Itta/275/2011 Of The Commissioner Of Income Tax [Central] v. M/S Sri Rayalaseema Green Energy Limited

THE HON’BLE SRI JUSTICE V.V.S.RAOAND THE HON’BLE SRI JUSTICE SANJAY KUMAR INCOME TAX TRIBUNAL APPEAL No.275 of 2011 November 15, 2011 Between: The Commissioner of Income Tax (Central), Hyderabad And ... Appellant M/s.Sri Rayalaseema Green Energy Limited, Hyderabad ...Respondent THE HON’BLE SRI JUSTICE V.V.S.RAOANDTHE HON’BLE SRI JUSTICE SANJAY KUMAR INCOME TAX TRIBUNAL APPEAL No.275 of 2011 JUDGMENT: (Per Hon’ble Sri Justice V.V.S.Rao) In this appeal by the Revenue under Section 260A of theIncome Tax Act, 1961 (the Act), the brief facts of the matter are asfollows. The respondent (assessee) borrowed Rs.1,500 lakhs from Indian Renewable Energy Development Agency Limited(IREDA) during the financial year 1999-2000. As per the sanctionletter of the lender the assessee was required to utilize Rs.1,400lakhs towards project cost and the balance Rs.100 lakhs towardsmargin money for depositing with the Bank for obtaining bankguarantee. It did so and earned interest of Rs.18,71,591/- duringthe construction period. In its return of income for the assessmentyear 2001-02 it declared ‘Nil’ income but subsequently it filed arevised return declaring an income of Rs.3,166/-. In this return itset off the interest earned on the Bank deposit against interestaccrued in a sum of Rs.18,71,591/-. During the scrutiny, theassessee claimed deduction from interest income contending that in view of the nexus between the interest earned and interest paid,it cannot be brought to tax. The assessing officer, however, reliedon the decision of the Supreme Court in Turicorin Alkali Chemicals& Fertilisers Ltd v CIT[[1]]and added the interest to the return dulydemanding tax as well as interest under Section 234A and Section234B of the Act. The Commissioner of Income Tax (Appeals)confirmed the assessment, aggrieved by which the assesseesuccessfully filed appeal being ITA No.1008/Hyderabad/2004which was allowed by the ITAT, Hyderabad Bench-B on29.6.2007. The Tribunal followed a subsequent judgment of theSupreme Court in CIT v Bokaro Steel Ltd[[2]]. The Senior Standing Counsel for the Income Tax wouldcontend that the Tribunal was in error in applying the ratio inBokaro Steel and that the Tribunal ought to have applied thedecision in Tuticorin Alkali Chemicals. We have perused the order of the Tribunal. After analyzingthe decision of the Supreme Court in Tuticorin Alkali Chemicals,which was earlier in point of time, as well as the subsequentdecision in Bokaro Steel, the Tribunal held that the deposit by theassessee with the Bank was an obligation which it was to fulfil interms of the loan sanctioned to it; the deposits were not placedwith the Bank in order to earn interest and earning of interest wasincidental; and gross interest cannot be taxed but net interest asshown by the assessee can only be taxed. The fact that theinterest earned on the Bank deposit was set off against theinterest paid also weighed with the Tribunal. This finding of theTribunal and the application of the principle in Bokaro Steelin ouropinion does not warrant any appellate consideration underSection 260A of the Act. In Bokaro Steel the Supreme Court was concerned with therent charged by the assessee from its contractors, the hire charges for plant & machinery which were given to the contractorsand interest from advances made to the contractors by theassessee for the purpose of facilitating the work. DistinguishingTuticorin Alkali Chemicals,their Lordships held as follows. In Bokaro Steel the Supreme Court was concerned with therent charged by the assessee from its contractors, the hire charges for plant & machinery which were given to the contractorsand interest from advances made to the contractors by theassessee for the purpose of facilitating the work. DistinguishingTuticorin Alkali Chemicals,their Lordships held as follows. The activities of the assessee in connection with allthese three receipts are directly connected with or areincidental to the work of construction of its plant undertakenby the assessee. Broadly speaking, these pertain to thearrangements made by the assessee with its contractorspertaining to the work of construction. To facilitate the work ofthe contractors, the assessee permitted the contractors touse the premises of the assessee for housing their staff andworkers engaged in the construction activity of theassessee's plant. This was clearly to facilitate the work ofconstruction. Had this facility not been provided by theassessee, the contractors would have had to make their ownarrangements and this would have been reflected in thecharges of the contractors for the construction work. Instead,the assessee has provided these facilities. The same is trueof the hire charges for plant and machinery which was givenby the assessee to the contractors for the assessee'sconstruction work. The receipts in this connection also go tocompensate the assessee for the wear and tear on themachinery. The advances which the assessee made to thecontractors to facilitate the construction activity of puttingtogether a very large project was as much to ensure that thework of the contractors proceeded without any financialhitches as to help the contractors. The arrangements whichwere made between the assessee-Company and thecontractors pertaining to these three receipts arearrangements which are intrinsically connected with theconstruction of its steel plant. The receipts have beenadjusted against the charges payable to the contractors andhave gone to reduce the cost of construction. They have,therefore, been rightly held as capital receipts and not incomeof the assessee from any independent source. In this case also there is no dispute that as per the sanctionletter of IREDA the assessee was obliged to keep Rs.100 lakhs asa deposit in the Bank towards margin money and the interestthereon was duly adjusted towards interest paid by the assesseeand, therefore, it is only a capital receipt and not interest incomeexigible to tax. The appeal, therefore, is misconceived and isliable to be dismissed. In the result, the appeal fails and is accordingly dismissed. No costs. ________________ (V.V.S. RAO, J) November 15, 2011YS [1](1997) 6 SCC 117 : (1997) 227 ITR 172 (SC) [2](1999) 1 SCC 645 : (1999) 236 ITR 315 (SC) _____________________ (SANJAY KUMAR, J)