Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
 
 
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
 
 
 
 
Popular Search: VAT RATES :: due date for vat payment :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: list of goods taxed at 4% :: VAT Audit :: ACCOUNTING STANDARDS :: empanelment :: ARTICLES ON INPUT TAX CREDIT IN VAT :: articles on VAT and GST in India :: TDS :: TAX RATES - GOODS TAXABLE @ 4% :: ACCOUNTING STANDARD :: form 3cd :: cpt :: Central Excise rule to resale the machines to a new company
 
 
From the Courts »
 Micro Spacematrix Solution P Ltd vs. ITO (ITAT Delhi)
 CIT vs. Greenfield Hotels & Estates Pvt. Ltd (Bombay High Court)
 IndiaBulls Financial Services Ltd vs. DCIT (Delhi High Court)
 Maharao Bhim Singh of Kota vs. CIT (Supreme Court)
 Ravneet Takhar Vs. Commissioner Of Income Tax Ix And Ors.
 Jaiprakash Associates Ltd. Vs. Commissioner Of Income Tax
 Formula One World Championship Limited Vs. Commissioner Of Income Tax, International Taxation-3 And Anr.
 Commissioner Of Income Tax International Taxation-3 Delhi Vs. Formula One World Championship Ltd. And Anr.
 Reliance Communications Ltd vs. DDIT (ITAT Mumbai)
  Sushila Devi vs. CIT (Delhi High Court)
 Ashok Prapann Sharma vs. CIT (Supreme Court)a

Pr Commissioner Of Income Tax Vs. Facor Power Ltd
February, 01st 2016
         THE HIGH COURT OF DELHI AT NEW DELHI
%                                      Judgment delivered on: 07.01.2016

+       ITA 1011/2015

PR COMMISSIONER OF INCOME TAX                                  ... Appellant

                                         versus

FACOR POWER LTD                                                ... Respondent
Advocates who appeared in this case:
For the Appellant     : Mr Zoheb Hossain for Mr Rohit Madan
For the Respondent    : None

CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE SANJEEV SACHDEVA

                                   JUDGMENT

BADAR DURREZ AHMED, J (ORAL)

1.      This appeal under Section 260A of the Income Tax Act (hereinafter

referred to as `the said Act') has been filed by the revenue being aggrieved

by the order dated 10.06.2015 passed by the Income Tax Appellate

Tribunal, New Delhi in ITA 4300/Del/2012 pertaining to the assessment

year 2009-10.


2.      The revenue has proposed the following questions which, according

to the revenue, are substantial questions of law which need to be

determined by this Court :-



ITA 1011/2015                                                        Page 1 of 13
      A.        Whether the mode and manner of raising funds on which
                interest is earned, whether by way of loan or through
                share capital, is a material consideration in deciding the
                taxability of interest earned on such funds as income from
                other sources?
      B.        Whether the earning of interest on surplus funds make it
                inextricably linked with setting up of the power project?

      C.        Whether the judgment in Tuticorin Alkali Chemicals and
                Fertilizers Ltd v. CIT (1997) 227 ITR 172 (SC) is
                applicable to the present case and whether the judgment of
                this Hon'ble Court in Indian Oil Panipat Consortium Ltd
                is distinguishable from the facts of the present case?
      D.        Whether the Hon'ble ITAT has failed to consider the
                judgment of this Hon'ble Court in CIT v. Madhya Bharat
                Energy Corporation Ltd (ITA No. 950/2008 dated
                11.07.2011) wherein it was held that interest earned on
                FDs cannot be set off as pre-operative expenses?


3.      The facts are that the assessee company was incorporated on

24.08.2005 to carry on in India or elsewhere the business to generate,

receive, produce, improve, buy, sell etc. electric power by establishing

thermal power plants, atomic power plants etc.. In the year under

consideration, no business activity was carried out by the assessee as the

project was under implementation.


4.      On scrutiny, the assessment proceedings under Section 143(3) of

the said Act were initiated. The Assessing Officer had noted that the




ITA 1011/2015                                                      Page 2 of 13
assessee had received an amount of  70,75,843/- from State Bank of

Mysore as interest on fixed deposits but that the said amount was not

declared in the return of income as `income from other sources'. It was

also noted by the Assessing Officer that the assessee had reduced the said

interest amount from the capital work in progress and, therefore, the

assessee was required to provide an explanation as to why the said

interest income should not be treated as `income from other sources'.


5.      The assessee submitted that it had earned interest on FDRs which

were placed with the bank as margin money for procurement of various

capital goods for setting up of the power project. The Assessing Officer

did not accept the explanation offered by the assessee and made an

addition of  70,75,843/- as `income from other sources'.


6.      Being aggrieved, the assessee preferred an appeal before the

Commissioner of Income Tax (Appeals). Since the Assessing Officer had

placed reliance on the Supreme Court decision in the case of Tuticorin

Alkali Chemicals and Fertilizers Ltd v. CIT: (1997) 227 ITR 172 (SC) ,

the assessee sought to distinguish the said decision on the basis of facts and

placed reliance on the decision of a Division Bench of this Court in the case







ITA 1011/2015                                                    Page 3 of 13
of Indian Oil Panipat Power Consortium Limited v. Income Tax Officer:

315 ITR 255.


7.      After considering the submissions made on the part of the assessee

and the material on record, the Commissioner of Income Tax (Appeals), by

virtue of his order dated 14.05.2012, allowed the assessee's appeal and

deleted the said addition. The relevant portion of the Commissioner of

Income Tax (Appeals)'s order reads as under:-


      "7.3      Decision
            I have considered the submission of the appellant and
      observation of the ASSESSING OFFICER. It is seen that
      appellant company was in the process of setting up a power
      project in Orissa. For that appellant had acquired land in F.Y.
      2007-08 and spent Rs. 68.62 lacs on purchase of land etc. During
      the F.Y.2008-09, appellant company has taken money from share
      holders as additional share capital in October 2008 for the
      purpose of acquiring capital assets for setting of the power plant.
      The money so received was put in FDRs for a temporary period
      of 3 months till the orders for machinery were placed. In the
      month of December, appellant awarded contract to M/s Thyssan
      Krupp Industries Pvt. Ltd for purchase of boiler for Rs.7500 lacs.
      The appellant gave advance of Rs.50,00,000/- to said company.
      In the month of January the appellant gave order for STG Set for
      Rs.3510 Lacs and paid advance of Rs.130 lacs to M/s BHEL. In
      the month of May 2009, appellant further gave contract to M/s
      Paharpur Cooling Towers for Rs. 1017 lacs and paid advance of
      Rs. 10 lacs. These facts established that amount raised as



ITA 1011/2015                                                    Page 4 of 13
      additional share capital from share holders and put in the FDRs
      was inextricably linked with acquisition of plant and
      machinery by the appellant company. The additional share
      capital raised was for purpose of acquiring capital assets which
      was temporarily put in the Fixed Deposits. The appellant had
      spent substantial money in acquisition of land in F.Y. 2007-08
      and for that purpose it has spent Rs.68.62 lacs. This shows that
      the funds raised by the appellant from share holders were not idle
      but the same were meant for acquisition Of capital assets. In view
      of the above it is held that funds raised by the appellant company
      were inextricably linked with acquisition of the capital assets. The
      interest received from such funds which were put in FDRs for
      temporary period was in the nature of capital receipts and such
      receipts was required to be set off against the preoperative
      expenses. In this regard reliance is placed on the decision of
      Hon'ble Delhi High Court in the case of Indian Oil Panipat
      Power Consortium Ltd. vs ITO [20091315 ITR 0255 (DEL).


      INCOME OR CAPITAL -- INTEREST - INTEREST
      EARNED   PRIOR  TO   COMMENCEMENT     OF
      BUSINESS ON FUNDS BROUGHT IN BY WAY OF
      SHARE CAPITAL FOR SPECIFIC PURPOSE - IS
      CAPITAL RECEIPT - LIABLE TO BE SET OFF
      AGAINST PRE-OPERATIVE EXPENSES-INCOME-
      TAX ACT.
      The assessee-company was incorporated in pursuance of a joint
      venture entered into between Indian Oil Corporation and M of
      Japan to set up a Power Project. In order to effectuate the
      purpose for which the joint venture was conceived, share capital
      was contributed by these two corporations which included Rs.20
      crores by way of additional share capital. The Assessing Officer
      treated the interest earned on monies received as share capital
      by the assessee temporarily placed in a fixed deposit awaiting
      acquisition of land which had run into legal entanglements on


ITA 1011/2015                                                     Page 5 of 13
      account of title as "Income from other sources". The
      Commissioner (Appeals) accepted the stand of the assessee that
      the interest was in the nature of a capital receipt which was
      liable to be set off against pre-operative expenses. The Tribunal
      reversed this order. On appeal:


      Held, allowing the appeals 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 be classified as "Income from the other sources".
      Since the income was earned in a period prior to
      commencement of business it was in the nature of a capital
      receipt and was required to be set off against pre-operative
      expenses.
      Tuticorin Alkali Chemicals and Fertilizers                 Ltd.    vs
      CITI19971 227 ITR 172(SC) distinguished .
      The facts of the case laws relied upon by the ASSESSING
      OFFICER were different, therefore, the same are not
      applicable to the case of the appellant. The additional share
      capital raised by the appellant was linked with acquisition of
      capital assets, therefore, interest received from such capital is
      capital receipt and same can be adjusted against preoperative
      expenses. Therefore, the addition made by the ASS1SSING
      OFFICER of Rs.70,75,843/-treating the interest income as
      "income from other sources" is deleted.
      8.      Ground No. 5 & 6:- These grounds of appeal are general
      in nature, therefore, do not require adjudication.

      9.        In the result, the appeal is partly allowed. "




ITA 1011/2015                                                     Page 6 of 13
8.      Being aggrieved by the decision of the Commissioner of Income Tax

(Appeals), the revenue preferred the said appeal (ITA 4300/Del/2012)

before the Income Tax Appellate Tribunal on the following grounds:-

      "1.     The Learned CIT (A) has erred on the facts and
      circumstances of the case and in lmv in treating the interest
      income of Rs. 70,75,843/- received on account of bank deposit as
      capital receipt instead of treating it as. income under head other
      sources and there by overlooking the ratio laid down in the case
      of Tuticorin Alkali Chemicals and Fertilizers Ltd.

      2.      The Learned C1T(A) has erred on facts and circumstances
      of the case and in law in allowing to adjust interest income
      against preoperative expenses, however assessee had no
      compulsion for making fixed deposit with the bank rather it was
      surplus money kept with the bank to earn interest."


9.      The Income Tax Appellate Tribunal concurred with the view of the

Commissioner of Income Tax (Appeals) and held that the interest income

earned by the assessee in the pre-commencement period could not be stated

to be `income from other sources'. The Tribunal confirmed the finding of

fact returned by the Commissioner of Income Tax (Appeals) that the

amount raised as additional share capital from the shareholders and put in

fixed deposits was inextricably linked with the acquisition of plant and

machinery by the assessee. The Commissioner of Income Tax (Appeals)

had also held on facts that the additional share capital raised was for the



ITA 1011/2015                                                   Page 7 of 13
purposes of acquiring capital assets which were temporarily put in fixed

deposits.       Advances had been made towards purchase of plant and

machinery and orders had been placed. And, awaiting delivery, the funds

were temporarily put in fixed deposits. It is in this sense that findings of

fact were returned by both the Commissioner of Income Tax (Appeals) and

Income Tax Appellate Tribunal that the interest earned on the FDRs was

inextricably linked with the acquisition of plants and machinery by the

assessee company.


10.     After having heard the learned counsel for the revenue, we are of the

view that no substantial question of law arises for our consideration. This

is so because, in our view, the Tribunal has correctly placed reliance on the

decision of this Court in Indian Oil Panipat Power Consortium Limited

(supra). The facts in that case were quite similar. In that case also monies

had been received as share capital by the assessee which were temporarily

put in fixed deposits awaiting acquisition of land which had run into legal

entanglements on account of title. The question of law which was raised

before the Division Bench was: ­

        "Whether the Tribunal misdirected itself in law in holding that
        interest which accrued on funds deployed with the bank could be
        taxed as income from other sources and not as capital receipt
        liable to be set of against pre-operative expenses?"


ITA 1011/2015                                                    Page 8 of 13
The Division Bench considered the decisions of the Supreme Court in

Tuticorin Alkali Chemicals and Fertilizers Ltd (supra) and CIT v.

Bokaro Steel Limited: (1999) 236 ITR 315 . The Division Bench held

as under:-

      "5.     In our opinion the Tribunal has misconstrued the ratio of
      the judgment of the Supreme Court in the case of Tuticorin
      Alkali Chemicals (supra) and that of Bokaro Steel Ltd. (supra).
      The test which permeates through the judgment of the Supreme
      Court in Tuticorin Alkali Chemicals (supra) is that if funds have
      been borrowed for setting up of a plant and if the funds are
      ,,surplus and then by virtue of that circumstance they are
      invested in fixed deposits the income earned in the form of
      interest will be taxable under the head "income from other
      sources. On the other hand the ratio of the Supreme Court
      judgment in Bokaro Steel Ltd. (supra) to our mind is that if
      income is earned, whether by way of interest or in any other
      manner on funds which are otherwise ,,inextricably linked to the
      setting up of the plant, such income is required to be capitalized
      to be set off against pre-operative expenses.

      5.1     The test, therefore, to our mind is whether the activity
      which is taken up for setting up of the business and the funds
      which are garnered are inextricably connected to the setting up of
      the plant. The clue is perhaps available in Section 3 of the Act
      which states that for newly set up business the previous year shall
      be the period beginning with the date of setting up of the
      business. Therefore, as per the provision of Section 4 of the Act
      which is the charging Section income which arises to an assessee
      from the date of setting of the business but prior to
      commencement is chargeable to tax depending on whether it is of
      a revenue nature or capital receipt. The income of a newly set up
      business, post the date of its setting up can be taxed if it is of a
      revenue nature under any of the heads provided under Section 14



ITA 1011/2015                                                      Page 9 of 13
      in Chapter IV of the Act. For an income to be classified as
      income under the head "profit and gains of business or
      profession" it would have to be an activity which is in some
      manner or form connected with business. The word "business" is
      of wide import which would also include all such activities
      which coalesce into setting up of the business. See Mazagaon
      Dock Ltd vs CIT & Excess Profits Tax; (1958) 34 ITR 368 (SC),
      and Narain Swadeshi Weaving Mills vs Commissioner of Excess
      Profits Tax; (1954) 26 ITR 765 (SC). Once it is held that the
      assessees income is an income connected with business, which
      would be so in the present case, in view of the finding of fact by
      the CIT(A) that the monies which were inducted into the joint
      venture company by the joint venture partners were primarily
      infused to purchase land and to develop infrastructure ­ then it
      cannot be held that the income derived by parking the funds
      temporarily with Tokyo Mitsubishi Bank, will result in the
      character of the funds being changed, in as much as, the interest
      earned from the bank would have a hue different than that of
      business and be brought to tax under the head ,,income from
      other sources". It is well-settled that an income received by the
      assessee can be taxed under the head "income from other
      sources" only if it does not fall under any other head of income
      as provided in Section 14 of the Act. The head "income from
      other sources" is a residuary head of income. See S.G. Mercantile
      Corporation P. Ltd vs CIT, Calcutta; (1972) 83 ITR 700 (SC) and
      CIT vs Govinda Choudhury & Sons.; (1993) 203 ITR 881 (SC).

      5.2     It is clear upon a perusal of the facts as found by the
      authorities below that the funds in the form of share capital were
      infused for a specific purpose of acquiring land and the
      development of infrastructure. Therefore, the interest earned on
      funds primarily brought for infusion in the business could not
      have been classified as income from other sources. Since the
      income was earned in a period prior to commencement of
      business it was in the nature of capital receipt and hence was
      required to be set off against pre-operative expenses. In the case
      of Tuticorin Alkali Chemicals (supra) it was found by the
      authorities that the funds available with the assessee in that case
      were `surplus' and, therefore, the Supreme Court held that the


ITA 1011/2015                                                     Page 10 of 13
      interest earned on surplus funds would have to be treated as
      `income from other sources'. On the other hand in Bokaro Steel
      Ltd (supra) where the assessee had earned interest on advance
      paid to contractors during pre-commencement period was found
      to be `inextricably linked' to the setting up of the plant of the
      assessee and hence was held to be a capital receipt which was
      permitted to be set off against pre-operative expenses."


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 Limited (supra) would squarely apply to the facts of the

present case and the Tribunal was right in applying the same.




ITA 1011/2015                                                        Page 11 of 13
12.     Before parting with this decision, we would, however, like to

comment upon a contention which has been raised by the learned counsel

for the revenue. He submitted that the Tribunal in the impugned order

made an observation in paragraph 8 of the impugned order which gives an

impression that if funds were obtained through raising share capital as

distinct from borrowed funds, then the question of interest derived on

placing those funds in a fixed deposit amounting to `income from other

sources' would not arise. Such an impression ought not to be gathered

from the Tribunal's decision because the Supreme Court in Tuticorin

Alkali Chemicals and Fertilizers Ltd (supra) had clearly stated that

whether the funds are raised by issue of shares and debentures or

through borrowing would not make any difference to the principles set

out thereunder. The principle being that if the capital of a company is

fruitfully utilised instead of keeping it idle, the income thus generated,

will be of a revenue nature and not accretion of capital.





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



ITA 1011/2015                                                      Page 12 of 13
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.


14.     For the foregoing reasons, we do not find that there is any substantial

question of law which arises for our consideration and the very issues

which are sought to be raised in the present case had been squarely covered

by the decision of this Court in Indian Oil Panipat Power Consortium

Limited (supra).

        The appeal is dismissed.

                                        BADAR DURREZ AHMED, J



JANUARY 07, 2016                           SANJEEV SACHDEVA, J
SR




ITA 1011/2015                                                     Page 13 of 13

 
 
Home | About Us | Terms and Conditions | Contact Us
Copyright 2016 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Custom Software Development Outsourcing Custom Software Development Offshore Cus

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions