Commissioner
of Income-Tax Bihar-II, Patna Vs. Bokaro Steel Limited, Bokaro
[1998] INSC 632 (18
December 1998)
Sujata
V. Manohar, & G.B.Pattanaik., Mrs. Sujata V. Manohar, J.
Civil
Appeal Nos. 2544-45 of 1988 pertain to assessment year 1972-73 while Civil
Appeal Nos. 642-48 of 1989 pertain to assessment years 1965-66 to 1971-72. The
Income-tax Appellate Tribunal had referred the following questions to the High
Court for determination under Section 256(1) of the Income-tax Act, 1961:- At
the instance of the Revenue:
"Assessment
year 1965-66:
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.56 received by the assessee-company
for letting out the plant and machinery to the contractors were not taxable?
Assessment
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?
Assessment
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 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?
Assessment
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?
Assessment
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?
Assessment
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.13,502 received from contractors in
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?
Assessment
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 M/s. Hindustan Steel Ltd. is
not taxable?"
For
the assessment 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 section 22 of the Income-tax Act, 1961, or the said
income should be assessed under section 28 of the Income-tax Act, 1961, as
business income or in any event, under section 56 of the Income-tax 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, M/s 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 company's 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 assessee's 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 asseessee-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 assessee's
land for construction work.
The
stones lying on the assessee's company's 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 assessment year 1971-72 shown in its accounts as
income from interest a certain sum said to have been accrued to the assessee
from M/s Hindustan Steel Limited for eight locomotives supplied by the assessee-company
to M/s Hindustan Steel Limited. The assessee-company, however, reversed this
entry in the next year because eight new locomotives were supplied by M/s
Hindustan Steel Limited to the assessee and no interest income actually accrued
to the assessee.
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 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. v. Commissioner
of Income-tax ( [1997] 227 ITR 172). 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 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 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 had 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 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
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.
In the
case of Addl. Commissioner of Income-tax, New Delhi V. Indian Drugs and
Pharmaceuticals ltd. ([1983] 141 ITR 134), the Delhi High Court considered a
case where the work of construction of the factory of the assessee was in
progress and production had not commenced. receipts from sale of tender forms
and supply of water and electricity to the contractors engaged in construction
as also receipts on account of sale of stones, boulders, grass and trees were
held to be receipts not from independent sources but were considered as
inextricably linked with the process of setting up of business. These were
directly related to the capital structure of business and were held to be
capital in nature. We agree with this view taken by the Delhi High Court.
The
appellant, however, relied upon the decision of this Court in Tuticorin Alkali
Chemicals and Fertilizers Ltd. v. Commissioner of Income-tax (supra). That case
dealt with the question whether investment of borrowed funds prior to
commencement of business, resulting in earning of interest by the assessee
would amount to the assessee earning any income. This Court held that if a
person borrows money for business purposes, but utilizes that money to earn
interest, however temporarily, the interest so generated will be his income.
This income can be utilized by the assessee whichever way he likes. Merely
because he utilized it to re-pay the interest on the loan taken, will not make
the interest income as a capital receipt. The department relied upon the observations
made in that judgment (at page 179) to the effect that it the company, even
before it commences business, invests surplus funds in its hands for purchase
of land or house property and later sells it at profit, the gain made by the
company will be assessable under the head "capital gains". Similarly,
if a company purchases rented house and gets rent, such rent will be assessable
to tax under Section 22 as income from house property. Likewise, the company
may have income from other sources. The company may also, as in that case, keep
the surplus funds in short-term deposits in order to earn interest. Such
interest will be chargeable under Section 56 of the Income-tax Act. This Court
also emphasised the fact that the company was not bound to utilize the interest
so earned to adjust it against the interest paid on borrowed capital. The
company was free to use this income in any manner it liked. 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. v. Commissioner of
Income-tax, A.P. ([1975] 98 ITR 167), 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 Section 10(5) of the Indian Income-tax 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 off 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 of 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 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 income.
The
same reasoning would apply to royalty received by the assessee company for
stone etc. excavated from the assessee company's land. The land had been
allowed to be utilized by the contractors for the purpose of excavating stones
to be used in the construction work of assessee's 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 receipt.
In the
assessment year 1971-72, the assessee had shown in its books of accounts a sum
of Rs.7,39,232/- as income from interest received from M/s. 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 M/s. 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.
In
support of this finding, the assessee has drawn our attention to a decision of
this Court in Godhra Electricity Co. Ltd. v. Commissioner of Income-tax ([1997]
225 ITR 746) where the Court, inter alia, examined the case system and the
mercantile system of accounting in the context of hypothetical income. The
computation of income is made in accordance with the method of accounting
regularly employed by the assessee. It may be either the case system where
entries are made on the basis of actual receipts and actual outgoings or
disbursements; or it may be the mercantile system where entries are made on
accrual basis, that is to say, accrual of the right to receive payment and the
accrual of the liability to disburse or pay.
However,
in both cases unless there is real income, there cannot be any income-tax.
Considering the facts before it, the Court said that although the assessee-company
was following the mercantile system of accounting and had made entries in the
books regarding enhanced charges for the supply of electricity made to its
consumers, no real income had accrued to the assessee-company in respect of
those enhanced charges in view of the fact that soon after the assessee-company
decided to enhance the rate, representative suits were filed by the consumers
which were decreed by the court and ultimately, after various proceedings which
took place, the assessee-company was not able to realise the enhanced charges.
The Court held that no real income had accrued to assessee-company and hence
the entries in respect of enhanced charges did not reflect the real income of
the assessee and could not be brought to tax by the Income-tax Officer.
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.
In the
premise, the appeals are dismissed. There will, however, be no order as to
costs.
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