2020 (12) TMI 441 - AT - Income Tax

Revenue expenditure or capital expenditure - Interest paid on loans from HUDCO - temporary deployment of HUDCO loan funds - Amount of loan disbursed by HUDCO, till its utilisation for purpose of construction of bridges, were temporarily invested in fixed deposits - HELD THAT - Admittedly, there is no difference in factual background in respect of this issue for years under consideration as well as the preceding assessment years the orders of which has been placed before us. There are no contrary evidences placed before us by Ld. CIT.DR in order to deviate from consistent view taken by coordinate bench of this Tribunal on this issue in preceding years. Respectfully following the same, we allow alternate claim raised by Ld. AR. We thus direct entire interest paid on loans from HUDCO as revenue expenditure. Interest on grants received from Government of Karnataka set of against advances recoverable from contractor's - CIT(A) observed that, assessee filed working of such interest income relating to projects other than package bridge projects and that the interest earned on deployment of grant funds in FD's and are creation to such grant and not income in the hands of assessee - HELD THAT - Assessee received Grant for Government of Karnataka for carrying out construction activities. It is also not disputed that assessee was a nodal agent for Government of Karnataka. And that assessee had parked the Grants so received in FD till such monies were utilized, against which interest was earned. Hon'ble Karnataka High Court on identical facts has held that such interest income earned was inextricably linked with the business activity of assessee. Revenue has not brought before us any evidence to establish that these grants were used for any other purpose other than for construction activities on behalf of Government of Karnataka. Admittedly, there is no difference in factual background in respect of this issue for years under consideration as well as facts considered by Hon'ble High Court in case of CIT vs Karnataka State Agricultural Produce Processing and Export Corporation Ltd. 2015 (11) TMI 391 - KARNATAKA HIGH COURT There are no factual differences brought out by Ld. CIT.DR in the present case. Therefore no reason to interfere with the view taken by Ld. CIT(A). Proportionate deduction of interest earned on temporary deployment of HUDCO loan funds and interest earned on mobilisation advances out of capital work in progress of bridges during the years under consideration - AO added the said amount by holding that assessee has deposited spare funds arising from mobilisation advance received in fixed deposits - HELD THAT - No dispute that interest on advances made to contractors by assessee is not in connection with construction activities. Admittedly, these advances have been made by assessee to contractors for facilitating the work of construction. We note that the facts before Hon'ble Supreme Court in one of the issue are on identical nature of advance made by assessee there. Assessee in the present case has advanced money to the contractor's thereby avoiding a third-party involvement. Against such advances, assessee has earned interest. Such interest along with advance was reduced in capital work in progress and final bill of payment made to contractors. As decided in BOKARO STEEL LIMITED 1998 (12) TMI 4 - SUPREME COURT such kind of arrangement facilitates the contractor's towards the work of construction on behalf of assessee and therefore any interest earned from such advances cannot be held as revenue receipts in the hands of assessee. Deduction u/s 43B on Royalty payments - as submitted royalties are in connection with deduction made on contractor's bills, who carried out the construction of bridges and other infrastructure and assessee was required to remit the same to the Government of Karnataka - AO disallowed the same as such payment has not been made by assessee to the government of Karnataka - CIT(A) deleted the addition by holding that these were not considered by assessee in the profit and loss account and therefore did not form part of any deduction claimed as expenses - AR alternatively submitted that, in the event payments are added back, it must be allowed in the assessment year when the amount has been deposited with the Government - HELD THAT - Phrase, 'actually paid , has been used in this section, only to emphasize that, the payment should be real and a payment in point of fact and not something which is a pretence or a fiction. In the present facts of the case assessee has collected certain payments by in the form of royalties from the contractor's however did not deposit it. In case of labour welfare cess the same has been deposited beyond the due date in certain years. We find force in the alternative argument advanced by Ld. AR. We are therefore remanding the issue back to Ld. AO. Ld. AO shall call for all necessary details and information is in order to verify the contentions/submissions of assessee. Assessee shall file all requisite information in support of its claim of having paid the statutory dues to the Government of Karnataka. Ld. AO shall then consider the claim of assessee to the extent of actual payment made in the relevant assessment year.

Summary

Issues Involved:
1. Interest earned on temporary deployment of HUDCO loan funds.
2. Interest on grants received from the Government of Karnataka set off against advances recoverable from contractors.
3. Interest earned from mobilization advance given to contractors.
4. Royalty and labor welfare cess disallowed under section 43B.

Issue-wise Detailed Analysis:

Issue I: Interest Earned on Temporary Deployment of HUDCO Loan Funds
The assessee availed loans from HUDCO for constructing bridges and temporarily invested the loan amounts in fixed deposits, earning interest. The Assessing Officer (AO) treated this interest as taxable income under "Income from Other Sources," disallowing the assessee's claim to reduce the interest income from the cost of assets. The CIT(A) upheld the AO's decision. However, the Tribunal referred to its previous decision in the assessee's own case for the assessment year 2005-06, where it allowed the alternate plea that the entire interest paid on loans from HUDCO should be allowed as revenue expenditure. Consequently, the Tribunal directed that the interest paid on HUDCO loans be treated as revenue expenditure, partially allowing the assessee's appeal.

Issue II: Interest on Grants Received from Government of Karnataka Set Off Against Advances Recoverable from Contractors
The assessee received specific grants from the Government of Karnataka for infrastructure projects and temporarily parked these funds in fixed deposits, earning interest. The AO treated this interest as taxable income, relying on the Supreme Court decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. The CIT(A) observed that the interest belonged to the Government of Karnataka and not the assessee, and allowed the set-off against the interest income. The Tribunal upheld the CIT(A)'s decision, relying on the Karnataka High Court's rulings in similar cases, which held that such interest income is not taxable as it is inextricably linked with the grants and the original purpose of the funds. The Tribunal dismissed the revenue's appeal.

Issue III: Interest Earned from Mobilization Advance Given to Contractors
The assessee earned interest on mobilization advances given to contractors, which was set off against the capital work in progress. The AO added this interest as taxable income, but the CIT(A) held that the interest earned from mobilization advances was part of the normal business activity and should reduce the capital work in progress. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in Bokaro Steel Ltd., which held that interest earned on advances made to contractors for facilitating construction activities should be treated as capital receipts and not taxable income. The Tribunal dismissed the revenue's appeal on this issue.

Issue IV: Royalty and Labor Welfare Cess Disallowed Under Section 43B
The AO disallowed the royalty and labor welfare cess payments not made to the Government of Karnataka, treating them as revenue expenses. The CIT(A) deleted the addition, noting that these payments were related to capital works and not debited to the profit and loss account. The Tribunal remanded the issue back to the AO for verification, directing that the payments should be allowed in the assessment year when they were actually made. The Tribunal allowed the grounds for statistical purposes and remanded the issue for verification.

Conclusion:
The Tribunal's judgment provided a detailed analysis of each issue, referencing relevant case laws and previous decisions to uphold or dismiss the appeals. The Tribunal partly allowed the assessee's appeals on the interest earned on HUDCO loan funds and dismissed the revenue's appeals on the interest on grants and mobilization advances. The issue of royalty and labor welfare cess was remanded back to the AO for verification. The cross objections filed by the assessee were dismissed as infructuous.