The Commissioner of Income Tax and Assistant Commissioner of Income Tax vs Tehri Hydro Development Corporation

Prafulla C. Pant, J.—In all these three appeals, preferred u/s 260-A of the Income Tax Act, 1961, common questions of law are involved, as such, the appeals are being taken up together, for their disposal.

The common questions of law involved in these appeals are as under:

Whether, Income Tax Appellate Tribunal (for short ITAT has erred in law in deleting addition of 2.5% on income earned by way of interest by the respondent-assessee Tehri Hydro Development Corporation (for short THDC), claimed by it as deduction u/s 57(iii) of the Income Tax Act, 1961?

Whether, the Commissioner of Income Tax (Appeals) [for short CIT(A)] and ITAT have erred in law in accepting the rent and interest received from its employees and oustees in Dam area as capital receipts and thereby excluding the same from taxability?

Brief facts giving rise to these appeals are that assessee company is a public sector undertaking of Government of India, which is engaged in construction of Hydro-Electric project for generation of power and irrigation. During the assessment year 1999-2000, the assessee company filed its return of income declaring its total income and simultaneously claiming deductions on the interest on deposits with the banks, interest received on rent from its employees and oustees in Dam area (for construction of their houses for rehabilitation). The assessing Officer (hereinafter referred as A.O.) issued notices u/s 143(2) to the assessee company. After hearing the assessee, the A.O. disallowed the deduction claimed on account of interest of deposits with the bank and also disallowed the claim of deduction on interest received on the amounts deposited by employees of assessee and oustees in Dam area and also on the rent received from the employees. Aggrieved by the orders passed by A.O., the respondent assessee preferred appeal before CIT(A). The CIT(A) vide its order dated 22.01.2004 allowed the deductions claimed by the respondent-assessee. Aggrieved by said order, Revenue preferred cross I.T.A. No. 1996 / Del / 2004, before the ITAT raising the issue whether, the interest and rent should be treated as revenue receipt or capital receipt. On the other hand, the assessee also filed I.T.A. No. 2139 / Del / 2004 before the ITAT. Also, a Misc. Application No. 222 / Del / 2006 seeking rectification of the mistake alleged to have occurred in the Tribunal''s order dated 11.01.2001 (pertaining to assessment year 1991-92), passed in I.T.A. No. 3371 and 3556 / Del / 94, was filed by the Revenue. The ITAT dismissed the cross appeal filed by the Revenue, but the appeal of the respondent-assessee (I.T.A. No. 2139 / Del / 2004) was allowed permitting deductions of administrative expenditure to the extent of 2.5% on interest income. The Misc. Application No. 222 / Del / 2006 was also dismissed, as the ITAT found no error apparent on the record in its order dated 11.01.2001, passed in ITA No. 3371 and 3556 / Del / 1994, as alleged by the Revenue. Hence, these appeals.

We have heard learned Counsel for the parties and perused the impugned orders passed by the ITAT.

Section 14 of the Income Tax Act, 1961, provides ''heads of income'' for the purposes of charging income tax and computing total income. Said Section classifies heads of income into six categories, namely (A) Salaries, (B) interest on securities (since omitted), (C) income from house property, (D) profits and gains of business or profession, (E) capital gains, and (F) income from other sources. Undoubtedly, the interest income in question and the amount received by respondent-assessee from oustees in Dam area is covered under the last head i.e. ''income from other sources''. Section 57 of the Act provides deduction permissible in respect of income chargeable under the head of ''income from other sources''. Clause (iii) of said Section provides deductions on ''any other expenditure'' laid out or expended wholly and exclusively for the purpose of making or earning such income. The CIT(A) and ITAT have allowed the deductions under the aforesaid Clause (iii) of Section 57 of the Act, by which revenue is aggrieved and filed these appeals. Apart from this, what is significant in the present case is that the respondent-assessee Tehri Hydro Development Corporation, a Government of India Enterprise, was doing its construction activities and not business activities during the relevant period and that is why the receipts from the employees and oustees in Dam area was treated by CIT(A) and ITAT, as capital receipts.

In Tuticorin Alkali Chemicals and Fertilizers Ltd., Madras Vs. Commissioner of Income Tax, Madras, , it has been held by the Apex court that interest income is always revenue in nature unless it is received by way of damages or compensation, but it has been further held that the assessee may be entitled to capitalize the interest payable by it. It is also observed by the Apex court in said case that expenditure would be taxable as indicated for the purposes of business if the assessee''s business had commenced. (In the present case, the THDC was still at the stage of construction).

In Commissioner of Income Tax Bihar-II Patna Vs. Bokaro Steel Limited, Bokaro, , in similar circumstances, the Apex court has held as under:

We have to consider whether the amounts received by the assessee under these five heads can be treated as income of the assessee for the relevant assessment years. The Tribunal has held that all these amounts (under items Nos. 1 to 4) received by the assessee have gone to reduce the cost of construction. These are in the nature of capital receipts which can be set off against the capital expenditure incurred by the assessee during the relevant assessment years. This view has been upheld by the High Court and hence the department has come by way of the present appeals.

During these assessment years, the respondent-assessee had invested the amounts borrowed by it for the construction work which were not immediately required, in short-term deposits and earned interest. It has been held in these proceedings that the receipt of interest amounts to income of the assessee from other sources. The assessee has not filed any appeal from this finding which is given against it. In any case, this question is now concluded by a decision of this Court in Tuticorin Alkali Chemicals and Fertilizers Ltd., Madras Vs. Commissioner of Income Tax, Madras, . Hence, we are not called upon to examine that issue.

We will take the first three heads under which the assessee has received certain amounts. These are, the rent charged by the assessee to its contractors for housing workers and staff employed by the contractor for the construction work of the assessee including certain amenities granted to the staff by the assessee. Secondly, hire charges for plant and machinery which was given to the contractors by the assessee for use in the construction work of the assessee, and thirdly, interest from advances made to the contractors by the assessee for the purpose of facilitating the work of construction. The activities of the assessee in connection with all these three receipts are directly connected with or are incidental to the work of construction of its plant undertaken by the assessee. Broadly speaking, these pertain to the arrangements made by the assessee with its contractors pertaining to the work of construction. To facilitate the work of the contractors, the assessee permitted the contractors to use the premises of the assessee for housing its staff and workers engaged in the construction activity of the assessee''s plant. This was clearly to facilitate the work of construction. Had this facility not been provided by the assessee, the contractors would have had to make their own arrangements and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee has provided these facilities. The same is true of the hire charges for plant and machinery which was given by the assessee to the contractors for the assessee''s construction work. The receipts in this connection also go to compensate the assessee for the wear and tear on the machinery. The advances which the assessee made to the contractors to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitch as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts are arrangements which are intrinsically connected with the construction of its steel plant. The receipts have been adjusted against the charges payable to the contractors and have gone to reduce the cost of construction. They have, therefore, been rightly held as capital receipts and not income of the assessee from any independent source.

In view of the principle of law laid down by the Apex court in Bokaro Steel Ltd. case (supra), quoted above, we do not find any error of law committed by the ITAT in allowing the deductions to the extent of 2.5% towards administrative costs on the interest income on short term deposits, and in further holding that the interest and rent received from its employees and oustees in Dam area had a nature of capital receipts, as the construction process was still on and the respondent-assessee had yet not started the business activity.

Questions of law stand answered, accordingly.

For the reasons, as discussed above, all the three appeals are dismissed. No order as to costs.