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2020 (3) TMI 1280 - HC - Income TaxAddition u/s 56 - interest earned on bank deposits treated as income from other sources - HELD THAT - Assessee was having its own fund of ₹ 5 crores, which was not sufficient enough to provide the security deposit to GVISPL. Thus, the borrowed fund was utilised by the assessee for furnishing the security deposit. AO did not disturb the interest expense claimed on such borrowed fund which was not capitalised as the cost of the project but the interest income from such borrowed fund which was placed as the security deposit by the assessee with GVISPL was treated as income from other sources and not as part of the project. As found by the Tribunal as well as the CIT(A) that Assessing Officer could not have treated interest expense and the interest income differently arising from the same fund. When the Assessing Officer was satisfied with regard to the utilisation of the fund, he ought to have considered the interest income and interest expenses arising from the same fund at par. Assessing Officer could not have treated interest income as income from other sources on one hand and treated interest expenses as part of the project cost. Both the CIT(A) and Tribunal have rightly come to the conclusion that the interest income earned by the assessee is inextricably linked with the project as both interest expenses and interest income are arising from the same borrowed fund. Interest income on the fixed deposit placed with the Bank for issuance of bank guarantee - HELD THAT - Reliance placed by the Assessing Officer on the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals 1997 (7) TMI 4 - SUPREME COURT would not be tenable because in the said decision, the Supreme Court has held that if the idle fund of the assessee is invested for the purpose of earning interest income, such income would be treated as income from other sources. Considering the concurrent findings of fact arrived at by the CIT(A) and the Tribunal that the interest income earned by the assessee on the security deposit kept with GVISPL is directly and inextricably linked with the project, the project cost is to be reduced to that extent as the assessee has borrowed funds for placing such security deposit and interest expenses incurred for such borrowed funds are capitalised. Therefore, we are of the opinion that in the facts of the case, the question No.1 proposed by the Revenue cannot be termed as a substantial question of law. Disallowance on account of CENVAT credit - assessee in its audited financial statements has shown an unutilised CENVAT credit as on 03.02.2011 and claimed that such CENVAT credit pertains to the services received by the assessee and does not pertain to inventories as envisaged under the provision of Section 145A - HELD THAT - Both CIT(A) and the Tribunal have arrived at findings of fact that the assessee was following the method of valuation consistently and there was no dissatisfaction of the Assessing Officer about the correctness of the books of accounts of the assessee and the assessee has been recording his transaction of purchase, sales and valuation of inventories net of CENVAT. Consequently, if the inventory of the closing stock is enhanced by the amount of CENVAT credit attributable to it, then the amount of corresponding purchase is also required to be increased by the said amount, which would result into tax neutral exercise. In view of the above concurrent findings of fact arrived at by the CIT(A) and Tribunal, we are of the opinion that the addition made by the Assessing Officer on account of CENVAT credit is rightly deleted as the assessee has consistently followed the valuation method of net of CENVAT Credit and the addition of CENVAT Credit would also require adding of the CENVAT credit in the purchases, resulting into tax neutral exercise.
Issues Involved:
1. Deletion of addition made under Section 56 of the Income Tax Act, 1961 regarding interest income. 2. Deletion of addition of unutilized CENVAT credit under Section 145A of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Deletion of Addition Made Under Section 56 of the Income Tax Act, 1961 Regarding Interest Income: The Revenue questioned whether the Appellate Tribunal erred in law and on facts in deleting the addition of ?3,81,36,986 made under Section 56 of the Act without appreciating that the said income earned is not inextricably linked with the business of the assessee and cannot be reduced from capital expenditure. The Tribunal and CIT(A) found that the interest income earned by the assessee on the security deposit placed with GVISPL was directly linked with the project undertaken by the assessee. The Tribunal observed that similar logic applies to the income generated by the assessee before the commencement of commercial production, which should be reduced from the cost of the project if it is inextricably linked with the project. The Tribunal relied on the Supreme Court's judgment in CIT Vs. Bokaro Steel Ltd., which held that income directly connected with the business of the assessee should be reduced from the cost of the project. Conversely, in Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs CIT, interest income not linked with the project was treated as income from other sources. The Tribunal concluded that the Assessing Officer (AO) erred in treating interest expenses and interest income differently arising from the same fund. The Tribunal also found that the interest income earned by the assessee on the fixed deposit kept with the Bank for the issuance of Bank Guarantee was directly linked with the project awarded by GMDCL. 2. Deletion of Addition of Unutilized CENVAT Credit Under Section 145A of the Income Tax Act, 1961: The Revenue questioned whether the Appellate Tribunal erred in deleting the addition of unutilized CENVAT credit of ?29,60,018/- without appreciating that the assessee followed the exclusive method for accounting CENVAT as against the inclusive method mandated under Section 145A of the Act. The CIT(A) and Tribunal found that the assessee was engaged in the mining activity (service sector) and that the CENVAT credit pertained to services received by the assessee, not inventories. The Tribunal observed that if the inventory of closing stock is enhanced by the amount of CENVAT credit attributable to it, then the amount of corresponding purchases should also be increased by the said amount, resulting in a tax-neutral exercise. The Tribunal relied on the judgment of the Gujarat High Court in Pr.CIT vs. Gujarat Gas Company Ltd., which held that if there is a corresponding less debit to the purchase account, there is already income offered for tax, making further addition unnecessary. The Tribunal concluded that the AO erred in enhancing the value of the closing stock without giving effect to the purchases. Conclusion: The High Court found no substantial question of law in the Revenue's appeals, affirming the concurrent findings of fact by the CIT(A) and Tribunal. The interest income earned by the assessee was inextricably linked with the project, and the addition of unutilized CENVAT credit was rightly deleted as it would result in a tax-neutral exercise. Consequently, the appeals were dismissed.
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