Gujarat High Court
The Principal Commissioner Of Income ... vs Adani Mining Pvt. Ltd. on 2 March, 2020
Author: Bhargav D. Karia
Bench: J.B.Pardiwala, Bhargav D. Karia
C/TAXAP/113/2020 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 113 of 2020
With
R/TAX APPEAL NO. 114 of 2020
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE J.B.PARDIWALA
and
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
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1 Whether Reporters of Local Papers may be allowed to
see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of the
judgment ?
4 Whether this case involves a substantial question of law
as to the interpretation of the Constitution of India or any
order made thereunder ?
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THE PRINCIPAL COMMISSIONER OF INCOME TAX-1
Versus
ADANI MINING PVT. LTD.
================================================================
Appearance:
MRS MAUNA M LEARNED STANDING COUNSEL
BHATT(174)
ASSISTED BY LEARNED ADVOCATE MR. KARAN SANGHANI for the
Appellant(s) No. 1
for the Opponent(s) No. 1
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CORAM: HONOURABLE MR. JUSTICE J.B.PARDIWALA
and
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
Date : 02/03/2020
ORAL JUDGMENT
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1. These Tax Appeals are at the instance of Revenue filed under Section 260A of the Income Tax Act, 1961 Page 1 of 19 Downloaded on : Sun Feb 14 22:05:52 IST 2021 C/TAXAP/113/2020 JUDGMENT (for short, the 'Act, 1961') and directed against the Common Order dated 25.09.2019 passed by the Income Tax Appellate Tribunal, Ahmedabad, Bench 'B' Ahmedabad (for short 'the Tribunal')in ITA No.1972/Ahd/2015 and C.O. No.155/Ahd/2015 for A.Y. 2011-2012.
2. In Tax Appeal No. 113 of 2019, the Revenue has proposed following questions as substantial questions of law:
"[A] Whether the Appellate Tribunal has erred in law and on facts in deleting the addition of Rs. 3,81,36,986 made under Section 56 of the Act without appreciating the fact that the said income earned is not inextricably linked with the business of the assessee and cannot be reduced from capital expenditure."
[B] Whether, the Appellate Tribunal has erred in law and on facts in deleting the addition of unutilized CENVAT credit of Rs.29,60,018/- without appreciating the fact that the assessee has followed exclusive method for accounting CENVAT as against inclusive method mandated under Section 145A of the Act?"
2.1. In Tax Appeal No. 114 of 2020, the Revenue has proposed the following solitary question as substantial question of law:
"Whether the Appellate Tribunal has erred on facts and in law in deleting the addition of Rs. 1,04,463 made under Section 56 of the Act on account of interest earned on bank deposits?"Page 2 of 19 Downloaded on : Sun Feb 14 22:05:52 IST 2021
C/TAXAP/113/2020 JUDGMENT
3. The short facts giving rise to these appeals may be summarized as under:
3.1. The respondent-assessee is a Pvt. Ltd. Company and 100% subsidiary of Adani Enterprises Ltd. (for short, "AEL"). The assessee is engaged in the business of mining/exploration activities. AEL was awarded a contract by UCM Coal Company Limited during the year 2010-11 in a consortium for the development and operation of coal block situated in Orissa. 3.2. AEL subsequently assigned the contract to the assessee, and the assessee thereafter, entered into a Washery Agreement with G.V. Info Solution Pvt. Ltd. (for short, "GVISPL"). As per the agreement, GVISPL had undertaken the work of constructing, operating and managing the coal washery for the project on behalf of the assessee.
3.3. The assessee, as per the terms of the agreement with GVISPL provided a security deposit of Rs.150 crores subject to the interest at the rate of 6% per annum. The assessee, accordingly, earned an interest income of Rs. 3,81,36,986/-. The assessee reduced this interest income from the project development Page 3 of 19 Downloaded on : Sun Feb 14 22:05:52 IST 2021 C/TAXAP/113/2020 JUDGMENT expenditure as such income was inextricably linked with the business/project which was not commenced in the year under consideration. The assessee claimed that the interest income cannot be treated as income from other sources under Section 56 of the Act, 1961. 3.4. The assessee also claimed that it had entered into an agreement with Gujarat Mineral Development Corporation Limited (for short "GMDCL") for carrying out the activity of core drilling, non-core drilling and well logging for oil exploration at Morga-II in Chhattisgarh. The assessee, as per the terms of the agreement provided a security deposit of Rs.1,25,00,000/- and 19,99,000/-for due performance by way of furnishing Bank Guarantee. The assessee claimed that the interest earned by it on the deposit with the Bank for obtaining the Bank Guarantee amounting to Rs.1,04,463/- is to be reduced from the project development expenditure on the ground that such interest is inextricably linked with the project and commercial operation in respect of such project. 3.5. The Assessing Officer during the course of assessment proceedings found that: Page 4 of 19 Downloaded on : Sun Feb 14 22:05:52 IST 2021
C/TAXAP/113/2020 JUDGMENT
(i) M/s. TAS Integrators Pvt. Ltd. advanced loan of Rs. 100 crores to AEL, which was received by it from GVISPL, similarly the GVISPL received such fund of Rs. 100 crores from the Assessee/AEL.
(ii) There was no evidence to prove that GVISPL has utilised the fund received from the assessee on the execution of the project.
(iii) The Assessing Officer, therefore, was of the opinion that security deposit placed by the assessee with GVISPL was only an arrangement between the parties and the same was not linked with the project of the assessee. The Assessing Officer, therefore, treated the interest income earned by the assessee on the security deposit placed by GVISPL as income from other sources under Section 56 of the Act, 1961. 3.6. The Assessing Officer also disallowed Rs.1,04,463/- earned by the assessee on the deposit kept with the Bank for issuance of Bank Guarantee as income from other sources.
3.7. The assessee being aggrieved and dissatisfied with the assessment order, preferred an Appeal before the CIT (A). The CIT (A), after considering the Page 5 of 19 Downloaded on : Sun Feb 14 22:05:52 IST 2021 C/TAXAP/113/2020 JUDGMENT submission of the assessee, held that the security deposit placed with GVISPL was directly linked with the project undertaken by the assessee from AEL/UCM. 3.8. The CIT(A) therefore, directed to reduce the interest income from the project development expenditure. However, the CIT(A) confirmed the action of the Assessing Officer with respect to interest income of Rs.1,04,463 earned on the fixed deposit made with the Bank in order to obtain the Bank Guarantee by the assessee, on the ground that the assessee failed to substantiate that it was linked with the project.
3.9. The Revenue, being aggrieved by the order of the CIT(A) went into appeal before the Tribunal against the direction of treating the interest income of Rs.3,81,36,986/- as connected with the project of the assessee and the assessee filed cross objection before the Tribunal against upholding the order of the Assessing Officer by the CIT (A) treating the interest income of Rs.1,04,463/- as income from other sources.
3.10. The Tribunal, after considering the rival Page 6 of 19 Downloaded on : Sun Feb 14 22:05:52 IST 2021 C/TAXAP/113/2020 JUDGMENT submissions in respect of the deletion of addition of interest income of Rs. 3,81,36,986/- by CIT (A) confirmed the order of CIT(A) and allowed cross objection filed by the assessee by reversing the order of CIT(A) for the interest income of Rs.1,04,463/- considered as income from other sources and held as under:
"6. We have heard the rival contentions of both the parties and perused the materials available on record. There is no quarrel to the fact that all the expenditures incurred by the assessee before the commencement of the commercial production should be capitalized to the cost of the project provided these are inextricably linked with the project. Similar logic also applies to the income generated by the assessee before the commencement of the commercial production. Therefore the same should be reduced from the cost of the project provided these are inextricably linked with the project. Thus the criteria, be it expenses or the income is that the same should be directly connected and have a live link with the project.
6.1 In holding so, we find support and the strength from the judgment of Hon'ble Supreme Court in the case of CIT Vs. Bokaro Steel Ltd. reported in 236 ITR 315 wherein the income such as rental charges, machine higher charges, and interest income, etc were reduced from the cost of the project as these incomes were directly connected with the business of the assessee. 6.2 Similarly, the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs CIT reported in 227 ITR 172 has treated the interest income as the income from other sources due to the fact that the same was not linked with the project of the assessee. 6.3 Thus, the criteria to see any receipt or payment is whether the same is inextricably linked with the project. Accordingly, any Page 7 of 19 Downloaded on : Sun Feb 14 22:05:52 IST 2021 C/TAXAP/113/2020 JUDGMENT receipt shall be treated as inextricably linked with the project if it arises in the course of the project of the assessee.
6.4 Now coming to the present facts of the case whether the impugned interest income from GVI represents the income in connection with the project. Regarding the interest income from the GVI, we among other thing, note that a question also arises about the source of fund forwarded by the assessee to GVI in the form of security deposit, whether it was own fund or non-interest /interest-bearing fund. On perusal of the balance sheet, we note that the own fund of the assessee stands at ₹ 5 crores which are not sufficient enough to provide such security deposit. Thus the borrowed fund has been utilized for furnishing such security deposit. The AO has not disturbed the interest expenses on such borrowed fund which was capitalized to the cost of the project. But the AO treated the interest income from such borrowed fund as income from other sources and not as part of the impugned project. In our considered view, the AO cannot treat the interest expenses and interest income differently arising from the same fund. In our view, if the AO was not satisfied about the utilization of the fund, then he should have treated the interest income and interest expenses in the similar fashion. In other words, the AO should have treated the interest income from other sources and against that interest expenses should have been allowed as expenses against the same as these are inextricably linked. But the AO has not done so. Accordingly, we are of the view that the AO erred in treating the interest expenses and income differently despite these are inextricably linked. Thus, we are of the view that once the AO has accepted the interest cost as part of the project then the same treatment needs to be given even to the interest income by adjusting the same against the part of the project cost as the interest expense and income are inextricably linked. Accordingly, we do not find any reason to disturb the finding of the ld. CIT-A. 6.5 Regarding the interest income from GMDCL, we note that such income was earned by the assessee Page 8 of 19 Downloaded on : Sun Feb 14 22:05:52 IST 2021 C/TAXAP/113/2020 JUDGMENT on the fixed deposits on the bank guarantee made in connection with the project awarded by GMDCL. This fact can be verified from the bank guarantee furnished by the Axis Bank Ltd on behalf of the assessee, which is placed on pages 98 to 101 of the paper book. There was also no allegation that such bank guarantee represents the circular transaction. Moreover, there was no defect pointed out by the authorities below in the bank guarantee furnished by the assessee. Accordingly, we disagree with the finding of the learned CIT (A). Hence the ground filed by the assessee in its CO is allowed. In view of the above, the ground of appeal of Revenue is dismissed and the ground filed by the assessee in its CO is allowed."
3.11. From the impugned order passed by the CIT (A) as well as the Tribunal and on the perusal of balance-sheet produced on record, it is found that the assessee was having its own fund of Rs.5 crores, which was not sufficient enough to provide the security deposit to GVISPL. Thus, the borrowed fund was utilised by the assessee for furnishing the security deposit. The Assessing Officer did not disturb the interest expense claimed on such borrowed fund which was not capitalised as the cost of the project but the interest income from such borrowed fund which was placed as the security deposit by the assessee with GVISPL was treated as income from other sources and not as part of the project. Thus, it was found by the Tribunal as well as the CIT(A) that Page 9 of 19 Downloaded on : Sun Feb 14 22:05:52 IST 2021 C/TAXAP/113/2020 JUDGMENT Assessing Officer could not have treated interest expense and the interest income differently arising from the same fund. When the Assessing Officer was satisfied with regard to the utilisation of the fund, he ought to have considered the interest income and interest expenses arising from the same fund at par. In other words, the Assessing Officer could not have treated interest income as income from other sources on one hand and treated interest expenses as part of the project cost.
4. In such circumstances, both the CIT(A) and Tribunal have rightly come to the conclusion that the interest income earned by the assessee is inextricably linked with the project as both interest expenses and interest income are arising from the same borrowed fund.
5. With regard to the interest income on the fixed deposit placed with the Bank for issuance of bank guarantee, the Tribunal has found that the bank guarantee was in connection with the project awarded by GMDCL. The Tribunal also verified this fact from the Bank Guarantee furnished by the Axis Bank Ltd. on behalf of the assessee from the materials placed Page 10 of 19 Downloaded on : Sun Feb 14 22:05:52 IST 2021 C/TAXAP/113/2020 JUDGMENT before it. The Tribunal has further noted that there was also no allegation that such Bank Guarantee represents Circular Transactions. The Tribunal therefore, disagreed with the CIT(A) and allowed the cross objections filed by the assessee by holding that the interest income earned by the assessee on the fixed deposit kept with the Bank for the purpose of issuance of Bank Guarantee is directly linked with project of the assessee.
6. Ms. Mauna Bhatt, the learned Standing counsel assisted by learned advocate Mr. Karan Sanghani submitted that the decision of the Tribunal as well as CIT(A) is erroneous because both the authorities did not consider the facts brought on record by the Assessing officer that the security deposit forwarded to GVISPL was nothing but an arrangement amongst the parties and the said funds were not utilised by the GVISPL.
7. The CIT (A) taking into consideration the decision of the Supreme Court in the case of CIT Vs. Bokaro Steel Ltd. reported in 236 ITR 315, has come to the conclusion that the interest income earned by the assessee was with regard to the security deposit Page 11 of 19 Downloaded on : Sun Feb 14 22:05:52 IST 2021 C/TAXAP/113/2020 JUDGMENT kept by the assessee for the purpose of the project. The Supreme Court in that case has held as under:
"7. The appellant, however, relied upon the decision of this Court in Tuticorin Alkali Chemicals & Fertilisers Ltd. vs. CIT (supra). That case dealt with the question whether investment of borrowed funds prior to commencement of business, resulting in earning of interest by the assessee would amount to the assessee earning any income.
This Court held that if a person borrows money for business purposes, but utilises that money to earn interest, however temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. Merely because he utilised it to repay the interest on the loan taken, will not make the interest income as a capital receipt. The Department relied upon the observations made in that judgment (at p. 179) to the effect that if the company, even before it commences business, invests surplus funds in its hands for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head "capital gains". Similarly, if a company purchases rented house and gets rent, such rent will be assessable to tax under s. 22 as income from house property. Likewise, the company may have income from other sources. The company may also, as in that case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under s. 56 of the IT Act. This Court also emphasised the fact that the company was not bound to utilise the interest so earned to adjust it against the interest paid on borrowed capital. The company was free to use this income in any manner it liked. However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the Page 12 of 19 Downloaded on : Sun Feb 14 22:05:52 IST 2021 C/TAXAP/113/2020 JUDGMENT construction activities or business activities of the assessee, the same cannot be said in the present case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee-company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction. In the case of Challapalli Sugars Ltd. vs. CIT 1974 CTR (SC) 309 : (1975) 98 ITR 167 (SC) : TC 17R.834, this Court examined the question whether interest paid before the commencement of production by a company on amounts borrowed for the acquisition and installation of plant and machinery would form a part of the actual cost of the asset to the assessee within the meaning of that expression in s. 10(5) of the Indian IT Act, 1922, and whether the assessee will be entitled to depreciation allowances and development rebate with reference to such interest also. The Court held that the accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a 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 capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee receives any 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 are receipts of a capital nature and cannot be taxed as income.
8. The same reasoning would apply to Page 13 of 19 Downloaded on : Sun Feb 14 22:05:52 IST 2021 C/TAXAP/113/2020 JUDGMENT royalty received by the assessee-company for stone, etc. excavated from the assessee-company's land. The land had been allowed to be utilised by the contractors for the purpose of excavating stones to be used in the construction work of assessee's steel plant. The cost of the plant to the extent of such royalty received, is reduced for the assessee. It is, therefore, rightly taken as a capital receipt."
8. In view of the aforesaid finding of facts, the reliance placed by the Assessing Officer on the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals vs. Commissioner of Income Tax, Madras reported in 227 ITR 172, would not be tenable because in the said decision, the Supreme Court has held that if the idle fund of the assessee is invested for the purpose of earning interest income, such income would be treated as income from other sources.
9. In view of above and considering the concurrent findings of fact arrived at by the CIT(A) and the Tribunal that the interest income earned by the assessee on the security deposit kept with GVISPL is directly and inextricably linked with the project, the project cost is to be reduced to that extent as the assessee has borrowed funds for placing such security deposit and interest expenses incurred for Page 14 of 19 Downloaded on : Sun Feb 14 22:05:52 IST 2021 C/TAXAP/113/2020 JUDGMENT such borrowed funds are capitalised. Therefore, we are of the opinion that in the facts of the case, the question No.1 proposed by the Revenue cannot be termed as a substantial question of law.
10. With regard to the second question, the Assessing Officer disallowed Rs.29,60,018/- on account of CENVAT credit. The assessee in its audited financial statements has shown an unutilised CENVAT credit as on 03.02.2011 and claimed that such CENVAT credit pertains to the services received by the assessee and does not pertain to inventories as envisaged under the provision of Section 145A of the Act, 1961 and therefore, the provisions of Section 145A of the Act, 1961 do not apply to it.
11. However, the Assessing Officer was not satisfied with the contention of the assessee and added the amount of CENVAT credit as on the date of balance- sheet to the total income of the assessee by observing that as per the provisions of Section 145A of the Act, 1961, the assessee was liable to include amount of duty, cess, tax etc. in the amount of purchases, sales and the closing stock. Page 15 of 19 Downloaded on : Sun Feb 14 22:05:52 IST 2021
C/TAXAP/113/2020 JUDGMENT 12. Being aggrieved and dissatisfied with the
addition of amount of CENVAT credit, the assessee preferred an appeal before the CIT(A) who deleted the addition made by the Assessing Officer by observing as under:
"5.2 This issue was discussed by the A.O at para 3 of the assessment order. As seen from the appellant's reply dated 20.01.2014, it was contended that the appellant company was engaged in the mining activity i.e. service sector; the CENVAT credit pertained to the services received by the appellant; the credit did not pertain to the inventories and therefore the provisions of section 145A were not applicable. A.O. did not make any observations on these contentions. Instead he made the addition of the CNEVAT credit to the closing stock. Having considered the facts of the matter, I am inclined to accept the contentions of the AR that given the nature of business of the appellant the provisions of section 145A are not attracted.
5.3 Even if the provisions of section 145A are attracted, the addition is not sustainable. Judicial opinion is settled that all the three items namely, purchases, sale and the inventory as mentioned in section 145A are to be adjusted to include element of VAT. Such an exercise is revenue neutral. Impugned addition is not in accordance with law. It is deleted. This ground of appeal is allowed."
13. The Revenue being aggrieved preferred an Appeal before the Tribunal. The Tribunal, however, confirmed the order passed by the CIT(A) by observing as under:
"9.2 From the preceding discussion, we note that the assessee has been recording its transactions of purchase, sales, and valuation of inventories, net of CENVAT consistently. Thus, Page 16 of 19 Downloaded on : Sun Feb 14 22:05:52 IST 2021 C/TAXAP/113/2020 JUDGMENT if the inventory of closing stock is enhanced by the amount of CENVAT credit attributable to it, then the amount of corresponding purchases should also be increased by the said amount which will result in tax neutral exercise. Thus, in our considered view, the Assessing Officer erred in enhancing the value of the closing stock without giving effect to the purchases. In this regard, we find support and guidance from the judgment of Hon'ble Gujarat High Court in the case of Pr.CIT vs. Gujarat Gas Company Ltd. In Tax Appeal No.90 of 2017 vide order dated 07/02/2017, wherein it was held as under:-
"3.03. Now, so far as question No. [B] i.e. with respect to addition made by the A.O. on account of unutilized modvat/cenvat credit of Rs. 56,08,089/- is connected, it is required to be noted that the learned tribunal has taken note that with respect to modvat receivable account, there is corresponding less debit to the purchase account and hence to that extent there is already income offered for tax. If that be so, there was no question of further adding modvat/cenvat credit to the income of the assessee for the year under consideration. Under the circumstances, we see no reason to interfere with the impugned judgement and order passed by the learned tribunal so far as confirming the order passed by the learned CIT(A) deleting the addition made by the A.O. on account of unutilised modvat/cenvat credit of Rs. 56,08,089/-. We are in complete agreement with the view taken by the learned tribunal."
9.3 There is no ambiguity that the assessee has been following the exclusive method of accounting. In view of the above, we concur with the view of the Ld. CIT(A) and accordingly decline to interfere in his order. Hence, the ground of appeal of the Revenue is dismissed."
14. Thus, both CIT(A) and the Tribunal have arrived at findings of fact that the assessee was following Page 17 of 19 Downloaded on : Sun Feb 14 22:05:52 IST 2021 C/TAXAP/113/2020 JUDGMENT the method of valuation consistently and there was no dissatisfaction of the Assessing Officer about the correctness of the books of accounts of the assessee and the assessee has been recording his transaction of purchase, sales and valuation of inventories net of CENVAT. Consequently, if the inventory of the closing stock is enhanced by the amount of CENVAT credit attributable to it, then the amount of corresponding purchase is also required to be increased by the said amount, which would result into tax neutral exercise. The Tribunal has rightly relied upon the judgment of this Court in case of Gujarat Gas Company Limited in Tax Appeal No.90 of 2017 in the impugned order.
15. In view of the above concurrent findings of fact arrived at by the CIT(A) and Tribunal, we are of the opinion that the addition made by the Assessing Officer on account of CENVAT credit is rightly deleted as the assessee has consistently followed the valuation method of net of CENVAT Credit and the addition of CENVAT Credit would also require adding of the CENVAT credit in the purchases, resulting into tax neutral exercise.
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16. In such circumstances, we are of the opinion that the questions proposed by the Revenue cannot be termed as substantial questions of law. In the result, the appeals fail and are accordingly dismissed.
(J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) KUMAR ALOK Page 19 of 19 Downloaded on : Sun Feb 14 22:05:52 IST 2021