T.A. Nos.2180 & 2181/Chny/18 10 the ld. Counsel for the assessee has relied on the decision of the Hon’ble Jurisdictional High Court in the case of CIT v. VGR Foundations 298 ITR 132, wherein, by following the decisions of the Hon’ble Supreme Court in the cases of CIT v. Bokaro Steel Ltd. (supra) and CIT v. Karnaaka Power Corporation (supra), the Hon’ble High Court has concluded that the interest on moneys borrowed for the period prior to commencement of business is allowable as deduction under section 57 against interest income while computing income from other sources. 6.3 Similarly, in the case of India Metal One Steel Plate Processing (P) Ltd. v. DCIT [2019] 108 taxmann.com 332 (Madras), the Hon’ble Madras High court has held that where the assessee is engaged in manufacturing activities, deposited share application money in fixed deposits during setting up of plant and machinery and earned interest thereon, since revenue authorities did not examine as to whether there was an inextricable like of funds so deposited with setting up of assessee’s business, the impugned order bringing interest income to tax under the head ‘other sources’, was to be set aside. I.T.A. Nos.2180 & 2181/Chny/18 11 6.4 Further, in the case of CIT v. Bangalore Metro Rail Corporation Ltd. [2022] 135 taxmann.com 268 (Karnataka), the Hon’ble Karnataka High Court has held that where, out of funds granted by State Government to assessee – Government company for implementation of a rail-based Mass rapid Transit System, unutilized funds of project were invested by assessee in fixed deposits and mutual funds as per directions of Government, since interest accrued therefrom had to be utilized only for purpose of scheme, it could not be counted as income of assessee and could not be considered as revenue receipts. Moreover, in the case of PCIT v. Bank Note Paper Mill India (P.) Ltd. [2018] 95 taxmann.com 158 (Karnataka), the Hon’ble High Court has held that the interest income earned by assessee company on bank deposits made out of share capital prior to commencement of business operations was not liable to be taxed as same was eligible for deduction against public issue expenses incurred by company. The relevant portion of the order is reproduced as under: “5. Learned Counsel for the Revenue, Mr. K.V. Aravind has fairly submitted that in the recent decision rendered by the Hon’ble Supreme Court on 24.04.2018 in the case of ‘Commissioner of Income Tax-IV, Ahmedabad v. Shree Rama Multi Tech Ltd.,’ [(2018) 92 taxmann.com 363 (SC)], the Hon’ble Supreme Court has again reiterated a similar position and held that such interest earned before the commencement of business operations is not liable to be taxed and is eligible for deduction against the public issue expenses incurred by the Company. I.T.A. Nos.2180 & 2181/Chny/18 12 The relevant portion of Paragraphs 12 and 13 of the said Judgment are quoted below for ready reference: “12) The common rationale that is followed in all these judgment is that if there is any surplus money which is lying idle and it has been deposited in the bank for the purpose of earning interest then it is liable to be taxed as income from other sources but if the income accrued is merely incidental and not the prime purpose of doing the act in question which resulted into accrual of some additional income then the income is not liable to be assessed and is eligible to be claimed as deduction. Putting the above rationale in terms of the present case, if the share application money that is received is deposited in the bank in light of the statutory mandatory requirement then the accrued interest is not liable to be taxed and is eligible for deduction against the public issue expenses. The issue of share relates to capital structure of the company and hence expenses incurred in connection with the issue of shares are to be capitalized because the purpose of such deposit is not to make some additional income but to comply with the statutory requirement, and interest accrued on such deposit is merely incidental. In the present case, the Respondent was statutorily required to keep the share application money in the bank till the allotment of shares was complete. In that sense, we are of the view that the High Court was right in holding that the interest accrued to such deposit of money in the bank is liable to be setoff against the public issue expenses that the company has incurred as the interest earned was inextricably linked with requirement of the company to raise share capital and was thus adjustable towards the expenditure involved for the share issue. 13) In view of the forgoing discussion, we are of the view that the High Court was right in upholding the decision of the Tribunal dated 21.10.2011 that the interest income earned out of the share application money is liable to be set off against the public issue expenses. The judgment passed by the Division Bench of the High Court in remanding the matter to the Tribunal on other issues requires no interference.” 6.5 Respectfully following various judgements of various Courts, we also of the considered opinion that the interested income earned by the I.T.A. Nos.2180 & 2181/Chny/18 13 assessee from the funds temporarily parked in the short term flexi deposits is a capital receipt and hence, cannot be taxed as income from other sources. Thus, we find no infirmity in the order passed by the ld. CIT(A) and accordingly, the ground raised by the Revenue for both the assessment years is dismissed. 6.6 The ld. DR has relied upon the decision in the case of Thermal Powertech Corporation India Ltd. v. DCIT [2017] 81 txmann.com 168 (Hyderabad – Trib), wherein, the facts of the case were that for the purpose of setting up of the project, the assessee has borrowed certain funds from the banks and has invested a part of the borrowed funds which were not immediately required in short term deposits with an intention to earn interest ostensibly to reduce the interest liability. The above case law has no application to the facts of the present case for the reason that in the case in hand, the assessee is a joint venture between Government of India and Government of Tamil Nadu incorporated for the implementation of Chennai metro Rail Project. This project is being implemented as a central sector project through the executing agency, i.e., CMRL, which will work as a Special Purpose Vehicle for the implementation of the project with GOI and GOTN being I.T.A. Nos.2180 & 2181/Chny/18 14 the joint promoters with equal equity holdings. Therefore, the case law relied on by the ld. DR has no application to the facts of the present case. 7. In the result, both the appeals filed by the Revenue are dismissed. Order pronounced on 24 th June, 2022 at Chennai. Sd/- Sd/- (G. MANJUNATHA) ACCOUNTANT MEMBER (V. DURGA RAO) JUDICIAL MEMBER Chennai, Dated, 24.06.2022 Vm/- आदेश की Ůितिलिप अŤेिषत/Copy to: 1. अपीलाथŎ/Appellant, 2.ŮȑथŎ/ Respondent, 3. आयकर आयुƅ (अपील)/CIT(A), 4. आयकर आयुƅ/CIT, 5. िवभागीय Ůितिनिध/DR & 6. गाडŊ फाईल/GF.