The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) held that receipts from construction of plant and machinery are eligible for adjusting against the expenses on capital work in progress.
The Assessee, Matix Fertilizers and Chemicals engaged in the business of manufacturing /production and sale of fertilizers. The company set up a plant for production of ‘ammonia’ and ‘urea’ at Industrial in West Bengal. For setting up of said plant, the assessee awarded an ‘Erection, Procurement and Commissioning contract to M/s Essar Project India Ltd. (EPIL) for a lump fixed price of Rs.3200 cr procurement, supply, erection, commissioning, testing of machinery and wrap up guarantee etc.
The assessee process technology license agreement with ‘Saipem S.p.A’, Italy, ‘Kellogg Brown & Root Inc.’ USA. This project was supervised by ‘M/s Project and Development India Ltd’. (PDIL). The project was funded by a consortium of Banks, an ‘IDBI’ Bank.
A search was carried out in case of assessee , who filed return of income under Section 153A of the Income Tax Act, 1961.Accordingly the assessment was completed by making addition of interest income on margin money kept with Bank/Financial Institution which was held the Assessing Officer as taxable under the head ‘income from other sources.
Aggrieved by the order assesee filed an appeal before the CIT(A). The CIT(A) allowed the appeal filed by the assessee . Thereafter the revenue filed an appeal before the tribunal.
During the adjudication Ajay R. Singh, the counsel for assessee relied upon the decision of CIT v. Bokaro Steel Ltd argued that”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”
Sanyogita Nagpa, Department representatives supported the decision of assessing officers.
The tribunal observed that the Assessing Officer has rejected the contention of the assessee that interest income is derived from or attributed to the activity of the construction of the project and therefore the same is eligible to be judged against the capital work-in-progress.
Further the bench observed that the supreme court in case of Bokaro Steel Ltd has held that when assessee receives any amount which is inextricably linked to the process of construction of plant and machinery such receipts goes to the root cause of asset and thus eligible for adjusting against the expenses on capital work in progress.
After analyzing the submission of both parties, the bench comprising Sandeep Singh Karhail (Judicial Member) and Om Prakash Kant, (Accountant Member) held that receipts from construction of plant and machinery are eligible for adjusting against the expenses on capital work in progress.
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