Important Point
Where the assessee during construction of its plant earned rental income by letting out quarters to contractor to house workmen, earned income by hiring out machinery to contractor, earned interest income by advancing amounts to contractor, and earned royalty on allowing contractor to extract stones from lands, and all those receipts were adjusted against charges payable to contractor, the receipts being inextricably connected with construction of plant which reduced cost of construction, could not be treated as revenue receipts so as to tax u/s. 28(i).

Headnote:(i) Income-tax Act, 1961-Section 28(i)-Business income-Chargeability of-Capital or revenue receipt-Assessee was in process of constructing and errecting its plant-Let out quarters to contractor for housing workmen, given on hire machinery for use in construction, advanced amounts on interest for purpose of facilitating construction work and allowed contractor to excavate stones from land on royalty-Rental receipts, hire charges and interest on advances were adjusted against charges payable to contractor-Receipts intrinsically connected with construction of plant-Receipts reduced cost of construction -Receipts amount to capital receipt-Cannot be subjected to tax.
       Held : We will take the first three heads under which the assessee has received certain amounts. 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 use in 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 contractor for the assessee’s construction work. The receipts in this connection also go to compensate the assessee for the wear and tear on the machinery. The advances which the assessee made to the contractor 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. 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. (Para 5)
       In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income. (Para 7)
       The same reasoning would apply to royalty received by the assessee company for stone etc. excavated from the assessee company’s land. The land had been allowed to be utilised by the contractors for the purpose of excavating stones to be used in the construction work of assessee’s steel plant. The cost of the plant to the extent of such royalty received, is reduced for the assessee. It is, therefore, rightly taken as a capital receipt. (Para 8)
       (ii) Income-tax Act, 1961-Section 4 read with Section 28(i)-Business income - Chargeability of-In books of account certain amount shown as accrued interest on account of locomotive supplied by assessee to a party-Entries reversed in next year on ground that the party replaced with now locomotives lent-Tribunal and High Court held entries in books reflected only hypothetical income and there being no real income same was not exigible to tax-Warrants no interference. (Paras 9 & 10)

Judgment

Mrs. Sujata V. Manohar, J.-Civil Appeal Nos. 2544-45 of 1988 pertain to assessment year 1972-73 while Civil Appeal Nos. 642-48 of 1989 pertain to assessment years 1965-66 to 1971-72. The Income-tax Appellate Tribunal had referred the following questions to the High Court for determination under Section 256(1) of the Income-tax Act, 1961:-

At the instance of the Revenue :

“Assessment year 1965-66:

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the hire charges of Rs. 56 received by the assessee-company for letting out the plant and machinery to the contractors were not taxable?

Assessment year 1966-67:

(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the hire charges of Rs. 7,224 received by the assessee-company for letting out of the plant and machinery to the contractors were not taxable?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the royalty of Rs. 8,530/- received from the contractor was not taxable as it was of capital nature and not revenue?

Assessment year 1967-68:

(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the hire charges of Rs. 12,195 received by the assessee-company for letting out of the plant and machinery to the contractors were not taxable?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the royalty of Rs. 1,22,902 received from the contractors was not taxable as it was capital in nature and not revenue?

Assessment year 1968-69:

(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the hire charges of Rs. 17,913 received by the assessee-company for letting out of the plant and machinery to the contractors were not taxable?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the royalty of Rs. 65,799 received from the contractor was not taxable as it was of capital in nature and not revenue?

Assessment year 1969-70:

(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the hire charges amounting to Rs. 46,342 received by the assessee-company for letting out of the plant and machinery to the contractors were not taxable?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the royalty of Rs. 25,928 received from the contractors was not taxable as it was of capital nature and not revenue?

Assessment year 1970-71:

(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the interest received by the assessee-company on the amount of Rs. 7,50,502 advanced to the contractors was not taxable?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the hire charges of Rs. 182 received by the assessee-company for letting out the plant and machinery to the contractors were not taxable?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the royalty of Rs. 13,052 received from contractors is not taxable as it is of capital nature and not revenue?

(4) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding miscellaneous of Rs. 49 as not taxable?

Assessment year 1971-72:

(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the interest received by the assessee-company on the amount of

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1998 Supreme(SC) 1259

Cases Referred (2)