* IN THE HIGH COURT OF DELHI AT NEW DELHI
ITA No. 1156/2007 & 1157/2007
% Judgment delivered on : 26.02.2009
INDIAN OIL PANIPAT POWER CONSORTIUM
LIMITED, NEW DELHI ..... Appellant
Versus
INCOME TAX OFFICER ..... Respondent
Advocates who appeared in this case:
For the Appellant : Mr B.B. Ahuja, Sr. Advocate with
Mr Sunil Magon, Advocate
For the Respondent : Ms Prem Lata Bansal & Mr Mohan Prasad
Gupta, Advocate
CORAM :-
HON'BLE MR JUSTICE VIKRAMAJIT SEN
HON'BLE MR JUSTICE RAJIV SHAKDHER
1. Whether the Reporters of local papers may
be allowed to see the judgment ? Yes
2. To be referred to Reporters or not ? Yes
3. Whether the judgment should be reported Yes
in the Digest ?
VIKRAMAJIT SEN, J
1. These are appeals under Section 260A of the Income Tax Act,
1961 (hereinafter referred to as the „Act‟) preferred by the assessee
against the Judgment dated 22.04.2007 passed by the Income Tax
Appellate Tribunal (hereinafter referred to as the „Tribunal‟) in ITA No.
2349/Del/03 and ITA No. 1573/Del/04 pertaining to Assessment Years
2001-02 and 2002-03 respectively.
2. The only issue which arose for consideration of the authorities
below was as to the treatment which was to be accorded to the interest
earned on monies received as share capital by the assessee which were
temporarily put in a fixed deposit awaiting acquisition of land which had
run into legal entanglements on account of title. The Assessing Officer
had treated the interest received by the assessee in respect of the
ITA 1156&1157/2007 Page 1 of 8
aforementioned two years as „income from other sources‟, whereas the
Commissioner of Income Tax (Appeals) [hereinafter referred to as the
„CIT(A)‟] had accepted the stand of the assessee that the interest was in
the nature of capital receipt which was liable to be set off against pre-
operative expenses. In a further appeal to the Tribunal by the Revenue
the Tribunal reversed the decision of the CIT(A). The Tribunal was of
the view that the facts obtaining in the present case were similar to
those which arose in the judgment of the Supreme Court in the case of
Tuticorin Alkali Chemicals and Fertilizers Ltd vs CIT; (1997) 227
ITR 172. The assessee being aggrieved is in appeal before us.
3. We have heard the learned counsel for the parties at length.
Following substantial question of law arises for our consideration:
“Whether the Tribunal misdirected itself in law in holding
that interest which accrued on funds deployed with the
bank could be taxed as income from other sources and not
as capital receipt liable to be set of against pre-operative
expenses?”
We are called upon to really decide as to whether given the facts
obtaining in the assessee‟s case it would be covered by the line of cases
which follow the ratio of the decision of the Supreme Court in Tuticorin
Alkali Chemicals (supra) or those which follow the ratio of the
Supreme Court in the case of CIT vs Bokaro Steel Ltd; (1999) 236
ITR 315. At the outset we must note that the Supreme Court in the
case of Bokaro Steel Ltd (supra) has noticed the judgment of the
Supreme Court in Tuticorin Alkali Chemicals (supra). Therefore, in
these circumstances it would be incumbent to note the following brief
facts as recorded by the authorities below:
3.1 The assessee company was incorporated on 06.10.1999 in
pursuance of a joint venture entered into between Indian Oil
Corporation and Marubeni Corporation of Japan. The joint venture was
ITA 1156&1157/2007 Page 2 of 8
conceived to set up a power project at Panipat in the state of Haryana.
It was expected that the project would be set up by the end of the
financial year 2000-01. In order to effectuate the purpose for which
joint venture was conceived, share capital was contributed by Indian Oil
Corporation and Marubeni Corporation of Japan which included Rs 20
crores by way of additional share capital.
3.2 To be noted that the assessee had taken a stand before the
Assessing Officer that these funds were required primarily for purchase
of land and development of infrastructure. However, due to legal
entanglements with respect to title of land, which the Haryana
Government was to acquire for the assessee, in the interregnum, the
funds acquired by way of share capital were put in a fixed deposit with
the Tokyo Mitsubishi Bank by the assessee.
3.3 The assessee earned interest in the sum of Rs 1,65,75,906/- in
assessment year 2001-02 and Rs 1,54,62,098/- in the assessment year
2002-03. As mentioned hereinabove the Assessing Officer applied the
ratio of the judgment of the Supreme Court in Tuticorin Alkali
Chemicals (supra) and the judgment of the Supreme Court in the case
of CIT vs Autokast Ltd; (2001) 248 ITR 110 and held that the
interest which accrued to the assessee was assessable under the head
“income from other sources” and could not be set off against pre-
operative expenses as claimed by the assessee.
3.4 Aggrieved by the order the assessee preferred an appeal to the
CIT(A). The CIT(A) examined the facts in detail. It is pertinent to note
that the CIT(A) in paragraph 4 of his Order dated 06.02.2003
categorically found that the funds were placed in fixed deposit so that
liquidity was ensured and money would remain available when required
for purchase of land and infrastructure development and hence the
interest earned was ‘inextricably linked’ with the setting up of the
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power plant. Based on this line of reasoning the CIT(A) applied the
judgment of the Supreme Court in Bokaro Steel Ltd. (supra) and
allowed the claim of the assessee by directing the Assessing Officer to
delete the addition and consider the same for capitalization towards pre-
operative expenses.
3.5 The Tribunal in an appeal preferred by the Revenue, by virtue of
the impugned judgment, has reversed the decision of the CIT(A).
4. It is important to note that the Tribunal without holding that the
finding of fact of the CIT(A), that the interest earned was „inextricably
linked‟ with the setting up of the power plant reversed the decision of
the CIT(A) by making a bald observation that the “deposit of share
capital has no or very remote connection with setting up of plant and
machinery”. The Tribunal further observed that it was an independent
income earned in a similar fashion as was the case in Tuticorin Alkali
Chemicals (supra).
5. In our opinion the Tribunal has misconstrued the ratio of the
judgment of the Supreme Court in the case of Tuticorin Alkali
Chemicals (supra) and that of Bokaro Steel Ltd. (supra). The test
which permeates through the judgment of the Supreme Court in
Tuticorin Alkali Chemicals (supra) 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. (supra) 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.
ITA 1156&1157/2007 Page 4 of 8
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
activities which coalesce into setting up of the business. See Mazagaon
Dock Ltd vs CIT & Excess Profits Tax; (1958) 34 ITR 368 (SC), and
Narain Swadeshi Weaving Mills vs Commissioner of Excess
Profits Tax; (1954) 26 ITR 765 (SC). Once it is held that the
assessee‟s income is an income connected with business, which would
be so in the present case, in view of the finding of fact by the CIT(A) that
the monies which were inducted into the joint venture company by the
joint venture partners were primarily infused to purchase land and to
develop infrastructure – then it cannot be held that the income derived
by parking the funds temporarily with Tokyo Mitsubishi Bank, will result
in the character of the funds being changed, in as much as, the interest
earned from the bank would have a hue different than that of business
and be brought to tax under the head „income from other sources”. It is
ITA 1156&1157/2007 Page 5 of 8
well-settled that an income received by the assessee can be taxed under
the head “income from other sources” only if it does not fall under any
other head of income as provided in Section 14 of the Act. The head
“income from other sources” is a residuary head of income. See S.G.
Mercantile Corporation P. Ltd vs CIT, Calcutta; (1972) 83 ITR
700 (SC) and CIT vs Govinda Choudhury & Sons.; (1993) 203 ITR
881 (SC).
5.2 It is clear upon a perusal of the facts as found by the authorities
below that 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 (supra) 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 (supra)
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 pre-operative
expenses.
6. There is another perspective from which the present issue can be
examined. Under Section 208 of the Companies Act, 1956 a company
can pay interest on share capital which is issued for a specific purpose
to defray expenses for construction of any work and which cannot be
ITA 1156&1157/2007 Page 6 of 8
made profitable for a long period subject to certain restrictions
contained in Section (2) to (7) of Section 208. This section was
specifically noted by the Supreme Court in Challapalli Sugars Ltd vs CIT
(1975) 98 ITR 167. The Supreme Court went on to observe at page 175
as follows:
“We have already referred to section 208 of the Companies
Act which makes provision for payment of interest on share
capital in certain contingencies. Clause (b) of sub-Section
(1) of that section provides that in case interest is paid on
share capital issued for the purpose of raising money to
defray the expenses of constructing any work or building or
the provision of any plant in contingencies mentioned in that
section, the sum so paid by way of interest may be charged
to capital as part of the cost of construction of the work or
building or the provision of the plant. The above provision
thus gives statutory recognition to the principle of
capitalizing the interest in case the interest is paid on money
raised to defray expenses of the construction of any work or
building or the provision of any plant in contingencies
mentioned in that section even though such money
constitutes share capital. The same principle, in our
opinion, should hold good if interest is paid on money not
raised by way 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 any plant. The reason
indeed would be stronger in case such interest is paid on
money taken on loan for meeting the above expenses.”
6.1 In our view the situation in the instant case is quite similar except
here instead of paying interest on funds brought in for specific purpose
interest is earned on funds brought in by way of share capital for a
specific purpose. Could it be said that in the former situation interest
could have been capitalized and in the later situation it cannot be
capitalized. To test the principle we could extend the example, that is,
would our answer be any different had assessee passed on the interest
to the respective shareholders. If not, then in our view the only
conclusion possible is that interest earned in the present circumstances
ought to be capitalized.
7. In view of the discussion above, in our opinion the Tribunal
misdirected itself in applying the decision of the Supreme Court in
ITA 1156&1157/2007 Page 7 of 8
Tuticorin Alkali Chemicals (supra) in the facts of the present case. In
our opinion on account of the finding of fact returned by the CIT(A) that
the funds infused in the assessee by the joint venture partner were
inextricably linked with the setting up of the plant, the interest earned
by the assessee could not be treated as income from other sources. In
the result we answer the question as framed in favour of the assessee
and against the Revenue. These appeals are allowed and the impugned
judgment is set aside.
VIKRAMAJIT SEN, J.
RAJIV SHAKDHER, J.
February 26, 2009
kk
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