9911796707
TMI Blog2024 (12) TMI 1218X X X X Extracts X X X X X X X X Extracts X X X X ..... , the same would be applicable where the asset is to be constructed, developed or is of a nature that requires considerable time to bring it to use. Illustratively, in case where a plant is being set up in a factory and the requisite funds for setting up the same are deployed for a period of time, the interest paid on the amount borrowed for the said purpose and interest earned on temporary deposits during the course of deployment are required to be accounted for as a part of the capital costs. This is not true for an off the shelf product. Illustratively, if a motor vehicle is purchased from borrowed capital, neither the interest paid nor the interest earned on the funds borrowed for payment of consideration of the same can be accounted for as a part of the cost of the said asset. In the present case, there is no dispute that the Assessee was set up to acquire resources to ensure supply of coal. At the material time it was in the process of negotiation for acquiring a coal mine, to set up its business, and thus called for capital from its shareholders for the purpose of payment of the acquisition costs. It is the part of the said funds that were kept in the short-term fixed deposi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee had filed its Income Tax Return for the relevant AY 2012-13 declaring its income as NIL. During the course of the assessment proceedings, the AO noticed that the Assessee had earned an amount of Rs. 11,45,92,550/- in respect of the funds received from its promoters. The Assessee had also paid interest to its promoters amounting to Rs. 11,14,73,651/-. According to the AO, the difference between the interest earned and interest paid was chargeable to tax as income from other sources . Accordingly, the AO passed the assessment order determining the Assessee s total income at Rs. 31,18,900/-. 4. Aggrieved by the same, the Assessee filed an appeal before the CIT(A) claiming that it was entitled to set off the interest earned against the amounts capitalized as Capital Work-in-Progress (CWIP in short). The CIT(A) rejected the said contention holding that the interest was in the nature of revenue receipt and not a capital receipt and therefore, it was required to be accounted for and taxed accordingly. The CIT(A) concluded that the amount earned on short term deposits was chargeable to tax under the head income from other sources in terms of Section 56 of the Act. The CIT(A) was also of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rseas to secure supply of coal to its promoters. During the financial year relating to AY 2012-13, the Assessee was actively pursuing a proposal to acquire and develop a coal mine overseas. The notes to the final accounts of the Assessee indicate that the Assessee had received equity contribution of Rs. 2.00 Crores from SAIL, Rs. 1.00 Crore from RINL, and Rs. 1.00 Crore from NMDC. In addition, the accounts reflected an advance of Rs. 156 Crores from RINL. The accounts also indicated that the Assessee had received a sum of Rs. 1,81,28,800/-, Rs. 23,92,296/-, and Rs. 24,58,199/- as reimbursement of expenses from SAIL, RINL, and CIL respectively. 8. Apparently, the funds received were kept in a short term fixed deposit yielding interest. The Assessee claimed that it had called funds from shareholders and promoters for the purpose of acquisition of a coal mine overseas. At the material time, the transaction for such acquisition was at an advanced stage. On 29.06.2011, the Assessee received a sum of Rs. 157 Crores from RINL as call money. Out of the aforesaid sum, an amount of Rs. 1.00 Crore was accounted for share application money and the balance was reflected as borrowing and was kep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the same to RINL as the Assessee was hopeful that another proposal may fructify. Subsequently since the proposal for acquisition of the coalmine which was being pursued was abandoned the Assessee refunded the amount of Rs. 156 Crores received from RINL. Since the Assessee had earned interest on the said amount received from RINL, it also decided to pay interest to RINL. 14. It is material to note that RINL confirmed that the amount received by it was accounted for as income in its hand and tax was paid on the same. REASONS AND CONCLUSIONS 15. It is the Assessee s case that income by way of interest is not chargeable to tax under the head income from other sources as it was inextricably linked to acquisition of coal mine a capital asset. The Assessee claims that the amount of interest payable on the funds borrowed for acquiring such asset is required to be added to the total cost of the asset. Similarly, interest on such funds, which were temporarily kept in an interest-bearing account pending utilization, was liable to be adjusted from the cost of such asset. 16. The Assessee claims that this question is squarely covered by the decision of this court in Indian Oil Panipat Power C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e substantial time is required to construct the asset or bring the asset to use. The financial costs for such assets are thus considered as a part of the intrinsic value of the said asset. 22. It is material to note that there is a distinction between the price of an asset and its cost. On the same principle the amounts received which are directly linked to the acquisition or construction of the asset, are required to be reduced from the capital cost of the said asset. In one sense, such receipts mitigate the cost of the capital asset. And, it is essential to reflect the correct cost of the asset. 23. It is relevant to refer to the Accounting Standard 16 [AS-2016: The said standard was notified under the Companies (Accounting Standard Rules) 2016 under the Companies Act, 1956 and has been renotified being as part of the Companies (Accounting Standard Rules) 2021 under the Companies Act, 2013.] . The said Standards applies to a qualifying asset , which is defined as an asset that takes substantial period to get ready for its intended use or sale. The AS-16 also explains that the substantial period of time as contemplated under the standard, primarily depends upon the circumstances o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that borrowing during the period less any investment income on the temporary investment of those borrowings. 13. The financing arrangements for a qualifying asset may result in an entity obtaining borrowed funds and incurring associated borrowing costs before some or all of the funds are used for expenditures on the qualifying asset. In such circumstances, the funds are often temporarily invested pending their expenditure on the qualifying asset. In determining the amount of borrowing costs eligible for capitalisation during a period, any investment income earned on such funds is deducted from the borrowing costs incurred. [emphasis added] 26. Accounting treatment of various items are guided by an overarching principle that final accounts should reflect the true and fair view of the reported entity. In order for a capital value of an asset (which takes a considerable time to bring it to intended use) to be fairly disclosed on historical cost basis, it would be essential to subsume within the cost of the said asset all elements of expenditure, which directly contribute to the cost of that asset. 27. It is for this reason that general administrative cost of an entity which cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rued in the sense which no commercial man would misunderstand. For this purpose it would be necessary to ascertain the connotation of the above expression in accordance with the normal rules of accountancy prevailing in commerce and industry . The word cost , as observed on p. 424 of Simon's Taxes D Third Edition, is not synonymous with price . Other items of expenditure, such for instance as freight or warehouse charges or insurance, must in certain cases be added to the price. The matter has been dealt with in Accountancy by Pickles, 1955 Ed. on p. 944 under the head Payment of interest on Construction Capital as under: In the ordinary course of affairs no dividends may be paid unless such dividends are paid out of profits: interest on debentures (being a charge is, however, payable whether profits are earned or not). Where company raises share capital and out of the proceeds defrays the expenses of the construction of any works or buildings or provision of plant which cannot be made profitable for a lengthened period the company may pay interest on so much of that share capital as is paid up for the period and may charge to capital the sum paid by way of interest, provided t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tices, issued by the Institute of Chartered Accountants of India (1974) it is observed in para 2.5 as under: 2.5 Fixed assets should be valued at cost and depreciation should be written off on a proper and consistent basis. Cost includes all expenditure necessary to bring the assets into existence and to put them in working condition. By way of illustration the following may be mentioned: (i) Legal charges and stamp duties in the case of land, (ii) Architect's fees in the case of buildings, (iii) Wages, salaries and installation expenses in the case of machinery, and (iv) Interest on borrowings to the extent specified in para 2.22. Relevant part of para 2.22 reads as under: 2.22 The question often arises as to whether interest on borrowings can be capitalised and added to the fixed assets which have been created as a result of such expenditure. The accepted view seems to be that in the case of a newly started company which is in the process of constructing and erecting its plant, the interest incurred before production commences may be capitalised. Interest incurred means actual interest paid or payable in respect of borrowings which are used to finance capital expenditure. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of share capital but taken on loan for the purpose of defraying the expenses of the construction of any work or building or the provision of any plant. The reason indeed would be stronger in case such interest is paid on money taken on loan for meeting the above expenses. [emphasis added] 31. The later decisions rendered by the courts are required to be understood in the light of the concept of cost of an asset as explained above. 32. Mr Sanjay Kumar, stoutly relied upon the decision in Tuticorin Alkali Chemicals and Fertilizers Limited, Madras v. CIT, Madras3. The appellant in that case was incorporated on 03.12.1971 for the purpose of manufacturing heavy chemicals such as ammonium chloride and soda ash. The trial production of its factories commenced on 30.06.1982. It had prior to its trial production period had borrowed the funds from various banks and financial institutions. A part of the borrowed funds were not immediately required and kept in short term deposits. It also deposited certain sum with Tamil Nadu Electricity Board. During the previous year ending on 30.06.1981 (relevant to AY 1982-83), the appellant received interest totaling to Rs. 2,92,440/-, which was disclosed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for plant and machinery that was given to contractor by the assessee for use in the construction work, and interest from the advances made to contractor for the purpose of facilitating the construction work. These receipts were sought to be taxed under separate heads. However, the Supreme Court explained that said receipts were intrinsically connected with the construction of the steel plant and therefore, they were rightly adjusted to reduce the cost of construction. It is also material to note that the Supreme Court also approved the decision of this court in Additional Commissioner of Income Tax, New Delhi v. Indian Drugs and Pharmaceuticals Limited (1983) 141 ITR 134, whereby this court had held that receipts from sale of tender forms, supply of water, electricity, sale of stones, boulders, grass and trees during the course of construction of a factory were capital in nature and thus, were required to be reduced from the capital cost of the factory. 36. We consider it apposite to refer to the following extract of the decision in CIT, Bihar II, Patna v. Bokaro Steels Limited : - 5. We will take the first three heads under which the assessee has received certain amounts. These ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. ([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 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. 37. In a subsequent decision rendered by this Court in Indian Oil Panipat Power Consortium Limited, New Delhi v. Income Tax Officer1 a Coordinate Bench of this court considered the question whether the funds deployed with the bank could be taxed as income from other sources and not as a capital receipt to be set off against preoperative expenses, in the facts of that case. In that case, the assessee (Indian Oil Panipat Power Consortium Limited, New Delhi) was incorporated on 06.10.1999 as a joint venture between Indian Oil Corpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Section 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 business. Therefore, as per the provision of Section 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 a newly set up business, post the date of its setting up can be taxed if it is of a revenue nature under any of the heads provided under Section 14 in Chapter IV of the Act. For an income to be classified as income under the head profit and gains of business or profession it would have to be an activity which is in some manner or form connected with business. The word business is of wide import which would also include all such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital receipt which was permitted to be set off against pre-operative expenses. 39. The aforesaid view has also been reiterated by this court in several decisions including Principal Commissioner of Income Tax-7 v. M/s Triumph Realty Pvt Limited Neutral Citation: 2022:DHC:1159-DB; Principal Commissioner of Income Tax v. Facor Power Ltd (2016) 380 ITR 474; and The Pr. Commissioner of Income Tax-5 v. Jaypee Powergrid Limited Neutral Citation: 2023:DHC:8992-DB. 40. In view of the above, the key issue is whether interest on funds deposited in the short-term fixed deposit can be construed as incidental to setting up the business acquisition of a coal mine. Plainly, if the interest is earned on the amounts which were temporarily kept in fixed deposits in the course of acquisition of the coal mine to set up its business, the interest earned would require to be accounted for as the part of the capital value of the business/asset. 41. We may, however, add a caveat that this accounting treatment is or will be applicable only if the nature of the asset is such that requires time for construction or for putting it in use. Illustratively, the same would be applicable where the asset is to be con ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
