Case: Commissioner of Income Tax Bihar-II Patna Vs. Bokaro Steel Limited

1. Civil Appeal Nos. 2544-45 of 1988 pertain to Assesment Year 1972-73 while Civil Appeal Nos. 642-48 of 1989 pertain to Assesment Years 1965-66 to 1971-72. The Tribunal had referred the following questions to the High Court for determination under s. 256(1) of the IT Act, 1961At the instance of the Revenuent Year 1965-66Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the hire charges of Rs. 56 received by the assessee-company for letting out the plant and machinery to the contractors were not taxable?nt Year 1966-67.(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the hire charges of Rs. 7, 224 received by the assessee-company for letting out of the plant and machinery to the contractors were not taxable?(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the royalty of Rs. 8, 530 received from the contractor was not taxable as it was of capital nature and not revenue?nt Year 1967-68(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the hire charges of Rs. 12, 195 received by the assessee-company for letting out of the plant and machinery to the contractors were not taxable?(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the royalty of Rs. 1, 22, 902 received from the contractors was not taxable as it was capital in nature and not revenue?nt Year 1968-69(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the hire charges of Rs. 17, 913 received by the assessee-company for letting out of the plant and machinery to the contractors were not taxable?(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the royalty of Rs. 65, 799 received from the contractor was not taxable as it was of capital in nature and not revenue?nt Year 1969-70(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the hire charges amounting to Rs. 46, 342 received by the assessee-company for letting out of the plant and machinery to the contractors were not taxable?(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the royalty of Rs. 25, 928 received from the contractors was not taxable as it was of capital nature and not revenue?nt Year 1970-71(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the interest received by the assessee-company on the amount of Rs. 7, 50, 502 advanced to the contractors was not taxable?(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the hire charges of Rs. 182 received by the assessee-company for letting out the plant and machinery to the contractors were not taxable?(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the royalty of Rs. 13, 052 received from contractors is not taxable as it is of capital nature and not revenue?(4) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding miscellaneous of Rs. 49 as not taxable?nt Year 1971-72(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the interest received by the assessee-company on the amount of Rs. 14, 98, 993 advanced to the contractor was not taxable?(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the hire charges of Rs. 3, 68, 442 received by the assessee-company for letting out the plant and machinery to the contractors were not taxable?(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the royalty of Rs. 6, 504 received from the contractors is not taxable as it is capital in nature and not revenue?(4) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the interest received amounting to Rs. 7, 39, 332 by the assessee-company on the amount advanced to Hindustan Steel Ltd. is not taxable?Assesment Year 1972-73 a consolidated reference was made at the instance of the Revenue as well as the assessee and the following questions were referred(1) Whether, on the facts and in the circumstances of the case, the receipts arising from the letting out of the quarters to the outsiders, such as employees of the contractors engaged in the construction of the plant can be treated as the income of the assessee and/or, in any event, should be adjusted against the cost of construction so as to reduce such cost?(2) Whether, on the facts and in the circumstances of the case, the receipts from the letting out of the properties to outsiders, such as the employees of the contractors engaged in the construction of the plant are to be assessed as income from property under s. 22 of the IT Act, 1961, or the said income should be assessed under s. 28 of the IT Act, 1961, as business income or in any event, under s. 56 of the IT Act, 1961, as income from other sources?(3) Whether, on the facts and in the circumstances of the case, the receipts arising from the letting out of the quarters to the outsiders, such as employees of the contractors engaged in the construction of the plant can be treated as the income of the assessee and/or, in any event, should be adjusted against the cost of construction so as to reduce such cost?(4) Whether, on the facts and in the circumstances of the case, the interest received from the bank on short-term deposits is liable to be assessed as the income of the assessee or such interest should reduce the cost of construction of the assessee and, therefore, would not constitute the income of the assessee?. The assessee is a corporation wholly owned by the Government of India. It was assessed in the status of a company. The assessee-company, Bokaro Steel Ltd., was incorporated in January, 1964. Its object was to construct and own an integral iron and steel works. During the assessment years under consideration, the work of construction of the companys factory and installation of the plant was in the process of completion. The company had not started any business during the assessment years in question.(1) During this period the company had given to the contractors quarters for the residence of the staff and workers employed by the contractors who had been engaged by the assessee-respondent for carrying out the work of construction. The assessee charged the contractors for the use of the quarters so given to the contractors for the residence of his workmen who were engaged in the construction activity of the assessees plant(2) Secondly, during the assessment years in question the assessee had entered into supplementary agreements with its contractors under which the assessee had made certain advances to the contractors to enable them to execute the large scale construction work smoothly. The assessee had agreed to advance these advances to the contractors on payment of interest. The contractors thus did not have to raise funds from outside agencies. For the assessee-company, this arrangement primarily meant payment in advance of the amounts of the contractors bills for which the assessee-company had charged interest. This interest was later adjusted against the dues of the contractors(3) For the purpose of the construction work the assessee had given on hire certain plant and machinery to the contractors. Against the letting of plant and machinery the assessee received from the contractors income in the form of hire charges. It was not the business of the assessee-company to let out plant and machinery to others. The assessee-company permitted its use only to its own contractors for the construction work done by the contractors for the assessee-company. The Tribunal has found that the assessee-company charged hire charges for such use of plant and machinery in order to cover the maintenance and wear and tear of the plant and machinery belonging to the assessee(4) The assessee-company allowed the contractors to use the stones lying on the assessees land for construction work. The stones lying on the assessees companys land were the capital assets of the assessee-company. The assessee charged the contractor a certain amount by way of royalty for excavation and use of these stones for construction work(5) The assessee had, during the asst. yr. 1971-72 shown in its accounts as income from interest a certain sum said to have been accrued to the assessee from Hindustan Steel Ltd. for eight locomotives supplied by the assessee-company to Hindustan Steel Ltd. The assessee-company, however, reversed this entry in the next year because eight new locomotives were supplied by Hindustan Steel Ltd. to the assessee and no interest income actually accrued to the assesseeThe Tribunal has held that all these amounts (under items 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.

Court's reasoning:
4. 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 & Fertilisers Ltd. vs. CIT (SC). Hence, we are not called upon to examine that issue.5. 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 contractor, the assessee permitted the contractor to use the premises of the assessee for housing its staff and workers engaged in the construction activity of the assessees 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 contractor for the assessees 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 contractor 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.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 utilisation of various assets of the company and the payments received for such utilisation 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. In the case of Challapalli Sugars Ltd. vs. CIT (SC) : TC 17R.834, this Court examined the question whether interest paid before the commencement of production by a company on amounts borrowed for the acquisition and installation of plant and machinery would form a part of the actual cost of the asset to the assessee within the meaning of that expression in s. 10(5) of the Indian IT Act, 1922, and whether the assessee will be entitled to depreciation allowances and development rebate with reference to such interest also. The Court held that the accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income8. The same reasoning would apply to royalty received by the assessee-company for stone, etc. excavated from the assessee-companys land. The land had been allowed to be utilised by the contractors for the purpose of excavating stones to be used in the construction work of assessees steel plant. The cost of the plant to the extent of such royalty received, is reduced for the assessee. It is, therefore, rightly taken as a capital receipt9. In the asst. yr. 1971-72, the assessee had shown in its books of accounts a sum of Rs. 7, 39, 232 as income from interest received from Hindustan Steel Ltd. for the eight locomotives supplied by the assessee-company to them. The entry in this regard was reversed in the next year since Hindustan Steel Ltd. had replaced the eight locomotives lent by the assessee-company to it by new ones. The entire nature of the transaction was changed between the parties. There was a resolution of the assessee-company in this regard and the income from interest did not result at all as the original agreement ceased to be operative ab initio. The entry in the books which was made was about a hypothetical income which did not materialise and the entry was reversed in the next year. Both the Tribunal as well as the High Court have held that since this entry reflected only hypothetical income, it could not be brought to tax as income. Only real income can be brought to tax.11. In the present case also the entry which was initially made as interest was reversed the next year because in fact the nature of the transaction was changed and the assessee did not receive any real income. The High Court has, therefore, rightly held this entry as not reflecting the real income of the assessee and hence not exigible to income-tax.