Facts

The assessee is a corporation wholly owned by the Government of India. It was assessed in the status of a company. The assessee-company,  Bokaro  Steel Ltd., was incorporated in January 1964. Its object was to construct and own an integral iron and steel works. During the assessment years under consideration, the work   of construction of the company’s factory and installation of the plant was in the process of completion. During the year, the assessee received certain amounts from the contractors for housing accommodation for construction workers, hire charges of plant  and machinery, interest on advance, and royalty for excavation and use   of stone found on the assessee’s land. The Tribunal held that, all of amounts received by the assessee would go to reduction of cost of construction.

Issue

Whether receipts from the Construction Company being intrinsically connected with construction of assessee’s plant, will it be considered as a capital receipt and  not income of assessee from any independent source?

View

These are the 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. Secondly, hire charges for plant and machinery which was given to the contractors by the assessee for using the construction work of the assessee, and thirdly, interest from advances made to the contractors by the assessee, for the purpose of facilitating   the work of construction. 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 its plant undertaken by the assessee. Broadly speaking, these pertain to the arrangements made by the assessee with its contractors pertaining    to the work of construction. To facilitate the work of the contractor, the assessee

permitted the contractor to use the premises of the assessee, for housing its staff and workers engaged in the construction activity of the assessee’s plant. This was clearly to facilitate the work of construction. Had this facility not been provided   by the assessee, the contractors would have had to make their own arrangements, and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee has provided these facilities. The same     is true of the hire charges for plant and machinery which was given by the assessee to the contractors for the assessee’s construction work. The receipts in   this connection also go to compensate the assessee for the wear and tear of the machinery. 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 hitches    as to help the contractors.

Held

The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts are arrangements which are intrinsically connected with the construction of its steel plant. The receipts have been adjusted against the charges payable to the contractors and have gone to reduce the cost of construction. They have, therefore, been rightly held as capital receipts and not income of the assessee from any independent source. (AY. 1965-66 to 1971-72) (CA No. 2544-45 of 1988 dt. 18-12-1988)

Editorial: Also refer Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC) followed, CIT (Addl.) v. Indian Drugs and Pharmaceuticals Ltd. [1983] 141 ITR 134 (Delhi), Patna High Court in CIT v.  Bokaro Steel Ltd. (No. 1) [1988] 170   ITR 522 and Bokaro Steel Ltd. v. CIT(No.2) [1988] 170 ITR 545 (Pat.) affirmed.

Also refer Roads and Bridges Development Corporation v. ACIT (257 Taxman 392) (Kerala HC), CIT v. Karnal Co-operative Sugar Mills Ltd. [2000] 243 ITR 2/[2001] 118 Taxman 489 (SC) which have given similar proposition.

“Those who know how to think need no teachers.”

– Mahatma Gandhi