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TMI Blog2018 (4) TMI 1853X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 31.07.2013 of the Ld. CIT (Appeals)-VII, New Delhi and pertains to assessment year 2009-10. 2. The sole issue under dispute is the addition of ₹ 3,40,52,432/- and pertains to interest income on FDRs for short term duration which was treated as income from other sources by the Assessing Officer as against the same being treated as a capital receipt by the assessee. Brief facts of the case are that the assessee is a limited company incorporated on 5.10.2006 as a joint venture company between Jaiprakash Power Ventures Ltd. and Power Grid Corporation of India Ltd. The sole objective of the company was to set up a power transmission system in the State of Himachal Pradesh. The actual work of construction of the said project was started in Financial Year 2007-08 and was completed in financial year 2012-13. The total estimated completion cost was ₹ 981 crore for which equity of ₹ 300 crore and a debt of ₹ 700 crore were raised. The entire debt was received from consortium of banks under Trust and Retention Account Agreement and loan agreement. Project funds were also raised from time to time during the period of the project. Out of the project funds so raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4) The interest earned by the appellant is inextricably linked with the implementation of the transmission-line project and is a capital receipt which only offsets the cost of the project. 5) The appellant's case is governed by the rule in Bokaro Steel Ltd [1999] 236 ITR 315 (SC) and followed in Indian Oil Panipat Power Consortium Ltd v. ITO 315 ITR 255 (Del). 2.4 The assessee has also filed an additional ground in the appeal which reads as under:- That without prejudice to the main ground that the interest income on FDRs during project implementation period is a capital receipt, Ld. Assessing Officer has erred in not netting the interest income of ₹ 3,40,52,432/- with interest paid of ₹ 5,79,93,992/- on funds borrowed for the implementation of the project while taxing the same as income from other sources. As such too, as interest paid far exceeds interest income, no income is taxable as other income. 3. The Ld. AR submitted that the additional ground of appeal being raised deserved to be admitted as the same pertained to a question of law. Ld. AR also relied on the judgment of the Hon ble Apex Court in the case of National Thermal Po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 315 (SC) wherein it had been held that if any amount which is inextricably linked with the process of setting up of plant and machinery is received, such receipt will be in the nature of capital and cannot be taxed as income. 6.1 Ld. AR also submitted that the Ld. Commissioner of Income Tax (A) had solely relied upon the judgment of Hon ble Apex court in the case of Tuticorin Chemicals and Fertilizers Ltd. (supra), ignoring numerous subsequent judgments of the Hon ble Apex Court. 7. The Ld. Sr. DR placed reliance on the order of the Assessing Officer as well as the Ld. Commissioner of Income Tax (A) and submitted that the judgment of the Hon ble Apex Court in the case of Tuticorin Chemicals and Fertilizers Ltd. is very clear inasmuch as it lays down that interest earned prior to commencement of business was assessable under income from other sources. 8. We have heard the rival submissions and perused the material available on record. We note that a similar issue had come up before ITAT Ahmedabad Bench in the case of Adani Power Ltd. vs. ACIT in ITA No. 2755/AHD/2011. In its order dated 27.7.2015, the Coordinate Bench of the ITAT analysed the ratio of the judgment of the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertilizers Ltd. (supra), held as under:- ..., dismissing the appeal, that the first three heads of income were (i) the rent charged by the assessee to its contractors for housing workers and staff employed by the contractor for the construction work of the assessee including certain amenities granted to the staff by the assessee, (ii) hire charges for plant and machinery which was given to the contractors by the assessee for use in the construction work of the assessee, and (iii) interest from advances made to the contractors by the assessee for the purpose of facilitating the work of construction. The activities of the assessee 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 we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and Bokaro Steel Ltd. (supra) at length, held at pages 258, 259 and 260 of report, i.e., 315 ITR 255, as under:- 5. In our opinion the Tribunal has misconstrued the ratio of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals [1997] 227 ITR 172 and that of Bokaro Steel Ltd. [1999] 236 ITR 315. The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals [1997] 227 ITR 172 is that if funds have been borrowed for setting up of a plant and if the funds are 'surplus' and then by virtue of that circumstance they are invested in fixed deposits the income earned 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre-operative expenses. In the case of Tuticorin Alkali Chemicals [1997] 227 ITR 172 it was found by the authorities that the funds available 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. 24. From the above, it is evident that the Hon&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny other judgment in favour of the revenue other than the judgment of the Hon ble Apex Court in the case of Tuticorin Chemicals and Fertilizers Ltd (supra) which has been duly considered and distinguished by the Hon ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. (supra) and which covers the case of the assessee in its favour. The co-ordinate Bench of the Tribunal has also taken a view in favour of the assessee on identical facts and the same has been reproduced in the preceding paragraphs of this order. Therefore, in view of the order of the Coordinate Bench and respectfully applying the ratio of the judgment of the Hon ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. (supra), we hold that since the business of the assessee had not commenced, the interest received in the period prior to the commencement of business was in the nature of capital receipt and was required to be set off against the preoperative expenses. Therefore, the impugned interest income is a capital receipt not chargeable to tax during the year under consideration. Accordingly, we allow the grounds of appeal raised by the assessee. 9. In the result, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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