Income Tax Appellate Tribunal - Kolkata
Electrosteel Steels Limited, Kolkata vs Dcit, Cen, Cir-Xxi, Kolkata, Kolkata on 15 November, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH : KOLKATA
[Before Hon'ble Shri Aby. T. Varkey, JM & Shri M.Balaganesh, AM ]
I.T.(SS).A Nos. 29 & 30/Kol/2014
Assessment Years : 2008-09 & 2009-10
Electrosteel Steels Ltd. -vs- DCIT, CC-XXI, Kolkata
(formerly known as Electrosteel Integrated Ltd.)
[PAN: AABCE 6875 H]
(Appellant) (Respondent)
For the Appellant : Shri Pritam Chowdhury, AR
For the Respondent : Shri Goulean Hangshing, CIT, DR
Date of Hearing : 02.112017
Date of Pronouncement : 15.11.2017
ORDER
Per M.Balaganesh, AM
1. These appeals are preferred by the assessee against the orders of the Learned Commissioner of Income Tax (Appeals) , Central-II, Kolkata [in short the ld CITA] vide Appeal Nos. 196 & 197 /CC-XXI/CIT(A)C-II/11-12 dated 30.12.2013 for Asst Years 2008-09 and 2009-10 respectively. Assessments were framed by the Learned Deputy Commissioner of Income Tax, Central Circle -XXI, Kolkata [ in short the ld AO] u/s 153C/ 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the 'Act') for Asst Year 2008-09 and u/s 143(3) of the Act for the Asst Year 2009-10 dated 21.12.2011. Since identical facts are involved in both the appeals, they are taken up together and disposed off by this common order for the sake of convenience.
2. We find that the assessee had raised several grounds revolving around one issue i.e the chargeability of interest income on deposits to tax. The central issue involved in these appeals is as to whether the ld CITA was justified in confirming the addition made 2 IT(SS)A Nos.29 & 30/Kol/2014 Electrosteel Steels Ltd. (Formerly known as Electrosteel Integrated Ltd.
A.Yrs.2008-09 & 2009-10 on account of interest income on deposits earned by the assessee, in the facts and circumstances of the case.
3. The brief facts of this issue is that the assessee is a company incorporated on 20.12.2006 under the Companies Act, 1956. The assessee is engaged in the business of setting up a 2.2 MTPA Iron & Steel Plant including a Ductile Iron Pipes and Fitting Plant (in short ' the plant') in the State of Jharkhand,, interalia, to manufacture Straight Bars, Iron Rods and Ductile Iron Pipes. The assessee was incorporated for setting of the steel plant and the same was in progress and production at the steel plant had not started. The assessee filed its original return of income for the Asst Year 2008-09 on 29.9.2008 showing total income of Rs 3,69,38,763/- under the normal provisions of the Act and tax liability of Rs 1,26,61,361/- was discharged by tax deducted at source of Rs 83,69,850/- , advance tax of Rs 39,50,000/- and payment of self assessment tax of Rs 3,41,510/-. Subsequently the assessee filed the revised return of income on 31.8.2009 showing total income at Rs Nil and claiming refund of Rs 1,26,61,361/- under the normal provisions of the Act and the same was intimated to erstwhile AO vide letter dated 31.8.2009.
3.1. M/s Electrosteel Casting Ltd is the related party of the assessee. A search and seizure operation u/s 132 of the Act was conducted on 19.3.2009 at the premises of Electrosteel Casting Ltd, wherein certain documents / details in relation to the assessee were seized by income tax department. Based on the documents seized thereon, proceedings u/s 153C were initiated on the assessee and assessee vide its letter dated 23.8.2011 submitted that the revised return filed on 31.8.2009 should be treated as a return filed in response to notice issued u/s 153C of the Act. The assessee furnished the details / explanation as desired by the ld AO in the assessment proceedings. The assessee earned interest income of Rs 3,69,36,403/- in the Asst Year 2008-09 as below:-
2 3IT(SS)A Nos.29 & 30/Kol/2014 Electrosteel Steels Ltd. (Formerly known as Electrosteel Integrated Ltd.
A.Yrs.2008-09 & 2009-10
Particulars Interest Interest Total
Received Accrued Interest Income
Interest on FD with SBI CAG
Branch from temporarily parked
Money out of equity funds 1,92,73,564 1,57,74,280 3,50,47,844
Interest on FD with SBI CAG
Branch from temporarily parked
Money out of Term Loan funds 18,88,559 18,88,559
---------------------------------------------------- 1,92,73,564 1,76,62,839 3,69,36,403
-----------------------------------------------------
3.2. The ld AO asked the assessee to show cause as to why interest income of Rs 3,69,36,403/- earned during the Asst Year 2008-09 should not be taxed as 'income from other sources'. In response, the assessee vide its letter dated 15.11.2011 submitted as under:-
"4. In the instant case, during the AY 2008-09 the company was setting up a 2.2 MTPA Iron & Steel Plant including a Ductile Iron Pipes and Fitting Plant ("the Plant") in the State of Jharkhand, inter alia, to manufacture, Straight Bars, Iron Rods and Ductile Iron Pipes. Further the object of the company as per the Memorandum and Articles of Association of the company include investing surplus fund of the company for earning interest income. Copy of the Memorandum and Articles of Association of the company. Relevant extracts of the Memorandum and Articles of Association, has been reproduced herewith as below:
"9. To invest any moneys of the Company out of own surplus fund of the company not immediately required in such investment as may be thought proper".
5. Therefore, the company as per the objects of the Memorandum and Articles of Association has invested the amount and earned interest income. The interest income earned by the company does not de hors the business which is carried on by it but is attributable and incidental to the business carried on by company. The monies which were inducted by the shareholders into the company and borrowed by the company were primarily infused for the purpose of business i.e. for setting up the .plant. The funds were placed in fixed deposit so that the liquidity was ensured and money would remain available when required for setting up the plant and hence is attributable and incidental to the business carried on by company. Thus the interest income earned out 3 4 IT(SS)A Nos.29 & 30/Kol/2014 Electrosteel Steels Ltd. (Formerly known as Electrosteel Integrated Ltd.
A.Yrs.2008-09 & 2009-10 of such money is chargeable under the head "Business and Profession". In this regard it is pertinent to note that an income received 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 s. 14 of the Act. The head "Income from other sources" is a residuary head of income. In the instant case since the interest income is chargeable under the head "Business and Profession" hence the same cannot be chargeable to tax under the head "Income from Other Sources". Reliance in this regard is placed on the following decisions:
6. The Hon'bIe Supreme Court in Commissioner of Income-tax Vs Govinda Choudhury & Sons reported in (1994) 74 Taxman 331(SC) has held as follows:
"This brings us to a consideration of the second question. The sum of Rs. 2,77,692 was received by the assessee as interest on the amounts which were determined to be payable by the assessee in respect of certain contracts executed by the assessee and in regard to the payments under which there was a dispute between the two parties. The assessee is a contractor. Its business is to enter into contracts. In the course of the execution of these contracts, it has also to face disputes with the State Government and it has also to reckon with delay in payment of amounts that are due to it. If the amounts are not paid at the proper time and interest is awarded or paid for such delay, such interest is only an accretion to the assessee's receipts from the contracts. It is obviously attributable and incidental to the business carried on by it. It would not be correct to say, as the Tribunal has held, that this interest is totally de hors the contract business carried on by the assessee. It is well-settled that interest can be assessed under the head 'Income from other sources' only if it cannot be brought within one or the other of the specific heads of charge. We find it difficult to comprehend how the interest receipts by the assessee can be treated as receipts which flow to it de hors the business which is carried on by it. In our view, the interest payable to it certainly partakes of the same character as the receipts for the payment of which it was otherwise entitled under the contract and which payment has been delayed as a result of certain disputes between the parties. It cannot be separated from the other amounts granted to the assessee under the award and treated as 'income from other sources'. The second question is, therefore, answered in favour of the assessee and against the revenue. "
7. The Hon'ble Madras High Court in CIT Vs Tamil Nadu Dairy Development Corpn. Ltd reported in (1995) 216 ITR 535 (Mad) has held as follows:
"In CIT v. Calcutta National Bank Ltd. [1959J 37 ITR 171, the Supreme Court has observed as follows: 'The term, 'business' is a word of very wide, though by no means determinate, scope. It has rightly been observed in judicial decisions of high authority that it is neither practicable nor desirable to make any attempt at de-limiting the ambit of its connotation. Each case has to be determined with reference to the particular kind of activity and occupation of the person concerned. Though ordinarily, 'business' implies a continuous 4 5 IT(SS)A Nos.29 & 30/Kol/2014 Electrosteel Steels Ltd. (Formerly known as Electrosteel Integrated Ltd.
A.Yrs.2008-09 & 2009-10 activity in carrying on a particular trade or avocation, it may also include an activity which may be called, 'quiescent'.' Upon the facts of the case, the Supreme Court held that the realisation of rental income by the assessee-bank, was in the course of its business in prosecution of one of the objects in its memorandum; it was, therefore, liable to be included in its business profits. "
8. The Hon'ble Calcutta High Court in Eveready Industries India Limited Vs. CIT reported in (2010) 323 ITR 312 (Cal) has held as follows:
"The assessee earned interest on such short-term fixed deposits made out of the business funds available with the assessee before they were utilized for actual business and, therefore, the same was incidental to the business activity of the assessee-company and interest on such short-term deposit must be treated as business income. The assessee, a tea growing and manufacturing company, was left with surplus funds. The assessee invested such surplus funds in short-term deposits to exploit the business funds of the company and earned interest. Therefore, the interest income of the assessee is business income and not income from other sources" (Emphasis Added)
9. The Hon'ble Madras High Court in Commissioner of Income-tax Vs. South India Shipping Corpn. Ltd· reported in (1996) 87 Taxman 23 (Mad) has held as follows:
"Taking into consideration the above rulings of the Supreme Court and of this Court, we are of the considered view that a sum representing interest from London brokers, other interest and miscellaneous receipts of the assessee- company should be treated as income derived from the activity of shipping business and should be treated as business income. In the instant case, the assessees, a public limited company, whose principal business is shipping and the aforesaid interest amounts are derived from the foreign business activity of the shipping company and there is a nexus between the shipping business of the assessee-company and accrued interest on the London brokers' business activity. Further, the London brokers of the assessee-company are merely carrying on the shipping business of the assessee-company in a foreign country which is incidental to the principal business of shipping of the assessee- company. Accordingly, the income derived by way of interest from the London brokers of the assessee-company are entitled to the benefit under section 80J.
10. Further reliance in this regard is placed on the decision of the Hon 'ble High Court where the above view has been followed Commissioner of Income Tax vs. Tirupati Woollen Mills Ltd reported in (1992) 193 ITR 252 (Cal) Commissioner of Income Tax vs. Producin (P) Ltd reported in (2007) 290 ITR 598 (Kar)
11. In view of our submission above, we humbly submit before your goodself that the interest income earned during the AY 2008-09 is chargeable under the head "Business and Profession" . However in the instant case, it is an admitted position that during the AY 2008-09, the business of the assessee has not commenced. If a company has not commenced business, there cannot be any question of assessment of its 'profits and gains of business. Since the business had not ·started, there could not be any computation of business income or loss incurred by the assessee 5 6 IT(SS)A Nos.29 & 30/Kol/2014 Electrosteel Steels Ltd. (Formerly known as Electrosteel Integrated Ltd.
A.Yrs.2008-09 & 2009-10 in the relevant AY. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence has to be set off against pre-operative expenses.
12. Further, the amount invested by the shareholders and borrowed from banks was inextricably linked with the setting up of the plant, and hence the interest earned by the assessee is of capital nature and cannot be taxed as income. In the instant case, the monies which were inducted by the shareholders into the company and borrowed by the company were preliminary infused for the purpose of business i.e. for setting up the plant. The funds were placed in fixed deposit so that the liquidity was ensured and money would remain available when required for setting up the plant and hence is inextricably linked with the setting up of the plant. Since, the income was earned prior to commencement of business it is in the nature of capital receipt and is required to be set off against pre-operative expenses.
3.3. The assessee further placed reliance on the following decisions in support of its contentions:-
a) Decision of Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Limited vs Income Tax Officer reported in (2009) 315 ITR 255 (Del)
b) Decision of Hon'ble Delhi High Court in the case of CIT vs Petronet LNG Ltd reported in 2011-TIOL-316-HC-DEL-IT 3.4. The assessee further submitted that the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilisers Limited vs CIT reported in (1997) 227 ITR 172 (SC) has been subsequently distinguished by the Hon'ble Supreme Court in CIT vs Bokaro Steel Ltd reported in (1999) 236 ITR 315 (SC) ; CIT vs Karnataka Power Corporation reported in (2001) 247 ITR 268 (SC) ; CIT vs Karnal Co-operative Sugar Mills Ltd reported in (2000) 243 ITR 2 (SC) ; Bongaigaon Refinery & Petrochemicals Ltd vs CIT reported in (2001) 251 ITR 329 (SC) and decision of Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Limited vs ITO reported in (2009) 315 ITR 255 (Del). It was further submitted that in the case of Tuticorin Alkali Chemicals supra, the issue involved was whether income earned by the assessee out of surplus funds should be taxed under the head 'income from other sources' or not. However, in the instant case, as submitted above the income from interest were incidental to the business carried on by the company and inextricably 6 7 IT(SS)A Nos.29 & 30/Kol/2014 Electrosteel Steels Ltd. (Formerly known as Electrosteel Integrated Ltd.
A.Yrs.2008-09 & 2009-10 linked with the setting up of the plant and hence decision of the Hon'ble Supreme Court in Bokaro Steel Ltd and other supra would be applicable. Accordingly it was pleaded that interest income earned during the Asst Year 2008-09 is required to be set off against pre-operative expenses and is not liable to be taxed.
3.5. The assessee further submitted that as per accounting principles and Accounting Standard issued by the Institute of Chartered Accountants of India (ICAI), it has in its audited accounts for the year ended 31.3.2008 , set off the interest income from the expenses incurred prior to commencement of business. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of CIT vs U.P.State Industrial Development Corporation reported in (1997) 225 ITR 703(SC) wherein it was held as follows:-
" It is a well accepted proposition that for the purposes of ascertaining profits and gains the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statutes".
3.5.1. Further reliance was placed on the decision of the Hon'ble Supreme Court in the case of P.M.Mohammed Meerakhan vs CIT reported in (1969) 73 ITR 735 (SC) wherein it was held as follows:-
"For that purpose it was the duty of the Income Tax Officer to find out what profit the business has made according to the true accountancy practice."
3.5.2. The assessee also placed reliance on the decision of the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd vs CIT reported in (1975) 98 ITR 167 (SC) wherein it was held that interest paid before commencement of production on amount borrowed by the assessee for the acquisition and installation of plant and machinery forms part of the 'actual cost'.
7 8IT(SS)A Nos.29 & 30/Kol/2014 Electrosteel Steels Ltd. (Formerly known as Electrosteel Integrated Ltd.
A.Yrs.2008-09 & 2009-10 3.6. Based on the aforesaid judgments, the assessee pleaded that it is evident that the rule of accountancy should be adopted in absence of any contrary statutory provisions in the Act and pleaded that the interest income is to be construed as a capital receipt eligible to be set off against the expenses incurred prior to commencement of production and would go to reduce the total project cost.
3.7. Without prejudice to the aforesaid submissions, it was submitted that the assessee had earned interest income of Rs 18,88,559/- out of amount invested sourced out of term loans and has incurred expenses of Rs 41,36,849/- towards interest paid on term loan for earning interest income. Hence as per section 57 of the Act, the expenses which are not in the nature of capital expenditure and has been laid out or expended wholly and exclusively for the purpose of making or earning interest income can be claimed as deductible expense in computing income from other sources. Thus interest expenses of Rs 41,36,849/- incurred for earning interest income has to be allowed as deduction u/s 57 (iii) of the Act if any amount is charged to tax. Reliance was placed on the decision of the Hon'ble Madras High Court in the case of CIT vs VGR Foundations reported in (2008) 298 ITR 132 (Mad). The facts of that case were as follows:-
The assessee had incurred interest expenses prior to commencement of business and the assessee had also earned interest income from out of the fixed deposits with bank out of share application money before the commencement of business.
The Hon'ble High Court has held that interest on moneys borrowed for the period prior to the commencement of business can be allowed as deduction from the interest under section 57 of the Act while computing 'income from other sources' in respect of the interest received.8 9
IT(SS)A Nos.29 & 30/Kol/2014 Electrosteel Steels Ltd. (Formerly known as Electrosteel Integrated Ltd.
A.Yrs.2008-09 & 2009-10
4. The ld AO observed that the case laws relied upon by the assessee are factually distinguishable as under:-
" A) The extract in CIT vs. Govinda Choudhury & Sons (74 Taxman 331) deals with the sum of Rs. 2,77,692 received by the assessee as interest on the amounts which were determined to be payable by the assessee in respect of certain contracts executed by the assessee and in regard to the payments under which there was a dispute between the two parties.
This decision is misplaced in the context of the present case, .here no disputes are in picture.
B) The decision in CIT vs Bokaro Steels Ltd. (236 ITR 315) has no bearing upon this assessment as the following extract from the decision would prove:-
"During these assessment years, the respondent-assessee had invested the amounts borrowed by it for the construction work which were not immediately required, in short- term deposits and earned interest. It has been held in these proceedings that the receipt of interest amounts to income of the assessee from other sources. The assessee has not filed any appeal from this finding which is given against it. In any case, this question is now concluded by a decision of this Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1991) 227 ITR 172. Hence, we are not called upon to examine that issue."
Hence the question of taxability of interest earned from short term deposits never came up before the Hon'ble SC in this - case. On the contrary, this decision goes on to say, as would be evident from the above extract, that the interest earned from the short term deposits will have to be taxed as revenue receipts, and only strengthens the view point taken by me, citing the Tuticorin Alkali Chemicals & Fertilizers Ltd. decision in the process.
C) On the other hand, the decision of CIT vs Karnal Co- operative Sugar Mills Ltd.(243 ITR 2) seeks to differentiate between deposits from idle/surplus funds and those that have to be compulsorily made in the process of investment in machinery.etc., viz.. interest from deposits that have a "lien" tag.
In this context, it is seen that out of the interest received of Rs. 3,69,36,403/- during the previous year, there is no portion that can be apportioned as interest received by virtue of business investments, and hence, the entire amount of interest received is being treated as interest from idle/surplus funds and is being taxed as income from other sources.
D) The Bongaigaon Refinery & Petrochemicals Ltd. decision has been needlessly quoted by the assessee, since the extract of the decision relied upon by the assessee says that "The High Court has already held that the interest income derived by the assessee during its formative period was taxable income."
9 10IT(SS)A Nos.29 & 30/Kol/2014 Electrosteel Steels Ltd. (Formerly known as Electrosteel Integrated Ltd.
A.Yrs.2008-09 & 2009-10 In view of the discussions above, the interest income of Rs. 3,69,36,403/- received by the assessee during the previous year, is liable to be taxed as Income from other sources, and is being done so by me.
Accordingly the ld AO placed reliance on the decision of Tuticorin Alkali Chemicals supra and brought the interest income of Rs 3,69,36,403/- to tax under the head 'income from other sources'.
5. The ld CITA observed in his order as under:-
"5.1 In the course of assessment proceedings as well as in the appellate proceedings, the appellant submitted the details of interest received/receivable in the year under appeal aggregating to Rs. 3,69,36,403/-. It is submitted by the appellant that the interest of Rs. 3,50,47,844/- was received on FD with SBI CAG Branch, Kolkata from temporarily parked money whose source was equity fund. Thus, it is apparent that the Fixed Deposits were taken by the appellant from the surplus fund which was not required immediately for the purpose of business i.e. the setting up of the plant. In fact, this has already been admitted by the appellant in its submission that the money which was not utilized immediately was invested in fixed deposits, so that the liquidity was ensured and money would remain available when required for setting up the plant. It means that the fixed deposits were not taken by the appellant for the purpose of its business i.e. to keep margin money etc. or as a pre-condition to make import etc. The fixed deposits were taken purely out of the surplus fund. Under the circumstances, I am of the opinion that the AO was justified in holding that the interest income of Rs. 3,69,36,403/- is assessable to tax in pre-commencement period as "Income from Other Sources."
5.1. The ld CITA distinguished the various case laws relied upon by the assessee as under:-
"5.2 In the course of assessment proceedings as well as the appellate proceedings, the appellant has placed its reliance on the decision of Hon'ble Supreme Court in the case of Bokaro Steel Ltd. (supra). However, I am of the opinion that the decision in the case of Bokaro Steel is not applicable in the case of appellant. In that case, in addition to the issue of interest received on short term deposits in pre-commencement period, there were three more issues i.e. the rent charged by the assessee to its contractors for housing workers and staff employed by the contractor for construction work of the assessee, secondly, hire charges for plant· and machinery which was given to the contractors by the assessee for use in the construction work of the assessee, and thirdly, interest from advances made to the contractors by the assessee for facilitating the work of construction. With reference to aforesaid three types of receipts, it was held 10 11 IT(SS)A Nos.29 & 30/Kol/2014 Electrosteel Steels Ltd. (Formerly known as Electrosteel Integrated Ltd.
A.Yrs.2008-09 & 2009-10 that the amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These receipts are of capital nature and cannot be taxed as income. However, with reference to the interest earned on short term deposits made out of the surplus funds which were not immediately required, the Hon'ble Supreme Court observed as under:
"During these assessment years, the respondent - assessee had invested the amounts borrowed by it for the construction work which were not immediately required, in short-term deposits and earned interest. It has been held in these proceedings that the receipt of interest amounts' to income of the assessee from other sources. The assessee has not filed any appeal from this finding which is given against it. In any case, this question is now concluded by a decision of this court in Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT, 227 ITR 172. Hence, we are not called upon to examine that issue."
Thus, in the case of Bokaro Steel, the issue of taxability of interest on short-term deposits was not adjudicated by the Apex Court and, therefore, is not relevant in the case of appellant. The Hon'ble Apex Court has observed that this already been concluded in the case of Tuticorin Alkali. In the instant case, there is no dispute that the interest income was earned by making short- term deposits of the surplus fund not required immediately for setting up the plant. Hence, it is taxable as income from other sources. It cannot be said that the interest income was inextricably linked with the business of the appellant company.
5.3 The appellant relied on the decision of Supreme Court in the case of Bongaigaon Refinery and Pertochemicals Ltd. (supra). But, in this case also it is held that the interest income derived by the assessee during its formative period was taxable income. However, the income derived by the assessee from house property, its guest house, charges for equipment and recoveries from contractors on account of water and electricity supply were covered by the decision in Bokaro Steel Ltd.'s case. Thus, this decision is also of no help to the appellant company because the interest income derived during the formative period has been held to be taxable income.
5.4 The appellant has relied on the decision of Hon"ble Delhi High Court in the case of NTPC SAIL Power Company Pvt. Ltd., 2012-TIOL-652-HC-DEL-IT. In this case the assessee company earned total interest receipts of Rs.616.73 lakhs during the year. The interest was earned on temporary deposits made from surplus funds and on the deposits made with banks by way of margin or giving advances etc. for the purpose of expansion. The interest earned from such deposits and advances was Rs.331.58 lakhs. The assessee adjusted interest of Rs.331.58 lakhs from the cost of project and admitted the balance interest of RS.28S.15 lakhs i.e. (Rs.616.73 lakh - RS.331.58 lakh) as normal income. The AO brought to tax the Interest income of Rs.331.58 lakhs also as income from 11 12 IT(SS)A Nos.29 & 30/Kol/2014 Electrosteel Steels Ltd. (Formerly known as Electrosteel Integrated Ltd.
A.Yrs.2008-09 & 2009-10 other sources. However, in appeal, the said amount of interest of 331.58 lakhs was held to be inextricably linked with the project of the assessee being the interest on margin money and advances and, therefore, capital in nature which would go to reduce the cost of the project. In the case of appellant company, the facts are distinguishable as no amount of interest was received by the company on account of deposits for margin or advances for the purpose of its setting up of steel plant. Thus, the decision relied upon by the appellant is not applicable in its case. Similarly, other judicial decisions relied upon by the appellant are also distinguishable on facts."
5.2 The ld CITA observed that the ratio laid down by the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals supra would suit the facts of the instant case more appropriately and accordingly upheld the addition made by the ld AO. The ld CITA also observed that it is immaterial as to whether the investment was made in short term deposits out of shareholders funds or the borrowed funds. The interest received on such short term deposits would be taxable under the head 'income from other sources'. Aggrieved, the assessee is in appeal before us on the following grounds:-
1. That on the facts and circumstances of the case, the Learned CIT(A) was not justified and erred in upholding the order of the Learned AO in determining the total income under the normal provisions of the Act at Rs. 36,936,403/-
disregarding the submissions made by the appellant.
2. That on the facts and circumstances of the case, the Learned CIT(A) was not justified and erred in upholding the order of the Learned AO in taxing the interest income of Rs. 36,936,403/- under the head "Income from Other Sources"disregarding the submissions made by the appellant.
3. Without prejudice to grounds 1 & 2, on the facts and circumstances of the case, the Learned CIT(A) was not justified and erred in upholding the order of the Learned AO in disallowing the claim of the appellant in respect of deduction of expenses incurred of Rs. 4,136,849/- as per Section 57 of the Act, against interest income of Rs. 1,888,559/- earned on fixed deposits with banks whose source was term loan.
4. That, on the facts and circumstances of the case, the Learned CIT(A) was not justified and erred in upholding the order of the Learned AO in levying interest under the provisions of 234C of the Act.
12 13IT(SS)A Nos.29 & 30/Kol/2014 Electrosteel Steels Ltd. (Formerly known as Electrosteel Integrated Ltd.
A.Yrs.2008-09 & 2009-10
5. That, on the facts and circumstances of the case, the Learned CIT(A) was not justified and erred in upholding the order of the Learned AO in initiating penalty proceedings under section 271(1)(c) of the Act ignoring the fact that the Appellant has not filed inaccurate particulars of income or concealed its income.
6. That the appellant craves leave to add, alter and amend the grounds of appeal on or before the date of hearing.
6. We have heard the rival submissions and perused the materials available on record. It is not in dispute that the business of setting up of a steel plant had not commenced during the year under appeal. It is not in dispute that the assessee had received share capital from its shareholders and also term loans from banks for the purpose of its business of setting up of a steel plant. The unutilized portion of the said funds were invested in short term deposits with banks and interest income derived thereon by the assessee as under:-
Particulars Interest Interest Total
Received Accrued Interest Income
Interest on FD with SBI CAG
Branch from temporarily parked
Money out of equity funds 1,92,73,564 1,57,74,280 3,50,47,844
Interest on FD with SBI CAG
Branch from temporarily parked
Money out of Term Loan funds 18,88,559 18,88,559
---------------------------------------------------- 1,92,73,564 1,76,62,839 3,69,36,403
-----------------------------------------------------
6.1. It is not in dispute that the assessee had voluntarily offered the aforesaid interest income of Rs 3,69,36,403/- as income from other sources in the original return of income and paid taxes accordingly. Later in the revised return, it had withdrawn the same by stating that the said interest income would only go to reduce the total project cost of the steel plant as the funds utilized for making investments in deposits were only 13 14 IT(SS)A Nos.29 & 30/Kol/2014 Electrosteel Steels Ltd. (Formerly known as Electrosteel Integrated Ltd.
A.Yrs.2008-09 & 2009-10 business funds which remained unutilized by the assessee. Since the business funds were utilized, the assessee pleaded that the interest income derived from those business funds would be business income and since the business had not been commenced, the same would go to reduce the total project cost of the steel plant of the assessee. The assessee also placed reliance on clause 9 of its Memorandum of Association, wherein , the assessee was entitled to invest its surplus funds in the form of deposits etc and derive interest income. Pursuant to the search and seizure operation conducted u/s 132 of the Act on 19.3.2009, the ld AO in the assessment framed, treated the interest income under the head 'income from other sources' by placing reliance on the decision of Hon'ble Supreme Court in the case of Tutikorin Alkali Chemicals supra. It is not in dispute that the main share capital of the assessee company was subscribed by Electrosteel Castings Ltd as per subscription agreement dated 8.5.2007. The subscriber of the share capital had agreed to invest in the assessee company based on their assessment of future growth prospect and potential of the company. The investor had agreed to subscribe Rs 500 crores in equity shares for setting up the plant by the assessee company. It was contended by the ld AR that as per the agreement with Electrosteel Castings Ltd, the assessee company had to invest the money in setting up the plant. Accordingly it was contended by the ld AR that the money received had inextricable link with the process of setting up the plant and machinery and the money which was not utilized immediately was invested in fixed deposit, so that liquidity was ensured and money would remain available when required for setting up the plant. We find that the ld AR placed reliance on the Co-ordinate Bench of Mumbai Tribunal in the case of Solarfield Energy Two Pvt Ltd vs ITO in ITA No. 5076/Mum/2016 for Asst Year 2012-13 dated 11.9.2017 wherein it was held as under:-
We have heard rival contentions and perused the material available on record in the light of decisions relied upon. We have also applied our mind to the decisions relied upon. Undisputed facts are, the assessee was awarded the work of setting-up of Solar Power Plant project in Rajasthan by NVVNL. It is also evident, NVVNL has entered into 14 15 IT(SS)A Nos.29 & 30/Kol/2014 Electrosteel Steels Ltd. (Formerly known as Electrosteel Integrated Ltd.
A.Yrs.2008-09 & 2009-10 a power projects agreement with the assessee on 25th January 2012. As per the terms and conditions stipulated in the bid one of the financial criteria in Request For Selection (RFS) document requires a newly incorporated company to have the required net worth connected to the capacity of the power project. Thus, as per the pre- condition, the assessee was required to have the net worth of Rs. 60 crore. Since, the assessee was not having the required net worth it had to infuse fund for enabling itself to meet the qualification criteria and for this purpose, assessee's parent company KESPPL stepped in and invested fund in acquiring 98,500 equity shares and 1,00,000 compulsorily convertible preference shares of the assessee company, thereby, enabling the assessee to have the required net worth. Thus, as could be seen, the infusion of fund was integrally and inextricably connected with the setting-up of the power project. As evident from the facts on record, out of the funds available with the assessee from issue of equity shares an amount of Rs. 40 crore was temporarily parked in fixed deposit with HDFC Bank Ltd. on 1st March 2012, since, wasn't immediately required for implementation of the power project. It is also evident that the assessee only on 29th May 2012, entered into a EPC contract with Larsen & Toubro Ltd. for developing the 20 MW Solar Photo Voltaic Power Plant. These facts clearly demonstrate, the funds required for setting up of power project was temporarily parked in fixed deposit, thereby, indicating that the interest earned on such fixed deposit has an immediate and proximate nexus with the setting up of power project. Notably, the Departmental Authorities have rejected assessee's claim that the interest earned is a capital receipt relying upon the decision of the Hon'ble Supreme Court in Tuticorin Alkali Chemicals and Fertilisers Ltd. (supra). On a careful reading of the said judgment, we are of the view that the ratio laid down therein will not apply to the facts of the present case. In the case of Tuticorin Alkali Chemicals and Fertilisers Ltd. the assessee has borrowed funds for setting up of a plant. However, the surplus fund available out of the borrowed fund was invested in fixed deposit and assessee earned interest. The Department held that the interest earned from fixed deposit on investment of surplus fund during the pre-
construction period is assessable as income from other sources. However, the Hon'ble Supreme Court in case of Bokaro Steels Ltd. (supra) took note of the decision in Tuticorin Alkali Chemicals and Fertilisers Ltd. (supra) referred to by the Departmental Authorities. Further, the Hon'ble Supreme Court took note of the decision of the Hon'ble Supreme Court in Challapalli Sugars Ltd. vs CIT, [1995] 98 ITR 167 (SC) wherein it was held that accepted accountancy rule for determining cost of fixed deposit is to include all expenditure necessary to bring such assets into existence and to pay them in working condition. In case money is borrowed by newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalized and added to the cost of fixed asset created as a result of such expenditure. Following the aforesaid reasoning, the Hon'ble Supreme Court in Bokaro Steels Ltd. (supra) held that by applying the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting-up of plant and machinery such receipts will come to reduce the cost of its assets, hence, are of capital nature. The ratio laid down by the Hon'ble Supreme Court in Bokaro Steels Ltd. (supra) was followed by the Hon'ble Delhi High Court in Indian Oil Panipat Power Consortium Ltd. (supra). The 15 16 IT(SS)A Nos.29 & 30/Kol/2014 Electrosteel Steels Ltd. (Formerly known as Electrosteel Integrated Ltd.
A.Yrs.2008-09 & 2009-10 facts of this case are, the assessee a joint venture company was to set-up a power project to effectuate the purpose for which joint venture was created. The joint venture partners contributed share capital which included a sum by way of additional share capital. The said fund, though, was required for purchase of land and development of infrastructure, however, due to legal entanglement with regard to title of land, the funds were temporarily invested in fixed deposit with bank earning interest thereon. The assessee claimed such interest as capital receipt and set it off against pre-operative expenditure. However, the Assessing Officer assessed the interest as income from other sources. The learned Commissioner (Appeals) having found that interest earned was inextricably linked with the setting-up of the power plant allowed the claim of the assessee following the decisions of the Hon'ble Supreme Court in Bokaro Steels Ltd. (supra). However, while deciding Department's appeal, the Tribunal followed the decision in Tuticorin Alkali Chemicals and Fertilisers Ltd. (supra) and reversed the order of the learned Commissioner (Appeals). When the matter came up before the High Court, the High Court following the decision of the Hon'ble Supreme Court in Bokaro Steels Ltd. (supra) held that, since, the interest income was inextricably linked to the set-up of power project, it will be a capital receipt and will come to reduce the cost of the project and accordingly allowed assessee's claim. In our view, the ratio laid down in case of Bokaro Steels Ltd. (supra) and Indian Oil Panipat Power Consortium Ltd. (supra) are squarely applicable to the facts of the present case. Undisputedly, in case of assessee, the funds invested temporarily in the fixed deposit were for the purpose of setting-up of the power project. Therefore, the interest earned is inextricably linked with the power project. The other decisions relied upon by the learned Sr. Counsel including the decision in case of CIT vs. Karnal Co-operative Sugar Mills Ltd. (supra) express similar view. That being the case, applying the ratio laid down in the decisions referred to above, we hold that the interest earned on fixed deposit is capital receipt and has to be set-off against pre-operatives expenditure thereby will go to reduce the cost of CWIP. Grounds raised is allowed.
9. In the result, assessee's appeal is allowed."
6.2. We also find that the decision of the Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd vs ITO reported in (2009) 315 ITR 255 (Del) clearly supports the case of the assessee wherein it was held that :-
5. In our opinion, the Tribunal had misconstrued the ratio of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and that of Bokaro Steel Ltd.'scase (supra). The test, which permeated through the judgment of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case (supra ), was that 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 taxable under the head 'income from other sources'. On the other hand, the ratio of the Supreme Court judgment in Bokaro Steel Ltd.'s case(supra) is that if 16 17 IT(SS)A Nos.29 & 30/Kol/2014 Electrosteel Steels Ltd. (Formerly known as Electrosteel Integrated Ltd.
A.Yrs.2008-09 & 2009-10 income is earned, whether by way of interest 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 capitalized to be set off against pre-operative expenses. 5.1. The test, therefore, 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 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 which is the charging section, income, which arises to an assessee from the date of setting up of the business but prior to commencement, is chargeable to tax, depending on whether it is of a revenue nature or a capital receipt. The income of a newly set-up business, post 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. For an income to be classified as an income under the head 'profits and gains 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. Once it is held that the assessee's income is an income connected with business, as in the instant case in view of the finding of fact by the Commissioner (Appeals) that the 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 could not be held that the income derived by parking the funds temporarily with bank, would result in the character of the funds being 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 received 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 section 14. The head 'Income from other sources' is a residuary head of income. See S.G.Mercantile Corpn. (P) Ltd vs CIT [1972] 83 ITR 700 (SC) and CIT vs Govinda Choudhury & Sons [1993] 203 ITR 881 (SC).
5.2. In the instant case, it was clear upon a perusal of the facts as found by the authorities below that the funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business 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 against pre-operative expenses.
6. There is another perspective from which the present issue can be examined. Under section 208 of the Companies Act, 1956 a company can pay interest on share capital which is issued for a specific purpose to defray expenses for construction of any work and which cannot be made profitable for a long period subject to certain restrictions contained in sub-sections (2) to (7) of section 208. This section was specifically noted by the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. The Supreme Court went on to observe as follows:
17 18IT(SS)A Nos.29 & 30/Kol/2014 Electrosteel Steels Ltd. (Formerly known as Electrosteel Integrated Ltd.
A.Yrs.2008-09 & 2009-10 "We have already referred to section 208 of the Companies Act which makes provision for payment of interest on share capital in certain contingencies. Clause (b) of sub- section (1) of that section provides that in case interest is paid on share capital issued for the purpose of raising money to defray the expenses of constructing any work or building or the provision of any plant in contingencies mentioned in that section, the sum so paid by way of interest may be charged to capital as part of the cost of construction of the work or building or the provision of the plant. The above provision thus gives statutory recognition to the principle of capitalizing the interest in case the interest is paid on money raised to defray expenses of the construction of any work or building or the provision of any plant in contingencies mentioned in that section even though such money constitutes share capital. The same principle, in our opinion, should hold good if interest is paid on money not raised by way of share capital but taken on loan for the purpose of defraying the expenses of the construction of any work or building or the provision any plant. The reason indeed would be stronger in case such interest is paid on money taken on loan for meeting the above expenses." (p. 175) 6.1. In our view the situation in the instant case is quite similar except here instead of paying interest on funds brought in for specific purpose interest is earned on funds brought in by way of share capital for a specific purpose. Could it be said that in the former situation interest could have been capitalized and in the later situation it cannot be capitalized. To test the principle we could extend the example, that is, would our answer be any different had assessee passed on the interest to the respective shareholders. If not, then in our view the only conclusion possible is that interest earned in the present circumstances ought to be capitalized.
7.In view of the discussion above, the Tribunal misdirected itself in applying the decision of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra ) in the facts of the instant case. On account of the finding of fact returned by the Commissioner (Appeals) that the funds infused by the joint venture partners in the assessee-company were inextricably linked with the setting up of the power plant, the interest earned by the assessee could not be treated as 'income from other sources'. Therefore, the impugned judgment was to be set aside.
6.3. In view of the aforesaid decision, we are unable to sustain the view taken by the ld CITA by placing reliance on Tuticorin Alkali Chemicals supra. Respectfully following the aforesaid decision of Hon'ble Delhi High Court supra and decision of Mumbai Tribunal supra , which had considered all the decisions relied upon hereinabove, we hold that the interest income derived by the assessee in the sum of Rs 3,50,47,844/-, being the amounts invested in deposits out of share capital, would be capital receipt and would go to reduce the project cost of steel plant as it is inextricably linked with the 18 19 IT(SS)A Nos.29 & 30/Kol/2014 Electrosteel Steels Ltd. (Formerly known as Electrosteel Integrated Ltd.
A.Yrs.2008-09 & 2009-10 setting up of the power plant. Following the same judgement, we hold that the interest income derived in the sum of Rs 18,88,559/- from deposits invested out of borrowed funds, would be liable to tax under the head income from other sources, which would be in line with the decision of the Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals supra. Accordingly, the grounds raised by the assessee for the Asst Year 2008-09 are partly allowed.
7. Now let us come to the grounds raised in the Asst Year 2009-10. The issue involved in this appeal is similar to Asst Year 2008-09. The assessee during the Asst Year 2009- 10 had earned interest income on deposits as under:-
Particulars Interest Interest Total
Received Accrued Interest Income
Interest on FD with SBI CAG
Branch from temporarily parked
Money out of equity funds 1,79,65,828 1,79,65,828 (A)
Interest on FD with SBI CAG
Branch from temporarily parked
Money out of Term Loan funds 2,42,96,798 2,42,96,798 (B)
Interest on FD as lien for Bank
Guarantee in favour of Customs 1,83,36,986 51,47,810 2,34,84,796 (C )
----------------------------------------------------
6,05,99,612 51,47,810 6,57,47,422
-----------------------------------------------------
As far as Interest referred to in (A) above, the decision rendered in Asst Year 2008-09 would apply with equal force for this asst year also. Accordingly the grounds raised in this regard are allowed.
19 20IT(SS)A Nos.29 & 30/Kol/2014 Electrosteel Steels Ltd. (Formerly known as Electrosteel Integrated Ltd.
A.Yrs.2008-09 & 2009-10 As far as Interest referred to in (B) above, the decision rendered in Asst Year 2008-09 would apply with equal force for this asst year also. Accordingly the grounds raised in this regard are dismissed.
As far as Interest referred to in (C ) above, the deposits were invested with bank for obtaining Bank Guarantees in favour of Customs Department which is inextricably linked with the business of setting up of steel plant of the assessee. Hence the ratio laid down in the decisions of the Hon'ble Supreme Court in the case of CIT vs Bokaro Steel Ltd reported in (1999) 236 ITR 315 (SC) ; CIT vs Karnal Co-operative Sugar Mills Ltd reported in (2000) 243 ITR 2 (SC) ; and Bongaigaon Refinery & Petrochemicals Ltd vs CIT reported in (2001) 251 ITR 329 (SC) would be squarely applicable to the instant case and hence the interest income derived thereon would only go to reduce the project cost of steel plant and hence had to be construed as capital receipt. Accordingly, the grounds raised in this regard by the assessee are allowed.
8. In the result, the appeals of the assessee in IT(SS)A Nos . 29 & 30 /Kol/2014 for Asst Years 2008-09 and 2009-10 respectively are partly allowed.
Order pronounced in the Court on 15.11.2017
Sd/- Sd/-
[A.T. Varkey] [ M.Balaganesh ]
Judicial Member Accountant Member
Dated : 15.11.2017
SB, Sr. PS
20
21
IT(SS)A Nos.29 & 30/Kol/2014
Electrosteel Steels Ltd. (Formerly known as
Electrosteel Integrated Ltd.
A.Yrs.2008-09 & 2009-10
Copy of the order forwarded to:
1. Electrosteel Steels Ltd. (Formerly Known as Electrosteel Integrated Ltd.), 19, Camac Street, Kolkata-700017
2. DCIT, CC-XXI, 18, Rabindra Sarani, Poddar Court, 5th Floor, Kolkata-700001
3. C.I.T(A)- 4. C.I.T.- Kolkata.
5. CIT(DR), Kolkata Benches, Kolkata.
True copy By Order Senior Private Secretary Head of Office/D.D.O., ITAT, Kolkata Benches 21