Interest Earned On Borrowed Funds Kept For Acquiring Coal Mine Is Not Revenue Receipt If Coal Mine Is Aborted, Borrowings Are Repaid: Delhi HC

The Division Bench of Acting Chief Justice Vibhu Bakhru and Justice Swarana Kanta Sharma observed that if the interest is earned on the amounts temporarily kept in fixed deposits in course of acquisition of coal mine to set up its business, then interest earned would require to be accounted for as part of capital value of business/ asset.

However, this accounting treatment is or will be applicable only if the nature of the asset is such that requires time for construction or for putting it in use, added the Bench.

Facts of the case

The assessee/ Respondent, is, essentially, a joint venture company formed as a special purpose vehicle (SPV) by five public sector undertakings (PSUs), and is incorporated with the purpose of ensuring adequate and dependable coal supply for its promoter companies. For such purpose, the assessee would acquire resources including a coal mine overseas to secure supply of coal to its promoters. In pursuance of the same, the assessee received huge equity contribution, and the funds received were kept in a short-term fixed deposit yielding interest. The assessee claimed that it had called funds from shareholders and promoters for the purpose of acquisition of coal mine overseas. At the material time, the transaction for such acquisition was at an advanced stage, and the assessee received a sum of 157 crores from RINL as call money. Out of the said sum, an amount of one crore was accounted for share application money and the balance was reflected as borrowing and was kept in a fixed deposit with a bank. Those fixed deposits yielded interest of Rs.11,45,19,580/- and the assessee claimed that it had also incurred Rs.4,48,78,068/- on day-to-day expenses as well as for preparation of the project report.

The assessee thereafter filed its return declaring Nil income. According to the AO, the difference between the interest earned and interest paid was chargeable to tax as income from other sources. Accordingly, the AO passed assessment order determining assessee's total income at Rs.31,18,900/-.

On appeal, the CIT(A) held that interest was in the nature of 'revenue receipt' and the amount earned on short term deposits was chargeable to tax as income from other sources in terms of Sec 56. The CIT(A) also held that a deduction u/s 57(iii) was not permissible in respect of the interest payable on funds received from promoters, as that expenditure could not be considered as incurred 'wholly or exclusively' for the purpose of earning interest income from short term deposits.

Observation of the High Court

The Bench found that the assessee was set up to acquire resources to ensure supply of coal, and at the material time it was in the process of negotiation for acquiring a coal mine, to set up its business.

The assessee had also called for capital from its shareholders for the purpose of payment of the acquisition costs, added the Bench.

The Bench also noted that part of the funds was kept in the short-term fixed deposit in the bank for pending payment of the construction.

However, the Bench noted that the attempt to acquire the coal mine was aborted and thus the amounts borrowed were repaid to RINL.

The funds in question were not surplus funds of assessee, and the same were called for and were earmarked for acquisition of a coal mine overseas, added the Bench.

The Bench observed that the said coal mine was to be the assessee's undertaking as the assessee was formed for the purpose of acquiring and operating a coal mine overseas.

The High Court therefore dismissed the Revenue's appeal, while concluding that the funds in question were not surplus funds but funds that were called for and earmarked for a specific purpose of acquiring a coal mine.

Counsel for Petitioner/ Revenue: Sanjay Kumar

Counsel for Respondent/ Assessee: Divyanshu Agarwal and Aneesh Mittal

Case Title: Pr. CIT vs. International Coal Ventures Pvt Ltd

Case Number: ITA 1174/2018

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