ASST CIT 6(2)(2), MUMBAI V. ESSAR POWER GUJARAT LTD, MUMBAI

ITA 4020/MUM/2016

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 6813 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-06-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 13-06-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Capital receipt
• Section: 56; 2

Judgement Text

, INCOME-TAX APPELLATE TRIBUNAL -JBENCH MUMBAI , , BEFORE S/SH.RAJENDRA,ACCOUNTANT MEMBER AND AMARJIT SINGH,JUDICIAL MEMBER ./I.T.A./4020/MUM/2016, / ASSESSMENT YEAR: 2011-12 ./I.T.A./4019/MUM/2016, / ASSESSMENT YEAR: 2012-13 ACIT-6(2)(2) ROOM NO.563, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400 020. VS. M/S. ESSAR POWER GUJARAT LTD. ESSAR HOUSE, 11 KK MARG, MAHALAXMI MUMBAI-400 034. PAN:AABCE 7510 K ( /APPELLANT ) ( / RESPONDENT) / REVENUE BY: SHRI VIRENDRA SINGH /ASSESSEE BY: SHRI ANUJ KISHNADWALA / DATE OF HEARING: 21/05/2018 / DATE OF PRONOUNCEMENT: 01/06/2018 , ,, , 1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) , - PER RAJENDRA, AM - CHALLENGING THE ORDERS DATED 23/03/2016 OF THE CIT( A)-12,MUMBAI,THE ASSESSING OFFICER (AO)HAS FILED ABOVE APPEALS.ASSESSEE-COMPANY IS ENG AGED IN THE BUSINESS SETTING UP OF COAL BASED POWER PLANT.AS THE ISSUES RAISED IN BOTH THE APPEALS ARE SIMILAR,SO,WE ARE ADJUDICATING THEM TOGETHER.DETAILS OF FILINGS OF RETURNS,RETUNRE D INCOMES,ASSESSED INCOMES CAN BE SUMMAR -ISED AS UNDER: AY. ROI FILED ON RETURNED INCOME ASST.DATE ASSESSED INCOME 2011-12 05/09/2011 RS.3.65 CRORES 18/03/2014 RS.6.9 9 CRORES 2012-13 27/09/2012 RS.5.44 CRORES 29/12/2014 RS.11. 14 CRORES ITA/4020/MUM/2016,AY.2011-12: 2. EFFECTIVE GROUND OF APPEAL IS ABOUT TREATING THE IN TEREST AMOUNT,AMOUNGTING TO RS.3.33 CRORES,ON MARGIN MONEY KEPT FOR OBTAINING BANK GUAR ANTEE FOR CREDIT FOR POWER BUSINESS AS BUSINESS INCOME. DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESSEE WAS IN THE PROCESS OF PROJECT CONSTRUCTION AND SETTING UP OF POWER GENERA TION PLANT,THAT ALL THE EXPENDITURE INCURRED DURING THE PRE-COMMENCEMENT STAGE WAS REFL ECTED UNDER THE HEAD 'CAPITAL WORK IN PROGRESS ' AND 'PREOPERATIVE EXPENSES' IN THE BOOKS OF ACCOUNTS,THAT IT WAS REQUIRED KEEP MARGIN DEPOSITS WITH BANK FOR OPENING LETTER OF CRE DIT, BANK GUARANTEE FOR PPA WITH GUVNL, 4019/M/16 & 4020/M/16(12-13)&(11-12) ESSAR POWER GUJARAT LTD. 2 SECURITY DEPOSITS FOR CONTACT REGISTRATION OF MEGA POWER STATUS AND DIESEL PLANT,FOREIGN LC FOR COAL PROCUREMENT ETC.,THAT ALL THE EXPENDITURE INCURRED TOWARDS CONSTRUCTION OF THE PLANT WERE CLUBBED UNDER CWIP AND PREOPERATIVE EXPENSES,T HAT ALL THE FINANCE COST TILL COMMENCE -MENT OF COMMERCIAL PRODUCTION WAS ALSO CAPITALISED ,THAT THE ASSESSEE DID NOT DEBIT ANY INTEREST EXPENDITURE RELATING TO ITS BORROWINGS TO THE P&L A/C. FOR THE YEAR,THAT THE TOTAL INTEREST COST WAS DEBITED TO PRE-OPERATIVE EXPENSES ,THAT CORRESPONDING INTEREST INCOME EARNED ON THE MARGIN DEPOSITS EARMARKED AGAINST THE BORROW ING FACILITIES WAS DEDUCTED FROM THE SAME. THE AO,AFTER CITING THE JUDGMENTS OF TUTICORIN ALKA LI CHEMICALS & FERTILIZERS LTD. (227 ITR 172);SOUTH INDIA SHIPPING CORPORATION LTD.(240ITR24 );RADICO KHAITAN LTD (274 ITR 354); RAJASTHAN LAND DEVELOPMENT CORPN. (211 ITR 597)AND RAVI RATNA EXPORTS P. LTD.(246 ITR 443) HELD THAT THE INTEREST INCOME RECEIVED ON MARG IN MONEY WAS TO BE TAXED UNDER THE HEAD INCOME FROM OTHER SOURCES. 3. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE FILED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA)AND MADE DETAILED SUBMISSIONS.AFTER C ONSIDERING THE AVAILABLE MATERIAL,SHE HELD THAT THAT THE ASSESSEE HAD NOT COMMENCED ITS B USINESS OPERATIONS DURING THE YEAR UNDER CONSIDERATION,THAT ALL THE EXPENSES INCURRED IN CON NECTION WITH THE SETTING UP OF THE POWER PLANT WERE CAPITALIZED AND THE INCOME EARNED OUT OF THE FUNDS MOBILIZED FOR THE CONSTRUCTION OF THE POWER PLANT FOR THE PURPOSE OF AVAILING THE CREDIT FACILITIES AND AS PER THE TERMS OF THE POWER PURCHASE AGREEMENT FROM THE BANKS WAS ON ACCO UNT OF COMPULSION IN ORDER TO AVAIL SUCH FACILITY,THAT THE INTEREST INCOME EARNED ON TH E FDR/MARGIN MONEY PLACED WITH BANK WAS INEXTRICABLY LINKED TO THE SETTING UP OF THE POWER PLANT,THAT THERE WAS CONSIDERABLE FORCE IN THE ARGUMENT THAT THE AFORESAID INTEREST INCOME WAS INEXTRICABLY CONNECTED TO THE SETTING UP OF THE POWER PLANT,THAT THE INTEREST INCOME HAD BEE N DERIVED FROM FIXED DEPOSIT PLACED WITH THE BANK FOR AVAILING OF LC AND ISSUE OF BANK GUARA NTEE FOR THE SETTING UP OF THE POWER PROJECT,THAT THE INTEREST INCOME HAD TO BE TREATED AS PART OF THE PROCESS OF SETTING UP OF THE PLANT, THAT INCOME EARNED,WHICH IS INEXTRICABLY LIN KED TO THE SETTING UP OF THE BUSINESS HAD TO BE CAPITALIZED AND REDUCED FROM THE BALANCE OF 'CAP ITAL WORK IN PROGRESS',THAT INTEREST INCOME COULD NOT BE TREATED AS 'INCOME FROM OTHER SOURCES' CHARGEABLE U/S 56 OF THE ACT. SHE RELIED UPON THE CASES OF BOKARO STEEL LTD.(236 ITR 315),IN DIAN DRUGS AND PHARMACEUTICALS LTD. (141ITR134),KARNAL COOPERATIVE SUGAR MILLS LTD (243 ITR2)AND KARNATAKA POWER CORPORA- TION(247 ITR 268). 4019/M/16 & 4020/M/16(12-13)&(11-12) ESSAR POWER GUJARAT LTD. 3 4. BEFORE US,THE DEPARTMENTAL.REPRESNETATIVE(DR) SUPPO RTED THE ORDER OF THE AO AND STATED THAT HE HAD RIGHTLY TAXED THE INTEREST INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. THE AUTHORISED REPRESENTATIVE(AR)STATED THAT THE AS SESSEE WAS REQUIRED TO MAKE DEPOSIT WITH THE BANKS FOR THE PURPOSE OF OPENING OF LETTER OF CREDIT,THAT THE AMOUNT SO DEPOSITED WOULD PARTAKE THE CHARACTERISTICS OF TRADE RELATED DEPOSITS MADE FOR THE PURPOSE OF THE POWER GENERATION BUSINESS,THAT DURING THE TENURE OF THE S AID MARGIN DEPOSIT THE ASSESSEE HAD EARNED INTEREST WHICH WAS INCIDENTAL AND INTERLINKED WITH ITS BUSINESS OF APPELLANT,THAT EARNED INTEREST REDUCED THE COST OF THE PROJECT,THAT ALL T HE EXPENDITURE INCURRED TOWARDS CONSTRUCTION OF THE PLANT WERE CLUBBED UNDER CWIP AND PREOPERATI VE EXPENSES, THAT THE INTEREST RECEIVED ON THE FIXED DEPOSITS WAS RIGHTLY REDUCED FROM SAME .WITH REGARD TO THE ACCOUNTING FOR THE FINANCE COST RELATING TO THE BORROWINGS AS MENTIONE D ABOVE AND CORRESPONDING INTEREST INCOME EARNED FROM DEPOSITS EARMARKED AGAINST FINAN CING FACULTIES DURING CONSTRUCTION PERIOD,HE SUBMITTED THAT ALL THE FINANCE COST TILL COMMENCEMENT OF COMMERCIAL PRODUCTION WAS CAPITALISED,THAT THE INTEREST INCOME EARNED FRO M DEPOSITS EARMARKED AGAINST FINANCING FACILITIES DURING CONSTRUCTION PERIOD WAS DEDUCTED FROM THE SAME.HE REFERRED TO CLAUSE 2.4 OF SIGNIFICANT ACCOUNTING POLICIES AS APPEARING IN SCH EDULE XI,BEING NOTES FORMING PART OF THE ACCOUNTS AND STATED THAT THE ASSESSEE DID NOT DEBIT ANY INTEREST EXPENDITURE RELATING TO ITS BORROWINGS TO THE PROFIT AND LOSS ACCOUNT FOR THE Y EAR,THAT TOTAL INTEREST COST WAS DEBITED TO PRE-OPERATIVE EXPENSES,THAT CORRESPONDING INTEREST INCOME EARNED ON THE MARGIN DEPOSITS EARMARKED AGAINST THE BORROWING FACILITIES WAS DEDU CTED FROM THE SAME AS PER THE ACCOUNTING POLICY. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT THE ASSESSEE WAS SETTING UP A THERMAL POWER PLANT,THAT DURING THE YEAR UNDER APPEAL,THE PROJECT OF CONSTRUCTION OF THE POWER PLANT WAS UNDER PROGRESS AND NO COMMERCIAL ACTIVITIES WHATSOEVER HAD BEGUN,THAT ALL THE MAJOR EXPENSES INCURRED IN R ELATION TO THE PROJECT WERE CAPITALISED UNDER 'CAPITAL WORK IN PROGRESS',THAT DURING THE YE AR UNDER APPEAL THE ASSESSEE HAD EARNED INTEREST INCOME OUT OF THE FUNDS AUGMENTED FOR ISSU ING BANK GUARANTEE TO VARIOUS PARTIES IN CONNECTION WITH THE CONSTRUCTION OF THE POWER PROJE CTS AS WELL AS FOR MEETING THE VARIOUS EXPENSES FOR PURCHASE OF VARIOUS ASSETS REQUIRED IN THE CONSTRUCTION OF THE POWER PLANT, THAT THE SAME WAS TREATED AS CAPITAL ASSET BY THE ASSESS EE,THAT IT WAS ACCORDINGLY REDUCED FROM THE CAPITAL WORK IN PROGRESS AND WAS CLAIMED AS BUSINES S INCOME. IN OUR OPINION,IN CASE MONEY IS BORROWED BY A NEWLY STARTED COMPANY,WHICH IS IN THE PROCESS OF CONSTRUCTING AND ERECTING ITS PLANT,THE INTEREST INCURRED BEFORE THE COMMENCEMENT OF 4019/M/16 & 4020/M/16(12-13)&(11-12) ESSAR POWER GUJARAT LTD. 4 PRODUCTION ON SUCH BORROWED MONEY HAS TO BE CAPITAL ISED AND HAS TO BE ADDED TO THE COST OF THE FIXED ASSETS CREATED AS A RESULT OF SUCH EXPEND ITURE.SIMILARLY,IF THE ASSESSEE RECEIVES ANY AMOUNT WHICH IS INEXTRICABLY LINKED WITH THE PROCES S OF SETTING UP ITS PLANT AND MACHINERY SUCH RECEIPTS WILL GO TO REDUCE THE COST OF ITS ASS ETS.WE ALSO HOLD THAT TREATMENT OF THE RECEIPTS DEPENDS ON THE PURPOSE FOR WHICH THE FUNDS ARE UTIL ISED.THE USE OF FUNDS DECIDES THE CHARACTERISATION OF THE AMOUNT. IN THE CASE UNDER CONSIDERATION THAT THE INTEREST R ECEIPT WAS DIRECTLY LINKED TO SETTING UP OF BUSINESS APPARATUS OF THE ASSESSEE.IT WAS NOT IDLE MONEY THAT WAS INVESTED OR PARKED FOR EARNING INTEREST.WE HAVE PERUSED THE CLAUSE 2.4 OF SIGNIFICANT ACCOUNTING POLICIES,AS APPEARING IN SCHEDULE XI AND ARE OF THE OPINION THA T THE INTEREST INCOME EARNED BY THE ASSESSEE HAD DIRECT AND INTIMATE CONNECTION WITH IT S BUSINESS.SETTING OF POWER PLANTS TAKES TIME AND THE ASSESSEE HAS TO MAKE INVESTMENT WITH B ANKS FOR AVAILING VARIOUS FACILITIES. WE FIND THAT THE FAA HAD PLACED RELIANCE ON THE CAS ES OF BOKARO STEEL LTD. (SUPRA), INDIAN DRUGS AND PHARMACEUTICALS LTD.(SUPRA),KARNAL COOPER ATIVE SUGAR MILLS LTD (SUPRA)AND KARNATAKA POWER CORPORATION.IT IS FOUND THAT THE JU DGMENT OF BOKARO STEEL(SUPRA)CASE WAS FOLLOWED IN THE CASE OF KARNAL COOPERATIVE SUGAR MI LLS LTD.(SUPRA),WHEREIN THE INTEREST EARNED BY THE ASSESSEE ON AMOUNTS DEPOSITED WITH BA NKS TO OPEN LETTERS OF CREDIT,FOR PURCHASE OF MACHINERY REQUIRED FOR SETTING UP ITS PLANT,WAS HELD TO BE DIRECTLY LINKED WITH THE PURCHASE OF PLANT AND MACHINERY AND THEREFORE WAS HELD TO BE A CAPITAL RECEIPT ON THE GROUND THAT THE SAME WAS DIRECTLY CONNECTED AND INCIDENTAL TO THE C ONSTRUCTION OF PLANT.WE ARE REPRODUCING A PORTION OF THE JUDGMENT DELIVERED BY THE HONBLE AP EX COURT IN THE MATTER OF KARNAL COOPERATIVE SUGAR MILLS LTD.(SUPRA)WHEREIN THE COUR T,AFTER TAKING NOTE OF THE FACTS OF THE CASE,HAS HELD AS UNDER: IN THE PRESENT CASE, THE ASSESSEE HAD DEPOSITED M ONEY TO OPEN A LETTER OF CREDIT FOR THE PURCHASE OF THE MACHINERY REQUIRED FOR SETTING UP I TS PLANT IN TERMS OF THE ASSESSEES AGREEMENT WITH THE SUPPLIER. IT WAS ON THE MONEY SO DEPOSITED THAT SOME INTEREST HAD BEEN EARNED. THIS WAS, THEREFORE, NOT A CASE WHERE ANY S URPLUS SHARE CAPITAL MONEY WHICH WAS LYING IDLE HAD BEEN DEPOSITED IN THE BANK FOR THE P URPOSE OF EARNING INTEREST. THE DEPOSIT OF MONEY IN THE PRESENT CASE WAS DIRECTLY LINKED WITH THE PURCHASE OF PLANT AND MACHINERY. HENCE, ANY INCOME EARNED ON SUCH DEPOSIT WAS INCIDE NTAL TO THE ACQUISITION OF ASSETS FOR THE SETTING UP OF THE PLANT AND MACHINERY. THE INTEREST WAS A CAPITAL RECEIPT, WHICH WOULD GO TO REDUCE THE COST OF ASSET. ALL OTHER CASES,CITED ABOVE,SUPPORT THE VIEW TAKEN BY HER. 5.1. CONSIDERING THE ABOVE,WE ARE OF THE OPINION THAT TH E FAA HAD RIGHTLY HELD THAT IN THE CASE OF INTEREST RECEIPTS ON MARGIN DEPOSITS KEPT WITH T HE BANKS FOR THE PURPOSE OF GETTING THE CREDIT FACILITIES WHICH WERE REQUIRED FOR THE CONST RUCTION OF THE PLANT,IT WAS TO BE ALLOWED TO 4019/M/16 & 4020/M/16(12-13)&(11-12) ESSAR POWER GUJARAT LTD. 5 BE REDUCED FROM THE COST OF THE PLANT AND WAS TO BE HELD AS NOT TAXABLE.SO,CONFIRMING HER ORDER,WE HOLD THAT HER ORDER DOES NOT SUFFER FROM A NY FACTUAL OR LEGAL INFIRMITY.EFFECTIVE GROUND OF APPEAL IS DECIDED AGAINST THE AO. ITA/4019/MUM/2016,AY.2012-13: 6. FOLLOWING OUR ORDER,FOR THE EARLIER AY.,WE HOLD THA T THE ORDER OF THE FAA HAS TO BE ENDORSED,AS THE FACTS OF THE CASE UNDER APPEAL ARE SIMILAR, THE ONLY DIFFERENCE IS ABOUT AMOUNT INVOLVED IN THE GROUND OF APPEAL RAISED BY THE AO. AS A RESULT, APPEALS FI LED BY THE AO FOR BOTH THE AY.S.STAND DISMISSED. !!' #! .. !$! %!!&'!( )*+!!!, . ORDER PRONOUNCED IN THE OPEN COURT ON 1 ST JUNE, 2018 . )( - * 1 , 2018 SD/- S D/- ( / AMARJIT SINGH ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED : 01.06.2018. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR J BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.