Chhattisgarh Energy Consortium (India) Private Limited, Hyderabad V. Income Tax Officer, Ward-1(4), Hyderabad

ITA 47/Hyd/2018

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 6110 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 11 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-12-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB-B
• Assessment Year: 2014-2015
• Appeal Filed On: 03-01-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: Y V S T SAI
• Keywords: Business income; Revision of order; Capital expenditure
• Section: 56; 263; 2; 143(3); 195

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘ B ‘ Bench, Hyderabad (Through Video Conferencing) Before Shri A. Mohan Alankamony, Accountant Member AND Shri S.S. Godara, Judicial Member ITA No.1504/Hyd/2017 Assessment Year: 2013-14 Chattisgarh Energy Consortium (India) Pvt. Ltd. Hyderabad. PAN : AADCC1336R. Vs. ITO, Ward – 1(4), Hyderabad. (Appellant) (Respondent) ITA No.2246/Hyd/2017 Assessment Year: 2014-15 ITO, Ward – 1(4), Hyderabad. Vs. Chattisgarh Energy Consortium (India) Pvt. Ltd. Hyderabad. PAN : AADCC1336R. (Appellant) (Respondent) ITA No.47/Hyd/2018 Assessment Year : 2014-15 Chattisgarh Energy Consortium (India) Pvt. Ltd. Hyderabad. PAN : AADCC1336R. ITO, Ward – 1(4), Hyderabad. (Appellant) (Respondent) Assessee by: Shri A.V. Raghuram. Revenue by: Shri YVST Sai Date of hearing: 14/12/2021 Date of pronouncement: 20/12/2021 ITA Nos.1504/Hyd/2017, ITA 2246/Hyd/2017 and ITA 47/Hyd/2018 2 O R D E R Per S. S. Godara, J.M. The instant batch of three appeals pertains to a single assessee namely M/s. Chattisgarh Energy Consortium (India) Private Limited. Its first and foremost appeal ITA 1504/Hyd/2017 for assessment year 2013-14 arises against the Principal Commissioner of Income Tax - 1, Hyderabad’s order dated 23.06.2017 in F.No.19(2)/ Pr.CIT-1/Hyd/263/2016-17, involving proceedings u/s 263 of the Income Tax Act (hereinafter referred as “the Act”) 2. Latter assessment year 2014-15 involves the Revenue’s and assessee’s cross-appeals ITA 2246/Hyd/2017 and ITA 47/Hyd/2018 against the Commissioner of Income Tax (Appeals)-1, Hyderabad’s order dated 31.07.2017 in appeal No.0234/CIT(A)- 1/Hyd/2016-17/2017-18, involving proceedings u/s 143(3) of the Income Tax Act. Heard both the parties. Case file(s) perused. 3. It transpires during the course of hearing that although the relevant provisions invoked in both these appeals are different i.e., Sec.263 in former assessment year 2013-14 and Sec.143(3) of the Act in latter assessment year 2014-15; respectively, the fact however remains that the identical sole question that arises for our apt adjudication is that the allowability of interest expenditure against interest income which stands assessed under the residuary ITA Nos.1504/Hyd/2017, ITA 2246/Hyd/2017 and ITA 47/Hyd/2018 3 head of income from “other” sources u/s 56 r.w.s. 57 of the Act. We note in this backdrop that learned PCIT’s revision directions in A.Y. 2013-14 under challenge hold that the corresponding regular assessment dt.17.12.2015 is an erroneous one causing prejudice to interest of the Revenue vide following detailed discussion. 2. On perusal of the record. it is noticed that. during the pre- operative stage. the assessee earned interest income of Rs. 2,08,33,562/- and the same is shown as 'other income' (Note13) in the P & L a/c. In the computation of total income. interest expenditure of Rs. 1,91,54,274/- on borrowings was excluded from the head 'Income from business' and claimed as expenditure u/s 57 against interest income i.e. income from other sources. The interest income offered as income chargeable under the head 'income from other sources' and therefore any expenditure including interest expenditure can be allowed under sec. 57 of the I T Act only if it is wholly and exclusively incurred for the purpose of earning interest income. But, on perusal of the financials for the year. the interest bearing funds were availed for the purpose of core business and not for earning interest income. Therefore. such interest expenditure during the pre-operative period has to be capitalized as borrowing cost and allocated to fixed assets on commencement of business and cannot be claimed as expenditure under sec. 57. In the case of Tuticorin Alkali Chemicals & Fertilizers (227 ITR 172) the Apex Court in a judgment rendered by a bench of three judges. after considering the legal position on the subject in detail, held that the interest income earned by the assessee before commencement of business on short term deposits with banks, even out of term loans secured from financial institutions. is an income chargeable under the head "income from other sources" and would not go to reduce the interest payable by the assessee which would be capitalized after the commencement of commercial production. In the present case also, the interest on advances did not spring or emanate from the business activity of the assessee and hence it is not business income. The interest income earned during the year is not inextricably linked to the setting-up of the plant etc. In such a situation, the interest income on advances earned during pre- commencement period would not go to reduce the pre-operative or incidental expenses/interest pending capitalization. Such expenses are required to be capitalized / allocated after the commencement of commercial production. ITA Nos.1504/Hyd/2017, ITA 2246/Hyd/2017 and ITA 47/Hyd/2018 4 2.1 In view of the foregoing and the decision of the Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers (227 ITR 172), the interest income on loans advanced earned by the assessee during pre-commencement period would not go to reduce the incidental expenses pending capitalization or cost of capital assets or interest expenditure. The interest income of Rs.2,08.33,562/- earned by the assessee on advances is chargeable to tax separately under the head "income from other sources" as admitted by the assessee in its return of income. Accordingly, the interest expenditure of Rs. 1,91,54,274/- claimed by the assessee which is not an expenditure u/s.57 of the IT Act against interest income of Rs. 2,08,33.562/- is not an admissible deduction. In other words, interest income of Rs.2,08,33,562/- is liable to be assessed as income from other sources without allowing any expenditure during pre-operative period. 2.2 However, in the assessment order passed by the AO, interest expenditure of Rs.1,91,54,274/- was allowed as deduction erroneously against interest income of Rs.2,08,33,562/- as claimed by the assessee. Thus, the assessment order dated 17.12.2015 passed u/s 143(3) of the I.T. Act is prima-facie erroneous in law and prejudicial to the interest of revenue and therefore, the same was proposed for revision u/s 263 of the I.T. AG. 2.3. In view of the above, vide this office show cause letter dated 22.02.2017, the assessee was asked to show-cause as to why the assessment order u/s 143(3) of the Act dated 17.12.2015 should not be revised as per the above discussion. 3. In response to the above show cause letter, Shri Sai Phani Kumar, ACA and Shri Hemanth Kumar Reddy. CFO of the company appeared for the assessee on 01.03.2017. Ld. Counsel stated that they filed appeal before CIT(A) against the assessment order passed for AY 2014-15 on similar issue and submitted that written submissions would be filed on 02.03.2017. Subsequently. written submissions were filed on the issue, which is subject matter of proceedings u/s.263. The relevant portions of the written submissions are extracted below. "With reference to the above we bring to your kind notice that the company is in the business of setting up a power project in the state of Chattisgarh. For the construction of the project the company has raised funds from holding company Ramky Enviro Engineers Limited. But due to various reasons there is no progress in the construction of the project during the financial year 2012-13. Because of that the entire funds raised by the company during the year have not been used for the purpose of the project. Hence, meanwhile the company has ITA Nos.1504/Hyd/2017, ITA 2246/Hyd/2017 and ITA 47/Hyd/2018 5 given these funds to some of the group companies and collected interest. As per the Accounting Standard 16- Borrowing cost "Borrowing costs that are attributable to the acquisition and construction of qualifying assets are to be capitalized as part of cost of such assets till such time asset is ready for its intended use. All other borrowing costs should be charged to the Profit & Loss account as period costs". Hence the borrowing costs relating to qualifying assets only to be capitalized and costs not related to project should be charged to profit and loss account. Based on that principle during the year the company has capitalized an amount of Rs.91,49,927/- relating to interest cost on assets relating to power project and interest cost of Rs.1,91,54,274/ - not related to project are debited to profit and loss account. As per the provisions of section 57 of the income tax act, 1961 any expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income will be allowed as deduction. There is a clear nexus between borrowings and advances. The company has earned an amount of Rs.2,08,33,562/- towards interest from the advances given and for this amount the company has incurred interest expenditure. Hence the same was claimed as deduction U/ Sec. 57. Hence, we request you to allow the deductions as per section 57 as this expenditure will not qualify for capitalization as per the prudent accounting principles and drop the further proceedings. 4. The submissions made by the assessee are carefully examined with reference to the facts of the case and the material available on record. Assessee Company has raised funds from holding company Ramky Enviro Engineers Limited for construction of power project but it appears that there is no progress in the construction of the said project during the F.Y. 2012-13. Consequently. the funds so raised have been advanced to group companies and collected interest and the interest so earned was shown as 'other income' in the P & L a/c. The interest income on the advances was also offered as other income under the head 'Income from other sources' in the return of income. As already mentioned hereinabove. in the case of Tuticorin Alkali Chemicals & Fertilizers (227 ITR 172). the Apex Court after considering the legal position on the subject in detail. held that the interest income earned by the assessee before commencement of business on ITA Nos.1504/Hyd/2017, ITA 2246/Hyd/2017 and ITA 47/Hyd/2018 6 short term deposits with banks. even out of term loans secured from financial institutions. is an income chargeable under the head "income from other sources" and would not go to reduce the interest payable by the assessee which would be capitalized after the commencement of commercial production. In the present case also. the interest on advances did not spring or emanate from the business activity of the assessee and hence it is not business income. The interest income earned during the year is not inextricably linked to the setting-up of the plant or deposit of money to open a letter of credit for purchase of machinery required for setting up its plant etc. In such a situation. the interest income on advances to group concerns earned during pre- commencement period would not go to reduce the pre-operative or incidental expenses/interest pending capitalization. Such expenses are required to be capitalized / allocated after the commencement of commercial production. At this stage. it may be appropriate to refer to the recent decision of ITA T. Hyderabad in the case of Thermal Powertech Corporation India Ltd. Bharat Oman Refineries Ltd. (164 ITD 449). wherein the ITAT after considering all the decisions of the Supreme Court on the issue held that the interest earned on short term deposits made out of borrowed funds. prior to commencement of business. is clearly an income from other sources and not the business income. 4.1 Referring to AS-16. Ld. Counsel canvassed that the borrowing costs relating to qualifying assets only to be capitalized and costs not related to project should be charged to profit and loss account. It is submitted that based on that principle during the year the company has capitalized an amount of Rs.91,49,927/- relating to interest cost on assets relating to power project and interest cost of Rs.1,91,54.274/- not related to project is debited to profit and loss account. This aspect was also considered by Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers referred ante and held that when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in raw or not the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act. In any case, as already stated. the interest on loans availed for setting up new project during pre-operative period needs to be capitalized and allocated to fixed assets after the commencement of business and cannot be allowed as expenditure under sec. 57. Therefore. such reference to AS-16 does not advance the case of the assessee. ITA Nos.1504/Hyd/2017, ITA 2246/Hyd/2017 and ITA 47/Hyd/2018 7 4.2 The other contention of the assessee is that the issue involved is a contentious issue and therefore it cannot be said that there is an error in the assessment order and it has caused prejudice to the interests of the revenue. This argument of the assessee is also not acceptable. It is also noticed from the record that the claim was allowed by the AO in a perfunctory manner without making any inquiries or verification in this regard which should have been made on the facts of the case and in the light of the decision of Apex Court referred above. The record does not indicate that AO has applied his mind to facts and materials on record through a process of enquiry and investigation and formed a view on the admissibility of interest expenditure against income from other sources. Thus. this is not a case where AO has taken one of the possible views in the matter. The claim of the assessee for the subject deduction of interest was allowed by the Assessing Officer overlooking the decision of Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers and therefore under clause (c) of Explanation-2 to sec. 263, assessment order under' consideration is deemed to be erroneous and prejudicial to the interests of the revenue. 5. In view of the foregoing and the decision of the Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers (227 ITR 172), the interest income on advances earned by the assessee during pre-commencement period would not go to reduce the incidental expenses pending capitalization or cost of capital assets or interest expenditure. The interest income of Rs.2,08,33,562/- earned by the assessee on advances is chargeable to tax separately under the head "income from other sources" as admitted by the assessee in its return of income. The interest expenditure of Rs.1,91.54,274/- claimed by the assessee against interest income of Rs.2,08,33,562/- is not an admissible deduction. In other words, interest income of Rs.2,08,33,562/- is liable to be assessed as income from other sources without allowing any expenditure during pre-operative period. 6. Thus. it is manifestly clear that the assessment order dated 17.12.2015 passed by the Assessing Officer in the case of the assessee for A.Y. 2013-14 is not only erroneous but also prejudicial to the interests of revenue and the twin conditions as contemplated in sec. 263 are satisfied in the present case. Accordingly, by virtue of the powers vested in the undersigned under sec. 263 of the Act, the Assessing Officer is directed to disallow interest expenditure of Rs. 1,91.54,274/- claimed by the assessee against interest income of Rs. 2,08,33,562/- and pass consequential order accordingly.” ITA Nos.1504/Hyd/2017, ITA 2246/Hyd/2017 and ITA 47/Hyd/2018 8 4. Latter A.Y. 2014-15 contains the Revenue’s and assessee’s sole substantive grounds each that the CIT(A) has erred in law and on facts in deleting the interest expenditure claim of Rs.2,77,26,027/- and upholding interest income assessed of Rs.2,84,24,110/-; as income from ‘other sources’ than business income, respectively. 5. We have given our thoughtful consideration to rival pleadings. The assessee’s vehement contentions before us in A.Y. 2013-14 are that the Assessing Officer had originally framed his regular assessment not disallowing the interest expenditure claim against interest income which has been held to be eligible for capitalization only in the impugned revision directions. 6. Learned CIT-DR has placed on record a catena of case law that such an interest income derived from investment of surplus funds; not for business purpose but for deriving interest income before commencement or setting up of business is not exigible for any netting benefit u/s 57(iii) of the Act. His list includes the following judicial precedents:- • M/s Berco Underwritings (India) Pvt. Ltd., Cherlapally Vs. ITO, Ward (1), Hyderabad – ITA No.1678/Hyd/2012 dt.17.06.2013. • CIT Vs. Rassi Cement Limited (1998) 100 Taxman 568 (Andhra Pradesh) • Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT – (1997) 93 Taxman 502 (SC). ITA Nos.1504/Hyd/2017, ITA 2246/Hyd/2017 and ITA 47/Hyd/2018 9 • Thermal Powertech Corporation India Ltd. Vs. DCIT (2017) 81 taxmann.com 168 (Hyderabad Trib.) • CIT Vs. Sponge Iron India Ltd. (1993) 67 Taxman 537 (Andhra Pradesh) • National Thermal Power Vs. Inspecting Asst. Commissioner (1998) 24 ITD 1 (Delhi) (SB). • Consolidated Fibres and Chemicals Ltd. Vs. CIT (2005) 195 CTR (Cal) 605. 7. Mr. YVST Sai draws strong support from the hon’ble apex court’s decision in Tuticorin Alkali Chemicals and Fertilizers Ltd Vs. CIT (1997) 93 taxman 502 (SC) that their lordships have already decided the instant issue against the assessee and in Revenue’s favour. 8. We have given our thoughtful consideration to the foregoing rival pleadings and find no merit in the Revenue’s stand. There could hardly be any dispute regarding the settled legal proposition that an assessment has to be both erroneous as well as causing prejudice to the interest of Revenue; simultaneously, before the CIT or PCIT; as the case may be, sets into motion section 263 revision jurisdiction. And that it is not each and every assessment that would be treated as revisable unless the Assessing Officer has not adopted one of the two possible views in light of M/s. Malabar Industries Co., Vs. CIT (2000) 243 ITR 83 (SC) to this effect. ITA Nos.1504/Hyd/2017, ITA 2246/Hyd/2017 and ITA 47/Hyd/2018 10 9. Now comes the clinching issue involved in the instant appeal is as to whether the learned PCIT has rightly directed the Assessing Officer to disallow the assessee’s interest expenditure claim of Rs.2,08,33,562/-. We find in principle that the learned PCIT has not committed any error at all in holding that the Assessing Officer’s regular assessment has not been carried out detailed enquiries in light of clause (c) of Explanation 2 to section 263 inserted by the Finance Act 2015 w.e.f. 01.06.2015. Learned counsel could not dispute the clinching fact that the Assessing Officer had not issued any show cause during the regular assessment in issue regarding allowability of interest claim against the interest income which stood assessed as ‘income from other sources’. We thus uphold the learned PCIT’s directions in principle. 10. We next note that the learned PCIT’s directions do not deserve to be agreed with on merits in light of his detailed discussion that the assessee is not eligible for claiming interest expenditure against its interest income which stands assessed as ‘income from other sources’. The Revenue’s vehement contention in support thereof is that the assessee’s interest expenditure; if any, forming subject matter of adjudication before us has to be capitalized than claimed u/s 57(iii) of the Act. We find no merit in the Revenue’s instant argument based on hon’ble apex court’s decision wherein their lordships made it clear in para 14 that “it is not the case of the assessee that the interest payment on term loans is allowable as deduction u/s 57”. The very factual position appears to have continued in the Revenue’s other decisions as well. We find in Consolidated Fibres and Chemicals Limited (supra) that their ITA Nos.1504/Hyd/2017, ITA 2246/Hyd/2017 and ITA 47/Hyd/2018 11 lordships of hon’ble Calcutta high court hold in para 16 that “but still it has to be seen whether this amount has been laid out or expended wholly and exclusively for the purpose of earning the income. Unless this test is satisfied benefit u/s 57(iii) cannot be available”. We observe that once the Revenue decides to invoke the residuary head of assessment in the case as income from “other” sources u/s 56 r.w.s. 57 of the Act, the very income indeed deserves to be subjected to “any other expenditure (not being capital in nature) was laid out or expended wholly or exclusively for the purpose of making or earning such income will be allowed as deduction in light of (iii) of the latter provisions. We thus are of the opinion that the Revenue cannot be allowed to tax an assessee’s receipt income as income from “other” sources and thereafter exclude the expenditure allowance regarding the same as it amounts to “cherry-picking” of provisions. We further quote stricter interpretation principle in Commissioner of Customs Vs. Dilip Kumar (2018) 9 SSC 1 to conclude that since sections 56 and 57 are specific taxing provisions, for the purpose of assessing income from “other” sources, the same overrides all general provisions that the interest expenditure laid out or expended wholly or exclusively for the purpose of making or earning such income would not be allowable as the same is also eligible to be capitalized (supra). We wish to make it clear that such an expenditure claim shall not be treated as an instance of double deduction in any case as a matter of caution. We thus reject the Revenue’s contentions on merits and are of the opinion that the facts of the relevant case requires us to direct the Assessing Officer to frame his afresh computation in former A.Y. 2013-14 wherein he shall assess assessee’s interest income as ITA Nos.1504/Hyd/2017, ITA 2246/Hyd/2017 and ITA 47/Hyd/2018 12 ‘income from other sources’ and allow the corresponding interest expenditure u/s 57(iii) of the Act subject to all necessary conditions incorporated therein as per law. Ordered accordingly. The assessee’s former appeal ITA 1504/Hyd/2017 is accepted for statistical purposes to this limited extent. 11. Next A.Y. 2014-15 involves Revenue’s and assessee’s cross appeal ITA 2246/Hyd/2017. We first of all find no substance in Revenue’s sole substantive grievance in principle that the CIT(A) has erred in law and on facts in allowing interest expenditure of Rs.2,77,26,027/- against its interest income. We are further of the opinion that as we have already directed the Assessing Officer to frame afresh computation of assessee’s interest income vis-à-vis the expenditure u/s 57 in A.Y. 2013-14, the very directions need to be reiterated here. Ordered accordingly. This Revenue’s appeal ITA No.2246/Hyd/2017 is accepted for statistical purposes. 12. Lastly comes the assessee’s cross appeal ITA 47/Hyd/2018 raising its sole substantive grievance that its interest income of Rs.2,84,24,110/- has been wrongly assessed as income from other sources. Needless to say, case law CIT Vs. Rassi Cement (1998) 100 Taxman 568 (Andhra Pradesh) as well as Revenue’s other decisions (supra) have already decided that such an interest income is assessable under the head ‘income from other sources’ only. We thus next reiterate our foregoing directions regarding computation of income u/s 57 of the Act in very terms. Assessee’s cross appeal ITA 47/Hyd/2018 is also allowed for statistical purposes. ITA Nos.1504/Hyd/2017, ITA 2246/Hyd/2017 and ITA 47/Hyd/2018 13 No other ground has been pressed before us. 13. The assessee’s former ITA 1504/Hyd/2017 is partly accepted for statistical purposes and latter ITA 47/Hyd/2018 as well as Revenue’s appeal ITA 2246/Hyd/2017 are allowed for statistical purposes in above terms. A copy of this common order be placed in respective case files. Order pronounced in the Open Court on 20 th December, 2021. Sd/- Sd/- Sd/- (A. MOHAN ALANKAMONY) ACCOUNTANT MEMBER (S.S. GODARA) JUDICIAL MEMBER Hyderabad, dated 20 th December, 2021. TYNM/sps Copy to: S.No Addresses 1 M/s. Chattisgarh Energy Consortium (India) Pvt. Limited, 13 th Floor, Ramky Grandiose, Ramky Towers Complex, Gachibowli, Hyderabad – 33. 2 The Income Tax Officer, Ward 1(4), Hyderabad. 3 The Pr.Commissioner of Income Tax -1, Hyderabad. 4 CIT (A) – 1, Hyderabad. 5 Pr. CIT – 1, Hyderabad. 6 DR, ITAT Hyderabad Benches 7 Guard File By Order