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TMI Blog2012 (1) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs.2,71,92,899/- by disallowing interest expenses of Rs.1,36,11,665/- and Rs.1,35,81,234/- being document development expenses. 3. The respondent-assessee succeeded in the first appeal and the tribunal has affirmed the said decision and upheld the deletions made by the Commissioner of Income (Appeals). 4. Revenue has filed the present appeal in respect of disallowance of interest expense of Rs.1,36,11,665/-. 5. The respondent-assessee was a wholly owned subsidiary of Power Finance Corporation (PFC) and was incorporated/created as a special purpose vehicle (SPV) for inviting bids for construction and building of an ultra mega power project at Sasan in Madhya Pradesh. The respondent-assessee as a SPV was subsequently transferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was also liable to pay interest to the Power Procurement Utilities on the Commitment Advance paid. The interest expenditure for the assessment year 2007-08 was Rs.2,07,58,287/-. This was shown as a reduction from interest income received from PFC credited to the capital work in progress. 9. In the income tax return, the assessee, however, had shown the interest received from PFC under Section 57 as "income from other sources". It may be noted that the respondent-assessee had not commenced business operation. The Assessing Officer himself had recorded that the entire interest earned and to be paid was shown as "capital work in progress". 10. The Assessing Officer took a very narrow view and held that interest paid was on ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortium‟ (supra). Reliance has been placed on "CIT vs. Bokaro Steel Ltd., 236 I.T.R. 315(SC), wherein it has been held that if money is borrowed by a newly started company which is in the process of constructing and erecting its plant and machinery, the interest incurred before the commencement of production on such borrowed money can be capitalized and added to the cost of the fixed asset created as result of such expenditure; that likewise, if the assessee receives any amount inextricably linked with the process of setting up of its plant and machinery, such receipts will go to reduce the cost of its assets and these are receipts of a capital nature, not capable of being taxed as income. „Bokaro Steel Ltd.‟ (supra) has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ursed by the assessee." 13. Thereafter, the tribunal has observed following : 10. We have heard both the parties and have perused the material on record. It is seen that as per the Minutes of the Meeting between the Secretary, Power with the Member Secretaries of various States, it was agreed that the States would provide funds@ Rs.1crore per 100 MG for state-wise allocation regarding acquisition of land for Power projects and coalmines. These funds were to be provided to the SPV in the form of Commitment Advance. Also, an agreement had been entered into between PFC and the assessee. As per this agreement, the entire expenditure on development of the Project was to be incurred by PFC out of its own funds, till it received the Commitment A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Power Consortium Ltd.‟(supra) is squarely applicable to the present case, as discussed. This is in consonance with „Bokaro Steel Ltd. (supra), „Karnal Cooperative Sugar Mill‟ (supra), "CIT vs. Karnataka Power Corporation", 247 I.T.R. 268(SC) and "Bongaigaon Refinery and Petro Chemical Co. Ltd. vs. CIT‟, 251 I.T.R. 329(SC), wherein also, it has been laid down that any receipt inextricably linked to the setting up of the project is capital receipt not liable to tax and going to reduce the cost of the project. In the present case too, the funds infused by the assessee company were inextricably linked with the setting up of the power plant. Likewise, the interest payment was also capital expenditure, which fact w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent was set up. In view of the factual matrix, interest received on unutilized commitment advances cannot be taxed as revenue income and interest paid on commitment advance treated as a capital expense. This will be contradictory. The entire expenditure for inviting bids etc. and even documentation was paid to PFC. The amounts received from the prospective bidders on account of sale of tender documents was also transferred to PFC. As noticed above, Revenue has not challenged and has accepted the order of the tribunal deleting addition of Rs.1,35,81,234/- paid by the respondent-assessee to PFC for preparation of tender documents. In view of the factual matrix, the tribunal has rightly followed the ratio in Indian Oil Power Consortium (su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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