2016-VIL-975-ITAT-JAI

Income Tax Appellate Tribunal JAIPUR

ITA No. 628/JP/2014

Date: 11.08.2016

ROAD INFRASTRUCTURE DEVELOPMENT COMPANY OF RAJASTHAN LTD.

Vs

THE DCIT, CIRCLE-6, JAIPUR.

For The Assessee : Shri P.P. Pareek (CA)
For The Revenue : Shri R.S. Dagur (Addl.CIT)

BENCH

SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM

JUDGMENT

PER SHRI VIKRAM SINGH YADAV, A.M.

The appeal filed by the assessee is arising from the order dated 23.07.2014 passed by the learned CIT(A)-II, Jaipur for A.Y. 2009-10. The assessee has raised the following effective grounds of appeal:-

1. That the order passed by ld. Assessing Officer and Ld. CIT(A)-II, Jaipur has also erred in considering Rs. 35,39,474/- as income from other sources rather than reducing it from the capital cost for the construction, as this amount pertains to prior to commercial operations of the road for which this amount was borrowed.

2. That the order passed by ld. Assessing Officer and Ld. CIT(A)-II, Jaipur has also erred in double taxation of interest income of Rs. 1,64,07,481/-.

3. That the order passed by ld. Assessing Officer and Ld. CIT(A)-II, Jaipur has also erred in not allowing deprecation on road and amortising the cost on the basis of concession period, which is against the provisions of Income Tax Act, 1961.

2. The facts relevant for the issue under consideration are that the appellant company was formed as a joint venture company between Government of Rajasthan and IL&FS Ltd. and is engaged in development establishment, strengthening, upgradation, repair, rehabilitation, improvement, operation, maintenance and implementation of road and other infrastructure projects and facilities. During the financial year 2008-09, the company had completed Four (4) mega roads project out of Seven (7) and the remaining Three (3) projects which were under progress at the begin ning of the year were also completed during the year. The details of which are as under:

	Project Name	Status as on 31.03.2009
(i)	Phalodi to Pachpadra (PR-1)	15-Jun-07
(ii)	Pachpadra to Ramji Ki Gol (PR-2)	28-Dec-2007
(iii)	Hanumangarh to Ratangarh (HK-1)	28-Feb-08
(iv)	Ratangarh to Kishangarh (HK-2)	28-Feb-08
(v)	Alwar to Sikandra (AS)	31-Aug-2008
(vi)	Lalsot to Kota (LJ-1)	15-Dec-2008
(vii)	Baran to Jhalawar (LJ-2)	15-Apr-2008

2.1 The first ground is with regard to considering interest earned on shortterm receipts (STR) prior to commercial operations of the roads, as income from other sources rather than reducing it from the capital cost of construction of the roads. To implement and execute the project, loans were sanctioned and disbursed by a consortium of banks. Once the assessee commenced commercial operations of the roads, the interest expense on relatable borrowings were claimed as an allowable expenditure and interest income on STR were taken to the Profit & Loss account and offered to tax. In respect of remaining road stretches which were under construction and in case of completed road stretches upto the date of commercial operations, the total expenditure including the interest paid on borrowed funds net of interest income earned on STR was capitalized under the head Project work in progress (Capital work in progress ‘CWIP’). In respect of the latter road stretches which were under construction during the year and in case of completed road stretches upto the date of commercial operations, the Assessing Officer has not agreed to the treatment given for the interest earned on STR and Ld. CIT (Appeals) has also concurred with the same and interest receipt on STR of Rs. 35,39,474/- were brought to tax as income under the head “Income from Other Sources”.

2.2 The Ld. AO at para 2.3 Page 4 of his Order has observed that –

“The reply of the assessee has been considered but it is not accepted. The assessee has parked his spare funds in the FDRS in the Banks and the interest there from cannot be considered as business receipts. The assessee received interest during preceding years also which shows that the assessee was having spare funds to invest in the FDRs wherefrom it earned interest. Merely commencement of business alone cannot change the treatment of income. Considering the above facts, the interest received by the assessee from banks is liable to be treated as income from Other Sources. The assessee has not furnished the basis of interest apportioned towards Capital or the P&L account. No details or basis of interest apportioned towards various projects has also been provided as the assessee was carrying various other projects also which were underway. The assessee has shown to have earned interest of Rs. 1,99,46,955/- from FDRs in Banks out of which Rs. 35,39,474/- is adjusted in WIP and Rs. 1,64,07,481/- towards borrowing cost capitalized.

Further, in view of decision in the case of Tuticorin Alkali, total interest income earned from surplus fund should be declared separately as income from Other Sources instead of capitalizing it. Therefore FDRs. 1,99,46,955/- is added to the income of the assessee from Other sources.”

2.3 On appeal, the Ld. CIT(Appeals) in para 4.4.1 to 4.4.4 at page 5 to 7 of his order observed that:

(4.4.1) I have perused the facts of the case, the assessment order, submissions of the appellant and the case laws cited by the assessing Officer and the appellant. The appellant has relied upon the case of CIT vs. Bokaro Steels Ltd. 236 ITR 316 (SC) to emphasize the point that the interest income earned on Short term Fixed Deposit receipts was inextricably linked with the setting up of the project – in this case construction of the Road. It has been stated by the appellant that the Assessing Officer has wrongly applied the case law of Tuticorin Alkali Chemicals & Fertilizers Ltd. because in that case the assessee was liberty to use the interest income in any manner it so desired. In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. the Supreme Court has clearly stated that interest income generated prior to commencement of business, however temporarily it is to be taxed under the head – Income from other sources, unless there is a case of diversion of income by overriding title. It has therefore, to be examined in this case as to diversion by overriding title on the interest income earned. I have perused the common loan agreement submitted by the appellant wherein it has been stated that the borrower will deposit all disbursements and all cash inflows into a Trust and Retention account including toll liquidated damages revenues etc. which shall be subject to verification by the Senior Lenders. It has also been stated that all disbursement shall be used solely for the implementation of the project and for no other purpose. I have also perused the negative covenants given in clause 7.2 of the above agreement. In none of the clauses is there any mention of diversion by overriding title regarding the interest income earned. The only requirement is that the interest income has to be deposited in the trust and retention account. For that matter even toll receipts have to be deposited in this account. Mere deposit into this account does create any diversion by overriding title. For if this had been the case, then there would have been diversion by overriding title even with respect to toll receipts. In any case, the appellant has also not pointed out any clause which creates a diversion by overriding title on the interest income earned. Therefore, it is held that there is no diversion by overriding title on the interest income earned prior to the period when the roads were put to commercial use. Therefore the ratio in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. is applicable to the facts of this case.

(4.4.2) As regards, the case law relied upon by the appellant – CIT vs. Bokaro steel Ltd., (supra) I would like to reproduce para 4 of the said order “4 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 proceeding that the receipt of interest amounts to income of the assessee from other sources, the assessee has not filed any appeal for 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 (1997) 227 ITR 172. Hence we are not called upon to examine that issue.”

(4.4.3) Therefore, the case of Bokaro Steel Ltd. reiterates that ratio in the case of Tuticorin Alkali chemicals and Fertilizers ltd. In fact, the issue of interest income prior to the commencement of operation was not before the Hon’ble Sup0reme court in this case. The issue which has been adjudicated upon in this case is – whether(i) certain receipts upon the utilization of its assets viz. rent received from the contractor for the resident of workers employed by the contractor (ii) interest on advances given on hire to the contractor for the purposes of construction of the factory, could be separately taxed as income (whereas the assessee had reduced it receipts from the cost of construction. The Supreme Court held that these receipts were inextricably linked with the activity of setting up of the steel plant and therefore, were capital receipts which could not be taxed separately as income. The issues adjudicated upon in this case are totally different from the present case.

(4.4.4) In view of the above discussion, it is held that interest on fixed deposit receipts amounting to Rs. 1,99,46,955/- is to be taxed under the head income from other sources, in view of the judgement of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. which has further been reaffirmed in the case of Bokaro steels Ltd. Therefore, the addition made by the Assessing Officer is upheld.”

2.4 The ld AR submitted that firstly, he would like to draw reference of the Bench to the decision of Hon’ble Supreme Court in the case of CIT vs. Bokaro Steels Ltd. (236 ITR 315). In that case also, a similar issue arose and the Hon'ble Supreme Court has held that the income earned during the setting up of the project cannot be taxed as income from other sources as it is inextricably linked with the setting up of the project. The Hon'ble Supreme Court has also considered the earlier decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (93 Taxman 502) and have concluded that the income earned during the setting up of the project cannot be taxed as income from other sources. As the interest income is inextricably linked to the activity of setting up of the project the same can be reduced from the total expenditure incurred which is treated as preoperative expenses and is part of capital work in progress and which will be capitalized on commencement of commercial operations.

2.5 The ld AR further submitted that in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra) wherein the Hon'ble Supreme Court had come to the conclusion that "the Company was at liberty to use the interest income as it likes. It was under no obligation to utilize this interest income to reduce its liability to pay interest to its creditors. It could re-invest the interest income in land or shares, it could purchase securities, it could buy house property, it could also setup another line of business, it might even pay dividends out of this income to its shareholders. There was no overriding title of anybody diverting the income at source to pay the amount to the creditors of the company". However, in our case, it was under lien and control of the bank as a designated Trust and Retention Account, which is very clearly proved from Article 7 Para No. 7.1.2 of Common Loan Agreement signed between the Assessee and Consortium of banker dated 23.11.2005, which describes the process of disbursement and use of funds disbursed.

2.6 The ld AR further submitted that for the better control on the disbursed loan for this type of projects and operational convenience, the loan is disbursed on the basis of drawdown schedule and is kept in escrow account of the bank that account can be current account or it could be converted into any other account like short term deposit, etc. To our mind, the interest earned on keeping that money with the same bank and merely changing the nature of deposit cannot be constituted as utilization of funds other than the object for which it was sanctioned and disbursed and for all practical purposes more particularly as decided by number of judicial pronouncement that real income should be taxed and actual expenditure should be allowed stating all the interest earned out of disbursed amount is well within four walls of calculating the cost, which is to be capitalized.

2.7 The ld AR further submitted that as stated in Para 7.1.2 of the Loan Agreement, it is very clear that the money disbursed by the Bankers could be used for the purposes specified therein and all the amount was kept in “Trust and Retention Account” which was monitored by the banker/lenders. As Para 7.1 of the Loan Agreement and the nature of “Trust and Retention Account” states how, when and where this money can be utilized. The situation would have been different, if this money would have been invested in some security or was given as loan to someone else or was used for some other purposes but merely keeping the fund in separate type of account with the same rider of No Lien and utilization for the specified propose with the same bank which is lender, to our understanding, to arrive at the cost to the party should be netted, which has been done by the company. There is well defined distinction on the income earned during the construction period by the Hon’ble Supreme Court itself in the case of Commissioner of Income tax vs. Bokaro Steel Ltd 236 ITR 315 (S.C.) and our case is more similar to ‘Bokaro Steel’ case.

2.8 The ld AR further submitted that without restricting our submissions on the difference between our case and Tuticorin Alkali Chemicals and similarity with Bokaro Steel Ltd., he would like to draw our attention to the judgment of Hon’ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd vs Income Tax Officer dated 26 February, 2009 (ITA No. 1156/2007 & 1157/2007) and in case of CIT vs. Sasan Power Ltd. dated 6th January, 2012 (ITA 10/2012). The ld AR submitted that there is similarity of facts in our case and judgment of Hon’ble Delhi High Court in the case of Indian Oil Panipat Power ... vs Income Tax Officer on 26 February, 2009 (ITA No. 1156/2007 & 1157/2007) and in case of CIT vs. Sasan Power Ltd. on 6th January, 2012 (ITA 10/2012), we request to allow this ground of appeal and treat the interest earned during construction period as capital receipt “Deductible from Pre-Operative Expenses” and not as an “Income from Other Sources”.

2.9 The ld. DR vehemently argued the matter and submitted that the facts of the case are similar to that of Tuticorin Alkalies Chemicals and Fertilizers Ltd (supra) and he relies on the same and support the order of the lower authorities.

2.10 We have heard the rival contentions and pursued the material available on record. We find that both the parties have relied upon the decisions of the Hon'ble Supreme Court and in addition, the assessee has relied upon the decisions of Hon'ble Delhi High Court. Therefore, it would be appropriate to first refer to these decisions and some of the other recent decisions of Hon’ble High Courts and Coordinate Bench decisions.

2.11 In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), the Hon'ble Supreme Court held as under:-

“The facts of this case were not in dispute. In the usual course, interest received by the company from bank deposits and loans would be taxable as income under the head Income from other sources' under section 56. It was argued on behalf of the company that it had not yet commenced its business and in any event if the income was derived from funds borrowed for setting up the factory of the company, it should be adjusted against the interest payable on the borrowed funds.

Neither of the two factors can affect taxability of the income earned by the company the total income of the company is chargeable to tax under section 4. The Total income has to be computed in accordance with the provisions of the Act. Section 14 lays down that for the purpose of computation, income of an assessee has to be classified under six heads. In the instant case, the company had chosen not to keep its surplus capital idle, but had decided to invest it fruitfully. The fruits of such investment will clearly be of the revenue nature.

If the capital of a company is fruitfully utilised instead of keeping it idle, the income thus generated will be of the revenue nature and not accretion of capital Whether the company raised the capital by issue of shares or debentures or by borrowing will not make any difference to this principle. If borrowed capital is used for the purpose of earning income, that income will have to be taxed in accordance with law. Income is something which flows from the property. Something received in place of the property will be capital receipt. The amount of interest received by the company flows from its investments and is its income and is clearly taxable even though the interest amount is earned by utilising borrowed capital.

It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilising the borrowed funds as its income.

The company was at liberty to use the interest income as it liked it was under no obligation to utilise this interest income to reduce its liability to pay interest to its creditors. It could re-invest the interest income in land or shares, it could purchase securities, it could buy house property, it could also setup another line of business, it might even pay dividends out of this income to its shareholders. There was no overriding title of anybody diverting the income at source to pay the amount to the creditors of the company. It is well-settled that tax is attracted at the point when the income is earned Taxability of income is not dependent upon its destination or the manner of its utilisation. It has to be seen whether at the point of accrual, the amount is of the revenue nature and if so, the amount will have to be taxed.

It is true that the Supreme Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act.

Whether a particular receipt is of the nature of income and falls within the charge of section 4 is a question of law which has to be decided by the Court on the basis of the provisions of the Act and the interpretation of the term 'income' given in a large number of decisions of the High Courts, the Privy Council and also this Court. It is well-settled that income attracts tax as soon as it accrues. The application or destination of the income has nothing to do with its accrual or taxability. It is also wellsettled that interest income is always of a revenue nature unless it is received by way of damages or compensation.”

2.12 In the case of Bokaro Steel Ltd. (supra), the Hon'ble Supreme Court, after considering the decision of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), held as under:-

“The activities of the assessee in connection with first three receipts were directly connected with or were incidental to the work of construction of its plant undertaken by the assessee. Broadly speaking, these pertained to the arrangements made by the assessee with its contractors pertaining to the work of construction. To facilitate the work of the contractor, the assessee permitted the contractor to use the premises of the assessee for housing its staff and workers engaged in the construction activity of the assessee's plant. This was clearly to facilitate the work of construction. Had this facility not been provided by the assessee, the contractors would have had to make their own arrangements and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee had provided these facilities. The same was true of the hire charges for plant and machinery which was given by the assessee to the contractor for the assessee's construction work. The receipts in this connection also went to compensate the assessee for the wear and tear on the machinery. The advances which the assessee made to the contractor to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitches as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts were arrangements which were intrinsically connected with the construction of its steel plant. The receipts had been adjusted against the charges payable to the contractors and had gone to reduce the cost of construction. They had, therefore, been rightly held as capital receipts and not income of the assessee from any independent source.

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 received any amounts which were inextricably linked with the process of setting up its plant and machinery, such receipts would go to reduce the cost of its assets. These were receipts of a capital nature and could not be taxed as income.

The same reasoning would apply to royalty received by the assesseecompany for stones, 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 the assessee's steel plant. The cost of the plant to the extent of such royalty received, was reduced for the assessee. It was, therefore, rightly taken as a capital receipt.”

2.13 That the Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. (supra), after considering the decisions in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) and Bokaro Steel Ltd. (supra) at length, 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 & Fertilizers Ltd.'s case (supra) and that of Bokaro Steel Ltd. (supra). The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case (supra ) is 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) 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. v. CIT & EPT [1958] 34 ITR 368 (SC), and Narain Swdeshi Weaving Mills v. CEPT [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, 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 of the Act. The head "income from other sources" is a residuary head of income. See S.G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 (SC) and CIT v. Govinda Choudhury & Sons [1993] 203 ITR 881 (SC).

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 & Fertilisers Ltd. (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.'s case (supra) where the assessee had earned interest on advance paid to contractors during precommencement 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.

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 subsections (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.

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, in our opinion the Tribunal misdirected itself in applying the decision of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case (supra ) in the facts of the present case. In our opinion on account of the finding of fact returned by the CIT(A) that the funds infused in the assessee by the joint venture partner were inextricably linked with the setting up of the plant, the interest earned by the assessee could not be treated as income from other sources. In the result we answer the question as framed in favour of the assessee and against the revenue. These appeals are allowed and the impugned judgment is set aside.”

2.14 That the Hon'ble Delhi High Court in the case of Sasan Power Ltd (supra) following the decision in case of Indian Oil Panipat Power Consortium Ltd. (supra), has held as under:

“14. It is clear from the facts stated above that Commissioner of Income Tax (Appeals) and tribunal have specifically held that the interest income was on capital account. We have gone through the grounds of appeal and do not find any reason or justification to upset the said finding. The factual findings recorded by the CIT(Appeals) and tribunal are not under challenge. The CIT(Appeals) and the tribunal have held that in view of the factual position quoted above the decision of the Supreme Court in CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 / 102 Taxman 94 was applicable as the Commitment Advance, which had been paid to PFC. This is not a case of surplus funds, which were available and investment were made in fixed deposits to earn interest. The interest paid to the power procurement utilities on commitment advances was capitalized. Interest paid and interest received were inextricably linked and have a commonality about their nature and character. The appellant cannot treat them differently. Commitment Advances and interest paid and received had reference to bidding process and linked to the project/purpose for which the respondent was set up. In view of the factual matrix, interest received on unutilized commitment advances cannot be taxed as revenue income and interest paid on commitment advance treated as a capital expense. This will be contradictory. The entire expenditure for inviting bids etc. and even documentation was paid to PFC. The amounts received from the prospective bidders on account of sale of tender documents was also transferred to PFC. As noticed above, Revenue has not challenged and has accepted the order of the tribunal deleting addition of Rs. 1,35,81,234/-paid by the respondent-assessee to PFC for preparation of tender documents. In view of the factual matrix, the tribunal has rightly followed the ratio in Indian Oil Panipat power Consortium Ltd.'s case (supra).”

2.15 In a recent decision, the Delhi High Court in case of Pr. Commissioner of Income-tax v. Facor Power Ltd. [2016] 66 taxmann.com 178 (Delhi) following the decision in case of Indian Oil Panipat Power Consortium Ltd. (supra), has held as under:

11. From the above extract, it is evident that the test that is required to be employed 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 same. In the present case, findings of fact have been returned by the Commissioner of Income Tax (Appeals) and have been confirmed by the Income Tax Appellate Tribunal to the effect that the funds were inextricably connected with the setting up of the power plant of the assessee. The learned counsel for the revenue has also not been able to point out any perversity in such finding and, therefore, the factual findings have to be taken as those accepted by the Income Tax Appellate Tribunal which is the final fact finding authority in the income tax regime. That being the case, the decision of the Division Bench in Indian Oil Panipat Power Consortium Ltd. (supra) would squarely apply to the facts of the present case and the Tribunal was right in applying the same.

13. In the present case, there is a finding of fact that the money placed in the fixed deposit was inextricably linked with the setting up of the power plant. Thus, the revenue generated on account of interest on the said fixed deposits would be in the nature of a capital receipt and not a revenue receipt. This case has been decided on the basis of this principle and not on the basis that the source of the funds was through raising of share capital and not through borrowings.”

2.16 The Coordinate Bench in case of Adani Power Ltd. v. Assistant Commissioner of Income-tax, Range-1, Ahmedabad [2015] 61 taxmann.com 355 (Ahmedabad - Trib.) has held as under:

“2.16 From the above, it is evident that the Hon'ble Delhi High Court has considered and interpreted the decisions of Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) as well as Bokaro Steel Ltd. (supra). The conclusion of the Delhi High Court is in fact the law which emerges as per the decision of Hon'ble Apex Court. Therefore, in our opinion, the CIT(A) was not justified in ignoring the decision of Hon'ble Delhi High Court by simply mentioning that the issue is covered by the decision of Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). After considering these two decisions of the Hon'ble Apex Court and also some other decisions of the Hon'ble Apex Court, their Lordships of the Delhi High Court arrived at the conclusion "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 the 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 the pre-operative expenses." That, the ratio of the above finding of the Hon'ble Delhi High Court would be squarely applicable to the facts of the assessee's case, because admittedly in the case under appeal before us the share capital as well as loans were raised for the specific purpose of setting up of the power generation plants. The business of the assessee has not been commenced and therefore, as per above decision, the interest received in the period prior to commencement of business was in the nature of capital receipt and hence was required to be set off against the pre-operative expenses. The assessee has already set off the interest income against the preoperative expenses which is titled as "project development expenditure". In view of above, we are of the opinion that the interest income of Rs. 1,35,87,158/- as well as Rs. 1,64,07,481/- was a capital receipt not chargeable to tax during the year under consideration. Accordingly, Ground Nos. 1 of the assessee's appeal is allowed.”

2.17 Further, we drawn guidance from the decision of Hon’ble Rajasthan High Court in case of Commissioner of Income-tax-I v. Kansara Modler Ltd. [2012] 20 taxmann.com 641 (Raj.) wherein it was held that:

"13. In that view of the matter, what we are required to consider is, as to whether the Tribunal was legally justified in not applying the judgment rendered in Tuticorin's case (supra), or that, the Tribunal was justified in applying the judgments given in Bokaro Steel, and Karnal Cooperative Sugar Mill's case. If this question were to come originally before us, perhaps we might have taken a task of undertaking the exercise, as to which of the views is required to be followed, and may be, that we might have come to any conclusion, either ways. In such circumstances, when the learned Tribunal, after examining all the three judgments, in Tuticorin's case (supra), Karnal Cooperative Sugar Mill's case (supra), and Bokaro Steel's case (supra), has examined the question, and found Karnal Cooperative's case (supra) to be the nearest, and latest case, on facts, in our view, it cannot be said, that the Tribunal was wholly wrong in adopting this course. It would have been equally the same situation, if the learned Tribunal would have adopted the other line of reasoning, following the judgment in Tuticorin's case (supra).

14. Therefore, when there are two sets of judgments of Hon'ble Supreme Court, proceeding on different lines of reasoning’s, and both stand on their own logical footing, and in that event, if the learned Tribunal has accepted one line of reasoning, supported by one set of judgments, it cannot be said, that the learned Tribunal was legally not justified in following the decision, as followed by it, simply because it might have been possible, or might be more appropriate to follow the other set of judgment, by following the other line of reasoning.”

2.18 From the above, it is evident that there are two sets of judgments of Hon'ble Supreme Court, proceeding on different lines of reasonings. The Hon’ble Delhi High Court in case of Indian Oil Panipat Consortium Ltd (supra) has considered and interpreted the decisions of Hon’ble Supreme Court in case of Tuticorin Alkali Chemicals & Fertilizers (supra) as well as Bokaro Steel ltd (supra). After analyzing both the decisions of Hon’ble Supreme Court, it held that “the test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case (supra ) is 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) 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.”

2.19 The facts in the instant case are pari materia with the facts of the Indian Oil Panipat (supra) and the ratio decidendi of Hon’ble Delhi High Court in that case will squarely apply to the facts of the assessee. In the instant case, undisputedly, the funds have been borrowed for the specific purpose of execution of the mega road projects and as per the loan agreement executed between the consortium of bankers and the assessee dated 23.11.2005, all the disbursements shall be deposited in the trust and retention account which shall be subject to strict control and verification by the Senior lenders and all disbursements shall be utilised solely for the purposes of implementation of the project and no other purpose. The funds are thus inextricably linked to the setting up of the mega road projects and interest earned on such borrowed funds infused in the business could not be classified as income from other sources. We also note a distinguishing feature in the instant case that the assessee is not at liberty to use the interest so earned as per its will and discretion unlike the case in Tuticorin Alkali Chemicals & Fertilizers (supra) and the interest has to be used solely for the purposes of implementation of the specified projects only. The impunged interest receipt of Rs. 35,39,479/- on such borrowed funds relates to the mega road projects/stretches which were under construction and the completed road projects/stretches upto the date of commencement of commercial operations. Therefore, the interest received prior to commencement of commercial operations of the specified mega road projects will be in the nature of capital receipt and will be required to be set off against the pre-operative expenditure capitalized under the head “Capital work in progress” and the same cannot be brought to tax under the head “income from other sources”. Hence, ground no. 1 of the assessee is allowed.

3. In ground No.2, the assessee has challenged the action of the Ld.AO in double taxation of interest income of Rs. 1,64,07,481/-.

3.1 The ld AR submitted that the ld. CIT(A) upheld the order of the ld. AO regarding the taxation of interest capitalized as well as deducted from the interest expenditure debited into P&L account as income from Other Sources to the extent of Rs. 1,99,46,955/- in spite of giving clear cut finding in the para

4.1 of his order , which has resulted into addition of s. 1,64,07,481/- twice as assessee himself has deducted the same amount from the expenditure incurred under the head interest paid and net amount was shown as expenditure in the Profit and Loss account of the year. Hence Rs. 1,64,07,481/- has been considered two times as income and subjected to income tax twice.

3.2 From the perusal of the CIT(A)’s order it is noted that the interest income of Rs. 1,64,07,481/- was reduced from the interest expenditure debited in the P&L account in other words the interest expenditure has been shown net of interest income of Rs. 1,64,07,481/-. This shows that the interest income of Rs. 1,64,07,481/- has already been credited in the profit and loss account. However, the way it has been reflected in the profit and loss account is by way of reduction from the overall interest expenditure. We accordingly agree with the contentions of the ld. AR that where the income has already been offered in the profit and loss account there is no occasion for the AO to bring the same income to tax again as this will result in double taxation. Hence we direct to delete the addition of Rs. 1,64,07,481/- in the hands of the assessee. The ground No.2 is accordingly allowed.

4. In ground No.3 the ld. AR during the course of hearing submitted that he does not want to press this ground hence the ground No.3 is dismissed as not pressed.

5. In the result, appeal of the assessee is partly allowed.

Order pronounced in the open court on 11/08/2016.

 

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