The Delhi High Court recently cancelled an income tax addition of ₹31 Lakh based on the accrual of interest from surplus funds parked in fixed deposits, earmarked for the acquisition of a coal mine.
An Income Tax Appeal was filed before the Delhi High Court by the Principal Commissioner of Income Tax – 4 against International Coal Ventures Ltd., a joint venture company formed by five public sector undertakings for ensuring adequate coal supply for their promoter companies.
The Respondent was seeking to acquire and develop an overseas coal mine during the Assessment Year (A.Y.) 2012-13 and sought funds from their promoters, undertakings namely, Steel Authority of India Limited (SAIL), Coal India Limited (CIL), Rashtriya Ispat Nigam Limited (RINL), National Mining Development Corporation Limited (NMDC), and National Thermal Power Corporation Limited (NTPC) for the same.
International Coal Ventures deposited ₹157 Crore received from their promoters to a fixed deposit, yielding ₹11,45,19,580/- as interest during A.Y. 2012-13.
Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here
Subsequently, the Assessee filed their returns of income for A.Y. 2012-13 as “NIL” contested by the AO who noted that the Assessee had earned an amount of ₹11,45,92,550/- in respect of the funds received from its promoters and had even paid out an amount of to ₹11,14,73,651/- from the accrued interest.
The key issue pertained to ₹157 Crores given by RINL to ICVL for the purchase of an overseas coal mine which did not fructify; however, the amount was retained with a bank account maintained in the hope that another similar deal would come through. The plan was later abandoned following which ICVL refunded ₹156 Crore and accrued interest from the amount to RINL.
ICVL, represented by Divyanshu Agarwal and Aneesh Mittal, submitted before the Delhi High Court that the funds had been kept in short-term fixed deposit in the bank and had been earmarked for the acquisition of a coal mine.
Meanwhile the Revenue, represented by Sanjay Kumar, argued that the interest amount received by the Respondent constituted surplus income taxable under Section 56 of the Act.
Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here
A Division Bench of Acting Chief Justice Vibhu Bakhru and Justice Swarana Kanta Sharma delved into the principles governing the constitution of capital and revenue receipts. Referring to distinguishing principles established by the Supreme Court in CIT, Bihar II, Patna v. Bokaro Steels Limited (1999) and Tuticorin Alkali Chemicals and Fertilizers Limited,Madras v. CIT, Madras (1997) in deciding that the interest received may be treated as capital receipt towards reduction of the capital cost of the asset.
The Delhi High Court affirmed that the interest-bearing funds deposited by ICVL are not ‘surplus funds’ but funds that were called for and earmarked for the specific purpose of acquiring a coal mine. Consequently, the appeal was answered in favour of ICVL and against the Revenue.
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