COMMISSIONER OF INCOME TAX, BIHAR-II, PATNA. versus BOKARO STEEL LTD. BOKARO

Citation: [1998] SUPP. 3 S.C.R. 680 · Decided: 18-12-1998 · Supreme Court of India · Bench: SUJATA V. MANOHAR · Disposal: Dismissed

Judgment (excerpt)

A 
COMMISSIONER OF INCOME TAX, BIHAR-II, PATNA. 
v. 
BO KARO STEEL LTD. BOKARO 
DECEMBER 18, 1998 
B 
[SUJATA V. MANOHAR AND G.B. PATTANAIK, JJ.] 
Income Tax Act, 1961-Assessee-Bokaro Steel Limited-During 
construction of factory and before commencement of business sums received 
by it as : (a) rent for housing workers and staff employed by contractors; (b) 
C hire charges for plant and machinery given to the contractors for use in 
construction work of assessee; (c) interest from advances made to the 
contractors by assessee for purpose of facilitating work of construction-
Held, these are receipts of capital nature and cannot be taxed as income-
These receipts being inextricably linked with the setting up of the capital 
D structure of the assessee-company, reduced cost of construction and could 
not be held to be income of assessee from any independent source. 
Capital Receipt-Royalty-Assessee-Company receiving certain 
amount by way of royalty charged from contractor for use of stones lying on 
assessee 's land for construction work-Cost of the plant to the extent of such 
E royalty received reduced for the assessee-Royalty received-Held to be a 
capital receipt. 
Income-Hypothetical income-Assessee making an entry in its books 
of accounts showing certain amount as income from interest received from 
another company for the eight locomotives supplied by the assessee-comparry 
F to them-Entry reversed in the next year since the other company replaced 
the eight locomotives lent by the assessee company to it by new ones-Said 
entry reflecting only hypothetical income and the assessee not receiving any 
:-ea! income-View of the High Court that this entry did not reflect that real 
income of the assessee and hence not exigible to income-tax; upheld 
G 
The assessee-company, a corporation wholly owned by the Govt of India 
was incorporated in January 1964 with the object to construct and own 
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. The company had 
H not started any business during the assessment year in question. During 
680 
-._,_. 
C.I.T. v. BOKARO STEEL LTD . 
681 
. this period, the assessee company received the following payments: (1) A 
Payment for the quarters given to the contractors for the residence of their 
workmen engaged in the construction activity of the assessee's plant; (2) 
Interest for the advance made to the contractors to enable.them to execute 
the large scale construction work smoothly; this interest was later adjusted 
against the dues of the contractors; (3) Income in the form of hire charges B 
for the plant machinery given to the contractors on hire for the purpose of 
construction work; (4) Amount received by way of royalty charged from the 
contractor for use of stones excavated from the assessee's land for 
construction work; and (5) Interest from a certain sum said to have been 
accrued to the assessee during the assessment year 1971-72 from another 
company for eight locomotives supplied by the assessee-company to the other C 
company. This entry was however reversed in the next year because eight 
new locomotives were supplied by the other company to the assessee and no 
interest income actually accrued to the assessee. 
The Income-tax Appellate Tribunal held that all the amounts (under 
items 1 to 4) received by the assessee were in the nature of capital receipts D 
which could be set off against the capital expenditure incurred by the assessee 
during the relevant assessment years. Hence, these amounts could not be 
taxed as income. Reference was made to the High Court by the Income-tax 
Appellate Tribunal. The reference was answered in favour of the assessee 
and against the appellant thereby upholding the view of the Tribunal. Hence, E 
the present appeals. 
Dismissing the appeals, this Court 
HELD. 1.1. If the assessee receives any amounts which are inextricably 
linked with the process of setting up its plant and machinery, such receipts F 
will go to reduce the cost of .its assets. These are receipts of a capital nature 
and cannot be taxed as income. (691-A) 
1.2. The activities of the assessee in co.nnection with all these three 
receipts namely, (1) rent for housing workers and staff employed by 
contractors for the construction activity of the assessee's plant; (2) hire G 
charge for plant and machinery given to the co

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