2019 (9) TMI 1230 - AT - Income Tax

Addition on account of interest income treating the same as inextricably linked with the business and accordingly reduced from the cost of the project - HELD THAT - If the AO was not satisfied about the utilization of the fund then he should have treated the interest income and interest expenses in the similar fashion. In other words the AO should have treated the interest income from other sources and against that interest expenses should have been allowed as expenses against the same as these are inextricably linked. But the AO has not done so. Accordingly we are of the view that the AO erred in treating the interest expenses and income differently despite these are inextricably linked. Thus we are of the view that once the AO has accepted the interest cost as part of the project then the same treatment needs to be given even to the interest income by adjusting the same against the part of the project cost as the interest expense and income are inextricably linked. Accordingly we do not find any reason to disturb the finding of the ld. CIT-A. Regarding the interest income from GMDCL we note that such income was earned by the assessee on the fixed deposits on the bank guarantee made in connection with the project awarded by GMDCL. This fact can be verified from the bank guarantee furnished by the Axis Bank Ltd on behalf of the assessee. There was also no allegation that such bank guarantee represents the circular transaction. Moreover there was no defect pointed out by the authorities below in the bank guarantee furnished by the assessee. Accordingly we disagree with the finding of the learned CIT (A). Hence the ground filed by the assessee in its CO is allowed. Ground of appeal of Revenue is dismissed and the ground filed by the assessee in its CO is allowed. Addition on account of CENVAT Credit - contention of the assessee by observing that as per the provisions of section 145A of the Act the assessee is liable to include the amount of duty cess tax etc in the amount of purchases sales and the closing stock - CIT(A) deleted the addition made by the Assessing Officer by observing that the assessee has been following its method of valuation consistently and there was no dissatisfaction of the Assessing Officer about the correctness/completeness of the books of accounts of the assessee - HELD THAT - we note that the assessee has been recording its transactions of purchase sales and valuation of inventories net of CENVAT consistently. Thus 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 which will result in tax neutral exercise. Thus in our considered view the Assessing Officer erred in enhancing the value of the closing stock without giving effect to the purchases. See GUJARAT GAS COMPANY LTD. AND 1 2017 (2) TMI 649 - GUJARAT HIGH COURT . There is no ambiguity that the assessee has been following the exclusive method of accounting. In view of the above we concur with the view of the Ld. CIT(A) and accordingly decline to interfere in his order.

Summary

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 1: Deletion of Addition Made Under Section 56 of the Income Tax Act, 1961 Regarding Interest Income

The Revenue challenged the deletion of ?3,81,36,986/- made under section 56 of the Act, arguing that the interest income earned was not inextricably linked with the business of the assessee and could not be reduced from capital expenditure. The assessee, a private limited company and subsidiary of Adani Enterprises Ltd. (AEL), was engaged in mining/exploration activities. AEL had assigned a contract to the assessee, which then entered into a washery agreement with GVI Info Private Ltd., providing a security deposit of ?150 crores, earning interest income of ?3,81,36,986/-. The assessee claimed this interest income was linked with the project and reduced it from project development expenditure. The AO found no evidence that GVI utilized the funds for the project and treated the interest income as income from other sources. The CIT(A) held the security deposit was directly linked with the project and directed the reduction of interest income from project expenditure. However, the CIT(A) confirmed the AO’s treatment of ?1,04,463/- interest income from bank deposits as income from other sources, as the assessee failed to substantiate its linkage to the project.

Upon appeal, the Tribunal noted that all expenditures and incomes before the commencement of commercial production should be capitalized if inextricably linked with the project. The Tribunal referred to the Supreme Court judgments in CIT Vs. Bokaro Steel Ltd. and Tuticorin Alkali Chemicals & Fertilizers Ltd. to establish that the interest income from GVI was linked to the project. The Tribunal found that the AO erred in treating interest expenses and income differently when both were inextricably linked. Therefore, the Tribunal upheld the CIT(A)’s decision regarding the interest income from GVI but disagreed with the CIT(A) on the interest income from GMDCL, allowing the assessee’s claim that it was linked to the project.

Issue 2: Deletion of Addition of Unutilized CENVAT Credit Under Section 145A of the Income Tax Act, 1961

The Revenue contested the deletion of ?29,60,018/- on account of unutilized CENVAT credit. The assessee argued that the CENVAT credit pertained to services received and did not relate to inventories, thus section 145A did not apply. The AO added the CENVAT credit to the closing stock, but the CIT(A) deleted the addition, accepting the assessee’s contention that section 145A was not applicable to its service sector business. The CIT(A) also noted that even if section 145A applied, the adjustment would be revenue-neutral as it would affect purchases, sales, and inventory equally.

The Tribunal agreed with the CIT(A), noting that the assessee consistently followed the exclusive method of accounting, and any adjustment to closing stock should correspondingly adjust purchases, resulting in a tax-neutral effect. The Tribunal cited the Gujarat High Court judgment in Pr.CIT vs. Gujarat Gas Company Ltd. to support this view. Consequently, the Tribunal upheld the CIT(A)’s decision, dismissing the Revenue’s appeal.

Conclusion:

The Tribunal dismissed the Revenue’s appeal regarding both issues and allowed the assessee’s cross-objection regarding the interest income from GMDCL. The order was pronounced in the court on 25/09/2019 at Ahmedabad.