(Prayer: Appeal filed under Section 260-A of the Income Tax Act against the order dated 7.7.05 passed by the Income Tax Appellate Tribunal, Chennai 'A' Bench, Chennai, made in ITA No.1463/Mds/2000.)
R. Sudhakar, J.
1. Aggrieved by the order of the Tribunal in allowing the appeal filed by the Revenue, the appellant/assessee is before this Court by filing the present appeal. This Court, vide order dated 11.6.07, while admitting the appeal, framed the following questions of law for consideration :-
"i) Whether the Tribunal is justified in concluding that the amount of Rs.12,50,000/= received towards cost of tender documents was correctly assessed by the respondent under the head "other sources" on the facts and circumstances of the case?
ii) Whether the Tribunal is correct in confirming the assessment of the said receipt under the head "income from other sources" by the respondent in the light of the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd., even though the subsequent decision rendered by the Supreme Court distinguishing the above case was followed by the first appellate authority in deleting the said addition?"
2. The case of the appellant/assessee is that while it intended to produce power, floated a global tender and towards sale of tender documents, during the pre-commencement period, received a sum of Rs.12,50,000/= as part of the tendering process. According to the Department, the said amount was to be treated as revenue receipt, while on the other hand, the assessee contended that the tender documents were supplied as part of the pre-commencement of the power project, which also includes consultancy charges and, therefore, it was capital expenditure. The Department, in support of their stand, relied on the decision of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. - Vs - Commissioner of Income Tax (1997 (227) ITR 172 (SC)), on the contrary the assessee/appellant relied upon the decision of the Supreme Court in Commissioner of Income Tax - Vs - Bokaro Steel Ltd. (1999 (236) ITR 315 (SC)). The case was adjudicated and an assessment order was passed negativing the stand of the assessee/appellant.
3. The assessee/appellant, aggrieved by the said order, preferred appeal to the CIT (Appeals), who after considering the case, held in favour of the assessee/appellant following the decision of the Supreme Court in Bokara Steel case (supra). Aggrieved by the said order, the Department preferred appeal before the Tribunal. The Tribunal, following the decision of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers case (supra), allowed the appeal and held in favour of the Department against which the assessee/appellant is before this Court by filing the present appeal.
4. Heard Mr.Sridhar, learned counsel appearing for the appellant/assessee and Mr.T.R.Senthilkumar, learned standing counsel appearing for the respondent/Department and perused the materials placed in the typed set of documents as also the judgments relied on by the learned counsel on either side which have been referred by the authorities below in coming to their respective findings.
5. The short issue that arise for consideration in this appeal is "Whether on the admitted facts, the receipt of amount on the sale of tender documents should be treated as income from other sources or as capital receipt?".
6. For better appreciation of the case on hand, the reasoning of the Tribunal, as found in para-3 of its order, is extracted hereinbelow :-
"3. We have considered the rival submissions made by both the sides and perused the materials available on record. It is an admitted position that the receipt by way of sale of tender documents is pre commencement receipt. There is no strong denial of the above fact. When it is pre commencement receipt the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd., cited supra, is directly on the point at issue. The decision of the Hon'ble Supreme Court in the case of Bokaro Steel Ltd., on which the Commissioner (Appeals) relied on, is distinguishable as the decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd., has directly dealt with the pre commencement expense and receipts. We are of the view that the order of the Assessing Officer bringing the receipt as income from other sources is perfectly justified and the deletion of the same by the Commissioner (Appeals) is not in accordance with law. We therefore set aside the order of the Commissioner (Appeals) and restore that of the Assessing Officer."
7. in Tuticorin Alkali Chemicals & Fertilizers case (supra), the issue before the Supreme Court was whether interest earned from borrowed capital, lying idle, should be treated as income from other sources or capital is in nature. In the facts of the said case, the Supreme Court was of the view that the company had surplus funds in its hands and in order to earn income out of the surplus funds, it invested the amounts for the purpose of earning interest and, therefore, held that it is revenue in nature and has to be taxed accordingly. The relevant portion is extracted hereinbelow for better clarity:-
"In the case before us, the company had surplus funds in its hands. In order to earn income out of the surplus funds, it invested the amount for the purpose of earning interest. The interest thus earned is clearly of revenue nature and will have to be taxed accordingly. The accountants may have taken some other view but accountancy practice is not necessarily good law. In B. S. C. Footwear’s case (1972 (83) ITR 269), the House of Lords had no hesitation in holding that the accounting practice for calculating its profit followed by the assessee and accepted by the Revenue for 30 years could not be treated as sanctioned by law and was not acceptable for the purpose of computation of taxable income."
8. In the case of Bokara Steel (supra), the Supreme Court found that the activities of the assessee was in connection with three receipts, viz., 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; 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 finally the interest from advance made to the contractors by the assessee for the purpose of facilitating the work of construction of its plant undertaken by the assessee. The activities of the assessee in connection with all these three receipts were directly connected with or incidental to the work of construction of its plant undertaken by the assessee. 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 hitch as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts were arrangements which were intrinsically connected with the construction of its steel plant. The receipts had been adjusted against the charges payable to the contractors and had gone to reduce the cost of construction. While considering this issue, the Supreme Court had occasion to take into consideration the judgment of the Delhi High Court in the case of ACIT - Vs - Indian Drugs & Pharmaceuticals (1983 (141) ITR 134 (Del.)) and endorsed the view of the Delhi High Court and, finally it was held that the receipts were capital receipts and not income of the assessee from any independent source. The relevant portion of the decision of the Supreme Court is extracted hereinbelow for better appreciation :-
"In the case of Addl. CIT 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."
9. A reading of the order of the CIT (Appeals) as also the Tribunal would reveal that the CIT (Appeals) has relied on the decision of the Supreme Court in Bokaro Steel case (supra), more particularly, para-6, which has been extracted above, to come to the conclusion that in the case on hand, the receipt by way of sale of tender documents, even at the pre-commencement stage is inextricably linked to the process of setting up of business and, is therefore, capital in nature. Similar was the view of the Delhi High Court in the case of Indian Drugs & Pharmaceuticals (supra), which view has been endorsed by the Supreme Court.
10. However, a reading of the order of the Tribunal would reveal that there can be no iota of doubt that the Tribunal failed to appreciate the finding of the Delhi High Court, in similar set of facts, which was ultimately endorsed by the Supreme Court that the receipts which are inextricably linked to the process of setting up of business could not be construed in any other manner other than in the nature of capital receipt.
11. The Tribunal fell in error in merely stating that the decision in Bokaro Steel case (supra) is distinguishable from Tuticorin Alkali Chemicals & Fertilizers case (supra), without even understanding the scope of the decision in Bokaro Steel case (supra). The admitted fact in this case is that the amount received by the a
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ppellant/assessee in sale of tender documents at the pre-commencement stage is in relation to the establishment of the unit and, therefore, it could be clearly stated that it is intrinsically connected with the purpose of setting up of the unit. This Court is in agreement with the view expressed by the Supreme Court in Bokaro Steel case (supra), which has affirmed the view of the Delhi High Court in Indian Drugs & Pharmaceuticals case (supra) and is of the considered view that the said decision is squarely applicable to the facts of the present case. Accordingly, the first substantial question of law is answered in favour of the appellant/assessee and against the respondent/Revenue. 12. In view of the answer to the first question of law, the second question of law becomes academic and does not require any consideration at the hands of this Court and, therefore, the same is not dealt with. 13. In the result, the appeal is allowed setting aside the order of the Tribunal dated 7.7.05 made in ITA No.1463/Mds/2000. However, in the circumstances of the case, there shall be no order as to costs.