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 ITO vs. Vikram A. Pradhan (ITAT Mumbai)

ITO, Ward 13(1) New Delhi 110 002 Vs. NTPC Tamil Nadu Energy Co.Ltd. NTPC Bhavan, Core 7, Scope Complex 7, Institutional area, Lodhi road New Delhi 110 003
June, 26th 2015
               IN THE INCOME TAX APPELLATE TRIBUNAL
                    DELHI BENCHES : "E", NEW DELHI

              BEFORE SHRI H.S.SIDHU, JUDICIAL MEMBER
                               AND
           SHRI J.SUDHAKAR REDDY, ACCOUNTANT MEMBER

                         I.T.A.No. 6015/DEL/2013
                                A.Y. 2009-10
ITO, Ward 13(1)                       NTPC Tamil Nadu Energy Co.Ltd.
New Delhi 110 002              Vs.    NTPC Bhavan, Core 7, Scope Complex
                                      7, Institutional area, Lodhi road
                                      New Delhi 110 003

                                       PAN: AABCN 9916 C

       (APPELLANT)                                 (RESPONDENT)


            Assessee by                :   Sh. Ajay Kr.Agarwal, C.A.
           Department by               :   Sh. B.Dhamkanunjna, Sr.DR

                               ORDER

PER J. SUDHAKAR REDDY, ACCOUNTANT MEMBER

      This is an appeal filed by the Revenue against the order of the
Ld.CIT(Appeals) ­ XVI, New Delhi dated 29.8.2013        pertaining to the A.Y.
2009-10.

2.    Facts in brief:- The facts of the case are given in paras 3.3.1 to 3.3.3
of the order of the Ld.CIT(A), which are extracted for ready reference.

"The assessee is a Public Limited Company which was incorporated on
23.5.2003 as a joint venture company between NTPC Ltd. And Tamil Nadu
Electricity Board (hereinafter referred to as TNEB), with an equal percentage
of share holdings. The main objective of the petitioner company was to
construct power plants for generating electricity. The petitioner company was
incorporated with the authorised capital of Rs.20000,00,00,000. The issued,
subscribed and paid up capital of the petitioner company stood at
Rs.380,00,00,000 as on 31.3.2009 and the amount lying in Share Deposit
A/c ­ Pending Allotment was Rs.32,00,00,000. The petitioner company had
also raised Secured Loans of Rs.605,61,00,000.

       The facts of the case are that the petitioner company had started
construction of the power generating plant of the capacity to produce 1500
                                 ITA No. 6015/Del/2013
                                      A.Y. 2009-10
                        NTPC Tamil Nadu Energy Co.Ltd., New Delhi

MW of electricity at Vallur, in the outskirts of Chennai, Tamilnadu, in the
financial year 2003-04. The actual work of construction of the said power
plant was started on 28-03-2007, which is now expected to be completed in
the financial year 2912-13. The funds for the entire power plant had been
planned to be financed by way of approximately 30% as equity contributions
from the shareholder and the balance approximately 70% by raising debt
funds. Undisputedly, the aforesaid funds were raised during the initial period
of construction by way of equity contributions or by raising debt funds, to
meet the cost of purchase of land etc. from the Salt Commissioner, Chennai
and for giving advances to the various contractors aggregating to
Rs.285,10,54,363. Thus it may be submitted that the entire funds generated
from time to time were utilized to meet the cost of infrastructure development
work and also disbursement of advances to the contractors who were
contracted for carrying out the specific jobs.
       The petitioner company had filed its Return of income on 16-09-2009,
declaring its total income at Rs. NIL. However the amount of interest income of
Rs.33,18,899 received during the year on temporarily parking of its funds
with the bank in STDR account for short durations was treated as capital
receipts in the period of construction of the power plant. The purpose was, so
that these funds remain available to the petitioner company at all times for
meeting capital expenditure. The interest received from the contractors
aggregated to Rs.62, 19,455 and the miscellaneous income of Rs. 64,197 was
also treated as capital receipts during the course of the construction of the
Power plant.





3.     The A.O. at pages 3 and 4 held as follows.

" 2.   Miscellaneous Income

From a further perusal of the P&L account and schedule-11, it is seen that the
assessee has earned a Misc. income of Rs.96,02,551/-, which comprises of
the following

       (i)     Interest of Rs.33,18,899/- on FDR with Indian Banks
       (ii)    Interest of Rs.62,19,455/- on deposits with others
       (iii)   Rs.64197/- on account of Misc. Receipts

However, the assessee has not offered this income for tax, rather it has been
set off against interest & finance charges under "Expenditure during
Construction".

The assessee was asked to show cause as to why the above income should
not be assessed as "income from other sources" as the same has been earned




                                                                                  2
                                 ITA No. 6015/Del/2013
                                      A.Y. 2009-10
                        NTPC Tamil Nadu Energy Co.Ltd., New Delhi

during pre-commencement period of the business. Vide letter                 dated
01/12/2011, the assessee has submitted as under :

"This interest income from banks was basically earned on the funds
temporarily parked in banks as short term deposits. As we were in the
construction phase of the project, all the expenditure and income during the
period is taken as incidental expenditure during construction and getting
capitalized along with the project cost."

This argument of the assessee is not acceptable because the interest income
earned on fixed deposit etc. is specifically taxable under the head "Income
from other sources" u/s 56 of the I. T. Act.

Reliance is placed on the decision of the Hon'ble supreme Court In the case of
Tuticorin Alkali Chemical &Fertilizers Ltd. Vs CIT {1997} 227 ITR 172(SC).


The assessee has failed to establish any nexus between the earning of such
interest with its business i.e setting up of the power plant. In fact it has itself
admitted that it had temporarily parked its surplus funds in banks as short
term deposits. Therefore the facts of case are similar to the case of Tuticorin
Alkali Chemical &Fertilizers Ltd. Vs CIT ( supra). Hence the ratio of the
judgement given by the apex court in 'that case is squarely applicable in the
case of the assessee.

It is also pertinent to mention that the assessee had paid an advance tax of
Rs.1,08,152/- on 13.9.2008 and also of Rs.3,27,692/- on 13.12.2008. It has
also claimed credit for TDS of Rs.22,56,682/- on interest. Since the assessee
knew that it will not earn any income from business during the year and the
only income would be interest income, then the payment of advance tax
shows that it was fully aware that such interest income is liable to tax."


4.    Aggrieved the assessee carried the matter in appeal. The First
Appellate Authority applied the decision of the Hon'ble Supreme Court in the
case of CIT vs. Bokaro Steel Ltd.,           102 Taxman 94 (SC) as well as the
judgement of the Jurisdictional High Court in the case of NTPC SAIL Power
Co. (P) Ltd. Vs. CIT in ITA 1238 judgement dt. 17.7.2012 and decided the
issue in favour of the assessee.

5.    Aggrieved the Revenue is in appeal before us on the following grounds.

1.    The Ld. CIT(A) has erred in law and on fact in deleting the addition of
Rs. 96,02,551/- including interest on deposit with Indian Banks and others.




                                                                                      3
                                ITA No. 6015/Del/2013
                                     A.Y. 2009-10
                       NTPC Tamil Nadu Energy Co.Ltd., New Delhi

2.     The Ld. CIT (A) has erred in law and facts in not appreciating the
provision laid down in Subsection 1 to section 5 of the Act wherein it has been
clearly mentioned that the total income of any previous year of a person who
is resident includes all income from whatever source derived.

3.    The Ld. CIT (A) has erred in law and facts in not accepting the
Assessing Officers plea that the income earned on fixed deposits etc is to be
taxed under the head 'Income from Other sources" u/s 56 of the Income Tax
Act, 1961.

4.     The Ld.CIT (A) has erred in law and facts in not considering the fact
that interest earned on fixed deposits is ultimately an income and also failed
to mention any provision of the Act under which such income is exempt.

5.    The Ld. CIT (A) has erred in law and facts in holding that the interest on
surplus amount is not taxable though the surplus amount is nowhere
mentioned under the provision of the income Tax Act, 1961.

6.   The appellant craves to be allowed to add any fresh ground of appeal
and/or delete or amend any of the ground of appeal.



6.    We have heard Shri        P.Dhamkanunja, Ld.Sr.D.R. on behalf of the
Revenue     and Shri Ajay Kumar Agarwal, C.A. the Ld.Counsel for the
assessee.




7.    The Ld.Sr.D.R. contended that the assessee has not demonstrated
nexus between the earning of interest with the business of the assessee. He
relied on the decision of the Hon'ble Supreme Court in CIT vs. Tuticorin
Alkali and Chemicals & Fertilisers Ltd. (1997) 227 ITR 172         and submitted
that the order of the A.O. should be restored and the order of the First
Appellate Authority be reversed.

8.    The Ld.Counsel for the assessee on the other hand submitted that
under similar facts and circumstances the E Bench of the Tribunal in the
assessee's own case for the A.Y. 2008-09 in ITA 1520/Del/2013 order dt.
20th June, 2014 had upheld the findings of the First Appellate Authority and




                                                                                   4
                                ITA No. 6015/Del/2013
                                     A.Y. 2009-10
                       NTPC Tamil Nadu Energy Co.Ltd., New Delhi

dismissed the appeal of the Revenue. He relied on the submissions made by
him before the First Appellate Authority.

9.    Rival contentions heard. On a careful consideration of the facts and
circumstances of the case, on perusal of material on record, orders of the
authorities below, case laws cited, we hold as follows.
10.   For the immediately preceding A.Y. 2008-09 the E Bench of the
Tribunal in ITA 1520/Del/2013 order dt. 20th June, 2014 has held as
follows.

"4.   We have heard rival parties and have gone through the material placed
on record. We find that Ld. CIT(A) had decided the issue in favour of the
assessee by relying upon the judicial pronouncements of Hon'ble Supreme
Court and Hon'ble Delhi High Court as contained in para 8.1.2 to 8.2, which
are reproduced as under:

       "8.1.2 The appellant company was incorporated on 23-05-2003 as a
joint venture company between NTPC Ltd. and Tamil Nadu Electricity Board
for the purpose of construction of power plant for generation of electricity. The
said power plant was located at Yellur at the outskirt of Chennai, Tamil Nadu.
The construction of the power generating unit was started on 28-03-2007
which is expected to be completed by 2012-13. The total authorized capital of
the company was Rs.2000 crores. By end of financial year 31-03-2008 the
assessee company had raised RS.380, 00,00, 0001-. These funds were
essentially utilized during the initial period of construction from A. Y. 2004-05
to A. Y. 2008-09 for conducting survey, investigation & preliminary expenses,
for purchasing land (1002.19 acres), for infrastructure development work and
for disbursement as advance to the contractors engaged for construction of
power plant etc. There was also some litigation for acquisition of land. The
assessing officer treated Rs.42,06,774/- chargeable to tax u/s 56 of the Act
as 'Income from other sources' relying on the decision of the apex court in the
case of CIT vs. Tuticorin Alkali and Chemicals & Fertilizers Ltd. (1997) 227
ITR 172. However, the whole emphasis of Apex Court decision in the Tuticorin
Alkali Chemicals & Fertilizers Ltd. (supra) was that funds were found to be
surplus. The company was ready to commence trial production and .the
surplus funds were deposited in bank to earn interest. However, there is no
finding of fact given by the assessing officer that there were surplus funds
available with the assessee company. Even, in the remand report of the
assessing officer there is no finding of fact that the investment in bank STDRs
were made out of surplus funds. Simply because money is lying in bank
meant for construction of the plant, cannot be considered as the surplus



                                                                                    5
                                 ITA No. 6015/Del/2013
                                      A.Y. 2009-10
                        NTPC Tamil Nadu Energy Co.Ltd., New Delhi

money. The surplus money can arise only after meeting all the obligations
relating to the construction of the power plant and if the money is found to be
surplus after the completion of construction of the unit. In the instant case the
work of construction of the power plant has just started. Therefore, funds
cannot be said to be at surplus. The purpose of bank deposits yielding interest
was evidently to maintain liquidity of funds and to reduce the cost of
construction of the power plant. Interest income was inextricably linked with
the setting up of the power plant because interest income have gone on to
reduce the incidental expenses for setting up of the plant as evident from
schedule 12 of balance sheet showing details of incidental expenses during
construction. Further, when amounts of liability towards sundry creditors
(Rs.23.52 crores) are far more than the funds lying in bank (Rs.3.34 crores), it
cannot be said that there are surplus funds available with the company.
Hon 'ble Supreme Court in Bokaro Alkali Chemicals and Fertilizers Ltd. after
considering the decision in the case of Tuticorin Alkali Chemicals and
Fertilizers Ltd. held that;

"However, while interest earned by investing borrowed capital in short-term
deposits is an independent source of income not connected with the
construction activities or business activities of the assessee, the same cannot
be said in the present case where the utilization of various assets of the
company and the payments received for such utilization 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.

8.1.3        Hon'ble Delhi High Court in Indian Oil Panipat Power Consortium
Ltd. vs. ITA (2009) 315 ITR 255 (De!.) held that where interest on money
received as share capital is temporarily placed in fixed deposit awaiting
acquisition of land, a claim that such interest is a capital receipt entitled to be
set off against pre-operative expenses, is admissible, as the funds received by
the assessee company by the joint venture partners are "inextricably linked"
with the setting up of the plant and such interest earned cannot be treated as
income from other sources. The Hon 'hie Delhi High Court, had also
distinguished the facts before them from the facts which were before the apex
court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v CIT. The
distinction drawn by Delhi High Court, was that that there was a finding of
fact recorded in the case before the apex court that whatever money was
deposited in the bank was essentially found to be the surplus funds in the
hands of that company and the very purpose of making fixed deposits was to
earn interest on such surplus money. Apex court under those peculiar







                                                                                      6
                                ITA No. 6015/Del/2013
                                     A.Y. 2009-10
                       NTPC Tamil Nadu Energy Co.Ltd., New Delhi

circumstances, had held that interest income arising of surplus funds, was
chargeable to tax as income from other sources.

8.1.4 In identical issue in the case of NTPC Sail Power Company (P) Ltd. VS.
CIT in ITA No. 1238, Hon'ble Delhi High Court in its decision on 1710712012
held that:-

"It is no doubt correct that the proviso to section 36 (1) (iii) of the Income Tax
Act enacts that any amount of the interest paid towards ("in respect of) capital
borrowed for acquisition of an asset or for extension of existing business
regardless of its capitalization in the books or otherwise, "for any period
beginning from the date on which the capital was borrowed for acquisition of
the asset till the date on which such asset was first put to use" would not
qualify as deduction. However, in -all these cases, when the interest was
received by the assessee towards interest paid for fixed deposits when the
borrowed funds could not be immediately put to use for the purpose for which
they were taken, this Court, and indeed the Supreme Court held that if the
receipt is "inextricably linked" to the setting up of the project, it would be
capital receipt not liable to tax but ultimately be used to reduce the cost of the
project. By the same logic, in this case too, the funds invested by the assessee
company and the interest earned were inextricably linked with the setting up
of the power plant."

8.1.5         The above decisions are squarely applicable in the instant
appeal. In view of the above, since the work of construction of the power plant
has just started and funds were essentially utilized for conducting survey,
investigation & preliminary expenses, for land purchase, for infrastructure
development work and for disbursement as advance to the contractors
engaged for construction of power plant etc., therefore, funds cannot be said
to be at surplus. Moreover, the liability towards sundry creditors (Rs.23.52
crores) are far more than the funds lying in bank (Rs.3.34 crores). Interest
income is also inextricably linked with the setting up of the power plant
because interest income have gone on to reduce the incidental expenses for
setting up of the plant as evident from schedule 12 of balance sheet showing
details of incidental expenses during construction. In view of the above, as the
interest on STDR are "inextricably linked" to the setting up. of the project and
the fact that no surplus funds are also available with the appellant company,
therefore, such income is required to be capitalized to be set off against the
pre operative expenses. As such the A. O. is not justified in adding the sum of
Rs.36,06,774/- as income for other source u/s 56.

8.2 Regarding the forfeited earnest money deposit of Rs.6 lakhs, the sum
represents earnest money deposited to carryon contract for construction of


                                                                                     7
                                   ITA No. 6015/Del/2013
                                        A.Y. 2009-10
                          NTPC Tamil Nadu Energy Co.Ltd., New Delhi

approach road to the project site. The said sum was forfeited for non
performance by the contractor. Therefore, the forfeited sum is inextricably
linked to the setting up of the project and is required to be capitalized to be set
off against the pre operative expenses. In view of the above, the above facts
and the decision cited above, this ground of appeal is decided in favour of the
appellant. "

5. We find that Ld. CIT(A) has rightly appreciated the facts of the case and
has rightly arrived at the correct. conclusion as the funds kept in bank
deposits cannot be classified as surplus funds as project was under
completion. The argument of Ld. D.R. that facts were not verified by Ld.CIT(A)
does not hold any force as Ld.CIT(A) by quoting figures in his roder ahs
arrived at the conclusion. Therefore, we do not find any infirmity in the order
of Ld.CIT(A) and, therefore, appeal filed by the Revenue is dismissed.

6.        In view of above, appeal filed by the Revenue is dismissed."



11.       The Ld.Sr.D.R. could not demonstrate that the facts of the current
year are different from the facts of the earlier year. As we are of the opinion
that the facts are identical, we respectfully follow the order of the Coordinate
Bench and uphold the order of the First Appellate Authority and dismiss
this appeal by the Revenue.

12.       In the result Revenue's appeal stands dismissed.

          Order pronounced in the Open Court on 24th              June, 2015.



                  Sd/-                                                Sd/-


   [H.S.SIDHU]                                             [J. SUDHAKAR REDDY]
JUDICIAL MEMBER                                            ACCOUNTANT MEMBER

Dt.       the 24th June, 2015

      ·   Manga




                                                                                      8
                                  ITA No. 6015/Del/2013
                                       A.Y. 2009-10
                         NTPC Tamil Nadu Energy Co.Ltd., New Delhi



Copy   forwarded to: -
1.     Appellant
2.     Respondent
3.     CIT
4.     CIT (A)
5.     DR, ITAT
                                   TRUE COPY
                                                                     By Order,




                                         Assistant Registrar, ITAT, Delhi Benches




                                                                                    9

 
 
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