Income Tax Appellate Tribunal - Hyderabad
Andhra Pradesh Gas Infrastructure ... vs Ito, Ward-1(2), Hyderabad, Hyderabad on 7 August, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "B", HYDERABAD
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
AND
SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER
ITA No. 1475/Hyd/2016
Assessment Year: 2012-2013
Andhra Pradesh Gas Vs. Income Tax Officer,
Infrastructure Ward-1(2),
Corporation Private Hyderabad.
Limited,
Hyderabad.
PAN: AAICA 1047 N
(Appellant) (Respondent)
Revenue by: Shri K. Kulasekhar
Assessee by: Sri Nilanjan, DR
Date of hearing: 07.08.2018
Date of pronouncement: 17 th August, 2018
ORDER
PER INTURI RAMA RAO, A.M.:
This is an appeal filed by the assessee directed against the order of Ld. CIT(A)-1, Hyderabad dated 13.07.2016 for the assessment year 2013-14. The appellant raised the following grounds of appeal: -
"1. The order of the Assessing Officer is erroneous, unjust and contrary to the facts of the case.
2. The Assessing Officer assessed the total income of Rs. 1,31,29,606/ -
by adding the interest income to the returned income and taxed accordingly of Rs. 57,50,870/-. Treating it as income generated under the head "income from other sources".
3. During the assessment proceedings we have submitted the documentary evidences relating the case, but the Assessing Officer contending that the interest income is not directly related to the capital nature. So it shall not be allowed for adjustment against the capital expenditure."
22. Briefly, the facts of the case are that the assessee is a company duly incorporated under the provisions of Companies Act, 1956. The return of income for the A.Y. 2012-13 was filed on 25.09.2012 admitting a total income at Rs. NIL. Against the said return of income, the assessment was completed by the ITO, Ward -1(2), Hyderabad (hereinafter called A.O.) vide order dated 24/02/2015 passed u/s 143(3) of the I.T. Act, 1961 (the Act) at a total income of Rs. 1,31,29,606/-. While doing so, the Assessing Officer has brought to tax the interest earned on Fixed Deposits with banks of Rs. 1,31,29,606/- rejecting the contention that the interest income should go to reduce the cost of the construction of the project which is being set-up for the purpose of Oil and Natural Gs exploration activities. Since the assessee -company has not commenced commercial activities till date, the same would reduce cost of the project. It is further submitted that the Fixed Deposit was made out of the funds received in the form of share capital from A.P. Infrastructure Corporation Ltd., & A.P. Genco Power Generation Corporation. Being aggrieved, an appeal was filed before the CIT(A) who vide the impugned order confirmed the action of the A.O. by holding that there were no borrowed funds to earn the interest income and it is not permissible to set-off income against the expenditure. Being aggrieved, the appellant is before us in the present appeal.
3. We have heard the rival submissions and perused the record. the issue in the present appeal is whether the interest income earned during the construction period of the project would go to reduce the cost of project or assessable under the head income from other source s. This issue is dealt with by the Coordinate Bench of Bangalore, authored by the Accountant Member, the case of Income Tax Officer vs. Bank Note Paper Mill India (P.) Ltd., (56 ITR (T) 266), by holding as under:-
3"7. We heard rival submissions and perused material on record. The short issue that comes up for consideration in the present appeal is whether interest income earned by the assessee during the construction period on bank deposits made out of share application money received by it, is taxable as 'income from other sources' or it should go to reduce capital cost of the plant which is being set up by the assessee- company. Undisputedly, facts are that the said interest income was earned by the assessee-company on bank deposits made out of share capital received by it from the Reserve Bank of India. The share capital was received by the respondent- assessee-company to meet capital expenditure for setting up of assessee's factory. As the funds were not immediately required, the respondent-assessee made deposits with bank on which assessee earned interest. This interest income was treated as abatement of capital cost of the project/factory by the assessee-company in the books of account, whereas the AO was of the opinion that the same should be treated as revenue receipt and brought to tax placing reliance on the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). The decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) was distinguished by the Hon'ble Supreme Court in the case of Bokaro Steel Ltd.(supra) wherein it was held that the ratio of the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) is not applicable where interest receipt is directly connected with or incidental to working of construction of the assessee's plant. The decision of the Hon'ble Supreme Court in the case of Bokaro Steel Ltd. (supra) was followed subsequently in the case of Karnal Co-operative Sugar Mills Ltd. (supra). An identical issue had come up for consideration before the Hon'ble Jurisdictional High Court in the case of CIT v. Karnataka State Agricultural Produce Processing & Export Corpn. Ltd. [2015] 57 taxmann.com 349/231 Taxman 831/377 ITR 496. In that case the State Government Corporation earned interest on deposits temporarily kept out of grants received from the State Government was taxable or not? The facts are that the State Government Corporation earned interest during the construction period on the fixed deposits temporarily made out of State Government grants. The issue before the Hon'ble High Court was whether such interest income was taxable or should go to reduce the capital cost of the project. The Hon'ble High Court, after considering the decisions of the Hon'ble Supreme Court in the case of Bongaigaon Refinary Petrochemicals Ltd. v. CIT [2001] 119 Taxman 488/251 ITR 329 (SC), Bokaro Steel Ltd. (supra), and Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and its own decision in the case of Karnataka Power Corpn. (supra) and CIT v. Karnataka Urban Infrastructure & Development & Finance Corpn. [2006] 155 Taxman 228/284 ITR 582 (Kar.) held that such interest income would go to reduce the capital cost of the project, is on the capital account and should not be brought to tax. The relevant portion of the judgment is as under:
'9. After hearing the rival contentions and perusing the material on record, we have noticed that the assessee-company is a Government owned company. In order to facilitate infrastructure facilities in various parts of the State of Karnataka, for increasing the export of horticultural produce, a sum of Rs. 10.00 crores was granted to the assessee. Before the utilisation of this grant amount, it was temporarily kept in fixed deposits and the interest was earned on the said amount. The assessee has placed certain additional evidence before 4 the Tribunal to establish that the Government of Karnataka had specifically directed that interest earned on fixed deposits of grants pending utilisation should be treated as additional grant of the scheme and not to be treated as "income of the company". No liberty was provided to the company to make use of that the interest earned on the said amount kept in fixed deposits.
Though the assessee-company is engaged in trading in agricultural produce, it has no power to make use of the said grant made by the Government of Karnataka other than for a particular scheme i.e., the said amount cannot be diverted for any other purpose other than for which it was sanctioned as per the Government Order dated 23.1.2007. Thus, the emphasis made by the revenue that the assessee-company being engaged in trading activities cannot be considered as a nodal agency of the State Government and the interest earned on the grants by the assessee-company has to be treated as income is not acceptable in view of the specific directions issued by the State Government regarding the utilization of the amount granted and on the interest accrued thereon.
10. The Tribunal relied on the Judgment of this Court in the case of Karnataka Urban Infrastructure Development Finance Corpn.'s case (KUIDC) (supra) wherein it is held that:
"The material on record shows that the very purpose of constitution of the assessee was to act as a nodal agency for implementation of mega-city scheme worked out by the Planning Commission. Both the Central and the State Governments are expected to provide requisite finances for implementation of the said project. The funds from the Central and State Governments will flow directly to the specialised institutions/nodal agencies as grant and the nodal agency will constitute a revolving fund with the help of Central and State shares out of which finance could be provided to various agencies such as water, sewerage boards, municipal corporations, etc. The objective is to create and maintain a fund for the development of infrastructural assets on a continuing basis and, therefore, the assessee is a nodal agency formed/created by the Government of Karnataka as per the guidelines; there is no profit motive as the entire fund entrusted and the interest accrued therefrom on deposits in bank though in the name of the assessee has to be applied only for the purpose of welfare of the nation/States as provided in the guidelines; the whole of the fund belongs to the State Exchequer and the assessee has to channelise them to the objects of centrally sponsored scheme of infrastructure development for mega-city of Bangalore. Funds of one wing of the Government is distributed to the other wing of the Government for public purpose as per the guidelines issued. The monies so received, till it is utilised, is parked in a bank. The finding recorded by the Tribunal clearly shows that the entire money in question is received for implementation of the scheme which is for a public purpose and the said scheme is implemented as per the guidelines of the Central Government and, therefore, the assessee is only acting as a nodal agency of Central Government for implementation of these projects. It is not the case of the Revenue that the assessee was carrying on any business or activities of its own while implementing the scheme in question. The unutilised money, during which the project could not be fully implemented, is deposited in a bank to earn interest. That interest earned is also again utilised for the implementation of the mega-city scheme which is also permitted under 5 the scheme. Therefore, in computing the total income of the assessee for any previous year the interest accrued on bank deposits cannot be treated as an income of the assessee as the interest is earned out of the money given by the Government of India for the purpose of implementation of mega-city scheme. Therefore, we do not find any error in the conclusion reached by the Tribunal that there was no income earned by way of interest by the assessee and setting aside the order of AO which is affirmed by the first appellate authority. The finding given by the Tribunal is purely a question of fact. We do not find any substantial question of law involved in this appeal and therefore, this appeal is liable to be dismissed at the stage of admission itself."
11. In Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case (supra), the Apex Court has held that:
"There is another aspect of this matter. The company, in this case, is at liberty to use the interest income as it likes. It is under no obligation to utilise this interest income to reduce its liability to pay interest to its creditors. It can re- invest the interest income in land or share, it can purchase securities, it can buy house property, it can also set up another line of business, it may even pay dividends out of this income to its shareholders".
12. In the case of Karnataka Power Corpn. (supra), the Apex Court following the Judgment of Bokaro Steel Ltd'scase (supra) has held that "interest receipts and hire charges from contractors are in the nature of capital receipts".
13. In the case of Bongaigaon Refinary & Petrochemicals Ltd. v. CIT [2001] 251 ITR 329/119 Taxman 488 the Apex Court considering the decision in Tuticorin Alkali Chemicals Ltd.'s case (supra) and Bokaro Steel Ltd.'s case (supra) has held that in Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case, the question related was with the interest earned by the Company during its formative period by investments while in Bokaro Steel Ltd.'s case (supra), it is so confined and did not apply where the receipts were directly connected with or were incidental to the work of construction of the assessee's plant. Accordingly, applying the law enunciated in Bokaro Steel Ltd. case allowed the appeal.
14. In the light of the judgments referred to above, we have examined the case on hand. It is clear that the assessee has received the grant of Rs 10.00 crores from the Government of Karnataka for a particular project i.e., for improvement of infrastructure and to promote export of horticultural produce. Before the said grant was utilized for the specific purpose it was parked in fixed deposits and the interest was earned and by the subsequent additional evidence produced by the assessee before the Tribunal, it is further made clear that the State Government has categorically specified that any interest earned on those grants originally granted has to be considered as an additional grant and not an income of the assessee-Company.
15. As explained by the Apex Court, in Bongaigaon Refinary & Petrochemicals Ltd.'s case, (supra), in Tuticorin's case, the investment in deposits was made by the Company during its formative period by investments and in Bokaro Steels Ltd.'s case (supra) the inextricable link between the interest earned and the set up of the plant was established. Thus, in the present case we are of the view that this is not an investment made subsequent to the 6 setting up of the project but this is the unutilized income parked in fixed deposits for a temporary period and inextricable link for the interest earned on the grants and the original grant made by the State Government to set up a project is established as in Bokaro Steel case. "
Respectfully following the ratios of the decisions laid down in the above cases, we hold that even in the present case also, interest earned should only go to reduce the capital cost of the project to be set up by the respondent company and it should not be brought to tax, as the interest is earned on capital account. The appeal of the revenue is dismissed."
4. The above decision of the ITAT was affirmed by the Hon'ble Karnataka High Court vide IT Appeal No. 690 of 2017, dated 21.06.2018 after observing that the appeal filed by the Revenue is frivolous held as under:
"4. The relevant portion of the impugned Order of the learned Tribunal in favour of Assessee is quoted below for ready reference:
"7. We heard rival submissions and perused material on record. The short issue that comes up for consideration in the present appeal is whether interest income earned by the assessee during the construction period on bank deposits made out of share application money received by it, is taxable as 'income from other sources' or it should go to reduce capital cost of the plant which is being set up by the assessee-company. Undisputedly, facts are that the said interest income was earned by the assessee-company on bank deposits made out of share capital received by it from the Reserve Bank of India. The share capital was received by the respondent-assessee-company to meet capital expenditure for setting up of assessee's factory. As the funds were not immediately required, the respondent-assessee made deposits with bank on which assessee earned inerest. This interest income was treated as abatement of capital cost of the project/factory by the assessee-company in the books of account, whereas the AO was of the opinion that the same should be treated as revenue receipt and brought to tax placing reliance on the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). The decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) was distinguished by the Hon'ble Supreme Court in the case of Bokaro Steel Ltd. ((236 ITR 315)(SC) wherein it was held that the ratio of the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) is not applicable where interest receipt is directly connected with or incidental to working of construction of the assessee's plant. The decision of the Hon'ble Supreme Court in the case of Bokaro Steel Ltd. (supra) was followed subsequently in the case of CIT v. Karnal Co-operative Sugar Mills Ltd. (243 ITR 2). An identical issue had come up for consideration before the Hon'ble Jurisdictional High Court in the case of CITA v. Karnataka State Agricultural Produce 7 Processing and Export Corporation Ltd. (377 ITR 496). In that case the State Government Corporation earned interest on deposits temporarily kept out of grants received from the State Government was taxable or not? The facts are that the State Government Corporation earned interest during the construction period on the fixed deposits temporarily made out of State Government grants. The issue before the Hon'ble High Court was whether such interest income was taxable or should go to reduce the capital cost of the project. The Hon'ble High Court, after considering the decisions of the Hon'ble Supreme Court in the case of Bongaigaon Refinary Petrochemicals Ltd. v. CIT (251 ITR
329)(SC), Bokara Steel Ltd. (supra), and Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and its own decision in the case of CIT v. Karnataka Power Corporation, (247 ITR 268) and CIT v. Karnataka Urban Infrastructure and Development and Finance Corporation (284 ITR 582) held that such interest income would go to reduce the capital cost of the project, is on the capital account and should not be brought to tax."
5. Learned Counsel for the Revenue, Mr. K.V. Aravind has fairly submitted that in the recent decision rendered by the Hon'ble Supreme Court on 24.04.2018 in the case of CIT v. Shree Rama Multi Tech Ltd. [2018] 92 taxmann.com 363/255 Taxman 136/403 ITR 426 the Hon'ble Supreme Court has again reiterated a similar position and held that such interest earned before the commencement of business operations is not liable to be taxed and is eligible for deduction against the public issue expenses incurred by the Company. The relevant portion of Paragraphs 12 and 13 of the said Judgment are quoted below for ready reference:
"(12) The common rationale that is followed in all these judgment is that if there is any surplus money which is lying idle and it has been deposited in the bank for the purpose of earning interest then it is liable to be taxed as income from other sources but if the income accrued is merely incidental and not the prime purpose of doing the act in question which resulted into accrual of some additional income then the income is not liable to be assessed and is eligible to be claimed as deduction. Putting the above rationale in terms of the present case, if the share application money that is received is deposited in the bank in light of the statutory mandatory requirement then the accrued interest is not liable to be taxed and is eligible for deduction against the public issue expenses. The issue of share relates to capital structure of the company and hence expenses incurred in connection with the issue of shares are to be capitalized because the purpose of such deposit is not to make some additional income but to comply with the statutory requirement, and interest accrued on such deposit is merely incidental. In the present case, the Respondent was statutorily required to keep the share application money in the bank till the allotment of shares was complete. In that sense, we are of the view that the High Court was right in holding that the interest accrued to such deposit of money in the bank is liable to be set off against the public issue expenses that the company has incurred as the interest earned was inextricably linked with requirement of the company to raise share capital and was thus adjustable towards the expenditure involved for the share issue.
(13) In view of the forgoing discussion, we are of the view that the High Court was right in upholding the decision of the Tribunal dated 21.10.2011 that the interest income earned out of the share application money is liable to be set off 8 against the public issue expenses. The judgment passed by the Division Bench of the High Court in remanding the matter to the Tribunal on other issues requires no interference."
6. In view of the said legal position with regard to aforesaid issue, we are satisfied that no substantial question of law arises in the present case and the Appeal filed by the Revenue is without merit and liable to be dismissed.
7. The Appeal is accordingly dismissed.
8. We express our concern and anguish at the tendency of the Revenue Department to file unnecessary appeals u/s. 260-A of the Act even though the issues are ex facie covered by the decision of the jurisdictional High Courts or even the Hon'ble Supreme Court of India. The substantial question of law essentially means that a question of law which is not already settled by the Constitutional Courts can only fall within the ambit of Section 260-A of the Act and therefore repetitive filing of such appeals by the tax Department who are expected to be serious and bonafide litigants in the Constitutional Courts is a matter of concern. It is expected of the concerned Authorities who approve filing of such appeals u/s. 260-A of the Act, to bona fide apply their mind to such aspects of the matter and only after recording appropriate reasons for need to file such appeals and need to get substantial question of law genuinely arising from the Order of the Tribunal determined by Constitutional Courts, that they should approve the filing of such appeals and the High Court u/s. 260-A of the Act. But, the present Appeal filed by the Revenue is certainly not one of that kind and therefore we record our note of caution for the Revenue Authorities concerned in this regard."
5. Even the coordinate Bench of Hyderabad while deciding the similar issue in the case Elgen (India) Pvt Ltd. vs. ITO (ITA Nos. 1286 & 1287/Hyd/2016, dated 29.11.2017) placed reliance on the jurisdictional High Court decision in the case Derco Coolcing Coils Ltd [198 ITR 375 (AP)] and held as under:-
"9.6. Considering the above discussion, in our considered view, the interest income earned by as sessee by depositing the share capital in Fixed Deposits under constraint are eligible to treat the income as capital in nature and allowed to set -off against the pre-commencement expenses during the year. Accordingly, grounds raised by the assessee are allowed."
6. Thus, in the light of the above legal position, we hold that the interest income earned during period of construction of the project 9 should only go to reduce the cost of the project. Accordingly, Grounds raised by the assessee are allowed.
7. In the result, appeal filed by the assessee is allowed.
Pronounced in the open Court on 17th August, 2018.
Sd/- Sd/-
(P. MADHAVI DEVI) (INTURI RAMA RAO)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 17 th August, 2018
OKK
Copy to:-
1) M/s. Andhra Pradesh Gas Infrastructure Corporation Pvt Ltd., 5 -9-
58/B, 2 nd floor, Parizram Bhavan, Basheer Bagh, Hyderabad -500004.
2) The Income Tax Officer, Ward-1(2), Hyderabad.
3) The CIT(A)-1, Hyderabad 4) The Pr. CIT-1, Hyderabad 5) The DR, ITAT, Hyderabad 6) Guard File