Commissioner Of Income Tax-Ii, Chandigarh v. M/S Essar Commvision Ltd. (Now Hfcl Infotel Ltd.), Mohali

ITA No. 238 of 2009 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 238 of 2009 (O&M) Date of Decision: 28.8.2015 Commissioner of Income Tax-II, Chandigarh ....Appellant. Versus M/s Essar Commvision Ltd. (now HFCL Infotel Ltd.), Mohali ...Respondent. 1.Whether the Reporters of the local papers may be allowed to see the judgment?the judgment? 2.To be referred to the Reporters or not? Yes 3.Whether the judgment should be reported in the Digest? CORAM:-HON'BLE MR. JUSTICE AJAY KUMAR MITTAL.HON'BLE MR. JUSTICE RAMENDRA JAIN. PRESENT: Ms. Urvashi Dhugga, Advocate for the appellant. Mr. Ravi Shankar, Advocate for the respondent. AJAY KUMAR MITTAL, J. 1.Delay of 753 days in re-filing the appeal is condoned. 2.This appeal has been preferred by the revenue underSection 260A of the Income Tax Act, 1961 against the order dated24.5.2006 (Annexure A-3) passed by the Income Tax Appellate Tribunal,Chandigarh Bench 'A', Chandigarh, in ITA No. 539/Chandi/2004, for theassessment year 1998-99, claiming the following substantial question oflaw:- Whether the Tribunal in the facts relevant to the caseand in law was right in allowing set off, of interest income earned on the fixed deposits kept forarranging bank guarantees, towards the cost ofcapital assets? 3.A few facts necessary for adjudication of the instant appealas narrated therein may be noticed. The assessee is engaged in thebusiness of providing telecommunication services and filed its return ofincome on 27.11.1998 declaring the income at ` 12 lacs. The AssessingOfficer framed the assessment under Section 143(3) of the Act videorder dated 30.8.2000 (Annexure A-1) at ` 75,00,960/- by holding thatthe interest earned on the fixed deposit relating to pre-operative periodconstitutes income assessable under the head 'Income from othersources' and such income could not be set off against the pre-operativeexpenses, the assessing officer assessed the interest amounting to` 62,93,942/- under the head 'Income from other sources' for which hedrew support from Tuticorin Alkali Chemicals and Fertilizers Ltd. v.Commissioner of Income-Tax, Madras, (1997) 227 ITR 172 andCommissioner of Income-Tax Vs. Coromandal Cements Ltd., 234ITR 412 (SC). Feeling aggrieved, the assessee filed an appeal beforethe Commissioner of Income Tax (Appeals) [for brevity “the CIT(A)”].The CIT(A) vide order dated 2.3.2001 (Annexure A-2) allowed the appealand deleted the interest income of ` 62,93,942/-. Reliance was placedupon judgments of the Apex Court in Karnal Cooperative Sugar MillsLtd. v. Commissioner of Income-Tax (1998) 233 ITR 531 (P&H) and inCommissioner of Income-Tax v. Bokaro Steel Ltd. (1999) 236 ITR315 (SC). Being dissatisfied, the revenue filed an appeal before theTribunal who vide order dated 24.5.2006 (Annexure A-3) following its ITA No. 238 of 2009-3- earlier order dated 14.11.2005 in the case of the assessee for theassessment years 1999-2000 and 2000-01 in ITA Nos. 614-15/Chandi/2003 upheld the order of the CIT(A) and dismissed theappeal. Hence, the present appeal. 4.Learned counsel for the revenue submitted that theassessee was required to explain the purpose for which the interestincome has been utilized. It was urged that in view of Supreme Courtjudgment in Tuticorin Alkali Chemicals and Fertilizers Ltd. v.Commissioner of Income-Tax (1997) 227 ITR 172, the Tribunal haderred in deciding the issue in favour of the assessee. Reliance wasplaced upon the following judgments also in support of her contention:- (i)Commissioner of Income-Tax v. Dr. V.P.Gopinathan, (2001) 248 ITR 449 (SC);Gopinathan, (2001) 248 ITR 449 (SC); (ii)Commissioner of Income-Tax v. DercoCooling Coils Ltd. (1992) 198 ITR 375 (AP);Cooling Coils Ltd. (1992) 198 ITR 375 (AP); (iii)Commissioner of Income-Tax v. ManglamCement Ltd., (1996) 217 ITR 369 (Raj);Cement Ltd., (1996) 217 ITR 369 (Raj); (i)Commissioner of Income-Tax v. Dr. V.P.Gopinathan, (2001) 248 ITR 449 (SC);Gopinathan, (2001) 248 ITR 449 (SC); (ii)Commissioner of Income-Tax v. DercoCooling Coils Ltd. (1992) 198 ITR 375 (AP);Cooling Coils Ltd. (1992) 198 ITR 375 (AP); (iii)Commissioner of Income-Tax v. ManglamCement Ltd., (1996) 217 ITR 369 (Raj);Cement Ltd., (1996) 217 ITR 369 (Raj); (iv)Commissioner of Income-Tax v. PandianChemicals Ltd. (1998) 233 ITR 497 (Mad);Chemicals Ltd. (1998) 233 ITR 497 (Mad); (v)Commissioner of Income-Tax v. AutokastLtd., (1998) 229 ITR 789 (Ker.);Ltd., (1998) 229 ITR 789 (Ker.); (vi)Southern Herbals Ltd. v. SettlementCommission (IT&WT) and another, (2003)261 ITR 681 (Kar.);Commission (IT&WT) and another, (2003)261 ITR 681 (Kar.); 5.The primary issue that arises for consideration in this appealis whether the interest earned by the assessee on the fixed deposits kept for managing bank guarantees during pre-operative period wouldreduce the cost of the capital assets. 6.In order to effectively, adjudicate the controversy involvedherein it would be advantageous to refer to various judgments on thesubject as heavy reliance has been placed thereon by both the parties. 7.A Division Bench of this Court in Karnal Sugar Mill Ltd'scase (supra) was considering the issue where the cooperative societywas formed for running sugar mills and production had not started. Theassessee had kept part of share capital as fixed deposit to open a letterof credit under agreement for purchase of machinery. The questionarose as to the nature of taxability of receipt of interest on such fixeddeposit. It was held by this Court that the interest was not assessable asincome from other sources as it was directly related to acquisition of theasset and would reduce the cost of the asset. The relevant conclusionreads thus:- “In the case of the assessee before us, it has alreadybeen seen that money was deposited, to open a letterof credit under the terms of the agreement with thesupplier of the machine. It was, therefore, not a casewhere surplus share capital money lying idle andunused had been deposited in the bank. Here themoney was deposited out of necessity for the purposeof acquiring an asset. The plea of the Department thatunutilised and surplus money had been deposited bythe assessee, does not appear to be correct. Theassessee's plea that money had been deposited soas to open a letter of credit has not been controverted. Therefore, the activity of depositing money out of theshare capital was an activity incidental to theacquisition of the asset. It was not a case wheresurplus share capital money was deposited with thebank because it was lying unutilised and idle. Theassessee deposited the money with the bank with adefinite purpose to execute an agreement for thepurpose of acquiring the machine. There is, however,no evidence on record to show that the fixed deposithas been made by the assessee out of theborrowings. It was the share capital which wasdeposited. The question, therefore, arises as towhether the deposit of the share capital money wasmade because the assessee did not for the timebeing, require the money for its business. Theassessee purchased fixed deposits in the course ofan activity directly relatable to the acquisition of anasset. There is, thus, a direct nexus between thepurchase of the machinery and the deposit of moneyin the -bank. This nexus shall bring about apresumption in the assessee's favour that the moneywas deposited not without a purpose but with theobject of acquiring a machine from the supplier. Suchinterest income being directly relatable to the terms ofthe contract for acquiring a business asset should goto reduce the cost of the asset. As has been seen, theSupreme Court in CIT v. U. P. State Industrial -6- Development Corporation [1997] 225 ITR 703 took -6- Development Corporation [1997] 225 ITR 703 took notice of the activity of underwriting shares and theearning of the underwriting commission andbrokerage from such activity. It was held that as theunderwriting commission had been earned by theassessee in the course of taking over certain shares,such commission shall go to reduce the cost of theshares acquired by the assessee and could not betaken into the profit and loss account. Since, theassessee had subscribed certain shares out of theunderwritten shares, the commission relating to thoseshares went towards the cost and no income wasearned by the underwriter. Following the ratio laiddown by the Supreme Court in CIT v. U. P. StateIndustrial Development Corporation [1997] 225ITR 703, it has to be concluded, in the present case,that the interest income earned by the assessee wasdirectly relatable to the activity of acquiring an assetfrom a supplier in whose favour a letter of credit wasopened after paying money in fixed deposits. Since,the two activities, namely, deposits made in the bankand the acquisition of machinery have a direct nexus,the interest income has to be associated with the costof the asset so acquired. It was not a case of depositof surplus money, entirely unconnected with any otheractivity of the assessee. The deposit of share capitalmoney with the bank had a definite purpose and object. In this light, the interest earned by theassessee shall go to reduce the cost of the assetacquired out of the transaction.” 8.An appeal carried by the revenue against the aforesaidpronouncement was dismissed by the Apex Court in Commissioner ofIncome Tax v. Karnal Cooperative Sugar Mills Ltd. (2000) 243 ITR 2with the following observations:- “Leave granted. 2. In the present case, the assessee haddeposited money to open a letter of credit for thepurchase of the machinery required for setting up itsplant in terms of the assessee's agreement with thesupplier. It was on the money so deposited that someinterest has been earned. This is, therefore, not acase where any surplus share capital money which islying idle has been deposited in the bank for thepurpose of earning interest. The deposit of money inthe present case is directly linked with the purchase ofplant and machinery. Hence, any income earned onsuch deposit is incidental to the acquisition of assetsfor the setting up of the plant and machinery. In thisview of the matter the ratio laid down by this court inTuticorin Alkali Chemicals and Fertilizers Limitedv. CIT, will not be attracted. The more appropriatedecision in the factual situation in the present case isin CIT v. Bokaro Steel Ltd. The appeal is dismissed.There will be no order as to costs.” ITA No. 238 of 2009 9.In Bokaro Steel Ltd.'s case (supra), a two Judges Benchof the Apex Court was considering the case of an assessee who hadreceived rent from its contractors for housing workers and staffemployed by the contractor for the construction work of the assessee.The assessee had received hire charges for plant and machinery whichwere given to the contractor by the assessee for use in the constructionwork of the assessee. Interest was also received from advances madeto contractors for facilitating the construction work. After referring to the judgment in Tuticorin Alkali Chemicals and Fertilizers Ltd.'s case(supra), it was concluded that the receipts of the assessee wereinextricably linked with the setting up of capital structure of theassessee-company and therefore, these receipts, which were recoveredin pre-operative period were capital receipts and shall reduce the cost ofconstruction. judgment in Tuticorin Alkali Chemicals and Fertilizers Ltd.'s case(supra), it was concluded that the receipts of the assessee wereinextricably linked with the setting up of capital structure of theassessee-company and therefore, these receipts, which were recoveredin pre-operative period were capital receipts and shall reduce the cost ofconstruction. 10.In Commissioner of Income Tax v. Karnataka PowerCorporation (2001) 247 ITR 268 (SC), a three Judge Bench of theSupreme Court was considering the issue where the assessee receivedinterest and hire charges from contractors which were claimed as capitalreceipt reducing the capital cost. The Tribunal and the High Courtdecided the matter in favour of the assessee against which the revenuewent in appeal to the Supreme Court. The Supreme Court upheld theview of the Tribunal and the High Court following its earlier decision inthe case of Bokaro Steel Ltd's case (supra). 11.In Bongaigaon Refinery and Petrochemcials Ltd. v. CIT(2001) 251 ITR 329 (SC), the assessee received interest income,income from guest house, charges for equipment and recoveries fromthe contractors on account of water and electricity supply. The High ITA No. 238 of 2009-9- Court, following the decision of the Supreme Court in the case ofTuticorin Alkali Chemcials and Fertilizers Ltd.'s case (supra) heldthat the above receipts are taxable in the assessee's hand. TheSupreme Court while considering the issue held that the income wasreceived by the assessee during formative period towards renting ofguest house, charges for equipment and recovery from contractorstowards water and electricity supply and they are covered by thedecision of the Supreme Court in Bokaro Steel Ltd's case (supra) and,therefore, these receipts will go to reduce the cost of construction. Arelevant extract from the decision of the Supreme Court is quoted asunder:- “That was a case in which the question related tointerest earned by a company during its formativeperiod by investments. This court has held in CIT v.Bokaro Steel Ltd. (1999) 236 ITR 315 (SC), that it isso confined and did not apply where the receipts weredirectly connected with or were incidental to the workof construction of the assessee's plant. The decisionin CIT v. Bokaro Steel Ltd. (supra) has beenfollowed by a two-judge Bench of this Court in CIT v.Karnal Cooperative Sugar Mills Ltd. (2000) 243 ITR2 (SC) and by a three-Judge Bench in CIT v.Karnataka Power Corporation (2001) 247 ITR 268(SC). In fact, in the latter case, it was not disputed bythe Revenue that the question that related to hirecharges paid by contractors had to be answered in light of the judgment in Bokaro Steel Ltd's case(supra). It is, therefore, not possible now to take anyview different from that taken in Bokaro Steel Ltd'scase (supra).” 12.It may also be noted that in the case of the assessee itselfin ITA Nos. 616 and 617 of 2006 (Commissioner of Income Tax,Chandigarh-I v. M/s HFCL Infotel Limited, Mohali) decided on9.7.2007 for the assessment years 1999-2000 and 2000-01, the identicalissue was held in favour of the assessee in view of the judgments of theApex Court in Karnal Cooperative Sugar Mills Ltd. and Bokaro SteelLtd. cases (supra) against which the Special Leave Petition (Civil) No.17019 of 2008 was dismissed by the Apex Court on 6.1.2009. light of the judgment in Bokaro Steel Ltd's case(supra). It is, therefore, not possible now to take anyview different from that taken in Bokaro Steel Ltd'scase (supra).” 12.It may also be noted that in the case of the assessee itselfin ITA Nos. 616 and 617 of 2006 (Commissioner of Income Tax,Chandigarh-I v. M/s HFCL Infotel Limited, Mohali) decided on9.7.2007 for the assessment years 1999-2000 and 2000-01, the identicalissue was held in favour of the assessee in view of the judgments of theApex Court in Karnal Cooperative Sugar Mills Ltd. and Bokaro SteelLtd. cases (supra) against which the Special Leave Petition (Civil) No.17019 of 2008 was dismissed by the Apex Court on 6.1.2009. 13.Adverting to the judgment of the Apex Court in TuticorinAlkali Chemicals and Fertilizers Ltd.'s case (supra) on which heavyreliance has been placed by the learned counsel for the revenue, thereinthe assessee had taken loans from banks and financial institutions forthe purpose of setting up factories whereas surplus borrowed fundswhich were not required by the assessee was kept invested in the shortterm deposit with banks. The interest income on those surplus shortterm deposit with the banks was held to be assessable as 'Income fromother sources' under Section 56 of the Act by a three Judges Bench ofthe Supreme Court. This judgment was followed by the Supreme Courtin Coromondal Cements Ltd.'s case (supra). However, the situationherein is distinguishable inasmuch as in the present case, the assesseehad earned interest income on the fixed deposits kept for arranging bankguarantees in the formative period and not that the surplus funds wereutilized for earning additional interest income. In Gopinathan's case ITA No. 238 of 2009 (supra), interest had accrued from fixed deposit in bank and there wasloan taken against security of fixed deposit. The interest on loan washeld to be not deductible under Section 57(iii) of the Act. The factualmatrix herein is different and thus, this decision also has no applicability.Regarding other pronouncements on which revenue had placed relianceas referred to in para 4 above of different High Courts, suffice it to noticethat the issues there were either similar to the one raised in TuticorinAlkali Chemicals and Fertilizers Ltd.'s case (supra) as they arebased following the said decision or are on individual fact situationinvolved in those cases. Thus, they also do not advance the contentionof the revenue. 14.In view of the above, the substantial question of law isanswered against the revenue and in favour of the assessee.Accordingly, finding no merit in this appeal, the same is herebydismissed. (AJAY KUMAR MITTAL) JUDGE August 28, 2015 gbs (RAMENDRA JAIN) JUDGE