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TMI Blog2019 (1) TMI 1132X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue income and consequently not liable to be set off against project development costs - Held that:- The action of the assessee merely reduces the interest costs on borrowed funds to some extent. Therefore, interest on borrowed funds and interest earned on fixed deposits cannot be given varied treatment where the interest costs have been capitalized to the power project. We do not visualize any justifiable reason for holding the interest income on fixed deposits out of borrowed funds and utilized for furtherance of the project to be of revenue character. The conclusion drawn by the CIT(A) is thus manifestly mis-conceived and thus deserves to be set aside and reversed. The action of the CIT(A) in upholding the interest income received from IDBI Bank as taxable revenue income under s.56 of the Act is thus wholly untenable and consequently, the treatment adopted by the assessee in this regard requires to be restored. In this view of the matter, we set aside the action of the CIT(A) and direct the AO to delete the addition made on this score. - decided in favour of assessee. - I.T.A. No. 1430/Ahd/2015 And CROSS OBJECTION No. 114/Ahd/2015 - - - Dated:- 18-1-2019 - SHRI PRADIP KU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities for construction of power plant and interest was earned thereon. The assessee company characterized the aforestated interest income as capital receipt and hence reduced the project development expenditure to this extent. It was the case of the assessee that such deposits are inextricably linked with highly capital intensive power project as such mega projects require use of state of art technology, substantial imports, planning and execution of installation and commission over a substantial long period of time. It was claimed that the assessee has also inter alia incurred very heavy interest costs on borrowed funds to the tune of ₹ 84,26,19,593/-. The assessee thus claimed that both interest incurred on borrowed funds and interest income derived from temporary deposits form part of project development expenditure and both outgo and receipt bears the character of capital item. The AO however held that interest earned on temporary deposits amounting to ₹ 3,68,56,918/- derived from deposits placed with bank are in the nature of revenue income and thus cannot be reduced from project costs of capital nature. While holding so, the AO denied nexus between the deposits ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antee in respect of the request for proposal floated by Rajasthan Rajya Vidyut Prasaran Nigam Ltd. for supply of upto 1200 MW power. The above bank guarantee had been made available to the appellant-company on a condition that the appellant-company places a margin of 10% of the total credit facility it had availed. The appellant-company had availed the credit facility of ₹ 360 crores from IDBI Bank Ltd., for which it had deposited ₹ 36 crores as margin money. To summarize, the appellant-company would like to reproduce the relevant part of the Term Sheet entered into between IDBI Bank Ltd. and the appellant-company as under:- Sr. No. Particulars Terms Conditions I Type of Facility Bank Guarantee Limit (Contract Performance Guarantee) Ii Limit/Amount Rs.360 crore (Rupees Three Hundred Sixty crores only) Iii Purpose The Bank Guarantee would be utilized for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant-company was already submitted to the Assessing Officer vide letter dated 17.2.2014. The Assessing Officer nowhere in the body of the assessment order denied the fact that the above banking facility availed in lieu of margin money were not inextricably linked to the setting up of the power plant. In fact, the only contention of the Assessing Officer is that the interest income earned during the pre-commencement stage not being exempt u/s.10 would be taxable. In doing so, the Assessing Officer has grossly erred, on the facts as well as in law. In support of the contention of the appellant-company that the income which is inextricably linked to the setting up of the plant is a capital receipt, reliance is placed on the following decisions:- (i) CIT vs. Bokaro Steel Ltd., 236 ITR 315 (SC). On analysis of the above decision, it may be seen that Bokaro Steel Ltd. had earned income through rent from contractors for housing workers and staff-employees, hire charges on plant and machinery given to contractors and interest on advances made to contractors for facilitating the work of construction. The principle laid down by the Hon'ble Apex Court is reprodu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to reduce the cost of construction. They have, therefore, been rightly held as capital receipts and not income of the assessee from any independent source. 6. In the case of Addl. CIT v. Indian Drugs Pharmaceutical^ Ltd. [1983] 141 ITR 134, the Delhi High Court considered a case where the work of construction of the factory of the assessee was in progress and production had not commenced. Receipts from the sale of tender forms and supply of water and electricity to the contractors engaged in construction as also receipts on account of sale of stones, boulders, grass and trees were held to be receipts not from independent sources but were considered as inextricably linked with the process of setting up of business. These were directly related to the capital structure of business and were held to be capital in nature. We agree with this view taken by the Delhi High Court. 7. The appellant, however, relied upon the decision of this Court in Tuticorin Alkali Chemicals Fertilizers Ltd.'s case (supra). That case dealt with the question whether the investment of borrowed funds prior to commencement of business, resulting in earning of interest by the assesses, would a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1922 and whether the assessee will be entitled to depreciation allowances and development rebate with reference to such interest also. The Court held that the accepted accountancy rule for determining cost affixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income. 8. The same reasoning would apply to royalty received by the assessee- company for stones, etc., excavated from the assesseecompany's land. The land had been allowed to be utilised by the contractors for the purpose of excavating stones to be used in the construction work of asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity for purchase of machinery for setting up a plant. The Hon 'ble Apex Court held that the deposit of money was directly linked with the purchase of plant and machinery and therefore the income earned on such deposit was incidental to the acquisition of the asset. As narrated above, the appellant-company has placed the above margin money with the bank in order to avail credit facilities for giving performance bank guarantee to the State Electricity Utility Company and to avail other credit facilities for developing and construction of power plant. Therefore, the appellant has proved beyond any doubt the inextricable nexus between deposit/margin money with the construction of power plant. Therefore the interest income is capital receipt which should go on to reduce the capital cost of the project. (iii) CIT vs. Jaypee DSC Ventures Ltd., 35 ITR 132 (Del.). The relevant part of this decision is reproduced below: FACTS: The assessee filed its return of income for the relevant assessment year declaring nil income. It had furnished performance guarantee in favour of NHAI to get the contract awarded in its favour and to procure the said guarantee, it had kept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above, it is seen that performance bank guarantee has been given by Jay pee DSC Ventures Ltd., for faithful performance obligation to NHAI. In order to give such performance bank guarantee the assessee had placed a fixed deposit as margin money. The bank guarantee was furnished on a condition precedent to enter a contract and therefore the Hon'ble Delhi High Court held that the interest earned on the fixed deposit used for furnishing bank guarantee as having inextricable nexus in securing the contract and hence interest was held as capital receipt not liable to tax as income from other source. The facts of the case in regard to the interest earned by the appellant-company from IDBI Bank Ltd. is exactly the same wherein it has earned interest income on fixed assets placed with the bank for furnishing performance bank guarantee to the State Electricity Utility Company . At this juncture it would also be relevant to refer to clause pertaining to Contract Performance Guarantee entered into between State Electricity Companies and the appellant company. Copy of relevant portion of the agreement is attached herewith vide Annexure 3. On perusal your good self would appreciate th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resent appeal, would have to be treated as revenue receipt. [Para 11] On perusal of the above case law, your good self may appreciate that the only requirement to justify whether the receipt is a capital receipt or otherwise is to test whether the receipt is inextricably linked with setting up of power plant or not. The appellant company has brought on record all relevant facts to prove the direct nexus between the Fixed deposit (on which interest income is earned) with setting up of power plant. Therefore on application of the above case law interest income may be characterized as a capital receipt. 4.2 In the assessment order A.O. observed that the appellant was engaged in the business of manufacturing power in the state of Rajasthan; the project was under implementation stage; the generation of power had not commenced in the year under consideration; therefore the interest earned by the appellant on the fixed deposits kept with the banks was assessable as income from other sources (and the interest income cannot be reduced from the cost of the project). Accordingly he assessed the interest income of ₹ 3,68,56,918/- as income from other sources u/s 56. This amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spute that Appellant's business is being set up and accordingly Appellant did not offer any business income. Appellant raised funds for setting up project, however, 'during the construction period of the project, surplus funds were invested on which interest and other income were received. In the Return of Income field Appellant offered interest income of ₹ 7,9151,306 and claimed that interest income of ₹ 1,3981,841 was earned from deposits which were given as lien against opening of LC, bid bonds and bank guarantees. This income was not offered for tax \on the ground that the same is inextricably linked with capital projects and hence to be reduced from capital cost. Assessing Officer after examining the various issues found that Appellant's claim is not justified in view of the Supreme Court decision in the case of Tuticorin Alkalies, Chemicals and Fertilizers Ltd., 227 ITR 172. Appellant relied upon the other decisions. However, the following extract from the decision of Apex Court in the case of Tuticorin Alkalies, Chemicals and Fertilizers Ltd., is quite relevant to decide the issue. For the purpose of setting up of the factories, the company has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be taxed. The decision ofHon'ble Supreme Court in the case of Bokaro Steel Ltd., and Karnal Co-operative Sugar Mills Ltd., do not support the Appellant's claim since in both the cases, interest income was directly coming from the implementation of the project. In the Appellant's case, the same is from investment in bond required as security for PPA and not for setting up the project. PPA is not for implementation of the project but the same is for sale of electricity after commencement of business. Therefore, Appellant does not get benefit from these decisions. The other decisions relied upon by the Appellant are on the interpretation of apex court decisions referred earlier. Since facts of the Appellant's case are similar to the decisions of apex court, Appellant is liable for tax on interest. The addition made by the Assessing Officer is accordingly confirmed. Facts remaining the same in the year under consideration, following the above order, assessment of interest earned on Bid-Bonds of ₹ 1,46,60,271 as income from other sources is upheld. In the instant case, the appellant had made fixed deposit with IDBI Bank for obtaining Bank guarantee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t interest expenditure was capitalized as project development expenditure; such balance interest earned on FD/security deposit was inextricably linked with the implementation of the power project; Assessing Officer taxed the interest income earned on FD with Axis Bank and security deposit with MSEDC as income from other sources; the margin money kept with Axis Bank was against the letter of credit as confirmed by the certificate issued by the bank; this deposit was directly linked to the acquisition of Plant Machinery; Assessing Officer accepted part of the deposit pertaining to the same loan as linked with the business and did not accept part of the same certificate; as regards the security deposit with MSEDC, it was not with the intention of earning interest income; rather it was a pre-requisite for securing electricity connection to implement the project; therefore, this deposit was inextricably linked with the power project of the Appellant Company and in view of various case laws relied on, impugned assessment under the head income from other sources is not in accordance with law. 3.4 The contentions of the Learned AR are cogent and tenable. Appellant itself offered Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the tune of ₹ 5,25,385,87 is required to be credited against preoperative expenses incurred by the Assessee. In the instant case, appellant kept fixed deposit as margin money with SBI for obtaining Bank guarantee to avail term loan facility for the project related works. The margin money kept is 10 % of the Bank guarantee of ₹ 150 crores obtained from SBI. Keeping these facts and the above mentioned decisions I am of the view that the interest earned is required to be credited against pre operative expenses incurred by the appellant. Therefore assessing the interest income as income from other sources u/s 56 is not in accordance with law. Addition of the interest received from SBI of ₹ 1,45,50,007/- is deleted. These grounds of appeal are partly allowed. 5. Ground no. 4 5 are as under: 4. Without prejudice to the above, the Assessing Officer ought to have allowed netting off of interest income of ₹ 3,68,56,918/- against huge interest expenditure of ₹ 842,619,593 incurred by the appellant-company. 5. Without prejudice and without admitting, that the income is taxable as income from other sources, even if it is held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year. (iii) A bank statement showing transfer of funds (Rs.41 crore) from Axis Bank to IDBI bank has been attached herewith . It is submitted that aforesaid FD was kept from IDBI Bank account. 3.3.2 Fixed deposit with SBI used for providing bank during construction of power project: (i) The deposit made in SBI was also out of borrowed funds. (ii) Vide letter dated 11.02.2014, annexure-6 submitted during the course of assessment proceedings, it is clearly seen that the appellant has received money from Adani Power Ltd. Amounting to ₹ 10 crore-which was credited to IDBI Bank Ltd. And out of the same, ₹ 8.5 crore has been transferred to SBI from which FD of 7,51,03,000/- has been made. (iii) From the above facts, your good self may appreciate that the appellant company has brought on record all facts which show that the interest expenses incurred are wholly and exclusively for the purpose of earning income and the same must be allowed to be set off within the purview of section 57 (iii) of The Act. 3.3. It is further submitted that the same issue had arisen in the case of M/s. Adani Power Ltd. (A.Y.2009-10), in which the appellant had take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to ₹ 66,32,613 as income from other sources is upheld. As regards the balance interest income of ₹ 1,92,87,348 offered to tax in the Return of Income, the contention of the Learned AR is that term loan taken was kept as short term deposit with the banks (pending finalization of purchase of Plant Machinery) and the interest income was earned on the said deposit. It is contended that the nexus between the interest income earned and the interest expenditure incurred is clearly demonstrated. In support thereof he relied on the Ahmedabad Tribunal decision in the case of JCIT V/s Steelco Gujarat Limited (99 ITD 408), wherein it was held that netting of interest is to be allowed if the interest expenditure was related to the interest income earned. Assessing Officer is directed to verify the contentions of the Learned AR that there is a close nexus between the interest expenditure and the interest income and that the interest paid was more than the interest earned. If it is found to be correct he shall reduce the amount of ₹ 1,92,87,348 from the income assessed under the head 'Income from the other sources'. Subject to verification, this ground of appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 315 (SC) and Karnataka Power Corporation 247 ITR 268 (SC). To buttress its claim on merits that accrued interest on earmarked funds would go to reduce the cost of the project and does not represent revenue nature and chargeable nature, the learned AR submitted that on the similar analogy, assessee has simultaneously capitalised interest and finance costs of ₹ 136.80 Crores and added the same to the capital costs incurred for development of power project of highly capital intensive nature involving long gestation period. The learned AR submitted that there is no reason to treat interest costs and interest income on different footings in the similarly placed circumstances. The learned AR thereafter adverted our attention to the decision of the co-ordinate bench rendered in the case of holding company in the identical facts in DCIT vs. Adani Power Ltd. ITA No. 1663/Ahd/2014. The learned AR pointed out that the co-ordinate bench in the aforesaid case has adjudicated the issue in favour of the asessee and upheld the action of the CIT(A) after taking note of host of judicial precedents. It was thus contended that the issue is no longer res integra. The learned AR next emphatical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... power plant in the same measure. We find that the identical issue came up for consideration of the co-ordinate bench in a group case in a similarly placed situation. 14. It will be apt to reproduce the relevant operative para of the decision in Adani Power Ltd. (supra) relied upon by the Assesee: 16. Next question relates to quantification of interest income available with the assessee for set off against pre-operative expenditure in power project implementation. We find that the ld.CIT(A) has not independently examined any issue in this order, rather followed order of his predecessor in the assessment year 2008-09. The ITAT did not approve the order of the ld.CIT(A) in the assessment year 2008-09 and respectfully following the order of the ITAT in the assessment year 2008-09, we are of the view that interest income of ₹ 8,17,60,319/- is available with the assessee for set off against pre-operative expenditure which is titled as project development expenditure . Discussion made by the Tribunal in the assessment year 2008-09 on this issue reads as under: 18. We find that both the parties have relied upon the decisions of the Hon'ble Apex Court and in additi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in connection with all these three receipts were directly connected with or incidental to the work of construction of its plant undertaken by the assessee. The advances which the assessee made to the contractors to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitch as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts were arrangements which were intrinsically connected with the construction of its steel plant. The receipts had been adjusted against the charges payable to the contractors and had gone to reduce the cost of construction. They had, therefore, been rightly held as capital receipts and not income of the assessee from any independent source. 20. In the case of Karnal Co-operative Sugar Mills Ltd. (supra), their Lordships of Hon'ble Apex Court, after applying the decision of Bokaro Steel Ltd. (supra), held as under:- Held, that, in the present case, the assessee had deposited money to open a letter of credit for the purchase of the machinery requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned in the form of interest will be taxable under the head Income from other sources'. On the other hand the ratio of the Supreme Court judgment in Bokaro Steel Ltd. [1999] 236 ITR 315 to our mind is that if income is earned, whether by way of interest or in any other manner on funds which are otherwise 'inextricably linked' to the setting up of the plant, such income is required to be capitalized to be set off against pre- operative expenses. 5.1 The test, therefore, to our mind is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the plant. The clue is perhaps available in s. 3 of the Act which states that for newly set up business the previous year shall be the period beginning with the date of setting up of the ITA No. 2755/Ahd/2011 Adani Power Ltd vs. ACIT AYs 2008- 09 business. Therefore, as per the provision of s. 4 of the Act which is the charging section income which arises to an assessee from the date of setting of the business but prior to commencement is chargeable to tax depending on whether it is of a revenue nature or capital receipt. The income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable with the assessee in that case were 'surplus' and, therefore, the Supreme Court held that the interest earned on surplus funds would have to be treated as 'income from other sources'. On the other hand in Bokaro Steel Ltd. [1999] 236 ITR 315 (SC) where the assessee had earned interest on advance paid to contractors during pre-commencement period was found to be 'inextricably linked' to the setting up of the plant of the assessee and hence was held to be a capital receipt which was permitted to be set off against preoperative expenses. (underlined ours to supply emphasis) 24. From the above, it is evident that the Hon'ble Delhi High Court has considered and interpreted the decisions of Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra) as well as Bokaro Steel Ltd. (supra). The conclusion of the Delhi High Court is in fact the law which emerges as per the decision of Hon'ble Apex Court. Therefore, in our opinion, the CIT(A) was not justified in ignoring the decision of Hon'ble Delhi High Court by simply mentioning that the issue is covered by the decision of Hon'ble Apex Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith SBI. The CIT(A) has rightly held that interest income to be of capital nature linked with the process of setting up of its power plant and such receipts would go to reduce the cost of the project which also includes huge interest costs as capitalized. For coming to such conclusion, the CIT(A) has taken cognizance of the decision of the Hon ble Supreme Court in the case of Bokaro Steel Ltd. (supra), Karnataka corporation Sugar Mills Ltd. Bongaigaon Refinery Petro Chemicals Ltd. vs. CIT [2001] 251 ITR 329 which in turn distinguish the decision of the Hon ble Supreme court in Tuticorin Alkali Chemicals Fertilizers Ltd. (supra). The CIT(A) has observed on facts that assessee kept fixed deposit as margin money with SBI for obtaining bank guarantee to avail term loan facility for the project related works. The margin money kept is 10% of the bank guarantee of ₹ 150 Crores obtained from SBI. The CIT(A) thus found that deposits were integrally connected with the setting up of power plant. Thus, we find ourselves in complete agreement with the action of the CIT(A) in upholding the action of AO to reduce interest income arising from deposits placed with SBI out of project devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1200 MW power by assessee, with specific validity period. The CIT(A) while admitting that power purchase agreement may require some security in the form of bank guarantee but inexplicably held that such act does not mean that investment is inextricably linked to the implementation of project. In our view, the conclusion drawn by the CIT(A) adversed to the assessee is outright bizarre; and totally unpalatable judicially. The CIT(A) has ignored the vital consideration that the fixed deposits have not been placed to park idle and surplus fund but borrowed money has been utilized by way of fixed deposit for obtaining the bank guarantee for the purpose of the project being set up. The action of the assessee merely reduces the interest costs on borrowed funds to some extent. Therefore, interest on borrowed funds and interest earned on fixed deposits cannot be given varied treatment where the interest costs have been capitalized to the power project. We do not visualize any justifiable reason for holding the interest income on fixed deposits out of borrowed funds and utilized for furtherance of the project to be of revenue character. The conclusion drawn by the CIT(A) is thus manifestly m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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