Hyderabad Hi-Tech Park Private Limited, Hyderabad, Hyderabad V. ITO, Ward-2(2), Hyderabad, Hyderabad

ITA 587/HYD/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 5924 (ITAT-HYDERABAD)
• Duration Of Justice: 7 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-12-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 22-11-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 25-04-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K J RAO
• Assessee Lawyers: S RAMA RAO
• Keywords: Capital receipt

Judgement Text

ITA NO 587 OF 2016 HYDERABAD HITECH PARK P LTD HYD ERABAD PAGE 1 OF 6 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S.RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO.587/HYD/2016 (ASSESSMENT YEAR: 2010-11) M/S HYDERABAD HI-TECH TEXTILE PARK PVT LTD HYDERABAD PAN: AABCH 5511 P VS INCOME TAX OFFICER WARD 2(2) HYDERABAD FOR ASSESSEE : SHRI S. RAMA RAO FOR REVENUE : SHRI K.J. RAO, DR O R D E R PER SMT. P. MADHAVI DEVI, J.M. THIS IS ASSESSEES APPEAL FOR THE A.Y 2010-11. THE ASSESSEE IS AGGRIEVED BY THE ORDER OF THE CIT (A) I N CONFIRMING THE ACTION OF THE AO IN TREATING THE INTEREST EARNED ON DEPOSITS AS INCOME FROM OTHER SOURCES AND NOT AS BUSINESS IN COME AS DECLARED BY THE ASSESSEE. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY WHICH IS SET UP FOR MANUFACTURE OF TEXTILE FABRICS, FILED ITS RETURN OF INCOME FOR THE A.Y 2010-11 ON 5.10.2010 ADMITTING NIL INCOME. THE AO REQUIRED THE ASSESSEE TO FILE VARIO US DETAILS. THE ASSESSEE FILED THE DETAILS AND ON PERUSAL OF THE SA ME, THE AO OBSERVED THAT THE ASSESSEE COMPANY WAS INCORPORATED AS A SPECIAL PURPOSE VEHICLE (SPV) TO DEVELOP A WORLD-CL ASS TEXTILE PARK WHEREIN ABOUT 108 SMALL AND MEDIUM SCALE TEXTILE PO WER-LOOM DATE OF HEARING : 22.11.2016 DATE OF PRONOUNCEMENT : 21.12.2016 ITA NO 587 OF 2016 HYDERABAD HITECH PARK P LTD HYD ERABAD PAGE 2 OF 6 ENTREPRENEURS HAVE BEEN ENVISAGED TO BECOME SUBSCRI BERS. THE WHOLE SCHEME WAS DESIGNED UNDER PUBLIC-PRIVATE-PART NERSHIP WITH GRANTS-IN-AID FROM GOVT. OF INDIA WITH A TOTAL CAPITAL OUTLAY OF RS.106.14 CRORES. PURSUANT TO THEIR OBJECTIVE, THE LAND WAS PURCHASED WITH THE CONTRIBUTIONS FROM THE MEMBERS. THE COMPANY ALSO RECEIVED GRANTS FROM THE GOVT. OF INDI A AS WELL AS FROM THE STATE GOVT. TO THE TUNE OF RS.13.10 CRORES AND UTILIZED THE SAME FOR INFRASTRUCTURE DEVELOPMENT OF THE PROJ ECT. THE AO OBSERVED FROM THE ANNUAL REPORT OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION THAT THE COMPANY COMPLETED CONS TRUCTION OF THE COMPOUND WALL, 10 WORK SHEDS, CULVERTS ETC AND THAT THE PROJECT IS UNDER PROGRESS. FURTHER, FROM THE BALANCE SHEET OF THE COMPANY, THE AO OBSERVED THAT THE ASSESSEE HAD SHOW N A SUM OF RS.2,07,88,824 AS PRE-OPERATIVE EXPENDITURE PENDING ALLOCATION. ON PERUSAL OF THE SCHEDULES ENCLOSED TO THE BALANCE SHEET, THE AO FOUND THAT THE ASSESSEE COMPANY HAS NETTED OFF THE PRE-OPERATIVE EXPENSES WITH INTEREST INCOME OF RS.11,06,816 RECEI VED DURING THE YEAR ON FIXED DEPOSITS OUT OF THE GRANTS RECEIVED. OBSERVING THAT THE PROJECT IS STILL UNDER PROGRESS, THE AO WAS OF THE OPINION THAT THE EXPENSES PRIOR TO SET UP OF BUSINESS CANNOT BE SAID TO BE INCURRED FOR THE BUSINESS CARRIED ON BY THE ASSESSE E AND THEREFORE HAS TO BE CAPITALIZED. DURING THE COURSE OF THE ASS ESSMENT PROCEEDINGS, THE ASSESSEE WAS ASKED TO SUBSTANTIATE THE NETTING OF THE PRE-OPERATIVE EXPENSES WITH THE INTEREST INCOME . 3. IN RESPONSE, THE ASSESSEE SUBMITTED THAT BEFORE UTILIZING THE GRANT RECEIVED FOR CONSTRUCTION OF TH E PROJECT, THE MONEYS WERE PARKED IN FIXED DEPOSITS FOR SHORTER PER IOD AND SINCE THE ACTUAL BUSINESS HAS NOT COMMENCED DURING THE YEAR, THE INTEREST RECEIVED ON THESE FDS WOULD REDUCE THE PRE-OPERATIVE ITA NO 587 OF 2016 HYDERABAD HITECH PARK P LTD HYD ERABAD PAGE 3 OF 6 EXPENSES. THE ASSESSEE ALSO PLACED RELIANCE UPON TH E FOLLOWING DECISIONS: A) CIT VS. KARNATAKA POWER CORPORATION (247 ITR 268 ) B) CIT VS. BOKARO STEEL LTD (236 ITR 315) C) CIT VS. KAMAL COOPERATIVE SUGAR MILLS LTD, BONGAIGAON REFINERY & PETROCHEMICALS LTD V. CIT (25 1 ITR 329) 4. THE AO WAS HOWEVER, NOT CONVINCED WITH THE ASSESSEES CONTENTIONS. HE HELD THAT UNLESS THERE I S AN INDIVISIBLE NEXUS WITH THE NATURE OF THE BUSINESS OF THE ASSESS EE, INTEREST EARNED ON FDS, BEFORE COMMENCEMENT OF BUSINESS, IS TO BE TREATED AS INCOME FROM OTHER SOURCES. HE OBSERVED T HAT THE ASSESSEE COMPANY, DURING THE PERIOD OF CONSTRUCTION AND ESTABLISHMENT OF ITS PROJECT, INVESTED ITS FUNDS IN SHORT TERM DEPOSITS WITH BANKS AND EARNED INTEREST THEREON AND THE ACT OF THE ASSESSEE IS DRIVEN BY COMMON BUSINESS REQUIREME NTS AND NOT BY ANY COMPULSION; AS WAS THE CASE OF THE ASSESSEES IN THE CASE LAWS RELIED UPON BY THE ASSESSEE. THEREFORE, HE TRE ATED THE INTEREST INCOME AS INCOME FROM OTHER SOURCES AND BR OUGHT IT TO TAX. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BE FORE THE CIT (A) WHO CONFIRMED THE ORDER OF THE AO AND THE ASSESSEE IS IN SECOND APPEAL BEFORE US. 5. THE LEARNED COUNSEL FOR THE ASSESSEE PLACED RELI ANCE UPON THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE T HE CIT (A) WHICH ARE REPRODUCED BY THE CIT (A) IN HIS ORDER AT PARA 5.1. HE ALSO DISTINGUISHED THE FACTS OF THE ASSESSEES CASE FROM THE FACTS OF THE CASE OF M/S. KAKINADA SEZ PRIVATE LTD FOR THE A. Y 2007-08 ON WHICH THE CIT (A) HAS PLACED RELIANCE UPON TO CONFI RM THE DISALLOWANCE OF THE CLAIM OF THE ASSESSEE. ITA NO 587 OF 2016 HYDERABAD HITECH PARK P LTD HYD ERABAD PAGE 4 OF 6 6. LEARNED DR, HOWEVER, SUPPORTED THE ORDERS OF TH E AUTHORITIES BELOW. 7. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE M ATERIAL ON RECORD, UNDISPUTEDLY THE ASSESSEE HAS RECEIVED T HE GRANTS-IN- AID FROM THE GOVT. OF INDIA AND THE STATE GOVT. AND THE ASSESSEE HAS PLACED THE UNUTILIZED FUNDS IN THE ESCROW A/C. IT IS THE CASE OF THE ASSESSEE THAT SINCE THE AMOUNTS HAVE BEEN KE PT IN THE ESCROW A/C, THE FUNDS CANNOT BE USED FOR ANY OTHER PURPOSE AND THE FUNDS DID NOT BELONG TO THE ASSESSEE AS WELL. A CCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE, THE INTEREST INCO ME IS NOT THE INCOME OF THE ASSESSEE BUT ONLY GOES TO THE INCREAS E THE GRANTS- IN-AID AND ONE OF THE CONDITIONS OF GRANTS-IN-AID I S THAT THE UNUTILIZED AMOUNTS HAVE TO BE RETURNED TO THE GOVT. ALONG WITH THE INTEREST. THEREFORE, THE INTEREST INCOME DERIVE D BY THE ASSESSEE IS ALSO THE INCOME OF THE GOVT. AND NOT OF THE ASSESSEE AND HENCE IT OUGHT TO HAVE BEEN ALLOWED TO BE SET O FF AGAINST THE PRE-OPERATIVE EXPENSES. WE FIND THAT SIMILAR ISSUE HAD ARISEN BEFORE THE HON'BLE DELHI HIGH COURT IN THE FOLLOWIN G CASES: (I) CIT VS. SASAN POWER LTD, REPORTED IN (2012) 18 TAXMANN.COM 182 (DELHI.) (II) INDIAN OIL PANIPAT POWER CONSORTIUM LTD REPORT ED IN (2009) 181 TAXMANN.COM 249 (DEL.) THE HON'BLE DELHI HIGH COURT IN THE CASE OF INDIAN OIL PANIPAT POWER CONSORTIUM LTD (SUPRA) AT PARA 5 TO 5.2 OF IT S ORDER HELD AS UNDER: 5. IN OUR OPINION THE TRIBUNAL HAS MISCONSTRUED THE RATIO OF THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF TUTICO RIN ALKALI CHEMICALS (SUPRA) AND THAT OF BOKARO STEEL LTD. (SU PRA). THE TEST WHICH PERMEATES THROUGH THE JUDGMENT OF THE SUPREME COURT IN TUTICORIN ALKALI CHEMICALS (SUPRA) IS THAT IF FUNDS HAVE BEEN BORROWED FOR SETTING UP OF A PLANT AND IF THE FUNDS ARE SURPLUS ITA NO 587 OF 2016 HYDERABAD HITECH PARK P LTD HYD ERABAD PAGE 5 OF 6 AND THEN BY VIRTUE OF THAT CIRCUMSTANCE THEY ARE IN VESTED IN FIXED DEPOSITS THE INCOME EARNED IN THE FORM OF INTEREST WILL BE TAXABLE UNDER THE HEAD 'INCOME FROM OTHER SOURCES . ON THE OTHER HAND THE RATIO OF THE SUPREME COURT JUDGMENT IN BOKARO S TEEL LTD. (SUPRA) TO OUR MIND IS THAT IF INCOME IS EARNED, WH ETHER BY WAY OF INTEREST OR IN ANY OTHER MANNER ON FUNDS WHICH A RE OTHERWISE INEXTRICABLY LINKED TO THE SETTING UP OF THE PLANT, SUCH INCOME IS REQUIRED TO BE CAPITALIZED TO BE SET OFF AGAINST PR E-OPERATIVE EXPENSES. 5.1 THE TEST, THEREFORE, TO OUR MIND IS WHETHER THE ACTIVITY WHICH IS TAKEN UP FOR SETTING UP OF THE BUSINESS AND THE FUNDS 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 STATES THAT FOR NEWLY SET UP BUSINESS THE PREVIOUS YEAR SHALL BE THE PERIOD BEGINNING WITH THE DATE OF SETTING UP OF THE BUSINESS. THEREFORE, AS PER THE PROVISION 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 COMMEN CEMENT IS CHARGEABLE TO TAX DEPENDING ON WHETHER IT IS OF A R EVENUE NATURE OR CAPITAL RECEIPT. THE INCOME OF A NEWLY SET UP BU SINESS, POST THE DATE OF ITS SETTING UP CAN BE TAXED IF IT IS OF A R EVENUE NATURE UNDER ANY OF THE HEADS PROVIDED UNDER SECTION 14 IN CHAPTER IV OF THE ACT. FOR AN INCOME TO BE CLASSIFIED AS INCOM E UNDER THE HEAD 'PROFIT AND GAINS OF BUSINESS OR PROFESSION' I T WOULD HAVE TO BE AN ACTIVITY WHICH IS IN SOME MANNER OR FORM CONN ECTED WITH BUSINESS. THE WORD 'BUSINESS' IS OF WIDE IMPORT WHI CH WOULD ALSO INCLUDE ALL SUCH ACTIVITIES WHICH COALESCE INT O SETTING UP OF THE BUSINESS. SEE MAZAGAON DOCK LTD VS CIT & EXCESS PROFITS TAX ; (1958) 34 ITR 368 (SC), AND NARAIN SWADESHI WEAVI NG MILLS VS COMMISSIONER OF EXCESS PROFITS TAX ; (1954) 26 ITR 765 (SC). ONCE IT IS HELD THAT THE ASSESSEE S 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 T HE MONIES WHICH WERE INDUCTED 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 THA T THE INCOME DERIVED BY PARKING THE FUNDS TEMPORARILY WITH TOKYO MITSUBISHI BANK, WILL RESULT IN THE CHARACTER OF THE FUNDS BEI NG CHANGED, IN AS MUCH AS, THE INTEREST EARNED FROM THE BANK WOULD HAVE A HUE DIFFERENT THAN THAT OF BUSINESS AND BE BROUGHT TO T AX UNDER THE HEAD INCOME FROM OTHER SOURCES'. IT IS WELL-SETTLE D THAT AN INCOME RECEIVED BY THE ASSESSEE CAN BE TAXED UNDER THE HEAD 'INCOME FROM OTHER SOURCES' ONLY IF IT DOES NOT FAL L UNDER ANY OTHER HEAD OF INCOME AS PROVIDED IN SECTION 14 OF THE ACT. THE HEAD 'INCOME FROM OTHER SOURCES' IS A RESIDUARY HEA D OF INCOME. SEE S.G. MERCANTILE CORPORATION P. LTD VS C IT, CALCUTTA ; (1972) 83 ITR 700 (SC) AND CIT VS GOVINDA CHOUDHURY & SONS .; (1993) 203 ITR 881 (SC). ITA NO 587 OF 2016 HYDERABAD HITECH PARK P LTD HYD ERABAD PAGE 6 OF 6 5.2 IT IS CLEAR UPON A PERUSAL OF THE FACTS AS FOUN D BY THE AUTHORITIES BELOW THAT THE FUNDS IN THE FORM OF SHA RE CAPITAL WERE INFUSED FOR A SPECIFIC PURPOSE OF ACQUIRING LAND AN D THE DEVELOPMENT OF INFRASTRUCTURE. THEREFORE, THE INTER EST 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 AN D HENCE WAS REQUIRED TO BE SET OFF AGAINST PRE-OPERATIVE EXPENS ES. IN THE CASE OF TUTICORIN ALKALI CHEMICALS (SUPRA) IT WAS FOUND BY THE AUTHORITIES THAT THE FUNDS AVAILABLE WITH THE ASSES SEE IN THAT CASE WERE SURPLUS AND, THEREFORE, THE SUPREME 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 STEEL LTD (SUPRA) WHERE THE ASSESSEE HAD EARNED INTEREST ON ADVANCE PAID TO CONTRACTORS DURING PRE-COMMENCEMENT PERIOD WAS FOUND TO BE INEXTRICABLY LINKED TO THE SETTING UP OF THE PLANT OF THE ASSESSEE AND HENCE WAS HELD TO BE A CAPITAL RECEIPT WHICH WAS PERMITTED TO BE SET OFF AGAINST PRE-OPERATIVE EXPEN SES. THEREFORE, RESPECTFULLY FOLLOWING THE ABOVE DECISIO NS, THE ASSESSEES APPEAL IS ACCORDINGLY ALLOWED. 8. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST DECEMBER, 2016. SD/- SD/- (S.RIFAUR RAHMAN) ACCOUNTANT MEMBER (P. MADHAVI DEVI) JUDICIAL MEMBER HYDERABAD, DATED 21 ST DECEMBER, 2016. VINODAN/SPS COPY TO: 1 SHRI S. RAMA RAO, ADVOCATE, FLAT NO.102, SHRIYAS ELEGANCE, 3-6- 643 STREET NO.9 HIMAYATNAGAR, HYDERABAD 500029 2 INCOME TAX OFFICER WARD 2(2) SIGNATURE TOWERS, KO NDAPUR, HYDERABAD 3 CIT (A)-2 HYDERABAD 4 PR. CIT 2 HYDERABAD 5 THE DR, ITAT HYDERABAD 6 GUARD FILE BY ORDER