The Commissioner Of Income Tax-Ii ... vs Madhya Bharat Energy Corpn. Ltd.
2011 Latest Caselaw 3233 Del

*               IN THE HIGH COURT OF DELHI AT NEW DELHI

+                                 ITA No.950/2008

                                                  Reserved On: MAY 20, 2011
%
                                         Judgment Delivered On: JULY 11, 2011

THE COMMISSIONER OF INCOME                                    .... APPELLANT
TAX-II NEW DELHI

                     Through: Mr. Sanjeev Sabharwal,            Sr.   Standing
                              Counsel for the Revenue.

                                         Versus

MADHYA BHARAT ENERGY CORPN.                .... RESPONDENT
LTD.
            Through: Ms. Devashish Bharuka, Advocate for the
                     Assessee.

CORAM:
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MR. JUSTICE M.L. MEHTA


1.    Whether reporters of Local papers be                      Yes
      allowed to see the judgment?
2.    To be referred to the reporter or not?                    Yes

3.    Whether the judgment                 should   be          Yes
      reported in the Digest?


M.L. MEHTA, J.

*

1. This is an appeal under Section 260A of the Income Tax Act

(hereinafter referred to as „the Act‟ for short) against order dated

21st September 2007 of the Income Tax Appellate Tribunal („the

Tribunal‟ for short). This appeal was admitted on the following

substantial questions of law:

"(a) Whether the ITAT was correct in law in holding that the reassessment order was invalidly made for assessment years 1999-2000 and 2000-2001 as no notice under Section 143(2) was issued?

(b) Whether the ITAT was correct in law in holding that the interest income on FDRs is not to be treated as income from other sources and is required to be reduced from pre-production expenses?"

2. Though the impugned order is related to Assessment Years

(henceforth „AY‟ for short) 1999-2000 to 2003-2004, but the

challenge is in respect to the order relating to AY 1999-2000 and

2000-2001. The facts leading to filing of the present appeal,

being relevant need to be narrated.

3. The assessee company entered into an agreement with AGIO

Countertrade PTE Ltd., Singapore (hereinafter to be referred to

as „the investing company) and Madhya Pradesh State Electricity

Board (hereinafter to be referred to as „MPSEB‟). The Assessee

company was established to set up a power plant in Madhya

Pradesh. It participated in a bid which was called by MPSEB. As

per the requirement of the bid process, a security deposit of

`11.65 crore was to be deposited with MPSEB on or before 17th

August 1998. The assessee company requested the investing

company to remit the requisite amount, but, the same could only

be received on 18.08.1998, and due to delay in remittance, the

assessee could not deposit the security amount with MPSEB on

or before the stipulated date of 17th August 1998 and

consequently the bid of the assessee was rejected. As per the

arbitration agreement, the assessee raised claims against the

investing company for the loss caused due to disqualification by

MPSEB. This claim of the assessee was resisted by the investing

company. The amount of `6.00 crore submitted by the assessee

to MPSEB on 18.08.1998 was returned back by MPSEB due to

delay of one day and the balance amount of `5.65 crore which

was deposited by the assessee on 17.08.1998 was also returned

back by MPSEB vide their letter dated 11.09.1998. The assessee

company filed a writ against MPSEB in the High Court of Jabalpur,

Madhya Pradesh. In the meantime, on 15.09.1998, the assessee

company and the investing company referred the matter to the

sole arbitrator for resolution of their dispute. The claim of the

investing company before the arbitrator was that a sum of `6.77

crore was remitted by it to enable the assessee to make security

deposit with MPSEB to obtain the bid for setting up of a power

plant. The said bid was rejected, but the assessee was holding

the said money even though the purpose for which the amount

was remitted had failed. The investing company pleaded that it

apprehended that during the proceedings of arbitration, the

assessee may appropriate these funds for the purposes other

than repayment of amounts to the investing company, and if the

funds are diverted by the assessee, the right of the investing

company in the remittances would be adversely affected. On the

other hand, it was pleaded by the assessee that since the

investing company is not a resident of India, it will be difficult for

the assessee to obtain remittance again. In case the investing

company is allowed to take the funds out of India, then all the

legal proceedings now initiated by the assessee against the

MPSEB will be jeopardized and the assessee will not be able to

make the payment of security deposit in time. It was also

pleaded by the assessee that it being a statutory body is

required to incur various expenses to comply with the statutory

requirements, but its own capital is too inadequate to meet these

expenses and the promoters have also not contributed, after the

failure of the bid with MPSEB. On 25.09.1998, the arbitrator

passed the following directions:

"On the due consideration of the submissions by the claimant and respondent, I find that the claims of the parties are justified in their own right. I fully agree with the claimant that if the respondent is permitted to take away the remittance sum of `6.77 crores out of India then its claim raised under the present proceedings shall be frustrated. Further the claimant is still pursuing legal proceeding shall be frustrated. Further the claimant is still pursuing legal proceeding shall be frustrated. Further the claimant is still pursuing legal proceedings to obtain rights to set up power plant in Madhya Pradesh and for which it might be necessary to take payment of security

deposit. If the respondent's plea for retransfer of funds is allowed then claimant's bid to obtain these rights through judicial proceedings may also stand defeated. In these circumstance the respondent's plea for retransfer of funds is not acceptable at this stage of the proceedings.

At the same time, however, I find that with the fears expressed by the respondent regarding diversion of funds by the claimant cannot be said to be misplaced. I, therefore, direct the claimant out of the remittance received from the respondent amounting to `6.77 crore shall make fixed deposits for sum of `6.77 crore with any of the scheduled bank or banks and the FDR's shall be kept in the safe custody.

I, further, accept the claimants submission that in order to meet the day today business expenses and to meet the costs, charges and expenses of pursuing and defending, the court proceedings, the funds would have to be arranged. I, therefore, direct that interest earned on the FD's made shall be sued and or appropriated for meeting the day today costs or for running of the organization of the claimant and to meet legal costs, charges and expenses. However, it is expressly provided that in case the respondent's claims are upheld then the claimant may have to pay interest/ finance charges or appropriate compensation to the respondent for use of funds which now stands locked up in making the FD."

4. After the aforesaid order the arbitrator adjourned the matter to

07.12.1998, but the investing company filed a suit before this

Court before 07.12.1998. In view of this, the arbitrator

adjourned the proceedings sine die on 09.12.1998. This Court on

a petition filed by the assessee for release of various bank

accounts passed the under-mentioned order:

"By this application, the defendant No. 1 seeks a direction to the defendant No.6 Corporation Bank to allow the defendant No. 1 to operate its all other bank accounts except the seven fixed receipts bearing No.981830 to 981836. Learned counsel for the defendant No. 6 does not wish to oppose the application. Accordingly, the application is allowed and the Corporation Bank is directed to allow the defendant No.1 to operate its all other bank accounts including the fixed deposit receipts etc. except the aforesaid seven fixed deposit receipts bearing No. 981830 to 981836."

5. It is in this manner that 07 Fixed Deposits of `1.00 crore each

were maintained by the assessee. It may be noted here that in

the mean time for making assessment for the AY 2001-2002, the

interest income earned by the assessee from FDRs and bank

deposit were treated as "Income from Other Sources" and was

allowed to be adjusted against the pre-operative expenses and

therefore, reassessment proceedings were initiated in respect of

AY 1999-2000 & AY 2000-2001. Undisputedly, the assessee was

at the stage of pre-commencement of its business when the

amounts as mentioned above came to be invested in the FDs.

For the AY 1999-2000, the assessee earned interest amounting

to Rs.93,81,222/- out of which it had received interest of

Rs.48,65,812/- from MPSEB on security deposit of Rs.5.22 crore.

The balance amount of interest of Rs.45,15,408/- was earned by

the assessee on FDs of Rs.7.00 crore.

6. The assessee filed Return of Income (ITR) on 28.12.1999 under

Section 143(1) of the Act. Subsequently, the AO noted that the

assessee had adjusted interest income of Rs.93,81,222/- against

the pre-operative expenses. The AO being of the view that the

interest income in pre-production stage was to be taxed as

"Income from Other Sources" in view of the decision of the

Supreme Court in the case of Tuticorn Alkali Chemicals &

Fertilizer, 227 ITR 172 and CIT Vs. Cormondal Cement Ltd.,

234 ITR 412, he formed reason to believe that interest income of

Rs.93,81,222/- has escaped assessment. He also noted that on

the same facts the interest income for the AY 2001-2002 was

also charged to tax as "Income from Other Sources". The AO,

therefore, issued a notice under Section 148 of the Act on

21.03.2003. In response to this notice, the assessee filed its

return of income declaring Nil income on 25.04.2003. The AO

issued a notice under Section 142(1) of the Act and also a

questionnaire to the assessee, but the same remained un-

replied. Another notice along with questionnaire was issued on

21.01.2004, in response to which the AR of the assessee

attended the proceedings on 30.01.2004 and asked for reasons

for issue of notice under Section 148 of the Act. He was given a

copy of the reasons recorded on 06.02.2004, 03.03.2004 and

15.03.2004 and he also filed the requisite details. It was

thereafter that the AO passed an order of re-assessment on

23.03.2004. The AO had noted that the company was setting up

a power plant in Madhya Pradesh and commercial operation had

not started, but interest of Rs.45,15,408/- received on FDs was

adjusted against the pre-operative expenses. While passing the

order on 23.03.2004, the AO rejected the claims of the assessee

that the money remained in the fixed deposits as per the order

of this Court which restrained it from encashment from FDRs till

further order and that the money was for setting up a power

project and thus the interest received during the pendency of the

matter before this Court was to be adjusted against the power

project. In this regard the AO noted that vide order dated

09.12.1998, this Court allowed the assessee to operate all its

bank accounts except 07 FDRs which were already in existence

prior to the filing of the suit in this Court by the investing

company on 01.12.1998. On 02.12.1998 this Court issued

restraint of all assets and bank accounts against the assessee.

However, on 09.12.1998, the said restraint order was modified

and the same remained restricted to FDRs of Rs.7.00 crore. The

operative part of the order passed by this Court on 09.12.1998

has already been reproduced above in para No.4. We note that

Rs.10.00 crore was invested by the assessee in FDRs on

28.09.1998 after MPSEB returned the security money and thus

the investment in FDRs is in no way linked with the power

project. The AO also observed that these funds were surplus

with the assessee at that stage and its business activities had

not yet commenced and thus investment in FDRs was neither

connected with nor was it incidental to setting up of a power

project.

7. It is also gathered from the impugned order that the AR of the

assessee informed the Tribunal that vide order dated 20.02.2002

this Court passed a decree in the aforesaid suit vide which

assessee was permitted encashment of 07 FDRs and these FDRs

were actually encashed on 08.07.2002 and the amounts were

repatriated to the investing company on 11.07.2002.

8. The AO accordingly assessed the interest income of

Rs.45,15,408/- earned from FDs under the head "Income from

Other Sources". Before the CIT(A) additional ground was taken

by the assessee challenging the validity of the assessment

alleging that no notice under Section 143(2) of the Act was

served upon the assessee before the reassessment. The CIT(A)

maintained the order of the AO on merits and also rejected the

additional plea of invalidity of the assessment on account of non

issuance of notice under Section 143(2) of the Act. Against this

order of the CIT(A), the assessee preferred an appeal before the

Tribunal which came to be allowed by the impugned order.

9. We have heard Mr. Sanjeev Sabharwal, Sr. Standing Counsel for

the Revenue and Mr. Devashish Bharuka, learned counsel for the

Assessee.

10. The reopening of the assessment under Section 148 of the Act

has been challenged on two grounds. Firstly, it is alleged that

the assessment could not be reopened under Section 148 of the

Act as the assessee had given detailed note with the original

return as to why interest income was not to be taxed, but was to

be adjusted against the project cost, and so it cannot be

reopened merely on account of change of opinion. Secondly,

reassessment has been alleged to be a nullity in the absence of

issue of notice under Section 143(2) of the Act to the assessee.

The submission that issue of notice under Section 148 of the Act

represented change of opinion has not been dealt with by the

Tribunal. However, the CITA has rightly recorded that the

change of opinion is only possible if there was application of

mind in the first assessment, but in this case there was no

assessment and the intimation under Section 143 (1) (a) of the

Act was neither an assessment nor it involved application of

mind. This Court in the case of Mahanagar Telephone Nigam

Ltd. Vs. Chairman, Central Board of Direct Taxes And

Another has in regard to an argument similar to the assessee‟s

argument held that "Therefore, there being no assessment under

Section 143 (1) (a) of the Act, the question of change of opinion,

as contended, does not arise." With regard to this ground of

challenge, it may be stated that admittedly the assessee filed

original return of income on 28th December, 1999 and the same

was processed under Section 143 (1) (a) of the Act. It was only

during the proceeding of AY 2001-2002, that the AO noticed that

the interest income of Rs.93,81,222/- has escaped assessment

and he also noticed that on the same facts, the interest income

for the AY 2001-2002 was charged to tax as "Income from Other

Sources". He accordingly issued notice under Section 148 of the

Act. It is settled law that the intimation with regard to

assessment made under Section 143 (1) (a) of the Act is not an

assessment. A reference in this regard can also be made to the

decision in Mahanagar Telephone Nigam Ltd. (supra).

11. As per explanation 2(b) to Section 147 of the Act, where a return

income is furnished, but no assessment has been made and it is

noticed by the AO that an assessee had understated the income,

it will be deemed to be a case where income chargeable to tax

had escaped assessment. In the case of Ranchi Club Vs. CIT,

214 ITR 643 (Patna) it was held in a case where only intimation

was sent, notice under Section 148 of the Act could be issued in

terms of Explanation 2 (b) to Section 147 of the Act. The case of

Mahanagar Telephone Nigam Ltd. (supra) confirmed that "So

long as the ingredients of section 147 are fulfilled, the Assessing

Officer is free to initiate to proceed under Section 147 and failure

to take steps under section 143(3) will not render the Assessing

Officer powerless to initiate reassessment proceedings even

when intimation under Section 143(1) had been issued."

12. It is noted that the impugned assessment is in response to notice

under Section 148 of the Act and the Act does not specifically

provide that the assessment made under Section 147 of the Act

will be after issue of the notice under Section 143(2) of the Act.

In fact, AO has the basic jurisdiction to assess the income in

terms of Section 147 and Section 148 of the Act where he has

reason to believe that the income has escaped assessment. On

the submissions of non issuance of notice under Section 143(2)

of the Act, we are of the view that the findings of the Tribunal in

this regard are not as per the scheme of the provisions of Section

147 and 148 of the Act.

13. Though no specific notice was required under Section 143(2) of

the Act, as noted above, the questionnaires dated 11.11.2003

and 21.01.2004 provided the assessee specific opportunity to

support his return by seeking documentary evidence and details

in regard to the following query:

"As per return, interest of Rs.93,81,222/- was received by you during the year, which is adjusted

against pre operative expenses. The interest income should be charged."

14. On merits, the submissions of learned counsel for the assessee

was that the interest received on FDs was incidental to

acquisition of assets. In other words his submission was that the

interest received was inextricably linked with the process of

setting up of plant and machinery and as such receipts are to go

to reduce the cost of assets and the nature of capital and cannot

be taxed as income. He submitted that the money which was

deposited in the shape of FDs was not lying idle or surplus and

was not deposited for the purpose of earning interest. The

learned counsel appearing for the assessee replied upon the

case of Tuticorn Alkali Chemicals & Fertilizer (supra).

15. As per the finding of fact as was recorded by the AO, the

assessee received share application money of about Rs.18.37

crore from co-promoters including approximately Rs.7.00 crore

from the investing company. There is nothing on record to

suggest that money received from the investing company was

directly invested in FD. In fact, the assessee was regularly

incurring expenses in pre-operative expenses account, fixed

assets, as well as giving loans and advances out of funds

received by it. This court only restrained the assessee on

09.12.1998 from enacting Rs.7.00 crore FDR, whereas share

application money had been received in August‟98. Therefore,

till the passing of the order by this Court on 09.12.1998, all

surplus funds lying with the assessee were invested in the FDs.

It was after the return of Rs.6.00 crore on 19.08.98 and Rs.5.65

crore on 11.09.1998 by MPSEB due to delay in deposit of security

money, that the assessee got issued ten FDs of Rs.1.00 crore

each on 28.09.1998. This was in fact investment made by the

assessee to earn interest from the surplus amount lying with it

till the resolution of the issues with the investing company and

MPSEB. When the MPSEB had already rejected the bid, the

assessee seemed to be fighting a lost battle. The investment in

FDs in such circumstances could not be said to be anyway linked

with the power project. At that stage the funds were lying

surplus with the assessee and its business activities had not yet

commenced. Thus, the investment in FD cannot be said to be

connected with or incidental to setting up a power project.

16. In the case of Tuticorn Alkali Chemicals & Fertilizer (supra),

the assessee company was incorporated on 03.12.1971 for the

purpose of manufacturing heavy chemicals such as ammonium

chloride and soda ash. The trial production of the factories of the

company commenced on 30.06.1982. For the purpose of setting

up of the factories, the company had taken term loans from

various banks and financial institutions. That part of the

borrowed funds which was not immediately required by the

company was kept invested in short-term deposits with banks.

Such investments were specifically permitted by the

memorandum and articles of association of the said company.

For accounting year ending on 30.06.1981 i.e. AY 1982-83, the

company received total amount of interest of Rs.2,92,440/-. The

company disclosed the said amount of Rs.2,92,440/- as income

from other sources. It also disclosed business loss of

Rs.3,21,801/-, after setting off the interest income, it was

claimed by the company the benefit of carry forward of net loss

of Rs.29,360/-. Later on revised return was filed showing

business loss of Rs.3,21,801/-. It was claimed that as per

accepted accounting practice, interest and finance charges along

with pre-production expenses had to be capitalized and thus

interest income of Rs.2,92,440/- should go to reduce the pre-

production expenses (including interest and finance charges)

which would ultimately be capitalized. The claim of the assessee

was rejected by the AO and CIT(A). In this case it was found that

the company had surplus funds in its hands and invested the

same for the purpose of earning interest. Therefore, it was held

that the interest earned was clearly of revenue nature and the

same had to be taxed accordingly.

17. Now coming back to the facts of this case, it is seen that the

assessee had retained money received from the investing

company without any purpose as the bid of the assessee had

already been rejected by the MPSEB. Though the assessee was

contesting rejection of bid in the High Court, the amount was

kept deposited in the shape of FDs only to earn interest till such

time the issues with MPSEB and investing company were

resolved. The interest earned on these investments cannot be

related to setting up of business. In the case of CIT vs.

Monarch Tools (Pvt. Ltd.), 260 ITR 258 (Madras), the interest

earned by making FDs with banks was not in any way linked to

the business that the assessee was carrying on and, therefore,

the interest income was held to be „income from other sources‟

and not „business income‟.

18. In the given circumstances, the act of the assessee of making

FDs and earning interest thereon could not be said to be for the

only definite purpose and project of setting up of a unit. Since

the bid had already been rejected, the investment could not be

said to be for the setting up of the said unit. It was a case of

depositing unutilized and surplus money by the assessee to earn

interest and therefore, the interest earned by the assessee being

revenue in nature is liable to be assessed as "income from other

sources".

19. In view of these discussions, we come to the conclusion that the

interest earned by the assessee on FDs is assessable as „income

from other sources‟ and any set off of the same cannot be given

to the assessee as pre-operative expenses.

20. In view of above discussion, we answer both the questions in

negative and in favour of the revenue and against the assessee.

The appeal is accordingly allowed.

                                                    M.L.MEHTA
                                                     (JUDGE)



                                                    A.K. SIKRI
JULY 11, 2011                                        (JUDGE)
„awanish‟