PCIT vs. Bank Note Paper Mill India Pvt Ltd (Karnataka High Court)

IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 21ST DAY OF JUNE 2018
PRESENT
THE HON’BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON’BLE MRS.JUSTICE S.SUJATHA
I.T.A. No.690/2017
BETWEEN :
1. THE Pr. COMMISSIONER OF INCOME
TAX CIT(A), 5TH FLOOR, BMTC BUILDING,
80 FEET ROAD, KORAMANGALA,
BENGALURU-560095
2. THE INCOME TAX OFFICER
WARD-1(1)(3), 2ND FLOOR,
BMTC BUILDING, 80 FEET ROAD,
KORAMANGALA, BENGALURU-560095 …APPELLANTS
(BY SRI K.V.ARAVIND, ADV.)
AND :
M/s BANK NOTE PAPER MILL
INDIA PVT. LTD.,
I FLOOR, S.R.COMPLEX, No.2,
TAVARAKERE MAIN ROAD,
SG PALYA, DRC POST,
BENGALURU-560029
PAN: AAECB 3245M .…RESPONDENT
THIS INCOME TAX APPEAL IS FILED UNDER SECTION
260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER
DATED 17.03.2017 PASSED IN ITA NO.692/BANG/2015, FOR
THE ASSESSMENT YEAR 2011-2012, PRAYING TO I.
Date of Judgment 21-06-2018, ITA No.690/2017
The Pr. Commissioner of Income Tax CIT(A) & another Vs.
M/s Bank Note Paper Mill India Pvt. Ltd.
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FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED
ABOVE. II.ALLOW THE APPEAL AND SET ASIDE THE ORDERS
PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL,
BENGALURU IN ITA NO.692/BANG/2015 DATED 17.03.2017
CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER
AND CONFIRM THE ORDER PASSED BY THE INCOME TAX
OFFICER, WARD-1(1)(3), BENGALURU & ETC.
THIS APPEAL COMING ON FOR ORDERS, THIS DAY,
Dr. VINEET KOTHARI, J., DELIVERED THE FOLLOWING:
J U D G M E N T
Mr. K.V.Aravind, Adv. for Appellants – Revenue
The Revenue has filed this Appeal u/s. 260-A of
the Income Tax Act, 1961 [‘Act’ for short], purportedly
raising certain substantial questions of law against the
Order of the learned Income Tax Appellate Tribunal on
17.03.2017 in I.T.A. No.692/Bang/2015 for
Assessment Year 2011-12 in the case of Income Tax
Officer v. Bank Note Paper Mill India Pvt. Ltd.,.
2. By the impugned Order, the learned
Tribunal following the decision of the Hon’ble Supreme
Court in the case of ‘Commissioner of Income Tax
Bihar – II, Patna Vs. Bokaro Steel Limited’ [236 ITR
Date of Judgment 21-06-2018, ITA No.690/2017
The Pr. Commissioner of Income Tax CIT(A) & another Vs.
M/s Bank Note Paper Mill India Pvt. Ltd.
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315], which distinguished the earlier view of the Hon’ble
Supreme Court in the case of ‘Tuticorin Alkali
Chemicals & Fertilizers Vs. Commissioner of Income
Tax’ [(1997) 227 ITR 172] and held that the interest
income earned by the Assessee-Company on bank
deposits made out of share capital received by it from
the Reserve Bank of India could not be taxed as “Income
from Other Sources” as the said interest income was
earned prior to commencement of operations of the
company during the construction period.
3. The learned Tribunal also referred and relied
upon the Judgments of this Court in the case of
‘Commissioner of Income Tax v. Karnataka Power
Corporation’ [247 ITR 268] and ‘Commissioner of
Income Tax v. Karnataka Urban Infrastructure and
Development and Finance Corporation [284 ITR 582]
and held that such interest income would go to reduce
the capital cost of the project and is on the capital
Date of Judgment 21-06-2018, ITA No.690/2017
The Pr. Commissioner of Income Tax CIT(A) & another Vs.
M/s Bank Note Paper Mill India Pvt. Ltd.
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account and the same cannot be taxed during the
relevant year in which such interest income is earned.
4. The relevant portion of the impugned Order
of the learned Tribunal in favour of Assessee is quoted
below for ready reference:
“7. We heard rival submissions and perused
material on record. The short issue that comes up
for consideration in the present appeal is whether
interest income earned by the assessee during
the construction period on bank deposits made
out of share application money received by it, is
taxable as ‘income from other sources’ or it
should go to reduce capital cost of the plant which
is being set up by the assessee-company.
Undisputedly, facts are that the said interest
income was earned by the assessee-company on
bank deposits made out of share capital received
by it from the Reserve Bank of India. The share
capital was received by the respondent-assesseecompany
to meet capital expenditure for setting
up of assessee’s factory. As the funds were not
immediately required, the respondent-assessee
made deposits with bank on which assessee
earned inerest. This interest income was treated
Date of Judgment 21-06-2018, ITA No.690/2017
The Pr. Commissioner of Income Tax CIT(A) & another Vs.
M/s Bank Note Paper Mill India Pvt. Ltd.
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as abatement of capital cost of the project/factory
by the assessee-company in the books of account,
whereas the AO was of the opinion that the same
should be treated as revenue receipt and brought
to tax placing reliance on the decision of the
Hon’ble Supreme Court in the case of Tuticorin
Alkali Chemicals & Fertilizers Ltd. (supra).
The decision of the Hon’ble Supreme Court in the
case of Tuticorin Alkali Chemicals & Fertilizers
Ltd. (supra) was distinguished by the Hon’ble
Supreme Court in the case of Bokaro Steel
Ltd. ((236 ITR 315)(SC) wherein it was held that
the ratio of the decision of the Hon’ble Supreme
Court in the case of Tuticorin Alkali Chemicals
& Fertilizers Ltd. (supra) is not applicable
where interest receipt is directly connected
with or incidental to working of
construction of the assessee’s plant. The
decision of the Hon’ble Supreme Court in the case
of Bokaro Steel Ltd. (supra) was followed
subsequently in the case of CIT vs. Karnal Cooperative
Sugar Mills Ltd. (243 ITR 2). An
identical issue had come up for consideration
before the Hon’ble Jurisdictional High Court in the
case of CITA vs. Karnataka State Agricultural
Produce Processing and Export Corporation Ltd.
(377 ITR 496). In that case the State Government
Date of Judgment 21-06-2018, ITA No.690/2017
The Pr. Commissioner of Income Tax CIT(A) & another Vs.
M/s Bank Note Paper Mill India Pvt. Ltd.
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Corporation earned interest on deposits
temporarily kept out of grants received from the
State Government was taxable or not? The facts
are that the State Government Corporation earned
interest during the construction period on the
fixed deposits temporarily made out of State
Government grants. The issue before the Hon’ble
High Court was whether such interest income
was taxable or should go to reduce the capital
cost of the project. The Hon’ble High Court, after
considering the decisions of the Hon’ble Supreme
Court in the case of Bongaigaon Refinary
Petrochemicals Ltd. v. CIT (251 ITR 329)(SC),
Bokara Steel Ltd. (supra), and Tuticorin Alkali
Chemicals & Fertilizers Ltd. (supra) and its own
decision in the case of CIT v. Karnataka Power
Corporation, (247 ITR 268) and CIT v. Karnataka
Urban Infrastructure and Development and
Finance Corporation (284 ITR 582) held that such
interest income would go to reduce the capital
cost of the project, is on the capital account and
should not be brought to tax.”
5. Learned Counsel for the Revenue,
Mr. K.V. Aravind has fairly submitted that in the recent
decision rendered by the Hon’ble Supreme Court on
Date of Judgment 21-06-2018, ITA No.690/2017
The Pr. Commissioner of Income Tax CIT(A) & another Vs.
M/s Bank Note Paper Mill India Pvt. Ltd.
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24.04.2018 in the case of ‘Commissioner of Income
Tax-IV, Ahmedabad v. Shree Rama Multi Tech Ltd.,’
[(2018) 92 taxmann.com 363 (SC)], the Hon’ble
Supreme Court has again reiterated a similar position
and held that such interest earned before the
commencement of business operations is not liable to
be taxed and is eligible for deduction against the public
issue expenses incurred by the Company. The relevant
portion of Paragraphs 12 and 13 of the said Judgment
are quoted below for ready reference:
“12) The common rationale that is followed
in all these judgment is that if there is any
surplus money which is lying idle and it has been
deposited in the bank for the purpose of earning
interest then it is liable to be taxed as income
from other sources but if the income accrued is
merely incidental and not the prime purpose of
doing the act in question which resulted into
accrual of some additional income then the
income is not liable to be assessed and is
eligible to be claimed as deduction. Putting
the above rationale in terms of the present case, if
the share application money that is received is
Date of Judgment 21-06-2018, ITA No.690/2017
The Pr. Commissioner of Income Tax CIT(A) & another Vs.
M/s Bank Note Paper Mill India Pvt. Ltd.
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deposited in the bank in light of the statutory
mandatory requirement then the accrued interest
is not liable to be taxed and is eligible for
deduction against the public issue expenses. The
issue of share relates to capital structure of the
company and hence expenses incurred in
connection with the issue of shares are to be
capitalized because the purpose of such deposit
is not to make some additional income but to
comply with the statutory requirement, and
interest accrued on such deposit is merely
incidental. In the present case, the Respondent
was statutorily required to keep the share
application money in the bank till the allotment of
shares was complete. In that sense, we are of the
view that the High Court was right in holding that
the interest accrued to such deposit of money in
the bank is liable to be setoff against the public
issue expenses that the company has incurred as
the interest earned was inextricably linked with
requirement of the company to raise share capital
and was thus adjustable towards the
expenditure involved for the share issue.
13) In view of the forgoing discussion, we
are of the view that the High Court was right in
upholding the decision of the Tribunal dated
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The Pr. Commissioner of Income Tax CIT(A) & another Vs.
M/s Bank Note Paper Mill India Pvt. Ltd.
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21.10.2011 that the interest income earned
out of the share application money is liable
to be set off against the public issue
expenses. The judgment passed by the Division
Bench of the High Court in remanding the matter
to the Tribunal on other issues requires no
interference.”
6. In view of the said legal position with regard
to aforesaid issue, we are satisfied that no substantial
question of law arises in the present case and the
Appeal filed by the Revenue is without merit and liable
to be dismissed.
7. The Appeal is accordingly dismissed.
8. We express our concern and anguish at the
tendency of the Revenue Department to file unnecessary
appeals u/s. 260-A of the Act even though the issues
are ex facie covered by the decision of the jurisdictional
High Courts or even the Hon’ble Supreme Court of
India. The substantial question of law essentially means
that a question of law which is not already settled by
Date of Judgment 21-06-2018, ITA No.690/2017
The Pr. Commissioner of Income Tax CIT(A) & another Vs.
M/s Bank Note Paper Mill India Pvt. Ltd.
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the Constitutional Courts can only fall within the ambit
of Section 260-A of the Act and therefore repetitive filing
of such appeals by the Tax Department who are
expected to be serious and bonafide litigants in the
Constitutional Courts is a matter of concern. It is
expected of the concerned Authorities who approve filing
of such appeals u/s. 260-A of the Act, to bonafide apply
their mind to such aspects of the matter and only after
recording appropriate reasons for need to file such
appeals and need to get substantial question of law
genuinely arising from the Order of the Tribunal
determined by Constitutional Courts, that they should
approve the filing of such appeals and the High Court
u/s. 260-A of the Act. But, the present Appeal filed by
the Revenue is certainly not one of that kind and
therefore we record our note of caution for the Revenue
Authorities concerned in this regard.
Date of Judgment 21-06-2018, ITA No.690/2017
The Pr. Commissioner of Income Tax CIT(A) & another Vs.
M/s Bank Note Paper Mill India Pvt. Ltd.
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Copy of this Order shall be sent to the
Respondent-Assessee, as well as to the Chief
Commissioner and Central Board of Direct Taxes,
Ministry of Finance, Department of Revenue, New Delhi,
for aforesaid needful action.
Sd/-
JUDGE
Sd/-
JUDGE
AN/-