Bihar Police Building Construction Corporation Pvt. Ltd v. Principal Chief Commissioner Of Income Tax C.r. Building, Bir Chandpatel Path Patna

IN THE HIGH COURT OF JUDICATURE AT PATNACivil Writ Jurisdiction Case No.17037 of 2022 ====================================================== Bihar Police Building Construction Corporation Pvt. Ltd. Through its ChiefAccounts Officer of Hemant Kumar, (M) age 53 years, 5 B.M.P. Campus, P.O.Veterinary College, P.S. Vetenary College Dist. Patna, Bihar 800001. ... ... Petitioner/s Versus 1.Principal Chief Commissioner of Income Tax C.R. Building, Bir ChandPatel Path Patna. 800001Patel Path Patna. 800001 2.Principal Commissioner of Income Tax, C.R. Building, Bir Chand Patel PathPatna. 800001Patna. 800001 3.Additional Commissioner of Income Tax, C.R. Building, Bir Chand PatelPath Patna. 800001Path Patna. 800001 4.Joint Commissioner of Income Tax, C.R. Building, Bir Chand Patel PathPatna. 800001Patna. 800001 5.Deputy Commissioner of Income Tax, LokNayak Bhawan, DakbanglowRoad, Patna 800001Road, Patna 800001 6.Assistant Commissioner of Income Tax, LokNayak Bhawan, DakbanglowRoad, Patna 800001Road, Patna 800001 CORAM: HONOURABLE THE CHIEF JUSTICE and HONOURABLE MR. JUSTICE PARTHA SARTHYCAV JUDGMENT (Per: HONOURABLE THE CHIEF JUSTICE) Date : 05-09-2023 The writ petition is filed against an assessmentorder passed under Section 143(3) of the Income Tax Act(hereinafter referred to I.T. Act) dated 26.03.2021. The statutoryremedy by way of an appeal was not availed of. The questionraised is also one which can be considered in appeal; as towhether the income earned on the deposits made by the assessee, is liable to be computed in the total income of theassessee; when the interest earned is from the funds received asgrants from the Government, for construction of buildings of thePolice Department. It is also contended that Annexure-3government circular has stipulated that the grants for thesuccessive years would be reduced to the extent of the interestearned from the un-utilized funds of the earlier years kept infixed deposits. Hence, though, earned as interest from the fixeddeposits from the banks, it cannot be assessed as income fromother sources under Section 56 of the I.T. Act, is the questionraised. We have to notice that there would be gross delay fromthe date on which the order is passed; which would also be ahurdle insofar as availing the alternate remedy of an appeal. 2. We are not convinced that the matter falls underany of the specific grounds found in State of H.P & Ors. v.Gujarat Ambuja Cement Limited & Anr.; (2005) 6 SCC 499.There is no jurisdictional error, violation of principles of naturaljustice or abuse of process of Court averred or argued by thepetitioner in the above writ petition. We are proceeding toadjudicate the issue since the matter is pending from 2022 andthere is no purpose served in relegating the petitioner to theAppellate remedy. 3. Though, there are contentions raised of theassessment order having not been served on the assessee, it is tobe noticed that the department asserts otherwise of the orderhaving been uploaded in the website. 2. We are not convinced that the matter falls underany of the specific grounds found in State of H.P & Ors. v.Gujarat Ambuja Cement Limited & Anr.; (2005) 6 SCC 499.There is no jurisdictional error, violation of principles of naturaljustice or abuse of process of Court averred or argued by thepetitioner in the above writ petition. We are proceeding toadjudicate the issue since the matter is pending from 2022 andthere is no purpose served in relegating the petitioner to theAppellate remedy. 3. Though, there are contentions raised of theassessment order having not been served on the assessee, it is tobe noticed that the department asserts otherwise of the orderhaving been uploaded in the website. 4. Learned counsel for the petitioner relied on thedecisions of the Hon’ble Supreme Court in Commissioner ofIncome Tax, Bihar - II, Patna v. Bokaro Steel Ltd, Bokaro,reported in (1999) 1 SCC 645 followed by the Delhi HighCourt in NTPC Sail Power Company Private Limited v.Commissioner of Income Tax reported in 2012 SCC OnlineDel 3717 decided on 17.10.2010. The department, on the otherhand, points out that the assessee, is engaged in the constructionof buildings for the Police Department. The decisions cited arenot applicable since they were with respect to borrowed funds,as distinguished from the grants received from the Government.The decisions clearly were on the interest on borrowed funds,parked in fixed deposits for short terms, while the expansion ofthe business or construction activities for the purpose ofbusiness are going on. It was only in that circumstance theinterest earned on short term deposits were allowed set-off asagainst the interest paid on such borrowed funds. 5. As far as the facts are concerned, the assessee receives grants from the State Government for the purpose ofconstruction of buildings, which were deposited in banks. In thesubject assessment year being 2018–19, the assessee earned atotal interest of Rs. 12,63,82,110/-. The assessee returned onlyan interest income of Rs. 10,01,81,879/- after deducting anamount of Rs. 2,68,00,231/-. The assessee claimed TDS for thetotal amounts received as interest. The Assessing Officer addedon the differential amount of interest coming to Rs.2,68,00,231/- as the income of the assessee, against which thepresent writ petition is filed. 6. In Bokaro Steel Ltd.,(supra) the issue as towhether the interest earned from borrowed funds kept in fixeddeposits could be termed as income from other sources orviewed as capital receipts was not raised at all. A mere referencewas made to the issue to find it covered by the Tuticorin AlkaliChemicals and Fertilizers Ltd., v. CIT (1997) 6 SCC 117. TheHon’ble Supreme Court inTuticorin (supra) held that interestearned at the pre-business stage by investing part of borrowedfunds is taxable as income from other sources and is notadjustable against the interest paid on borrowings even if itcould be capitalized after commencement of business. It washeld that “the amount of interest received by the company flows 6. In Bokaro Steel Ltd.,(supra) the issue as towhether the interest earned from borrowed funds kept in fixeddeposits could be termed as income from other sources orviewed as capital receipts was not raised at all. A mere referencewas made to the issue to find it covered by the Tuticorin AlkaliChemicals and Fertilizers Ltd., v. CIT (1997) 6 SCC 117. TheHon’ble Supreme Court inTuticorin (supra) held that interestearned at the pre-business stage by investing part of borrowedfunds is taxable as income from other sources and is notadjustable against the interest paid on borrowings even if itcould be capitalized after commencement of business. It washeld that “the amount of interest received by the company flows from its investments and is it’s income and is clearly taxableeven though the interest amount is earned by utilizing borrowedcapital” (sic para 14). It was held by the Hon’ble SupremeCourt that it was perfectly permissible for the Company to keepthe surplus funds in short-term deposits, where interest isearned; which would normally be chargeable under Section 56of the Income Tax Act, in which event the company was notbound to utilize the interest earned to adjust it against theinterest paid as borrowed capital. However, when borrowedcapital is kept in short-term deposits and the interest incomeearned, though an independent source of income, not connectedwith the construction activities or business activities of theassessee; the same being inextricably connected with the settingup of a steel plant of the assessee; it could be viewed as capitalreceipts after commencement of business. We find noapplication for the dictum in the instant case. 7. In Bokaro Steel Ltd.,(supra) , it was held that “inthe case ofChallapalli Sugar Ltd., v. CIT[(1975) 3 SCC 572 : 1975 SCC (Tax) 65 : (1975)98 ITR 167] this Court examined the questionwhether interest paid before the commencement ofproduction by a company on amounts borrowed forthe acquisition and installation of plant andmachinery would form part of the actual cost of theasset to the assessee within the meaning of thatexpression in Section 10(5) of the Indian Income Tax Act, 1922 and whether the assessee will beentitled to depreciation allowances anddevelopment rebate with reference to such interestalso. The Court held that the accepted accountancyrule for determining the cost of fixed assets is toinclude all expenditure necessary to bring suchassets into existence and to put them in workingcondition. In case money is borrowed by a newly-started company which is in the process ofconstructing and erecting its plant, the interestincurred before the commencement of productionon such borrowed money can be capitalized andadded to the cost of the fixed assets created as aresult of such expenditure. By the same reasoning,if the assessee receives any amounts which areinextricably linked with the process of setting up itsplant and machinery, such receipts will go toreduce the cost of its assets. These are receipts of acapital nature and cannot be taxed as income.” 8. In NTPC Sail Power Company Private Limited (supra), the question referred was as to whether the interestearned on the deposits and advances can be added in thecomputation of total income instead of being set off against theinterest on borrowed funds, utilized for the new unit. The HighCourt of Delhi also followed the principle laid down by theHon’ble Supreme Court of there being an inextricable link to thesetting up of a project which makes it a capital receipt not liableto tax but, ultimately used in the reduction of the cost of theproject. In that case also, the funds invested by the assesseecompany and the interest earned were found to be inextricably linked with the setting up of power plant and hence, liable to betreated as capital receipts. 8. In NTPC Sail Power Company Private Limited (supra), the question referred was as to whether the interestearned on the deposits and advances can be added in thecomputation of total income instead of being set off against theinterest on borrowed funds, utilized for the new unit. The HighCourt of Delhi also followed the principle laid down by theHon’ble Supreme Court of there being an inextricable link to thesetting up of a project which makes it a capital receipt not liableto tax but, ultimately used in the reduction of the cost of theproject. In that case also, the funds invested by the assesseecompany and the interest earned were found to be inextricably linked with the setting up of power plant and hence, liable to betreated as capital receipts. 9. In the present case, we have to notice that theinterest earned is not of borrowed funds. The assessee is aconstruction corporation under the State, engaged in theconstruction of buildings for the Police Department. Theconstruction is carried on by the Corporation with grants givenby the Government. The grants given by the Government areparked in fixed deposits which earned interest. It has to beemphasized that the assessee is not carrying out the constructionfor the purpose of setting up of business or for expansion of abusiness; but is engaged in the activity of construction itself,with the funds made available by the Government. The interestincome earned from the grants made by the Government for thepurpose of construction of buildings for the Police Departmentcan only be treated as income from other sources. It is not anactivity inextricably connected with the construction ofbuildings and it does not in any manner reduce the cost ofconstruction; as in the case of interest earned on borrowed fundsparked in short term deposits, with which borrowed funds theconstruction is carried out. In the case of the assessee herein thefunds parked in deposits, out of the grants received, are surplus funds; since the amounts earned by the assessee from thedeposit of such funds are set-off from the grants for thesubsequent year. The principle inTuticorin Alkali Chemicalsand Fertilizers Ltd. (supra) applies squarely and not that ofBokaro Steel Ltd., (supra). 10. The circular of the State Government providingfor deduction of grants in the successive years to the extent ofthe interest earned from the grants of the earlier year, cannotregulate the taxability under the Income Tax Act. If at all,income tax is deducted from the interest earned, the Corporationwould be entitled to request the Government to not deduct theamounts paid as income tax from the grants of the subsequentyears. The circular issued by the State Government regulatingthe business/transaction between the Government and it’sCorporation cannot have any effect on the taxability of theinterest income which is deemed to be income from othersources under Section 56 of the Income Tax Act. 11. There is no question of any deduction beingpermitted, as permissible under Section 36 (i)(iii) of the Act,which is with respect to interest paid on borrowed capital for thepurpose of business or profession, there is no such factualground raised herein. 12. We find absolutely no reason to entertain thewrit petition and dismiss the same. (K. Vinod Chandran, CJ) Partha Sarthy, J. I agree (Partha Sarthy, J) sharun/-AFR/NAFRAFRCAV DATE25.08.2023Uploading Date05.09.2023Transmission Date