ITO, New Delhi V. M/s. Indian Oil Panipat Consortium Power Ltd., New Delhi

ITA 4499/DEL/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 65848 (ITAT-DELHI)
• Duration Of Justice: 2 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-11-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2008-2009
• Appeal Filed On: 23-08-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SATPAL SINGH
• Keywords: Capital receipt

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : C NEW DELHI BEFORE SHRI UBS BEDI, JM AND SHRI J.SUDHAKAR REDDY, AM ITA NO. 4499/DEL/2012 ASSESSMENT YEAR : 2008-09 ITO, WARD 11(4) VS. M/S INDIAN OIL PANIPAT CONSORTI UM POWER LTD. NEW DELHI H 1/204, 2 ND FLOOR, VIKRAMADITYA TOWER ALAKNANDA SHOPPING COMPLEX NEW DELHI 110 019 PAN: AAAC16741B (APPELLANT) (RESPONDENT) APPELLANT BY:- SH.SATPAL SINGH, SR.D.R. RESPONDENT BY:- SHRI RAJ KUMAR, C.A. O R D E R PER J.SUDHAKAR REDDY, AM THIS IS AN APPEAL FILED BY THE REVENUE DIRECTED AGA INST THE ORDER OF THE CIT(A)-XV DT. 6.6.2012 FOR THE A.Y. 2008-09 O N THE FOLLOWING GROUNDS. 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, LD.CIT(A) WAS JUSTIFIED IN DELETING AN ADDITION MAD E BY THE ASSESSING OFFICER ON ACCOUNT OF INTEREST RECEIVED F ROM BANK AS INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. 2. THAT THE APPELLANT SEEKS LEAVE TO ADD, AMEND, A LTER ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF HEARI NG. 2. WE HAVE HEARD SHRI SATPAL SINGH, SR.D.R. FOR REV ENUE AND SHRI RAJ KUMAR, C.A. FOR THE ASSESSEE. 2 3. THE SOLE ISSUE FOR ADJUDICATION IS WHETHER THE I NTEREST RECEIVED BY THE ASSESSEE FROM BANKS IS ASSESSABLE UNDER THE HEA D INCOME FROM OTHER SOURCES AS AGAINST THE CLAIM OF THE ASSESSEE THAT THE RECEIPT IS CAPITAL IN NATURE. BOTH PARTIES AGREED THAT THE FACTS OF THE PRESENT CASE ARE SIMILAR TO THE FACTS OF THE ASSESSEES OWN CASE FRO M THE AYS 2001-02 TO THE ASSESSMENT YEAR 2007-08, AND THAT THE ISSUE HAS COME UP BEFORE THE JURISDICTIONAL HIGH COURT AND THAT THE ISSUE IS NO MORE RES-INTEGRA. 4. FOR THE ASSESSMENT YEAR 2001-2002 AND 2002-2003, THE JURISDICTIONAL HIGH COURT IN THE ASSESSEES OWN CAS E REPORTED IN 315 ITR 255 DELHI HELD AS FOLLOWS:- IN OUR OPINION, THE TRIBUNAL HAS MISCONSTRUED TH E RATIO OF THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF TUTICO RIN ALKALI CHEMICALS [1997] 227 ITR 172 AND THAT OF BOKARO STEEL LTD. [1 999] 236 ITR 315. THE TEST WHICH PERMEATES THROUGH THE JUDGMENT OF THE SU PREME COURT IN TUTICORIN ALKALI CHEMICALS [1997] 227 ITR 172 IS TH AT IF FUNDS HAVE BEEN BORROWED FOR SETTING UP OF A PLANT AND IF THE FUNDS ARE ' SURPLUS' AND THEN BY VIRTUE OF THAT CIRCUMSTANCE THEY ARE INVESTED IN FIXED DEPOSITS THE INCOME EARNED IN THE FORM OF INTEREST WILL BE TAXAB LE UNDER THE HEAD ' INCOME FROM OTHER SOURCES' . ON THE OTHER HAND, THE RATIO OF THE SUPREME COURT JUDGMENT IN BOKARO STEEL LTD. [1999] 236 IT R 315 TO OUR MIND IS THAT IF INCOME IS EARNED, WHETHER BY WAY OF INTERES T OR IN ANY OTHER MANNER ON FUNDS WHICH ARE OTHERWISE ' INEXTRICABLY LINKED' TO THE SETTING UP OF THE PLANT, SUCH INCOME IS REQUIRED TO BE CAPI TALIZED TO BE SET OFF AGAINST PRE-OPERATIVE EXPENSES. THE TEST, THEREFORE, TO OUR MIND IS WHETHER THE A CTIVITY WHICH IS TAKEN UP FOR SETTING UP OF THE BUSINESS AND THE FUN DS WHICH ARE GARNERED ARE INEXTRICABLY CONNECTED TO THE SETTING UP OF THE PLANT. THE CLUE IS PERHAPS AVAILABLE IN SECTION 3 OF THE ACT WHICH STA TES THAT FOR NEWLY SET UP BUSINESS THE PREVIOUS YEAR SHALL BE THE PERIOD BEGI NNING WITH THE DATE OF SETTING UP OF THE BUSINESS. THEREFORE, AS PER THE P ROVISION OF SECTION 4 OF THE ACT WHICH IS THE CHARGING SECTION INCOME WHICH ARISES TO AN ASSESSEE FROM THE DATE OF SETTING OF THE BUSINESS BUT PRIOR TO COMMENCEMENT IS CHARGEABLE TO TAX DEPENDING ON WHETHER IT IS OF A R EVENUE NATURE OR CAPITAL 3 RECEIPT. THE INCOME OF A NEWLY SET UP BUSINESS, POS T 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 INCOME TO BE CLASSIFIED AS INCOME UNDER THE HEAD ' PROFITS AND G AINS OF BUSINESS OR PROFESSION' IT WOULD HAVE TO BE AN ACTIVITY WHICH IS IN SOME MANNER OR FORM CONNECTED WITH BUSINESS. THE WORD ' BUSINESS' IS OF WIDE IMPORT WHICH WOULD ALSO INCLUDE ALL SUCH ACTIVITIES WHICH COALESCE INTO SETTING UP OF THE BUSINESS. SEE MAZAGAON DOCK LTD. V. CIT/EXCE SS PROFITS TAX [1958] 34 ITR 368 (SC) AND NARAIN SWADESHI WEAVING MILLS V . COMMISSIONER OF EXCESS PROFITS TAX [1954] 26 ITR 765 (SC). ONCE IT IS HELD THAT THE ASSESSEE'S INCOME IS AN INCOME CONNECTED WITH BUSIN ESS, WHICH WOULD BE SO IN THE PRESENT CASE, IN VIEW OF THE FINDING OF F ACT BY THE COMMISSIONER OF INCOME-TAX (APPEALS) THAT THE MONIES WHICH WERE IND UCTED INTO THE JOINT VENTURE COMPANY BY THE JOINT VENTURE PARTNERS WERE PRIMARILY INFUSED TO PURCHASE LAND AND TO DEVELOP INFRASTRUCTURE THEN IT CANNOT BE HELD THAT THE INCOME DERIVED BY PARKING THE FUNDS TEMPORARILY WIT H TOKYO MITSUBISHI BANK, WILL RESULT IN THE CHARACTER OF THE FUNDS BEI NG CHANGED, INASMUCH AS, THE INTEREST EARNED FROM THE BANK WOULD HAVE A HUE DIFFERENT THAN THAT OF BUSINESS AND BE BROUGHT TO TAX UNDER THE HEAD ' INCOME FROM OTHER SOURCES' . IT IS WELL-SETTLED THAT AN INCOME RECEIV ED BY THE ASSESSEE CAN BE TAXED UNDER THE HEAD ' INCOME FROM OTHER SOURCES' ONLY IF IT DOES NOT FALL UNDER ANY OTHER HEAD OF INCOME AS PROVIDED IN SECTI ON 14 OF THE ACT. THE HEAD ' INCOME FROM OTHER SOURCES' IS A RESIDUARY H EAD OF INCOME. SEE S. G. MERCANTILE CORPORATION P. LTD. V. CIT [1972] 83 ITR 700 (SC) AND CIT V. GOVINDA CHOUDHURY AND SONS [1993] 203 ITR 881 (SC). IT IS CLEAR UPON A PERUSAL OF THE FACTS AS FOUND BY THE AUTHORITIES BE LOW THAT THE FUNDS IN THE FORM OF SHARE CAPITAL WERE INFUSED FOR A SPECIFIC P URPOSE OF ACQUIRING LAND AND THE DEVELOPMENT OF INFRASTRUCTURE. THEREFORE, T HE INTEREST EARNED ON FUNDS PRIMARILY BROUGHT FOR INFUSION IN THE BUSINES S COULD NOT HAVE BEEN CLASSIFIED AS INCOME FROM OTHER SOURCES. SINCE THE INCOME WAS EARNED IN A PERIOD PRIOR TO COMMENCEMENT OF BUSINESS IT WAS IN THE NATURE OF CAPITAL RECEIPT AND HENCE WAS REQUIRED TO BE SET OFF AGAINS T PRE-OPERATIVE EXPENSES. IN THE CASE OF TUTICORIN ALKALI CHEMICALS [1997] 227 ITR 172 IT WAS FOUND BY THE AUTHORITIES THAT THE FUNDS AVAILAB LE WITH THE ASSESSEE IN THAT CASE WERE ' SURPLUS' AND, THEREFORE, THE SUPR EME COURT HELD 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 INTEREST ON ADVANCE PAID TO CONTRACTORS DURING PRE-COMMENCEMENT PERIOD WAS FOUN D TO BE ' INEXTRICABLY LINKED' TO THE SETTING UP OF THE PLAN T OF THE ASSESSEE AND HENCE WAS HELD TO BE A CAPITAL RECEIPT WHICH WAS PE RMITTED TO BE SET OFF AGAINST PRE-OPERATIVE EXPENSES. THERE IS ANOTHER PERSPECTIVE FROM WHICH THE PRESE NT ISSUE CAN BE EXAMINED. UNDER SECTION 208 OF THE COMPANIES ACT , 1956, A COMPANY CAN PAY INTEREST ON SHARE CAPITAL WHICH IS ISSUED F OR A SPECIFIC PURPOSE TO 4 DEFRAY EXPENSES FOR CONSTRUCTION OF ANY WORK AND WH ICH CANNOT BE MADE PROFITABLE FOR A LONG PERIOD SUBJECT TO CERTAIN RES TRICTIONS CONTAINED IN SUB- SECTIONS (2) TO (7) OF SECTION 208. THIS SECTION WA S SPECIFICALLY NOTED BY THE SUPREME COURT IN CHALLAPALLI SUGARS LTD. V. CIT [19 75] 98 ITR 167. THE SUPREME COURT WENT ON TO OBSERVE AT PAGE 175 AS FOL LOWS : ' WE HAVE ALREADY REFERRED TO SECTION 208 OF THE COMPANIES ACT WHICH MAKES PROVISION FOR PAYMENT OF INTEREST O N SHARE CAPITAL IN CERTAIN CONTINGENCIES. CLAUSE (B) OF SUB-SECTION (1 ) OF THAT SECTION PROVIDES THAT IN CASE INTEREST IS PAID ON SHARE CAPITAL ISSU ED FOR THE PURPOSE OF RAISING MONEY TO DEFRAY THE EXPENSES OF CONSTRUCTIN G ANY WORK OR BUILDING OR THE PROVISION OF ANY PLANT IN CONTINGENCIES MENT IONED IN THAT SECTION, THE SUM SO PAID BY WAY OF INTEREST MAY BE CHARGED TO CA PITAL AS PART OF THE COST OF CONSTRUCTION OF THE WORK OR BUILDING OR THE PROVISION OF THE PLANT. THE ABOVE PROVISION THUS GIVES STATUTORY RECOGNITIO N TO THE PRINCIPLE OF CAPITALIZING THE INTEREST IN CASE THE INTEREST IS P AID ON MONEY RAISED TO DEFRAY EXPENSES OF THE CONSTRUCTION OF ANY WORK OR BUILDING OR THE PROVISION OF ANY PLANT IN CONTINGENCIES MENTIONED I N THAT SECTION EVEN THOUGH SUCH MONEY CONSTITUTES SHARE CAPITAL. THE SA ME PRINCIPLE, IN OUR OPINION, SHOULD HOLD GOOD IF INTEREST IS PAID ON MO NEY NOT RAISED BY WAY OF SHARE CAPITAL BUT TAKEN ON LOAN FOR THE PURPOSE O F DEFRAYING THE EXPENSES OF THE CONSTRUCTION OF ANY WORK OR BUILDING OR THE PROVISION OF ANY PLANT. THE REASON INDEED WOULD BE STRONGER IN CASE SUCH IN TEREST IS PAID ON MONEY TAKEN ON LOAN FOR MEETING THE ABOVE EXPENSES. ' IN OUR VIEW, THE SITUATION IN THE INSTANT CASE IS QUITE SIMILAR 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 SHARE CAPITAL FOR A SPECIFIC PURPOSE. COULD IT BE SAID THAT IN THE FO RMER SITUATION INTEREST COULD HAVE BEEN CAPITALIZED AND IN THE LATTER SITUA TION IT CANNOT BE CAPITALIZED. TO TEST THE PRINCIPLE WE COULD EXTEND THE EXAMPLE, THAT IS, WOULD OUR ANSWER BE ANY DIFFERENT HAD ASSESSEE PASS ED ON THE INTEREST TO THE RESPECTIVE SHAREHOLDERS. IF NOT, THEN, IN OUR V IEW, THE ONLY CONCLUSION POSSIBLE IS THAT INTEREST EARNED IN THE PRESENT CIR CUMSTANCES OUGHT TO BE CAPITALIZED. IN VIEW OF THE DISCUSSION ABOVE, IN OUR OPINION, THE TRIBUNAL MISDIRECTED ITSELF IN APPLYING THE DECISION OF THE SUPREME COURT IN TUTICORIN ALKALI CHEMICALS [1997] 227 ITR 172 IN THE FACTS OF THE PRESENT CASE. IN OUR OPINION, ON ACCOUNT OF THE FINDING OF FACT RETURNED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) THAT THE FUNDS INFUSED IN THE ASSESSEE BY THE JOINT VENTURE PARTNER WERE INEXTRICABLY LINKED WITH THE S ETTING UP OF THE PLANT, THE INTEREST EARNED BY THE ASSESSEE COULD NOT BE TR EATED AS INCOME FROM OTHER SOURCES. IN THE RESULT WE ANSWER THE QUESTION AS FRAMED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. THESE APPEALS ARE ALLOWED AND THE IMPUGNED JUDGMENT IS SET ASIDE. 5 5. LD.CIT(A) FOLLOWED THE DECISION OF THE JURISDICT IONAL HIGH COURT AND GRANTED RELIEF. WE FIND NO INFIRMITY IN THE SA ME. 6. IN THE RESULT THE APPEAL OF THE REVENUE IS DISMI SSED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST NOVEMBER,2012. SD/- SD/- (U.B.S. BEDI) (J.SUDH AKAR REDDY) JUDICIAL MEMBER ACCOUNTANT MEMBE R DATED: THE 21 ST NOVEMBER, 2012 *MANGA COPY OF THE ORDER FORWARDED TO: 1. APPELLANT; 2.RESPONDENT; 3.CIT; 4.CIT (A); 5.DR; 6.GUARD FILE BY ORDER DY. REGISTRAR 1. DATE OF DICTATION: 2. DRAFT PLACED BEFORE THE AUTHOR ON: 3. DRAFT PROPOSED AND PLACED BEFORE SECOND MEMBER ON: 4. DRAFT DISCUSSED/APPROVED BY THE SECOND MEMBER ON: 5. APPROVED DRAFT CAME TO SR.P.S. ON: 6. DATE OF PRONOUNCEMENT : 7. FILE SENT TO BENCH CLERK ON : 8. DATE ON WHICH FILE GIVEN TO HEAD CLERK ON: 9. DATE OF DISPATCHING THE ORDER ON :