Income Tax Appellate Tribunal - Hyderabad
Hyderabad Hi-Tech Park Private ... vs Ito, Ward-2(2), Hyderabad, Hyderabad on 21 December, 2016
ITA No 587 of 2016 Hyderabad Hitech Park P Ltd Hyderabad
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 Vs Income Tax Officer
Textile Park Pvt Ltd Ward 2(2)
Hyderabad Hyderabad
PAN: AABCH 5511 P
For Assessee : Shri S. Rama Rao
For Revenue : Shri K.J. Rao, DR
Date of Hearing: 22.11.2016
Date of Pronouncement: 21.12.2016
ORDER
Per Smt. P. Madhavi Devi, J.M.
This is assessee's appeal for the A.Y 2010-11. The assessee is aggrieved by the order of the CIT (A) in confirming the action of the AO in treating the interest earned on deposits as "income from other sources" and not as "business income" as declared by the assessee.
2. Brief facts of the case are that the assessee company 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 various details. The assessee filed the details and on perusal of the same, the AO observed that the assessee company was incorporated as a Special Purpose Vehicle (SPV) to develop a world-class textile park wherein about 108 small and medium scale textile power-loom Page 1 of 6 ITA No 587 of 2016 Hyderabad Hitech Park P Ltd Hyderabad entrepreneurs have been envisaged to become subscribers. The whole scheme was designed under public-private-partnership 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 India as well as from the State Govt. to the tune of Rs.13.10 crores and utilized the same for infrastructure development of the project. The AO observed from the annual report of the assessee for the year under consideration that the company completed construction 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 shown 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 received 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 assessee and therefore has to be capitalized. During the course of the assessment 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 the project, the moneys were parked in Fixed Deposits for shorter period and since the actual business has not commenced during the year, the interest received on these FDs would reduce the pre-operative Page 2 of 6 ITA No 587 of 2016 Hyderabad Hitech Park P Ltd Hyderabad expenses. The assessee also placed reliance upon the 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 (251 ITR 329)
4. The AO was however, not convinced with the assessee's contentions. He held that unless there is an indivisible nexus with the nature of the business of the assessee, interest earned on FDs, before commencement of business, is to be treated as income from other sources. He observed that 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 requirements and not by any compulsion; as was the case of the assessees in the case laws relied upon by the assessee. Therefore, he treated the interest income as income from other sources and brought it to tax. Aggrieved, the assessee preferred an appeal before 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 reliance upon the submissions made by the assessee before the CIT (A) which are reproduced by the CIT (A) in his order at Para 5.1. He also distinguished the facts of the assessee's 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 confirm the disallowance of the claim of the assessee.
Page 3 of 6ITA No 587 of 2016 Hyderabad Hitech Park P Ltd Hyderabad
6. Learned DR, however, supported the orders of the authorities below.
7. Having regard to the rival contentions and the material on record, undisputedly the assessee has received the 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 kept 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. According to the learned Counsel for the assessee, the interest income is not the income of the assessee but only goes to the increase the grants- in-aid and one of the conditions of grants-in-aid is that the unutilized amounts have to be returned to the Govt. along with the interest. Therefore, the interest income derived 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 off against the pre-operative expenses. We find that similar issue had arisen before the Hon'ble Delhi High Court in the following cases:
(i) CIT vs. Sasan Power Ltd, reported in (2012) 18 Taxmann.com 182 (Delhi.)
(ii) Indian Oil Panipat Power Consortium Ltd reported 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 its 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 Tuticorin Alkali Chemicals (supra) and that of Bokaro Steel Ltd. (supra). 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‟ Page 4 of 6 ITA No 587 of 2016 Hyderabad Hitech Park P Ltd Hyderabad 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. (supra) to our mind is that if 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, 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 commencement is chargeable to tax depending on whether it is of a revenue nature or 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 of the Act. For an income to be classified as income under the head "profit 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. See Mazagaon Dock Ltd vs CIT & Excess Profits Tax; (1958) 34 ITR 368 (SC), and Narain Swadeshi Weaving 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 present case, in view of the finding of fact by the CIT(A) 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 cannot be held that the income derived by parking the funds temporarily with Tokyo Mitsubishi Bank, will result in the character of the funds being changed, in as much 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 of the Act. The head "income from other sources" is a residuary head of income. See S.G. Mercantile Corporation P. Ltd vs CIT, Calcutta; (1972) 83 ITR 700 (SC) and CIT vs Govinda Choudhury & Sons.; (1993) 203 ITR 881 (SC).
Page 5 of 6ITA No 587 of 2016 Hyderabad Hitech Park P Ltd Hyderabad 5.2 It is 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. In the case of Tuticorin Alkali Chemicals (supra) it was found by the authorities that the funds available with the assessee in that case were „surplus‟ and, therefore, the Supreme Court held that the interest earned on surplus funds would have to be treated 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 expenses".
Therefore, respectfully following the above decisions, the assessee's appeal is accordingly allowed.
8. In the result, assessee's appeal is allowed. Order pronounced in the Open Court on 21st December, 2016.
Sd/- Sd/-
(S.Rifaur Rahman) (P. Madhavi Devi)
Accountant Member Judicial Member
Hyderabad, dated 21st December, 2016.
Vinodan/sps
Copy to:
1 Shri S. Rama Rao, Advocate, Flat No.102, Shriya's Elegance, 3-6- 643 Street No.9 Himayatnagar, Hyderabad 500029 2 Income Tax Officer Ward 2(2) Signature Towers, Kondapur, Hyderabad 3 CIT (A)-2 Hyderabad 4 Pr. CIT - 2 Hyderabad 5 The DR, ITAT Hyderabad 6 Guard File By Order Page 6 of 6