THE HON’BLE SRI JUSTICE V.V.S.RAO AND 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 ... Appellant And M/s.Sri Rayalaseema Green Energy Limited, Hyderabad ...Respondent THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE 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 the Income Tax Act, 1961 (the Act), the brief facts of the matter are as follows. 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 sanction letter of the lender the assessee was required to utilize Rs.1,400 lakhs towards project cost and the balance Rs.100 lakhs towards margin money for depositing with the Bank for obtaining bank guarantee. It did so and earned interest of Rs.18,71,591/- during the construction period. In its return of income for the assessment year 2001-02 it declared ‘Nil’ income but subsequently it filed a revised return declaring an income of Rs.3,166/-. In this return it set off the interest earned on the Bank deposit against interest accrued in a sum of Rs.18,71,591/-. During the scrutiny, the assessee 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, relied on the decision of the Supreme Court in Turicorin Alkali Chemicals & Fertilisers Ltd v CIT[1] and added the interest to the return duly demanding tax as well as interest under Section 234A and Section 234B of the Act. The Commissioner of Income Tax (Appeals) confirmed the assessment, aggrieved by which the assessee successfully filed appeal being ITA No.1008/Hyderabad/2004 which was allowed by the ITAT, Hyderabad Bench-B on 29.6.2007. The Tribunal followed a subsequent judgment of the Supreme Court in CIT v Bokaro Steel Ltd[2]. The Senior Standing Counsel for the Income Tax would contend that the Tribunal was in error in applying the ratio in Bokaro Steel and that the Tribunal ought to have applied the decision in Tuticorin Alkali Chemicals. We have perused the order of the Tribunal. After analyzing the decision of the Supreme Court in Tuticorin Alkali Chemicals, which was earlier in point of time, as well as the subsequent decision in Bokaro Steel, the Tribunal held that the deposit by the assessee with the Bank was an obligation which it was to fulfil in terms of the loan sanctioned to it; the deposits were not placed with the Bank in order to earn interest and earning of interest was incidental; and gross interest cannot be taxed but net interest as shown by the assessee can only be taxed. The fact that the interest earned on the Bank deposit was set off against the interest paid also weighed with the Tribunal. This finding of the Tribunal and the application of the principle in Bokaro Steel in our opinion does not warrant any appellate consideration under Section 260A of the Act. In Bokaro Steel the Supreme Court was concerned with the rent charged by the assessee from its contractors, the hire charges for plant & machinery which were given to the contractors and interest from advances made to the contractors by the assessee for the purpose of facilitating the work. Distinguishing Tuticorin Alkali Chemicals, their Lordships held as follows. 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 their 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 hitches 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 this case also there is no dispute that as per the sanction letter of IREDA the assessee was obliged to keep Rs.100 lakhs as a deposit in the Bank towards margin money and the interest thereon was duly adjusted towards interest paid by the assessee and, therefore, it is only a capital receipt and not interest income exigible to tax. The appeal, therefore, is misconceived and is liable to be dismissed. In the result, the appeal fails and is accordingly dismissed. No costs. ________________ (V.V.S. RAO, J) _____________________ (SANJAY KUMAR, J) November 15, 2011 YS [1] (1997) 6 SCC 117 : (1997) 227 ITR 172 (SC) [2] (1999) 1 SCC 645 : (1999) 236 ITR 315 (SC)