THE issue before the Bench is - Whether when the sum held as FDs is in relation to share capital infused by the non-resident parent for acquisition of land for setting up a steel plant by its subsidiary, such income is to be treated as income from other sources. And the verdict goes against the Revenue.
Facts of the case
Assessee, an Indian Company is a wholly owned subsidiary of POSCO, Korea of POSCO Group, of international repute. POSCO Group had specialized knowledge in steel making and were desirous to have a Port based Steel plant in the state of Orissa, India. POSCO– India Private Limited is a company formed to undertake a Greenfield project for setting up an Integrated Steel Plant in Orissa. POSCO, Korea entered into a MOU with the Govt. of Orissa to set up a 12 million Ton p.a (MTPA) Integrated Steel Plant with a captive port with handling capacity of 30-35 MTPA and captive mines of 20 MTPA capacity. The estimated Project Cost is around USD 11739
million (Rs.52000 crores), out of which Land and development cost was around USD 92 million (Rs.400 crores). The land required for the steelworks and the port was estimated about 4000 Acres, and the site selected for the project had 89% Government land (3,566 acres), and only 438 acres of private land was required to be acquired with a maximum displacement potential of 500-odd families. In fact to minimize displacement, POSCO had revised project layout in excess of 50 times, and the private dwellings were located in the peripheral fringe area of the project land layout plan. It was expected that the Government Land could be transferred to start the project work within a year of MOU itself due to which with immediate effect Rs.225 Crore was brought by POSCO by way of Share Capital. Land earmarked for the project was initially thought to be non-forest land but was found to be forest land later, requiring making of a forest diversion proposal and clearance for forest diversion. The total land leased to POSCO was only 528.50 acres as against the requirement of about 4000 acres for the project. And thus excepting a small portion (about 13%) of the required land could not be taken possession of through Government of Orissa. It was but logical that POSCO can start work on ground only after taking possession of encroachment free Government land. To sum up, the delay in implementing the project was primarily attributable to issues arising out of land acquisition, prolonged disruptions in the schedule of implementation backed up by ineffective Govt. workings, local law and order situation caused by protests and demands from the villagers. Thus the payment made by ‘POSCO-India’ was only for such land acquired and balance moneys were put into Deposit with Bank. In fact during Project implementation period, as the business was yet to be set up, as can be seen from the audited accounts filed, NO profit and loss Account was prepared by POSCO, and only a statement of Expenditure during Construction Account was prepared in which the entire interest from Bank was shown as reduction from cost of Expenditure during Construction/ Project implementation and the net amount was carried over in Balance Sheet for future capitalization. The interest earned on temporary deposits coming out of share capital brought in for initial acquisition of land and creation of infrastructure in setting up of the Project was inextricably and directly linked to such setting up of the Integrated Steel Plant / Project.
It was submitted by AR that for the AY 2006-07 and 2007-08, the assessee had filed returns declaring the income from other sources on account of bank having deducted TDS on the interest income accrued to the assessee on the term deposits, when the AO following the decision of SC in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd v. CIT considered the case of the assessee and also denied the 10% expenditure incurred on estimation on the amount of interest earned when actually the whole of the amount earned was capitalized by reducing from the project cost insofar as not a single rupee was earned on account of any other business. Before CIT(A), AR had submitted that the CIT(A) had considered the case of the assessee that the word “surplus” has to be considered in the manner to render income taxable as income from other sources. He had not denied the fact that it was not surplus but assessee’s own capital which was parked in the bank to earn interest insofar as the interest had been utilised for the purpose of carrying on the residual project cost which were more than 2 or 3 times of earning of interest. It was further submitted that the CIT(A) had also submitted the distinction between the decisions of SC in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd v. CIT and CIT v. Bokaro Steel Ltd (2002-TIOL-161-SC-IT) when the facts and circumstances of the assessee’s case were squarely applicable as per the decision of Delhi HC in the case of India Oil Panipat Power Consortium Ltd v. ITO (315 ITR 255). The facts of assessee - POSCO were similar to the said case of India Oil Panipat Power Consortium Ltd v. ITO. In the case of the assessee- POSCO, the AO had not applied Indian Oil Panipat’s case and had preferred to follow and relied on SC Judgments in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (2002-TIOL-489-SC-IT-LB) instead of SC Judgment in CIT v. Bokaro Steel Ltd. (2002-TIOL-161-SC-IT). The said Bokaro Steel’s case decided by Apex Court, Tuticorin Alkali’s case had also been referred and discussed in detail. In the above said the Indian Oil Panipat (IOP) case both Bokaro Steel’s case and Tuticorin Alkali’s case had been taken into account and considered by the Delhi HC.
Before the Tribunal, AR contended that as per CIT(A), since the assessee-POSCO had not obtained approval / permission, therefore, according to him, there was no direct connection between funds and setting up of the steel plant project and so there cannot be any link between the money brought in and the unapproved project , since the project had not got the statutory approvals, it cannot deploy funds for setting up of the project. POSCO had brought in share capital which had no direct nexus with the proposed unapproved project and therefore, the share capital was to be considered as “excess” and hence the funds brought in for the purpose of setting up of the steel plant were purely “surplus” and there was no linkage between the proposed unapproved steel plant and the funds. If the clearances were not received then the appellant company can not set up any steel plant. Thus he concluded that there was no link between the Share Capital brought in and the deposits made into the bank there from for the alleged unapproved project. The Counsel of the assessee submitted that the above conclusion of the CIT(A) were contrary to facts in as much as POSCO India had obtained various approvals, consents and permission. It had acted in best possible manner in the circumstances to pay/deposit money for Land to Govt. and private parties but the Govt. had failed to transfer/ give possession of the same and the money of Rs.225 crores brought in under Share Capital towards land and Infra facilities could not be spent and unutilized funds had to be kept in deposit in Bank which resulted in Interest which had immediate and direct link and nexus with the Project and thus the CIT(A) had relied upon some news item and on irrelevant considerations, erroneously distinguished POSCO’s case with that of Indian Oil Panipat’ case, and did not apply the same in POSCO’s case and dismissed the appeal of assessee. In respect of the AYs 2006-07 and 2007-08, the AR submitted that for the AYs 2006-07 and 2007-08, the facts were similar to AY 2008-09. In fact the CIT(A) had only followed his own order for A.Y 2006-07. Moreover, the CIT(A) had passed the orders for A.Y 2006-07 receiving the remand report from AO. Accordingly, the AR had submitted that for the AYs 2006-07 and 2007-08, it was proper to restore the matter to the file of AO to pass orders denovo as per law keeping in view the principles decided for AY 2008-09. On the other hand, DR had supported the orders of the authorities below for his part of submissions. He submitted that it was a change of stance by the assessee before the Tribunal insofar as on the same facts which accounting had been considered by the SC in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd v. CIT was not an indication of taxability was considered by the AO on the filing of the return by the assessee declaring interest income as income from other sources and denying the claim of 10% expenditure thereof as the case laws cited by the assessee appellant before the CIT(A) were also distinguished by the CIT(A) for the AY 2008-09, the facts remaining identical as were in AYs 2006-07 and 2007-08 the assessee could not now claim the applicability of facts similar to that of Delhi HC’s decision in the case of India Oil Panipat Power Consortium Ltd v. ITO.
Having heard the matter, the Tribunal held that,
++ we are inclined to find the contention of the AR appropriate to the extent that it was never a change of stance on the facts remaining the same beginning from AY 2006-07. It was a misconstruction of the facts for the purpose of finding applicability of the provisions of law ennunciated by the SC in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd v. CIT. The law ennunciated in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd v. CIT cannot alone be considered as favoring Revenue insofar as it also talks about capitalization of the interest and the circumstances, which circumstances have been dealt with by the Delhi HC in the case of India Oil Panipat Power Consortium Ltd v. ITO and further more in the case of NTPC Sail Power Company Pvt. Ltd., v. CIT (2012-TIOL-652-HC-DEL-IT) which has also been relied on by the Counsel of the assessee. Assessee's counsel has submitted the financial statements duly audited under the provisions of the I.T.Act as well as under the Companies Act which have been verified by the AO requiring no reference to be made to the Transfer Pricing Officer under the provisions of Section 92CA. In other words, no business income has been generated by the assessee. The expenditure claimed therefore was only for the purpose of setting up the project envisaged and there is no method for balancing interest, if any, passed on to the share holders on account of dividend or business income by the assessee. 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 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 "Profits 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. 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 JV by the Koreans 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 Bank, will result in the character of the funds being changed, inasmuch 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 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. In the instant case, it was 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;
++ as per the proviso to Section 36(1)(iii) that interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession was being allowed as deduction u/.s.36(1)(iii) as revenue expenditure was amended w.e.f. 1.4.2004 when the amount of interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business or profession whether capitalized in the books of account or not for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction, holds true for the income insofar as once having identified that the income from interest is from the Banks where the share capital was parked was to not earn interest to be balanced interest on capital borrowed when the assessee’s own funds were being utilised for the purpose of incurring the project cost which took undue delay due to Government and other interference. In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd v. CIT , SC has held - “if the company, even before it commences business, invests the surplus funds in its hands for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head ‘Capital gains’. Similarly, if a company purchases a rented house and gets rent, such rent will be assessable to tax under section 22 as income from house property. Likewise, a company may have income from other sources…………….. The company may also, as in that case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under section 56 of the Income-tax Act”. Subsequently SC in the case of CIT v. Bokaro Steel Ltd held – “However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction;
++ the returns filed by the assessee for the AYs 2006-07 and 2007-08 clearly indicate that the assessee at no point of time was having income from other sources irrespective of the accounting of the income having been capitalized when the claim of expenditure of 10% was purely on estimation when apparently it was not the business of the assessee to earn income but parking of its funds when the interest income sought to be considered exempt for computing expenditure under the provisions of Section 14A. The Counsel of the assessee, therefore, has clarified that the assessee cannot be subjected to taxation in the impugned Assessment Year on the interest income capitalized and at the same time allow amortization thereof in the hope that project will see the light of the day in the years to come when the I.T.Department will allow less deduction than otherwise claimed will be multiplication of assessments for no fault of the assessee appellant. We are therefore inclined to hold that the Counsel of the assessee has submitted a bulk Paper Book which inter alia correlates to earning of interest on the amounts deposited in the Banks to be utilised for the purpose of business of the assessee as per the project envisaged and as per the project approved by the Government of Orissa but taken time due to reason beyond the assessee’s control insofar as sanction and authorization have taken its toll when the fact finding is whether capitalization by reducing the preoperative expenses could be isolated for the purpose of taxation as income from other sources following the case laws annunciated by SC in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd v. CIT when again SC have clarified the stand in the case of CIT v. Bokaro Steel Ltd was whether the business of the assessee was to claim the expenditure incurred for earning of such interest having been adjusted against the other expenses incurred rather leans in favour of the assessee to the extent that the interest was inextricably linked to the expenditures incurred which project cost did not require further approval but was taking time which time earned interest to the assessee when recording expenditure have been claimed from the interest earned for consideration of 10% thereof was not to be disturbed at all. In this view of the matter, we are of the considered view that for the Assessment Year 2008-09 the interest cannot be taxed as income from other sources in the hands of the assessee and therefore, the subsequent disallowance of expenses claimed at 10% to earn that income has been infused in the total project cost cannot be disallowed insofar as the whole of the income has been capitalized was rightly considered for revision by the assessee before the Assessing Officer filing NIL return. The appeal for the Assessment Year 2008-09, therefore, is allowed on the basis of facts and figures brought on record by the Assessing Officer as well as the CIT(A) and as mentioned above. However in view of the principles laid out above, we are inclined to restore the issue to the file of the AO for the Assessment Year s 2006-07 and 2007-08 to consider the case of the assessee de novo on establishing the fact that the interest has been earned on the parking of share capital and not any surplus generated as was considered by the SC insofar as the earning of interest has been capitalized by reducing the project cost to be amortized has to be considered as a nullity after verification. Needless to say, an opportunity of being heard to the assessee be granted to establish the fact as have been narrated before us in the light of AY Year 2008-09 when it is not a change of stance as contested by the DR but on the same set of facts the interest portion cannot be isolated for the purpose of taxation. In the result, the appeal for the AY 2008-09 is allowed and the AO is directed to accept the NIL revised return and the appeals for the AYs 2006-07 and 2007-08 are restored to the file of the AO for consideration afresh in the light of our decision for the AY 2008-09 above. The same are considered to be allowed for statistical purposes.
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