M/S. Neelachal Ispat Nigam vs Assistant Commissioner Of Income
2021 Latest Caselaw 11838 Ori

                IN THE HIGH COURT OF ORISSA AT CUTTACK

                                  I.TA. No.8 of 2005

             M/s. Neelachal Ispat Nigam
             Limited                                 .... Appellant Company
                                             Mr. Amit Pattnaik, Mr. S.P. Sarangi,
                                          B.C. Mohanty, P.P. Mohanty, D.K. Das,
                                          A.K. Kanungo & P.K. Dash, Advocates

                                             -versus-
             Assistant Commissioner of Income
             Tax, Circle-2(1), Bhubaneswar &
             Others                                     ....       Respondents
                                  Mr. T.K. Satapathy, Senior Standing Counsel

                       CORAM:
                       THE CHIEF JUSTICE
                       JUSTICE A. K. MOHAPATRA

                                           ORDER

17.11.2021 Order No. Dr. S. Muralidhar, CJ.

02. 1. The present appeal is directed against the order dated 3rd September, 2004 passed by the Income Tax Appellate Tribunal, Cuttack Bench, Cuttack (ITAT) in ITA No.271/CTK/01 for the assessment year 1998-99.

2. Admit. The following question of law is framed for consideration of the Court:

"Whether in the facts and circumstances of the case, the interest derived from Short Term Deposit Receipts made by the Appellant to enable it to open letter of credit for procuring plant and machineries is

incidental to the acquisition of assets and should be treated as receipts of a capital nature and cannot be taxed as income?"

3. The brief facts are that, for the Assessment Year (AY) in question, the Appellant - assesse filed return showing a loss of Rs.17,81,76,910/-. In the statement of income, the interest on deposits were shown at Rs.4,40,92,790/-, against which interest on loan at Rs.22,22,69,701/- was claimed. The excess of interest paid over the interest earned was stated to have been capitalized.

4. The Assistant Commissioner of Income Tax, Circle-2(1), Bhubaneswar passed an assessment order on 29th December, 2000 under Section 143(3) of the Income Tax Act, 1961 (IT Act). The entire interest receipt of Rs.4,40,92,790/- was treated as "income from other sources" and not allowed to be capitalised.

5. The Commissioner of Income Tax (Appeals) II, Orissa, Bhubaneswar (CITA) concurred with the view of the Assessing Officer (AO) following the decision of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd., Madras v. Commissioner of Income Tax, Madras (1997) 6 SCC 117.

6. The ITAT, by the impugned order dated 3rd September 2004, concurred with the AO and the CIT (A) that the interest earned on short term deposits could not be treated at par with the interest on deposits compulsorily required to be made in the process of implementation of the project. It was held that, the interest earned

on the deposits not meant for opening any letter of credit for import of plant and machinery and which is out of surplus funds had to be treated a revenue. It was further noted that, this had been disallowed to be capitalized in the earlier AYs 1995-96 and 1997- 98 by the very same Bench of the ITAT.

7. This Court heard the submissions of Mr. Amit Pattnaik, learned counsel for the Appellant Assessee and Mr. T.K. Satapathy, learned Senior Standing Counsel for the Department.

8. Mr. Pattnaik submitted that the AO, CIT (A) and the ITAT had misinterpreted the decision in Tuticorin Alkali Chemicals & Fertilizers Ltd., Madras v. Commissioner of Income Tax, Madras (supra). According to him, the observations in the said judgment were not against the case of the Appellant. He also placed reliance on the decisions of the Supreme Court in Commissioner of Income Tax, Bihar II, Patna v. Bokaro Steel Ltd., Bokaro (1999) 1 SCC 645 and Commissioner of Income Tax v. Karnal Co-operative Sugar Mills Ltd. (2000) 243 ITR 2 (SC).

9. Mr. Pattnaik pointed out that the facts of the present case were overlooked by the AO, the CIT (A) and the ITAT. Here Short Term Deposit Receipts (STDRs) were made by the Appellant to enable it to open letter of credit (LoC) for procuring plant and machineries. The interest of Rs.4,40,92,790/- earned on the STDRs was utilised for the purpose of the project. There was no question of any surplus amount which was kept in STDRs. Therefore the

interest amount could only be considered as cutting down the cost of the asset as long as the project was at the construction stage.

10. Mr. Satapathy, learned Sr. Standing Counsel, on the other hand relied on the observation in Tuticorin Alkali Chemicals & Fertilizers Ltd., Madras v. Commissioner of Income Tax, Madras, (supra) to urge that the interest on the STDRs in the present case had to be treated as "income from other sources".

11. The above submissions have been considered. The factual aspect of the case, as evident from the order of the AO itself is that, the aforementioned interest amount was earned on the temporary STDRs created to enable opening of LoCs for procuring plant and machinery for the project. It is not in dispute that the Appellant Assessee had been borrowing loans from financial institutions, the State Government and the MMTC and using the interest accrued on the STDRs for payments against the projects. While interest was being paid regularly to the above borrowing banks, the borrowed money was being kept in the STDR Banks. These facts have not been able to be disputed by the Department.

12. The Court is of the view that the observations in Tuticorin Alkali Chemicals & Fertilizers Ltd., Madras v. Commissioner of Income Tax, Madras, (supra) have not been understood in their true perspective. The relevant observations, understood in the context of the facts of the said case, in para 22 of the judgment,

"the Company had surplus funds in its hands. In order to earn income out of the surplus funds, it invested the amount for the purpose of earning interest. The interest thus earned is clearly of revenue nature and will have to be taxed accordingly. The accountants may have taken some other view but accountancy practice is not necessarily good law."

13. The situation there involved placing surplus funds in deposits unlike the present case, where the interest earned on the STDRs created with the borrowed funds were fully utilized only towards the cost of the capital assets. This is also evident from the observation in para-13 of the decision in Tuticorin Alkali Chemicals & Fertilizers Ltd., Madras vs. Commissioner of Income Tax, Madras that, "the company has chosen not to keep its surplus tax idle, that has decided to invest it total". It was in that context held that, "the fruits of such investment will clearly rear revenue in nature."

14. The above observations in the said decision become clearer when one peruses the subsequent decisions where it has been referred including the Commissioner of Income Tax, Bihar II, Patna v. Bokaro Steel Ltd., Bokaro (supra). The facts in the latter decision were that there the work of construction of the assessee company's factory and installation of the plant was in progress and during that period the Assessee had received, inter alia, from the contractors hire charges for plant and machinery and interest from the advance made to the contractors for the purpose of facilitating the work of construction. The Supreme Court upheld the view of

the ITAT that the interest earned had gone towards reducing the cost of construction and was in the nature of capital receipt which could be set off against the capital expenditure incurred by the assesse during the relevant AYs. While interpreting the decision in Tuticorin Alkali Chemicals & Fertilizers Ltd., Madras vs. Commissioner of Income Tax, Madras, (supra), the Supreme Court observed as under:

"This Court also emphasized the fact that the company was not bound to utilize the interest so earned to adjust it against the interest paid on borrowed capital. The company was free to use this income in any manner it liked. 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 utilization of various assets of the Company and the payments received for such utilization 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."

15. It was further observed, after referring to the decision in Challapalli Sugar Ltd. v. CIT (1975) 3 SCC 572, as under:

"In case money is borrowed by a newly-started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalized and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning, if the assessee

receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income."

16. Turning to the case of Commissioner of Income Tax v. Karnal Co-operative Sugar Mills Ltd.,(supra), the facts were that "the assessee had deposited money to open a letter of credit for the purchase of the machinery required for setting up its plant in terms of the assessee's agreement with the supplier."

17. The Supreme Court concluded that the interest earned was not on any surplus share capital and that a deposit of the money towards "directly linked with the purchase of plant and machinery". It was accordingly concluded that:

"Hence, any income earned on such deposit is incidental to the acquisition of assets for the setting up of the plant and machinery. In this view of the matter the ratio laid down by this court in Tuticorin Alkali Chemicals and Fertilizers Limited vs. CIT [1997] 227ITR172(SC), will not be attracted. The more appropriate decision in the factual situation in the present case is in CIT v. Bokaro Steel Ltd. [1999] 236ITR315(SC)."

18. In the present case, the facts are akin to the decision in Karnal Co-operative Sugar Mills Ltd. (supra). Factually it is seen that the interest earned on the STDR was towards reducing the cost of the capital assets and therefore should not have been treated as revenue receipt in the hands of the Assessee.

19. Consequently, the question framed is answered in affirmative, i.e. in favour of the Assessee and against the Department. In other words, it is held, in the facts and circumstances of the case, that the interest earned from STDRs made by the Appellant to enable to open LoC for procuring plant and machineries is incidental to such acquisition and should be treated as receipt of a capital nature and not taxed as income.

20. The impugned orders of the AO, CIT(A) and ITAT are accordingly set aside. The appeal is allowed in the above terms.

21. An urgent certified copy of this order be granted as per rules.

(Dr. S. Muralidhar) Chief Justice

(A. K. Mohapatra) Judge

S.K.Parida