Roads & Bridges Development Corporation of Kerala Limited v. Commissioner of Income Tax (I.T.A. No. 376 of 2010)

# **IN THE HIGH COURT OF KERALA AT ERNAKULAM** **THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON FRIDAY, THE 6TH DAY OF JULY 2018 / 15TH ASHADHA, 1940** **ITA.No. 376 of 2010** **ITA.1013/2008 of INCOME TAX APPELLATE TRIBUNAL,COCHIN BENCH, COCHIN** ## **APPELLANTS/RESPONDENT IN ITA :** **ROADS & BRIDGES DEVELOPMENT CORPORATION, OF KERALA LIMITED, 2ND FLOOR, PREETHY BUILDING, M.V. ROAD, PALARIVATTOM, COCHIN-682025.** **BY ADVS.SRI.E.K.NANDAKUMAR SRI.P.BENNY THOMAS SRI.P.GOPINATH SRI.K.JOHN MATHAI SMT.PREETHA S.NAIR** ## **RESPONDENT/APPELLANT IN RTA :** *** ASST. COMMISSIONER OF INCOME TAX, CIRCLE-I(3), ERNAKULAM. (CORRECTED)** - **ADDRESS OF THE RESPONDENT IS CORRECTED AS:** **COMMISSIONER OF INCOME TAX, I.S. PRESS ROAD, COCHIN – 682018.** - **ADDRESS OF THE RESPONDENT IS CORRECTED AS PER ORDER DATED 6.7.2018 IN I.A.757/2011.** **BY ADVS. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX** **THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 06-07-2018, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** **EL** **21.7.2018** **ITA.No. 376 of 2010** ## **APPENDIX** ## **PETITIONER(S)' ANNEXURES** **ANX. A TRUE COPY OF THE ASSESSMENT ORDER DATED 30.11.2006 ANX. B TRUE COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) DATED 30.9.2008 ANX. C TRUE COPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, DATED 31.5.2010** ## **RESPONDENT(S)' ANNEXURE** **NIL** **TRUE COPY** **P.S. TO JUDGE** **EL** **23.7.2018** ## **K. VINOD CHANDRAN & ASHOK MENON, JJ. ---------------------------------I.T.A. No.376 of 2010** ## **---------------------------------Dated this the 6[th] day of July, 2018** ## **JUDGMENT** ## K. Vinod Chandran, J. The issue raised in the appeal is as to the nature of the interest received, on mobilisation advance made by the assessee to its contractors, whether it is a capital income or a revenue income. The revenue categorised it as a revenue income in the assessment order, which was taken up in appeal. In first appeal relying on _**Commissioner of Income tax v. Bokaro Steel Ltd. [1999 236 ITR 315]**_ , the assessment order was overturned to the extent of finding the interest income received to be a capital income. The First Appellate Authority relied on _**Tuticorin Alkali Chemicals And**_ **I.T.A. No.376 of 2010** **2** _**Fertilisers Ltd. v. Commissioner of Income Tax**_ _**[1997 227 ITR 172]**_ and _**Commissioner of Income Tax v. Cochin Shipyard Ltd. [(2000) 158 CTR (Ker) 208]**_ . The Tribunal, though noticed _**Bokaro Steel Ltd.**_ [supra], did not consider the effect of the said decision. 2. The substantial questions of law arising are as follows: _“(i) Whether the Tribunal was right in having affirmed the order of the Assessing Officer, treating the interest income received by the assessee on mobilisation advance to the contractors as revenue income, especially when the said interest income was adjusted in the final bills of the contractor and resulted in reduction of the cost of construction?_ _(ii) Ought not the Tribunal have relied on_ _**Bokaro Steel Ltd.** [supra] to find the interest income received on mobilisation advance to be a capital receipt?”_ 3. We need not labour much on the facts, since **I.T.A. No.376 of 2010** **3** the interest income received is on mobilisation advance given to the contractors to ensure smooth commencement and completion of the work. At the end of the construction work, on payment of the entire bills, there is deduction made with respect to the interest accrued on such mobilisation advance along with deduction of advance granted. The revenue found the said income to be assessable as a revenue receipt in the subject year. 4. _**Tuticorin Alkali Chemicals And Fertilisers Ltd.**_ [supra] was in the circumstances of a Company, which was on the process of being set up; having taken term loans from various Banks and financial institutions, part of which borrowed funds, were parked in short-term deposits; pending its utilisation in the setting up of the factory. The short-term deposits earned interest income, which was claimed as capital expenditure, since the **I.T.A. No.376 of 2010** **4** accrual of interest was before the setting up of the factory and according to the assessee was applied in setting up the factory. The Hon'ble Supreme Court held that interest income is always of a revenue nature, unless it is received by way of damages or compensation. If the capital of a Company is fruitfully utilized instead of being kept idle, the income thus generated is of a revenue nature and not an accretion to capital, was the declaration. 5. We find that a Division Bench of this Court in _**Cochin Shipyard Ltd.**_ [supra] followed the aforesaid judgment. We also notice that _**Cochin Shipyard Ltd.**_ was on identical facts as in the present case, wherein the assessee had entrusted work to the contractors and had advanced amounts to such contractors, for smooth commencement and completion of civil and other construction work. **I.T.A. No.376 of 2010** **5** The Division Bench held that the interest received on such loans was revenue receipt. We would have been normally bound by the said precedent and would have been obliged to follow the same, but for the decision of the Hon'ble Supreme Court, of a three judge bench in _**Bokaro Steel Ltd.**_ [supra]. _**Bokaro Steel Ltd.**_ which distnguished _**Tuticorin Alkali Chemicals And Fertilisers Ltd.**_ [supra] [again a three Judge Bench] was not noticed by the Division Bench of this Court in _**Cochin Shipyard Ltd.**_ 6. _**Bokaro Steel Ltd.**_ [supra] considered many issues, three of which are relevant to the present case. Therein there was a construction of plant for which contractors were appointed. The awarder/ assessee received income from the contractors by way of (i) rent for providing accommodation to the employees of the contractor, (ii) interest on mobilisation funds given to the contractor and **I.T.A. No.376 of 2010** **6** (iii) the hire charges for plant and machinery given to the contractors for carrying out the construction activity. The Hon'ble Supreme Court first took up these heads for consideration. It was held that 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 plant undertaken by the assessee. These were found to be arrangements made by the assessee with its contractors pertaining to the work of construction. All these arrangements were clearly to facilitate the work of construction and failure to provide these would have resulted in escalation of the charges of the contractors for the construction work. 7. The advances, which the assessee made to the contractors to facilitate the construction activity of putting together a very large project was “ _as_ **I.T.A. No.376 of 2010** **7** _much to ensure that the work of the contractors proceeded without any financial hitch as to help the contractors_ ”. These facilities were found to be intrinsically connected with the construction of the steel plant. They were found to be rightly held as capital receipts and not income of the assessee from any independent source. In such circumstances, on identical facts the Hon'ble Supreme Court having held so, we have to follow the Hon'ble Supreme Court, though on facts as available in the instant appeal, this Court has held otherwise in _**Cochin Shipyard Ltd.**_ At the risk of reiteration _**Bokaro Steel Ltd.**_ specifically referred to _**Tuticorin Alkali Chemicals And Fertilisers Ltd.**_ and distinguished it on facts, finding the interest received to be earned from advances received by the assessee for the purpose of setting up a factory, which was held to be a revenue receipt and not a **I.T.A. No.376 of 2010** **8** capital receipt. 8. On the above reasoning, respectfully following the decision of _**Bokaro Steel Ltd.**_ , we answer the questions of law in favour of the assessee and against the revenue. We allow the appeal setting aside the order of the Tribunal. Parties to suffer their respective costs. Sd/- **K. VINOD CHANDRAN, JUDGE.** Sd/- **ASHOK MENON, JUDGE.** //True Copy// P.A. To Judge sp/07/07/18