Cit vs Maithon Power Ltd
2015 Latest Caselaw 5212 Del

$~
*      IN THE HIGH COURT OF DELHI AT NEW DELHI
21.
+                                 ITA 5/2015
       CIT                                              ..... Appellant
                         Through: Mr.P. Roy Chaudhuri, Senior Standing
                         counsel with Mr. Ajit Sharma, Junior Standing
                         counsel.

                         versus

       MAITHON POWER LTD                         ..... Respondent
                   Through: Ms. Shashi M Kapila, Advocate with
                   Mr.R.R. Maurya, Mr. Pravesh Sharma and
                   Mr.Sanjay Kumar, Advocates

       CORAM:
       HON'BLE DR. JUSTICE S. MURALIDHAR
       HON'BLE MR. JUSTICE VIBHU BAKHRU

                         ORDER

% 21.07.2015

1.This appeal under Section 260A of the Income Tax Act, 1961 („Act) is

directed against the order dated 9th May 2014 passed by the Income Tax

Appellate Tribunal („ITAT‟) dismissing the Revenue‟s appeal i.e. ITA

No.2644/Del/2013 for the Assessment Year („AY‟) 2009-10.

2. In the present appeal the Court has by its order dated 20 th April 2015

framed the following question of law for consideration:

"Whether the ITAT has rightly upheld the decision of CIT (A) allowing relief to the Assessee Company by holding that refund of excise duty amounting to Rs.12,46,29,000/- claimed by the Assessee Company from DGFT is not income under Section 5 read with Section 28(iii)(b) of the Act in the hands of Assessee Company?"

3. At the outset question Mr. P. Roy Chaudhuri, learned Senior Standing

counsel for the Revenue clarifies that the relevant provision is Section 28

(iiic) of the Act. The above question will stand corrected accordingly.

4. The background facts are that the Assessee is a joint venture of the Tata

Power Company Ltd. and Damodar Valley Corporation with 74% and 26%

shareholding respectively. The Assessee company was incorporated on 26 th

July 2000 with the principal object of operating and maintaining the electric

power generating stations based on conventional/non-conventional

resources. The Assessee in the relevant AY 2009-10 was in the process of

setting up a thermal power generation plant at Maithon, Jharkhand. It

applied to the Ministry of Power, Government of India for grant of mega

power status which was under examination during the AY 2009-10. The

project was at the stage of construction and installation of power plants,

pending the grant of mega power status. The Assessee was required to pay

excise and customs duty on goods and materials wherever applicable.

Accordingly, the Assessee paid excise duty of Rs.2606.45 lakhs to its

vendors. It lodged a claim for Rs.1246.29 lakhs with the DGFT under para

8.2(g) of the Foreign Trade Policy as „deemed export benefits‟. The DGFT

by a letter dated 24th February 2009 admitted the claim of the Assessee to

the extent of Rs.1059.35 lakhs but had not yet reimbursed the said amount

to the Assessee in the AY in question. It is stated that, being a part of the

equipment cost, the excise duty has been accounted for as part of the project

cost and the amount refunded will be reduced from the project cost.

5. At this stage, it requires to be noticed that the Assessee initially claimed

depreciation on the equipment in its return. The Assessing Officer (AO)

disallowed the deduction on the ground that the Assessee was "claiming

double deduction of depreciation" wherein the capitalized project cost

includes depreciation as per company law as well as depreciation under the

Act. This disallowance was challenged by the Assessee before the CIT (A)

in Grounds 5 and 6. However, in the written submissions filed before the

CIT (A), the Assessee clarified that in AY 2009-10, it had transferred the

depreciation to capital work in progress and inadvertently reflected it as

unabsorbed depreciation in the return filed by it. On its own, while filing the

return for the subsequent AY 2010-11, the Assessee had reversed the above

claim for depreciation and brought forward nil amount of depreciation to

AY 2010-11. In other words, it was clarified by the Assessee that no benefit

of depreciation was claimed for AY 2009-10. This was accepted by CIT (A)

and grounds 5 and 6 of the appeal of the Assessee as regards the claim of

depreciation were disposed of as not pressed.

6. The AO treated the excise duty drawback claimed by the Assessee as

income of the Assessee in the year of the claim itself. The AO referred to

Section 28(iii) (b) which deals with cash assistance to exporters. Mr. P. Roy

Chaudhuri, learned counsel for the Revenue sought to clarify that this was

perhaps a typographical error and the AO might have intended to refer to

Section 28(iiic) which refers to "any duty of customs or excise repaid or

repayable as drawback to any person against exports under the Customs and

Central Excise Duties Drawback Rules, 1971".

7. The factual position as regards the actual dates of commencement of

commercial operation of the two units of the thermal power plant were 1 st

September 2011 and 24th July 2012 respectively. The CIT (A) accepted this

fact and this was affirmed by the ITAT as well. This factual position has not

been challenged by the Revenue. It is therefore, not in dispute that the

project was not operational during the AY in question i.e 2009-10.

8. Consequently, the finding of the CIT (A) that the business of the

Assessee had yet not been set up during the AY 2009-10 and that all the

costs incurred by it would have to be taken as capital work in progress

cannot be faulted. Where there is a refund of excise duty it would go to

reduce the project cost/capital work in progress since it is relatable only to

the capital assets. Even for the purpose of Section 28 (iiic) of the Act, the

excise duty repaid to the Assessee as drawback would have to relate to the

business income of the Assessee in order to be chargeable to tax under the

head of „profits and gains of business‟. In the present case, however, it

relates to the cost of acquisition of a capital asset which forms part of the

overall project cost incurred in the pre-commissioning phase of the project.

The duty drawback would therefore to that extent reduce the project cost

and therefore cannot, in the AY in question, be treated as business income.

9. The legal position in this regard is well-settled. In Challapalli Sugars

Ltd. v. CIT [1975] 98 ITR 167 (SC), the Supreme Court explained that the

"accepted accountancy rule for determining the cost of fixed assets is to

include all expenditure necessary to bring such assets into existence and to

put them in working condition". In the facts of that case it was held that the

interest incurred before the commencement of production on money

borrowed by a newly started company which was in the process of

constructing and erecting its plant "can be capitalised and added to the cost

of the fixed assets which have been created as a result of such expenditure".

10. In CIT v. Bokaro Steel Ltd [1999] 236 ITR 315, the Supreme Court was

considering the nature of the amounts received by the Assessee from its

contractors, engaged for the construction of its steel plant, under three

heads: (i) as rent for housing the workers and staff, (ii) hire charges for plant

and machinery made available to the contractors and (iii) interest from

advances made to the contactors. The Court found that the arrangements

between the Assessee and its contractors pertaining to the above three

receipts were "intrinsically connected with the construction of its steel

plant." The receipts had been adjusted against the charges payable to the

contractors and had, gone to reduce the cost of construction. Therefore they

were "rightly held as capital receipts and not income of the assessee from

any independent source".

11. The Court in CIT v. Bokaro Steel Ltd (supra) approved the decision of

this Court in ACIT v. Indian Drugs & Pharmaceuticals Ltd [1983] 141

ITR 134 (Del). In that case, receipts from sale of tender forms and supply of

water and electricity from the contractors at the stage when the construction

of the factory was in progress and the production had not yet commenced

were held to be "directly related to the capital structure of the business" and

therefore of "capital nature".

12. The above legal position has been further reiterated in CIT v. Karnataka

Power Corporation [2001] 247 ITR 268 (SC), and CIT v. Ponni Sugars &

Chemicals Ltd. [2008] 306 ITR 392 (SC). In Ponni Sugars (supra), the

Court was considering the nature of the subsidy received by a cooperative

society from the Government for the running of a sugar mill. The Court

applied the „purpose test‟. It held that the character of the receipt of subsidy

in the hands of the Assessee under the scheme had to be determined with

respect to the purpose for which the subsidy was granted. If the object of the

assistance under the subsidy scheme was to "enable the assessee to set up a

new unit or to expand the existing unit then the receipt of the subsidy would

be capital account". It was clarified that "the form or the mechanism

through which the subsidy is given are irrelevant".

13. In view of the aforementioned settled legal position, the Court concurs

with the views expressed by the CIT (A) and the ITAT that any refund or

drawback would go to ultimately reduce the cost of the project and had

therefore to be treated as a capital receipt.

14. Consequently, the question of law is answered in affirmative i.e. against

the Revenue and in favour of the Assessee.

15. The appeal is dismissed but with no order as to costs.

S. MURALIDHAR, J

VIBHU BAKHRU, J JULY 21, 2015 mg