Ntpc Tamil Nadu Energy Company Ltd., New ... vs Department Of Income Tax

I.T.A.No. 6015/DEL/2013 A.Y. 2009-10 ITO, Ward 13(1) NTPC Tamil Nadu Energy Co.Ltd. New Delhi 110 002 Vs. NTPC Bhavan, Core 7, Scope Complex 7, Institutional area, Lodhi road New Delhi 110 003

PAN: AABCN 9916 C

(APPELLANT) (RESPONDENT)

Assessee by : Sh. Ajay Kr.Agarwal, C.A. Department by : Sh. B.Dhamkanunjna, Sr.DR

ORDER

PER J. SUDHAKAR REDDY, ACCOUNTANT MEMBER

This is an appeal filed by the Revenue against the order of the Ld.CIT(Appeals) -XVI, New Delhi dated 29.8.2013 pertaining to the A.Y. 2009-10.

2. Facts in brief:- The facts of the case are given in paras 3.3.1 to 3.3.3 of the order of the Ld.CIT(A), which are extracted for ready reference.

"The assessee is a Public Limited Company which was incorporated on 23.5.2003 as a joint venture company between NTPC Ltd. And Tamil Nadu Electricity Board (hereinafter referred to as TNEB), with an equal percentage of share holdings. The main objective of the petitioner company was to construct power plants for generating electricity. The petitioner company was incorporated with the authorised capital of Rs.20000,00,00,000. The issued, subscribed and paid up capital of the petitioner company stood at Rs.380,00,00,000 as on 31.3.2009 and the amount lying in Share Deposit A/c - Pending Allotment was Rs.32,00,00,000. The petitioner company had also raised Secured Loans of Rs.605,61,00,000.

The facts of the case are that the petitioner company had started construction of the power generating plant of the capacity to produce 1500 ITA No. 6015/Del/2013 A.Y. 2009-10 NTPC Tamil Nadu Energy Co.Ltd., New Delhi

MW of electricity at Vallur, in the outskirts of Chennai, Tamilnadu, in the financial year 2003-04. The actual work of construction of the said power plant was started on 28-03-2007, which is now expected to be completed in the financial year 2912-13. The funds for the entire power plant had been planned to be financed by way of approximately 30% as equity contributions from the shareholder and the balance approximately 70% by raising debt funds. Undisputedly, the aforesaid funds were raised during the initial period of construction by way of equity contributions or by raising debt funds, to meet the cost of purchase of land etc. from the Salt Commissioner, Chennai and for giving advances to the various contractors aggregating to Rs.285,10,54,363. Thus it may be submitted that the entire funds generated from time to time were utilized to meet the cost of infrastructure development work and also disbursement of advances to the contractors who were contracted for carrying out the specific jobs.

The petitioner company had filed its Return of income on 16-09-2009, declaring its total income at Rs. NIL. However the amount of interest income of Rs.33,18,899 received during the year on temporarily parking of its funds with the bank in STDR account for short durations was treated as capital receipts in the period of construction of the power plant. The purpose was, so that these funds remain available to the petitioner company at all times for meeting capital expenditure. The interest received from the contractors aggregated to Rs.62, 19,455 and the miscellaneous income of Rs. 64,197 was also treated as capital receipts during the course of the construction of the Power plant.

3. The A.O. at pages 3 and 4 held as follows.

" 2. Miscellaneous Income

From a further perusal of the P&L account and schedule-11, it is seen that the assessee has earned a Misc. income of Rs.96,02,551/-, which comprises of the following

(i) Interest of Rs.33,18,899/- on FDR with Indian Banks

(ii) Interest of Rs.62,19,455/- on deposits with others

(iii) Rs.64197/- on account of Misc. Receipts

However, the assessee has not offered this income for tax, rather it has been set off against interest & finance charges under "Expenditure during Construction".

The assessee was asked to show cause as to why the above income should not be assessed as "income from other sources" as the same has been earned

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during pre-commencement period of the business. Vide letter dated 01/12/2011, the assessee has submitted as under :

"This interest income from banks was basically earned on the funds temporarily parked in banks as short term deposits. As we were in the construction phase of the project, all the expenditure and income during the period is taken as incidental expenditure during construction and getting capitalized along with the project cost."

This argument of the assessee is not acceptable because the interest income earned on fixed deposit etc. is specifically taxable under the head "Income from other sources" u/s 56 of the I. T. Act.

Reliance is placed on the decision of the Hon'ble supreme Court In the case of Tuticorin Alkali Chemical &Fertilizers Ltd. Vs CIT {1997} 227 ITR 172(SC).

The assessee has failed to establish any nexus between the earning of such interest with its business i.e setting up of the power plant. In fact it has itself admitted that it had temporarily parked its surplus funds in banks as short term deposits. Therefore the facts of case are similar to the case of Tuticorin Alkali Chemical &Fertilizers Ltd. Vs CIT ( supra). Hence the ratio of the judgement given by the apex court in 'that case is squarely applicable in the case of the assessee.

It is also pertinent to mention that the assessee had paid an advance tax of Rs.1,08,152/- on 13.9.2008 and also of Rs.3,27,692/- on 13.12.2008. It has also claimed credit for TDS of Rs.22,56,682/- on interest. Since the assessee knew that it will not earn any income from business during the year and the only income would be interest income, then the payment of advance tax shows that it was fully aware that such interest income is liable to tax."

4. Aggrieved the assessee carried the matter in appeal. The First Appellate Authority applied the decision of the Hon'ble Supreme Court in the case of CIT vs. Bokaro Steel Ltd., 102 Taxman 94 (SC) as well as the judgement of the Jurisdictional High Court in the case of NTPC SAIL Power Co. (P) Ltd. Vs. CIT in ITA 1238 judgement dt. 17.7.2012 and decided the issue in favour of the assessee.

5. Aggrieved the Revenue is in appeal before us on the following grounds.

1. The Ld. CIT(A) has erred in law and on fact in deleting the addition of Rs. 96,02,551/- including interest on deposit with Indian Banks and others.

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2. The Ld. CIT (A) has erred in law and facts in not appreciating the provision laid down in Subsection 1 to section 5 of the Act wherein it has been clearly mentioned that the total income of any previous year of a person who is resident includes all income from whatever source derived.

3. The Ld. CIT (A) has erred in law and facts in not accepting the Assessing Officers plea that the income earned on fixed deposits etc is to be taxed under the head 'Income from Other sources" u/s 56 of the Income Tax Act, 1961.

4. The Ld.CIT (A) has erred in law and facts in not considering the fact that interest earned on fixed deposits is ultimately an income and also failed to mention any provision of the Act under which such income is exempt.

5. The Ld. CIT (A) has erred in law and facts in holding that the interest on surplus amount is not taxable though the surplus amount is nowhere mentioned under the provision of the income Tax Act, 1961.

6. The appellant craves to be allowed to add any fresh ground of appeal and/or delete or amend any of the ground of appeal.

6. We have heard Shri P.Dhamkanunja, Ld.Sr.D.R. on behalf of the Revenue and Shri Ajay Kumar Agarwal, C.A. the Ld.Counsel for the assessee.

7. The Ld.Sr.D.R. contended that the assessee has not demonstrated nexus between the earning of interest with the business of the assessee. He relied on the decision of the Hon'ble Supreme Court in CIT vs. Tuticorin Alkali and Chemicals & Fertilisers Ltd. (1997) 227 ITR 172 and submitted that the order of the A.O. should be restored and the order of the First Appellate Authority be reversed.

8. The Ld.Counsel for the assessee on the other hand submitted that under similar facts and circumstances the E Bench of the Tribunal in the assessee's own case for the A.Y. 2008-09 in ITA 1520/Del/2013 order dt. 20th June, 2014 had upheld the findings of the First Appellate Authority and

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dismissed the appeal of the Revenue. He relied on the submissions made by him before the First Appellate Authority.

9. Rival contentions heard. On a careful consideration of the facts and circumstances of the case, on perusal of material on record, orders of the authorities below, case laws cited, we hold as follows.

10. For the immediately preceding A.Y. 2008-09 the E Bench of the Tribunal in ITA 1520/Del/2013 order dt. 20th June, 2014 has held as follows.

"4. We have heard rival parties and have gone through the material placed on record. We find that Ld. CIT(A) had decided the issue in favour of the assessee by relying upon the judicial pronouncements of Hon'ble Supreme Court and Hon'ble Delhi High Court as contained in para 8.1.2 to 8.2, which are reproduced as under:

"8.1.2 The appellant company was incorporated on 23-05-2003 as a joint venture company between NTPC Ltd. and Tamil Nadu Electricity Board for the purpose of construction of power plant for generation of electricity. The said power plant was located at Yellur at the outskirt of Chennai, Tamil Nadu. The construction of the power generating unit was started on 28-03-2007 which is expected to be completed by 2012-13. The total authorized capital of the company was Rs.2000 crores. By end of financial year 31-03-2008 the assessee company had raised RS.380, 00,00, 0001-. These funds were essentially utilized during the initial period of construction from A. Y. 2004-05 to A. Y. 2008-09 for conducting survey, investigation & preliminary expenses, for purchasing land (1002.19 acres), for infrastructure development work and for disbursement as advance to the contractors engaged for construction of power plant etc. There was also some litigation for acquisition of land. The assessing officer treated Rs.42,06,774/- chargeable to tax u/s 56 of the Act as 'Income from other sources' relying on the decision of the apex court in the case of CIT vs. Tuticorin Alkali and Chemicals & Fertilizers Ltd. (1997) 227 ITR 172. However, the whole emphasis of Apex Court decision in the Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) was that funds were found to be surplus. The company was ready to commence trial production and .the surplus funds were deposited in bank to earn interest. However, there is no finding of fact given by the assessing officer that there were surplus funds available with the assessee company. Even, in the remand report of the assessing officer there is no finding of fact that the investment in bank STDRs were made out of surplus funds. Simply because money is lying in bank meant for construction of the plant, cannot be considered as the surplus

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money. The surplus money can arise only after meeting all the obligations relating to the construction of the power plant and if the money is found to be surplus after the completion of construction of the unit. In the instant case the work of construction of the power plant has just started. Therefore, funds cannot be said to be at surplus. The purpose of bank deposits yielding interest was evidently to maintain liquidity of funds and to reduce the cost of construction of the power plant. Interest income was inextricably linked with the setting up of the power plant because interest income have gone on to reduce the incidental expenses for setting up of the plant as evident from schedule 12 of balance sheet showing details of incidental expenses during construction. Further, when amounts of liability towards sundry creditors (Rs.23.52 crores) are far more than the funds lying in bank (Rs.3.34 crores), it cannot be said that there are surplus funds available with the company. Hon 'ble Supreme Court in Bokaro Alkali Chemicals and Fertilizers Ltd. after considering the decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. held that;

"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.

8.1.3 Hon'ble Delhi High Court in Indian Oil Panipat Power Consortium Ltd. vs. ITA (2009) 315 ITR 255 (De!.) held that where interest on money received as share capital is temporarily placed in fixed deposit awaiting acquisition of land, a claim that such interest is a capital receipt entitled to be set off against pre-operative expenses, is admissible, as the funds received by the assessee company by the joint venture partners are "inextricably linked"

with the setting up of the plant and such interest earned cannot be treated as income from other sources. The Hon 'hie Delhi High Court, had also distinguished the facts before them from the facts which were before the apex court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v CIT. The distinction drawn by Delhi High Court, was that that there was a finding of fact recorded in the case before the apex court that whatever money was deposited in the bank was essentially found to be the surplus funds in the hands of that company and the very purpose of making fixed deposits was to earn interest on such surplus money. Apex court under those peculiar

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circumstances, had held that interest income arising of surplus funds, was chargeable to tax as income from other sources.

8.1.4 In identical issue in the case of NTPC Sail Power Company (P) Ltd. VS. CIT in ITA No. 1238, Hon'ble Delhi High Court in its decision on 1710712012 held that:-

"It is no doubt correct that the proviso to section 36 (1) (iii) of the Income Tax Act enacts that any amount of the interest paid towards ("in respect of) capital borrowed for acquisition of an asset or for extension of existing business regardless of its capitalization in the books or otherwise, "for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use" would not qualify as deduction. However, in -all these cases, when the interest was received by the assessee towards interest paid for fixed deposits when the borrowed funds could not be immediately put to use for the purpose for which they were taken, this Court, and indeed the Supreme Court held that if the receipt is "inextricably linked" to the setting up of the project, it would be capital receipt not liable to tax but ultimately be used to reduce the cost of the project. By the same logic, in this case too, the funds invested by the assessee company and the interest earned were inextricably linked with the setting up of the power plant."

8.1.5 The above decisions are squarely applicable in the instant appeal. In view of the above, since the work of construction of the power plant has just started and funds were essentially utilized for conducting survey, investigation & preliminary expenses, for land purchase, for infrastructure development work and for disbursement as advance to the contractors engaged for construction of power plant etc., therefore, funds cannot be said to be at surplus. Moreover, the liability towards sundry creditors (Rs.23.52 crores) are far more than the funds lying in bank (Rs.3.34 crores). Interest income is also inextricably linked with the setting up of the power plant because interest income have gone on to reduce the incidental expenses for setting up of the plant as evident from schedule 12 of balance sheet showing details of incidental expenses during construction. In view of the above, as the interest on STDR are "inextricably linked" to the setting up. of the project and the fact that no surplus funds are also available with the appellant company, therefore, such income is required to be capitalized to be set off against the pre operative expenses. As such the A. O. is not justified in adding the sum of Rs.36,06,774/- as income for other source u/s 56.

8.2 Regarding the forfeited earnest money deposit of Rs.6 lakhs, the sum represents earnest money deposited to carryon contract for construction of

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approach road to the project site. The said sum was forfeited for non performance by the contractor. Therefore, the forfeited sum is inextricably linked to the setting up of the project and is required to be capitalized to be set off against the pre operative expenses. In view of the above, the above facts and the decision cited above, this ground of appeal is decided in favour of the appellant. "

5. We find that Ld. CIT(A) has rightly appreciated the facts of the case and has rightly arrived at the correct. conclusion as the funds kept in bank deposits cannot be classified as surplus funds as project was under

completion. The argument of Ld. D.R. that facts were not verified by Ld.CIT(A) does not hold any force as Ld.CIT(A) by quoting figures in his roder ahs arrived at the conclusion. Therefore, we do not find any infirmity in the order of Ld.CIT(A) and, therefore, appeal filed by the Revenue is dismissed.

6. In view of above, appeal filed by the Revenue is dismissed."

11. The Ld.Sr.D.R. could not demonstrate that the facts of the current year are different from the facts of the earlier year. As we are of the opinion that the facts are identical, we respectfully follow the order of the Coordinate Bench and uphold the order of the First Appellate Authority and dismiss this appeal by the Revenue.

12. In the result Revenue's appeal stands dismissed.

Order pronounced in the Open Court on 24th June, 2015.

Sd/- Sd/-

[H.S.SIDHU] [J. SUDHAKAR REDDY] JUDICIAL MEMBER ACCOUNTANT MEMBER

Dt. the 24th June, 2015

· Manga

8 ITA No. 6015/Del/2013 A.Y. 2009-10 NTPC Tamil Nadu Energy Co.Ltd., New Delhi

Copy forwarded to: - 1. Appellant 2. Respondent 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY By Order,

Assistant Registrar, ITAT, Delhi Benches

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