Bharuch Eco Aqua Infrastructure Ltd., Dist.Bharuch V. The Dy.CIT.,Bharuch Circle, Bharuch

ITA 3245/AHD/2008

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57312 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 6 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-03-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 05-01-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 22-09-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C K MISHRA
• Assessee Lawyers: J P SHAH
• Keywords: Capital asset; Business income; Capital receipt; Capital expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, A BENCH, AHMEDABAD BEFORE SHRI MUKUL KUMAR SHRAWAT, JUDICIAL MEMBER AND SHRI A. K. GARODIA, ACCOUNTANT MEMBER I.T.A. NO.3245 / AHD/2008 (ASSESSMENT YEAR 2005-06) BHARUCH ECO AQUA INFRASTRUCTURE LTD., SURTI BHAGOR, NR. GUJ. GAS OFFICE, UMARVADA ROAD, ANKLESHWAR, DISTT BHARUCH VS. DCIT, BHARUCH CIRCLE, BHARUCH PAN/GIR NO. : AABCB 4070D (APPELLANT) .. (RESPONDENT) APPELLANT BY: SHRI J P SHAH, AR RESPONDENT BY: SHRI C.K.MISHRA, SR. DR DATE OF HEARING: 05.01.2012 DATE OF PRONOUNCEMENT: ___03.2012 O R D E R PER SHRI MUKUL KUMAR SHRAWAT, JM:- THIS IS THE APPEAL AT THE BEHEST OF THE ASSESSEE W HICH HAS EMANATED FROM THE ORDER OF LD. CIT(A) XVI, BHARUCH DATED 22. 07.2008 AND THE GROUNDS RAISED ARE HEREBY DECIDED AS UNDER: 1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD CIT(A) ERRED IN LAW IN CONFIRMING THE ACTION OF THE A.O. IGNORING THE LOSS OF RS.8,54,417/- CLAIMED BY THE APPELLANT. 2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LD. CIT(A) ERRED IN LAW IN UP HOLDING THE ACTION OF THE A.O. ASSESSING RS.49,32,314/- INTEREST INCOME UNDER THE HEAD INCOM E FROM OTHER SOURCES AND ALSO IGNORING THE DIRECT PAYMENT OF INT EREST ON THE SAID FUNDS. I.T.A.NO.3245 /AHD/2008 2 THE LD. CIT(A) OUGHT NOT HAVE UPHOLD THE ASSESSMENT MADE BY THE A.O. OF THE INTEREST UNDER THE HEAD INCOME FROM OTH ER SOURCES IGNORING THE CLAIM OF YOUR APPELLANT. 2. THE BRIEF FACTS AS EMERGED FROM THE CORRESPONDIN G ASSESSMENT ORDER PASSED U/S 143(3) DATED 29.11.2007 ARE THAT T HE COMPANY WAS TO UNDERTAKE A PROJECT OF LAYING PIPELINE FOR CARRYING THE TREATED AFFLUENT OF THE INDUSTRY. THE ASSESSEE COMPANY WAS ALSO TO PRO VIDE SERVICES FOR THE TREATMENT OF THE AFFLUENT. THE COMPANY WAS ALSO LA YING THE PIPES AND THAT WORK WAS IN PROGRESS DURING THE YEAR UNDER CONSIDER ATION. A RETURN OF LOSS OF RS.(-)8,54,417/- WAS FILED. IT WAS NOTED B Y THE A.O. THAT THE ASSESSEE COMPANY HAS RECEIVED INTEREST OF RS.49,32, 314/- FROM VARIOUS BANKS. THE SAID AMOUNT ALSO INCLUDED LATE PAYMENT OF EQUITY. AGAINST THE SAID AMOUNT, INTEREST EXPENSES OF RS.59,68,961/ - WAS DEDUCTED AND THE BALANCE OF RS.(-)10,36,647/- WAS TRANSFERRED TO PROJECTS PREOPERATIVE EXPENSES. THE OBSERVATION OF THE A.O. WAS THAT THE ASSESSEE HAD NOT OFFERED FOR TAX THE INTEREST INCOME OF RS.49,32,314 /- UNDER THE HEAD INCOME FROM OTHER SOURCES BUT DEDUCTED FROM THE O THER INTEREST EXPENSES. ANOTHER OBSERVATION OF THE A.O. WAS THAT ON VERIFICATION OF THE ANNUAL REPORT FOR THE FINANCIAL YEAR 2004-05, IT WA S FOUND THAT THE BUSINESS OF THE ASSESSEE WAS NOT COMMENCED. THE WO RK OF LAYING OF PIPELINE WAS STATED TO BE IN PROGRESS AND COULD NOT BE COMPLETED. IT IS WORTH TO COMMENT AT THAT STAGE THAT AS FAR AS THE F ACT ABOUT THE W.I.P. WAS CONCERNED, THE SAME HAS BEEN ADMITTED BY THE ASSESS EE IN VIEW OF THE DIRECTORS REPORT WHICH WAS REPRODUCED BY THE A.O. I N THE ASSESSMENT ORDER. SINCE, THE BUSINESS COULD NOT BE COMMENCED, THEREFORE, THE A.O. HAS HELD THAT THE EXPENDITURE INCURRED BY THE ASSES SEE WAS CAPITAL EXPENDITURE REQUIRED TO BE CAPITALIZED. AN ANOTHE R FACTUAL FINDING GIVEN BY THE A.O. WAS THAT THE SURPLUS FUNDS HAVE BEEN IN VESTED BY THE ASSESSEE I.T.A.NO.3245 /AHD/2008 3 WITH THE BANK OF BARODA AND HDFC LTD. AND THEREON R ECEIVED THE INTEREST OF RS.20,70,409/-. IT WAS ALSO FOUND BY THE A.O. T HAT THE ASSESSEE HAS RECEIVED INTEREST ON LATE PAYMENT OF EQUITY OF RS.2 8,28,391/- AND MONITORING CHARGES OF RS.33,514/-. IN THIS MANNER, THE A.O. HAS GIVEN THE BIFURCATION OF THE AMOUNT RECEIVED OF RS.49,32, 314/-, MENTIONED ABOVE. HE HAS HELD THAT THE SAID AMOUNT IS THEREFO RE, TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES, PRIMARILY BECAUSE OF THE FACT THAT THE BUSINESS COULD NOT BE COMMENCED DURING THE YEAR UND ER CONSIDERATION. IT HAS ALSO BEEN NOTED BY THE A.O. THAT THE INCOME OF THE LIKE NATURE WAS OFFERED FOR TAX BY THE ASSESSEE ITSELF IN THE PREVI OUS YEAR. THE ACCOUNT IN RESPECT OF SET OFF AND THE CLAIM OF LOSS HAS ALSO B EEN REPRODUCED BY THE A.O. AS UNDER: PARTICULARS AMOUNT RS. INTEREST ON TERM LOAN FROM IDFC LTD. 5968961 LESS: INTEREST ON FIXED DEPOSIT-BOB 210619 INTEREST ON FIXED DEPOSIT- HDFC 1859790 INTEREST ON LATE PAYMENT OF EQUITY 2828391 INTEREST ON LATE PAYMENT OF MONITORING CHARGES 3351 4 4932314 TOTAL 1036647 3. THE A.O. WAS NOT CONVINCED BY THE SUBMISSIONS O F THE ASSESSEE AND FINALLY HELD THAT INSTEAD OF CAPITALIZING OF IN TEREST EXPENDITURE OF RS.59,68,961/-, THE ASSESSEE HA SET OFF THE SAME AG AINST THE INTEREST INCOME AND CAPITALIZED THE REMAINING AMOUNT OF RS.1 0,36,647/- BY TRANSFERRING TO PROJECT PREOPERATIVE EXPENSES. T HE A.O. HAS CITED THE CASE OF TUTICORIN ALKALI AND CHEMICALS AS REPORTED IN 227 ITR 172(S.C.) FOR THE LEGAL PROPOSITION THAT THE INTEREST INCOME EARNED OUT OF SURPLUS FUND BEFORE COMMENCEMENT OF BUSINESS IS TAXABLE AS INCOME FROM OTHER SOURCES. SINCE THE INTEREST INCOME WAS HELD AS I NCOME FROM OTHER I.T.A.NO.3245 /AHD/2008 4 SOURCES, THEREFORE, THE LOSS DECLARED AS PER THE R ETURN WAS NOT ALLOWED AND THE SAID INCOME WAS TAXED AS UNDER: SUBJECT TO THE ABOVE REMARKS AND DISCUSSION, THE TO TAL INCOME OF THE ASSESSEE COMPANY IS COMPUTED AS UNDER: PROFITS AND GAINS OF BUSINESS OR PROFESSION (IN RS.) I TOTAL LOSS AS PER RETURN OF INCOME RS.8,54,417/ - II INCOME FROM OTHER SOURCES: INTEREST INCOME (AS DISCUSSED IN PARA 6) RS.49,32 ,314/- TOTAL INCOME RS.49,32,314/- 4. WHEN THE MATTER WAS CARRIED BEFORE THE 1 ST APPELLAT AUTHORITY, LD. CIT(A) HAS EXPRESSED THAT SINCE NO BUSINESS ACTIVIT Y WAS CARRIED DURING THE YEAR, THEREFORE, THE ENTIRE INTEREST EXPENDITUR E OF RS.59,68,961/- WAS REQUIRED TO BE CAPITALIZED. THE SECOND ASPECT WAS DEALT WITH BY THE LD. CIT(A) IN THE LIGHT OF THE DECISION IN THE CASES OF TUTICORIN ALKALI & CHEMICALS (SUPRA) AND HELD THAT THE INTEREST INCOME EARNED WAS CORRECTLY TAXED AS INCOME FROM OTHER SOURCES. THE OBSERVAT ION OF LD. CIT(A) WAS THAT THE ASSESSEE HAD RAISED TERM LOAN FROM IDF C LTD. WHICH WAS PARKED IN FIXED DEPOSIT. IN HIS OPINION, THE LOAN TAKEN FROM IDFC LTD. WAS FOR THE PURPOSE OF CAPITAL WORK OF LAYING OF ON SHORE PIPELINE/OFFSHORE PIPELINE AND ALSO FOR SETTING UP OF AFFLUENT TREATM ENT PLANT THEREFORE, THE INTEREST PAYMENT ON THE SAID LOAN WAS NOT REVENUE I N NATURE HENCE, CANNOT BE ALLOWED U/S 36(1)(III) OF THE INCOME TAX ACT, 19 61. IN HIS OPINION, THE PAYMENT OF INTEREST WAS IN RESPECT OF CAPITAL BORRO WED FOR ESTABLISHING THE BUSINESS. HENCE, THE INTEREST EXPENDITURE WAS NOT REVENUE IN NATURE. LD. CIT(A) HAS REPRODUCED PROVISO ANNEXED TO SECTION 36 (1)(III) FOR EXPLAINING THAT ANY AMOUNT OF INTEREST PAID IN RESP ECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTI NG BUSINESS THEN, NOT TO BE ALLOWED AS DEDUCTION. FINALLY THE ACTION OF THE A.O. WAS CONFIRMED. I.T.A.NO.3245 /AHD/2008 5 5. FROM THE SIDE OF THE ASSESSEE, LD. A.R. MR. J P SHAH APPEARED AND ARGUED THAT IN THE CASE OF INDIAN OIL PANIPAT POWER CONSORTIUM LTD. VS ITO AS REPORTED IN 115 ITR 255 (DEL.) IT WAS HELD T HAT THE INTEREST WHICH ACCRUED ON FUNDS DEPOSITED WITH THE BANK DURING PRE OPERATIVE PERIOD COULD NOT BE TAXED AS INCOME FROM OTHER SOURCES BUT CONSTITUTE CAPITAL RECEIPT LIABLE TO BE SET OFF AGAINST PREOPERATIVE E XPENSES. THE LD. A.R. HAS ALSO DRAWN OUR ATTENTION OF AN ORDER OF LD. CIT (A) VI BARODA DATED 28.03.2008 PRONOUNCED IN ASSESSEES OWN CASE IN SUP PORT OF THE CLAIM THAT THE BUSINESS OF THE ASSESSEE HAD PARTIALLY COM MENCED AS HELD IN THE SAID APPELLATE ORDER. LD. A.R. HAS ALSO DRAWN OUR ATTENTION ON PAGE 16 OF THE PAPER BOOK ON 5 TH ANNUAL REPOT WHEREIN VIDE COL. 14, THE DETAILS OF INTEREST EXPENDITURE ON TERM LOAN FORM IDFC LTD. AN D THE SET OFF OF INTEREST RECEIVED ON CERTAIN FIXED DEPOSITS HAVE BE EN NOTED. THIS ACCOUNT HAS ALREADY BEEN REPRODUCED HEREINABOVE WHILE DISCU SSING THE IMPUGNED ASSESSMENT ORDER. 6. FROM THE SIDE OF THE REVENUE, LD. D.R. MR. K C M ISHRA, SR. DR APPEARED AND SUPPORTED THE VIEW EXPRESSED BY THE A. O. AND CIT(A). 7. HAVING HEARD THE SUBMISSION OF BOTH THE SIDES, W E HEREBY HOLD THAT THE ISSUE AS RAKED UP BY THE A.O. HAS TWO COMPONENT S. THE 1 ST PART OF CONTROVERSY IS THAT WHETHER THE INTEREST INCOME OF RS.49,32,314/- WAS TO BE TAKEN AS INCOME FROM OTHER SOURCES OR NOT IT IS NOTED THAT INTEREST INCOME WAS EARNED FORM FIXED DEPOSIT WITH HDFC LTD AND BANK OF BARODA, THEREFORE THE REVENUE AUTHORITIES HAVE EXPR ESSED THEIR VIEW THAT THE SAME IS TO BE TAXED AS INCOME FORM OTHER SOURC ES. HOWEVER, IT WAS INFORMED DURING THE APPELLATE PROCEEDING TO LD. CIT (A) THAT THE ASSESSEE W AS HAVING SURPLUS FUNDS WHICH WAS INVESTED WITH T HE BANK OF BARODA AND HDFC LTD. THEREFORE, THE AMOUNT RECEIVED WAS N OT REQUIRED TO BE I.T.A.NO.3245 /AHD/2008 6 HELD AS INCOME FORM OTHER SOURCES BUT IT HAD DIRE CT NEXUS WITH THE BUSINESS ACTIVITIES, THEREFORE, THE NATURE OF RECEI PT WAS BUSINESS INCOME. 8. THE NEXT PLANK OF CONTROVERSY IS THAT THE INTERE ST PAID ON TERM LOAN WAS TO BE CAPITALIZED AS THE BUSINESS ACTIVITIES CO ULD NOT BE STARTED DURING THE YEAR UNDER CONSIDERATION. IN THIS REGARD, IT W AS INFORMED TO LD. CIT(A) THAT THE LOAN WAS REQUIRED TO BE UTILIZED FO R THE CAPITAL WORK OF LAYING OF PIPELINE. 8.1 IN THE LIGHT OF THIS FACTUAL BACKGROUND IF WE C ONSIDER THE DECISION OF HONBLE DELHI HIGH COURT PRONOUNCED IN THE CASE OF INDIAN OIL PNIPAT POWER CONSORTIUM (SUPRA) THEN ONE FACT HAS TO BE FI RST ASCERTAINED THAT WHETHER THE FUNDS WERE ESPECIALLY EARMARKED FOR THE DEVELOPMENT OF INFRA STRUCTURE OR NOT. AS PER THE CITED DECISION VIDE P ARA 5.1, THE HONBLE COURT HAS OPINED : THE TEST, THEREFORE, TO OUR MIND IS WHETHER THE AC TIVITY WHICH IS TAKEN UP FOR SETTING UP OF THE BUSINESS AND THE FUN DS WHICH HARE GARNERED ARE INEXTRICABLY CONNECTED TO THE SETTING UP OF THE PLANT ONCE IT IS HELD THAT THE ASSESSEES INCOME IS AN INCOME CONNECTED WITH BUSINESS, WHICH WOULD BE SO IN THE P RESENT CASE, IN VIEW OF THE FINDING OF FACT BY THE CIT(A) THAT THE MONIES WHICH WERE INDUCTED INTO THE JOINT VENTURE COMPANY BY THE JOINT VENTURE PARTNERS WERE PRIMARILY INFUSED TO PURCHASE LAND AN D TO DEVELOP INFRASTRUCTURE THEN IT CANNOT BE HELD THAT HE INCOM E DERIVED BY PARKING THE FUNDS TEMPORARILY WITH TOKYO MITSUBISHI BANK, WILL RESULT IN THE CHARACTER OF THE FUNDS BEING CHANGED, IN AS MUCH AS THE INTEREST EARNED FROM THE BANK WOULD HAVE A HUE DIFF ERENT THAN THAT OF BUSINESS AND BE BROUGHT TO TAX UNDER THE HEAD I NCOME FROM OTHER SOURCES. IT IS WELL SETTLED THAT AN INCOME RECEIVED BY THE ASSESSEE CAN BE TAXED UNDER THE HEAD INCOME FROM O THER SOURCES ONLY IF IT DOES NOT FALL UNDER ANY OTHER HEAD OF IN COME AS PROVIDED IN S.14 OF THE ACT. THE HEAD INCOME FROM OTHER SO URCES IS A RESIDUARY HEAD OF INCOME. I.T.A.NO.3245 /AHD/2008 7 9. THE HONBLE COURT HAS THEREFORE, STATED VIDE PAR A 5.2 THAT IT WAS CLEAR UPON PERUSAL OF THE FACT THAT THE FUNDS WERE IN THE FORM OF SHARE CAPITAL WHICH WAS INFUSED FOR A SPECIFIC PURPOSE FO R ACQUIRING LAND AND DEVELOPMENT OF INFRASTRUCTURE. THEREFORE, THE INTE REST EARNED ON FUNDS PRIMARILY FOR THE FIRST INFUSION IN THE BUSINESS CO ULD NOT HAVE BEEN CLASSIFIED AS INCOME FROM OTHER SOURCES. SINE THE INCOME WAS EARNED IN A PERIOD PRIOR TO COMMENCEMENT OF BUSINESS, IT WAS IN THE NATURE OF CAPITAL AND HENCE, IT WAS REQUIRED TO BE SET OFF AGAINST PR E-OPERATIVE EXPENSES. THE HONBLE DELHI HIGH COURT HAS ALSO CONSIDERED TH E DECISION OF TUTICORIN ALKALI & CHEMICALS (SUPRA) AS RELIED UPON BY THE A.O. IN THE PRESENT CASE, THE ASSESSEE IS UNDER OBLIGATION TO D EMONSTRATE THAT THE FUNDS WERE STUCKED UP WITH THE BANK OR SPECIFICALLY EARMARKED FOR ACQUISITION OF CAPITAL ASSET, AS OBSERVED BY THE HO NBLE COURT, THEN, THE INTEREST EARNED CANNOT BE TREATED AS INCOME FROM OT HER SOURCES. SINCE, AS PER THE ABOVE DISCUSSION BOTH THE ASPECTS HAVE NOT BEEN EXAMINED THOROUGHLY BY THE A.O., THEREFORE, WE DEEM IT PROPE R TO RESTORE THE GROUNDS OF ASSESSEE BACK TO THAT STAGE TO BE DECIDE D DE NOVO NEEDLESS TO SAY AFTER PROVIDING AN ADEQUATE OPPORTUNITY OF HEAR ING TO THE ASSESSEE. IN THE RESULT, GROUNDS RAISED BY THE ASSESSEE MAY BE T REATED AS ALLOWED BUT FOR STATISTICAL PURPOSES. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE STAND S ALLOWED FOR STATISTICAL PURPOSES. 11. ORDER PRONOUNCED IN THE OPEN COURT ON THE DATE MENTIONED HEREINABOVE. SD./- SD./- (A. K. GARODIA) (MUKUL KUMAR SHRAWAT) ACCOUNTANT MEMBER JUDICIAL MEMBER SP I.T.A.NO.3245 /AHD/2008 8 COPY OF THE ORDER FORWARDED TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT (APPEALS) 5. THE DR, AHMEDABAD BY ORDER 6. THE GUARD FILE AR,ITAT,AHMEDABAD 1. DATE OF DICTATION 20/3. 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 22/3.OTHER MEMBER 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P .S./P.S. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 23/3 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. P.S./P.S.26/3 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 26/ 3/12 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK .. 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER . 9. DATE OF DESPATCH OF THE ORDER. .