Madhya Pradesh High Court
M/S Bharat Oman Refineries Ltd vs Income Tax Officer Bhopal on 19 September, 2014
Author: Rajendra Menon
Bench: Rajendra Menon
HIGH COURT OF MADHYA PRADESH, JABALPUR
Income Tax Appeal No.16/2001
M/s Bharat Oman Refineries Ltd, Mumbai
Versus
Income Tax Officer, Bhopal
Present : Hon. Shri Justice Rajendra Menon
Hon. Shri Justice A.K.Sharma
Shri Sumit Nema and Shri Mukesh Agarwal, counsel for
appellant.
Shri Sanjay Lal, counsel for respondent.
Whether approved for reporting: Yes/No.
ORDER
(19.9.2014) Per Rajendra Menon, J :
This is assessee's appeal under the provisions of section 260-A of the Income Tax Act, 1961.
2. The appeal was admitted on 29.10.2001 for considering the following substantial question of law :-
"Whether the income from interest could be taxed holding it to be covered from prima facie adjustment under section 143(1)(a) of the Act ?"
3. The facts in brief necessary for disposal of this appeal goes to show that the assessee company is a joint venture undertaking formed by M/s Bharat Petroleum 2 I.T.A.No.16/2001 M/s Bharat Oman Refineries Ltd, Mumbai Vs Income Tax Officer, Bhopal Corporation Limited and M/s Oman Oil Company Limited by virtue of a joint venture agreement executed between these companies on 23.12.1993. The present assessee company was incorporated on 25.2.1994.
4. The appeal in question relates to the assessment year 1995-96 and the accounting year is said to have ended on 31.3.1995. It is said that for the assessment year in question a return showing nil income was filed, as during the aforesaid period the establishment was under
installation and no production had commenced. However alongwith the return, statement of income and expenditure was filed vide Annexure A-1 and in this statement income from interest to the tune of Rs.5,39,038/- on account of Short Term Deposit with the bank was indicated. The assessing officer made assessment under section 143(1)(a) of the Income Tax Act, 1961 (hereinafter referred to as 'Act' for short) and treating the sum of Rs.5,39,038/- as income from "other sources" determined tax at Rs.2,15,616/-, surcharge of Rs.32,342/- and a certain addition under section 143 (1)
(a) of the Act to the tune of Rs.43,123/- was made. The total tax of Rs.2,91,081/- was imposed. On this, interest, under section 234-B at Rs.39,673/- was also added. Be it as it may be the assessee challenged the aforesaid by pointing out that interest income could not be added under the head income from other sources and as the question was a debatable one it could not be assessed as prima facie admissible under section 143(1)(a) of the Act, a contention was advanced to say that the assessment and addition made under the purview of prima facie 3 I.T.A.No.16/2001 M/s Bharat Oman Refineries Ltd, Mumbai Vs Income Tax Officer, Bhopal adjustment as contemplated under section 143(1)(a) of the Act is not permissible. It is said that the matter should have been considered only while processing for regular assessment under section 143(3) and not under section 143(1)(a) of the Act. When the contention so advanced was not considered both before the appellate authority namely the Commissioner (Appeals) and the appellate Tribunal, this appeal has been filed on the question as indicated herein.
5. Shri Sumit Nema submitted that when a debatable question arises and when the issue is contentious, prima facie adjustment under section 143(1)(a) of the Act is not permissible and having accepted the same merely based on the judgment of Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT [(1997) 227 ITR 172 (SC)] and a Division Bench judgment of this Court in the case of M.P.State Industries Corporation Ltd. Vs. Commissioner of Income Tax [(1968) 69 ITR 824 (MP)] the assessment is unsustainable. Shri Nema argued that the income in question was received before commencement of production and was earned as interest due to compulsorily keeping of the funds in Bank as margin money against performance guarantee issued for securing the contract and merely because in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) by the Supreme Court and M.P.State Industries Corporation Ltd. (supra) by the High Court, it is held that the interest income earned is taxable under other sources of income, the issue could not be decided under 4 I.T.A.No.16/2001 M/s Bharat Oman Refineries Ltd, Mumbai Vs Income Tax Officer, Bhopal section 143(1)(a) of the Act and in doing so the Tribunal and appellate authority mis-directed itself. Taking us through the judgment of Supreme Court in the case of Commissioner of Income Tax Vs. Producin (P.) Ltd [(2010) 322 ITR 270(SC)] and judgment of Bombay High Court in the case of Shree Krishna Polyster Ltd. Vs. Deputy Commissioner of Income Tax [(2005) 195 CTR (Bom) 206], Shri Sumit Nema submitted that the question framed be answered in favour of the assessee and the entire assessment proceedings be quashed.
6. Learned counsel for appellant further submitted that in this case the interest in question was earned from deposit which was done compulsorily as the terms and conditions of contract require keeping of the funds in the bank as a margin money against performance guarantee issued for securing contract. Inviting our attention to the judgment of Supreme Court in the case of CIT Vs. Karnal Cooperative Sugar Mills Ltd. [(2000) 243 ITR 2 (SC)] and CIT Vs. Bokaro Steel Ltd. [(1999) 236 ITR 315 (SC)], Shri Nema argued that if the interest is earned from any amount which has got nexus with the activities that are inextricably linked with setting up of the capital structure of the company, then the interest cannot be treated to be received from other sources, but it should be treated as income received in connection with the business and therefore the exemption.
7. Refuting the aforesaid, Shri Sanjay Lal, learned counsel for respondent reiterated that the question involved in this case has already been considered finally 5 I.T.A.No.16/2001 M/s Bharat Oman Refineries Ltd, Mumbai Vs Income Tax Officer, Bhopal in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and M.P.State Industries Corporation Ltd. (supra), but in the case of same assessee in I.T.A.No.238/2012 similar question of law framed has been rejected. He invites our attention to the order dated 29.4.2013 passed in I.T.A.No.238/2012 wherein the questions were framed in following manner :-
"(i) Whether the Tribunal is correct in law in basing its finding on erroneous finding of AO about nexus of funds invested in FDR, and holding that the interest which accrued on equity funds deployed with the Bank could be taxed as income from other sources and not as a capital receipt liable to be set off against pre operative expenses ?
(ii) Whether the Tribunal was correct in law in holding that the interest earned by the assessee by short term investment of zero coupon debentures funds is liable to Income Tax as income from other sources ?"
It is submitted that in the aforesaid case this Court has answered against the same assessee after relying upon the judgment in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra).
8. We have considered the rival contentions and we find that in I.T.A.No.238/2012 decided by a coordinate Bench of this Court on 29.4.2013 the question as to whether the Tribunal was correct in holding the interest earned by the assessee by short 6 I.T.A.No.16/2001 M/s Bharat Oman Refineries Ltd, Mumbai Vs Income Tax Officer, Bhopal term investment liable to income tax, has been answered against the assessee and it has been held that such interest is liable for taxation as income from other sources, but the question framed in this appeal particularly with regard to the nature of dispute is not considered in the said case.
9. During the course of hearing Shri Sanjay Lal, learned counsel for respondent emphasized that the judgment relied upon by the assessee in the case of Karnal Cooperative Sugar Mils Ltd. (supra) is already considered by a coordinate Bench of this Court in I.T.A.No.238/2012 and therefore the contention of Shri Nema is not correct. We have gone through the order passed in I.T.A.No.238/2012 dated 29.4.2013 and we find that in the said case the questions of law framed are already quoted in the preceding paragraphs and we find that the nature of deposit for the years, which was subject matter of dispute in I.T.A.No.238/2012 are entirely different. In those cases the interest were earned on fixed deposit made out of borrowed funds which was akin to the interest earned in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), whereas in the present case the interest is earned on deposit made for the purpose of getting performance guarantee from the Bank. Even though the judgment in the case of Karnal Cooperative Sugar Mills Ltd. seems to have been cited before the Bench in I.T.A.No.238/2012 and the same is only referred to but there is no discussion about the said judgment, 7 I.T.A.No.16/2001 M/s Bharat Oman Refineries Ltd, Mumbai Vs Income Tax Officer, Bhopal nature of deposits made. It seems that the Bench found that the deposit in the said case was like the one considered by the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. and did not deem it appropriate to refer to the judgment in the case of Karnal Cooperative Sugar Mills Ltd. However in the present case the nature of deposit is similar to the deposit indicated in the case of Karnal Cooperative Sugar Mills Ltd. and therefore we are not inclined to accept the contention of Shri Sanjay Lal. That apart Shri Lal has cited a judgment of Delhi High Court in the case of Commissioner of Income Tax Vs. Indian Vaccines Corporation Ltd. [(2014) 363 ITR 0295] but on going through the aforesaid judgment, we find that the said judgment only relied upon the judgment of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and the judgment of Bokaro Steel Ltd. (supra), there is no reference to the judgment in the case of judgment of Karnal Cooperative Sugar Mills Ltd. (supra) and the nature of deposit in the case and its nexus with the interest earned alongwith their relationship for the purpose of acquisition of assets for setting up of establishment.
10. Much emphasis was made by Shri Sumit Nema to say that when a contentious or debatable issue is raised, its adjudication under section 143(3) of the Act after following the regular process of assessment was necessary and proceeding in the matter by treating it to be prima facie adjustment under 8 I.T.A.No.16/2001 M/s Bharat Oman Refineries Ltd, Mumbai Vs Income Tax Officer, Bhopal section 143(1)(a) of the Act, error is committed. It is argued by Shri Sumit Nema that now in the light of the law laid down in the case of Karnal Cooperative Sugar Mills Ltd. and Bokaro Steel Ltd. (supra) the law laid down in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) will not apply, as the nature of deposit in the present case and its nexus with the pre-production activity is a debatable issue.
11. We find that the Tribunal had gone into the question and after accepting the appellants proposal that contentious and debatable question should not be proceeded under section 143(1)(a) of the Act, it answered by holding that once the law is settled by the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and also by the jurisdictional High Court in the case of M.P.State Industries Corporation Ltd. (supra), the question whether the issue is contentious or debatable does not arise as the issue has been settled under the law and therefore could be proceeded under section 143(1)(a) of the Act.
12. That being the position we may proceed to examine the law laid down by the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). In the said case also the establishment of assessee had not commenced its business as is the factual position in the present case. The assesseee in that case also made Short 9 I.T.A.No.16/2001 M/s Bharat Oman Refineries Ltd, Mumbai Vs Income Tax Officer, Bhopal Term Deposit with the bank out of term loan secured from financial institutions and the interest earned by the assessee before commencement of business was assessed as income chargeable under the head income from other sources. In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) such income was held to be income from other sources.
13. Similarly the Division Bench of Madhya Pradesh High Court in the case of M.P.State Industries Corporation Ltd. (supra) has held that the interest earned by the assessee even though not income from business but was chargeable as income from other sources. It is therefore clear that in the matter of income earned by interest even before commencement of business in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) the income of assessee was added as income received from other sources and tax was charged, as was done in the present case.
14. From the aforesaid it would be clear that even if the interest is earned by the assessee in the manner as is indicated to in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) by term deposit with the bank and it is held to be chargeable as income from other sources. In the case of Karnal Cooperative Sugar Mills Ltd. (supra), the principle laid in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) is reconsidered and it was found that in the said case 10 I.T.A.No.16/2001 M/s Bharat Oman Refineries Ltd, Mumbai Vs Income Tax Officer, Bhopal the assessee had deposited the amount to open a letter of credit for purchase of machinery for setting up the plant. This was done in accordance to the agreement entered into by the assessee and the supplier and based on this it was found that this interest is earned on an amount deposited, which was primarily to be used for purchase of setting up of machinery, the interest earned on such deposit cannot be said to be interest or income received from other sources, but has to be considered as income received from business.
15. In the matter of Karnal Cooperative Sugar Mills Ltd. (supra) the Supreme Court has so dealt with :-
"In the present case, the assessee had deposited money to open a letter of credit for the purchase of the machinery required for setting up its plant in terms of the assessee's agreement with the supplier. It was on the money so deposited that some interest has been earned. This is, therefore, not a case where any surplus share capital money which is lying idle has been deposited in the bank for the purpose of earning interest. The deposit of money in the present case is directly linked with the purchase of plant and machinery.
Hence, any income earned on such deposit is incidental to the acquisition of assets for the setting up of the plant and machinery. In this view of the matter the ratio laid down by this court in Tuticorin Alkali Chemicals and Fertilizers Limited v. CIT, will not be attracted. The more appropriate decision in the factual situation in the present case is in CIT v. Bokaro Steel Ltd. The appeal is dismissed."
11I.T.A.No.16/2001 M/s Bharat Oman Refineries Ltd, Mumbai Vs Income Tax Officer, Bhopal
16. In this case also the appellant has not earned interest on the money lying idle with him for running industry. On the contrary by virtue of terms and conditions of the contract petitioner was to submit a performance guarantee and for the same he had to deposit certain funds with the Bank as margin money and it is on this margin money the interest was earned. That being so there is difference in the source from which the interest was earned in the present case and application of the principles of law laid down in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), becomes doubtful.
17. In the case of Bokaro Steel Ltd. (supra) the company which was a Government Company at the time of construction of its plant had advanced various amounts to its contractor and on the advance made to its contractor it received interest, rent from quarters given to the employees of the contractor and hire charges on certain plants and machinery. The interest earned on such advance were considered by the Supreme Court and it was found that these activities are intricately connected with the construction activities and interest earned, rent received, hire charges, royalty etc, cannot be treated as interest or income received from other sources.
18. If the judgment of Supreme Court in the matter are read, particularly in the case of Karnal Cooperative Sugar Mills Ltd. (supra), we find that the question of receipt of interest on the deposit and 12 I.T.A.No.16/2001 M/s Bharat Oman Refineries Ltd, Mumbai Vs Income Tax Officer, Bhopal the nature of deposit has to be analyzed and its to be seen as to what is its nexus with setting up of capital structure of assessee company. If it is found that the receipt of interest has some nexus and are linked to certain factors relatable to the setting up of capital, they can be set-off against each other as they are considered to be capital which would go to reduce the cost of capital structure.
19. In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) interest was earned by investing in borrowed fund in short terms deposit which was an independent source of income and had no nexus with the construction activities. However in the case of Karnal Cooperative Sugar Mills Ltd. and Bokaro Steel Ltd. (supra) there seems to be a deviation from earlier thinking and it is found that if the deposit of money is directly linked with purchase of plant and machinery as is seen in the case of Karnal Cooperative Sugar Mills Ltd . (supra), then such income earned is held to be incidental to acquisition of assets for setting up of plant and machinery and exemption has been granted. That being so looking to the nature of deposit in the present case and the source from which income has been received, we are of the considered view that a debatable question arises for consideration and it cannot be said that in view of the law laid down in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) or M.P.State Industries Corporation Ltd. (supra), a prima facie assessment 13 I.T.A.No.16/2001 M/s Bharat Oman Refineries Ltd, Mumbai Vs Income Tax Officer, Bhopal adjustment under section 143(1)(a) of the Act is permissible.
20. In the light of the nature of deposit made and the source from which the interest is received in the present case if the law laid down in the case of Karnal Cooperative Sugar Mills Ltd. (supra) is applicable, then the interest earned may not fall in the category of income from other sources, but may come in the category of income earned from business. That being the legal position it is to be held that in the matter of assessment of income in question a debatable question arises and therefore taxing of income in the facts and circumstances of the present case holding it to be covered as prima facie adjustment under section 143(1)(a) is not correct.
21. Accordingly we answer the reference in favour of the assessee and hold that the question as to whether the income in the facts and circumstances of the present case could be taxed under the provisions of section 143(1)(a) of the Act holding it to be prima facie adjustable, is not correct. The question is a debatable one and it requires consideration in accordance to the provisions of section 143.
22. Accordingly, we allow this appeal. Answer the question as indicated hereinabove and set aside the orders passed by the appellate authorities.
14I.T.A.No.16/2001 M/s Bharat Oman Refineries Ltd, Mumbai Vs Income Tax Officer, Bhopal
23. In view of aforesaid, the reference is answered and the appeal stands disposed of.
(Rajendra Menon) (A.K.Sharma)
Judge Judge
M